ABSTRACT
This study evaluates the effect of historical cost accounting on the reported profit of a
company: An evaluation of current cost accounting as an alternative reporting method. In
a high – inflationary and distorted economy like Nigeria with high uncertainties, the
conventional historical cost method of profit reporting has misled many companies into
liquidation since it has been found inadequate in accounting for the uncertainties. The
persistent nature of this phenomenon has called for a fair and suitable reporting method
of profits in times like this. The profits retained by the company are affected by costs and
appropriations of income. A higher cost will leave little income for appropriation and to
be retained in the company. The amount of profit will depend on the reported method in
operation. The historical cost method makes low depreciation to be charged while leaving
high profit for tax and dividends payments. In the light of the above, the objectives of the
study were to determine the nature of relationship between historical cost methods and
reported profits of manufacturing companies in Nigeria, ascertain the extent to which
current cost method affects the overstated profits made by manufacturing companies in
Nigeria and to determine how current cost accounting can be used to remedy the inherent
deficiencies in the historical cost methods.
An ex post facto research design was adopted
in this study. The population of the study comprises forty-eight ( 48) manufacturing
companies in Nigeria under 24 industrial classifications. Financial statements of these
companies are published annually for public consumption. But due to time lag, ten(10)
manufacturing companies quoted in the first tier securities market were randomly
selected . Secondary sources of data were used in the study. The data were obtained from
the statistical bulletin of the Central Bank of Nigeria and Annual Reports of the Nigerian
Stock Exchange. Depreciation charge served as the independent variables while Profits of
the firm served as the dependent variables and were used to measure the profitability,
capital adequacy ratio and improvement of shareholders` equity in the selected sampled
manufacturing companies. The Pearson Product Moment Correlation Coefficient was
employed to test the hypotheses one while Chi-Square were employed to test the
hypotheses two and three. These were done at the alpha level of 5% with the aid of the
SPSS 17.0 statistical software. The results of the study discovered that there is a positive
significant relationship between historical cost method and the reported profits of
companies in Nigeria , Current cost methods does not significantly affects the overstated
profits made by these companies and the study recommended that: there should
appropriate decision for current cost accounting method to be adopted so as to improve
their capital maintenance level, and there should be further research on the causes of
further research on the effect on historical cost accounting on the reported profits of
companies in Nigeria.
