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Question：Which of the following is not true of historic cost accounting (HCA)?
A. It is not easy to see trends.
B. It is easier to understand than alternative measures of performance.
C. It does not maintain shareholders' wealth.
D. It shows only true trading profits.
The correct answer is: D
Where there can be a long time between purchase of goods and their sale if there is inflation, this generates an artificial profit, which can be seen as a false trading profit rather than a true one.
As HCA does not incorporate inflation it makes it less easy to see trends over time without further analysis.
HCA tries to reflect shareholders' wealth, but using a nominal $ measurement. The maintenance of shareholders' wealth can only be achieved if it is adjusted for inflation in some way.
Alternative systems of accounting, such as current cost accounting, often are not well understood by readers of financial information.
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