Correlational and Differential Influence of Historical Cost and Current Cost Profits on the Operating Capabilities of the Firm

Abstract

The study investigated the correlation and differential influence of historical cost and current cost profits on the operating capabilities of the firm. The financial statements of thirty-one Nigerian Companies were surveyed and adjusted for effects of price changes using the Consumers’ Price Index (CPI). Correlation influence between the historical cost profits on the operating ability of the firm was measured and established on one hand and that of current cost profit on the other hand. Differential impacts of the method of profit measurement on the operating capability of the firm was equally measured and established. The weighted value of students’ distribution – t, HC reveals a correlation which is materially significant between profits and operating ability of the firm.  Equally, the F-test result reveals substantial differential impacts of profits measured on historical and current cost bases on the operating ability of the firm during periods of rising prices. Companies interested in maintaining equal operational strength during periods of changing prices are to adopt appropriate basis of profit measurements commensurating the impacts of price changes for the sustenance and survival of the firm.