During a period of inflation, many accountants believe that financial reports prepared under the historical cost convention are subject to the following major limitations:

1 inventories are undervalued;

2 depreciation is understated;

3 gains and losses on net monetary assets are undisclosed;

4 statement of financial position values are unrealistic; and 5 meaningful periodic comparisons are difficult to make.

\section*{Required:}
Explain briefly the limitations of historical cost accounting in periods of inflation with reference to each of the items listed above.
(Association of Accounting Technicians)