DPB10033 Accounting Concepts

According to the historical cost concept, how should a business record its activities?

• Based on the market value at the end of the year.

• Based on the cost value or actual price in source documents.

• Based on the estimated future value.

• Based on the value after depreciation.

What is the main idea behind the prudence or conservatism principle?

• To choose accounting methods that result in higher profits and assets.

• To record revenue and expenses only after cash has been exchanged.

• To be cautious and avoid overstating financial position by choosing methods that result in lower profits and assets.

• To only record transactions that are certain to happen.

The consistency principle states that businesses must:

• Change their accounting practices every year.

• Adhere to rules and principles consistently and not change them without concrete reasons.

• Use different methods to calculate closing inventory each period.

• Only use one type of accounting method for all transactions.

The matching principle requires that:

• Revenues and expenses are recorded when cash is exchanged.

• Expenses are matched with their related revenues in the same accounting period, regardless of when cash is exchanged.

• All expenses are recorded at the beginning of the accounting period.

• All revenues are recorded at the end of the accounting period.

When are revenues recognized and recorded under the accrual concept?

• When goods and services are sold or provided.

• When cash is received.

• When the accounting period ends.

• When a customer books an order.

Materiality refers to:

• The physical assets owned by a business.

• The cost of materials used in production.

• The relative importance or significance of an item or event.

• The total value of all business transactions.

What does the separate business entity concept dictate?

• A business's transactions and the owner's personal transactions must be kept separate.

• The business's finances should be combined with the owner's personal finances.

• Only the business owner's transactions need to be recorded.

• A business and its owner are considered a single entity.

The going concern assumption means that:

• A business is expected to close or be sold in the near future.

• All assets must be sold at their market value.

• Financial statements are prepared with the assumption that the business will continue to operate indefinitely.

• Depreciation expenses are not allocated to fixed assets.

What is the purpose of the objectivity principle?

• To allow management to use their personal opinions in financial statements.

• To ensure that records and reports are based on objective evidence, such as invoices and receipts.

• To ensure that accounting records are based on subjective evidence.

• To only record transactions that are easy to verify.

The money measurement concept requires that:

• All business transactions must be reported in physical currency.

• Only transactions involving cash should be recorded.

• The monetary value is always changing.

• All business transactions or events are reported in a specific monetary unit.