Assumption and Principles

Question 1

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

Answer 1

Economic entity

Question 2

According to the conceptual framework, the process of reporting an item in the financial statements of an entity is:

Answer 2

Recognition

Question 3

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?

Answer 3

Replacement cost

Question 4

On December 31, 20X2, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 20X2, the net realizable value of the equipment was below historical cost.
What is the appropriate measurement basis for equipment included in Brooks’ December 31, 20X2, Balance sheet?

Answer 4

Net Realizable Value.

The historical cost of the asset is no longer relevant.
The firm is no longer a going concern-the assumption that supports the historical cost principle. All that matters now is what Brooks can receive for the equipment.

Question 5

Reporting inventory at the lower of cost or market is a departure from the accounting principle of:

Answer 5

Historical cost

Question 6

Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?

Answer 6

Monetary Unit

The monetary unit assumption provides the basis for using the home-country currency as the reporting basis in the financial statements and also tends to imply that the unit of currency is stable (little or no inflation or deflation).