Which one of the following is not true?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → During the period of high inflation, the amounts associated with the items of balance sheet are adjusted to current price level.

Financial statements are drawn up on historical cost. Assets bought at different times are shown at what was paid for them, and no adjustment is made for changes in the price level, even in a period of high inflation. That is why the balance sheet does not show the current market position, one of the known limitations of financial statements.

Option (1) Financial statements are prepared on the basis of accounting principles and conventions. — A true statement. Conventions such as conservatism and materiality are followed in preparing them.

Option (2) Any changes in accounting principles or methods will affect the utility of the financial statements. — A true statement. A change of method (for example, of depreciation or stock valuation) makes the figures of different years hard to compare.

Option (4) Financial statements record only those transactions which can be expressed in monetary units only. — A true statement. Under the money measurement concept, facts that cannot be expressed in money are left out.

NCERT (2026-27 edition):
Nature of Financial Statements – “The chronologically recorded facts about events expressed in monetary terms for a defined period of time are the basis for the preparation of periodical financial statements which reveal the financial position as on a date and the financial results obtained during a period.”

NCERT (2026-27 edition):
Limitations of Financial Statements – “Though utmost care is taken in the preparation of the financial statements and provide detailed information to the users, they suffer from the following limitations: Do not reflect current situation: Financial statements are prepared on the basis of historical cost. Since the purchasing power of money is changing, the values of assets and liabilities shown in financial statement do not reflect current market situation.”

NCERT (2026-27 edition):
Nature of Financial Statements – “… Accounting Conventions: Certain accounting conventions are followed while preparing financial statements.”

NCERT (2026-27 edition):
Tools of Analysis of Financial Statements – “… The financial data will be comparative only when same accounting principles are used in preparing these statements. If this is not the case, the deviation in the use of accounting principles should be mentioned as a footnote.”