Question

When short-term investments appear in the balance sheet at their current market values, it is an exception to the ______ principle?

Answer 1

Answer:

cost

Explanation:

It states that the assets and services are recorded at their purchase cost and that the accounting record of the asset should be maintained based on cost rather than the current market value.

The cost is the economic expense caused by the production of some good or the offer of some service. This concept includes the purchase of inputs, the payment of labor, production and administrative expenses, among other activities. According to the cost principle, the acquired assets and services must be recorded at their actual cost (also called historical cost). Although the buyer thinks that he obtained a bargain, the good is recorded with the price paid in the transaction, not at its “expected” cost. Assume that your sound equipment store acquires equipment from a vendor in liquidation. Consider also that the transaction is a bargain and pay just $ 2,000 for the equipment that would normally have cost you $ 3,000. The cost principle needs to record the actual cost of $ 2,000, not the $ 3,000 that the equipment is worth.

The cost principle also states that accounting records must contain the historical cost of an asset while the company has it. Why? Because cost is an objective measure. Imagine that the store maintains ownership of the equipment for six months. During that period, equipment prices rise, which can be sold at $ 3,5000. Should their book value (their "book value") be the actual cost of $ 2,000 or the current market value of $ 3,500? In accordance with the cost principle, the book value of the equipment remains its actual cost of $ 2,000.

Answer 2

Cost Principle, 
requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired.