Final answer:
The relationship among historical cost, relevance, and faithful representation is vital in accounting and financial reporting.
Step-by-step explanation:
The relationship among historical cost, relevance, and faithful representation is vital in accounting and financial reporting. Historical cost refers to the original cost of an asset or liability, which is recorded at the time of acquisition. Relevance means that the information provided is useful and can influence the economic decisions of users. Faithful representation requires that the information accurately represents the economic phenomenon it purports to depict.
For example, when a company purchases a piece of machinery, it will record the historical cost of the machinery as an asset on its financial statements. This historical cost is relevant because it provides information about the company's investment in productive resources. To ensure faithful representation, the company must accurately record the cost of the machinery and any subsequent changes in its value.
In summary, historical cost provides a starting point for recording assets and liabilities in accounting, while relevance ensures that the information is useful for decision-making. Faithful representation ensures that the recorded information accurately reflects the economic reality of the transactions.