What does historic cost mean?

the original cost of an asset when it was bought. It is a fact, but it may be out of date.

Which of these is not recorded in accounting statements?

the skill of the workforce. It cannot be measured in money.

Why can different accounting policies make comparison difficult?

They produce different profit figures for the same events. Depreciation by a different method gives a different expense.

Which is a non-financial factor?

the location of the business. It matters to the business but has no figure in the accounts.

Accounting statements are based on:

past transactions. They report what has already happened.

The limitations of accounting statements · Cambridge IGCSE Accounting

In plain words

Financial statements look precise, down to the last dollar. They are less exact than they look, and they leave a great deal out. Anyone using them should know what they cannot tell you.

4 things to know

Historic cost: assets are recorded at what they cost when they were bought. Years later, with prices having changed, that figure may be far from what they are worth.
Accounting policies: many figures are estimates, such as depreciation and the allowance for irrecoverable debts. Different policies give different profits, which makes comparison difficult.
Non-financial aspects are left out, because only things that can be measured in money are recorded. The skill of the workforce, the location of the business and the state of the economy do not appear.
The statements also look backwards: they report a past period, and the future may be different.

Worked example

A business bought its premises for $80 000 twenty years ago, and they are still shown at that figure. Explain the limitation.

The statement of financial position uses historic cost.
Property prices have probably risen a great deal in twenty years.
So the premises may be worth far more than $80 000, and the statement understates the value of the business's assets.

Tips and tricks

Learn the three headings in the syllabus: historic cost, the application of accounting policies, and non-financial aspects.
A good workforce, loyal customers and a good location are valuable, and none of them is in the accounts.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

The limitations of accounting statements: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

What does historic cost mean?
- the cost of replacing an asset today
- the original cost of an asset when it was bought (the answer)
- the selling price of an asset
- the cost of an asset less its depreciation
It is a fact, but it may be out of date.
Which of these is not recorded in accounting statements?
- trade receivables
- inventory
- the skill of the workforce (the answer)
- bank loan
It cannot be measured in money.
Why can different accounting policies make comparison difficult?
- They change the bank balance.
- They produce different profit figures for the same events. (the answer)
- They are against the law.
- They change the sales figure.
Depreciation by a different method gives a different expense.
Which is a non-financial factor?
- the profit margin
- the current ratio
- the location of the business (the answer)
- the bank overdraft
It matters to the business but has no figure in the accounts.
Accounting statements are based on:
- future plans
- past transactions (the answer)
- the owner's opinions
- competitors' results
They report what has already happened.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

2 questions, 5 marks. Write your answers on paper, then check them.

The limitations of accounting statements

Cambridge IGCSE Accounting 0452 · 5 marks · papermunch.org

Name ______________________________ Date ______________

State three limitations of accounting statements.[3]
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Assets are shown at historic cost, which may be out of date. Figures depend on the accounting policies chosen, such as the method of depreciation. Non-financial aspects, such as the skill of the workforce, are not shown.
I got this one
Give two examples of non-financial aspects that are not shown in accounting statements.[2]
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The skill of the workforce and the location of the business. (Also: the economic climate.)
I got this one

Answers: The limitations of accounting statements

1. Assets are shown at historic cost, which may be out of date. Figures depend on the accounting policies chosen, such as the method of depreciation. Non-financial aspects, such as the skill of the workforce, are not shown.
2. The skill of the workforce and the location of the business. (Also: the economic climate.)