Historical cost accounting remains in use because of its practical advantages. Which of the following is not an advantage of historical cost accounting?

It avoids the overstatement of profit which can arise during periods of inflation

Amounts of transactions are reliable and can be verified

Amounts in the statement of financial position can be matched to amounts in the statement of cash flows

It provides fewer opportunities for creative accounting than systems of current value accounting

Overstatement of profits can arise during periods of inflation. This then leads to a number of other consequences. Which of the following is not a likely consequence of overstatement of profits?

Reduced dividends to shareholders

Higher wage demands from employees

Suter Co. acquired an item of plant on 31 December 20X2 at a cost of $500 000. It has a useful life of five years (straight-line depreciation) and an estimated residual value of 10 per cent of its historical cost or current cost as appropriate. As at 31 December 20X4, the manufacturer of the plant still makes the same item of plant and its current price is $600 000. What is the correct carrying amount to be shown in the statement of financial position of Suter Co. as at 31 December 20X4 under historical cost and current cost?

Historical cost: 320,000 - Current Cost: 384,000

Historical cost: 320,000 - Current Cost: 600,000

Historical cost: 300,000 - Current Cost: 600,000

Historical cost: 300,000 - Current Cost: 384,000

The 'physical capital maintenance' concept states that profit is the increase in the physical productive capacity of the business over the period. What type of accounting is this concept is applied in?

Current purchasing power accounting

the need for directors to act in the best interests of the company and not out of self-interest.

the directors running a company on behalf of the shareholders.

the need for directors to prepare financial statements that show a true and fair view.

the need for directors to disclose their personal shareholding in a company they manage.

Which of the following does not form part of a company’s main financial statements?

Statement of financial position

2. CPA Financial Accounting & Reporting Quick Revision Module 2

Authored by Rachel Collins

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MULTIPLE CHOICE QUESTION

5 mins • 1 pt

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.

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

Under what basis are assets usually valued?

Historical cost

Fair value

Current cost

Fulfilment value

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

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

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

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

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

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

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

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.

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

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

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2. CPA Financial Accounting & Reporting Quick Revision Module 2

Which statement is correct of the historical cost convention?

Under what basis are assets usually valued?

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

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?

Which of the following statements is correct?

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.'

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?

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

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