Nama: Resnavati NIM = 12301190 J05q Chapter 5 Postulates, Principles, and Concepts TRUE/FALSE 1 10. ML. 12. 13. 14. 15. The APB was the first to successfully derive an underlying framework of postulates and principles. (F)) ARS 1 and ARS 4 represent a milestone in the attempt to provide a unified theoretical underpinning for financial accounting rules by the APB. (T) One reason ARS | and ARS 3 fell short of the goal of obtaining a framework for APB accounting opinions is that the accounting profession refused to abandon historical cost. CT) Postulates are generally defined as basic assumptions that cannot be verified. (T) A principle contains elements observable by empirical techniques. ( F ) The key group in Moonitz’s set of postulates consists of postulates stemming from accounting itself. ( F) The key imperative postulate in ARS 1 appears to be stability of the monetary unit. ~ (7) There are eight broad principles in ARS 3. (T) Accounting concepts have largely evolved from practical operating necessities, including income tax laws. (7) Principles are basic assumptions concerning the business environment. () Output-oriented principles are broad rules that guide the accounting function. (=) The going-concem postulate states that unless there is evidence to the contrary, it is assumed that the firm will continue indefinitely. (7) The time period idea is somewhat artificial because it creates definite segments out of what is continuing process. ([}) ‘When the business is viewed in the context of accounting as well as in its legal form, it is clear that the entity is identical to its owner. (—) “Matching” refers to the fact that all expenses can be directly identified with er specific revenues or specific time periods. ¢ ¢)16. Conservatism, materiality, and disclosure are examples of constraining principles. (T) 17. The lower-of-cost or market valuation of inventories is an example of the disclosure principle. (F) 18. Conservatism has been called the dominant principle of accounting. CT) 19, Disclosure will become more important in the future because of market efficiency. (7) 20. Consistency refers to the degree of reliability users should find in financial statements when evaluating financial condition or the results of operations on an interfirm basis or predicting income or cash flows. (+) 21. Proprietary theory assumes that the owners and the firm are virtually identical. (T) 22. The balance sheet equation for entity theory is “Total Assets ~ Total Liabilities = Owners’ Equities. C1) 23. The proprietary theory approach largely coincides with the components of income ‘measurement as it is presently construed in historical cost-based systems. CT) 24. Under entity theory, creditors are considered equity holders. ({) 25. Preferred stockholders are residual equity holders. (£) MULTIPLE CHOICE L Which of the following is not a reason why ARS | and ARS 3 fell short of the goal of obtaining a framework for APB accounting opinions? x The authors refused to abandon historical cost. ‘The postulates were not complete and therefore could not exclude all value systems other than the one prescribed in the principles ©. Atleast one of the principles was not derived from any of the postulates. d. The question of whether valuations of various assets were additive became an issue. 2. Which of the following is a true statement? a. A principle contains elements observable by empirical techniques. b. The APB’s Special Committee on Research Program defined both postulates and broad principles. c. A principle is an analytical statement whose truth or falsity is self- contained by its intemal logic. Xx Postulates are generally defined as basic assumptions that cannot beverified, 3. Which of the following is not a true statement? a. A principle is a statement of a true and generalized nature containing referents to the real world. b. If principle could be empirically tested and proven true, it would be capable of becoming a law. DX. The truth of a law or principle means that it should not be replaced by a newer system. Principles are general statements that influence the way we view phenomena and the way we think about problems. 4, Which of the following is a true statement regarding Moonitz’s approach to ARS 1” He ly rejected an inductive type of approach. He used symbolic terminology and formal methods. He rejected a deductive approach rooted in reasoning alone. He was unconcemed about the experiential and empirical aspects of accounting. Which of the following is the key group in Moonitz’s set of postulates? a. The Environmental group RC The Imperatives c. The Economic group d, _Postulates stemming from accounting itself Which of the following is not a criticism that has been aimed at ARS 1? a. Some postulates appear to stem from one of the other postulate categories. b. _Self-evident postulates may not be sufficiently substantive to lead to a unique and meaningful set of accounting principles. The postulates are necessary but not sufficient to lead to a viable outcome. Postulates should have played a less passive role. 7. Which of the following is not true regarding the imperatives of ARS 1? a, They are normative in nature, They have developed within the context of accounting practice. They are objectives that should be striven for. xz The key imperative postulate appears to be consistency. 8. Which of the following is not a possible outcome of postulate C-4, stability of the monetary unit? a. If purchasing power of the monetary unit is not stable, some form of inflation accounting is appropriate. x If purchasing power of the monetary unit is not stable, historical cost is9, 10. ue 12. 13. sfill justified. If purchasing power of the monetary unit is-stable, a system of current values is justified. If purchasing power of the monetary unit is stable, retention of historical cost is justified. Which of the following statements is true regarding ARS 3? x b. c. d. One of its principles states that revenue is earned by the entire process of operations of the firm rather than at the point of sale. Allof its principles were derived form the postulates of ARS 1 ‘The asset valuation measures prescribed are additive. One of the main criticisms aimed at ARS 3 relates to its advocating the exit-value approach to asset valuation. Which of the following is not a true statement regarding ARS 1 and ARS 3? a. The authors were commissioned to find postulates and principles that would lead to a measure of true income. The postulates were not complete and could not exclude all value systems other than the one prescribed in the principles. The authors were able to identify a single concept of income that was superior to others. Nothing is said about the users of accounting information and what their needs and abilities might be. Which of the following is an accurate overall label for the terms postulates and principles? Constraints Concepts Axioms Conventions Which of the following are defined in the text as the result of the process of identifying, classifying, and interpreting various phenomena or precepts? b. c. d. Concepts Principles Postulates Axioms Which of the following are defined in the text as basic assumptions concerning the business environment? a. b. Concepts Principles Postulates Axioms14, 15. 16. 47. 18. 19, Which of the following are defined in the text as general approaches utilized in the recognition and measurement of accounting events? a. Concepts _ Principles c. Postulates 4. Axioms Which of the following are defined in the text as broad rules that guide the accounting function? xX Inpu-oriented principles ‘>. Output-oriented principles ©. Basic principles 4. Axioms Which of the following are the basic postulates underlying historical costing? a. Going Concem, Time Period, Market Prices, Monetary Unit b. Objectivity, Time Period, Accounting Entity, Monetary Uni Sc Going Concem, Time Period, Accounting Entity, Monetary Unit d.~ Going Concem, Time Period, Financial Statements, Monetary Unit Which of the following postulates states that unless there is evidence to the contrary, itis assumed that the firm will continue indefinitely? a. Entities b. Time period Consistency x Going concern Which of the following postulates is violated when and equities are reported under ordinary circumstances? “ Entities Time period Consistency Ma Going concern Which of the following is not true regarding the time period postulate? a. __ It results in an attificial segmentation of a continuing process. b. __Ithas led to accrual accounting. a It allows different accounting methods to be followed in interim periods. 20. It allows interim reports to include estimates of annual amounts, When we view the business entity in the context of accounting as well as in its legal form, it is clear that: ‘The entity is separate from its owners. ‘The entity is identical to its owners. c. The pooling method should be used for business combinations. d. Entities should be considered as one unit as a result of one controlling theother(s). 21. Who are residual equity holders? a. Preferred stockholders b. Managers c. Bondholders o> Common stockholders 22. Under which of the following theories would the accounting equation be Total Assets = Total Equities (including liabilities)? a. Residual equity theory b. Proprietary theory Entity theory d. Commander theory 23. Under which of the following theories would the accounting equation be Total Assets — Total Liabilities = Owners’ Equities? a. Residual equity theory Ee Proprietary theory c. Entity theory d. Commander theory 24, Which of the following theories assumes that the owners and the firm are virtually identical? a,, Residual equity theory OK Proprietary theory c. Entity theory 4. Commander theory 25. Which of the following theories assumes that the firm and its owners are separate beings? a. Residual equity theory b. Proprietary theory Entity theory 4. Commander theory 26. Which type of accounting principle is concerned with the comparability of financial statements of different firms? a, Input-oriented principles Output-oriented principles ¢. Constraining principles 4. Bothaandc 27. — Which type of accounting principle is concerned with general approaches or rules for preparing financial statements and their content? a. Input-oriented principlesb. _Output-oriented principles Constraining principles ©. OX Both a and c 28. Recognition and Matching are examples of: Input-oriented principles ‘>. Output-oriented principles ¢. Constraining principles 4. bothaande 29. Which of the following concepts applies to users of financial statements? x Comparability Consistency c. Uniformity 4. Bothb and 30. Which of the following concepts focuses on preparers of financial information? a. Comparability b. Consistency ©. Uniformity BK Both bande ESSAY QUESTIONS 1. Distinguish between a postulate and a principle as they are used in ARS 1 and ARS 3. Identify the major categories of each that are included in these two studies. 2, What were the reasons for the failure of ARS 1 and ARS 3? 3. What is the going-concern postulate of ARS 1, and how has it been criticized? 4. Distinguish between input-oriented principles and output-oriented principles and list at least three principles in each category. 5. Discuss the revenue recognition principle and how the terms “critical event,” “eared,” “realized,” and “realizable” apply to revenue recognition. 6. Discuss the matching principle and how it applies to recognizing expenses. Why is the matching principle currently under attack? 7. Distinguish between proprietary theory and entity theory. Include descriptions of the balance sheet equation used by each and how income is computed.8. Discuss the residual equity theory and its assumptions. 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