Accounting Online Program Certification Practice Test

Which of the following statements about the historical cost concept is true?

1. It allows for inflation adjustments on assets

2. Only items measurable in monetary terms can be recognized

3. It requires fair value measurement for all assets

4. It applies only to limited companies

The correct answer is: Only items measurable in monetary terms can be recognized

The historical cost concept is a fundamental accounting principle that dictates that assets should be recorded and reported at their original purchase price, also known as historical cost. This principle is crucial because it provides reliable and objective financial information, ensuring that the value of assets is based on actual transactions rather than estimates. The statement that only items measurable in monetary terms can be recognized aligns perfectly with the historical cost concept. This means that only assets that have a clear, quantifiable cost associated with them can be recorded in the financial statements. It emphasizes the importance of tangible transaction data that can be translated into a currency value, which is a cornerstone of the accounting framework. The other options highlight concepts that are not consistent with the historical cost principle. For instance, adjusting for inflation and requiring fair value measurement introduce subjectivity and variability that the historical cost concept aims to avoid. Additionally, the historical cost principle applies to all types of entities, not just limited companies, thus reinforcing the universality of this foundational concept in accounting.