Exit Price Accounting (EPA) also known as Continuously Contemporary Accounting (CoCoA) has been proposed by researchers such as McNeal, Sterling, and especially Raymond Chambers. It’s an accounting theory that prescribes that assets should be valued at exit prices and that financial statements should function to inform about an organization’s capacity to adapt. Chambers described the entity’s capacity to adapt as the cash that could be obtained if the entity sold its assets. Chambers believed that economic survival of the entity depends on the amount of cash it can command and the balance sheet is crucial to these decisions. Chambers used the term ‘current cash equivalents’ to refer to the amount that was expected to be generated through the orderly sale of assets. He believe that the information about current cash equivalent were fundamental to effective decision making. Chambers stated that ‘the accounting rules used were so different in effect that Continue reading
Financial Accounting Concepts
Positive Accounting Theory
The beginning of positive accounting theory is the Efficient Markets Hypothesis (EMH). The EMH is based on the assumption that capital markets react in an efficient and unbiased manner to publicly available information. The main strengths of Positive Accounting Theories over Normative Accounting Theories are the facts that hypothesis are framed in such a way that they are capable of falsification by empirical research. Also, these theories aim to provide an understanding of how the world works rather than stating how the world should work. Moreover, PAT tries to understand the relationship and connection between various accounting information, managers, firms, and markets; and also analyze these relationships within an economic framework. There are several assumptions made in development of positive accounting theory. The first is that the firm is a nexus of contracts. In relation to Positive Accounting Theory, because there is a need to be efficient, the firm will Continue reading
Reserves – Meaning, Objectives and Types
A reserve is a part of the profit set aside to meet future contingencies and losses. Usually, the whole amount of profit earned by the business is not distributed to the owners or shareholders. A part of the profit is retained in the business either for meeting its unexpected future liabilities and losses or for strengthening financial position. It can be created for redeeming liabilities or replacing depreciable assets or declaring uniform rate of dividend over years. It is created out of the profit only. If there is no profit in a particular year, no reserve can be created in that year. It is created by debiting the profit and loss appropriation account. It does not reduce the figure of net profit because it is created after determining profit. The reserve, therefore, reduces only the figure of divisible profit. It belongs to the owners and shareholders. It can be distributed Continue reading
Accounting Treatment for Material Losses: Waste, Scrap and Spoilage
Meaning and Types of Waste The loss of raw materials in processing is waste. Waste has no receivable value. It is a quantity loss of material in the process of producing goods. Waste is brought into record by comparing the input quantity with the output quantity. Waste may occur due to shrinkage, smoke, weight loss and evaporation causing the material to become waste. They are material losses causing a quantity loss. Waste may occur in terms of a by-product which does not produce any realizable value. For example, 20kg of potato does not give 20kg of potato chips. Thus, the fact that 15 kg of chips is produced out of 20kg potato means that 5 kg of potato is wasted in the course of making chips. 5kg of waste does not produce any sales value and so is treated as waste. Waste is divided into two types, normal and abnormal Continue reading
Behavioral Aspects of Budgeting
Budgetary control relies greatly on the individuals of a corporation. The human aspect in the budgetary system can be very complicated since the budgetary process involves relationships between different people within the corporation which includes the chief executive officer, managers and staff. Some times budgets affect people’s behaviors and vice versa. Thus the behavioral aspects of budgeting are of vital significance and consist of many different areas that high attention must be paid. First and foremost, we need to know the factors affecting the behavioral aspects of budgeting, including: Budgets perceived by employees as being too difficult In situations that lack full participation of all levels in preparing for the budgets, the employees will perceive the budgets as being too difficult to follow. In addition, the punishment that comes along from failing to meet what this budgeted has a tendency to encourage staff’s attempts to beat the system. This greatly Continue reading
Fixed and Flexible Budget
According to the flexibility factor, budgets are classified into: Fixed Budget This is budget in which targets are rigidly fixed. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they are applicable. Thus, twelve months or more may elapse before figures forecast for the budget are used to measure actual performance. Many things may happen during this intervening period and they may make the figures go widely out of line with the actual figures. Though it is true that a fixed, or static budget as it is sometimes called, can be revised whenever the necessity arises, it smacks of rigidity and artificiality so far as control over costs and expenses are concerned. Such budgets are preferred only where sales can be forecast with the greatest of accuracy which means, in turn, that the cost and expenses in relation to sales can Continue reading