True or false, with reasons

Six statements are answered: (i), (iii), (iv), (v), (vii) and (ix).

(i)False Extra chairs increase the hall's sitting capacity, so they bring a benefit that lasts beyond the year. An expenditure that adds to an asset's capacity is capital expenditure; it is added to the asset and depreciated, not charged as revenue expenditure in the year it is spent.

(iii)False A pending lawsuit is a contingent liability: whether anything will be paid depends on a future event the firm does not control. A contingent liability is not recognised in the balance sheet; it is disclosed in a note to the accounts, unless the chance of an outflow is remote.

(iv)True Under the full disclosure principle, the financial statements must disclose every material fact, relevant and reliable, that users need to judge the business; notes to the accounts serve this purpose.

(v)True Depreciation spreads an asset's cost over its useful life. That only makes sense because the business is assumed to go on operating; it is this going-concern assumption that calls for the distinction between capital and revenue expenditure. A business about to be wound up would value its assets at what they would fetch.

(vii)True Extraordinary items arise from events clearly distinct from the ordinary activities of the enterprise and are not expected to recur. AS 5 gives the example: losses sustained as a result of an earthquake may qualify as an extraordinary item for many enterprises. (For an insurer, claims arising from an earthquake would not be extraordinary.)

(ix)True AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, deals with prior period items (income or expenses arising in the current period from errors or omissions in earlier periods' statements) and with changes in accounting policies.