Accounting Quiz

What is the purpose of Recognition Criteria in accounting?

• To recognize things

• To determine when a transaction should be recorded

• To determine what amount should be recorded at a certain time

• To make your boss at work happy

Answer explanation

Recognition criteria is the standards or conditions that must be met before a transaction or event can be recorded in the financial statements. They are the guidelines that determine when an item should be recognized as an asset, liability, equity, revenue or expense in the financial statements.

What is the purpose of Measurement criteria?

• Tells you how to measure the depreciation of assets in your accounting books

• Criteria that tells you when you should record a transaction

• Provides guidelines for what amount should be recorded for an accounting transaction

• Criteria that helps you measure the size of your accounting books and financial position of your company

Answer explanation

Measurement criteria refer to the methods used to measure the monetary value of an asset, liability, equity, revenue or expense. It provides guidelines for WHAT AMOUNT should be recorded for the event.

An item will be recorded in the financial statements if…

• 1. If it has already been recorded

  2. If it can be measured

  3. If it is a large enough amount of money

• 1. If it can be classified

  2. If it can be measured

  3. If it is a large enough amount of money

• 1. If it can be classified

  2. If it can be measured

  3. If we can reasonably estimate the amount

• 1. If it can be classified

  2. If it provides future economic benefit

  3. If we can reasonably estimate the amount

What is the Revenue Recognition Principle?

• Revenue should only be recorded 30 days after it has been earned

• Revenue should only be recorded when cash is collect, not when it is earned

• Revenue should only be recorded after you've had a coffee

• Revenue should only be recorded when it is earned, not when cash is collected

Answer explanation

Revenue Recognition Principle determines the timing and amount of revenue that should be recognized in a company's financial statements. Revenue is generally recognized when it is earned.

Which is NOT a condition that has to be met for a business to recognize revenue in their books?

• The risk and reward of ownership are transferred to the buyer 

• The seller doesn't have control of the goods 

• The amount of revenue can be reliably measured 

• The amount of revenue exceeds $500

• Costs of the sale of goods can be measured

What is the Expense Recognition Principle?

• The process of matching expenses with the revenue they helped earn

• The process of recording expenses during the period they are incurred, regardless of when the payment is made

• The process of recording the expenses one period after they are incurred

• The process of recording expenses when a business pays for them

Answer explanation

Expense recognition the process of recording expenses in financial statements during the same period in which they are incurred, regardless of when the payment is made.

The matching principle states that expenses should be matched with the revenues that they help to generate in the same accounting period.

An expense is recorded when a cash transaction is recorded and a business pays for something

• TRUE

• FALSE

Answer explanation

Expenses are not just recognized when cash transactions occur or when a business pays for something

ie.  When supplies are used, the asset Supplies is decreased and an expense is recognized

When goods are shipped FOB destination, revenue is recorded on DAY GOODS ARE SHIPPED, however when goods are shipped FOB shipping point, revenue is recorded when GOODS ARRIVE to buyer

• FALSE

• TRUE

Answer explanation

When goods are shipped FOB shipping point, revenue is recorded on the day the goods are shipped

But when goods are shipped FOB destination revenue is recorded then the goods arrive to the buyer 

When goods are sold on credit revenue is recognized at point of sale as long as.....

• The buyer is your favourite cousin

• The buyer says they are pretty sure they will pay

• The buyer is driving a Lamborghini

• The seller is pretty the cash will be collected

• The seller can be sure that cash will be collected and recorded, and an estimate can be made on uncollectible accounts.

Answer explanation

When goods are sold on credit revenue is recognized at point of sale as long as the seller CAN BE SURE that cash will be collected and recorded, and an estimate can be made on uncollectible accounts.

IF THERE IS A DIRECT RELATIONSHIP BETWEEN AN EXPENSE AND REVENUE, how do you account for it?

Ie. COGS and SALES REVENUE 

• The asset must be recognized as an expense for the balance of its remaining value. 

• An expense is recognized immediately

• The costs are recognized as expenses in the period the revenue is recognized.

• A policy can be developed to allocate the cost of the asset to expense over time. 

Answer explanation

If there is a DIRECT RELATIONSHIP BETWEEN THE EXPENSES AND REVENUE: the costs are recognized as expenses in the period the revenue is recognized.