Deegan FAT3e TestBank Chapter 05

Deegan_FAT3e_chapter_05
Student: ___________________________________________________________________________
1. Which of the following best describes the basis of the accounting measurement model in use today?
A. Historical cost accounting
B. Current cost accounting
C. Historical cost, except where conceptual frameworks and accounting standards allow deviation from it
D. A mixed method accounting model
2. What is not a valid criticism of historical cost accounting?

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 current year's operating results by including the current year's income, holding gains that accrued
in previous periods
3. If historical cost profits are all distributed in dividends during times of rising inventory prices, this will lead
to (assuming other things being equal):
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

4. Which of the following measurement models of accounting equate with the perspectives of maintaining the
purchasing power of capital intact?
A. General price-level adjustment accounting
C. Continuously contemporary accounting
5. Which of the following is not a feature of current cost accounting?

A. It uses current values which could be based on present value, entry value (replacement) costs or exit value
(selling) prices
B. It seeks to maintain the operating capability of capital
C. It uses specific prices of assets rather than general price-level adjustments
D. It seeks to maintain the purchasing power of capital
6. Assume that there are three types of commodities (A, B and C) that are consumed at the following base-year
quantities and prices, as shown in the table below:
Commodity A Commodity B Commodity C
Year Price $ Qty Price $ Qty Price $ Qty
Base year 5.00 100 10.00 300 15:00 200
(2007)

2008 6.00 11.00 14.50
What is the price index at the end of 2008?

A. 1.0597281
B. 0.9588235
C. 1.0461538

7. Assuming a price index calculated 104.5 in 2008, compared with 100 in 2007, for a bundle of goods, what is
the current purchasing power of every dollar, compared to 2007?
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
8. Which of the following statements is not true in times of inflation?

A. Holders of monetary liabilities will gain
B. Holders of monetary assets will lose
C. If the amount of monetary assets is the same as monetary liabilities, then no gains or losses would occur
D. If the amount of monetary assets held is less than the amount of monetary liabilities held, then a net loss
would occur
9. The following procedures are required to apply the Current Purchasing Power Accounting (CPPA) model in
order to adjust the financial statements to reflect price-level adjusted financial statements.
Determine the movement in net monetary assets from the beginning of the year compared with the end of the
year.
Reconcile opening and closing net monetary assets with the reasons for the changes.
Determine when the movements in net monetary assets for each item took place and then apply the appropriate
price-level index to calculate current purchasing power adjusted amounts.
The difference between the adjusted and unadjusted amount total in the reconciliation is the loss on purchasing
power.
A price-adjusted Balance Sheet is then prepared, adjusting all the non-monetary assets with the end-of-year
price index.
In applying the CPPA model, if the price-level index was 120 at the beginning of the year, 150 at end of the
year, and averaged 135 during the year, what price-level index would be applied to sales that occurred
uniformly during the year?
A. 150/135
B. 135/150
C. 150/120
D. 135/120

year.
Determine when the movements in net monetary assets for each item took place, and then apply the appropriate
The difference between the adjusted and unadjusted amount totals in the reconciliation is the loss of purchasing
power.
price index.
In applying the CPPA model, if the price level index was 120 at the beginning of the year, 150 at end of the
year, and averaged 135 during the year, which of the following price-level indexes would be incorrect?
A. 150/135 would be applied to sales, purchases of goods, and payment of expenses
B. 150/120 would be applied to opening net monetary assets
C. 150/135 would be applied to dividends and tax if they did not arise until the end of the year
D. All of the given options are correct
year.
power.
price index.
In applying the CPPA model, where does the loss of purchasing power appear in the price-level adjusted
financial statements?
A. As a deduction from Retained Earnings in the Balance Sheet
B. As an expense in the income statement
C. As a deduction from profit after tax in the Income Statement
D. In the notes to the accounts

year.
power.
price index.
In applying the CPPA model, which of the following is correct in preparing the price-level adjusted financial
statements?
A. Purchasing power losses only arise as a result of holding net monetary assets
B. Non-monetary assets are restated in the Balance Sheet at their adjusted current purchasing power
C. Monetary assets are not adjusted because they are already stated in current purchasing power dollars
13. Which of the following is not a possible limitation with CPPA accounting?
A. The prices of the goods and services included in the general price index may not be reflective of the price
movements (inflation) specific to that particular industry
B. The information is simple, and easily understood by users
C. Research has shown that the information provided by CPPA may not be all that decision-relevant
D. Users might think that the price-level adjusted amounts might reflect the specific value of specific assets
14. A limitation of Current Cost Accounting does not include:

A. Replacement costs are easily determined, and therefore 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 that 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

15. Which of the following statements about holding gain (cost savings) in the CCA model is false?
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
16. Continuously Contemporary Accounting (CoCoA), as proposed by Chambers, includes the following
characteristics except:
A. Provides information about an entity's capacity to adapt to changing circumstances using its cash and cash
equivalents
B. All assets are valued in the Balance Sheet based on their exit (net selling) prices
C. Profit is defined as the amount that can be distributed while maintaining operating capacity intact
D. Unlike CCA, CoCoA does not make a distinction between realised and unrealised gains (cost savings)
17. Which of the following is a unique characteristic of the CoCoA model in comparison with other alternative
accounting models?
A. It attempts to recognise the changes in value of specific assets on the Balance Sheet
B. All gains (realised or unrealised) are treated as part of the profits
C. It includes an adjustment to take into account changes in purchasing power which it calls a 'capital
maintenance adjustment'

18. Which of the following is not a reason why alternative methods have not gained acceptance or been
formally implemented?
A. The arguments for the alternative methods were not logical
B. There appeared to be more interest when inflation was a problem than when it was not
C. Some alternative models were likely to incur significant costs, negative economic consequences and impacts
D. Lack of support by the public or the government, and eventually by the accounting profession
19. The reasons the promotion of alternative accounting models to historical cost did not succeed include.
A. Lack of agreement as to which model was the best
B. Such a change would have been extremely radical and costly
C. Such a change would create huge economical consequences, and therefore those affected would lobby to
protect their self-interest
20. How would the deprival value of an asset be determined?

A. It is the present value of the future cash flows to be generated by the asset, except where the current
replacement cost or net selling price is less than that value
B. It is the net selling price except where the value to the business (present value) is less, or the current
replacement cost greater
C. It is the current replacement cost where the present value is less than the current replacement cost and
greater than the net selling price
D. It is the value to the business of the asset (present value) within the bounds that this value is not less than the
net selling price or greater than its current replacement cost
21. Assume that an entity acquired 150 items of inventory at a cost of $90 each, and sold 100 of the items for
$160 each when the replacement cost to the entity was $120 each. Also assume that the replacement cost of the
50 remaining items of inventory at year end was $130. Under the Edwards and Bell approach to current cost
accounting, what portion of operating profit would be available for dividends?
A. $4 000 [100 x ($160 - $120)]
B. $1 000 [100 x ($130 - $120)]
C. $3 000 [100 x ($160 - $130)]
D. $1 500 [50 x ($160 - $130)]

50 remaining items of inventory at year end was $130. What would be the realised holding gain on the
inventory that was sold?
A. $7 000 [100 x ($160 - $90)]
B. $4 000 [100 x ($130 - $90)]
C. $3 000 [100 x ($120 - $90)]
D. $500 [50 x ($130 - $120)]
23. What is included in 'income' according to the Conceptual Framework?

A. All events that result in an increase in the net assets of the reporting entity, other than owner contributions
B. All events that result in an increase in the net assets of the reporting entity
C. Events that relate to the central operations of the entity
24. Which of the following statements is correct under our current accounting standards?
A. Many assets can, or must, be measured at historical cost
B. Inventory must be measured at cost, or net realisable value if it is lower
C. Property, plant and equipment can be valued at cost where an entity has adopted the ‘cost model’ for a class
of property, plant and equipment

Deegan_FAT3e_chapter_05 Key

1. Which of the following best describes the basis of the accounting measurement model in use today?
A. Historical cost accounting
C. Historical cost, except where conceptual frameworks and accounting standards allow deviation from it
D. A mixed method accounting model
Deegan - Chapter 05 #1
difficulty: easy

2. What is not a valid criticism of historical cost accounting?

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 current year's operating results by including the current year's income, holding gains that accrued
in previous periods
difficulty: easy

3. If historical cost profits are all distributed in dividends during times of rising inventory prices, this will lead
to (assuming other things being equal):
A. A reduction in financial capital
B. An erosion of operating capacity
C. No effect on capital
difficulty: medium

4. Which of the following measurement models of accounting equate with the perspectives of maintaining the
purchasing power of capital intact?
A. General price-level adjustment accounting
C. Continuously contemporary accounting
difficulty: easy

5. Which of the following is not a feature of current cost accounting?

A. It uses current values which could be based on present value, entry value (replacement) costs or exit value
(selling) prices
B. It seeks to maintain the operating capability of capital
C. It uses specific prices of assets rather than general price-level adjustments
D. It seeks to maintain the purchasing power of capital
difficulty: medium

6. Assume that there are three types of commodities (A, B and C) that are consumed at the following base-year
quantities and prices, as shown in the table below:
Commodity A Commodity B Commodity C
Year Price $ Qty Price $ Qty Price $ Qty
Base year 5.00 100 10.00 300 15:00 200
(2007)

2008 6.00 11.00 14.50
What is the price index at the end of 2008?

A. 1.0597281
B. 0.9588235
C. 1.0461538
difficulty: medium

7. Assuming a price index calculated 104.5 in 2008, compared with 100 in 2007, for a bundle of goods, what is
the current purchasing power of every dollar, compared to 2007?
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
difficulty: medium

8. Which of the following statements is not true in times of inflation?
A. Holders of monetary liabilities will gain
B. Holders of monetary assets will lose
C. If the amount of monetary assets is the same as monetary liabilities, then no gains or losses would occur
D. If the amount of monetary assets held is less than the amount of monetary liabilities held, then a net loss
would occur
difficulty: medium

year.
Determine when the movements in net monetary assets for each item took place and then apply the appropriate
The difference between the adjusted and unadjusted amount total in the reconciliation is the loss on purchasing
power.
price index.
In applying the CPPA model, if the price-level index was 120 at the beginning of the year, 150 at end of the
year, and averaged 135 during the year, what price-level index would be applied to sales that occurred
uniformly during the year?
A. 150/135
B. 135/150
C. 150/120
D. 135/120

difficulty: easy

year.
power.
price index.
In applying the CPPA model, if the price level index was 120 at the beginning of the year, 150 at end of the
year, and averaged 135 during the year, which of the following price-level indexes would be incorrect?
A. 150/135 would be applied to sales, purchases of goods, and payment of expenses
B. 150/120 would be applied to opening net monetary assets
C. 150/135 would be applied to dividends and tax if they did not arise until the end of the year

difficulty: medium

year.
power.
price index.
In applying the CPPA model, where does the loss of purchasing power appear in the price-level adjusted
financial statements?
A. As a deduction from Retained Earnings in the Balance Sheet
B. As an expense in the income statement
C. As a deduction from profit after tax in the Income Statement
D. In the notes to the accounts

difficulty: medium

year.
power.
price index.
In applying the CPPA model, which of the following is correct in preparing the price-level adjusted financial
statements?
A. Purchasing power losses only arise as a result of holding net monetary assets
B. Non-monetary assets are restated in the Balance Sheet at their adjusted current purchasing power
C. Monetary assets are not adjusted because they are already stated in current purchasing power dollars

difficulty: medium

13. Which of the following is not a possible limitation with CPPA accounting?
A. The prices of the goods and services included in the general price index may not be reflective of the price
movements (inflation) specific to that particular industry
B. The information is simple, and easily understood by users
C. Research has shown that the information provided by CPPA may not be all that decision-relevant
D. Users might think that the price-level adjusted amounts might reflect the specific value of specific assets

difficulty: easy

14. A limitation of Current Cost Accounting does not include:
A. Replacement costs are easily determined, and therefore 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 that 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

difficulty: easy

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

difficulty: hard

16. Continuously Contemporary Accounting (CoCoA), as proposed by Chambers, includes the following
characteristics except:
A. Provides information about an entity's capacity to adapt to changing circumstances using its cash and cash
equivalents
B. All assets are valued in the Balance Sheet based on their exit (net selling) prices
C. Profit is defined as the amount that can be distributed while maintaining operating capacity intact
D. Unlike CCA, CoCoA does not make a distinction between realised and unrealised gains (cost savings)

difficulty: medium

17. Which of the following is a unique characteristic of the CoCoA model in comparison with other alternative
accounting models?
A. It attempts to recognise the changes in value of specific assets on the Balance Sheet
B. All gains (realised or unrealised) are treated as part of the profits
C. It includes an adjustment to take into account changes in purchasing power which it calls a 'capital
maintenance adjustment'

difficulty: easy

18. Which of the following is not a reason why alternative methods have not gained acceptance or been
formally implemented?
A. The arguments for the alternative methods were not logical
B. There appeared to be more interest when inflation was a problem than when it was not
C. Some alternative models were likely to incur significant costs, negative economic consequences and impacts
D. Lack of support by the public or the government, and eventually by the accounting profession

difficulty: easy

19. The reasons the promotion of alternative accounting models to historical cost did not succeed include.
A. Lack of agreement as to which model was the best
B. Such a change would have been extremely radical and costly
C. Such a change would create huge economical consequences, and therefore those affected would lobby to
protect their self-interest

difficulty: easy

20. How would the deprival value of an asset be determined?
A. It is the present value of the future cash flows to be generated by the asset, except where the current
replacement cost or net selling price is less than that value
B. It is the net selling price except where the value to the business (present value) is less, or the current
replacement cost greater
C. It is the current replacement cost where the present value is less than the current replacement cost and
greater than the net selling price
D. It is the value to the business of the asset (present value) within the bounds that this value is not less than the
net selling price or greater than its current replacement cost
Deegan - Chapter 05
difficulty: hard

50 remaining items of inventory at year end was $130. Under the Edwards and Bell approach to current cost
accounting, what portion of operating profit would be available for dividends?
A. $4 000 [100 x ($160 - $120)]
B. $1 000 [100 x ($130 - $120)]
C. $3 000 [100 x ($160 - $130)]
D. $1 500 [50 x ($160 - $130)]
Deegan - Chapter 05
difficulty: medium

50 remaining items of inventory at year end was $130. What would be the realised holding gain on the
inventory that was sold?
A. $7 000 [100 x ($160 - $90)]
B. $4 000 [100 x ($130 - $90)]
C. $3 000 [100 x ($120 - $90)]
D. $500 [50 x ($130 - $120)]
Deegan - Chapter 05
difficulty: medium

23. What is included in 'income' according to the Conceptual Framework?
A. All events that result in an increase in the net assets of the reporting entity, other than owner contributions
B. All events that result in an increase in the net assets of the reporting entity
C. Events that relate to the central operations of the entity
Deegan - Chapter 05
difficulty: easy

24. Which of the following statements is correct under our current accounting standards?
A. Many assets can, or must, be measured at historical cost
B. Inventory must be measured at cost, or net realisable value if it is lower
C. Property, plant and equipment can be valued at cost where an entity has adopted the ‘cost model’ for a class
of property, plant and equipment
Deegan - Chapter 05
difficulty: easy

Deegan_FAT3e_chapter_05 Summary
Category # of Question

s
Deegan - Chapter 05 24
difficulty: easy 11
difficulty: hard 2
difficulty: medium 11

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B. Current cost accounting

D. A mixed method accounting model

2. What is not a valid criticism of historical cost accounting?

C. It understates profit in times of rising prices

B. An erosion of operating capacity

C. No effect on capital

D. None of the given options is correct

B. Current cost accounting

C. Continuously contemporary accounting

D. None of the given options is correct

5. Which of the following is not a feature of current cost accounting?

B. It seeks to maintain the operating capability of capital

D. It seeks to maintain the purchasing power of capital

Commodity A Commodity B Commodity C

Year Price $ Qty Price $ Qty Price $ Qty

Base year 5.00 100 10.00 300 15:00 200

2008 6.00 11.00 14.50

What is the price index at the end of 2008?

D. None of the given options is correct

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

8. Which of the following statements is not true in times of inflation?

B. Holders of monetary assets will lose

B. 150/120 would be applied to opening net monetary assets

D. All of the given options are correct

B. As an expense in the income statement

C. As a deduction from profit after tax in the Income Statement

D. In the notes to the accounts

D. All of the given options are correct

B. The information is simple, and easily understood by users

14. A limitation of Current Cost Accounting does not include:

D. All of the given options are correct

D. All of the given options are correct

D. All of the given options are correct

20. How would the deprival value of an asset be determined?

23. What is included in 'income' according to the Conceptual Framework?

B. Current cost accounting

D. A mixed method accounting model

2. What is not a valid criticism of historical cost accounting?

C. It understates profit in times of rising prices

B. An erosion of operating capacity

C. No effect on capital

D. None of the given options is correct

B. Current cost accounting

C. Continuously contemporary accounting

D. None of the given options is correct

5. Which of the following is not a feature of current cost accounting?

B. It seeks to maintain the operating capability of capital

D. It seeks to maintain the purchasing power of capital

Commodity A Commodity B Commodity C

Year Price $ Qty Price $ Qty Price $ Qty

Base year 5.00 100 10.00 300 15:00 200

2008 6.00 11.00 14.50

What is the price index at the end of 2008?

D. None of the given options is correct

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

B. Holders of monetary assets will lose

Deegan - Chapter 05 #10