If net profit of the firm is $ 280,000 and capital employed is $1400, 000 the return on capital employed will be 20%. During inflation with net profit calculated with replacement cost is $180,000 and capital employed is $22, 00,000 the return on capital employed will be 8.2%.This situationexpresses the following problem.

a.

Under historical cost accounting, the profits areoverstated,and fixed assets areunderstatedspecially when there isincreasein the price of theold fixedassets.

b.

Under historical cost accounting,returnon capital employed which is very useful for the valuation of the business by its owners, creditors and management will not be correct and may lead to misleadingdecision

c.

Both thegiven statementsare true in the givensituation

d.

Both thegiven statementsare false in the givensituation