Historical Costing | Accounting Assignment

Running head: ACCOUNTING
Accounting
Name of the Student
Name of the University
Author Note

1
ACCOUNTING
Table of Contents
Answer to Question 1...................................................................................................................2
Answer to Question 2...................................................................................................................3
Answer to Question 3...................................................................................................................5
Introduction..................................................................................................................................5
Factors affecting the use of historical costing..............................................................................5
Limitations of Historical Costing.................................................................................................5
Overview of Fair value approach.................................................................................................6
Conclusion...................................................................................................................................6
Bibliography.................................................................................................................................7

2
ACCOUNTING
Answer to Question 1
The concept of faithful representation suggests that the financial statements produced by
an entity should accurately reflect the underlying financial position of a business. One such
example of a faithful representation is the comparability of the results relating to assets contained
in the financial statements with the actual assets contained by the business. Faithful
representation of the financial statements is not limited to any particular financial statements and
should be contained in the statement of financial position, income statement and the statement of
cash flows. The three main attributes of the faithful representation of the financial statements of
the entity consists of completeness, error free and unbiasedness. Unbiasedness is also known as
neutrality being followed in the preparation of the financial statements. Neutrality refers to the
objective preparation of the financial statements without actually making a situation look
unnecessarily pessimistic or overly optimistic. A financial report can be faithful by reporting the
details in the most accurate manner possible. Similarly, they should also look to provide all the
necessary details in the most neutral manner possible. For example, taking a loan to purchase an
asset would result in an increase in both the assets side and the liabilities side of the balance
sheet. This should be reported in the financial statements to ensure that the users of the
statements remain sufficiently informed. Merely reporting the figures of the assets and loan can
result in a misinterpretation of the financial statements by the users. Hence, providing all the
details behind the transaction is one manner in which the faithful representation and neutrality
can both be maintained in the preparation of the financial statements.
Some of the most widely used terms in the conceptual framework of the AASB include
the faithful representation of the financial statements. This means that the financial statement
should faithfully represent what it intends to present. This is a fundamental qualitative