Question
Cost Allocation
Keeping an asset suggests reinvestment in the asset. Finance theory is reliable with the notion that reinvestment is at current value or replacement cost. Such a decision is seemingly based on comparing expected future cash flows that will be made by the asset and the cost of replacing it with a new one that may generate the same or different cash flows
According to the theoretical framework the drive of financial statements is to provide information regarding performance. Investment or else reinvestment decisions are a part of that performance. Yet, the historical cost of fixed assets is booked and allocated over following accounting periods
Required
a) Present arguments in favor of cost allocation
b) Does cost allocation provide relevant information?
c) Would a current-value approach to computation of fixed assets be preferable? Why?
d) Would a current-value approach be reliable with the physical capital maintenance concept? Describe
e) What problems as well as limitations are associated with using replacement cost for fixed assets?