Summary Ch 6 Theory Acc.

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LO 3 – Current Cost Accounting Objective of current cost accounting Current cost accounting (CCA) is an accounting system in which assets are valued at current market buying prices and profit is determined by allocation based on current costs. What is the objective of current cost accounting? Edwards and Bell express this fundamental problem in terms of three questions: * What amount of assets should be held at any particular time? This is the expansion problem. * What should be the form of these assets? This is the composition problem. * How should the assets be financed? This is the financing problem. To formulate relatively accurate expectations, managers need to evaluate past activities and decisions. A useful tool in…show more content…
Economic profit can be divided into two components parts: expected profit and unexpected profit. Expected profit measures the cash flows the firm is capable of generating into the indefinite future, whereas unexpected profit measures the changes in cash flow due to environmental factors that were not predicted at the beginning of the period. In a perfectly competitive economy, current cost profit is virtually identical to economic profit. The current operating profit under current cost is equal to the distributable cash flow component or expected profit. Holding gains are directly related to unexpected profit. LO 4 – Financial Capital versus Physical Capital In current cost accounting there are two fundamental and competing views on what constitutes beginning and ending capital – the financial concept and the physical concept. From a practical point of view, the main difference between the financial capital concept and the physical capital concept is whether or not holding gains (or losses) are included in profit. In quantitative terms, the difference between the two viewpoints is that holding gains are included in profit under financial capital and excluded under physical capital. In support of physical capital As previously noted, the inclusion of holding gains as profit is based mainly on two arguments: they are cost savings and they
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