Deck 6: Accounting Measurement Systems

Question 1

Under international accounting standards,the definition of fair value can vary substantially.

Answer 1

True

Question 2

The FASB shows its supports for the financial capital view of current cost accounting in the Statement 33.

Answer 2

False

Question 3

One of the reasons that MacNeal advocates the use of exit prices is the information gap created by the separation of ownership and control in companies.

Answer 3

True

Question 4

Exit price accounting can be seen as a short-term approach as it focuses on disposition and liquidation values.

Question 5

Exit price accounting has been criticised for it does not recognise the possibility of selling assets as one package.

Question 6

The term 'current cash equivalent' refers to the asset's realisable price on the basis of an orderly liquidation.

Question 7

The difference between the physical capital concept and the financial capital concept is that holding gains are included in profit under the physical capital concept.

Question 8

One of the criticisms of current cost accounting is that it does not recognise increases in the value of assets before the assets are sold.

Question 9

The three major income and capital measurement systems in accounting are based on historical cost,input values and exit values.

Question 10

Present measurement requirements in Australia can be criticised for inconsistency with respect to the valuation bases used.

Question 11

One reason for the growth in importance of accounting information is the use of the corporate form for large organisations.

Question 12

Including holding gains as a component of profit reflects a financial capital view.

Question 13

Exit price accounting considers value in use as one of its key factors.

Question 14

Each accounting measurement model creates the same type of misstatement risk for an auditor.

Question 15

Sterling defines profit as the difference between capital at two points in time.

Question 16

Historical cost is more accountable because it is based on actual transactions.

Question 17

If current cost accounting (CCA)is greater than current cash equivalents (CCE)and CCE is greater than net present value requirement (NPVR),it implies that assets have value in use and the firm should maintain its current operations.

Question 18

The difference between share market analysis and corporate analysis is that share market analysis focuses on the underlying values of companies whereas corporate analysis mainly tries to ascertain what other investors are thinking.

Question 19

Current cost profit is defined as the difference between the present (discounted)value of expected net cash flows of a firm at two points in times,excluding additional investments by and distributions to owners.

Question 20

If an asset's exit value differs significantly from its entry price this decreases the risk of holding the asset for the firm.

Question 21

Which of these best describes the second era of accounting phases as suggested by MacNeal?

A)There are numerous shareholders who own the company
B)The need to ensure that financial statements were reliable established public accounting as a profession
C)Doing business is very risky and ventures are usually concluded within few years
D)Providing financial reports for external users became an important function of accounting

Question 22

On the 1 June,Hazel Ltd commenced business with $10,000 cash and immediately purchased 2000 sprockets for $5 each.On the 30 June it sold all the units for $10.The current cost of the units on 30 June was $5.50 each.Under the physical capital perspective,what would be the capital maintenance adjustment for Hazel Ltd for June?

A)$1000
B)$2000
C)$9000
D)$10,000

Question 23

Which of these is not true with respect to the assumptions of the value-in-use and the value-in-exchange approaches?

A)Additivity of economic phenomena is made in the same unit,adjusted for inflation and price movements
B)Up-to-date observations of market prices are more relevant for financial decision making
C)Valuation does not depend on a subjective allocation
D)Historical cost accounting is a fairly reliable valuation method

Question 24

Which of these is a defence of current cost accounting?

A)It is the most objective of the proposed accounting methods
B)Relevant current events of the accounting period should be accounted for to maintain the usefulness of accounting information for decision-making
C)It specifically recognises future technological changes in profit determination
D)All of the above are defences

Question 25

Which of these is a criticism of the physical capital concept?

A)It is not meaningful if the firm does not continue to replace identical units
B)When costs are decreasing a profit may still be recorded when a company sells a product for less than purchase price
C)When a company buys and sells in the same market it will record zero profit
D)All of the above

Question 26

One of the key factors identified by Chambers in support of CoCoA is additivity.Which of the following does not support this view expressed by Chambers?

A)Using different measurement scales in financial statements renders them unable to provide practical meaning when the values are aggregated.
B)The valuation of all elements of the balance sheet at their money equivalents provides one rule that can be applied consistently by any company
C)The cash equivalent of assets can be quite different depending upon the procedure used in selling them
D)All of the above do not support the view that CoCoA has additivity.

Question 27

The argument that is descriptive of exit price accounting is:

A)It takes into account the opportunity cost of holding assets
B)The values of non-monetary assets are adjusted to measure changes in the market selling prices of those assets
C)When considering the financial position of the firm and the results of the firm's operations changes in the general purchasing power of money is taken into account
D)All of the above

Question 28

Under the physical capital perspective what capital maintenance adjustment would be needed for the following situation? GHI Company purchased 300 units on 1 March for $25 each.On 31 March,GHI sold all the units for $30 each.On this date the current cost of each unit was $29.

A)$1500
B)$1200
C)$9000
D)$300

Question 29

Which of the following is not what IAS 16 / AASB 116 prescribes in relation to asset measurement?

A)IAS 16 /AASB 116 allows companies to choose between a cost model and a current cost model
B)On acquisition the cost price of the asset is its fair value
C)All assets within a class must be valued under the same principles but not all classes must use the same valuation model
D)Assets have to be revalued in a specified period

Question 30

The statement in relation to historical cost that is true is:

A)The stewardship objective of historical cost accounting emphasises the contractual relationship between a firm and those who provide resources to it
B)Historical cost understates profit in a time of rising prices
C)Historical cost is more subjective than alternative systems about what is really going on in a company's business
D)A and B are true

Question 31

Under the historical cost accounting model the financial statement that is regarded as the most important is:

A)Balance sheet
B)Cash flow statement
C)Income statement
D)They are all equally important

Question 32

According to Whitman and Shubik,which of these is not the reason why investors are more interested in share market analysis compared to corporate analysis?

A)Investors develop a short-term view because the economics of share market investing is directed towards that end
B)Investors deal with highly marketable securities and therefore move in and out of situations readily
C)Investors have little knowledge about a company,its management,its policies and objectives
D)Investors are concerned about what is really going on in a company's business

Question 33

Which of the following is not true with respect to the notion of adaptive behaviour?

A)It implies a continual attempt to adapt to the competitive business environment for the sake of survival
B)The firm should consider at all times the alternative opportunities for greater returns for its non-current assets (i.e.if they were sold and the proceeds invested elsewhere)
B)The firm will keep a non-current asset if the present value of the future net cash flows from the use of the asset is less than the present value of the expected net cash flows from an alternative investment of the exit value of the asset
D)All of the above

Question 34

On the 1 June,Hazel Ltd commenced business with $10,000 cash and immediately purchased 2000 sprockets for $5 each.On the 30 June it sold all the units for $10.The current cost of the units on 30 June was $5.50.
What would be the profit for Hazel Ltd under the physical capital perspective?

A)$9 000
B)$10
C)$11
D)$12

Question 35

What was the main recommendation of SAP 1 Current Cost Accounting,issued in Australia in November 1983?

A)That companies disclosed information on profit from continuing operations on a current cost basis for the current financial year
B)That companies are not required to report historical cost information if they have disclosed current cost information
C)That companies presented supplementary current cost accounting statements in addition to historical cost financial statements
D)That companies used current cost for the main financial statements and historical cost as supplementary data

Question 36

The alternative that is not an argument in favour of exit price accounting is:

A)Valuing all elements in the financial statements at their money equivalents provides one rule that can be applied consistently.
B)The financial statements are allocation-free
C)Rather than measuring past events the method measures those that might happen if a firm does something other than what was planned
D)Exit price accounting involves references to real-world examples therefore it is more grounded in reality than historical cost accounting

Question 37

The statement that is true with respect to current cost accounting is:

A)Gains are recorded only when the assets are disposed of
B)Holding gains are not included in current operating profits
C)Current operating profit is the excess of the current value of the output sold over the current cost of the related inputs
D)None of the above is true

Question 38

Which measurement was agreed as the best basis of measurement by the IASB and the FASB?

A)Historical cost
B)Fair value
C)Exit price
D)Current cost

Question 39

Which of these is not a criticism of exit price accounting with respect to the profit concept?

A)Accounting must measure past events
B)Exit pricing does not provide relevant data to match against revenues
C)A firm can consider an asset to have value because of its use in business rather than its sale and use by another enterprise
D)All of these are not a criticism of exit value accounting with respect to the profit concept

Question 40

Which of these is not a criticism of historical cost accounting?

A)It is not objective and is open to manipulation
B)It has been used by business over many centuries
C)Historical cost overstates profit in times of rising prices
D)It relegates the balance sheet to a secondary position

Question 41

Outline and discuss the arguments for and against the adoption of the continuously contemporary accounting system.

Question 42

Are holding gains a component of accounting profit? Discuss.

Question 43

The statement that is not true in relation to auditing and accounting measurement systems is:

A)Auditors must contend with a mixed measurement model
B)Auditors deal with some valuation issues by seeking expert opinions.
C)Evidence suggests that expert valuations are more reliable than those made by management
D)None of the above,i.e.all are true statements

Question 44

'While proponents of current cost accounting are convinced that it provides more useful information than historic accounting,they do not agree on all issues.In general supporters can be divided into two camps; (1)those who believe in the financial capital concept,and (2)those who believe in the physical concept.' J.Godfrey,et el,'Accounting Theory',7^th Ed.p.205.
Explain the differences between the two concepts and the arguments for and against each viewpoint stating which you approach you believe is the most valid.

Question 45

Which of the following use of measurement concepts is not correct according to the international accounting standards?

A)Measurement of provisions is determined by the expected present value method
B)The residual value of an asset should be calculated as its discounted value
C)Property,plant and equipment may be valued at historical cost or revalued amount
D)Financial statements of an entity that operates in a hyperinflationary economy are adjusted using a general price level index

Question 46

Explain and discuss the difference between 'value in use' and 'value in exchange' and the two different perspectives they give on the purpose of financial accounting.

Question 47

'However at the current (most recent)stage the IAS approach can be described as a mixed valuation approach with fair value accounting sometimes defined as current market entry cost prices but also historic cost,selling prices and discounted future cash flows' J.Godfrey,et el,'Accounting Theory',7^th Ed.p.206.
Explain and discuss the above statement.