Chapter 2 Section 5: Financial Reporting and Changing Prices

Question 1

Define historic cost. What is its counterpart? What is the counterpart’s definition?

Answer 1

Actual exchange value in dollars at the time it was acquired Current cost Replacement cost. It accounts for appreciation.

Question 2

Define nominal dollars. What is its counterpart? What is the counterpart’s definition?

Answer 2

Unadjusted for changes in purchasing power Constant dollars Dollars restated based on inflation, using CPI ratios

Question 3

What are the four ways to measure prices and the effects of price changes? Define each

Answer 3

1. Historic cost/nominal dollars - historic prices, no adjustment for inflation 2. Historic cost/constant dollars - historic prices, adjusted for inflation 3. Current cost/nominal dollars - based on current cost without inflation adjustment 4. Current cost/constant dollars - replacement cost, adjusted for inflation

Question 4

Define monetary assets and liabilities

Answer 4

Fixed or denominated in dollars

Question 5

Define non-monetary assets and liabilities

Answer 5

Fluctuate in value with inflation and deflation

Question 6

Draw the chart for monetary assets vs. monetary liabilities.

Answer 6

As follows:

Question 7

Draw the chart for inflation and appreciation consideration.

Answer 7

As follows: