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Hi,
I need help in knowing the reason for answer of the following question:
The accounting concept or convention which, in times of rising prices, tends to understate asset values & overstate profits, is the:
A. going concern
B. prudence concept
C. realisation concept
D. historical cost conceptThe answer in Kaplan text book gives D without an explanation. I don’t understand why. Plz help.
Have you watched the free lectures on here? I guess not, because this is specifically covered in the lectures – it is a standard question!!!
The historical cost concept means that we value non-current assets at original cost less depreciation (based on the original cost).
If there is inflation, then the current cost of the assets would be higher (so using historical cost means they are under-valued) and depreciation would be higher if it were based on the current cost (so calculating it on original cost means that the depreciation expense is lower and so profit higher).I do suggest that you watch all of our free lectures. They cover the whole syllabus and if you use the lectures together with our free lecture notes then you do not need a study text – just a revision/exam kit in order to practice lots of questions.
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