Post-test_Accounting Principles and Concepts

1. "GAAP" refers to

• a. Guidelines for Accountants, Accounting Procedures

• b. General Association of Accounting Practitioners

• c. General Accounting and Auditing Principles

• d. Generally Accepted Accounting Principles

Answer explanation

GAAP refers to the set of rules and standards used in financial accounting and reporting.

2. The requirement that only transaction date capable of being expressed in terms of money be included in the accounting records relates to the ______.

• a. Economic entity assumption

• b.     Monetary unit assumption

• c.     Cost principle

• d.     Both b and c

Answer explanation

Monetary unit assumption – This principle states that only transactions measurable in monetary terms should be recorded in financial statements.

3. Financial statements combining the operations of Juan Chut and Cuz Plumbing Services would violate the

• a. economic entity assumption

• b.     monetary unit assumption

• c.     ownership assumption

• d.     cost principle

Answer explanation

Economic entity assumption – Financial statements should report only the business’s transactions separately from those of its owner(s) or other businesses.

4. The assumed continuation of a business entity in the absence of evidence to the contrary is an example of the accounting concept of

• a.  going concern

• b.     comparability

• c.     consistency

• d.      accrual

Answer explanation

Going concern – This assumption states that a business is expected to continue operating indefinitely unless there is evidence to suggest otherwise.

5. Recording the purchase price of a pencil sharpener (with an estimated useful life of ten years) as an expense of the current period is justified by the

• a. going concern assumption

• b. comparability principle

• c. materiality concept

• d. matching principle

Answer explanation

Materiality concept – Small expenses, like a pencil sharpener, can be expensed immediately instead of being capitalized if they are insignificant to financial reporting.

6. Conservatism is best described as selecting an accounting alternative that

• a. has the least favorable impact on owners' equity

• b. is least likely to mislead users of financial information

• c. overstates, as opposed to understates, liabilities

• d. understates assets and/or net income

Answer explanation

The conservatism principle ensures that accountants choose methods that do not overstate assets or income.

7. The financial statements prepared for the business are separate and distinct from the owners. This is in accordance with the

• a. full disclosure principle

• b. going concern principle

• c. economic entity assumption

• d. matching principle

Answer explanation

Economic entity assumption – This principle requires that business financial records be kept separate from the personal finances of owners.

8. The accrual basis of accounting is based primarily on _____.

• a.    conservatism and revenue realization

• b.     revenue realization and matching

• c.     conservatism and matching

• d.     consistency and matching

Answer explanation

The accrual basis of accounting follows these principles to recognize revenue and expenses when they are earned or incurred, not when cash is received or paid.

9. Accountants prepone financial statements of arbitrary points in time during a company's lifetime in accordance with the accounting concept of

 

• a. accounting periods

• b.     comparability

• c.     materiality

• d.      matching

Answer explanation

Financial statements are prepared at regular intervals, such as monthly, quarterly, or annually, according to the accounting period concept.

10. Recording the purchase price of a chalkboard eraser (with an estimated useful life of ten years) as an expense of the current period is justified by the

 

• a. going concern assumption

• b. comparability principle

• c. materiality concept

• d. matching principle

Answer explanation

Materiality concept – A chalkboard eraser’s cost is small enough to be expensed immediately rather than being spread over its useful life.