Deck 14: Accounting for Inflation and Changing Prices

Question 1

Inflation has posed the single greatest problem that is faced in accounting theory.

Answer 1

True

Question 2

Both predictive value and representational faithfulness are impaired under historical costing.

Answer 2

True

Question 3

Entry value refers to replacement cost in markets in which the asset, liability, or expense ordinarily acquired.

Answer 3

True

Question 4

Monetary items gain or lose purchasing power as the price level changes.

Question 5

SFAS No. 33 specified replacement cost as the basis of the primary financial statements.

Question 6

Deprival value is computed by taking the lower of Present Value and Net Realizable Value and then the lower of the survivor and Entry Value.

Question 7

Monetary holding gains and losses are capital adjustments only, and are not a component of income.

Question 8

Monetary assets and liabilities do not include notes receivable and payable.

Question 9

In ASR 190, the SEC reinforced its long-standing position of forbidding the presentation of information other than historical cost.

Question 10

Total holding gain or loss is the sum of monetary holding gains and losses and real holding gains and losses.

Question 11

Specific price level indexes can be used to estimate the prices of assets in current year dollars.

Question 12

A monetary holding gains are the difference between general price-level-adjustment amounts and current value.

Question 13

A general price index is broadly constructed for ascertaining the change in prices for all goods and services.

Question 14

A current value income system does not include purchasing power gains and losses as an element of income.

Question 15

SFAS No. 33 required both constant dollar and current-cost-adjusted income.

Question 16

Current cost represents an attempt to derive the specific value or worth for a particular point or period in time of assets, liabilities, expenses, and revenues.

Question 17

During periods of deflation, a firm's net monetary liability position experiences a purchasing power gain.

Question 18

The value of an asset may be determined by multiplying its historical cost by a fraction consisting of the general price index for the current period divided by the general price index existing at the time of acquisition.

Question 19

Deprival value measures the opportunity cost to the enterprise of being deprived of the asset.

Question 20

During a period of inflation, a firm's net monetary asset position experiences a purchasing power loss.

Question 21

Which of the following was required by SFAS No. 33 as the basis of primary financial statements?

A) Historical cost
B) Current cost
C) Present value of future cash flows
D) Net realizable value

Question 22

The cost approach to asset valuation involves determining the net realizable value, or exit value, of the asset.

Question 23

The overall format adopted in SFAS No. 33 is one aggregation rather than disaggregation.

Question 24

SFAS No. 157 may result in a decrease in financial statement comparability among firms.

Question 25

Which of the following describes "deprival value"?

A) It is a not a good measurement of fair value.
B) It is the higher of exit value and replacement cost.
C) It measures the opportunity cost to the enterprise of doing without the asset.
D) It is the lower of exit value and or present value of future cash flow.

Question 26

Which of the following is not a true statement?

A) Prior to SFAS 33, the majority of accounting literature on the subject of changing prices dealt with the possibility of restating historical cost financial statements for changes in general price levels.
B) Prior to SFAS 33, the majority of accounting literature on the subject of changing prices dealt with the possibility of adopting current cost as a new measurement system.
C) The need to consider the effects of changing prices in financial reports has followed a rather evolutionary development.
D) Measuring current costs is easier than restating historical cost for changes in units of currency.

Question 27

Which of the following qualities are impaired under historical costing?

A) Additivity
B) Predictive value
C) Representational faithfulness
D) All of the above

Question 28

Which of the following is a true statement regarding a general price index?

A) Its computation does not require statistical sampling.
B) It is narrowly constructed to determine the changing level of prices in a particular segment of the economy.
C) It is broadly constructed for ascertaining the change in prices for all goods and services.
D) It cannot be used to compute price-level adjusted historical cost.

Question 29

According to the text, which of the following has posed the single greatest problem that is faced in accounting theory?

A) Historical costing
B) Additivity
C) Inflation
D) Price-level adjustments

Question 30

SFAS No. 89 continued the requirement that current cost income measurement, purchasing power gain or loss and holding gain information be disclosed.

Question 31

Which of the following is not true statement?

A) Exit value denotes the selling price that can be received from the firm's assets when sold through a process of orderly liquidation.
B) Exit value is a form of opportunity cost.
C) Entry value refers to replacement cost.
D) Exit value is generally preferred to replacement cost.

Question 32

Which of the following is a true statement regarding a specific price index?

A) Its computation does not require statistical sampling.
B) It is narrowly constructed to determine the changing level of prices in a particular segment of the economy.
C) It is broadly constructed for ascertaining the change in prices for all goods and services.
D) It cannot be used to compute price-level adjusted historical cost.

Question 33

Which of the following does not accurately describe purchasing power gains and losses.

A) Purchasing power gains and losses arise because monetary items gain or lose purchasing power as the price level changes.
B) Purchasing power gains and losses are part of SFAS No. 157's income measurement system.
C) Purchasing power gains and losses are determined by measuring the purchasing power of the monetary items and comparing it with the actual amount of the net monetary accounts.
D) All systems of both general purchasing-power-adjusted income and current value income include purchasing power gains and losses as an element of income.

Question 34

SFAS No. 33 specified that the effects of changing prices should be presented as supplementary information in annual reports.

Question 35

Under SFAS No. 157, if an asset is valued from and "in-use" perspective, its value is based on its use in combination with other assets.

Question 36

SFAS No. 82 eliminated the constant dollar income disclosures required by SFAS No.33.

Question 37

The fair value system of SFAS No.157 is an exit value system.

Question 38

SFAS No. 157 is grounded in the belief that historical costing is more important than current values.

Question 39

Under SFAS No. 157, prices for assets include deductions for transaction costs.

Question 40

Which of the following is a true statement?

A) Shortly after its inception, the FASB issued an exposure draft that proposed requiring the presentation of, as supplemental information, the balance sheet and income statement restated in units of general purchasing power.
B) The Trueblood Commission committed itself to support of the current value concept.
C) In ASR 190, the SEC reinforced its long-standing position of forbidding the presentation of information other than historical cost.
D) The AAA has always opposed price-level restated financial statements.

Question 41

Which of the following is not a true statement regarding John C. Burton, former chief accountant of the SEC?

A) His influence moved the development of accounting for changing prices significantly forward.
B) He believed that any changes in financial reporting should be made to the measurement system itself.
C) He believed that inflation creates greater distortions when the current cost approach to measurement is used.
D) He had doubts as to whether a system using general price-level adjustments would provide any benefit.

Question 42

SFAS No. 33 required enterprises to report supplementary information under

A) A constant dollar approach
B) A current cost approach
C) Both constant dollar and current cost approaches
D) None of the above

Question 43

Respond to the following:
a.
Explain what is meant by price indexes.
b.
Compare and contrast the two types of price indexes, specific price indexes and general price indexes.
c.
How did SFAS No. 33 make use of price indexes?

Question 44

List and describe the three valuation techniques used by SFAS No. 157 for assets and liabilities.

Question 45

Which of the following type of gains and losses arises purely because of the change in the general price level during a period?

A) Monetary holding gains and losses
B) Real holding gains and losses
C) All holding gains and losses
D) Unrealized gains and losses

Question 46

Define inflation and describe how it and historical costing have posed a problem for accounting theory.

Question 47

What are the there levels for securing prices in the fair value pricing hierarchy of SFAS 157?

Question 48

Distinguish between monetary holding gains and losses and real holding gains and losses.

Question 49

Which of the following is not a valuation technique that may be applied according to SFAS No. 157?

A) The Net realizable value approach
B) The market approach
C) The income approach
D) The cost approach

Question 50

Explain the concept of purchasing power gains and losses and how these gains and losses arise.

Question 51

Which of the following accurately refers to SFAS No. 157?

A) It is an income statement oriented standard.
B) It requires that unrealized monetary holding gains be included in operating income.
C) Assets are valued from "in-use" and in-exchange" perspectives.
D) It requires that purchasing power gains and losses be included in other comprehensive income.

Question 52

Which of the following is not a feature of SFAS 157?

A) It affects most balance sheet accounts but has little to say about related income statement considerations.
B) The fair value of SFAS No. 157 is an entry value system.
C) It is grounded in the belief that fair values are more relevant for decision-making purposes than historical costing.
D) Prices for both assets and liabilities do not include deductions for transaction costs, except transportation.

Question 53

Which of the following is true regarding "unobservable inputs"?

A) They pertain to level 1 prices in the fair value pricing hierarchy
B) They do not appear on the fair value pricing hierarchy.
C) They are higher in verifiability than level two inputs.
D) They are inputs for which there is little market activity.

Question 54

SFAS No. 33 specified which of the following as the basis of primary financial statements?

A) Replacement cost
B) Nominal historical cost
C) Current value
D) Constant dollar

Question 55

Which of the following is not a true statement?

A) Exit value denotes the selling price that can be received from the firm's assets when sold through a process of orderly liquidation.
B) Exit value is a form of opportunity cost.
C) Entry value refers to replacement cost.
D) Exit value is generally preferred to replacement cost.