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The Daily Technical #109: How can you forecast a company's implied share price using its EPS?

How to answer "Why are most assets recorded at their historical cost under accrual accounting?"

February 10, 2025

Good morning. Welcome to the 109th edition of The Daily Technical.

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OVERVIEW OF YESTERDAY’S QUESTION
Why are most assets recorded at their historical cost under accrual accounting?

The historical cost principle states that an asset's value on the balance sheet must reflect the initial purchase price, not the current market value.

This guideline represents the most consistent measurement method since there's no need for constant revaluations and markups, thereby reducing market volatility.

Common Mistakes

  1. Forgetting the role of historical cost in stabilizing financial reports amid market fluctuations. Highlight that avoiding revaluations curtails unnecessary volatility in reported earnings.

  2. Lacking mentions of objectivity, a key advantage of historical cost. Stress that this method is objective and verifiable, offering a clear audit trail devoid of assumptions or projections.

TL;DR

  • Historical cost principle mandates recording assets at purchase price, not market value.

  • Ensures consistency by avoiding frequent revaluations.

  • Reduces market volatility in financial statements.

  • Provides stability and reliability in reporting.

TODAY’S QUESTION
How can you forecast a company's implied share price using its EPS?

Type your answer here. Within 60 seconds you’ll have custom feedback in your inbox.

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