Question 1

The principle of consistency states that:

Accepted Answer

The principle of consistency states that a company should choose a set of accounting methods and use them consistently from one period to the next. This allows for comparability between financial statements from different periods and helps ensure that financial information accurately reflects the company's performance over time. Choice B is incorrect because companies are allowed to change accounting methods if they have a legitimate reason to do so. Choice C is partially correct - companies may change accounting methods, but they must disclose the change and its effects on financial statements. Choice D is incorrect - companies should not use accounting methods that consistently inflate profits, as this would be unethical and misleading to investors.

Question 2

Which one of the following is violated when a firm measures accounts receivable at its face amount even though knowing some customers may not pay the amounts due?

Accepted Answer

The principle of conservatism requires that when there is uncertainty about the amount or timing of future cash flows associated with an accounting item, an accountant should choose the alternative that results in less net income or a lower asset amount. By measuring accounts receivable at its face amount even though knowing some customers may not pay the amounts due, the firm is overstating its accounts receivable balance, which could lead to an overstatement of its net income and assets. Therefore, the principle of conservatism is violated.

Question 3

Solution:
$\begin{array}{llll}
&\text { Cash Inflows } & \text { Cash Outflow } & \text { Future } & \text { Total } \
&\text { From Sale } & \text { for Replacement } & \text { Cash Flows } & \text { Cash Flows } \
\hline\text { Asset C: }\\text { Option } 3&3,500&(4,000)&6,000&5,500
\end{array}$
-Three years ago, Astro Masters, Inc. purchased the three assets listed in the following table. The chief financial officer, Bill Moss, is presently trying to decide what to do with each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information is provided to aid his decision.
$\begin{array}{|c|c|c|c|c|c|}
\hline \text { Asset } & \begin{array}{c}
\text { Original } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Replacement } \
\text { Cost }
\end{array} & \begin{array}{c}\text { Fair }\
\text { Market } \
\text { Value }
\end{array} & \begin{array}{c}
\text { PresentValue of Future } \
\text { Cash Flows Produced } \
\text { by Old Asset }
\end{array} & \begin{array}{c}
\text { Present Value of } \
\text { Future Cash Flows } \
\text { of Equivalent Asset }
\end{array} \\hline \mathrm{A} & \$ 4,500 & \$ 1,500 & \$ 2,000 & \$ 3,000 & \$ 5,000 \
\hline \mathrm{B} & \$ 2,000 & \$ 2,500 & \$ 1,000 & \$ 3,000 & \$ 4,500 \
\hline \mathrm{C} & \$ 2,500 & \$ 4,000 & \$ 3,500 & \$ 3,000 & \$ 6,000 \
\hline
\end{array}$
Based on your calculations of total cash flows, which of the following options is the best for Bill to pursue with respect to Asset B?

Accepted Answer

The answer of Solution:
\(\begin{array}{llll}
&\text { Cash Inflows } & \text...

Question 4

Which one of the following is most likely violated if a firm increases the dollar amount reported for unsold inventory on the balance sheet to a cost it anticipates it will have to pay for future inventory items?

Accepted Answer

This violates the principle of conservatism, which requires companies to record losses and liabilities as soon as they are anticipated, but to only record gains when realized. Increasing the dollar amount reported for unsold inventory to a cost that the firm anticipates it will have to pay for future inventory items is an overly optimistic assumption that violates this principle.

Question 5

The most common point of revenue recognition is:

Accepted Answer

Revenue should be recognized when goods are delivered to the customer and ownership of the goods is transferred, as this is considered the point at which the company has fulfilled its obligation to provide the goods to the customer. Collecting cash or producing goods are not necessarily indicators that revenue should be recognized. The customer issuing a check is also not a relevant factor for recognizing revenue.

Question 6

Three years ago, Astro Masters, Inc. purchased the three assets listed in the following table. The chief financial officer, Bill Moss, is presently trying to decide what to do with each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information is provided to aid his decision.
$\begin{array}{|c|c|c|c|c|c|}
\hline \text { Asset } & \begin{array}{c}
\text { Original } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Replacement } \
\text { Cost }
\end{array} & \begin{array}{c}\text { Fair }\
\text { Market } \
\text { Value }
\end{array} & \begin{array}{c}
\text { PresentValue of Future } \
\text { Cash Flows Produced } \
\text { by Old Asset }
\end{array} & \begin{array}{c}
\text { Present Value of } \
\text { Future Cash Flows } \
\text { of Equivalent Asset }
\end{array} \\hline \mathrm{A} & \$ 4,500 & \$ 1,500 & \$ 2,000 & \$ 3,000 & \$ 5,000 \
\hline \mathrm{B} & \$ 2,000 & \$ 2,500 & \$ 1,000 & \$ 3,000 & \$ 4,500 \
\hline \mathrm{C} & \$ 2,500 & \$ 4,000 & \$ 3,500 & \$ 3,000 & \$ 6,000 \
\hline
\end{array}$
Based on your calculations of total cash flows, which of the following options is the best for Bill to pursue with respect to Asset A?

Accepted Answer

For Asset A, selling and replacing it yields a total cash flow of $2,000 (from selling) + $5,000 (future cash flows of the new asset) - $1,500 (cost of replacement) = $5,500. Keeping it yields $3,000 (future cash flows of the old asset), which is less than the total cash flow from selling and replacing. Therefore, option 3 is the best.

Question 7

Three years ago, Astro Masters, Inc. purchased the three assets listed in the following table. The chief financial officer, Bill Moss, is presently trying to decide what to do with each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information is provided to aid his decision.
$\begin{array}{|c|c|c|c|c|c|}
\hline \text { Asset } & \begin{array}{c}
\text { Original } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Replacement } \
\text { Cost }
\end{array} & \begin{array}{c}\text { Fair }\
\text { Market } \
\text { Value }
\end{array} & \begin{array}{c}
\text { PresentValue of Future } \
\text { Cash Flows Produced } \
\text { by Old Asset }
\end{array} & \begin{array}{c}
\text { Present Value of } \
\text { Future Cash Flows } \
\text { of Equivalent Asset }
\end{array} \\hline \mathrm{A} & \$ 4,500 & \$ 1,500 & \$ 2,000 & \$ 3,000 & \$ 5,000 \
\hline \mathrm{B} & \$ 2,000 & \$ 2,500 & \$ 1,000 & \$ 3,000 & \$ 4,500 \
\hline \mathrm{C} & \$ 2,500 & \$ 4,000 & \$ 3,500 & \$ 3,000 & \$ 6,000 \
\hline
\end{array}$
Based on your calculations, what would be the total cash flows associated with selling and replacing Asset C with an equivalent asset?

Accepted Answer

The total cash flows from selling and replacing Asset C would be the fair market value of Asset C ($3,500) plus the present value of future cash flows of the equivalent asset ($6,000) minus the replacement cost ($4,000), which equals $5,500.

Question 8

Short-term investments have an original cost of $30,000 and a fair market vallue of $31,000 at December 31, 2018. At what amount would the investments be measured on the December 31, 2018 balance sheet?

Accepted Answer

Short-term investments are measured at their fair market value on the balance sheet. Since the fair market value of the investments is $31,000, this is the amount at which they would be measured on the balance sheet. Choice A is incorrect because this is the original cost, not the fair market value. Choice C is incorrect because a negative amount would not be used to measure an asset on the balance sheet. Choice D is incorrect because it is the difference between the original cost and fair market value, not the amount at which the investments would be measured on the balance sheet.

Question 9

Equipment with an original cost of $78,000 has a fair market value of $68,000, current replacement cost of $82,000, and a depreciated value of $74,000 on December 31, 2018. At what amount would net equipment be measured on the December 31, 2018 balance sheet?

Accepted Answer

The net equipment would be measured at the depreciated value of $74,000, which represents the amount the equipment has been used and worn down over time. The fair market value and replacement cost may be useful for decision-making purposes or insurance purposes, but for accounting purposes, the relevant value is the depreciated value.

Question 10

Sheena Company has accounts receivable of $13,000, with a present value of $10,000 on December 31, 2018. At what amount would the accounts receivable be measured on the December 31, 2018 balance sheet?

Accepted Answer

The accounts receivable will be measured at their present value of $10,000, which reflects the time value of money and the uncertainty of collection. Therefore, the accounts receivable would be measured at $10,000 on the balance sheet.

Question 11

Which one of the following is violated when a firm has a policy of accelerating the recognition of depreciation expense during good years and decreasing depreciation expense during lean years?

Accepted Answer

This practice violates the consistency principle, which requires that a company uses the same accounting methods and principles from period to period, ensuring comparability of financial statements over time. Accelerating or decreasing depreciation expense based on the firm's performance year to year is inconsistent.

Question 12

Information is considered material if:

Accepted Answer

Materiality of information is judged based on whether it could impact the decisions of the users of financial statements. Thus, choice A is correct as it captures this concept. Choice B is incorrect as materiality is not based on the likelihood of concern for a reasonable investor. Choice C is incorrect as even insignificant information may be material if it could impact user decisions. Choice D is incorrect as the FASB does not explicitly determine materiality but provides guidance for its assessment.

Question 13

The matching principle states that:

Accepted Answer

The matching principle in accounting dictates that expenses should be recognized in the same period as the revenues they helped to generate, ensuring that financial statements accurately reflect the company's financial performance.

Question 14

Which of the following are exceptions to financial accounting measurement?

Accepted Answer

The answer of Which of the following are exceptions to...

Question 15

Which one of the following statements best describes the concept of conservatism?

Accepted Answer

The concept of conservatism in accounting suggests that when faced with uncertainty, it's better to be cautious. This means understating assets and overstating liabilities, recognizing losses sooner rather than later, and delaying the recognition of gains. This approach helps ensure that financial statements do not overstate the financial position or performance of an entity.

Question 16

When in doubt, financial statements should:

Accepted Answer

This principle is known as conservatism in accounting. It advises that when there's uncertainty, accountants should err on the side of caution by understating assets and overstating liabilities, which can help prevent the overstatement of the company's financial position. Delaying the recognition of gains and accelerating the recognition of losses also align with this conservative approach.

Question 17

Which of the following represents two of the four criteria that must be met before revenue can be included in the income statement?

Accepted Answer

The collection of cash must be reasonably assured and the amount of revenue can be objectively measured are two of the criteria for recognizing revenue in the income statement.

Question 18

Seinfeld Company has land with an original cost of $70,000 and a fair market value of $81,000. Seinfeld has considered selling its business next year and listing the land with a realtor for $100,000. At what amount would land be measured on the December 31, 2018 balance sheet?

Accepted Answer

Under generally accepted accounting principles (GAAP), land and other tangible assets are recorded at their historical cost, not at their fair market value or the price at which the company plans to list them for sale. Therefore, the land would be measured on the balance sheet at its original cost of $70,000.

Question 19

Three years ago, Astro Masters, Inc. purchased the three assets listed in the following table. The chief financial officer, Bill Moss, is presently trying to decide what to do with each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information is provided to aid his decision.
$\begin{array}{|c|c|c|c|c|c|}
\hline \text { Asset } & \begin{array}{c}
\text { Original } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Replacement } \
\text { Cost }
\end{array} & \begin{array}{c}\text { Fair }\
\text { Market } \
\text { Value }
\end{array} & \begin{array}{c}
\text { PresentValue of Future } \
\text { Cash Flows Produced } \
\text { by Old Asset }
\end{array} & \begin{array}{c}
\text { Present Value of } \
\text { Future Cash Flows } \
\text { of Equivalent Asset }
\end{array} \\hline \mathrm{A} & \$ 4,500 & \$ 1,500 & \$ 2,000 & \$ 3,000 & \$ 5,000 \
\hline \mathrm{B} & \$ 2,000 & \$ 2,500 & \$ 1,000 & \$ 3,000 & \$ 4,500 \
\hline \mathrm{C} & \$ 2,500 & \$ 4,000 & \$ 3,500 & \$ 3,000 & \$ 6,000 \
\hline
\end{array}$
On December 31, 2018, just before preparing the company's financial statements, Bill decides to replace Asset A and keep both Assets B and C. According to generally accepted accounting principles, at what dollar amount should he report each of these respective assets on the balance sheet?

Accepted Answer

According to GAAP, assets should be reported at the lower of cost or fair market value. For Asset A, the lower of cost ($4,500) or fair market value ($2,000) is $2,000. For Asset B, the lower of cost ($2,000) or fair market value ($1,000) is $1,000. For Asset C, the lower of cost ($2,500) or fair market value ($3,500) is $2,500.

Question 20

Why would a company recognize the cost of an asset on its balance sheet rather than treat it as an expense on the date it is acquired?

Accepted Answer

According to the matching principle, costs should be recognized and reported in the same period as the related revenue. By recognizing the cost of an asset on the balance sheet, the company can then depreciate (allocate) the cost over the useful life of the asset, which aligns with the expected revenue generated by the asset. This ensures that expenses are matched with the revenue generated by the asset, resulting in a more accurate representation of the company's financial performance.

Quiz 3: The Measurement Fundamentals of Financial Accounting