One element of the objective of financial reporting is to provide information

that will attract new investors.

that is useful in assessing cash flows prospects.
about the investors in the entity.
about the liquidation value of the resources held by the entity.
Ans.
that is useful in assessing cash flows prospects.

What is the concept that supports the issuance of interim reports?

Consistency
Relevance
Faithful representation
Materiality
Ans.
Relevance

To achieve faithful representation, the financial statements

Must have predictive and confirmatory value

Must be complete, neutral and reasonably free from error
Are comparable, understandable, verifiable and timely
All of these would achieve faithful representation
Ans.
Must be complete, neutral and reasonably free from error

What is the underlying concept that supports estimating a fixed asset impairment charge?

Consistency
Matching
Faithful representation
Substance over form.
Ans.
Faithful representation

The economic entity assumption

is inapplicable to unincorporated businesses

recognizes the legal aspects of business organizations
requires periodic income measurement
is applicable to all forms of business organizations
Ans.
is applicable to all forms of business organizations
Identify the pervasive constraint and underlying assumption mentioned in the Conceptual Framework.
Pervasive constraint Underlying assumption

Cost Accrual basis

Cost Going concern
Timeliness Accrual basis
Timeliness Going concern
Ans.
Cost Going concern

During the lifetime of an entity accountants produce financial statements at artificial points in time in
accordance with the concept of
Objectivity Periodicity

No No
Yes No
No Yes
Yes Yes
Ans.
No Yes

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

periodicity assumption
matching principle
materiality constraint
historical cost principle
Ans.
historical cost principle

Which basic assumption may not be followed when a firm in bankruptcy reports financial results?

Economic entity assumption

Going concern assumption
Periodicity assumption
Monetary unit assumption
Ans.
Going concern assumption

Which of the following basic accounting assumptions is threatened by the existence of severe inflation in
the economy?

Monetary unit assumption

Periodicity assumption
Going-concern assumption
Economic entity assumption
Ans.
Monetary unit assumption

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

The historical cost principle is credible

Depreciation and amortization policies are justifiable and appropriate
The current-noncurrent classification of assets and liabilities is justifiable and signify-cant
All of these
Ans.
All of these

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

economic entity assumption

monetary unit assumption
materiality assumption
none of these
Ans.
none of these

When a parent and subsidiary relationships exist, consolidated financial statement are prepared in recognitions
of

Legal entity
Economic entity
Stable monetary unit
Time period
Ans.
Economic entity

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an

example of the

economic entity assumption

relevance characteristic
comparability characteristic
neutrality characteristic
Ans.
economic entity assumption

The basic assumptions of accounting used by the International Accounting Standards Board (IASB)
include all of the following except:

Going concern
Periodicity
Accrual basis
Materiality
Ans.
Materiality
Which of the following is not a basic assumption underlying the financial accounting structure?

Economic entity assumption.

Going concern assumption.
Periodicity assumption.
Historical cost assumption.
Ans.
Historical cost assumption.

Which basic assumption is illustrated when a firm reports financial results on an annual basis?

Economic entity assumption

Going concern assumption
Periodicity assumption
Monetary unit assumption
Ans.
Periodicity assumption

Which of the following basic assumptions of accounting (used by the International Accounting Standards
Board) makes depreciation and amortization policies justifiable and appropriate

Periodicity
Decision usefulness
Monetary unit
Going concern
Ans.
Going concern

The basic assumptions of accounting used by the International Accounting Standards Board
(IASB) include

Neutrality.
Periodicity.
Understandability.
Materiality.
Ans.
Periodicity.

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in
accordance with which basic accounting concept?

Cost/benefit constraint

Periodicity assumption

Materiality constraint
Expense recognition principle
Ans.
Periodicity assumption

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

Verifiable
Relevant
indicative of the entity's purchasing power
conservative
Ans.
Verifiable

Which accounting assumption or principle is being violated if a company provides financial reports in
connection with a new product introduction?

Economic entity
Periodicity
Revenue recognition
Full disclosure
Ans.
Economic entity

Under current IFRS, inflation is ignored in accounting due to the

economic entity assumption

going concern assumption
monetary unit assumption
periodicity assumption
Ans.
monetary unit assumption

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

At time of sale
At receipt of cash
During production
All of these are possible times of revenue recognition.
Ans.
All of these are possible times of revenue recognition.

The International Accounting Standards Board (IASB) defines one of the 5 elements as
follows: “the residual interest in the assets of the entity after deducting all its liabilities”
Which element matches this description?

Retained earnings.
Income.
Equity.
All of the choices match this definition.
Ans.
Equity.

Which of the following practices may not be an acceptable deviation from recognizing revenue at
the point of sale?

Upon receipt of cash.

During production
Upon receipt of order.
End of production.
Ans.
Upon receipt of order.

When should an expenditure be recorded as an asset rather than an expense?

Never.
Always.
If the amount is material.
When future benefit exits
Ans.
When future benefit exits

Revenue generally should be recognized

at the end of production.

at the time of cash collection.
when realized.
when a sale occurs.
Ans.
when a sale occurs.

The International Accounting Standards Board (IASB) defines five interrelated elements of
financial statements. Which of the following is not one of those elements?

Asset.
Income.
Equity.
All of the choices are elements defined by the IASB
Ans.
All of the choices are elements defined by the IASB
Which of the following is not a basic element of financial statements?

Assets.
Statement of financial position
Equity
Income.
Ans.
Statement of financial position

When is revenue generally recognized?

When cash is received.

When the warranty expires.
When production is completed.
When the sale occurs.
Ans.
When the sale occurs.

Application of the full disclosure principle

is theoretically desirable but not practical because the costs of complete disclosure exceed the
benefits.

is violated when important financial information is buried in the notes to the financial
statements.

is demonstrated by the use of supplementary information presenting the effects of changing

prices.

requires that the financial statements be consistent and comparable.

Ans.
is demonstrated by the use of supplementary information presenting the effects of changing
prices.

The accounting principle of expense recognition is best demonstrated by

not recognizing any expense unless some revenue is realized.

associating effort (expense) with accomplishment (revenue).
recognizing prepaid rent received as revenue.
establishing an Appropriation for Contingencies account.
Ans.
associating effort (expense) with accomplishment (revenue).
Not adjusting the amounts reported in the financial statements for inflation is an example of
which basic principle of accounting?

Economic entity.
Going concern.
Historical cost.
Full disclosure.
Ans.
Historical cost.

What is the general approach as to when product costs are recognized as expenses?

In the period when the expenses are paid.

In the period when the expenses are incurred.
In the period when the vendor invoice is received.
In the period when the related revenue is recognized.
Ans.
In the period when the related revenue is recognized.

Issuance of common stock for cash affects which basic element of financial statements?

Revenues.
Equity.
Liability.
Asset.
Ans.
Equity.

Recognition of expense related to amortization of an intangible asset illustrates which principle

of accounting?
Expense recognition.
Full disclosure.
Revenue recognition.
Historical cost.
Ans.
Expense recognition.

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

management decides it is appropriate to do so.

the product is available for sale to the ultimate consumer.

the entire amount receivable has been collected from the customer and there remains no further
warranty liability.

none of these
Ans.
none of these

Which of the following is not a required component of financial statements prepared in

accordance with generally accepted accounting principles?

President's letter to shareholders

Statement of financial position.
Income statement.
Notes to financial statements.
Ans.
President's letter to shareholders

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

Fair values are more relevant.

Historical costs are based on an exchange transaction.
Historical costs are reliable.
Fair values are subjective.
Ans.
Fair values are more relevant.

Revenue is generally recognized when a sale occurs. This statement describes the

consistency characteristic.
matching principle.
revenue recognition principle
relevance characteristic.
Ans.
revenue recognition principle

The financial capital concepts requires that net assets shall be stated at

Current cost
Historical cost
Historical cost adjusted for changes in purchasing power
Current cost adjusted for changes in purchasing power
Ans.
Historical cost
Which of the following statements is incorrect?

The principal difference between the two concepts of capital maintenance is the treatment of the effects
of changes in the prices of assets and liabilities of the entity.

In general terms, an entity has maintained its capital if it has as much capital at the end of the period as
it had at the beginning of the period.

Any amount over and above that required to maintain the capital at the beginning of the period is profit.

And upward change in the value of its assets is profit.

Ans.
And upward change in the value of its assets is profit.

Which of the following statements is incorrect?

Under a financial concept of capital, such as invested money or invested purchasing power, capital is
synonymous with the net assets or equity of the entity.

Under a physical concept of capital, such as operating capability, capital is regarded as the productive
capacity of the entity based on, for example, units of output per day.

The selection of the appropriate concept of capital by an entity should be based on the needs of
the management of its financial statements.

Thus, a financial concept of capital should be adopted if the users of financial statements are primarily
concerned with the maintenance of nominal invested capital or the purchasing power of invested
capital.
Ans.
The selection of the appropriate concept of capital by an entity should be based on the needs of
the management of its financial statements.

Which of the following statements regarding the concept of capital maintenance is incorrect?

The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to
maintain.

It provides the linkage between the concepts of capital and the concepts of profit because it provides the
point of reference by which profit is measured.

it is a prerequisite for distinguishing between an entity’s return on capital and its return of capital.

Only outflows of assets in excess of amounts needed to maintain capital may be regarded as
profit and therefore as a return on capital.
Ans.
Only outflows of assets in excess of amounts needed to maintain capital may be regarded as
profit and therefore as a return on capital.
The following statements are correct with regard to the concept of financial capital maintenance, except:

Under the concept of financial capital maintenance where capital is defined in terms of nominal
monetary units, profit represents the increase in nominal money capital over the period.

Increases in the prices of assets held over the period, conventionally referred to as holding gains, are,
conceptually, profits.

Holding gains may not be recognised as such, however, until the assets are recognized in an
exchange transaction.

When the concept of financial capital maintenance is defined in terms of constant purchasing power
units, profit represents the increase in invested purchasing power over the period. Thus, only that part of
the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as
profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of
equity.
Ans.
Holding gains may not be recognised as such, however, until the assets are recognized in an
exchange transaction.

The physical capital maintenance concept required the adoptions of which measurements basis?

Historical cost
Current cost
Realizable value
Present value
Ans.
Current cost

Under the financial capital concepts, a profit is earned only if

The monetary amount of the net assets at the end of the period exceeds the monetary amounts of
net asset of the beginning of the period

The monetary amount of net asset at the beginning of the period exceeds the monetary amount of
net asset at the end of the period

The monetary amount of net asset at the beginning of the period exceeds the monetary amount of
net asset at the end of the period , after excluding any distributions to and contributions from
owners

The monetary amount of net asset at the end of the period exceeds the monetary amount of net
asset at the beginning of the period , after excluding any distributions to and contributions from
owners
Ans.
The monetary amount of net asset at the end of the period exceeds the monetary amount of net
asset at the beginning of the period , after excluding any distributions to and contributions from
owners

Which of the following statements is incorrect?

If, however, the main concern of users is with the operating capability of the entity, a physical concept of
capital should be used. The concept chosen indicates the goal to be attained in determining profit, even
though there may be some measurement difficulties in making the concept operational.

The concepts of capital maintenance include the financial capital maintenance and unit capital
maintenance.

Under the financial capital maintenance concept a profit is earned only if the financial (or money)
amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets
at the beginning of the period, after excluding any distributions to, and contributions from, owners
during the period. Financial capital maintenance can be measured in either nominal monetary units or
units of constant purchasing power.

Under the physical capital maintenance concept a profit is earned only if the physical productive capacity
(or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the
end of the period exceeds the physical productive capacity at the beginning of the period, after excluding
any distributions to, and contributions from, owners during the period.
Ans.
The concepts of capital maintenance include the financial capital maintenance and unit capital
maintenance.

Which of the following statements is incorrect?

Profit is the residual amount that remains after expenses (including capital maintenance adjustments,
where appropriate) have been deducted from income.

The physical capital maintenance concept requires the adoption of the current cost basis of
measurement.

The financial capital maintenance concept does not require the use of a particular basis of
measurement.

Selection of the basis under this concept is independent on the type of financial capital that the
entity is seeking to maintain.
Ans.
Selection of the basis under this concept is independent on the type of financial capital that the
entity is seeking to maintain.
Under the physical capital concepts, a profit is earned only if

The physical productive capacity of the entity of the end of the period exceeds the physical
productive capacity at the beginning of the period

The physical productive capacity of the entity at the beginning of the period exceeds the physical
productive capacity at the end of the period

The physical productive capacity of the entity at the end of the period exceeds the physical
productive capacity at the beginning of the period after excluding any distributions to and
contributions from owners

The physical productive capacity of the entity at the beginning of the period exceeds the physical
productive capacity at the end of the period , after excluding any distributions to and
contributions from owners
Ans.
The physical productive capacity of the entity at the end of the period exceeds the physical
productive capacity at the beginning of the period after excluding any distributions to and
contributions from owners

The Allowance for Doubtful Accounts, which appears as a deduction from Accounts
Receivable on a statement of financial position and which is based on an estimate of bad
debts, is an application of the

consistency characteristic.
expense recognition principle
materiality constraint.
revenue recognition principle
Ans.
expense recognition principle