Historical cost accounting assumes that money holds a constant purchasing power, and: Historical cost accounting assumes that money holds a constant purchasing power, and: Can understate profits in times of rising prices, with distribution of profits leading to an increase in operating capacity. Can overstate profits in times of rising prices, with distribution of profits leading to an erosion of operating capacity. Can lead to an increase in purchasing power. Makes no difference to reported profits and operating capacity in times of rising prices.

The historical cost accounting method assumes that the purchasing power of money remains constant over time. However, this assumption does not always hold true, especially in times of inflation or deflation.

1. It can understate profits in times of rising prices: When prices are rising (inflation), the cost of goods sold (COGS) recorded in the financial statements may be lower than the actual current cost. This is because the COGS is based on the historical cost, not the current cost. As a result, the gross profit (sales - COGS) can be overstated, leading to an understatement of the actual economic profit.

2. It can overstate profits in times of rising prices: Conversely, if a company distributes these overstated profits (due to the understated COGS), it may lead to an erosion of operating capacity. This is because the company may not have enough retained earnings to replace the assets at their current, higher cost.

3. It can lead to an increase in purchasing power: This statement is not typically associated with historical cost accounting. The purchasing power of money is generally affected by inflation or deflation, not the accounting method used.

4. Makes no difference to reported profits and operating capacity in times of rising prices: This statement is not accurate. As explained above, the historical cost accounting method can lead to understated or overstated profits in times of rising prices, which can affect the reported operating capacity.