Accounting Concepts

Easy Test

Key Things to Know

Self Test

b

Easy Test

h

Medium Test

Easy Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. When applying the revenue recognition principle, revenues are most often recognized when

a. the goods are provided
b. the goods are ordered
c. the customer pays for the service
d. the goods are produced

Answer
A. Revenue must be recognized when earned and you believe the cash will be collected. Revenue is most often earned when the goods are provided. Revenues are not recorded when the customer pays and cash is received. When cash is received is not relevant.
2. The “unofficial” matching principle applies to

a. the balance sheet
b. the income statement
c. the statement of cash flows
d. revenues only

Answer
B. The matching principle applies to revenues and expenses which are reported on the income statement. The objective is that all expenses be reported in the same period as the revenue that is generated from the expense. The matching principle is difficult to achieve accurately because accountants must estimate many expenses and reductions to revenue.
3. Characteristics of relevance include

a. representational faithfulness
b. consistency
c. timeliness
d. neutrality

Answer
C. Timeliness, predictive, and feedback are part of what makes financial information relevant. 
4. Characteristics of reliability include

a. representational faithfulness
b. consistency
c. timeliness
d. predictive feedback

Answer
A. Representative faithfulness, verifiability and neutrality are part of what makes financial information reliable. Timeliness and predictive feedback are related to relevance.
5. Financial reporting objectives do not include providing

a. financial information to investors and creditors
b. financial information about assets and liabilities
c. financial information about cash flows
d. financial information about projected net income

Answer
D. The objective of financial reporting includes providing usable information to investors and creditors, providing information on assets and liabilities, and providing information on cash flows. Financial statements do not provide projections.
6. The matching principle is associated with

a. accrual accounting
b. the cash method of accounting
c. historical cost
d. conservatism

Answer
A. The matching principle requires revenues be recorded when earned and expenses be recorded when incurred, which is what is required under the accrual method of accounting.
7. The assumption that a business will continue to operate in the future is called

a. entity assumption
b. going concern assumption
c. timeliness assumption
d. liability assumption

Answer
B. The going concern assumption assumes that the business continues into the future.
8. The assumption that the owner’s personal assets are not recorded with the company’s assets is called

a. entity assumption
b. going concern assumption
c. timeliness assumption
d. asset assumption

Answer
A. The entity assumption states that only a company’s transactions will be reported in the company’s financial statements. The owner’s personal transactions are not mixed with the company’s transactions.
9. Which of the following is an example of the time period assumption?

a. a company continues in business and does not report financial information until there is a natural stop in the business
b. a company reports financial information at the end of every period
c. a company reports financial information when they have generated income
d. a company reports financial information when revenue is produced

Answer
B. The time period assumption states that a company must stop periodically and report for a period of time. It assumes the business will continue indefinitely and must have regular periods of reporting for comparability.
10. Which of the following principles states that a company must use the same accounting methods from one year to the next?

a. consistency
b. comparability
c. relevance
d. reliability

Answer
A. Consistency requires the company to use the same accounting principles from one period to the next. Comparability is possible only when consistency occurs.
11. Assets are recorded at the most reliable amount is associated with what principle?

a. consistency
b. conservatism
c. historical cost
d. predictive value

Answer
C. Historical cost principle requires that the asset be recorded at the amount that is reliable, which is the amount that it cost. This is verifiable.
12. Recording assets at fair market value is a violation of which concept?

a. consistency
b. conservatism
c. historical cost
d. predictive value

Answer
C. The historical cost principle requires that assets be recorded at cost because it is reliable and verifiable. Fair market value is not always reliable.  
13. Changing accounting methods from one year to the next with no valid business reason to do so is a violation of which concept?

a. consistency
b. conservatism
c. historical cost
d. predictive value

Answer
A. Consistency requires that a business follow the same accounting principles from one period to the next.  
14. Write the accounting assumption, principle, or characteristic which best supports the following. You may use an assumption, principle, or characteristic only one time.

1. ____________________ Footnotes are presented with financial statements so that all the important information will be disclosed.

2. ____________________ Timeliness and predictive value are characteristics of

3. ____________________ The concept that information should be true.

4. _____________________ Long term assets are originally recorded at what was paid for them

5. ____________________ The company depreciates all equipment over the time it is used

6. ____________________ An error of $10,000 would make a difference to the user

Answer
1. Full disclosure
2. Relevance
3. Reliability
4. Historical Cost
5. Matching
6. Materiality
15. Write the accounting assumption, principle, or characteristic which best supports the following. You may use an assumption, principle, or characteristic only one time.

1. ____________________ Financial statements are reported at the end of every period.

2. ____________________ 3 years of information is provided on financial statements

3. ____________________ No adjustments are made for inflation

4. _____________________ Long term assets are not recorded at fair market value

5. ____________________ Record losses when it is probable they will occur

6. ____________________ Do not record the owner’s personal transactions

7. ____________________ The company is expected to stay in business

8. ____________________ Use the same method when determining the value of inventory

Answer
1. Time period
2. Comparability
3. Monetary unit
4. Historical Cost
5. Conservatism
6. Entity
7. Going Concern
8. Consistency
16. Write the name of the element that is described:

1. Disposing of an asset for less than book value
2. Providing goods and service in exchange for an asset
3. Probable future economic benefit
4. Dividends paid to shareholders
5. Issuing common stock
6. The result of selling all assets and repaying all liabilities
7. Disposing of an asset for more than book value
8. Probable use of an economic benefit
9. Using an asset to produce revenues
10. Total change to owners equity not including transactions with owners

Answer
1. Loss
2. Revenue
3. Asset
4. Distributions to owners
5. Investments from owners
6. Equity
7. Gain
8. Liability
9. Expense
10. Comprehensive Income