Chapter 14—ACCOUNTING FOR INFLATION AND CHANGING PRICES
Accounting Theory: 8th edition Page 1 of 10
TRUE/FALSE
1. Inflation has posed the single greatest problem that is faced in accounting theory.
2. Both predictive value and representational faithfulness are impaired under historical costing.
3. In ASR 190, the SEC reinforced its long-standing position of forbidding the presentation of
information other than historical cost.
4. A general price index is broadly constructed for ascertaining the change in prices for all goods
and services.
5. The value of an asset may be determined by multiplying its historical cost by a fraction consisting
of the general price index for the current period divided by the general price index existing at the
time of acquisition.
6. Specific price level indexes can be used to estimate the prices of assets in current year dollars.
7. Entry value refers to replacement cost in markets in which the asset, liability, or expense
ordinarily acquired.
8. Current cost represents an attempt to derive the specific value or worth for a particular point or
period in time of assets, liabilities, expenses, and revenues.
9. Monetary assets and liabilities do not include notes receivable and payable.
10. Monetary items gain or lose purchasing power as the price level changes.
Accounting Theory: 8th edition Page 2 of 10
11. During a period of inflation, a firm’s net monetary asset position experiences a purchasing power
loss.
12. During periods of deflation, a firm’s net monetary liability position experiences a purchasing
power gain.
13. A current value income system does not include purchasing power gains and losses as an element
of income.
14. A monetary holding gains are the difference between general price-level-adjustment amounts and
current value.
15. Monetary holding gains and losses are capital adjustments only, and are not a component of
income.
16. Total holding gain or loss is the sum of monetary holding gains and losses and real holding gains
and losses.
17. Deprival value is computed by taking the lower of Present Value and Net Realizable Value and
then the lower of the survivor and Entry Value.
18. Deprival value measures the opportunity cost to the enterprise of being deprived of the asset.
19. SFAS No. 33 required both constant dollar and current-cost-adjusted income.
20. SFAS No. 33 specified replacement cost as the basis of the primary financial statements.
Accounting Theory: 8th edition Page 3 of 10
21. SFAS No. 33 specified that the effects of changing prices should be presented as supplementary
information in annual reports.
22. The overall format adopted in SFAS No. 33 is one aggregation rather than disaggregation.
23. SFAS No. 82 eliminated the constant dollar income disclosures required by SFAS No.33.
24. SFAS No. 89 continued the requirement that current cost income measurement, purchasing
power gain or loss and holding gain information be disclosed.
25. SFAS No. 157 is grounded in the belief that historical costing is more important than current
values.
26. The fair value system of SFAS No.157 is an exit value system.
27. Under SFAS No. 157, prices for assets include deductions for transaction costs.
28. The cost approach to asset valuation involves determining the net realizable value, or exit value,
of the asset.
29. Under SFAS No. 157, if an asset is valued from and “in–use” perspective, its value is based on its
use in combination with other assets.
30. SFAS No. 157 may result in a decrease in financial statement comparability among firms.
Chapter 14—ACCOUNTING FOR INFLATION AND CHANGING PRICES
Accounting Theory: 8th edition Page 4 of 10
MULTIPLE CHOICE
1. According to the text, which of the following has posed the single greatest problem that is faced
in accounting theory?
a.
Historical costing
b.
Additivity
c.
Inflation
d.
Price-level adjustments
2. Which of the following qualities are impaired under historical costing?
a.
Additivity
b.
Predictive value
c.
Representational faithfulness
d.
All of the above
3. Which of the following is a true statement?
a.
Shortly after its inception, the FASB issued an exposure draft that proposed requiring the
presentation of, as supplemental information, the balance sheet and income statement
restated in units of general purchasing power.
b.
The Trueblood Commission committed itself to support of the current value concept.
c.
In ASR 190, the SEC reinforced its long-standing position of forbidding the presentation
of information other than historical cost.
d.
The AAA has always opposed price-level restated financial statements.
4. Which of the following is not a true statement?
a.
Prior to SFAS 33, the majority of accounting literature on the subject of changing prices
dealt with the possibility of restating historical cost financial statements for changes in
general price levels.
b.
Prior to SFAS 33, the majority of accounting literature on the subject of changing prices
dealt with the possibility of adopting current cost as a new measurement system.
c.
The need to consider the effects of changing prices in financial reports has followed a
rather evolutionary development.
d.
Measuring current costs is easier than restating historical cost for changes in units of
currency.
Accounting Theory: 8th edition Page 5 of 10
5. Which of the following is a true statement regarding a specific price index?
a.
Its computation does not require statistical sampling.
b.
It is narrowly constructed to determine the changing level of prices in a particular segment
of the economy.
c.
It is broadly constructed for ascertaining the change in prices for all goods and services.
d.
It cannot be used to compute price-level adjusted historical cost.
6. Which of the following is a true statement regarding a general price index?
a. Its computation does not require statistical sampling.
b.
It is narrowly constructed to determine the changing level of prices in a particular segment
of the economy.
c.
It is broadly constructed for ascertaining the change in prices for all goods and services.
d.
It cannot be used to compute price-level adjusted historical cost.
7. Which of the following is not true statement?
a.
Exit value denotes the selling price that can be received from the firm’s assets when sold
through a process of orderly liquidation.
b.
Exit value is a form of opportunity cost.
c.
Entry value refers to replacement cost.
d.
Exit value is generally preferred to replacement cost.
8. Which of the following does not accurately describe purchasing power gains and losses.
a.
Purchasing power gains and losses arise because monetary items gain or lose purchasing
power as the price level changes.
b.
Purchasing power gains and losses are part of SFAS No. 157’s income measurement
system.
c.
Purchasing power gains and losses are determined by measuring the purchasing power of
the monetary items and comparing it with the actual amount of the net monetary accounts.
d.
All systems of both general purchasing-power-adjusted income and current value income
include purchasing power gains and losses as an element of income.
9. Which of the following describes “deprival value”?
a.
It is a not a good measurement of fair value.
b.
It is the higher of exit value and replacement cost.
c.
It measures the opportunity cost to the enterprise of doing without the asset.
d.
It is the lower of exit value and or present value of future cash flow.
Accounting Theory: 8th edition Page 6 of 10
10. Which of the following was required by SFAS No. 33 as the basis of primary financial
statements?
a.
Historical cost
b.
Current cost
c.
Present value of future cash flows
d.
Net realizable value
11. Which of the following is not a true statement?
a.
Exit value denotes the selling price that can be received from the firm’s assets when sold
through a process of orderly liquidation.
b.
Exit value is a form of opportunity cost.
c.
Entry value refers to replacement cost.
d.
Exit value is generally preferred to replacement cost.
12. SFAS No. 33 required enterprises to report supplementary information under
a.
A constant dollar approach
b.
A current cost approach
c.
Both constant dollar and current cost approaches
d.
None of the above
13. Which of the following is not a feature of SFAS 157?
a.
It affects most balance sheet accounts but has little to say about related income statement
considerations.
b.
The fair value of SFAS No. 157 is an entry value system.
c.
It is grounded in the belief that fair values are more relevant for decision-making purposes
than historical costing.
d.
Prices for both assets and liabilities do not include deductions for transaction costs, except
transportation.
14. Which of the following is not a valuation technique that may be applied according to SFAS No.
157?
a.
The Net realizable value approach
b.
The market approach
c.
The income approach
d.
The cost approach
15. Which of the following is true regarding “unobservable inputs”?
a.
They pertain to level 1 prices in the fair value pricing hierarchy
b.
They do not appear on the fair value pricing hierarchy.
c.
They are higher in verifiability than level two inputs.
d.
They are inputs for which there is little market activity.
16. Which of the following accurately refers to SFAS No. 157?
a.
It is an income statement oriented standard.
b.
It requires that unrealized monetary holding gains be included in operating income.
c.
Assets are valued from “in–use” and in–exchange” perspectives.
d.
It requires that purchasing power gains and losses be included in other comprehensive
income.
17. Which of the following is not a true statement regarding John C. Burton, former chief accountant
of the SEC?
a.
His influence moved the development of accounting for changing prices significantly
forward.
b.
He believed that any changes in financial reporting should be made to the measurement
system itself.
c.
He believed that inflation creates greater distortions when the current cost approach to
measurement is used.
d.
He had doubts as to whether a system using general price-level adjustments would provide
any benefit.
18. Which of the following type of gains and losses arises purely because of the change in the general
price level during a period?
a.
Monetary holding gains and losses
b.
Real holding gains and losses
c.
All holding gains and losses
d.
Unrealized gains and losses
19. SFAS No. 33 specified which of the following as the basis of primary financial statements?
a.
Replacement cost
b.
Nominal historical cost
c.
Current value
d.
Constant dollar
determine how much change has occurred.
change in prices for all goods and services of an economy.
c.
SFAS No. 33 required that a price index, such as the Consumer Price Index, be used
20. Which of the following statements does not apply to SFAS No. 33?
a.
It was withdrawn in part because of the abatement of inflation.
b.
It required current-cost-adjusted income to be published as supplemental information.
c.
It required purchasing power gains and losses on monetary items to be disclosed.
d.
It considered constant dollar adjustments to be of little value.
ESSAY
1. Define inflation and describe how it and historical costing have posed a problem for accounting
theory.
2. Respond to the following:
a.
Explain what is meant by price indexes.
b.
Compare and contrast the two types of price indexes, specific price indexes and
general price indexes.
c.
How did SFAS No. 33 make use of price indexes?
3. Explain the concept of purchasing power gains and losses and how these gains and losses arise.
4. Distinguish between monetary holding gains and losses and real holding gains and losses.
5. List and describe the three valuation techniques used by SFAS No. 157 for assets and liabilities.
6. What are the there levels for securing prices in the fair value pricing hierarchy of SFAS 157?
