AN EMPIRICAL INVESTIGATION OF THE VALIDITY OF HISTORICAL COST/CONSTANT DOLLAR DATA ESTIMATION MODEL

Scope of Study. This dissertation examined the validity of the Davidson-Weil and Parker historical cost/constant dollar data estimation models. The models generate surrogate historical cost/constant dollar data directly from historical cost data available in comparative financial statements. Historical cost data for 432 companies were gathered. The estimation models were applied to the historical cost data to produce surrogate historical cost/constant dollar data. The estimated data were then compared to actual historical cost/constant dollar data which the 432 companies presented pursuant to reporting requirements of Statement of Financial Accounting Standards No. 33.;Findings and Conclusions. Both models achieved an average estimated historical cost/constant dollar cost of goods sold amount which was within one percent of the actual amount. Estimated historical cost/constant dollar depreciation expense exceeded actual historical cost/constant dollar depreciation expense by an average of 13.76 percent for the Davidson-Weil model and 14.51 percent for the Parker model. The estimated purchasing power gain/loss (identical calculation for both models) overstated actual amounts by an average of 70.11 percent; however, for companies with actual purchasing power gains and losses in excess of $10 million, the estimate exceeded the actual amount by an average of 18.68 percent.;Because "validity" is a normative criteria, it was not possible to make a priori statements about the "validity" of the models. Nevertheless, the results of this dissertation provided a basis for review of past studies which relied on the models and provided information which may be useful to accountants, auditors, and financial analysts who must prepare, review, or project historical cost/constant dollar data.