Question 1

Profit represents an increase in wealth.

Accepted Answer

Profit is defined as the financial gain obtained by subtracting the cost of goods sold or expenses from the revenue generated. This increase in revenue represents an increase in wealth, making the statement true.

Question 2

The net realisable value is the estimated proceeds of sales less, where applicable, all further costs to the stage of completion, and less all costs to be incurred in marketing, selling and distribution to customers.

Accepted Answer

The definition of net realisable value states that it is the estimated proceeds of sales less all further costs to the stage of completion, and less all costs to be incurred in marketing, selling and distribution to customers. Therefore, the statement is true.

Question 3

Choosing a measurement system affects profit but does not affect wealth.

Accepted Answer

Choosing a measurement system can affect both profit and wealth as it influences how assets, liabilities, and income are valued and reported, impacting financial statements and the perceived financial health of a business or individual.

Question 4

Fair value arises in circumstances where the price is based on an orderly transaction between a willing seller and a willing buyer.

Accepted Answer

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This definition assumes that the transaction takes place in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market. The transaction is also assumed to be between willing parties who have reasonable knowledge of the relevant facts and are not under any compulsion to complete the transaction.

Question 5

Profit measures the flow of resources into and out of the business over time.

Accepted Answer

Profit is the difference between the total revenue generated by a business and the total expenses incurred in producing that revenue over a period of time. It measures the flow of resources into and out of the business over time.

Question 6

Which of the following statements is true of profit and wealth?

Accepted Answer

Profit is a measure of the income earned by a business or individual over a specific period of time, while wealth is the accumulated assets and net worth of a business or individual at a specific point in time. Profit is non-static in the sense that it can fluctuate over time, whereas wealth is more static as it represents a snapshot of a person or business's financial situation at a single point in time.

Question 7

Net realisable value is based on an expected selling price in a forced sale.

Accepted Answer

Net realisable value is based on the estimated selling price less estimated costs of completion and selling in the ordinary course of business, not in a forced sale.

Question 8

Where an asset is exchanged between a willing seller and a willing buyer and the exchange price is below the market price due to fact that the parties involved are related, the resulting exchange price is referred to as fair value.

Accepted Answer

The described scenario would result in a transaction at a "related party price" or "arms-length price," but not necessarily fair value. Fair value is a valuation concept that seeks to determine the price at which an asset would change hands in an orderly transaction between market participants, not necessarily between related parties.

Question 9

The written down cost of an asset represents the cost of an asset after accumulated depreciation.

Accepted Answer

The written down cost of an asset is its original cost minus any accumulated depreciation, representing its current book value.

Question 10

Historic cost is the cost incurred by an individual or enterprise in acquiring an item, measured at the time of the originating transaction.

Accepted Answer

Historic cost is the actual cost incurred in acquiring an item at the time of the transaction. It is also known as the historical cost.

Question 11

James had $80 000 in the bank. He used some of this cash to buy a new car for $67 000 on 1 January. He subsequently modified the car, at no cost, and sold it for $78 000 on 1 March. What profit did James make from the sale of the car?

Accepted Answer

To calculate the profit made by James, we need to subtract the cost of buying the car from the selling price of the car.

Profit = selling price - cost price

Cost price = $67 000 (the amount James paid for the car)
Selling price = $78 000 (the amount James sold the car for)

Profit = $78 000 - $67 000 = $11 000

Therefore, James made a profit of $11 000 from the sale of the car. The correct answer choice is C.

Question 12

From the Hicksian economic viewpoint, profit is the amount which an individual can consume over a period and still be as well off at the end of the period as he/she was at the beginning of the period.

Accepted Answer

According to Hicksian economics, profit is indeed defined as the maximum amount an individual can consume over a period without being worse off at the end of the period compared to the beginning, effectively maintaining their level of economic welfare.

Question 13

The common measurement method adopted in most countries is that of historic cost.

Accepted Answer

Most countries use the historic cost method for measurement of assets and liabilities in financial reporting.

Question 14

The wealth of an entity is determined by what it controls and what it owes.

Accepted Answer

The wealth of an entity is determined by its assets (what it controls) and liabilities (what it owes), which is commonly known as its net worth or equity.

Question 15

The value of the expected earnings from using an item, discounted at an appropriate rate to give a present-day value, is the economic value.

Accepted Answer

This is a correct statement. Economic value is based on the expected earnings or benefits from the use of an item, discounted to reflect their present-day value using an appropriate interest or discount rate.

Question 16

The fair value of an asset is more reliable where there exists a liquid market for the asset, than when no liquid market exists.

Accepted Answer

The fair value of an asset is generally more reliable when there is a liquid market for the asset, as it provides a more objective and observable measure of the asset's value, based on the price at which it could be bought or sold in an active market. When no liquid market exists, fair value may need to be estimated using less objective methods, such as discounted cash flows or valuation models, which may be more subject to judgment and uncertainty.

Question 17

Which of the following statements is incorrect?

Accepted Answer

Profit does not represent the sum of all gains; it is the net result after subtracting expenses from revenues.

Question 18

Jane buys a 1957 FJ Holden at time T₀ for $100 000. At time T₁, the car is valued at $180 000. Jane's profit and wealth at T₁ are:

Accepted Answer

Jane's profit is the difference between the selling price ($180,000) and the purchase price ($100,000), which is $80,000. Her wealth at the time of valuation would be the value of the car, which is $180,000.

Question 19

Historical cost is often referred to as the most relevant method of measurement.

Accepted Answer

Historical cost is not always considered the most relevant method of measurement, as it does not reflect current market conditions or changes in the value of assets over time. Other methods, such as fair value or replacement cost, may be more appropriate in certain situations.

Question 20

Economic value is considered to be an ideal approach to measuring value, but may lack reliability due to the fact that the measure relies on estimates.

Accepted Answer

Economic value is based on estimates and predictions, which can be subject to bias and uncertainty, leading to a lack of reliability in measuring value.

Quiz 4: Wealth and the Measurement of Profit