Question 1

When is revenue generally recognized?
A) When cash is received.
B) When the warranty expires.
C) When production is completed.
D) When the company satisfies the performance obligation.

Accepted Answer

Revenue is generally recognized when the company satisfies the performance obligation, which means the company has fulfilled its promise to deliver goods or services to the customer. This typically occurs at the time when control of the goods or services is transferred to the customer, which could be at the point of delivery, completion of production or a specific date agreed upon with the customer. Revenue recognition is not solely based on cash receipt or warranty expiration.

Question 2

Which of the following basic assumptions of accounting (used by the International Accounting Standards Board) makes depreciation and amortization policies justifiable and appropriate?
A) Periodicity.
B) Decision usefulness
C) Monetary unit.
D) Going concern.

Accepted Answer

The going concern assumption assumes that a business entity will continue to operate in the foreseeable future. Therefore, it justifies the use of depreciation and amortization policies which allocate the cost of assets over their useful lives instead of expensing the whole cost in the year they are acquired.

Question 3

Which of the following is a component of the revenue recognition principle?
A) Cash is received and the amount is material.
B) Recognition occurs when the performance obligation is satisfied.
C) Production is complete and there is an active market for the product.
D) Cash is realized or realizable and production is complete.

Accepted Answer

The revenue recognition principle states that revenue should be recognized when the performance obligation is satisfied, which means that the goods or services have been delivered or rendered to the customer. This principle focuses on the timing of revenue recognition, rather than the receipt of cash or completion of production.

Question 4

Not adjusting the amounts reported in the financial statements for inflation is an example of which basic assumption or principle of accounting?
A) Economic entity.
B) Going concern.
C) Monetary unit.
D) Full disclosure.

Accepted Answer

Not adjusting for inflation violates the principle of monetary unit which assumes that financial transactions are recorded and reported in a stable currency without considering the effects of inflation.

Question 5

Valuing assets at their liquidation values rather than their cost is inconsistent with the
A) periodicity assumption.
B) expense recognition principle.
C) materiality equality.
D) historical cost principle.

Accepted Answer

Valuing assets at their liquidation values goes against the historical cost principle, which states that assets should be recorded at their original cost. The principle requires that assets be recorded at the amount paid for them at the time of purchase. This method provides a conservative basis for the valuation of assets.

Question 6

A company has a performance obligation when it agrees to
A) Perform a service for a customer and receives cash payment.
B) Sell a product to a customer after receiving payment.
C) Perform a service or sell a product to a customer.
D) None of these answers are correct.

Accepted Answer

A performance obligation can arise from either performing a service or selling a product to a customer, or both. Option A and B do describe transactions, but they do not necessarily fulfill the conditions for a performance obligation. Option D is incorrect as option C fulfills the requirements for a performance obligation.

Question 7

The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include
A) Monetary unit.
B) Decision usefulness
C) Timeliness.
D) All of the choices are basic assumptions of accounting.

Accepted Answer

The basic assumptions of accounting include the monetary unit assumption, which implies that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. Decision usefulness and timeliness are considered qualitative characteristics of financial information according to the IASB's conceptual framework, not basic assumptions.

Question 8

Generally, revenue from sales should be recognized at a point when
A) management decides it is appropriate to do so.
B) the product is available for sale to the ultimate consumer.
C) the entire amount receivable has been collected from the customer and there remains no further warranty liability.
D) None of these answers are correct.

Accepted Answer

Revenue recognition does not solely depend on management's decision, product availability, or complete collection of receivables and end of warranty liability. It typically follows specific accounting principles that recognize revenue when it is earned and realizable, often at the point of sale or delivery of goods or services, according to standards like IFRS or GAAP.

Question 9

Recognition of expense related to amortization of an intangible asset illustrates which principle of accounting?
A) Expense recognition.
B) Full disclosure.
C) Revenue recognition.
D) Historical cost.

Accepted Answer

The recognition of expense related to amortization of an intangible asset follows the Expense Recognition principle, which states that expenses should be recognized in the period in which they are incurred, regardless of when the actual payment is made.

Question 10

When should an expenditure be recorded as an asset rather than an expense?
A) Never.
B) Always.
C) If the amount is material.
D) When future benefit exists.

Accepted Answer

An expenditure should be recorded as an asset rather than an expense when future benefit exists. This means that the expenditure will provide economic benefit to the company beyond the current accounting period. Examples of assets include property, equipment, and investments.

Question 11

What is the general approach as to when product costs are recognized as expenses?
A) In the period when the expenses are paid.
B) In the period when the expenses are incurred.
C) In the period when the vendor invoice is received.
D) In the period when the related revenue is recognized.

Accepted Answer

Product costs are recognized as expenses in the period when the related revenue is recognized, following the matching principle in accounting. This principle dictates that expenses should be matched with the revenues they help to generate.

Question 12

The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a statement of financial position and which is based on an estimate of bad debts, is an application of the
A) consistency characteristic.
B) expense recognition principle.
C) materiality quality.
D) revenue recognition principle.

Accepted Answer

The allowance for doubtful accounts is based on the accountant's estimate of bad debts that will not be collected from customers. It is an application of the expense recognition principle, which requires expenses to be recognized in the same period as the related revenues. By estimating possible bad debts, the accountant is recognizing an expense in the period when it is incurred rather than waiting until the account is actually written off as uncollectible.

Question 13

Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles?
A) President's letter to shareholders.
B) Statement of financial position.
C) Income statement.
D) Notes to financial statements.

Accepted Answer

A President's letter to shareholders is not a required component of financial statements prepared in accordance with generally accepted accounting principles. However, it is often included in annual reports as a way for management to communicate with shareholders and provide additional information about the company's performance and future plans. The other options (B, C, and D) are all required components of financial statements.

Question 14

Revenue should be recognized
A) at the end of production.
B) at the time of cash collection.
C) when realized.
D) when the performance obligation is satisfied.

Accepted Answer

Revenue should be recognized when the performance obligation is satisfied, which means the goods or services have been provided to the customer and the customer has the ability to use or receive the benefit of what they paid for. This is in accordance with the principles of the new revenue recognition standard, ASC 606.  The end of production (A) may not necessarily coincide with the satisfaction of the performance obligation, so it is not the best choice. Timing of cash collection (B) and realization (C) are not the determining factors in recognizing revenue under ASC 606.

Question 15

Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the
A) consistency characteristic.
B) expense recognition principle.
C) revenue recognition principle.
D) relevance characteristic.

Accepted Answer

The statement refers to the revenue recognition principle, which states that revenue should be recognized when the performance obligation is satisfied or when goods and services are transferred to the customer.

Question 16

Application of the full disclosure principle
A) is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
B) is violated when important financial information is buried in the notes to the financial statements.
C) is demonstrated by the use of supplementary information explaining the effects of financing arrangements.
D) requires that the financial statements be consistent and comparable.

Accepted Answer

The full disclosure principle requires that all material financial information be presented in the financial statements or in the accompanying notes. The use of supplementary information to explain the effects of financing arrangements is a good example of applying the full disclosure principle. Option A is incorrect because although there may be costs associated with complete disclosure, the benefits of transparency and increased investor confidence outweigh these costs. Option B is incorrect because burying important financial information in the notes violates the full disclosure principle. Option D is incorrect because consistency and comparability are part of other accounting principles such as consistency and comparability.

Question 17

Which of the following is an argument against using historical cost in accounting?
A) Fair values are more relevant.
B) Historical costs are based on an exchange transaction.
C) Historical costs are reliable.
D) Fair values are subjective.

Accepted Answer

The argument against using historical cost in accounting is that fair values are more relevant. Fair values reflect the current market value of assets and liabilities, which is more useful for decision-making than the original cost paid for them.

Question 18

Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more
A) verifiable.
B) relevant.
C) indicative of the entity's purchasing power.
D) conservative.

Accepted Answer

Proponents of historical cost maintain that historical cost is more verifiable than other valuation alternatives because it relies on objective and objective evidence, such as invoices and receipts, to determine the original cost of an asset or liability. Historical cost is also considered to be conservative since it does not overstate the value of assets or income, which provides a measure of prudence. Although historical cost information may be relevant in certain situations, it is not necessarily more relevant than other alternatives, and it is not typically indicative of an entity's purchasing power.

Question 19

The measurement principle includes the
A) fair value principle only.
B) historical cost principle only.
C) revenue recognition principle and expense recognition principle.
D) historical cost principle and the fair value principle.

Accepted Answer

The measurement principle in accounting includes both the historical cost principle and the fair value principle. The historical cost principle records assets and liabilities at their original purchase price, while the fair value principle adjusts the value of assets and liabilities to reflect their current market value.

Question 20

The accounting principle of expense recognition is best demonstrated by
A) not recognizing any expense unless some revenue is realized.
B) associating effort (expense) with accomplishment (revenue).
C) recognizing prepaid rent received as revenue.
D) establishing an Appropriation for Contingencies account.

Accepted Answer

The expense recognition principle, also known as the matching principle, requires companies to associate their efforts or expenses with the revenue that those efforts generate. This means that expenses should be recognized in the same period that the revenue is recognized, regardless of when the actual payment is made. This principle helps to provide a more accurate picture of a company's financial performance over time. Therefore, option B is the best demonstration of the expense recognition principle.

Quiz 2: Conceptual Framework for Financial Reporting

When is revenue generally recognized?

Which of the following basic assumptions of accounting (used by the International Accounting Standards Board) makes depreciation and amortization policies justifiable and appropriate?

Which of the following is a component of the revenue recognition principle?

Not adjusting the amounts reported in the financial statements for inflation is an example of which basic assumption or principle of accounting?

Valuing assets at their liquidation values rather than their cost is inconsistent with the

A company has a performance obligation when it agrees to

The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include

Generally, revenue from sales should be recognized at a point when

Recognition of expense related to amortization of an intangible asset illustrates which principle of accounting?

When should an expenditure be recorded as an asset rather than an expense?

What is the general approach as to when product costs are recognized as expenses?

The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a statement of financial position and which is based on an estimate of bad debts, is an application of the

Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles?

Revenue should be recognized

Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the

Application of the full disclosure principle

Which of the following is an argument against using historical cost in accounting?

Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more

The measurement principle includes the

The accounting principle of expense recognition is best demonstrated by