ACCT 1A&B: Fundamentals of Accounting

BCSV

Fundamentals of Accounting Part I

Recognition Principles

I. Multiple Choice
Choose the letter of the best answer.

1. The elements directly related to the measurement of financial performance are

A. Assets, liabilities, equity, income and expenses
B. Assets, liabilities, equity
C. Income and expenses
D. Liquidity

2. The elements directly related to the measurement of financial position are

A. Assets, liabilities, equity, income and expenses
B. Assets, liabilities, equity
C. Income and expenses
D. Liquidity

3. These are resources controlled by the entity as a result of past transactions or events and from
which future economic benefits are expected to flow to the entity.
A. Assets
B. Liabilities
C. Equity
D. Income

4. These are present obligations of an entity arising from past transactions or events the settlement
of which is expected to result in an outflow from the entity of resources embodying economic
benefits.
A. Assets
B. Liabilities
C. Equity
D. Income

5. It is the residual interest in the assets of the entity after deducting all of its liabilities.
A. Assets
B. Liabilities
C. Equity
D. Income

6. It is a decrease in economic benefit during the accounting period related to a decrease in asset or
an increase in liability that results in decrease in equity other than distribution to owners.
A. Asset
B. Liability
C. Income
D. Expense

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7. It is an increase in economic benefit during the accounting period related to an increase in asset
or a decrease in liability that results in increase in equity other than contribution from owners.
A. Asset
B. Liability
C. Income
D. Expense

8. Which of the following statements is incorrect concerning assets?

A. Physical form is not essential to the existence of an asset.
B. In determining existence of an asset, the right of ownership is essential.
C. An asset results from past event.
D. There is a close association between incurring an expenditure and generating asset but the
two do not necessarily coincide.

9. This arises in the course of ordinary regular activities of the entity and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties and rent.
A. Income
B. Revenue
C. Profit
D. Gain

10. Which of the following statements in relation to income is true?

A. Income encompasses both revenue and gain.
B. Revenue encompasses both income and gain.
C. Gain encompasses both income and revenue.
D. Income encompasses revenue only.

11. It is the process of incorporating in the statement of financial position or statement of

comprehensive income an item that meets the definition of an element of the financial
statements.
A. Recognition
B. Measurement
C. Realization
D. Allocation

12. An item that meets the definition of an element shall be recognized when
I. It is probable that future economic benefits associated with the item will flow to
or from the entity
II. The item has a cost or value that can be measured with reliability.

A. I only
B. II only
C. Either I or II
D. Both I and II

13. An asset is recognized when

A. It is probable that future economic benefit will flow to the entity.
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B. The cost or value of the asset can be measured reliably.

C. The entity obtains control of the rights associated with the asset.
D. It is probable that future economic benefit will flow to the entity and the cost or value of the
asset can be measured reliably

14. An income is recognized when

A. It is probable that future economic benefit will flow to the entity and the economic benefit
can be measured reliably.
B. It is possible that future economic benefit will to the entity and the economic benefit can be
measured reliably.
C. The entity obtains control of the future economic benefit.
D. The future economic benefit can be measured reliably.

15. It is the process that involves the simultaneous or combined recognition of revenue and expenses
that result directly from the same transactions and other events.
A. Matching cost with revenue
B. Matching of revenue with cost
C. Systematic and rational allocation
D. Immediate recognition

16. When economic benefits are expected to arise over several accounting periods and the
association with income can only be broadly or indirectly determined, expenses are recognized on
the basis of
A. Strict matching
B. Systematic and rational allocation
C. Immediate recognition
D. Realization

17. Which of the following measurement attributes is not currently used in practice?
A. Present value
B. Net realizable value
C. Current replacement cost
D. Inflation-adjusted cost

18. It is the amount of cash or cash equivalent that would have to be paid if the same or an
equivalent asset was acquired currently.
A. Historical cost
B. Current cost
C. Realizable value
D. Present value

19. It is the amount of cash that could currently be obtained by selling the asset in an orderly
disposal.
A. Realizable value
B. Fair value
C. Market value
D. Present value
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20. Which of the following statements is not consistent with GAAP in relation to asset valuation?
A. Assets are originally recorded at cost.
B. Accountants assume that assets such as supplies, buildings and equipment will be used in the
business operations rather than sold.
C. Subtracting total liabilities from total assets results in the current market value of an entity.
D. Accountants base asset valuation upon objective and verifiable evidence rather than on
personal opinion.

21. Which of the following best describes the conditions that must be present for the recognition of
revenue?
a. The revenue must be earned, measureable, and collected.
b. The revenue must be earned, measurable, and collectible.
c. The revenue must be earned and collectible.
d. The revenue must be measurable and collectible.

22. Depending on the nature of the entity, revenue may be recognized based on different acceptable
criteria. Which of the following is not an accepted basis for recognition of revenue?
A. Passage of time
B. Performance of service
C. Completion of percentage of a project
D. Upon signing of contract

23. Revenue from an artistic performance is recognized once

A. The audience register for the event online.
B. The tickets for the concert are sold.
C. Cash has been received from the ticket sales.
D. The event takes place.

24. A wholesale bakery would normally recognize revenue when

A. The product is available for sale to a customer
B. Cash is received from the customer
C. Goods are delivered to the customer
D. Management chooses to do so

25. The term “revenue recognition” conventionally refers to

A. The process of identifying transactions to be recorded as revenue in an accounting period.
B. The process of measuring and relating revenue and expenses of an entity for an accounting
period.
C. The earning process which gives rise to revenue realization.
D. The process of identifying those transactions that result in an inflow of assets from customers.

26. Which of the following means the process of converting noncash resources and rights into cash
or claims to cash?
A. Allocation
B. Collection
C. Recognition
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D. Realization

27. The term “recognized” is synonymous with the term

A. recorded
B. realized
C. matched
D. allocated

28. According to the Conceptual Framework, an entity’s revenue may result from
A. A decrease in an asset from primary operations
B. An increase in an asset from incidental transactions.
C. An increase in a liability from incidental transactions.
D. A decrease in a liability from primary operations.

29. Which accounting principle is being observed when an accountant charges to expense a cost that
contributed to revenue during a period?
A. Revenue realization
B. Matching
C. Monetary unit
D. Conservatism

30. The primary distinction between revenue and gain is

A. The materiality of the amount
B. The likelihood that the transaction will recur in the future
C. The nature of the activity that gives rise to the transaction
D. The cost versus the benefit of the alternative method of disclosing the transaction

II. True or False

Write A if the statement is true otherwise, Write B.

1. Admission fees for a musical concert are recognized when received regardless of when the event
takes place.
2. Gains on assets unsold are identified in a precise sense by the term “unrecognized”.
3. Summarization is a theoretical basis for the allocation of expense.
4. An outflow of assets from an entity based on an activity that represents the entity’s major
operations is called expense.
5. Under the Conceptual Framework, the term “income” is synonymous to “comprehensive income”.
6. Revenues are inflows or other enhancements of assets or settlements of liabilities from major
operations.
7. Gains are inflows or other enhancements of assets or settlements of liabilities from major
operations.
8. Recognition means the process of reporting an asset, liability, income or expense on the face of
the financial statements of an entity.
9. The elements directly related to the measurement of financial performance are income and
expenses.
10. The elements of financial statements refer to the quantitative information shown in the statement
of financial position and statement of comprehensive income.
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11. The cost principle does not require that assets be recorded initially at acquisition cost.
12. Financial statements shall be based on historical cost rather than market value.
13. A liability is recognized in the statement of financial position when it is probable that an outflow
of resources embodying economic benefits will be required for the settlement of a present
obligation and the amount of the obligation can be measured precisely.
14. Gain represents an item that meets the definition of income and does not arise in the course of
ordinary activities.
15. Expenses are recognized in the income statement when it is probable that a decrease in future
economic benefits related to a decrease in an asset or an increase in liability has occurred and the
decrease in economic benefits can be measured reliably.

“You can never cross the ocean until you have the courage to lose sight of
the shore.”
~ Christopher Columbus

SUGGESTED KEY
Multiple choice True or false
1. C 1. B
2. B 2. B
3. A 3. A
4. B 4. A
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5. C 5. B
6. D 6. A
7. C 7. B
8. B 8. A
9. B 9. A
10. A 10. A
11. A 11. B
12. D 12. A
13. D 13. B
14. A 14. A
15. A 15. A
16. B
17. D
18. B
19. A
20. C
21. B
22. D
23. D
24. C
25. A
26. D
27. A
28. D
29. B
30. C

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