REVISION : ACCOUNTING PRINCIPLES and USERS OF FINANCIAL

REPORTING

1. According to accrual concept of accounting, financial or business

transaction is recorded:
(a)  when cash is received or paid
(b)  when transaction occurs
(c)  when profit is computed
(d)  when balance sheet is prepared

2. The John Marketing Company provides advertising services to an

investment company in year A but receives advertising fee in year B.
The John Marketing Company recognizes this revenue in year A. This
action of John Marketing Company is justified by:
(a)  business entity concept
(b)  revenue recognition principle
(c)  economic entity concept
(d)  going concern concept

3. A company is a going concern if:

(a)  its balance sheet shows a strong financial position
(b)  its income statement for the current year shows huge profit
(c)  there is no evidence that it will or will have to cease operations
within foreseeable future.
(d)  it is a public limited company

4. Which accounting concept or principle states that the transactions of a

business must be recorded separately from those of its owners or other
businesses?
(a)  materiality concept of accounting
(b)  time period concept of accounting
(c)  matching principle of accounting
(d)  business or economic entity concept of accounting

5. The business or economic entity concept is applicable to:

(a)  sole proprietorship form of business
(b)  partnership form of business
(c)  corporate form of business
(d)  all of the above
6. Which of the following states that a transaction is not recorded in the
books of accounts unless it is measurable in terms of money?
(a)  Matching principle
(b)  Revenue recognition principle
(c)  Monetary unit assumption
(d)  Time period assumption

7. Which one of the following states that the life of a business can be
divided into equal time periods?
(a)  Time period assumption
(b)  Revenue recognition principle
(c)  Economic entity concept
(d)  Accrual concept

8. The revenue is not recognized until it is earned and realized or at least

realizable. To which accounting principle/concept this statement
belongs?
(a)  Separate entity concept
(b)  Revenue recognition principle
(c)  Going concern concept
(d)  Conservatism concept

9. Sony, a multinational electronics corporation, rounds dollar amounts in

its financial statements to the nearest $1,000. Which accounting
principle/concept justifies this action?
(a)  Realization concept
(b)  Economic entity concept
(c)  Materiality concept
(d)  historical concept

10. The auditor noticed that the financial statements of Meta Company
were missing some footnotes important for users for decision making.
This action of the management is a violation of:
(a)  materiality concept
(b)  going concern concept
(c)  economic entity concept
(d)  full disclosure concept

11. A fixed asset costing $30,000 is depreciated over its estimated useful
life of 15 years. This action is related to:
 (a)  matching principle
(b)  monetary unit assumption
(c)  full disclosure concept
(d)  None of the above

12. In certain situations, companies might recognize losses but not gains.
This action belongs to:
(a)  revenue recognition principle
(b)  monetary unit assumption
(c)  conservatism principle
(d)  matching principle

13. The Modern Enterprises reported all assets in the balance sheet at
current market value. This action is a violation of:

(a)  materiality concept

(b)  conservatism concept
(c)  full disclosure concept
(d)  cost principle or historical cost concept

14. Which accounting principle/concept allows accountants to ignore other

accounting principle/concept if the amount in question is immaterial?
a.  business entity concept
b.  conservatism concept
c.  materiality concept
d.  full disclosure concept

15. The Widget Factory sells 2,000 widgets on credit. They have shipped
the widgets but have not collected payment. Can the Widget Factory
recognize the revenue?

a. Yes, the revenue is realizable

b. No, the revenue was not received
c. No, revenue must be in cash
d. Yes, the revenue is realized

16. Expenses incurred to generate revenue must be recorded in the same

time period as the revenue it generates. Which principle is this?
 a. Matching principle
b. Monetary unit principle
c. Revenue principle
d. Concept principle

17. Which of the following is taken into account While determining the
materiality of an amount?
a.  Size of the amount as well as organization
b.  Cumulative effect of all immaterial amounts
c.  Nature of the amount in question
d.  All of the above

18. Accounting normally deals with only those items that are capable of
being expressed in monetary terms. Money has the advantage that it is
a useful common denominator with which to express the wide variety
of resources held by a business.

a) The accounting principle explained above is money measurement

b) What are the resources held by the business that could not be
quantified in the monetary forms? Ability of managers, the quality of
workforce, the reputation of business products, location of the
business, relationship with customers.

19. Gives TWO (2) accounting treatments that follows the matching
concept. Depreciation and aloowance for doubtful debt

20. Dual concept asserts that each transaction has two aspects. What are
the two aspects of each of the following transactions?

a. Credit purchases of inventories $4000 ( increase in purchases and

increase in accounts payables $4000 )
b. Interest payment by cash $500 ( increase in interest expense and
decrease in cash by $500 )
c. Owner brought his motor van into the business with value of
$70,000 ( Increase in motor van and increase in capital by $70000)

21. Select the principle for each item i – vii.

i. if uncertainty in a potential financial estimate, a company should err on the side of caution
and report the most conservative amount E

ii. also known as the historical cost principle, states that everything the company owns or
controls (assets) must be recorded at their value at the date of acquisition A

iii. (also referred to as the matching principle) matches expenses with associated revenues
in the period in which the revenues were generated G
 iv. business must report any business activities that could affect what is reported on the
financial statements B

v. system of using a monetary unit by which to value the transaction, such as the US dollar D

vi. period of time in which you performed the service or gave the customer the product is the
period in which revenue is recognized F

vii. business may only report activities on financial statements that are specifically related to
company operations, not those activities that affect the owner personally C

A. cost principle

B. full disclosure principle

C. separate entity concept

D. monetary measurement concept

E. conservatism

F. revenue recognition principle

G. expense recognition principle

22. USERS OF FINANCIALSTATEMENTS

a) Match the user with the type of information needs.

Owner/Investors Need information about the profitability and

solvency of the business in order to determine
the risk and interest rate of loans
Lenders Need information for planning, policy making
and evaluation
Customers Need information about various businesses for
statistics and formulation of economic plan
Public Need information about the liquidity of
business in order to access the ability to repay
the amounts owed to them
Employees Need information about the trends and recent
development
Suppliers and trade creditors Need information about the profitability,
dividend yield and price earnings ratio in
order to assess the quality and the price of
shares of a company 
Government Interested in the stability of the business to
provide employment, fringe benefits and
promotion opportunities

Management Interested in long-tem stability of the business

 and continuance of the supply of particular
products

b) Based on the above financial users, specified the user for KYSB.
E.g. Owner/Invenstor – Founder Tan Sri Halim Saad and the
Shareholder of KYSB.

23. From each case below, state the date when the revenue can be
recorded by the business.

i) Bob’s Billiards, Inc. sells a pool table to bar on December

31,2019 for $5,000. The pool table was not paid for until January 15th
and it was not delivered to the bar until January 31.

According to the revenue recognition principle, Bob’s should not record

the sale in December. Even though the sale was realizable in that the
sale for $5,000 was initiated, it was not earned until January when the
pool table was delivered.

ii) Johnson and Waldorf, LLC is an accounting firm that provides

tax and consulting work. During 20 December 2019, JW provides
$2,000 of consulting work to one of its clients. The client does not pay
for the consulting time until the following January 2020.

According to the revenue recognition principle, JW should record the

revenue in December because the revenue was realized and earned in
December even though it was not received until January.

iii) Pat’s Retail, Inc. sells clothing from its retail outlets. A customer
purchases a shirt on June 15th 2019 and pays for it on a credit card.
Pat’s processes the credit card but does not actually receive the cash
until July.

The credit card purchase is treated the same as cash because it is a

claim to cash, so the revenue should be recorded in June when it was
realized and earned.
S23
a.

b.
c.