Question 1

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

Accepted Answer

The basic assumption of going concern assumes that a company will continue to operate in the foreseeable future, allowing for the use of depreciation and amortization policies. This assumption implies that the company's assets have a finite lifetime and lose value over time, which is reflected in these policies.

Question 2

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

Accepted Answer

The answer of Generally, revenue from sales should be recognized...

Question 3

Which of the following practices may not be an acceptable deviation from recognizing revenue at the point of sale?

Accepted Answer

Recognizing revenue upon receipt of order is generally not acceptable because it does not meet the criteria of revenue being earned and realizable, as the goods or services have not yet been delivered or performed.

Question 4

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

Accepted Answer

Valuing assets at their liquidation values instead of their historical cost violates the historical cost principle, which states that assets should be valued based on the amount paid to acquire them. This principle provides a reliable, verifiable basis for recording and reporting the value of assets on financial statements. Liquidation value reflects the amount a company could receive if it were to sell its assets in a distressed situation, and is not always representative of the true long-term value of the asset. Therefore, valuing assets at their liquidation values could result in unreliable and potentially misleading financial statements.

Question 5

When is revenue generally recognized?

Accepted Answer

Revenue is generally recognized when the sale occurs, regardless of when cash is received or the warranty expires. This is in accordance with the revenue recognition principle in accounting.

Question 6

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

Accepted Answer

The principle of historical cost states that assets and liabilities should be recorded at their original purchase price or acquisition cost. Not adjusting for inflation preserves the original historical cost of the item, rather than adjusting it for changes in the economy.

Question 7

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

Accepted Answer

An expenditure should be recorded as an asset rather than an expense when it is expected to provide future economic benefit, such as when it is likely to be used over several accounting periods or when it will generate revenue in the future. This is in accordance with the matching principle in accounting, which requires that expenses be matched with the revenue they generate.

Question 8

The accounting principle of expense recognition is best demonstrated by

Accepted Answer

The accounting principle of expense recognition, also known as matching principle, dictates that expenses should be recognized in the same period as the revenue they helped generate. Option A is incorrect because it suggests that no expenses should be recognized if there is no revenue, which is not always the case (e.g. salaries, rent). Option C is incorrect because prepaid rent received is a liability, not revenue. Option D is incorrect because establishing an Appropriation for Contingencies account does not relate to the recognition of expenses.

Question 9

Revenue is generally recognized when a sale occurs.This statement describes the

Accepted Answer

The statement describes the revenue recognition principle, which states that revenue should be recognized when it is earned and realized or realizable. This principle guides the timing of revenue recognition and is a fundamental concept in accounting.

Question 10

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

Accepted Answer

Proponents of historical cost argue that since historical cost is based on actual transactions and objective evidence, it is more verifiable than other alternatives like fair value. This makes financial statements more reliable and trustworthy for users. While historical cost may not always be the most relevant or indicative of the entity's current values or future potential, it is still preferred by many accountants and regulators due to its verifiability. The argument of conservatism is debatable and not applicable in all cases.

Question 11

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

Accepted Answer

The recognition of expense related to amortization of an intangible asset illustrates the expense recognition principle, which states that expenses should be recognized in the same period as the revenues they help to generate.

Question 12

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

Accepted Answer

While a President's letter to shareholders may be included in a company's annual report, it is not a required component of financial statements prepared in accordance with generally accepted accounting principles. The required components are typically the balance sheet (statement of financial position), income statement, statement of cash flows, and notes to financial statements.

Question 13

Which of the following is not a time when revenue may be recognized?

Accepted Answer

The answer of Which of the following is not a...

Question 14

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

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 15

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

Accepted Answer

The Allowance for Doubtful Accounts is a way of applying the expense recognition principle, which requires expenses (such as bad debts) to be recognized in the period in which the related revenue is recognized (when the sale is made). By estimating and setting aside an allowance for bad debts, a company is recognizing the expense of potentially uncollectible accounts in the same period in which it recognizes the related revenue.

Question 16

Application of the full disclosure principle

Accepted Answer

The full disclosure principle requires companies to disclose all relevant financial information that could impact users' decisions. One application of this principle is the use of supplementary information to present the effects of changing prices. This is particularly important when inflation or deflation has a significant impact on a company's financial position and performance, as it allows users to adjust the reported numbers to better reflect the economic reality. While full disclosure may come at a cost, it is necessary to ensure transparency and enhance the credibility of the financial statements. Option A is incorrect because while there may be costs associated with disclosing all relevant information, it is still desirable and necessary. Option B is incorrect because burying important financial information in the notes would violate the full disclosure principle. Option D is incorrect because consistency and comparability are requirements for financial statements, but they are not specific to the full disclosure principle.

Question 17

Revenue generally should be recognized

Accepted Answer

Revenue should be recognized when a sale occurs, regardless of whether cash has been collected or not. This is in accordance with the revenue recognition principle in accounting.

Question 18

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

Accepted Answer

The argument against using historical cost in accounting is that fair values are more relevant. This is because fair values reflect the current market value of an asset or liability, while historical cost may not accurately reflect its current value.

Question 19

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

Accepted Answer

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

Question 20

Which of the following are the two components of the revenue recognition principle?

Accepted Answer

The revenue recognition principle consists of two components: it is probable that future economic benefits will flow to the company and it is possible to reliably measure the amount. A, C, and D are not accurate descriptions of the revenue recognition principle.

Quiz 2: Conceptual Framework Underlying Financial Accounting