Financial Accounting: Balance Sheet Evaluation
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Questions and Answers

What is a limitation of Historical Cost Accounting (HCA) in terms of decision-making?

  • It is only used for small businesses
  • It does not provide sufficient information for evaluating business decisions (correct)
  • It provides current and relevant information for business decisions
  • It is not relevant for businesses with non-current assets

What assumption is made in Historical Cost Accounting regarding the life of a firm?

  • The firm is not expected to continue
  • The firm will eventually go bankrupt
  • The firm has a limited lifespan
  • The firm has an indefinite lifespan (correct)

Why is Historical Cost Accounting open to manipulation in financial reporting?

  • Because it is based on arbitrary decisions
  • Because it is based on current market values
  • Because it is based on the subjective judgment of management (correct)
  • Because it is based on objective measures

What is a criticism of Historical Cost Accounting regarding the matching concept?

<p>There is no established concept for proper matching (A)</p> Signup and view all the answers

What is a limitation of Historical Cost Accounting in terms of relevance?

<p>The information becomes less relevant over time (B)</p> Signup and view all the answers

What is a criticism of Historical Cost Accounting regarding asset valuation?

<p>It values assets at their historical cost (D)</p> Signup and view all the answers

What is the main concern of traditional accounting according to Sprouse (1973)?

<p>Relegating the balance sheet to a secondary position (D)</p> Signup and view all the answers

What is the primary focus of conventional accounting?

<p>Current rates of return (B)</p> Signup and view all the answers

What assumption underlies the basic concept of Current Cost Accounting (CCA)?

<p>The firm is a going concern (A)</p> Signup and view all the answers

What is a limitation of Historical Cost Accounting (HCA) for decision-making?

<p>It does not consider the current cost of replacement (D)</p> Signup and view all the answers

What is a consequence of conventional accounting practices?

<p>Creative accounting and misleading data (C)</p> Signup and view all the answers

What is a key aspect of investor needs that conventional accounting takes for granted?

<p>Psychology of market and its effect on share prices (A)</p> Signup and view all the answers

What is the primary objective of Current Cost Accounting?

<p>To assist managers in making decisions about resource allocation (B)</p> Signup and view all the answers

Which of the following is a limitation of Historical Cost Accounting for decision making?

<p>It does not take into account the current market value of assets (C)</p> Signup and view all the answers

What is the main assumption underlying the Going Concern concept?

<p>The business will continue to operate indefinitely (B)</p> Signup and view all the answers

Which of the following is a key concept in the Decision-Usefulness approach?

<p>Relevance (A)</p> Signup and view all the answers

What is the main objective of financial reporting according to the Objectivity principle?

<p>To provide stakeholders with a true and fair view of the company's financial position (A)</p> Signup and view all the answers

What is a potential consequence of manipulation of financial reporting?

<p>Distorted view of the company's financial position (C)</p> Signup and view all the answers

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