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Question : Assertion A :-  Price level changes and the purchasing power of money are inversely related. A change in the price level makes analysis of financial statements of different accounting years invalid.

Reason R :- Accounting records ignore changes in the value of money.

In the context of the above two statements, which of the following is correct?

Option 1: Both Assertion A and reason R are correct but the reason R is not the correct explanation of Assertion A 

Option 2: Both Assertion A and reason R are correct but the reason R is the correct explanation of Assertion A 

Option 3: Both Assertion A is correct but the reason R is not correct

Option 4: Both Assertion A and reason R are not correct


Team Careers360 21st Jan, 2024
Answer (1)
Team Careers360 23rd Jan, 2024

Correct Answer: Both Assertion A and reason R are correct but the reason R is the correct explanation of Assertion A 


Solution : Answer = Both Assertion A and reason R are correct but reason R is the correct explanation of Assertion A 

It may become invalid to compare financial accounts from various accounting years due to a shift in the level of prices. This is a result of accounting records failing to take changing currency values into account. Since accounting accounts are created at historical cost, changes in the worth of money are not taken into account.
Hence, the correct option is 2.

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