Question 1

What accounting concept justifies the usage of depreciation and amortization policies?

Accepted Answer

The going concern assumption states that the company will continue operating for the foreseeable future. Thus, accounting policies such as depreciation and amortization recognize that the assets are being used over a long period of time and need to be accounted for accordingly.

Question 2

Which of the following is a component of the revenue recognition principle?

Accepted Answer

The revenue recognition principle states that revenue should be recognized when the performance obligation is satisfied, which means the goods or services have been provided to the customer. This principle is based on the idea that revenue should be recognized when it has been earned, regardless of when payment is received. The other choices may be factors to consider but are not specific components of the revenue recognition principle.

Question 3

A company has a performance obligation when it agrees to

Accepted Answer

A company has a performance obligation when it agrees to perform a service or sell a product to a customer. The company has committed to providing something of value to the customer in exchange for payment, so it is obligated to deliver on that promise. Option A and B are incorrect as they only cover one aspect of a performance obligation, either selling a product or providing a service, but not both. Option D is incorrect as all of the other answer choices relate to performance obligations.

Question 4

The accounting principle of expense recognition is best demonstrated by

Accepted Answer

The expense recognition principle, also known as the matching principle, suggests that expenses should be recognized (recorded in the accounting system) in the same period as the related revenue, or effort should be associated with accomplishment. This helps to ensure that the financial statements accurately reflect the results of operations for a given period. Option A is incorrect because recognizing revenue is not a requirement for recognizing expenses. Option C is incorrect because prepaid rent received is not an expense, it is a liability until the rental period is over. Option D is incorrect because establishing an Appropriation for Contingencies account is not related to the expense recognition principle.

Question 5

Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles?

Accepted Answer

A President's letter to shareholders is not a required component of financial statements prepared in accordance with generally accepted accounting principles (GAAP). However, it is common for companies to include a letter from the CEO or President in their annual report as an additional communication with shareholders. The required components of financial statements prepared in accordance with GAAP include a balance sheet, income statement, and notes to financial statements.

Question 6

Revenue generally should be recognized

Accepted Answer

Revenue should be recognized when the performance obligation (i.e. delivery of goods or services) is satisfied, meaning the customer has received and accepted the goods or services. This is in accordance with the principles of accrual accounting, which requires revenue recognition to be tied to the timing of when the transaction occurs, rather than when cash is received.

Question 7

The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the

Accepted Answer

The allowance for doubtful accounts is a contra asset account that reflects the estimated amount of accounts receivable that may not be collected. This is an application of the expense recognition principle, which requires a company to record expenses in the period in which they are incurred. By estimating and recording the allowance for doubtful accounts, a company is able to recognize the expense associated with potential bad debts in the same period as the related revenue.

Question 8

Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the

Accepted Answer

The statement describes the revenue recognition principle, which states that revenue should be recognized when a company has fulfilled its performance obligation and earned the revenue. This principle is a key element of the accrual basis of accounting.

Question 9

Which of the following is an argument against using historical cost in accounting?

Accepted Answer

The argument against using historical cost in accounting is that fair values are more relevant. This is because fair values reflect current market conditions and are more useful in making economic decisions. Historical costs, on the other hand, are based on past transactions and do not necessarily reflect current market values. Therefore, fair values are considered to be more reliable in measuring assets and liabilities. B, C, and D are not arguments against using historical cost.

Question 10

Generally, revenue from sales should be recognized at a point when

Accepted Answer

Revenue recognition typically occurs when the earnings process is complete or virtually complete, and there is reasonable assurance about the collectability of the asset to be received (usually cash). The options provided do not accurately reflect the principles of revenue recognition as outlined in accounting standards, such as the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP), which focus on the transfer of control and risks and rewards of ownership, rather than the conditions described in the options.

Question 11

Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more

Accepted Answer

Proponents of historical cost argue that since historical cost is based on actual transactions and objective evidence, it is more verifiable than other alternatives like fair value. This makes financial statements more reliable and trustworthy for users. While historical cost may not always be the most relevant or indicative of the entity's current values or future potential, it is still preferred by many accountants and regulators due to its verifiability. The argument of conservatism is debatable and not applicable in all cases.

Question 12

When is revenue generally recognized?

Accepted Answer

Revenue is generally recognized when the company satisfies the performance obligation, which means that the goods or services have been delivered or provided to the customer and the payment is expected to be received. This is in accordance with the accrual accounting method which recognizes revenue when it is earned, not when payment is received. The other options - A) when cash is received, B) when the warranty expires, and C) when production is completed - are not always indicative of when revenue should be recognized.

Question 13

Which of the following is an implication of the going concern assumption?

Accepted Answer

The going concern assumption implies that the entity will continue to operate in the foreseeable future, therefore, the historical cost principle is credible, depreciation and amortization policies are justifiable and appropriate, and the current-noncurrent classification of assets and liabilities is justifiable and significant.

Question 14

The measurement principle includes the

Accepted Answer

The measurement principle includes both the historical cost principle and the fair value principle. The historical cost principle records assets and liabilities at their original cost while the fair value principle records assets and liabilities at their current market value. Both principles are used to accurately measure financial transactions and events.

Question 15

Valuing assets at their liquidation values rather than their cost is inconsistent with the

Accepted Answer

Valuing assets at their liquidation values rather than their cost goes against the historical cost principle, which states that assets should be recorded at their original cost. The historical cost principle requires that companies record assets based on the amount paid for them in the original transaction, which is verifiable and objective. Valuing assets at liquidation value may not be reliable or objective as it is based on future projections and assumptions.

Question 16

Which of the following is commonly referred to as the matching principle?

Accepted Answer

The matching principle (also known as the expense recognition principle) states that expenses should be recognized and matched with the revenues they helped to generate during the same accounting period. This ensures that the income statement accurately reflects the company's profitability for that period.

Question 17

The assumption that a company will not be sold or liquidated in the near future is known as the

Accepted Answer

The assumption described is actually the "going concern assumption," which is not listed among the options provided. The going concern assumption is the belief that a company will continue to operate for the foreseeable future, not being sold or liquidated. None of the options (A) economic entity assumption, (B) monetary unit assumption, or (C) periodicity assumption directly relate to this concept.

Question 18

Which of the following serves as the justification for the periodic recording of depreciation expense?

Accepted Answer

The periodic recording of depreciation expense is justified by the systematic and rational allocation of cost over the periods benefited. Depreciation is the process of allocating the cost of a tangible asset over its useful life, and recording depreciation expense each period is a way to distribute the cost of the asset in a way that matches its contribution to revenue over time.

Question 19

Product costs include each of the following except

Accepted Answer

Product costs include expenses directly related to the production of goods such as materials, labor, and overhead. Officer's salaries are considered an indirect expense and would be categorized as an administrative cost rather than a product cost.

Question 20

Application of the full disclosure principle

Accepted Answer

The full disclosure principle requires that all material information about a company's financial performance and position should be included in the financial statements or in the notes. Supplementary information, such as explanations of financing arrangements, can help to provide further transparency and meet the requirements of the full disclosure principle. Option A is incorrect, as the costs of disclosure should not outweigh the benefits. Option B refers to disclosure being buried, which is not in line with the full disclosure principle. Option D is a relevant principle, but not specific to the full disclosure principle.

Quiz 2: Conceptual Framework for Financial Reporting