In other words; when stock market advocates praise the returns of the market with reinvested dividends, if one were able to hypothetically invest in 1900, and they tout today’s returns it is a bit of a lie. For example, an employee’s salary for a month is a cost incurred to provide benefits that last only during the month in which services are performed. Stock prices plummeted worldwide Monday, amid heightened fears of a US recession.
Another important principle of accounting, the historical cost principle states that asset and liability measurements should be based on the amount transacted on in the original exchange transaction. Myth: The blame for the bubble in the housing market and pending Stock Market Crash rests with former U.S. Federal Reserve Chairman Alan Greenspan, who kept interest rates too low for too long.
The advantages of using historical costs to measure assets and liabilities are thus: the asset or liability is recorded at its cash price, the cash price that’s recorded is highly verifiable, and the cash price provides relevant cash flow information. Companies could be required to adopt strict treatments for measurement and classification purposes and be directed to apply the same treatments month after month. And in the long run, saner lending and more reasonable home prices will lead to a stronger economic recovery.
Soaring home prices were a worldwide phenomenon driven by demographics and low long-term interest rates, which were caused by low inflation and the huge buildup of savings in Asia. Myth: Because the current slowdown is due to the sharp cutback in the willingness of financial firms to lend, central banks can do little to improve the situation and stop the pending Stock Market Crash.