Question 1

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.

Accepted Answer

Financial statements report the historical cost of assets, not their current value.

Question 2

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.

Accepted Answer

The answer of Assume that you bought a new computer...

Question 3

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.

Accepted Answer

Net realisable value includes costs necessary to make the sale, such as marketing, selling, and distribution costs.

Question 4

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.

Accepted Answer

James initially had $80,000. He spent $67,000 on a car, leaving him with $13,000. After modifications costing $10,000 and $250 for advertising, his remaining cash before the sale was $2,750. Selling the car for $78,000 brought his total to $80,750.

Question 5

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?

Accepted Answer

The answer of Assume that the following information relates to...

Question 6

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

Accepted Answer

Plant and machinery are assets that are likely to appreciate or depreciate in value over time. Using historical cost accounting for plant and machinery may not accurately reflect their current fair value or replacement cost. In contrast, cash and prepaid rent are relatively stable in value, and accounts receivable can be written off if they become uncollectible.

Question 7

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

Accepted Answer

The answer of James had $80 000 in the bank....

Question 8

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.

Accepted Answer

Economic value is determined by the discounted net cash flows expected from the future use of the asset, reflecting its value in terms of the income it can generate.

Question 9

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.

Accepted Answer

- Historical cost is the amount at which an asset was originally purchased or acquired. Therefore, the historical cost of the item is $5050.
- Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In this case, the fair value of the item is $7000 because that's the price at which Tom sold it.
- Net realizable value is the estimated selling price in the ordinary course of business minus the estimated costs of completion and the estimated costs necessary to make the sale. In this case, the net realizable value is $6750 because Tom incurred $250 for advertising it before selling it for $7000.

Question 10

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

Accepted Answer

The answer of Distinguish between the terms 'wealth' and 'profit'....

Question 11

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

Accepted Answer

The answer of Aaron sold his large lounge chair for...

Question 12

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.

Accepted Answer

The answer of Peter has the following assets at various...

Question 13

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.

Accepted Answer

The fair value of an asset is more likely to be reliable if there is a liquid market for the asset, as this allows for a more accurate valuation based on market activity. Without a liquid market, fair value measurements may be based on estimates and assumptions, which could decrease reliability.

Question 14

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.

Accepted Answer

The historical cost of the car is the original purchase price, which was $67 000. The cost of modifications and the subsequent sale price do not affect the historical cost of the asset.

Question 15

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.

Accepted Answer

Historic cost refers to the purchase consideration of an item, plus any incidental costs incurred in order to acquire the item. It is the original cost of acquisition and does not take into account inflation or current market value.

Question 16

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.

Accepted Answer

The current accounting practice in Australia is to initially record property, plant and equipment at cost. This means that the asset is recorded at its historical cost, including any costs necessary to bring it to its present location and condition for its intended use. This approach provides a reliable and verifiable measure of the asset's value and is consistent with the historical cost principle of accounting. It also enables comparability between entities and helps to avoid subjective assessments of the asset's economic value, net realisable value or replacement cost.

Question 17

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

Accepted Answer

The answer of Explain what is meant by the term...

Question 18

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.

Accepted Answer

The replacement cost of an asset is sometimes called 'current cost'. It is the cost that would be incurred to replace an asset with an identical or similar asset at the current market price.

Question 19

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

Accepted Answer

The limitation 'use of estimates and allocations' would not be a concern for the Cash account as it is a current asset account that represents the amount of cash that a company has on hand or in its bank accounts. There are no estimates or allocations involved in recording cash transactions.

Question 20

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.

Accepted Answer

Economic value involves estimating the future earnings from an asset and discounting those earnings back to their present value. This process can introduce subjectivity and variability, making the figure potentially less reliable. It represents a measure of current value based on future earnings, thus encompassing all the mentioned aspects.

Quiz 4: Wealth and the Measurement of Profit

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

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

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

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:

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?

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

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?

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?

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

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:

Historic cost refers to:

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

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

The replacement cost of an asset:

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

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