Assertion (A) : The financial statements prepared on historical cost basis result into an erosion of capital in the long run. Reason (R) : Maintaining the books of accounts as per Current Purchasing Power Technique only may contain the inflationary pressure. In the context of above two statements, which one of the following is correct one ?
Both (A) and (R) are true, but (R) is not the correct explanation of (A).
Assertion (A): In inflation, historical cost accounts charge depreciation and cost of goods sold at old, lower prices. Profit is therefore overstated, and taxes and dividends paid out of it come partly out of capital, so the real (purchasing-power) capital of the firm is not maintained. A is true.
Reason (R): The Current Purchasing Power (CPP) method restates accounting figures with a general price index so that capital and profit are measured in units of constant purchasing power. It is one way to counter the effect of inflation on accounts. Read in that sense, R is acceptable as true, although "only" overstates it, because current cost accounting is an alternative method.
Link: A is explained by the understatement of costs under historical cost, while R proposes a remedy. A remedy does not explain why erosion happens, so R is not the correct explanation of A.
Hence, Both (A) and (R) are true, but (R) is not the correct explanation of (A).
Similar Questions
Assertion (A) : Human Resource Accounting is the measurement of the cost and value of people to the organization.
Reasoning (R) : Human Resource Accounting involves measuring costs incurred by the organizations to recruit, select, hire, train and develop employees and judge their economic value to the organization.
Codes :
Important Questions from Miscellaneous
Which event is marked as an Intangible Cultural Heritage of Humanity by UNESCO?
Who has been conferred with the rank of the Commander of the Order of the British Empire in 2018?
Who directead the film ‘Bhuvan Shome’?
The book “In my mother’s house” is written by _______
In which state is Vishwa Mitra Ka Tila situated?
