Question 1

Expensing the cost of a pencil holder that cost $1.25 instead of capitalizing it as a plant asset and depreciating it over its estimated useful life of 10 years:
A)violates the economic entity assumption.
B)violates GAAP since pencil holders are important assets.
C)is justified because of materiality.
D)is appropriate because of the stable dollar assumption.

Accepted Answer

Expensing a small asset like a pencil holder that costs only $1.25 is justified because of materiality, which suggests that immaterial items need not be recorded as assets in the financial statements. The cost of the pencil holder is insignificant and will not have a significant impact on the financial statements, and capitalizing it as a plant asset would create unnecessary costs and time-consuming efforts in terms of record-keeping and depreciation over the estimated useful life of 10 years. Therefore, it is more appropriate to expense it in the current period.

Question 2

Today's fair market value would be the same as:
A)the cash price of the asset when it was originally purchased.
B)the current price paid for an item in the input market.
C)the value of an item in the output market or sales price.
D)the discounted future cash flows from input and output markets.

Accepted Answer

Fair market value refers to the current value of an asset in the market, which is the value in the output market or the sales price. A is incorrect because the cash price when the asset was purchased may not reflect its current value. B is incorrect because the price paid in the input market may not be the same as the fair market value of the asset. D is incorrect because fair market value is determined based on current market conditions, not future cash flows.

Question 3

A company prepares financial statements once every year. What practice does this assumption illustrate?
A)Going concern assumption
B)Fiscal period assumption
C)The five-year moving theory
D)Stable dollar assumption

Accepted Answer

This assumption is the Fiscal Period Assumption, which assumes that a company's financial activities can be divided into specific and regular periods, typically one year, for consistent reporting and analysis.

Question 4

Present value is defined as:
A)the cash price of the asset when it was purchased.
B)the present price of any given product or service.
C)the selling price.
D)the discounted value of future cash flows.

Accepted Answer

Present value is the discounted value of future cash flows, meaning it is the current value of a future payment or stream of payments, taking into account the time value of money and discounting them back to their present value.

Question 5

Sales price is:
A)the input price of liabilities.
B)a form of market value.
C)a present value concept.
D)the current input cost.

Accepted Answer

Sales price is the amount that a buyer pays to a seller for a particular product or service. It is a form of market value, which is determined by the supply and demand of the product or service in the market. It may not necessarily be equal to the input cost or the present value of the product.

Question 6

Morgan Shipping held cash of $1 million throughout 2017 when the general price level decreased by over 30 percent. Morgan Shipping:
A)has more than $1 million of purchasing power at the end of the period.
B)has less than $1 million purchasing power at the end of the period.
C)must recognize the gain due to general price level increases in its income statement.
D)has the same $1 million purchasing power at the end of the period as at the beginning of the period.

Accepted Answer

When the general price level decreases, the value of money increases because you can buy more with the same amount of money. Therefore, if Morgan Shipping held cash of $1 million throughout a period when the general price level decreased by over 30 percent, it means that the purchasing power of that $1 million increased.

Question 7

When preparing the financial statements, we assume that the life of the entity will continue beyond the current period. Which assumption are we most likely following?
A)Stable dollar theory.
B)Going concern assumption.
C)Economic entity assumption.
D)Fiscal period assumption.

Accepted Answer

The going concern assumption assumes that the entity will continue to operate into the foreseeable future. This assumption is necessary to prepare financial statements, as it allows for the recognition and measurement of assets and liabilities based on their expected future benefits and obligations. The other options - stable dollar theory, economic entity assumption, and fiscal period assumption - do not relate to this specific assumption.

Question 8

The monetary unit that a company uses to measure economic transactions is primarily determined by the:
A)stable dollar concept adjusted for inflationary effects.
B)markets in which a company operates.
C)fiscal period a company has chosen.
D)decision by management to elect to use a given currency.

Accepted Answer

The monetary unit used by a company is primarily determined by the markets in which it operates. Companies typically use the currency of the country in which they are located or the currency of the country where they conduct the majority of their business. This ensures that financial statements accurately reflect the economic transactions of the company and are relevant to investors and stakeholders in those markets.

Question 9

Ten years after a company purchases a plot of land, it is reported on the balance sheet at its cost from the year it was purchased instead of its current selling price. This accounting practice is justified by the:
A)financial period assumption.
B)going concern assumption.
C)fiscal period assumption.
D)original cost base.

Accepted Answer

The accounting practice of reporting the cost of the plot of land on the balance sheet is justified by the original cost base principle, which states that assets should be recorded on the balance sheet at their original cost. This practice provides a more accurate representation of the company's financial position at the time of acquisition and helps to avoid fluctuations in the value of the asset over time. The other answer choices do not provide a rationale for this accounting treatment.

Question 10

Everett, Inc.'s reporting period ends on June 30th every year. This is an example of:
A)matching.
B)fiscal period.
C)materiality.
D)relevance.

Accepted Answer

This is an example of fiscal period, which is a specific time frame for financial reporting purposes.

Question 11

Which one of the following assumptions is violated when a company pays for its CEO's personal groceries using the company's bank account?
A)Stable dollar
B)Economic entity
C)Going concern
D)Ethical principle of accounting

Accepted Answer

The economic entity assumption is violated in this scenario because it requires a clear distinction between the company's transactions and the personal transactions of its owners or employees. Paying for the CEO's personal groceries with the company's funds blurs this distinction.

Question 12

Which assumption is applied when Laramie recognizes the operations of its wholly owned subsidiary, Big Sky, separately and distinctly from its own operations?
A)Economic entity assumption
B)Going concern assumption
C)Fiscal period assumption
D)The subsidiary stability assumption

Accepted Answer

The economic entity assumption assumes that the business is separate from its owners and other businesses. By recognizing the operations of its wholly owned subsidiary, Big Sky, separately and distinctly from its own operations, Laramie is adhering to this assumption.

Question 13

By recognizing the economic effects of inflation on the accounting financial statements, which accounting assumption is ignored?
A)Economic entity assumption
B)Going concern assumption
C)Stable dollar assumption
D)Fiscal period assumption

Accepted Answer

The stable dollar assumption assumes that the purchasing power of money remains constant over time, which is not the case in inflationary environments. Therefore, by recognizing the economic effects of inflation, the stable dollar assumption is ignored. The economic entity assumption, going concern assumption, and fiscal period assumption still hold true.

Question 14

Recognition of increases in purchasing power of monetary units is inconsistent with the:
A)economic entity assumption.
B)going concern assumption.
C)consistency principle.
D)stable dollar assumption.

Accepted Answer

The stable dollar assumption assumes that the value of the monetary unit remains stable over time. Recognition of increases in purchasing power of monetary units goes against this assumption and therefore is inconsistent with it.

Question 15

The stable dollar assumption assumes that:
A)the monetary unit is the functional currency of any country in which a company operates.
B)inflationary effects should be recognized in the financial statements
C)economic wealth is not measurable.
D)the monetary unit is stable across time.

Accepted Answer

The stable dollar assumption assumes that the monetary unit is stable across time, meaning that the value of the dollar remains constant throughout the period in question. This makes it easier to compare financial statements over different periods without having to adjust for inflation or exchange rate changes.

Question 16

As fiscal periods become shorter, the application of certain accounting methods become:
A)more arbitrary and subjective.
B)more objective.
C)more accurate.
D)more conservative.

Accepted Answer

As fiscal periods become shorter, there may be less time to gather all the necessary information and data, which can result in more arbitrary and subjective decisions when applying accounting methods. This is because there may be less time for thoughtful analysis and consideration of all available options. Therefore, option A is the correct answer.

Question 17

Most companies prepare annual financial statements:
A)with a fiscal ending date of June 30.
B)on the calendar year.
C)at a different date each year.
D)every two weeks.

Accepted Answer

Most companies prepare annual financial statements on the calendar year, which ends on December 31st. This allows for easier comparison of financial data between companies and industries.

Question 18

The fiscal period assumption states that the operating life of an economic entity:
A)is generally for a period of one year.
B)can be any period management decides it to be.
C)must be an entity separately distinct from its owners.
D)can be divided into time periods over which measures of performance and financial position can be developed and applied.

Accepted Answer

The fiscal period assumption implies that financial statements must be prepared periodically which means it can be divided into time periods over which measures of performance and financial position can be developed and applied. It doesn't restrict the life of an economic entity to only one year and doesn't necessarily require a separate entity from its owners. Hence, option D is the correct choice.

Question 19

Original cost may be defined as the:
A)cash price of the asset when purchased.
B)discounted future cash flows.
C)selling price.
D)price paid by the consumer when it was first released for consumer sales.

Accepted Answer

Original cost refers to the cash price of an asset at the time of purchase. It is the actual cost paid for acquiring the asset and does not include any future cash flows or potential resale value. Therefore, option A is the correct choice. Option B is incorrect as it refers to the present value of future cash flows and not the original cost. Option C is also incorrect as it refers to the selling price, which may differ from the original cost due to market fluctuations or other factors. Option D is incorrect as it refers to the price paid by the consumer when the asset was first released, which may not necessarily be the same as the original cost as the price may have been adjusted over time.

Question 20

Why must measures of performance and financial position be available on a timely basis?
A)For the users of the financial information to make decisions
B)For the SEC to determine whether the company should be shut down or not
C)FASB requires this information to be submitted to them for approval
D)For management to have time to manipulate income

Accepted Answer

Measures of performance and financial position need to be available on a timely basis so that users of financial information can make informed decisions. This information is crucial for investors, lenders, and other stakeholders to understand the financial health and viability of the company. Delays in reporting can result in missed opportunities or inaccurate assessments of the company's financial position. The other options (B, C, and D) are not accurate or desirable reasons for timely reporting.

Quiz 3: The Measurement Fundamentals of Financial Accounting

Expensing the cost of a pencil holder that cost $1.25 instead of capitalizing it as a plant asset and depreciating it over its estimated useful life of 10 years:

Today's fair market value would be the same as:

A company prepares financial statements once every year. What practice does this assumption illustrate?

Present value is defined as:

Sales price is:

Morgan Shipping held cash of $1 million throughout 2017 when the general price level decreased by over 30 percent. Morgan Shipping:

When preparing the financial statements, we assume that the life of the entity will continue beyond the current period. Which assumption are we most likely following?

The monetary unit that a company uses to measure economic transactions is primarily determined by the:

Ten years after a company purchases a plot of land, it is reported on the balance sheet at its cost from the year it was purchased instead of its current selling price. This accounting practice is justified by the:

Everett, Inc.'s reporting period ends on June 30th every year. This is an example of:

Which one of the following assumptions is violated when a company pays for its CEO's personal groceries using the company's bank account?

Which assumption is applied when Laramie recognizes the operations of its wholly owned subsidiary, Big Sky, separately and distinctly from its own operations?

By recognizing the economic effects of inflation on the accounting financial statements, which accounting assumption is ignored?

Recognition of increases in purchasing power of monetary units is inconsistent with the:

The stable dollar assumption assumes that:

As fiscal periods become shorter, the application of certain accounting methods become:

Most companies prepare annual financial statements:

The fiscal period assumption states that the operating life of an economic entity:

Original cost may be defined as the:

Why must measures of performance and financial position be available on a timely basis?