Question 1

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

Accepted Answer

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.

Question 2

Assume that for Company X,the opening residual equity was $30 000 000 and the price index increased from 150 to 175.The capital maintenance adjustment would be calculated and classified as:

Accepted Answer

A)  Calculation: $30 000 000 × 25/150 = $5 000 000 and classified as an income 
B)  Calculation: $30 000 000 × 25/175 = $4 285 714 and classified as an income 
C)  Calculation: $30 000 000 × 25/150 = $5 000 000 and classified as an expense 
D)  Calculation: $30 000 000 × 25/175 = $4 285 714 and classified as an expense

Question 3

A limitation of Current Cost Accounting does not include the fact that:

Accepted Answer

A)  Replacement costs are easily determined, and therefore the preparation cost is low 
B)  Replacement costs do not reflect what it would be worth if the firm decided to sell it 
C)  CCA assumes assets would in fact be replaced, or replaced with that type of asset and not another 
D)  There are too many versions of current cost accounting, making it confusing to preparers

Question 4

Which of the following statements about holding gain (cost savings)in the CCA model is false?

Accepted Answer

A)  Unrealised savings include gains (cost saving) from holding inventory that has increased in price, which have yet to be realised. 
B)  Realised savings relate to cost savings in inventory actually incurred, and gains (cost savings) relate to depreciation actually incurred. 
C)  Unrealised savings include gains (cost savings) from holding depreciable assets (with higher replacement costs) not yet realised through the process of depreciation. 
D)  All of the given options are correct.

Question 5

Which of the following aligns with CoCoA's definition of 'wealth'?

Accepted Answer

A)  The present (selling) price is seen as the correct valuation of wealth at a point in time. 
B)  Profit is not tied to the increase (or decrease) in the current net selling prices of the entity's assets. 
C)  Wealth is the distinction between realised and unrealised gains-not all gains are treated as part of profit. 
D)  Profit is the amount that cannot be distributed, while maintaining the entity's adaptive ability (adaptive capital).

Question 6

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

Accepted Answer

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.

Question 7

Craig sold land for $1 200 000.He had initially purchased the land for $1 000 000,when the price index was 100.The price index at the end of the current period is 118.The adjusted cost is $1 180 000.The adjusted profit is $20 000 (compared with an historical cost profit of $200 000).This is an example of:

Accepted Answer

A)  Financial capital maintenance perspective 
B)  Purchasing power maintenance perspective 
C)  Physical operating capital maintenance perspective 
D)  None of the given options is correct.

Question 8

Assuming a price index calculated 104.5 in 2013,compared with 100 in 2012,for a bundle of goods,what is the current purchasing power of every dollar,compared to 2012?

Accepted Answer

A)  95.5 cents in every dollar, on average 
B)  95.69 cents in every dollar, on average 
C)  96.5 cents in every dollar, on average 
D)  $1.045 in every dollar, on average

Question 9

In the historical cost model there is an assumption that the monetary unit is fixed and constant over time.Which of the following components of the modern economy makes the assumption less valid than it was at the time the model was developed?

Accepted Answer

A)  Specific price-level changes, occasioned by such things as technological advances and shifts in consumer preferences 
B)  General price-level changes (inflation) 
C)  Physical operating capital maintenance perspective 
D)  All of the given options are correct.

Exam 5: Measurement Issues: Accounting for the Effects of Changing Prices and Market Conditions