Accounting Concepts

Medium Test

Medium Test

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

1. Which concept serves as a basis for revenue and expense recognition?

a. historical cost
b. relevance
c. time period
d. conservatism

C. The time period principle states that financial information must be reported in incremental time periods. Revenues and expenses must be reported in the period they are earned and incurred.  
2. Relative to financial reporting, verifiability means

a. legal evidence
b. consensus
c. consistency
d. in accordance with GAAP

B. Verifiability means that more than one accountant would arrive at the same conclusion. This is consensus.
3. Recognizing expected losses immediately and expected gains when they are realized is an example of

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

C. Conservatism requires that losses be recognized and reported when known about and gains be recorded and reported when the cash is received. This is so that a user won’t be mislead if a positive thing does not occur in the company. 
4. The full disclosure principle requires a balance between

a. the cost benefit principle and relevance
b. reliability and relevance
c. time period principle and consistency
d. consistency and comparability

A. A company can not disclose “everything” to the user as this would cost too much. The company must provide information on material items that make a difference to the user’s decision.
5. Which of the following is an example of the matching principle?

a. recording depreciation expense when the asset is used to produce revenue
b. recording sales commission expense when the salesman is paid
c. recording bad debt expense when the customer says they won’t pay
d. recording a loss when the asset is sold

A. The matching principle requires that the expense be recorded in the same period as the revenue that was generated by the expense. Depreciation expense is recorded because of the matching concept; the cost of the asset is spread over the time the asset is used to produce revenues. When cash is paid or received does not matter.
6. Revenues and expenses are recognized following which of the two principles?

a. matching and historical cost
b. revenue recognition and matching
c. consistency and comparability
d. reliability and relevance

B. Revenue recognition states when revenues are recognized (when earned) and the matching principle states when expenses are recorded (in the same period as the revenue earned). Historical cost is associated with assets and liabilities. c. & d. apply generally to all items reported on the financial statements.
7. A company that purchases a stapler that it will use for 2 years and expenses the entire amount this period can do so because of

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

C. Materiality has to do with is the amount big enough to make a difference in a user’s decision. The amount a stapler costs is not big enough to matter whether the company calls the cost an asset or an expense. It does not matter how a company accounts for an amount that is too small to impact a decision maker.
8. 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

A. Consistency requires that a business follow the same accounting principles from one period to the next.  
9. One difference in comprehensive income and net income is

a. current period pension expense
b. gains that are not part of current period earnings
c. liabilities
d. investments from owners

B. Comprehensive income includes all changes in equity with the exception of transactions with owners (d). Net income is part of comprehensive income. Comprehensive income includes items that are not part of current period earnings such as certain gains and losses that are considered to be out of the control in management.
10. Which of the following is an expense?

a. selling an asset at a loss
b. the cost of borrowing money
c. any item that reduces equity
d. both b. and c.

B. An expense is using an asset to obtain a service that is used to produce revenues as part of the day to day business. Selling an asset is a peripheral activity. There are some items that reduce equity that are part of comprehensive income and not considered an expense that impacts net income. The bank providing the service of the use of their money is interest expense.
11. The historical cost principle states that a transaction should be recorded at the

a. most common transaction price
b. fair market value exchanged in the transaction
c. an original amount that is adjusted for inflation
d. what is received for the asset

B. Historical cost principle refers the cost that is recorded when an asset is purchased. The amount recorded should be the fair market value exchanged in the transaction. Adjustments for inflation are not made (monetary principle).  
12. The total change in equity as a result of non owner transactions is

a. combined income
b. controlled income
c. net income
d. comprehensive income

D. Comprehensive income is defined as the total change in equity as a result of non owner transactions. It includes revenues, expenses, and all types of gains/losses.
13. A constraint on accounting information is

a. recognition
b. timeliness
c. conservative
d. neutrality

C. Conservatism is a constraint on when and the value presented accounting information should be provided.
14. The elements of financial statements do not include

a. gains and losses
b. revenues
c. comprehensive income
d. net income

D. Net income is a result of the elements revenues + gains – expenses – losses. It is not one of the 10 elements defined by the concept statements.
15. When different accountants agree on the measurement of an element it is an example of

a. comparability
b. representational faithfulness
c. verifiability
d. reliability

C. Verifiability is the concept that more than one would arrive at the same conclusion.
16. Write the accounting assumption, principle, or characteristic which best supports the following. You may use an assumption, principle, or characteristic only one time.

1. ____________________ A practical justification for valuing an asset

2. ____________________ Reporting all information that may impact a decision

3. ____________________ The information is significant enough to impact a decision

4. _____________________ The amount is large enough to impact a decision

5. ____________________ Sales commissions are recognized in the same period as the sale

6. ____________________ A company reports quarterly financial statements

1. Conservatism
2. Full Disclosure
3. Relevant
4. Materiality
5. Matching
6. Periodicity
17. Write the accounting assumption, principle, or characteristic which best supports the following. You may use an assumption, principle, or characteristic only one time.

A. ____________________ Consensus among different people

B. ____________________ Assume assets will be used and liabilities will be paid

C. ____________________ Ignore inflation

D. _____________________ Record revenue when certain criteria are met

E. ____________________ Expectations are confirmed

F. ____________________ Important in analyzing more than one firm

G. ____________________ Consider the value of information before providing it

H. ____________________ Changing how you account for a transaction when there is a valid business reason to make the change

A. Verifiability
B. Going Concern
C. Monetary
D. Realization
E. Feedback (part of relevant)
F. Comparability
G. Cost Benefit
H. Consistency
18. Write the principle, assumption, characteristic or element that applies:

A. _______________ Accounting information should not be biased

B. _______________ Information should be available prior to a decision

C. _______________ A primary qualitative assumption

D. _______________ Use of an economic resource to provide services

E. _______________ The change to owners equity without including owner transactions

F. _______________ Selling an asset for more than carrying value

G. _______________ Record bad debt expense in the same period as the sale

H. ________________ Transfer of resources in exchange for common stock

I. ________________ Increase in assets from providing goods to customers

J. ________________ One million dollars does not impact a decision

A. Neutrality
B. Timeliness
C. Relevance or Reliability
D. Expense
E. Comprehensive income
F. Gain
G. Matching
H. Contributions from owners
I. Revenues
J. Materiality