CAF-1 · Chapter 9 · Question 12 of 15
During times of rising prices, preparing financial statements based strictly on historical cost generally leads to:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Overstated profits and understated assets.
Explanation
In times of rising prices, historical cost accounting will cause profits to be overstated (as older, lower costs are matched against current revenues) and assets to be understated.
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