Question 1

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 2

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 describes the revenue recognition principle, which governs when revenue is recognized in the financial statements. This principle states that revenue should be recognized when a company has fulfilled its performance obligation, which is typically when goods or services have been transferred to the customer and payment is expected.

Question 3

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 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 4

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. Historical cost represents the cost at the time of acquisition and does not take into account changes in market value or inflation. Fair values, on the other hand, represent the current market value of an asset or liability and are more relevant for decision-making purposes.

Question 5

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 an application of the expense recognition principle, which states that expenses should be recognized in the same period as the related revenues. The estimate for bad debts is an expense that must be recognized in the same period as the sale (revenue) is recognized.

Question 6

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, states that expenses should be recognized in the same period as the revenue they help generate. This principle is best demonstrated by Option B, associating effort (expense) with accomplishment (revenue).

Question 7

The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include
A)Neutrality.
B)Periodicity.
C)Understandability.
D)Materiality.

Accepted Answer

The answer of The basic assumptions of accounting used by...

Question 8

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 is inconsistent with the historical cost principle, which requires assets to be recorded at their original cost. The historical cost principle states that assets should be recorded at their cost, including all expenses necessary to get the asset in place and ready for use. Valuing assets at their liquidation values would violate this principle by not reflecting the original cost of the asset.

Question 9

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the
A)economic entity assumption.
B)relevance characteristic.
C)comparability characteristic.
D)neutrality characteristic.

Accepted Answer

The preparation of consolidated financial statements when a parent-subsidiary relationship exists is an application of the economic entity assumption, which states that a company is considered a separate, distinct economic entity from its owners or other entities. The consolidated financial statements combine the financial information of the parent and its subsidiaries as if they were one entity. The other characteristics (relevance, comparability, and neutrality) are important principles of financial reporting, but do not specifically apply to the preparation of consolidated financial statements.

Question 10

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 11

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?
A)Cost constraint
B)Periodicity assumption
C)Conservation
D)Expense recognition principle

Accepted Answer

The periodicity assumption requires accountants to divide the entity's lifetime into arbitrary periods of time (usually one year) and to prepare financial statements at the end of each period. This allows for meaningful comparisons of financial information over time and makes it easier for stakeholders to understand and analyze an entity's financial performance.

Question 12

The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include all of the following except:
A)Going concern.
B)Periodicity.
C)Accrual basis.
D)Materiality.

Accepted Answer

Materiality is not considered as a basic assumption of accounting by the IASB. The other three assumptions - going concern, periodicity, and accrual basis - are considered fundamental to the accounting process.

Question 13

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 company will continue to operate indefinitely. This assumption justifies the use of depreciation and amortization policies, as they allow for the allocation of the cost of long-term assets over their useful lives, rather than expensing the entire cost in the period of purchase.

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 delivered or transferred to the customer, and the customer has accepted them. This method of revenue recognition is based on the principle of accrual accounting, which matches revenue with expenses incurred in earning that revenue. It provides a more accurate picture of the company's financial performance, as it reflects the economic reality of the transaction, rather than just the timing of cash inflows and outflows.

Question 15

Which of the following is an implication of the going concern assumption?
A)The historical cost principle is credible.
B)Depreciation and amortization policies are justifiable and appropriate.
C)The current-noncurrent classification of assets and liabilities is justifiable and significant.
D)All of these answers are correct.

Accepted Answer

The going concern assumption implies that the entity will continue to operate in the foreseeable future, allowing it to use the historical cost principle, justify depreciation and amortization policies, and have a significant basis for the current-noncurrent classification of assets and liabilities. Therefore, all of these answers are correct.

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 information which can influence the judgment of an informed user of financial statements should be disclosed. The use of supplementary information is a form of disclosure which is used to explain the effects of financing arrangements. Therefore, choice C is the best answer. Choice A is incorrect because the costs of complete disclosure may be justified if the benefits outweigh the costs. Choice B is incorrect because burying important financial information in the notes to the financial statements violates the full disclosure principle. Choice D is incorrect because consistency and comparability are principles of accounting but not specific to the full disclosure principle.

Question 17

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 includes both the historical cost principle and the fair value principle. The historical cost principle states that assets should be recorded at their original cost, while the fair value principle dictates that assets should be recorded at their current market value. Therefore, D is the best choice as it includes both of these principles.

Question 18

The assumption that a company will not be sold or liquidated in the near future is known as the
A)economic entity assumption.
B)monetary unit assumption.
C)materiality assumption.
D)none of these answers are correct.

Accepted Answer

The assumption described is actually the "going concern assumption," which is not listed among the options provided. This assumption implies that the business will continue its operations in the foreseeable future and has no intention of liquidating or being forced to cease operations. Since none of the options A, B, or C accurately describe this assumption, the correct answer is D, "none of these answers are correct."

Question 19

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

According to the revenue recognition principle, revenue should be recognized when the company satisfies the performance obligation, which means when the product or service has been delivered to the customer or service has been performed, and the customer has accepted it. This may or may not coincide with the receipt of cash, and it does not have anything to do with the warranty or completion of production.

Question 20

The economic entity assumption
A)is inapplicable to unincorporated businesses.
B)recognizes the legal aspects of business organizations.
C)requires periodic income measurement.
D)is applicable to all forms of business organizations.

Accepted Answer

The economic entity assumption is applicable to all forms of business organizations, whether incorporated or unincorporated. This assumption requires that each entity be treated as a separate economic entity, distinct from its owners or other entities. This allows for accurate measurement and reporting of the entity's financial performance and position.

Quiz 2: Conceptual Framework for Financial Reporting

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

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

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

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

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

The accounting principle of expense recognition is best demonstrated by

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

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

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the

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

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?

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

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

Revenue should be recognized

Which of the following is an implication of the going concern assumption?

Application of the full disclosure principle

The measurement principle includes the

The assumption that a company will not be sold or liquidated in the near future is known as the

When is revenue generally recognized?

The economic entity assumption