1.

Importance
of
measurement

7.
2. Scale of
Measurement
Measurement
Issues

Chapter 5
Measurement
Theory
6. Accounting "Mind Map" 3. Operation
Measurement of Scale

4.
5. Reliability Fundamental,
& Accuracy Derived and
Fiat

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

1. Importance of Measurement
Two most quoted definition of “Measurement” :
- Campbell defines measurement as “the assignment of
numerals to represent properties of material systems
other than number, in virtue of laws governing these
properties”
- Stevens defines “assignment of numerals to objects or
events according to the rules”

Importance, both of them want to assign value to the result

of object or event (simply called data), to make the data
more informative and useful. With measurement, we will know
value of an object and what to do next related to the object.

2. Scale of Measurement
Every measurement used scales, type of scales made depends
on the semantics rule that used. Scales show what
information that will be represented by number. There 4
basic scale of measurement.
Terms Nominal Ordinal Interval Ratio
Continuou
Type Data Discrete Discrete Continuous
s
Absolute
Distinct Categories Ordered Meaningful
Zero
Feature Only Categories Intervals
Value
Student
Marital Grade, Temperatur
Age,
Status, Sex, Competitio e in
Example Height,
Gender, n Rank, Fahrenheit
Weight
Ethnicity Level of , IQ, Year
Position

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 Use of
Example Credit
Classificatio Standard Dollars
in rating,
n of Assets, Cost to
Accountin stock
Liabilities Accounting measure
g rating
assets

3. Operation of Scale
Invariance of scaleACCOUNTING
means that measurement
THEORY SUMMARY | BY : system will- 1801417001
Angelia Valentine

provide the same general form of the variables, and the

decision maker will make the same decision. The invariance
of a scale permits to know extent of theory remains the
same, even the scale is expressed in different units of
measurement.
Terms Nominal Ordinal Interval Ratio
Central
Frequency, Frequency,
Tendency Frequency, Frequency,
Mode, Mode,
(Descriptive Mode Mode, Median
Median Median, Mean
Statistics)
Inequality,
Inequality, Ranking Add,
Arithmetic Inequality,
Inequality Ranking Add, Subtract,
Equation Ranking
Subtract Multiply,
Divide
Statistical Chi Chi Square,
Analysis of Analysis of
Analysis Square, Analysis of
Variance, Variance,
Technique Analysis Variance,
Correlation, Correlation,
(Commonly of Rank Order
Regression Regression
Used) Variance Correlation

4. Fundamental, Derived and Fiat Measurement

Terms Fundamental Derived Fiat

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 Definition Numbers are Is one that Typical in social
assigned by depends on the sciences includes
reference measurement of accounting
to natural two or more
law quantities
Example Length, Measurement of Profit “there are
number, density depends hundreds way to
volume on measurement of measure profit”
both mass &
volume

5. Reliability and Accuracy in Measurement

- Concept of Reliability: relying on two aspects, 1. The
accuracy and certainty of measurement, 2.
Representative faithfulness
- Concept of Accuracy: accuracy reflects how close the
measurement is to the “true value” of the attribute
measure representation
- Two of that must be sure, because there are many
Sources of error such as THEORY
ACCOUNTING measurement
SUMMARYoperation stated- 1801417001
| BY : Angelia Valentine
imprecisely, wrong instrument, attribute, something in
environment, etc.
6. Measurement in Accounting
- Fundamental Measurement in Accounting: most
fundamental measurement is the measure of capital (by
historical cost, operational, financial, fair value)
and measure of profit (recently revenue recognition
linked to timely recognition measured by fair value)
- Derived Measurement in Accounting: Capital and Profit
also measure using derived measurement, due to
assessing the changes in the fair value of net asset
7. Measurement Issue for Auditors
The existence of alternative valuation methods for some
asset is issue for auditors, because proper use of methods,

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

accuracy and reliable result, and certain assumption that
reasonable from management cannot be beaten.

Additional resource :
- http://www.academia.edu/6929186/MEASUREMENT_THEORY_Ol
eh
- http://pojok-
akuntansi.blogspot.co.id/2016/02/measurement-
theory.html
- http://kodomogasuki.blogspot.co.id/2015/05/teori-
pengukuran-measurement-theory.html

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 1. Overview
Three Main
Measurement

8. Auditor's 2. Historical
Issue Cost Model

Chapter 6
Measurement 3. Current
7. "Fair Value"
Cost
under IFRS Theory Accounting
"Mind Map"

6. Value in Use 4. Financial Vs

VS Value in Physical
Exchange Capital

5. Exit Price
Accounting

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 1. Overview of Three Main Income and Capital Measurement
System

1960 Curent Cost System at

Buying Price (entry value)

1929 - late 1930 1961 Curent Cost System at

Historical Cost System Selling Price (exit value)
Fundamental Basis
For Measuring
Capital & Income

2. Historical Cost Model

 Definition
A historical cost is a measure of value used in
accounting in which the price of an asset on
the balance sheet is based on its nominal or original
cost when acquired by the company.
 Objective
In the historical cost system, the most important
issue relates to the measurement and reporting of
profit in relation to the net assets used.
Profit in historical cost method In traditional
accounting view:
 Income is the company's achievement for one
period.
 Expense is a done effort
 Profit is the effectiveness of a company as an
operating unit

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

  Two ACCOUNTING
Fundamental ConceptsTHEORY
to SUMMARY | BY : Angelia Valentine
the Historical Cost- 1801417001
Revenue-Expense
Description Matching of Cost Conservatism
Theory

Is a policy of anticipating
possible future losses but
Directs a company not future gains
to report an
expense on its Expenses should be allocated
Definition
income statement as soon as possible, while
in the same period revenues should not be
as the related recognized until there is a
revenues high probability that they
will be accepted

Not all costs and Tends to understate rather

expenses have a than overstate net assets
Cons /
cause and effect and net income, and
Critics relationship with therefore lead companies to
sales or revenues "play safe"

 Arguments for Advantages VS Critics for Historical

Cost
Advantages Weaknesses
Doesn’t provide enough
Simple, More Conventional
information that relevant to
Method, More Reliable and
investor, results in
Verifiable
incorrect dividend policies

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 Doesn’t have any adjustments
In terms of selling price
for inflation, hard to be
unidentifiable, historical
comparable with item purchased
cost play significant roles
in different time
Fits with cash flow
Financial statement present
statement, show exactly
old interest rate and outdated
what has been paid or
amounts
received
No Scope for Manipulation,
Intangibles assets are not
because data is supported
reported in financial
by evidence like invoice
statements
and receipt

3. Current Cost Accounting

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 Definition
Current cost is an accounting system in which an
asset is valued based on market price at the time
of purchase and profit is determined by the
allocation based on the current cost
 Objective
The purpose of Current cost is the need for
information by managers to make decisions in running
a business. They want to know how they should
allocate company resources to maximize profits.
 Profit Concept that Called “Business Profit”
Description Current Operating Realizable Cost Saving
Profit

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 Excess of the
current value of Increase in the current cost
the output sold of the assets held by the
Definition
over the current firm in the current period
cost of the asset
held by the firm
in current period

Different from
conventional
(historical cost)
stated that income
= current
operating profit +
reliazed holding The general terms used for
gain realizable cost saving is
Additional
holding gain or loses chich
Information In Current Cost can be realized or
System, Income / unrealized
Business Profit =
Current Operating
Profit + Both
Realized &
Unrealized Holding
gains

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 Arguments for Advantages VS Critics for Current Cost
Advantages Weaknesses
Can overcome the outdated Unreliable, because when the
issue in Historical Cost market price is not available

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 then the value is being
estimated
Possible to matching the
Changes in current cost not
current cost and current
always about fluctuation in
revenue resulted in better
selling price
current profit
Changes in current cost should
Can ignore the used of FIFO resulted in additional
LIFO because of using the increase in profit, even
current cost system though it is not being
realized in sales
Cannot provide the same
More Relevant, caused this
relevant and reliability in
take the inflationary
case of measuring the
adjustments into account
appreciation

4. Financial Capital VS Physical Capital (Capital

Maintenance)
Description Financial Capital Physical Capital

Financial capital
Physical capital is a
refers to the legal
Definition tangible asset that can
ownership of assets
be touched in a real
such as physical
sense
capital

In general, Physical capital is an

financial capital is economic source that is
Control / a capital held by controlled by entities
Held by shareholders or that are viewed or
bondholders interpreted as physical
production capacities

Profits or return on The difference between

Resulted in financial capital the present ending and
will arise after the the initial kos (or
effect of the owner historical cost) is the
/ claim transactions amount of adjustment to

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 during the period of retain capital so that
issuance the share does not belong
to the profit.

Financial capital Physical capital

maintenance is more
Conclusion trying to maintain
the economic value
in terms of capital
exchange rate
maintenance is more
trying to maintain
physical production
capacity.

5. Exit price Accounting

 Defintiion
Exit price is an accounting system that uses
the market price to measure the company's financial
position and financial performance. According to
Edwards and Bell (1961) exit value is the maximum
price of assets currently held when sold and reduced
by transaction costs. Another term exit value is
also called net realizable value of the asset.
 Objective
This making an important distinction between
measurement and assessment. the measurement gets
objective and independent prices from the measurer
(accountant), whereas the valuation is related to
expectations of future benefits that can be
generated by the underlying asset
 Advantages of Exit Price Accounting
This system provide information that is relevant
and reliable, additivity, allocation, reality,
objectivity and a measure of risk.
 Critics / Weaknesses of Exit Price Accounting
There is significant difference in valuation and
measurement that made in the past, the future and
the exit price itself.

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

6. Value in Use VS Value in Exchange

Value in use assesses the firm’s Value in Exchange assesses the

ability to survive in the long term firm’s ability to adapt in the short
(SOLVENCY ISSUE) term (LIQUIDITY ISSUE)

7. Fair Value Accounting under IFRS

IASB standards used different measurement based on
specific situation. IASV have been supporting the fair
value rather that recommending all encompassing one
accounting measurement method / system.

8. Issues for Auditors

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001
There is audit risk from different basis of measurement
model. This includes when auditor obtain valuation or
test the management assumption to these models.

Additional resource :
 https://www.investopedia.com/terms/h/historical-
cost.asp
 https://www.accountingcoach.com/blog/what-is-the-
matching-principle
 https://en.wikipedia.org/wiki/Convention_of_conservat
ism
 https://www.slideshare.net/sp45432/the-pros-and-cons-
of-current-cost-accounting-slide-5368333
 http://www.belajarakuntansionline.com/kelebihan-dan-
kelemahan-historical-cost-dan-current-cost/
 https://bizfluent.com/info-12061195-differences-
between-physical-financial-capital.html

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

 https://probophoenix.wordpress.com/2008/01/19/capital
-maintenance-physical-vs-financial/
 https://paliandri.wordpress.com/2013/03/12/historical
-cost-accounting/
 http://kodomogasuki.blogspot.co.id/2015/05/sistem-
akuntansi-historical-current.html
 http://www.academia.edu/6421286/DIFFERENCES_BETWEEN_C
URRENT_COST_AND_HISTORICAL_COST_ACCOUNTING
 http://www.academia.edu/23712734/CURRENT_COST_ACCOUNT
ING

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001

ACCOUNTING THEORY SUMMARY | BY : Angelia Valentine - 1801417001