1-6 Accounting Principles

Question 1

What are the four accounting principles that apply when recording and reporting financial information?

Answer 1

Measurement Principle
Revenue Recognition Principle
Expense Recognition Principle
Full Disclosure Principle

Question 2

Measurement Principle

Answer 2

Mixed-attribute measurement model (historical cost, fair value, fair value hierarchy)

Question 3

Historical Cost

Answer 3

Original Exchange Price
(Verifiable)
May be subject to depreciation, depletion, or amortization

Question 4

Fair Value

Answer 4

Price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
(Subjective)
The company must disclose the level of reliability of the estimate

Question 5

Fair Value Hierarchy

Answer 5

The current trend is for accounting standards to allow more valuation of items on the balance sheet at fair value than historical cost

Question 6

Revenue Recognition Principle

Answer 6

Begins with a contract between the seller and the customer where the seller makes a contractual promise to transfer goods or services to a customer in exchange for consideration (revenue is recognized when the performance obligation is met)

Question 7

Performance Obligation

Answer 7

The promise to transfer goods or services to the customer (5 step process)

Question 8

Expense Recognition Principle

Answer 8

1. Expense is directly related to the revenue (expense recorded when revenue is recognized)
2. Expense is incurred to obtain benefits exhausted within the period (expense is recorded as incurred)
3. Expense is incurred to obtain benefits over several periods (expense is allocated systematically and rationally)

Question 9

Full Disclosure Principle

Answer 9

Provide external users with the accounting information needed to make an informed investment and credit decision

Question 10

Notes to financial statements

Answer 10

Adding depth to amounts in the financial statements

Question 11

Supplementary schedules

Answer 11

Not required, but presented for the purpose of additional analysis

Question 12

Modifying comments on the face of financial statements

Answer 12

Clarify or refer to other parts of the financial statements

Question 13

What is the purpose of the Fair Value Hierarchy?

Answer 13

To increase consistency and comparability in fair value measurements and related disclosures

Question 14

Fair Value Hierarchy:

Level 1 Input

Answer 14

The quoted price of an identical asset, such as quoted price of shares of common stock traded on a stock exchange (least subjective, most verifiable)

Question 15

Fair Value Hierarchy:

Level 2 Input

Answer 15

Includes (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in inactive markets, (3) inputs other than quoted prices that are observable for the asset or liability, and (4) market-corroborated inputs

Question 16

Fair Value Hierarchy:

Level 3 Input

Answer 16

(Unobservable input) is developed by the company using the best information available, which can include the company’s own data, such as forecasted cash flows

Question 17

Fair Value Option

Answer 17

This allows companies to elect to present financial assets and liabilities at fair value on the face of the financial statements where fair value presentation is not required

Question 18

What are the four fundamental recognition criteria?

Answer 18

Definitions
Measurability
Relevance
Reliability

Question 19

Definitions

Answer 19

The item meets the definition of an element of financial statements

Question 20

Measurability

Answer 20

The item has a relevant attribute measurable with sufficient reliability

Question 21

Relevance

Answer 21

Information about the item is capable of making a difference in user decisions

Question 22

Reliability

Answer 22

Information about the item is representationally faithful, verifiable, and neutral

Question 23

When does the process of revenue recognition get more complex?

Answer 23

When multiple performance obligations exist

Question 24

When does the process of revenue recognition get more complex?

Answer 24

When multiple performance obligations exist and there is not a distinctive transaction price

Question 25

What is the Five Step Revenue Recognition Process?

Answer 25

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation

Question 26

When is management required in the reporting of the financial statements?

Answer 26

• Determination of initial recognition of equipment
• Which method to allocate the cost of equipment
• Select the depreciation method
• Test the equipment for impairment
• Determination of the items to disclose policies