Correlational and Differential Influence of Historical Cost and Current Cost Profits on the Operating Capabilities of the Firm

J O Udoayang,S A Effiong,A I Asuquo

doi:10.5430/ijfr.v2n1p64

Abstract

The study investigated the correlation and differential influence of historical cost and current cost profits on the operating capabilities of the firm. The financial statements of thirty-one Nigerian Companies were surveyed and adjusted for effects of price changes using the Consumers’ Price Index (CPI). Correlation influence between the historical cost profits on the operating ability of the firm was measured and established on one hand and that of current cost profit on the other hand. Differential impacts of the method of profit measurement on the operating capability of the firm was equally measured and established. The weighted value of students’ distribution – t, HC reveals a correlation which is materially significant between profits and operating ability of the firm.  Equally, the F-test result reveals substantial differential impacts of profits measured on historical and current cost bases on the operating ability of the firm during periods of rising prices. Companies interested in maintaining equal operational strength during periods of changing prices are to adopt appropriate basis of profit measurements commensurating the impacts of price changes for the sustenance and survival of the firm.

Highlights

The depleting nature of the shareholders capital resulting from the eroding effect of the historical cost accounting principle has made government and companies to be more concerned about maintaining the operating capital of the firm
The operating capability of the firm is effectively represented by the operating capital of the firm
Hypothesis one considers the differential influence of historical cost and current cost profits on the operating capital of the firm

Summary

Introduction

The depleting nature of the shareholders capital resulting from the eroding effect of the historical cost accounting principle has made government and companies to be more concerned about maintaining the operating capital of the firm. The historical cost concept of accounting has not provided for any feasible measures for reflecting the dynamic nature of business transactions, vis-à-vis changing prices. Due to this deficiency, most users of accounts tend to make mental adjustments to figures in the historical cost accounts to allow for the effect of inflation on the values of transactions. The existence of inflation and its persistent nature call for an alternative to the historical cost accounting method of ISSN 1923-4023 E-ISSN 1923-4031 www.sciedu.ca/ijfr profit reporting. Current cost accounting method has, as a basic principle, that operating profits should only be measured and reported after the capital of the firm has been maintained, (Dean, 1994). The emphasis on capital maintenance is highly imperative in today’s business environment if the business must survive and succeed (Glautier and Underdown, 1998)

Methods

Results

Conclusion