Question 1

Recognition of increases in purchasing power of monetary units is inconsistent with the:
A) economic entity assumption.
B) going concern assumption.
C) consistency principle.
D) stable dollar assumption.

Accepted Answer

The stable dollar assumption assumes that the value of money remains constant over time. Therefore, recognizing increases in purchasing power of monetary units would contradict this assumption, as it would imply that the value of money is changing over time.

Question 2

Which one of the following statements best describes the concept of consistency?
A) When uncertainty exists, understating assets, overstating liabilities, accelerating recognition of losses, and delaying recognition of gains is preferred.
B) Accounting numbers are consistently market value.
C) Different firms use identical accounting measurement methods for similar events.
D) Similar events are measured using identical accounting procedures from period to period.

Accepted Answer

The concept of consistency means that similar events should be measured and reported using the same accounting procedures from period to period. This ensures that financial statements are comparable over time, which helps users make better decisions. Choices A and B are incorrect because they promote biased or unreliable financial reporting, while Choice C is incorrect because different firms may use different accounting measurement methods for similar events.

Question 3

A company prepares financial statements once every year. What practice does this assumption illustrate?
A) Going concern assumption
B) Fiscal period assumption
C) The five-year moving theory
D) Stable dollar assumption

Accepted Answer

The fiscal period assumption assumes that businesses divide their activities into specific periods of time (usually a year) to prepare financial statements. Therefore, the fact that the company prepares financial statements every year demonstrates the fiscal period assumption.

Question 4

By recognizing the economic effects of inflation on the accounting financial statements, which accounting assumption is ignored?
A) Economic entity assumption
B) Going concern assumption
C) Stable dollar assumption
D) Fiscal period assumption

Accepted Answer

The stable dollar assumption assumes that the purchasing power of money remains constant over time. In the presence of inflation, this assumption is ignored as the value of money decreases over time. The economic entity assumption, going concern assumption, and fiscal period assumption are not directly related to the effects of inflation on financial statements.

Question 5

Today's fair market value would be the same as:
A) the cash price of the asset when it was originally purchased.
B) the current price paid for an item in the input market.
C) the value of an item in the output market or sales price.
D) the discounted future cash flows from input and output markets.

Accepted Answer

Today's fair market value refers to the value of an asset in the output market or the sales price, which is the price at which the asset can be sold in the current market. It is not related to the cash price of the asset when it was originally purchased (A) or the current price paid for an item in the input market (B). The discounted future cash flows from input and output markets (D) may be used to calculate the present value of an asset but is not the same as the fair market value.

Question 6

Which one of the following is violated when a firm measures property, plant, and equipment at its estimated selling price?
A) Objectivity
B) Economic entity assumption
C) Materiality
D) Input markets

Accepted Answer

When a firm measures property, plant, and equipment at its estimated selling price, it violates the objectivity principle of accounting which requires that all financial information must be verifiable and based on objective evidence. Estimating the selling price of an asset is subjective and can be influenced by various factors, such as market conditions and the firm's own expectations, which can lead to unreliable or biased financial information.

Question 7

Which one of the following statements best describes objectivity?
A) When uncertainty exists, understating assets, overstating liabilities, accelerating recognition of losses, and delaying recognition of gains is preferred.
B) The measurement of an event is verifiable and reliable.
C) Different firms use identical accounting measurement methods for similar events.
D) Objectives are laid out that are conservative or too aggressive by management.

Accepted Answer

Objectivity in accounting refers to the measurement of an event in a verifiable and reliable way, regardless of personal biases or opinions. Option A contradicts the principle of conservatism, which advises understating gains and overstating losses in uncertain situations. Option C describes consistency, not necessarily objectivity. Option D pertains to management's intentions, not the measure of events.

Question 8

Expensing the cost of a pencil holder that cost $1.25 instead of capitalizing it as a plant asset and depreciating it over its estimated useful life of 10 years:
A) violates the economic entity assumption.
B) violates GAAP since pencil holders are important assets.
C) is justified because of materiality.
D) is appropriate because of the stable dollar assumption.

Accepted Answer

Expensing the cost of a pencil holder that cost only $1.25 is justified because of materiality. Materiality refers to the concept that financial information should be presented accurately and completely, but only to the extent that it is relevant and significant for the users of financial statements. In this case, because the cost of the pencil holder is relatively small and insignificant, it can be expensed rather than being capitalized as a plant asset and depreciated over its estimated useful life of 10 years. This approach saves time and effort in accounting for small expenses and does not materially affect the financial statements.

Question 9

The valuation basis used to measure short-term investments is:
A) fair market value.
B) replacement cost.
C) original cost.
D) present value.

Accepted Answer

Short-term investments are typically highly liquid and can fluctuate in value quickly. Therefore, fair market value is the most appropriate valuation basis to use because it reflects the current market conditions and provides the most accurate representation of the investment's worth. Replacement cost and original cost may not accurately reflect the current value of the investment, and present value is typically used for long-term investments where future cash flows are considered.

Question 10

The valuation basis used to measure long-term liabilities is:
A) present value.
B) replacement cost.
C) fair market value.
D) historical cost.

Accepted Answer

The valuation basis used to measure long-term liabilities is present value, which is the current value of future cash flows discounted at a market rate of interest. This method takes into account the time value of money and the uncertainty of future events, providing a more accurate measurement of long-term liabilities. Replacement cost and fair market value are typically used for assets, while historical cost is the original cost of an asset and is not relevant for measuring long-term liabilities.

Question 11

Ten years after a company purchases a plot of land, it is measured on the balance sheet at its cost from the year it was purchased instead of its current selling price. This accounting practice is justified by the:
A) financial period assumption.
B) going concern assumption.
C) fiscal period assumption.
D) original cost base.

Accepted Answer

The original cost base, also known as the historical cost principle, requires that assets be recorded at their original purchase price, not their current market value.

Question 12

Present value, as of today, would be the same as:
A) the cash price of the asset when it was purchased.
B) the present price of any given product or service.
C) the selling price.
D) the discounted value of future cash flows.

Accepted Answer

Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return, which is calculated by discounting future cash flows.

Question 13

Original cost may be defined as the:
A) cash price of the asset when purchased.
B) discounted future cash flows.
C) selling price.
D) price you bought the item for when it was first released for consumer sales.

Accepted Answer

The original cost of an asset is the cash price of the asset when purchased.

Question 14

Net realizable value is:
A) the input price of liabilities.
B) a form of market value.
C) a present value concept.
D) the current input cost.

Accepted Answer

Net realizable value is a form of market value, representing the estimated selling price of an asset in the ordinary course of business minus any costs to complete and sell the asset.

Question 15

Which assumption is applied when Laramie recognizes the operations of its wholly owned subsidiary, Big Sky, separately and distinctly from its own operations?
A) Economic entity assumption
B) Going concern assumption
C) Fiscal period assumption
D) The subsidiary stability assumption

Accepted Answer

The economic entity assumption states that a business is a separate entity from its owners and other businesses, which means that Laramie recognizes the operations of its wholly owned subsidiary, Big Sky, separately and distinctly from its own operations.

Question 16

When preparing the financial statements, we assume that the life of the entity will continue beyond the current period. Which assumption are we most likely following?
A) Stable dollar theory.
B) Going concern assumption.
C) Economic entity assumption.
D) Fiscal period assumption.

Accepted Answer

The going concern assumption assumes that the entity will continue to operate in the foreseeable future and is an implication of the accrual basis of accounting. This assumption is fundamental to the preparation of financial statements as it enables the recording of assets at historical cost and the matching of expenses to revenues in the appropriate accounting periods.

Question 17

The shareholders' equity section of the balance sheet is:
A) a residual interest based on the book value of the company.
B) the amount for which the owner could sell the company.
C) valued at the present value of the dividends paid to shareholders.
D) the difference between the fair market value and the original cost of the company's assets.

Accepted Answer

Shareholders' equity is the residual interest in the assets of the company after deducting liabilities, and it is based on the book value, not market value or present value of dividends.

Question 18

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?
A) Relevance
B) Matching
C) Consistency
D) Conservatism

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 19

The valuation basis used to measure accounts payable is:
A) fair value.
B) replacement cost.
C) face value.
D) present value.

Accepted Answer

Accounts payable are typically measured at face value, which is the amount due to be paid to creditors.

Question 20

Most companies prepare annual financial statements:
A) with a fiscal ending date of June 30.
B) on the calendar year.
C) at a different date each year.
D) every two weeks.

Accepted Answer

Most companies prepare annual financial statements on the calendar year, which ends on December 31.

Quiz 3: The Measurement Fundamentals of Financial Accounting

Recognition of increases in purchasing power of monetary units is inconsistent with the:

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

A company prepares financial statements once every year. What practice does this assumption illustrate?

By recognizing the economic effects of inflation on the accounting financial statements, which accounting assumption is ignored?

Today's fair market value would be the same as:

Which one of the following is violated when a firm measures property, plant, and equipment at its estimated selling price?

Which one of the following statements best describes objectivity?

Expensing the cost of a pencil holder that cost $1.25 instead of capitalizing it as a plant asset and depreciating it over its estimated useful life of 10 years:

The valuation basis used to measure short-term investments is:

The valuation basis used to measure long-term liabilities is:

Ten years after a company purchases a plot of land, it is measured on the balance sheet at its cost from the year it was purchased instead of its current selling price. This accounting practice is justified by the:

Present value, as of today, would be the same as:

Original cost may be defined as the:

Net realizable value is:

Which assumption is applied when Laramie recognizes the operations of its wholly owned subsidiary, Big Sky, separately and distinctly from its own operations?

When preparing the financial statements, we assume that the life of the entity will continue beyond the current period. Which assumption are we most likely following?

The shareholders' equity section of the balance sheet is:

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?

The valuation basis used to measure accounts payable is:

Most companies prepare annual financial statements: