Historical Cost and Unit of Measure

Assets and liabilities are recorded in the accounting records at their historical cost. For example, if we purchase land for $1 million with a $1 million mortgage, the land is entered as an asset at $ 1 million and the mortgage note payable is entered as a liability at $ 1 million. These values remain in the accounting records for some time.

The unit of measure which is used in financial statements of business is the nominal dollar, or the dollar from the exchange transaction unadjusted for inflation or deflation.^[6] As a result, one company may have land, which was purchased in 1930, with a book value of $ 100 000 and another company may have a similar piece of property, which was bought in 1998, with a book value of $ 1 million.

б) Ответьте на вопросы.

1. At what cost are assets and liabilities recorded in the financial statements?

2. For how long is the historical value recorded?

3. What is the nominal dollar?

4. What does the book value depend on?

REVISION EXERCISES

Ex. 12. Дайте развёрнутые ответы на вопросы.

1. What answers does the balance sheet give to its readers?
2. What difficulties does the principle of the historical cost involve?
3. What are financial statements based on?
4. What are the principle components of financial statements?
5. What does the balance sheet reflect?
6. What does the income statement show?
7. What assets are recorded as current?
8. In what order are current assets listed on the balance sheet?
9. How are inventories listed?
10. What assets are recorded as fixed?
11. What is the idea of the historic cost of fixed assets?
12. How are liabilities classified?
13. What is the accounting equation?

Ex. 13. а) Прочитайте и переведите текст.

Limitations of the Balance Sheet

Does the balance sheet give all the answers to all the readers? The answer is definitely No. The balance sheet does not reflect current value because accountants record assets and liabilities on the basis of historical cost.

Many accountants believe that all the assets should be stated in current values; however, there are different opinions about the exact type of valuation basis.

Another limitation of the balance sheet is that answers to different questions are given by users. Will the Company collect receivables in time? Will the Company sell inventory? How long will the useful life of some assets be? Different answers are given by different users.

Besides, the balance sheet leaves out many of the items which are important to the business but are not recorded objectively. The value of a company’s human resources is certainly important but it is not mentioned because it is difficult to measure. Some companies say that a high percentage of their assets go down the elevator every night and come back in the morning.

б) Ответьте на вопросы.

1. Does the balance sheet answer all the answers?
2. What is the idea of the historical cost?
3. What valuation system is proposed?
4. Why are financial records interpreted in different ways?
5. What financial values are not recorded in the balance sheet?

Ex.14. Заполните пропуски словами из рамки.

Letter to Shareholders

the shareholders, is produced, optimistic, the financial statements, are based on

A company’s annual report is made every year. Only ___ are produced by the accountants. Much of an annual report ___ by managers and discusses many topics, some of them ___ accounting figures, some are not.

The letter to ___ is part of the annual report. It begins with a statement such as “I am pleased to report…” and is signed by the president. The letter usually contains an ___ message.

Ex.15. Заполните пропуски предлогами, где необходимо.

1. Journal entries are transferred ___ various accounts.
2. The company owes $150 million ___ foreign creditors.
3. Both sides of the balance sheet are always ___ balance.
4. What will be left ___ the owners?
5. What money is left ___ the owners if the company goes out of business ___ the date ___ the balance sheet?
6. This operation may result ___ a loss.
7. The operating statement shows how much the company earned or lost ___ a definite period of time.
8. The balance sheet reports ___ the financial position ___ a certain date.
9. The profit and a loss account shows income ___ a definite period such as a year or a calendar year.
10. It’s necessary to subtract expenses ___ the total income.
11. Any claim the business has ___ the property of other companies or banks is called an asset.
12. Any claim ___ the property is a liability.
13. Current assets are listed ___ the balance sheet ___ order of their liquidity.
14. Cash ___ hand or in a demand deposit ___ the bank is listed first.
15. Cash is the major resource ___ paying bills.
16. They purchased these goods ___ credit.
17. This money is owed ___ customers of the business.
18. The rent was paid ___ advance.
19. Liabilities are called current if they are paid ___ the current reporting year.
20. Equity is what a business owes ___ its shareholders.

Ex.16. Заполните пропуски артиклями, где необходимо.

1. It is important to know whether ___ owners are increasing their investment, or ___ business is working at ___ loss.

2. The balance sheet gives an idea what ___ company owns and what it owes on ___ certain date.

3. The balance sheet reports on ___ financial position as of ___ end of ___ year.

4. The operating statement is like ___ movie because it shows ___ work of ___ company.

5. The income statement shows income over ___ specified period such as ___ year or ___ calendar quarter.

6. ___ same period is mentioned in this report.

7. Bookkeepers list any property as ___ asset.

8. Fixed assets are sometimes called ___ plant assets.

9. ___ warehouse, ___ truck, or ___ machine are examples of fixed assets.

10. Current assets also include ___ inventories and ___ raw materials.

11. Current assets are listed in ___ balance sheet in order of their liquidity.

12. Cash is ___ first resource for paying ___ bills.

13. Liabilities are called current if they are paid within ___ current accounting year.

14. Equity is what ___ business owes both to ___ shareholders and ___ owners.

Lesson 3