Table Of Contents. Objective Of Financial Reporting2. Single
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Table of Contents
Objective of Financial Reporting 2
Single Measurement Approach 2
Mixed Measurement Approach 2
Breakdown of Woolsworth Measurement Approach 3
Our Recommendation 4
Objective of Financial Reporting
Since the core objective of financial reporting is to provide useful information to report users for making and reviewing resource allocation decisions (Deegan, 2012), it is of paramount importance that these statements are faithfully represented and relevant. The absence of either characteristic will cripple the decision making process.
Single Measurement Approach
Some companies attempt to meet those characteristics by relying on a single measurement approach. This is because it provides them with higher levels…show more content… However, Market values may be exposed to economic fluctuations which may cause assets/liabilities to be under or over valued.
Mixed Measurement Approach
As such, many companies, like Woolsworths, prefer to use a mixed measurement approach as there is flexibility to use more than a single measurement approach for different situations. Considering the different informational needs of report users, certain measurements may not be suitable to present information in a useful way (Dvořáková, 2009). For example, when there is a need for Woolsworth to predict the cash flows of an operation in a going concern business, cost accounting or historical costs measurement would be most appropriate, since cash flows should not deviate that much from previous years. However, when attempting to value prospective investments, fair value measurement would be more appropriate because it is based on current prices, and is therefore more accurate, which will help us make an informed decision on the future prospects of the investment.
Having said that, a mixed measurement approach presents its own set of problems. Firstly, it can lead to an ‘additivity problem’- where there is an aggregation of data that is measured by different approaches. Also, it undermines the comparability of financial