Chapter 5 - Normative theory; Changing prices - P1 | Take the Quiz

Which of the following best describes the basis of the accounting measurement model in use today?

A. Historical cost accounting

B. Current cost accounting

C. Historical cost, except where conceptual frameworks and accounting standards allow deviation from it

D. A mixed method accounting model

Which of the following is not a valid criticism of historical cost accounting?

A. It is not relevant in times of changing prices.

B. It is not logical to add assets together that have been purchased in different periods, with dollars of different purchasing power.

C. It understates profit in times of rising prices.

D. It distorts the current year's operating results by including the current year's income, holding gains that accrued in previous periods.

If historical cost profits are all distributed in dividends during times of rising inventory prices, this will lead to (assuming other things being equal):

A. A reduction in financial capital

B. An erosion of operating capacity

C. No effect on capital

D. None of the given options is correct

Which of the following measurement models of accounting equate with perspectives of maintaining the purchasing power of capital intact?

A. General price-level adjustment accounting

B. Current cost accounting

C. Continuously contemporary accounting

D. None of the given options is correct

Which of the following is not a feature of current cost accounting?

A. It uses current values which could be based on present value, entry value (replacement) costs or exit value (selling) prices.

B. It seeks to maintain the operating capability of capital.

C. It uses specific prices of assets rather than general price-level adjustments

D. It seeks to maintain the purchasing power of capital.

Which of the following statements is not true in times of inflation?

A. Holders of monetary liabilities will gain.

B. Holders of monetary assets will lose

C. If the amount of monetary assets is the same as monetary liabilities, no gains or losses would occur.

D. If the amount of monetary assets held is less than the amount of monetary liabilities held, a net loss would occur.

The reasons the promotion of alternative accounting models to historical cost did not succeed Include:

A. There was a lack of agreement as to which model was the best

B. The fact that such a change would have been extremely radical and costly

C. The fact that such a change would create huge economical consequences, and therefore those affected would lobby to protect their self-interest

D. All of the given options are correct.

How would the deprival value of an asset be determined?

A. It is the present value of the future cash flows to be generated by the asset, except where the current replacement cost or net selling price is less than that value.

B. It is the net selling price, except where the value to the business (present value) is less, or the current replacement cost greater.

C. It is the current replacement cost, where the present value is less than the current replacement cost and greater than the net selling price.

D. It is the value to the business of the asset (present value), within the bounds that this value is not less than the net selling price or greater than its current replacement cost.

What is included in 'income' according to the IASB Conceptual Framework?

A. All events that result in an increase in the net assets of the reporting entity, other than owner contributions

B. All events that result in an increase in the net assets of the reporting entity

C. Events that relate to the central operations of the entity

D. All of the given options are correct.

Which of the following statements is correct under our current accounting standards?

A. Many assets can, or must, be measured at historical cost

B. Inventory must be measured at cost, or net realisable value if it is lower

C. Property, plant and equipment can be valued at cost where an entity has adopted the 'cost model' for a class of property, plant and equipment.

D. All of the given options are correct.

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Chapter 5 - Normative theory; Changing prices - P1

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