Question 1 15 Marks For over 20 years the accounting profession in many countries has attempted to formulate a method of preparing financial statements that takes account of the effects of price increases (inflation). It seems that no proposed method of reflecting the effects of changing prices has gained international acceptance. The decision of the IASB, and the accounting standard setters in many countries, is that no form of accounting for price changes should be made compulsory, but entities are encouraged to present such information. There have been two main methods put forward by various accounting standard bodies for reporting the effects of price changes. One method is based on the movements in general price inflation and is referred to as a General (or Current) Purchasing Power Approach, the other method is based on specific price changes of goods and assets and is generally referred to as a Current Cost Approach. Some bodies have also suggested an approach which combines features of each method. Required: (a) Explain the limitations of (pure) historic cost accounts when used as a basis for assessing the performance of an entity. You should give an example of how each of three different user groups may be misled by such information. (b) Describe the advantages and criticisms of General Purchasing Power and Current Cost Accounting