Chapter 2 - Wealth And The Measurement Of Profit

Question 1

Key Concept: Wealth

Answer 1

Wealth is a static measure and represents a stock at a particular point in time. This stock can change over time. Hence, the wealth measured at the start of a period will not necessarily be equal to the wealth measured at the end of the period. The difference between the two is the profit or loss for that period of time.

Question 2

Key Concept: Profit

Answer 2

Profit represents the difference between the wealth at the start and at the end of the period. Unlike wealth, which is essentially a static measure, profit is a measure of flow that summarizes activity over a period.

Question 3

Key Concept: Original cost

Answer 3

The cost of the item at the time of the transaction between the buyer and the seller

Question 4

Key Concept: Historical cost (Anschaffungskosten)

Answer 4

The cost incurred by the individual or enterprise in acquiring an item measured at the time of the originating transaction

Question 5

Key Concept: Replacement cost (Wiederbeschaffungskosten)

Answer 5

The amount that would have to be paid at today’s prices to purchase an item similar to the existing item

Question 6

Key Concept: Economic value

Answer 6

Economic value is, or would be, an ideal measure of value and wealth. The value of the expected earnings from using the item in question discounted at an appropriate rate to give a present-day value.

Question 7

Key Concept: Net realizable value (erwarteter Verkaufserlös)

Answer 7

The net realizable value is an alternative measure of value to economic value

Question 8

There are a number of different ways in which we can measure wealth. List the alternatives discussed in the chapter together with any drawbacks or problems that were identified with their use.

Answer 8

The alternatives and the drawbacks identified were: original cost: identification of original cost as cost to whom

• historic cost: reductions in value, increases in prices
• replacement cost: special items, changes in technology leading to non-replacement
• economic value: problems for forecasting the future, the choice of appropriate discount rates
• net realizable value: do we want to sell, is it a forced sale or at open market value?