2. CPA Financial Accounting & Reporting Quick Revision Module 2

Which statement is correct of the historical cost convention?

• It records only past transactions.
• It fails to take account of changing price levels over time.
• It has been replaced in accounting records by a system of current cost accounting.
• It values all assets at their cost to the business, without any adjustment for depreciation.

Under what basis are assets usually valued?

• Historical cost
• Fair value
• Current cost
• Fulfilment value

In times of rising prices, what effect does the use of the historical cost concept have on a company's asset values and profit?

• Asset values and profit both overstated
• Asset values and profit both understated
• Asset values understated and profit overstated
• Asset values overstated and profit understated

Korbin Co. buys a machine for $50 000, paying $2 000 delivery charge. It will generate income of $8 000 per annum for seven years. At the end of seven years it will be scrapped, Korbin will pay a scrapping fee of $1 000 but will receive $4 000 for the scrap metal. What is its value in use?

• $50 000
• $52 000
• $59 000
• $60 000

Ladybird Co. purchased machine four years ago for $12 000, two years ago they paid for an upgraded component which cost $2 000, the machine is expected to have a useful life of six years. The machine can be purchased today for $14 000 and the upgrade component for $2 500. What is the current cost of the machine?

• 4667
• 5000
• 5500
• 5917

Which of the following statements is correct?

• Positive accounting theory is not based on actual accounting practice.
• Normative accounting theory attempts to predict actual accounting practice.
• The use of a conceptual framework is an example of positive accounting theory.
• The development of alternatives to historic cost is an example of normative accounting theory.

What does the following statement describe? 'The point of reference by which profit is measured; it is a prerequisite for distinguishing between an entity's return on capital and its return of capital.'

• Fair value
• Historical cost
• Capital maintenance
• Current cost accounting

Consider the following statements: I. Specific price inflation is based on the average rate of inflation. II. General price inflation measures price changes for a particular group of assets. Which statements are correct?

• I only
• II only
• Both I and II
• Neither I nor II

Which of the following statements about current purchasing power accounting (CPP) are correct? I. It measures profit as the increase in nominal money capital over the period. II.    It measures profit as the difference between income and expenses after allowing for the effect of inflation. III.  It measures profit as the difference between income and expenses after ensuring that physical capital has been maintained.

• II only
• III only
• I and II only
• I and III only

Which of the following is not used as a measure of deprival value?

• Fair value
• Economic value
• Replacement cost
• Net realisable value