Accounting Concepts & Assumptions

Practice Test

Introduction to Accounting

Accounting Concepts & Assumptions

Key Things To Know

Self Test

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Practice Test

Practice Test

Click the “Check Your Answer” box below each problem 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

Check Your Answer
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.  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

Check Your 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.
3.  The matching principle applies to

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

Check Your Answer
B.  The matching principle applies to revenues and expenses which are reported on the income statement.
4.  Characteristics of relevance include

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

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

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

Check Your Answer
A.  Representative faithfulness, verifiability and neutrality are part of what makes financial information reliable.
6.  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

Check Your Answer
D.  The objective of financial reporting include 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.
7.  Relative to financial reporting, verifiability means

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

Check Your Answer
B.  Verifiability means that more than one accountant would arrive at the same conclusion.  This is a consensus.
8.  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

Check Your Answer
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.
9.  The matching principle is associated with

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

Check Your 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.
10.  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

Check Your Answer
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.
11.   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

Check Your Answer
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.
12.  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

Check Your Answer
B.  The going concern assumption assumes that the business continues into the future.
13.  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

Check Your 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.
14.  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

Check Your 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.
15.  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

Check Your Answer
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.
16.  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

Check Your 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.
17.  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

Check Your Answer
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.
18.  Assets are recorded at the most reliable amount is associated with what principle?

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

Check Your 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.
19.  Recording assets at fair market value is a violation of which concept?

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

Check Your Answer
C.  The historical cost principle requires that assets be recorded at cost because it is reliable and verifiable.  Fair market value is not reliable.
20.  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

Check Your Answer
A.  Consistency requires that a business follow the same accounting principles from one period to the next.  
21.  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 believable.

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

Check Your Answer
1.  Full disclosure

2.  Relevance

3.  Reliability

4.  Historical Cost

5.  Matching

6.  Materiality

22.  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

Check Your Answer
1.  Time period

2.  Comparability

3.  Monetary

4.  Historical Cost

5.  Conservatism

6.  Entity

7.  Going Concern

8.  Consistency