Final answer:
The statement is false; companies don't abandon the historical cost principle merely because an asset's future utility drops below its original cost. Decisions are based on future potential rather than sunk costs, although assets can be reassessed for impairment.
Step-by-step explanation:
It is false that a company abandons the historical cost principle when the future utility of the asset falls below its original cost. Instead, the decision to give up on an asset is based on future utility and projected earnings rather than past costs.
The historical cost principle typically records an asset based on its original cost of acquisition. However, accounting standards do allow for the reassessment of an asset's value through impairment or devaluation processes if there's evidence that the future utility will not justify its current book value.
Firms facing sunk costs, such as money spent creating and launching a product that is performing poorly, should ignore these past expenses and instead make decisions based on future outcomes and additional marginal gains.
Essentially, once an expense is incurred and cannot be recovered, it is no longer relevant to the decision-making process. Instead, the focus should be on maximizing future revenue and profitability, regardless of the costs that have already been sunk.