REVISION - Intro to accounting theory HCA

Question 1

Weaknesses in HCA? 6

Answer 1

1. Profits are overstated
2. Depreciation charges are inadequate
3. Gains and losses on monetary items are not disclosed
4. Holding gains on inventories are not disclosed
5. Non-current asset values reported in SOFP are unrealistic
6. Accounting ratios are misleading.

Question 2

Strengths of HCA 3

Answer 2

1. Simple and understandable
2. Well-established.
3. Objective - historical cost is factual - this can be lost however when factoring depreciation

Question 3

What is HCA?

Answer 3

HCA records each transaction at its monetary amount at the time that the transaction occurs and makes no attempt to adjust for inflation. This is the traditional method of accounting.

Question 4

What is said about HCA in times of inflation?

Answer 4

It can be argued that HCA overstates entity’s profits. Capital depletion not fully recognised

Question 5

Effects of holding monetary assets vs monetary liabilities during periods of inflation?

Answer 5

Monetary assets lose purchasing power. Monetary liabilities gain purchasing power. These gains/losses are not reported for in the financial statements.

Question 6

Does gross profit in SOCI on HCA include holding gains?

Answer 6

Yes - these are not reported separately

Question 7

Why might HCA give a misleading impression on assets?

Answer 7

Because they are not shown at current value and so may give a misleading impression

Question 8

What are the alternatives to HCA?

Answer 8

Current purchasing power (CPP)

Current cost accounting (CCA)

Question 9

When is CPP prescribed by IAS29

Answer 9

When an entity has a functional currency in a hyper-inflationary economy