Deck 4: Wealth and the Measurement of Profit

Question 1

Profit represents an increase in wealth.

Answer 1

True

Question 2

The net realisable value is the estimated proceeds of sales less, where applicable, all further costs to the stage of completion, and less all costs to be incurred in marketing, selling and distribution to customers.

Answer 2

True

Question 3

Choosing a measurement system affects profit but does not affect wealth.

Answer 3

False

Question 4

Fair value arises in circumstances where the price is based on an orderly transaction between a willing seller and a willing buyer.

Question 5

Profit measures the flow of resources into and out of the business over time.

Question 6

Which of the following statements is true of profit and wealth?

A) Profit is money and wealth is savings.
B) Profit is a non-static measure and wealth is a static measure.
C) Profit and wealth are non-circular.
D) Profit and wealth are not related.

Question 7

Net realisable value is based on an expected selling price in a forced sale.

Question 8

Where an asset is exchanged between a willing seller and a willing buyer and the exchange price is below the market price due to fact that the parties involved are related, the resulting exchange price is referred to as fair value.

Question 9

The written down cost of an asset represents the cost of an asset after accumulated depreciation.

Question 10

Historic cost is the cost incurred by an individual or enterprise in acquiring an item, measured at the time of the originating transaction.

Question 11

James had $80 000 in the bank. He used some of this cash to buy a new car for $67 000 on 1 January. He subsequently modified the car, at no cost, and sold it for $78 000 on 1 March. What profit did James make from the sale of the car?

A) $3000
B) $8000
C) $11 000
D) $14 000

Question 12

From the Hicksian economic viewpoint, profit is the amount which an individual can consume over a period and still be as well off at the end of the period as he/she was at the beginning of the period.

Question 13

The common measurement method adopted in most countries is that of historic cost.

Question 14

The wealth of an entity is determined by what it controls and what it owes.

Question 15

The value of the expected earnings from using an item, discounted at an appropriate rate to give a present-day value, is the economic value.

Question 16

The fair value of an asset is more reliable where there exists a liquid market for the asset, than when no liquid market exists.

Question 17

Which of the following statements is incorrect?

A) Profit is a non-static measure and wealth is a static one.
B) Profit is the difference between wealth at the start and at the end of the period.
C) Profit represents the sum of all gains.
D) Profit represents an increase in wealth.

Question 18

Jane buys a 1957 FJ Holden at time T₀ for $100 000. At time T₁, the car is valued at $180 000. Jane's profit and wealth at T₁ are:

A) $100 000 and $80 000 respectively.
B) $80 000 and $180 000 respectively.
C) $80 000 and $100 000 respectively.
D) $80 000 and $80 000 respectively.

Question 19

Historical cost is often referred to as the most relevant method of measurement.

Question 20

Economic value is considered to be an ideal approach to measuring value, but may lack reliability due to the fact that the measure relies on estimates.

Question 21

Which of the following statements about the limitations of financial statements is false?

A) Many of the numbers reported in financial statements result from estimates.
B) Financial statements report primarily the current value of assets.
C) Some important factors may not be reported in a firm's financial statements.
D) Certain types of resources are not reported in the financial statements.

Question 22

Assume that you bought a new computer from Computers Plus for $3200 in August last year. However, your computer needs to be repaired. You have been advised that it will cost $275 to repair the computer. You could sell the computer for $500 if you have it repaired and $100 if you do not have it repaired. The new price for a similar computer in is $3050.

Question 23

When calculating costs associated with the sale of an item, which of the following are included in the net realisable value?

A) Marketing, manufacturing and selling costs.
B) Manufacturing, selling and distribution costs.
C) Marketing, selling and distribution costs.
D) Marketing and distribution costs.

Question 24

James had $80 000 in the bank. He used some of this cash to buy a new car for $67 000 on 1 January. James subsequently modified the car and sold it for $78 000 on 1 March. The modifications cost James $10 000, and he paid a total of $250 to advertise the car for sale. James' wealth after the sale of the car was:

A) $80 000.
B) $80 750.
C) $148 000.
D) $158 000.

Question 25

Assume that the following information relates to you at today's date. You have $120 cash in hand; $3350 deposited in a bank account; a motor vehicle valued at $13 000; jewellery and other miscellaneous items valued at $3200; and a friend owes you $100. You owe $1500 to a relative who lent you the money to purchase the vehicle. What is the amount ($) of your wealth, given the foregoing information?

Question 26

For which of the following accounts would the use of historical cost normally be a greater limitation than for the other three?

A) Cash
B) Accounts Receivable
C) Plant and Machinery
D) Prepaid Rent

Question 27

James had $80 000 in the bank. He used some of this cash to buy a new car for $67 000 on 1 January. James subsequently modified the car and sold it for $78 000 on 1 March. The modifications cost James $9000, and he paid a total of $250 to advertise the car for sale. James made a profit on the sale of the car of:

A) nil.
B) $1750.
C) $2000
D) $11 000

Question 28

Where an asset is measured on the basis of the discounted net cash flows that are expected to be generated by the future use of the item, the resulting measure is referred to as:

A) fair value.
B) net realisable value.
C) historic cost.
D) economic value.

Question 29

Tom purchased an item for $5050 last year. This year, he sold the item to a complete stranger for $7000 and incurred a sum of $250 for advertising it. Which of the following statements is true?

A) Historical cost is $5050.
B) Fair value is $7000.
C) Net realisable value is $6750.
D) All of the above.

Question 30

Distinguish between the terms 'wealth' and 'profit'.

Question 31

Aaron sold his large lounge chair for $1000. He incurred costs of $100 for advertising, $120 for hiring a van to transport the chair to the buyer, and $200 for a speeding fine. What is the net realisable value?

A) $1100
B) $1120
C) $1220
D) $1420

Question 32

Peter has the following assets at various dates. He has no liabilities and earned no other income over this two-year period. Which of these statements is correct?

A) Peter's wealth increased by $10 000 over this two-year period.
B) Peter's profit was $3000 for the year ended 31 December Year 3.
C) Peter's wealth was $134 000 at 31 December Year 3.
D) Peter's loss was $8000 for the year ended 31 December Year 2.

Question 33

Where an asset is measured at fair value, the figure involved:

A) is more likely to be reliable if a liquid market for the asset exists than if no liquid market exists.
B) reflects an historical value.
C) is the same as replacement cost.
D) is fair and reasonable.

Question 34

James had $80 000 in the bank. He used some of this cash to buy a new car for $67 000 on 1 January. James subsequently modified the car and sold it for $78 000 on 1 March. The modifications cost James $1000. The historical cost of the car is:

A) $67 000.
B) $68 000.
C) $77 000.
D) $78 000.

Question 35

Historic cost refers to:

A) the cost of selling an item.
B) the cost to replace an item
C) the purchase consideration of an item, plus incidental costs.
D) economic value.

Question 36

Current accounting practice in Australia is to initially record property, plant and equipment at:

A) economic value.
B) cost.
C) net realisable value.
D) replacement cost.

Question 37

Explain what is meant by the term written-down value, and how the measure differs from the historic cost of an asset.

Question 38

The replacement cost of an asset:

A) is the same as historical cost.
B) is sometimes called 'current cost'.
C) is the same as economic value.
D) should always be used where the asset is to be replaced.

Question 39

For which of the following accounts would the limitation 'use of estimates and allocations' not be a concern?

A) Inventory
B) Cash
C) Equipment
D) Accounts Receivable

Question 40

Where an asset is measured using economic value, the figure involved:

A) may lack reliability.
B) represents the discounted value of expected future earnings from the use of the asset.
C) represents a measure of current value.
D) all of the above.

Question 41

Pod Fashion buys and sells shoes. At 1 January the business held 500 pairs of shoes, valued at $10 a pair.
During January the business sold 410 pairs of the shoes at $40 cash per pair. The average cost of selling the shoes was $10 cash per pair. The replacement cost of the shoes at 31 January was $12 a pair. Further, due to market competition, the expected selling price of the shoes in the foreseeable future will be $38 a pair at an average selling cost of $10 per pair.

Question 42

In August 2005, Western Australia's then biggest meat processor, E G Green & Sons, was suspended trading with debts estimated at $20 million. The company was, at that time, facing either (i) liquidation, or (ii) trading out of difficulty and continuing as a going concern.

Question 43

In the 2014-15 English Premier League season, Manchester United signed 26-year-old Argentina winger, Angel di Maria, from Real Madrid for a British record transfer fee of £59.7 million. di Maria signed on with Manchester United for a five-year deal that will net him £6.5 million a year after tax, just behind United's captain Wayne Rooney in terms of annual earnings. Manchester United's total investment in di Maria is estimated to be in excess of £100 million.
[Source: HYPERLINK "http://www.dailymail.co.uk/home/search.html?s=&authornamef=Ian+Ladyman+for+MailOnline"Ladyman, I. (2014) 'Angel di Maria completes Manchester United transfer as Argentina star joins from Real Madrid for British record fee of £59.7m', MailOnline, 04:06 AEST, 27 August 2014 and Updated: 17:20 AEST, 27 August 2014
URL: HYPERLINK "http://www.dailymail.co.uk/sport/football/article-2734469/Angel-di-Maria-completes-Manchester-United-Argentina-star-joins-Real-Madrid-British-record-fee-59-7m.html"http://www.dailymail.co.uk/sport/football/article-2734469/Angel-di-Maria-completes-Manchester-United-Argentina-star-joins-Real-Madrid-British-record-fee-59-7m.html and accessed 8.30 AM WST, 17 September 2014].