Applicability of the Synchronized Models of Modified Current and Historical Cost Accounting Methods on the Reported Profits

Abstract

This study examines the applicability of the synchronized models of the historical cost method and the modified current cost method for financial reporting. Based on the inherent deceitful and irrelevant nature of the historical cost method during periods of rapid price changes and the glaring complex and subjective nature of the current cost method, this study develops models which combine objectivity, noticeable in the historical cost method, with relevance obtained from the current cost method while minimizing the deficiencies inherent in the two methods. Four models were synchronized based on historical cost and current cost data which resulted in the development of the modified accumulated depreciation adjustment (MADPA); modified cost of sales adjustment (MCOSA); modified monetary working capital adjustment (MMWCA) and modified gearing adjustment (MGA). The study revealed that the models when applied to the financial statements will bring about ?FAV (change in fix asset valuation), ?SV (change in stock valuation), ?SFV (change in shareholders’ fund valuation) and MCCR (modified current cost reserve). Based on these results, the study recommended that financial statements should be prepared on the bases of relevance, reliability, objectivity, understandability and comparability, especially during periods of changing prices, by applying the synchronized models developed in this study. These models remove the technicalities of ordinary current cost accounting method and retain the objectivity of the historical cost method. With the modified models, financial statements are objective, relevant, reliable and understandable during periods of changing prices.

KEYWORDS: Synchronized Models, Accounting Methods, Modified Current Cost Method, Historical Cost Method, Price Level Changes, Reported Profits