9A FAR Handout 9A1 And 9A2

Question 0

Economic Entity Assumption

Answer 0

Economic activity can be identified with a particular unit of
Accountability

However, you can define entity at higher level (parent)
or lower level (subsidiary)

Question 1

4 basic assumptions

Answer 1

1 economic entity assumption
2 going concern assumption
3 monetary unit assumption
4 periodicity assumption

Question 2

Going concern assumption

Answer 2

Business enterprise life is long

Going concern assumption does not apply if liquidation of
Business appears imminent

Question 3

In the going concern assumption, the fair value of an asset is irrelevant if…

2) What is this another reason for?

Answer 3

We need the asset on business operations

2) this is reason to use historical cost instead of fair value

Question 4

Monetary unit assumption

Answer 4

Money (the U.S. dollar) is common denominator for economic
Activity

Provides appropriate basis for accounting measurement and
analysis

Question 5

Periodicity assumption

Answer 5

Economic activities of enterprise can be divided into artificial time
Periods

We report financial information periodically to apprise users of
Performance and economic status

Question 6

4 basic principles of accounting

Answer 6

1 Historical Cost Principle
2 Revenue Recognition Principle
3 Matching Principle
4 Full Disclosure Principle

Question 7

Historical Cost Principle

2) why?

Answer 7

GAAP requires that most assets and liabilities be accounted for
And reported on basis of acquisition price

2) Because it’s the most reliable valuation

Question 8

Exceptions to historical cost principle being the best valuation in certain situations ?

2 examples

Answer 8

1 impairments

2 lower-cost-or-market

Question 9

Revenue recognition principle

Answer 9

Revenue is generally recognized when:

1 realized or realizable
And
2 earned

Question 10

Revenues are realizable when…

Answer 10

Assets received are readily convertible into cash or claims to
Cash

Question 11

Revenue recognition principle:

Revenues are considered earned when the entity has…

Answer 11

Substantially accomplished what it must do to be entitled to

The benefits represented by revenues

Question 12

Revenue Recognition Principle:

Recognition at time of sale provides…

Answer 12

A reasonable test

Question 13

Revenue Recognition Principle:

Exceptions to recognition at time of sale 4

Answer 13

1 during production (% completion)
2 receipt of cash (installment sales, cost recovery)
3 multiple deliverable revenue arrangements
4 milestone method for R&D

Question 14

Matching Principle

Answer 14

Expenses are matched to revenues whenever reasonable or

Practicable

Question 15

Full Disclosure Principle

Answer 15

Accountants use their judgement in deciding what gets reported
on financial statements

If something doesn’t appear in financial statements, it may appear
In footnotes or supplementary info

Question 16

Full disclosure principle:

The footnotes generally…

Answer 16

Amplify or explain the items in the main body of the statements

Question 17

Full disclosure principle:

Supplementary info (compared to footnotes)

Answer 17

Contains other info that may be highly relevant, but less reliable

Question 18

Full disclosure principle:

Segment reporting is a good example of…

Answer 18

Footnote disclosure

Question 19

3 Constraints

Answer 19

1 Cost benefit relationship

2 materiality

3 conservatism

Question 20

Cost benefit relationship

Answer 20

Information is expensive

The costs of providing the info must not outweigh the benefits
That can be derived from using it

Question 21

Materiality

Answer 21

Item is material if it’s inclusion or omission would influence or
Change judgement of reasonable person

Question 22

Conservatism

Answer 22

When in doubt, choose solution that will least likely overstate
Assets and income

Question 23

What are the 4 main processes of the Accounting Cycle?

Answer 23

1 Transaction JEs
2 Adjusting JEs
3 Financial Statements
4 Closing JEs

Question 24

Accounting Cycle: Transaction JEs (steps 1-3)

Answer 24

1 prepare transaction JEs and record them in journal

2 Post transaction JEs to general ledger

3 prepare unadjusted trial balance

Question 25

How many steps are in the accounting cycle?

Answer 25

10

Question 26

Accounting Cycle:

Adjusting JEs pertains to what numbered steps?

Answer 26

Steps 4-6

Question 27

Accounting Cycle:

Step 4

Answer 27

Prepare adjusting JEs, record them in the journal

Question 28

Accounting Cycle:

Step 4: accrual type adjusting JEs, what are the 2 entries needed?

Answer 28

1 adjusting JE first

2 cash JE second

Ex. For A/R, payables, other receivables

Question 29

Accounting Cycle:

Step 4: deferral type adjusting JEs, what are the 2 entries needed?

Answer 29

1 cash JE first

2 adjusting JE second

Ex. For depreciation, prepaid expenses, unearned revenue

Question 30

Adjusting entries do not…

Answer 30

Debit or credit cash

Question 31

Accounting Cycle:

Step 5 for adjusting journal entries

Answer 31

Post adjusting journal entries in general ledger

Question 32

Accounting Cycle:

Step 6 (adjusting journal entries)

Answer 32

Prepare adjusted trial balance

Question 33

Accounting Cycle:

Step 7

Answer 33

Prepare financial statements and footnotes under GAAP

Question 34

Accounting Cycle:

Steps 8-10 closing JEs

Answer 34

8 prepare closing JEs, record them in journal

9 post closing JEs to general ledger

10 prepare post closing trial balance

Question 35

What is optional to prepare at the end of the accounting cycle?

Answer 35

Prepare reversing JEs, record them in journal and post them to
General ledger