FAR 2 - Financial Reporting and Changing Prices

Question 1

Define monetary asset vs monetary liability

Answer 1

Holding monetary assets
Purchasing power gain - during period of deflation
Purchasing power loss - during a period of inflation

Holding monetary liabilities
Purchasing power gain - during a period of inflation
Purchasing power loss - during period of deflation

Question 2

Define:
Historic cost
Current cost
Nominal dollars
Constant Dollars

Answer 2

Historic Cost - actual exchange value in dollars an asset was acquired or liability was assumed

Current Cost - Cost that would be incurred at present time, the replacement cost - USE THE RECOVERABLE AMOUNT IF LOWER

Nominal Dollar - Unadjusted for changes in purchasing power

Constant Dollar - Dollars restated on calculation of CPI ratios

Question 3

Define:
Historic cost
Current cost
Nominal dollars
Constant Dollars

As they relate to appreciation and inflation?

Answer 3

Historic Cost - ignores appreciation

Current Cost - reflects appreciation

Nominal dollars - ignores inflation

Constant - adjusts for inflation

Question 4

What is required basis for GAAP?

Answer 4

Historic cost/ Nominal Dollar

Question 5

Difference between monetary and nonmonetary assets and liabilities?

Answer 5

Monetary are fixed. Dollars, receivable

Nonmonetary fluctuate in value. Building, inventory, stock