Question 1

The accounting principle that requires accounting information to be based on actual cost and requires assets and services to be recorded initially at the amount of cash or cash-equivalent given in exchange is the:

Accepted Answer

The cost principle states that assets and services should be recorded at their actual cost or the amount of cash or cash-equivalent given in exchange. This principle ensures that financial statements accurately reflect the company's financial position and avoid over- or under-estimation of asset values.

Question 2

A partnership:

Accepted Answer

A partnership has unlimited liability, meaning the owners (called partners) are personally responsible for all debts and obligations of the business. This is in contrast to a corporation, which has limited liability protection for its shareholders.

Question 3

On December 15, 2010, Myers Legal Services signed a $50,000 contract with a client to provide legal services to the client in 2011. Which accounting principle would require Myers Legal Services to record the legal fees revenue in 2011 and not 2010?

Accepted Answer

The revenue recognition principle requires revenue to be recognized when it is earned, which in this case would be when the legal services are provided in 2011. Therefore, Myers Legal Services should record the revenue in 2011 and not 2010.

Question 4

Recording the items on the financial statements in dollars is:

Accepted Answer

The monetary unit principle states that transactions should only be recorded in a single currency. In the United States, the dollar is the most commonly used monetary unit, so recording items on financial statements in dollars follows this principle.

Question 5

A limited partnership:

Accepted Answer

A limited partnership includes a general partner with unlimited liability, meaning they are personally responsible for the debts and obligations of the partnership. The limited partners have limited liability and are not personally liable for the debts and obligations of the partnership. This distinguishes it from a general partnership where all partners have unlimited liability.

Question 6

The question of when revenue should be recognized on the income statement (according to GAAP) is addressed by the:

Accepted Answer

The revenue recognition principle outlines when revenue should be recognized on the income statement according to Generally Accepted Accounting Principles (GAAP). It states that revenue should be recognized when it is earned and realized or realizable, and when the company has substantially performed its obligations to earn the revenue.

Question 7

Revenue is properly recognized:

Accepted Answer

Revenue should be recognized when the sale or service is completed and the business has the right to collect the sale price, even if payment has not been received yet. This is in accordance with the accrual accounting method, which recognizes revenue when it is earned, not necessarily when cash is received.

Question 8

The objectivity principle:

Accepted Answer

The objectivity principle requires that financial information in a company's financial statements be supported by independent and unbiased evidence. This means that the information should be factual and not influenced by personal opinions or biases.

Question 9

Which of the following accounting principles would prescribe that all goods and services purchased is recorded at cost?

Accepted Answer

The Cost principle states that all goods and services purchased should be recorded at their historical cost, which is the price paid to acquire them. This principle ensures accurate financial reporting and helps to prevent overvaluation of assets.

Question 10

Congress passed the Sarbanes-Oxley Act to

Accepted Answer

The Sarbanes-Oxley Act was passed in response to the financial scandals and financial abuses that were uncovered at companies such as Enron and WorldCom. The act aims to help curb financial abuses at companies that issue their stock to the public by creating more stringent regulations and holding executives accountable for their actions. It established the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing profession and required that all companies publicly disclose their internal control plans.

Question 11

An example of an operating activity is:

Accepted Answer

Paying wages is an example of an operating activity, which refers to the day-to-day business activities involved in producing and selling a company's products or services. It is considered an expense and is included in the company's income statement. Choices B, C, D, and E are examples of financing or investing activities, which are not considered operating activities.

Question 12

The principle that (1) requires revenue to be recognized at the time it is earned, (2) allows the inflow of assets associated with revenue to be in a form other than cash and (3) measures the amount of revenue as the cash plus the cash equivalent value of any non-cash assets received from customers in exchange for goods or services is called the:

Accepted Answer

The description given matches the definition of the revenue recognition principle, which requires revenue to be recognized when earned and allows for the recognition of non-cash assets received from customers as payment.

Question 13

Marian Mosely is the owner of Mosely Accounting Services. Which accounting assumption requires Marian to keep her personal financial information separate from the financial information of Mosely Accounting Services?

Accepted Answer

The business entity assumption requires that the accounting records of the business be kept separate from the owner's personal financial information. As a result, Marian Mosely must keep her personal financial information separate from the financial information of Mosely Accounting Services, since she is the owner of the business.

Question 14

The Maximum Experience Company acquired a building for $500,000. Maximum Experience had an appraisal done and found that the building was worth $575,000. The seller had paid $300,000 for the building 6 years ago. Which accounting principle would prescribe that Maximum Experience record the building on its records at $500,000?

Accepted Answer

The cost principle states that assets should be recorded at their original cost, which in this case is $500,000. The fact that the building may be worth more based on an appraisal or what the seller paid for it six years ago is not relevant to the cost principle.

Question 15

To include the personal assets and transactions of a business's owner in the records and reports of the business would be in conflict with the:

Accepted Answer

The business entity principle states that the business transactions should be recorded and reported separately from the personal transactions of the owner. Combining personal assets and transactions with the records of the business would be in conflict with this principle, as it would not accurately reflect the financial position of the business alone.

Question 16

Planning activities:

Accepted Answer

Planning activities involve defining the ideas, goals, and actions of an organization. While other choices may involve planning, they do not fully encompass the definition of planning activities. Choice A refers to financial resources, choice B refers to resources in general, and choices D and E refer to the implementation of plans.

Question 17

An example of a financing activity is:

Accepted Answer

Obtaining a long-term loan is a financing activity as it involves obtaining funds from external sources to finance the operations of a business. The other options relate to operating or investing activities.

Question 18

According to generally accepted accounting principles, a company's balance sheet should show the company's assets at:

Accepted Answer

The answer of According to generally accepted accounting principles, a...

Question 19

The amounts reported in the accounts for assets used in operations are based on their costs. This practice is best justified by the:

Accepted Answer

The cost principle requires that assets be recorded at their historical cost, which is the amount paid to acquire them. This practice ensures that the financial statements provide reliable and relevant information about the company's resources and the investments made to generate revenue. The going-concern principle assumes that the company will continue to operate in the future, while the objectivity principle requires that financial information be based on verifiable evidence. The business entity principle requires that the company's finances be presented separately from those of its owners. The revenue recognition principle specifies when and how revenue should be recorded, but it does not directly justify the use of cost-based accounting.

Question 20

The International Accounting Standards Board (IASB)

Accepted Answer

The International Accounting Standards Board (IASB) is a private sector organization that aims to create global accounting standards and promote the harmonization of accounting practices among different countries. It does not have the authority to impose its standards on companies, nor is it the only source of GAAP. It is not limited to companies that are members of the European Union.

Quiz 1: Introducing Accounting in Business