ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting
Which statement about historical cost accounting during a period of rising prices is correct?
Under historical cost in a period of rising prices, profit may be overstated because depreciation and cost of sales are based on older, lower prices than current replacement costs. Assets are not revalued to market value under this basis.
- ANon-current assets are shown at their current market value
- BProfit may be overstated because costs are matched at old pricesCorrect
- CLiabilities are always revalued upward to reflect inflation
- DCapital is maintained in physical operating capability terms
Explanation
Under historical cost, assets and expenses such as depreciation and cost of sales use older, lower prices, so profit can be overstated relative to replacement costs. Assets are not carried at market value. Physical capital maintenance is associated with current cost accounting, not historical cost.
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