The Use of Market Value to Measure Companies' Assets - Research Paper Example

Project Title: Historic Cost Accounting Summary Historical cost accounting presents the picture of assets founded on the real amount compensated. This is the opposite of accounting for inflation. Historical cost accounting reflects on the original cost forked out for items in relation to assets and liabilities. It disregards the prices stated in the times of acquiring the items. One of the main issues related to this type of accounting is that is imprecise. Despite this, this type of accounting is widely utilized. Business valuation is the method by which a business can be assessed and quantified in terms of its monetary potential t both the buyers and sellers. Of special interest is the fact that there is perhaps no single way to ascertain the value of any business. The reason for this is that different persons have their own different ways of assessing a business and coming up with a general figure or price. Investors may assess a business from the perspective of its historic income. Additionally, fiscal circumstances may influence the general opinion on the accurate and complete worth of the business in question. For example, during inflation times when times are harder and the prices of most goods are high, there tends to be lack of jobs and this forces the rate of unemployment to rise. This alternatively means that as more entrepreneurs and buyers hunt for businesses to purchase, there tends to be increased level of competition leading to higher prices. The condition that can lead to the sale of the business also has a direct influence on it’s the value when it is being sold. The expected outcomes include formulation of a framework that ensures that all dimensions regarding accounting practices and policies practsed by accounting practitioners and company policy are addressed. The planned methodology is that of questionnaires employing both email and telephone calls. The study will be based on companies operating in the United Kingdom bringing into consideration diverse cultural backgrounds. Other study will take twelve weeks and will place into consideration ethical and resource issues. Aims The aim of this proposal is to: Formulate a greater awareness of attitude and values regarding the practice of historic cost accounting in situations of inflation Communicate effectively and efficiently with both company management and staff regarding the existent company accounting policies. This will take into account the different cultures of the staff and will be implemented both remotely and face-to-face Significance It has often been stated that the failing to apply indexation, through HCA accounting gives a picture of variation between the rates levied on assets versus the rates of the current inflation. This consequence of simple bookkeeping methods is frequently forecasted. This is done so regardless of the implications that may arise in practicing this type of accounting method. This is known as the " effects of inflation" theory. The main purpose of this research is to study the descriptive competence of this theory using a variety of research methods. . Expected Outcomes Understanding different approaches and means that addresses limitations related to historic cost accounting in situations of inflation Assess alternatives to historic cost accounting that may mitigate the flaws accompanying this type of accounting Provide recommendations that will ensure that the true picture and value of assets is obtained regardless of inflation situations. Literature Review Financial statements arranged on the historical cost root, do not inevitably translate to a true and fair arrangement of a company’s performance or its prospect. As capital in this case is not upheld. Additionally, real evaluations of performance by utilizing some ratios can be meaningless. These ratios could be represented in the form of return on capital. Another issue occurs if the profits are exaggerated or capital is rated too low. Another issue can arise if the assets are priced under an assortment of conventions. Globally, financial statements are based on the historical cost basis of accounting. This is done regardless to modifications in the broad level of prices. The financial statements can also ignore the price increase of assets held within a certain entity. This can be done so up to the point where the asset could be revalued. These are some of the major weaknesses that are present in the utilization of Historical cost accounting in the situation of inflation. Methodology & Techniques Qualitative and quantitative methods are to be employed in the collection of appropriate data and information. Questionnaires both having qualitative and quantitative data will be given to accounting practitioners, employees and management involved in accounting projects and most of these questionnaires would be submitted through emails (Hofstede, 2000). Another approach would include using telephone calls to reach distant respondents enabling gathering of information from remote organizations. Information will be gathered from three Middle East companies that are working within Australia, and two Australian countries that are working in the Middle East Justification of research methodologies and techniques Utilization of questionnaires in this study provides a means to seek information to answer hypothetical questions. This means that questionnaires provides an instrumental in predicting casual cultural issues, quantifying variations, and describing the characteristics of employees in international companies. Moreover, the use of emails and telephone calls increases the size and breadth of respondents and thus may provide credibility, and means of generalization of collected information (Hofstede, 2000). Of the most important and useful quantitative and qualitative data collection instruments are questionnaires. Although there are many types of questionnaires, identifying the appropriate type usually depends, to a far extent, on the purpose(s) of it. In this study, the BALLI inventory which is a five-point Likert-type questionnaire will be most suitable for the purpose of (1) collecting quantitative data regarding the practitioners and accounting researchers beliefs regarding the pertinent issues of the application of historical cost accounting in the situation where inflation may be present. (2) providing descriptive data to find appropriate answers to the Research Questions (i.e What are the limitations of historical cost accounting in the situation of inflation? Another rationale for adopting this kind of scales lies in the high reliability of scores they provide and the variety of data they produce especially when they are appropriately developed and administered (Ward, 2006). Format of the Questionnaire The main purpose of the questionnaire will be to collect such quantitative data as those concerned with the practitioners beliefs on the application of historic cost accounting and their other beliefs on the draw backs associated with this form of accounting. For this purpose, Horwitz's BALLI questionnaire (1985) is to be adopted by the researcher. The questionnaire consists of a set of questions divided into four major areas: (1) knowledge of historical cost accounting, (2) the difficulty of learning, (3) beliefs on the application of this type of accounting in situations of inflation,(4) communication strategies in terms of the valuation of companies assets (Ward, 2006). Moreover, it is a five-point Likert scale that requires accounting practitioners to reflect their beliefs about by choosing among five options: 'I strongly agree', ‘I agree’, ‘neither agree nor disagree’, ‘I disagree’ and ‘I strongly disagree’. To suit the study goals and setting, some changes are to be done on the questionare. For example, some items will also be modified to be in a 'multiple-choice' format rather than an 'agreement' one. Some additions will be done on the questionnaire as independent questions. This, consequently, will add to the validity of the data obtained as this will supposedly be attributed to pre assumed notions (i.e. the data will not be affected by such internal validity threats as instrumentation, administration or sample maturation). At the final stage, the questionnaire will be of one part. It will include a brief introduction about the questionnaire, its goal and the items. Ethical consideration The questionnaires that will be presented to the respondents would contain sensitive information that affects both the employee and the company they may be employed. To avert any ethical issues, respondent and participants consent will be obtained prior to their administration while any information obtained from the respondents will be kept confidential. This will introduce confidentiality into the research and will also ensure that the respondents are free. Resources and Support Several resources in such a study will be important ranging from translating personnel to computer software that will be utilized to analyze the data and information gathered. Support in terms of financial will be required to produce the questionnaires and other important materials and outputs. Timetable Activity Week 1 2 3 4 5 6 7 8 9 10 11 12 Writing of proposal Designing and translation of Questionnaire X Pilot study to test questionnaires X X Review of pilot study X Actual research X X X Data analysis X Report writing X Review and editing of the report X Publication of the report X Read More