historical cost basis

Examples of historical cost basis in the following topics:

• Impact of Inflation on Financial Statement Analysis

  • In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices.
  • Many of the historical numbers appearing on financial statements are not economically relevant because prices have changed since they were incurred.
  • Hence, adding cash of $10,000 held on December 31, 2002, with $10,000 representing the cost of land acquired in 1955 (when the price level was significantly lower) is a dubious operation because of the significantly different amount of purchasing power represented by the two identical numbers.
  • Inflation accounting, a range of accounting systems designed to correct problems arising from historical cost accounting in the presence of inflation, is a solution to these problems.

• Depletion Base

  • The depletion base is the total cost of a natural resource and includes acquisition, exploration, development, and restoration costs.
  • The depletion base is the total cost of the natural resource.
  • Cost depletion is computed by (1) estimating the total quantity of mineral or other resources acquired and (2) assigning a proportionate amount of the total resource cost to the quantity extracted in the period.Cost Depletion FormulaAccording to the IRS Newswire, over 50 percent of oil and gas extraction businesses use cost depletion to figure their depletion expense.
  • The cost depletion formula for financial reporting purposes is the total investment cost of the property / (the quantity extracted during the period / the property's total estimated production).
  • When calculating cost depletion for tax purposes, multiply the formula by the property's adjusted basis or the property's historical cost subtracted by depletion expense for prior years.

• Limitations of the Balance Sheet

  • The three limitations to balance sheets are assets being recorded at historical cost, use of estimates, and the omission of valuable non-monetary assets.
  • There are three primary limitations to balance sheets, including the fact that they are recorded at historical cost, the use of estimates, and the omission of valuable things, such as intelligence.
  • Fixed assets are shown in the balance sheet at historical cost less depreciation up to date.
  • The historical cost will equal the carrying value only if there has been no change recorded in the value of the asset since acquisition.
  • Historical cost is criticized for its inaccuracy since it may not reflect current market valuation.

• Markup Pricing

  • So the relevant cost would be the cost that a buying company would incur if it made the product itself.
  • The first step involves calculation of the cost of production, and the second step is to determine the markup over costs.
  • The total cost has two components: total variable cost and total fixed cost.
  • In both cases, costs are computed on an average basis .
  • A cost-plus price will equal average variable costs plus average fixed costs plus markup per unit.

• Cost of Land

  • Land is recognized at its historical cost or purchase price, and can include any other related initial costs spent to put the land into use.
  • Land is recognized at its historical cost, or the cost paid to purchase the land, along with any other related initial costs spent to put the land into use.
  • If the land's market value increases over time, its value on the balance sheet remains at historical cost.
  • If the sale of land results in a gain, the additional cash or value received in excess of historical cost will increase net income for the period.
  • If the sale results in a loss and the business receives less than the land's historical cost, the loss will reduce net income for the period.

• Gross Profit Method

  • Periodic inventory is not updated on a regular basis.
  • Calculate the cost of goods available for sale as the sum of the cost of beginning inventory and cost of net purchases.
  • Use projected gross profit ratio or historical gross profit ratio whichever is more accurate and reliable.
  • Calculate the cost of ending inventory as the difference of cost of goods available for sale and estimated cost of goods sold.
  • Furniture Palace has cost of goods available for sale of $5000.

• Cost of Equipment

  • The cost of equipment is the item's purchase price, or historical cost, plus other initial costs related to acquisition and asset use.
  • The equipment's cost is calculated by adding the item's purchase price, or historical cost, to the other costs related to acquiring the asset.
  • Historical cost also includes delivery and installation of the asset, as well as the dismantling and removal of the asset when it is no longer in service.
  • Since accounting standards state that an asset should be carried at the net book value, equipment is listed on the balance sheet at its historical cost amount.
  • The cost of equipment includes all costs paid to put the asset into use.

• Cost of Buildings

  • The cost of a building is its original purchase price or historical cost and includes any other related initial costs.
  • The cost of a building is its original purchase price or historical cost and includes any other related initial costs spent to put it into use.
  • Buildings are listed at historical cost on the balance sheet as a long-term or non-current asset, since this type of asset is held for business use and is not easily converted into cash.
  • The cost of a building can include construction costs and other costs incurred to put the building into use.
  • Summarize how a company would calculate the cost of a building

• Cost of Improvements

  • The cost of an asset improvement is capitalized and added to the asset's historical cost on the balance sheet.
  • The cost of the improvement is capitalized and added to the asset's historical cost on the balance sheet.
  • If the capital improvement is financed, the interest cost associated with the improvement should not be capitalized as an addition to the asset's historical cost.
  • In 201X, the interest expense is $50; the interest expense is a period cost and reported on the income statement for 201X and not added to the asset's historical cost.
  • When the cost of a capital improvement is capitalized, the asset's historical cost increases and periodic depreciation expense will increase.

• Cost of capital

  • The cost of capital refers to the cost of the money used to pay for the capital.
  • Moreover, if a project contains a similar risk to a company's average business activities, then it is reasonable to use the company's average cost of capital as a basis for evaluating the success of investment .
  • In order to determine a company's cost of capital, the cost of debt and the cost of equity must be calculated.
  • One way of combining the cost of debt and equity to generate a single cost of capital number is through the weighted-average cost of capital (WACC).
  • The cost of capital is the cost of the money used to finance the plant.