Fair Value Vs Historical Cost Analysis

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The fair value and historical cost are fundamental approaches of accounting. They bring up major changes in the financial status of the entities. The main objective of financial reporting is to provide information on assest and liabilities about the particular entity, which helps it to make useful financial decision. The fair value (FV) is a common among accounting and finance professionals. Today the majority of the investors and creditors prefer FV. On the other hand these policy and decision makers lost interest in historical cost (HC) because it became old fashioned and doesn’t keep up with current market. Nowadays everyone wants to see the actual values on the balance sheet, “one of the major financial statements that gives a snapshot …show more content…
According to the journal of Accounting and Finance title “Fair Value Versus Historical Cost: Which is actually more ‘Fair’?” (Kaya, 2013) states that “The understandability advantage is obtained simply by the longstanding common practice and the verifiability advantage by historic cost accounting since the information is certain to be confirmed by several independent evaluators since the purchase price is fixed and easily determined.” Like what kaya said, historical cost is very reliable. Unlike fair value, historical cost has no room for doubt. Historical cost uses its original cost. So we don’t have to care about the uncertainty that comes with the current market price. The amount can be verified by looking at the past years …show more content…
Last year, I had to buy a plasma television of sixty inches. Its original cost at the time was $1,499.98. It was really expensive, so I didn’t buy it, but waited for it to decrease its fair value or market price. When Black Friday came the price of plasma television dropped by $500. I was able to purchase my plasma television at the price of $999.98. As I listed above in the definition section of fair value that fair value is obtained by taking objective factors. One of the important factor is the e law of supply vs. demand. The supply and demand goes hand in hand for a given product. If there is a demand of iPhones 4 then the fair value or the market price of the iPhone 4 is going to increase. And if the rival company launches a new and improved version of iPhone 4. Then the company’s demand is going to decrease and the price is going to drop as well. Another example would be when the demand of laptops increased, the fair value of desktop decreased. Overall the advantages of fair value is greater than its disadvantages. It is very useful for an investor or an external user to know the real value of the company or to see the current price of land before making an investment in stock market. As a consumer in today’s volatile economy I prefer fair value

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