Question 1

Application of the full disclosure principle
A)is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
B)is violated when important financial information is buried in the notes to the financial statements.
C)is demonstrated by the use of supplementary information presenting the effects of changing prices.
D)requires that the financial statements be consistent and comparable.

Accepted Answer

The full disclosure principle is demonstrated by the use of supplementary information presenting the effects of changing prices. This principle requires companies to disclose all relevant and material information in their financial statements and supplementary information. While complete disclosure may be expensive, it is essential to make informed decisions about a company's financial health. Violating this principle by burying important financial information in the notes to the financial statements can lead to legal and ethical problems. Consistency and comparability are requirements of the consistency principle.

Question 2

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
A)reliable.
B)relevant.
C)indicative of the entity's purchasing power.
D)conservative.

Accepted Answer

Proponents of historical cost argue that it provides a reliable measure of an entity's financial position and performance, as it is based on actual transactions that have occurred. Other valuation alternatives, such as fair value, may be subjective and based on estimates or assumptions. Therefore, historical cost is considered more reliable.

Question 3

Which of the following statements concerning the cost-benefit relationship is not true?
A)Business reporting should exclude information outside of management's expertise.
B)Management should not be required to report information that would significantly harm the company's competitive position.
C)Management should not be required to provide forecasted financial information.
D)If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.

Accepted Answer

The answer of Which of the following statements concerning the...

Question 4

The accounting principle of matching is best demonstrated by
A)not recognizing any expense unless some revenue is realized.
B)associating effort (expense) with accomplishment (revenue).
C)recognizing prepaid rent received as revenue.
D)establishing an Appropriation for Contingencies account.

Accepted Answer

The principle of matching requires the association of effort (expense) with accomplishment (revenue). This means that expenses should be recognized in the same accounting period as the revenues they helped to generate, in order to provide an accurate picture of the profitability of the business. Option A is incorrect because it implies that expenses can never be recognized unless there is revenue, which is not always the case. Option C is incorrect because recognizing prepaid rent as revenue would violate the principle of revenue recognition, while option D is unrelated to the principle of matching.

Question 5

Revenue generally should be recognized
A)at the end of production.
B)at the time of cash collection.
C)when realized.
D)when realized or realizable and earned.

Accepted Answer

Revenue should be recognized when it is realized (when cash or claims to cash are received or receivable) or realizable (when goods or services have been exchanged or there is an intention to exchange goods or services), and earned (when the seller has performed their obligations and the buyer has received the benefits of the transaction). This is in accordance with the revenue recognition principle in GAAP. Recognizing revenue at the end of production (choice A) or at the time of cash collection (choice B) may not accurately reflect when the revenue has been earned and may not align with GAAP. Realizing revenue (choice C) is not sufficient, as revenue must also be earned and/or realizable in order to be recognized.

Question 6

Under Statement of Financial Accounting Concepts No.5, which of the following, in the most precise sense, means the process of converting noncash resources and rights into cash or claims to cash?
A)Recognition
B)Measurement
C)Realization
D)Allocation

Accepted Answer

The process of converting noncash resources and rights into cash or claims to cash is called realization. This concept is part of SFAC No.5, which focuses on the recognition and measurement of elements in financial statements. Realization is a critical concept because it governs when and how revenue should be recognized in financial statements.

Question 7

Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of the application of the
A)consistency characteristic.
B)matching principle.
C)materiality constraint.
D)historical cost principle.

Accepted Answer

The materiality constraint allows companies to expense small, inexpensive items immediately rather than capitalizing them, as their impact on financial statements is negligible.

Question 8

Which of the following serves as the justification for the periodic recording of depreciation expense?
A)Association of efforts (expense) with accomplishments (revenue)
B)Systematic and rational allocation of cost over the periods benefited
C)Immediate recognition of an expense
D)Minimization of income tax liability

Accepted Answer

The periodic recording of depreciation expense is justified by the systematic and rational allocation of cost over the periods benefited. This method helps to accurately match the cost of long-term assets with the revenue generated from their use over time. It is not primarily done for the immediate recognition of an expense or for the minimization of income tax liability, although those may be secondary benefits. It is also not related to the association of efforts with accomplishments.

Question 9

Revenue is generally recognized when realized or realizable and earned.This statement describes the
A)consistency characteristic.
B)matching principle.
C)revenue recognition principle.
D)relevance characteristic.

Accepted Answer

The statement describes the revenue recognition principle, which states that revenue should be recognized when it is realized or realizable (collection is reasonably assured) and earned (services or goods have been provided). This principle guides when and how revenue should be recorded in a company's financial statements.

Question 10

"When products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash" is a definition of
A)allocated.
B)realized.
C)realizable.
D)earned.

Accepted Answer

The definition given is describing the concept of realization, which refers to the point at which revenue is recognized or earned. Therefore, the best choice is B, realized.

Question 11

Which of the following is an implication of the going concern assumption?
A)The historical cost principle is credible.
B)Depreciation and amortization policies are justifiable and appropriate.
C)The current-noncurrent classification of assets and liabilities is justifiable and signify-cant.
D)All of these.

Accepted Answer

The going concern assumption implies that the entity will continue to operate for the foreseeable future, which justifies the use of historical cost principle as it assumes that the value of assets and liabilities remain unchanged unless there is evidence to the contrary. Also, depreciation and amortization policies are appropriate as the assumption of continuity justifies spreading the cost of a long-lived asset over its useful life. Lastly, the current-noncurrent classification of assets and liabilities is significant as it assumes that the entity will continue to operate for the foreseeable future and allows for proper classification of assets and liabilities based on their expected realization or settlement dates.

Question 12

Which of the following are considered pervasive constraints by Statement of Financial Accounting Concepts No.2?
A)Cost-benefit relationship and conservatism
B)Timeliness and feedback value
C)Conservatism and verifiability
D)Materiality and cost-benefit relationship

Accepted Answer

Statement of Financial Accounting Concepts No.2 lists materiality and cost-benefit relationship as the two pervasive constraints in accounting. These constraints help to ensure that financial reporting is useful and relevant to users while also being practical and cost-effective to prepare. Conservatism, verifiability, timeliness, and feedback value are not considered pervasive constraints, although they are important qualitative characteristics of financial reporting.

Question 13

The assumption that a business enterprise will not be sold or liquidated in the near future is known as the
A)economic entity assumption.
B)monetary unit assumption.
C)conservatism assumption.
D)none of these.

Accepted Answer

The assumption that a business will continue to operate indefinitely and not be sold or liquidated in the near future is known as the "going concern assumption," which is not listed among the options provided.

Question 14

Generally, revenue from sales should be recognized at a point when
A)management decides it is appropriate to do so.
B)the product is available for sale to the ultimate consumer.
C)the entire amount receivable has been collected from the customer and there remains no further warranty liability.
D)none of these.

Accepted Answer

Revenue from sales is generally recognized when it is earned and realizable, typically at the point of delivery or transfer of ownership, not necessarily when collected or based on management's discretion.

Question 15

Which of the following statements about materiality is not correct?
A)An item must make a difference or it need not be disclosed.
B)Materiality is a matter of relative size or importance.
C)An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
D)All of these are correct statements about materiality.

Accepted Answer

All four statements are correct and consistent with the concept of materiality. Materiality is a fundamental concept in auditing, accounting, and financial reporting, and it refers to the significance, relevance, or importance of an item or piece of information. A material item is one that could affect the decision of a reasonable user of financial statements, and therefore it must be disclosed or presented in a way that allows users to understand its impact. Materiality is a matter of professional judgment, and it involves both quantitative and qualitative factors, such as size, nature, and context of the information. Therefore, all of the statements A, B, C, and D are correct and important to understand the concept of materiality.

Question 16

Which of the following is not a time when revenue may be recognized?
A)At time of sale
B)At receipt of cash
C)During production
D)All of these are possible times of revenue recognition.

Accepted Answer

Revenue can be recognized at different times depending on the circumstances and accounting methods, so all listed options are possible times for revenue recognition.

Question 17

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
A)consistency characteristic.
B)matching principle.
C)materiality constraint.
D)revenue recognition principle.

Accepted Answer

The allowance for doubtful accounts is based on the matching principle, which states that expenses should be recognized in the same period as the revenue they help to generate. By estimating bad debts and deducting them from accounts receivable, a company can more accurately match the costs of doing business with the revenue generated.

Question 18

The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as the
A)conservatism constraint.
B)materiality constraint.
C)substance over form principle.
D)industry practices constraint.

Accepted Answer

The concept described in the question is the conservatism constraint, which requires accountants to err on the side of caution and avoid overstating financial performance, thus leading to understating assets and revenues and overstating liabilities and expenses. This helps to prevent overstatement of financial strength and to promote transparency and accuracy in financial reporting. The other options do not accurately describe the concept in question.

Question 19

Under Statement of Financial Accounting Concepts No.2, which of the following relates to both relevance and reliability?
A)Cost-benefit constraint
B)Predictive value
C)Verifiability
D)Representational faithfulness

Accepted Answer

The cost-benefit constraint is a consideration that affects both relevance and reliability, as it involves weighing the benefits of information against the costs of providing it, impacting the decision usefulness of financial information.

Question 20

Valuing assets at their liquidation values rather than their cost is inconsistent with the
A)periodicity assumption.
B)matching principle.
C)materiality constraint.
D)historical cost principle.

Accepted Answer

Valuing assets at their liquidation values rather than their cost is inconsistent with the historical cost principle, which requires that assets be recorded at the amount paid to acquire them. Using liquidation values instead would mean that the assets are not being recorded at their actual historical cost.

Quiz 2: Conceptual Framework Underlying Financial Accounting

Application of the full disclosure principle

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

Which of the following statements concerning the cost-benefit relationship is not true?

The accounting principle of matching is best demonstrated by

Revenue generally should be recognized

Under Statement of Financial Accounting Concepts No.5, which of the following, in the most precise sense, means the process of converting noncash resources and rights into cash or claims to cash?

Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of the application of the

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

Revenue is generally recognized when realized or realizable and earned.This statement describes the

"When products (goods or services) , merchandise, or other assets are exchanged for cash or claims to cash" is a definition of

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

Which of the following are considered pervasive constraints by Statement of Financial Accounting Concepts No.2?

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

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

Which of the following statements about materiality is not correct?

Which of the following is not a time when revenue may be recognized?

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

The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as the

Under Statement of Financial Accounting Concepts No.2, which of the following relates to both relevance and reliability?

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