Question 1

Lawton Corporation records business transactions in dollars and disregards changes in the value of a dollar over time. Which of the following accounting assumptions does this represent?

Accepted Answer

Monetary unit assumption assumes that every transaction is recorded in a single monetary unit, which is not adjusted for changes in the value of money over time. Lawton Corporation's accounting practice of recording transactions in dollars without considering changes in the value of a dollar over time represents the monetary unit assumption.

Question 2

Under the going concern principle, accountants must provide proof that the business will remain in operations long enough to use existing resources for their intended purpose.

Accepted Answer

The going concern principle assumes that a business will continue to operate indefinitely, without the need for accountants to provide proof of its ability to do so. It is an assumption rather than a guarantee requiring proof.

Question 3

Provide the definition of each of the following accounting assumptions or principles.
 $$\begin{array} { | l | l | } 
\hline \text { Assumption or Principle } & \text { Definition } \
\hline \text { Going Concern Assumption } & \
\hline \text { Cost Principle } & \
\hline
\end{array}$$

Accepted Answer

The answer of Provide the definition of each of the...

Question 4

In the United States, transactions are recorded in dollars because the dollar's purchasing power does not change over time.

Accepted Answer

The purchasing power of the dollar can change over time due to factors such as inflation, so transactions in dollars do not necessarily reflect a stable value over time.

Question 5

Under the going concern principle, accountants assume that the business will remain in operations long enough to use existing resources for their intended purpose.

Accepted Answer

The going concern principle assumes that the business will continue to operate for the foreseeable future, allowing for the use of current resources in their intended purpose, such as long-term investments or debt repayment.

Question 6

International Financial Reporting Standards (IFRS) is the main U.S. accounting rule book and is currently created and governed by the Financial Accounting Standards Board.

Accepted Answer

IFRS is not the main U.S. accounting rule book. It is a set of international accounting standards that are adopted by many countries around the world, but not the United States. The Financial Accounting Standards Board (FASB) is the main accounting standard-setting body in the U.S. and governs the Generally Accepted Accounting Principles (GAAP).

Question 7

Thirty years ago, Citywide Grocery Corporation purchased a building for its grocery store for $30,000. Based on inflation estimates, the amount of the building has been adjusted in the accounting records. The building is now reported at $75,000 in Citywide's financial statements. Which of the following concepts or principles of accounting is being violated?

Accepted Answer

The cost principle states that assets should be recorded at their historical cost, not their current value based on inflation estimates. Citywide Grocery Corporation violates this principle by reporting the building at its adjusted value rather than its original cost.

Question 8

A business purchases a building for $250,000. The current market value is $375,000. The tax assessment value is $325,000. At what value should the building be recorded, and which accounting principle supports your answer?

Accepted Answer

The answer of A business purchases a building for $250,000....

Question 9

Provide the definition of each of the following accounting assumptions.
 $$\begin{array} { | l | l | } 
\hline \text { Assumption } & \text { Definition } \
\hline \text { Monetary Unit } & \
\hline \text { Economic Entity } & \
\hline
\end{array}$$

Accepted Answer

The answer of Provide the definition of each of the...

Question 10

International Financial Reporting Standards (IFRS) allows periodic revaluation of certain assets and liabilities to restate them to market value.

Accepted Answer

IFRS allows periodic revaluation of certain assets and liabilities to restate them to market value.

Question 11

International Financial Reporting Standards ________ U.S. Generally Accepted Accounting Principles.

Accepted Answer

International Financial Reporting Standards (IFRS) are generally less specific than U.S. Generally Accepted Accounting Principles (GAAP). IFRS focuses more on principles rather than rules, allowing for more professional judgment and interpretation. GAAP, on the other hand, is more rule-based with specific details on how transactions should be recorded and reported.

Question 12

Stuart Allen Corporation manufactures computer hardware. The president of the corporation bought a new car as a gift for his daughter and paid for it using cash from the business. Since the corporation paid for the car, it was recorded in its books as an asset. Which of the following concepts or principles of accounting did the corporation violate?

Accepted Answer

The economic entity assumption was violated because this principle requires a clear distinction between the transactions of the business and its owners or other businesses. Recording a personal car purchase as a business asset mixes personal transactions with business transactions, which is against this principle.

Question 13

As per the ________, the entity will remain in operation for the foreseeable future.

Accepted Answer

The going concern assumption states that the entity will operate for the foreseeable future, making choice C the best answer. The economic entity concept relates to the separation of the entity's finances from its owner's finances, while the monetary unit assumption refers to the use of a common unit of measurement (such as currency) in financial statements. The cost principle states that assets should be recorded at their historical cost.

Question 14

Regarding the monetary unit assumption, which of the following statements is correct?

Accepted Answer

The monetary unit assumption assumes that the dollar's purchasing power is stable, meaning that it does not change over time. It does not require items on the financial statements to be measured at their current market value, nor does it imply that a dollar will purchase more during periods of inflation.

Question 15

International Financial Reporting Standards are comparatively more specific and more rule-based than U.S. GAAP.

Accepted Answer

U.S. GAAP is considered more rule-based and detailed, whereas International Financial Reporting Standards (IFRS) are more principles-based and allow for more interpretation.

Question 16

Accountants assume that the dollar's purchasing power is stable.

Accepted Answer

Accountants usually use the historical cost accounting method, which assumes that the monetary unit, such as the dollar, is stable and does not consider inflation or changes in purchasing power.

Question 17

Under U.S. GAAP, the monetary unit assumption states that transactions are recorded in dollars. What is the basis for this assumption?

Accepted Answer

The answer of Under U.S. GAAP, the monetary unit assumption...

Question 18

Beverly Dalton incorporated her CPA practice in 2013. At that time, the corporation purchased land for $29,000. The December 31, 2019 market value of the land is $85,000. On the December 31, 2019 balance sheet, this asset should be reported at ________ under U.S. GAAP and at ________ under international reporting standards.

Accepted Answer

The answer of Beverly Dalton incorporated her CPA practice in...

Question 19

Ten years ago a corporation purchased a building for $160,000. At that time, the corporation felt that the building was worth $185,000. The current market value of the building is $430,000. The building has been assessed at $405,000 for property tax purposes. At which amount should the corporation record the building in its accounting records?

Accepted Answer

In accounting, assets are recorded at their historical cost. Therefore, the building should be recorded at its purchase price of $160,000, not its current market value or assessed value for tax purposes.

Question 20

The Securities and Exchange Commission allows U.S. businesses to choose whether they follow U.S. GAAP or International Financial Reporting Standards.

Accepted Answer

U.S. businesses are generally required to follow U.S. Generally Accepted Accounting Principles (U.S. GAAP) for financial reporting, and the Securities and Exchange Commission (SEC) has not adopted International Financial Reporting Standards (IFRS) for domestic companies.

Quiz 1: Accounting and the Business Environment