It has been stated that: ‘Current cost accounts allow for the impact of specific price changes on the net operating assets and thus the operating capability of the business. The same tools of analysis as those applied to historical cost accounts are generally appropriate. The ratios derived from current cost accounts... will often differ substantially from those revealed in historical cost accounts but should be more realistic indicators when assessing an entity or making comparisons between entities.’

Required

(a) Explain, with reasons, whether the value of the following ratios might differ if calculated using current cost accounts rather than the historical cost accounts.

(i) Return on capital employed (ROCE)

(ii) Stock turnover ratio (utilising the year end stock value)

(iii) Debtors turnover ratio

(iv) Gearing ratio (in the balance sheet) (8 marks)

(b) Explain the principal limitations of the specific historical cost ratios set out in part

(a) when utilising them for the purpose of inter-firm comparison. (11 marks)

(c) Briefly discuss whether you feel that current cost based ratios are more realistic indicators of a company’s performance than those ratios based upon historical cost accounts. (6 marks)

ACCA, Accounting and Audit Practice, June 1995 (25 marks)