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4,1) Some commentators on financial reporting practices argue that financial statements produced under the historic cost convention do not provide relevant information to users of those statements in times of rising prices

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4,1) Some commentators on financial reporting practices argue that financial statements produced under the historic cost convention do not provide relevant information to users of those statements in times of rising prices.

Requirements

(a) Identify the main limitations of historic cost accounting, explaining the nature of those limitations.

(b) Discuss how the use of other capital maintenance concepts to that applied under historic cost accounting might provide more useful information to users of financial statements. (5 marks)

ICAEW, Financial Reporting, May 1995

4.2 (a) Give a brief summary of the current value replacement cost accounting system (entry values).

(b) Give a brief summary of the current value net realisable value accounting system (exit values). (6 marks)

(c) To what extent do you consider it would be useful to prepare financial statements which used entry values for the profit and loss account and exit values for the balance sheet and why? (8 marks)

ACCA Level 2, The Regulatory Framework of Accounting, December 1989 (20 marks)

4.3 Three unrelated companies, Tower pic (a public company), Book Ltd (a private company) and Holdings pic (a quoted investment company) have summarised balance sheets, as on 30 June 1985, as set out below with relevant additional information.

(a) Tower plc

	£m		£m
Share capital	2.0	Fixed assets	3.3
Share premium account	0.5
Revaluation reserves	1.0	Net current assets	2.7
Profit and loss account	2.5
	6.0		6.0

 

(1) A partial revaluation of fixed assets took place during the year with the following result:

	£m
Surplus on land	0.65
Surplus on buildings	0.35
Surplus on plant and machinery	0.10
Deficit on fixtures and fittings	(0.10)
	1.00

 

The directors consider that the value of the remaining fixed assets not revalued is equal to their net book amounts.

(2) Depreciation is provided at 2% on building, 15% on plant and machinery, and 20% on fixtures and fittings. All fixed assets are depreciated for the full year on the cost or revalued amounts.

(3) Fixed assets comprise:

	£m
Land	1.2
Buildings	0.8
Plant and machinery	0.8
Fixtures and fittings	0.3
Development costs	0.2
	3.3

 

(b) Book Ltd – Current Cost Balance Sheet

	£000		£000	£000
Share capital	45	Fixed assets		50
Current cost reserve	40	Investment in Work Ltd		40
Retained profit	55	Current assets
		Stock	10
		Long-term work-in-progress	30
			40
		Cash	10	50
	140			140

 

(1) No provision has yet been made for the losses of the subsidiary, Worm Ltd. It is estimated that the net assets of Worm Ltd in which Book Ltd has an interest of 60% are £50000.