Historical-cost-based accounting measures are usually inadequate for evaluating economic returns on new investments and, in some cases, create disincentives for expansion.

Question

Quizplus · Accepted Answer

Historical-cost-based accounting measures only consider the initial cost of an investment and do not factor in inflation or changes in market conditions. This can lead to inaccuracies in evaluating the true economic return on investments, especially over long time periods. Additionally, if a company's assets appreciate in value over time, accounting rules may require the company to record the increase in value as a liability, creating a disincentive for investment or expansion.

Historical-Cost-Based Accounting Measures Are Usually Inadequate for Evaluating Economic Returns