191pps t/a carnegie et al; accounting: financial and organisational decision making © 1999...
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191PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
ACCOUNTINGACCOUNTINGFinancial and Organisational Financial and Organisational
Decision MakingDecision Making
Chapter 19
Alternative accounting systemSlides written by Sandra Porritt
designed by Tony Van Eekelen
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Learning ObjectivesLearning Objectives
• In this chapter you will be introduced to: – the capital maintenance concept’and why it is
of crucial importance in the measurement of periodic profit
– how the decisions relating to asset valuation, unit of measurement, and financial or physical capital concept impact on the measurement of profit
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Learning ObjectivesLearning Objectives
– the capital maintenance concept and the calculation of profit under the current purchasing power (CPP) system
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Learning ObjectivesLearning Objectives
– the capital maintenance concept and the calculation of profit under the continuously contemporary accounting(CoCoA) system
– the capital maintenance concept and the calculation of profit under the current cost accounting (CCA) system
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
– how to prepare CPP, CoCoA and CCA financial statements from given information in basic situations
– the advantages and disadvantages of the CPP, CoCoA and CCA systems.
Learning ObjectivesLearning Objectives
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
IntroductionIntroduction
• Capital maintenance concept underlies the historical cost system
• Look at three (3) accounting systemt that have an alternative capital maintenance concept
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Measuring profit and wealthMeasuring profit and wealth
profit = general growth in wealth over time
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Capital maintenance conceptCapital maintenance concept
• What property of the asset represents its wealth
• In what unit of measurement shall that wealth be measured
• Is capital to be maintained in terms of its financial value or the physical operating capacity it provides
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
The property of an assetThe property of an asset
• Motor vehicle for example
– current replacement cost
– net initial cost (historical cost)
– realisable value or market value
– present value of cash flows (represents valuations for different purposes)
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
The unit of measurementThe unit of measurement
• dollar• ‘constant’ or ‘price-
level’ adjusted dollar
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Maintenance of financial value Maintenance of financial value versus phsical operating capacityversus phsical operating capacity• the financial value of capital
• maintaining the ability to replace the physical asset held by the entity
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
ExampleExample
• Opening capital $50,000
• Profit for the period $5,000
• Closing money capital is $55,000
• but assume a general rate of inflation 4%
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example continuedExample continued
• Capital at 31 December 20X3 $ 55,000• Purchasing power adjusted
opening capital ($50,000 x 104/100) 52,000• Current purchasing power
(price level adjusted) profit 3,000
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
An analysis of the major An analysis of the major alternative systemsalternative systems
• CPP Current Purchasing Power Accounting
• CCA Current Cost Accounting
• CoCoA Continuously Contemporary Accounting
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
CPP : Current Purchasing CPP : Current Purchasing Power AccountingPower Accounting
• 1. PROPERTY MEASURED : Original cost
• 2. UNIT OF MEASUEMENT : The constant dollar
• 3. CAPITAL MAINTENANCE : Financial value
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
An evaluation of the CPP systemAn evaluation of the CPP system
• Capital maintenance – adjustment for changes in general price level
• Financial analysis– growth in purchasing power
• Reliability– index can be verified but which index
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example of CPPExample of CPP
Assets at beginning Cash at bank $6000Motor Vehicle 5000 Land 9000
An index of general price level was: 1 January 20X1 100 30 June 20X1 105 31 December 20X1 120
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
example continuedexample continued
• The first entry calculates the ‘capital maintenance reserve’by restating the opening balance in year end equilivant purchasing power DR CRCash at bank ( $6000 x 20%) $1200Motor Vehicle ( $5000 x 20%) 1000Land ( $9000 x 20%) 1800 Capital maintenance $4000
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Developments in CPPDevelopments in CPP
• adoption of CPP accounting was considered in the early 1970s because of high inflation
• the accounting profession in 1974 produced an exposure draft on CPP (A Method of Accounting for Changes in the Purchasing Power of Money)
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
CoCoA : Continuously CoCoA : Continuously Contemporary AccountingContemporary Accounting
• 1. PROPERTY MEASURED : Current cash equivalent
• 2. UNIT OF MEASUEMENT : Constant dollar
• 3. CAPITAL MAINTENANCE : Financial value
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
An evaluation of CoCoAAn evaluation of CoCoA
• Capital maintenance – current cash equivalent values
• Financial analysis– bases the recognition of revenue and expenses
on changes in market prices
• Reliability– relient on current market price data
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example of CoCoAExample of CoCoA
Initial capital of the Company consisted of cash $42,000
Assets at beginning of the second yearEquipment $28 000 at cost 23 000 CCE Cash at bank 14 000
A general price level index disclosed a rise of 10 per cent:
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
example continuedexample continued
• Wealth at end– Sum of closing CCE values $68 000
• The capital to maintain Opening CCE values $42 000plus Price level adjustment 4 200 46 200CoCoA net profit $21 800
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
CCA : Current Cost AccountingCCA : Current Cost Accounting
• 1. PROPERTY MEASURED : Current cash equivalent
• 2. UNIT OF MEASUEMENT : Constant dollar
• 3. CAPITAL MAINTENANCE : Financial value
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
An evaluation of CCAAn evaluation of CCA
• Capital maintenance – to maintain the operating capacity of thr entity
• Financial analysis– values are at current cost
• Reliability– a deficiency of CCA system is that it relies on
many allocations found in historical cost
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
Example of CCAExample of CCA Profit and Loss Statement for the year ended 31 December 20X1 Historical CCA Cost Sales $7500 $7500less Cost of Goods sold 3000 4500(1)Gross Profit 4500 3000less Depreciation 900 1000(2)Net Profit $3600 $2000
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
example continuedexample continued
• Note (1) an adjustment is made to the current cost adjustment account for $1500
• Note (2) an adjustment is made to the current cost adjustment account for $100
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Chapter 19:Alternative accounting system
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
SummarySummary
• Change to accounting practice will be slow• in terms of the objectives of accounting
each of the alternatives have been appraised• International consensus on alternatives to
the historical cost system does not currently exist