Accounting Theories Level 2

What does the Accrual basis of accounting state?

• Only cash transactions should be recorded.

• Business activities that have occurred should be recorded in the relevant accounting period.

• Both A and B

Which principle states that once an accounting method is chosen, it should be applied consistently?

• Consistency

• Matching

• Revenue Recognition

What is assumed about a business in the Going Concern theory?

• It has a definite economic life.

• It may close down at any time.

• It has an indefinite economic life unless there is credible evidence of closure.

What should be reported in the financial statements according to the Materiality principle?

• All information, regardless of relevance.

• Only relevant information that makes a difference to the decision-making process.

• No information should be reported.

What does the Accounting Entity theory state?

• Business and owner are treated as two separate entities.

• All transactions are recorded from the point of view of the business.

• Only business transactions affecting the business are recorded in the business books.

What does the Objectivity principle state?

• Accounting information must be supported by reliable and verifiable evidence.

• Financial statements should be free from opinions and biases.

• Both A and B

According to which principle, expenses incurred must be matched against income earned in the same period?

• Matching

• Prudence

• Materiality

How is the life of a business divided in the Accounting Period theory?

• Into irregular time intervals.

• Into regular time intervals.

• It is not divided.

According to the Prudence principle, what should be the accounting treatment chosen?

• The one that overstates assets and profits.

• The one that understates liabilities and losses.

• The one that least overstates assets and profits and least understates liabilities and losses.

What principle states that transactions should be recorded at their original cost?

• Historical Cost

• Objectivity

• Consistency