Ch.23 GAAP

Question 1

What are the concepts? Name the 10 of them.

Answer 1

1. Matching.
2. Accrual.
3. Realisation.
4. Consistency.
5. Historical cost.
6. Prudence.
7. Materiality.
8. Business entity.
9. Going concern.
10. Money measurement.
    MARCH PM BGM

Question 2

What is the definition of matching?

Answer 2

Matches revenue with its relevant expenses and costs in the same period.

Question 3

What are the key words of matching concept?

Answer 3

Warranty/ expense.

Question 4

What are the examples of matching concept?

Answer 4

1. Costs of goods sold.
2. Depreciation.
3. Warranty.
4. Bad debts.

Question 5

What are the shortcomings of matching concept?

Answer 5

Expenses may be charged on subjective, arbitrary basis.

Question 6

What is the definition of accrual concept?

Answer 6

1. Revenues are recorded, when goods or services are provided, delivered and accepted by customers. PDA
2. Expenses are recorded when goods or services are consumed.

Question 7

What are the key words for accrual concept?

Answer 7

1.Expenses
2. Revenue
3. Paid.

Question 8

What are the examples of accrual concept?

Answer 8

Accrued/ Prepaid expenses/ Revenue

Question 9

What are the shortcomings of accrual concept?

Answer 9

Complex to record in accrual basis.

Question 10

What is the definition of realisation concept?

Answer 10

Revenue should be recorded once recognised, when goods or services are provided, delivered or accepted by customers.

Question 11

What is the key word of realization concept?

Answer 11

Revenue

Question 12

What are the examples of realization concept?

Answer 12

Prepaid/ accrued revenue

Question 13

What are the shortcomings of realization concept?

Answer 13

Timing of revenue recognition cannot be easily determined.

Question 14

What is the definition of consistency concept?

Answer 14

1. A company must use the same accounting policy once it has been adopted.
2. A change can be made only when it can give a more true and fair view to the business.

Question 15

What are the key words of consistency concept?

Answer 15

1. Depreciation method
2. Changes in regulations.
3. True and fair.

Question 16

What are the examples of consistency concept?

Answer 16

Depreciation methods

Question 17

What are the shortcomings of consistency method?

Answer 17

Not subjective enough, as if change is made, it depends on professional judgement.

Question 18

What is the definition of historical cost concept?

Answer 18

Assets should be valued at cost of production or purchase.

Question 19

What are the key words of historical cost?

Answer 19

1. NCA
2. X year ago
3. Market price/ value.

Question 20

What are the examples of historical cost concept?

Answer 20

NCA

Question 21

What are the shortcomings of historical cost concept?

Answer 21

Historical cost may not be useful for decision making as the value may be underestimated.

Question 22

What is the definition of prudence concept?

Answer 22

Adopt policies which are least likely to overstate assets and profit.

Question 23

What are the key words of prudence concept?

Answer 23

1. Estimated
2. Uncertain.
3. Maybe happened

Question 24

What are the examples of prudence concept?

Answer 24

1. Allowance for doubtful debts.
2. LOC/ NRV.

Question 25

What are the shortcomings of prudence concept?

Answer 25

The exercise of prudence may be abused, leading understatement of assets.

Question 26

What is the definition of materiality concept?

Answer 26

Impact of an item's nature and size on company's financial operations. The principle states that if an item would not make a difference to the user's decision making, it is justifiable to write the item off as an expense when it is incurred.

Question 27

What are the keywords of materiality concept?

Answer 27

1. Stationary. 2. Significant.

Question 28

What are the examples of materiality concept?

Answer 28

1. Stationary. 2. Sample/ promotion expenses.

Question 29

What are the shortcomings of materiality concept?

Answer 29

Unclear and no uniformed definition for materiality.

Question 30

What is the definition of business entity concept?

Answer 30

Company is treated as separate entity from its owners. Only transactions affecting the company should be recorded.

Question 31

What are the key words of business entity concept?

Answer 31

Owner/ Private/ Own use/ Personal/ Owners' family

Question 32

What are the examples of business entity concept?

Answer 32

Drawings/ Capital

Question 33

What is the shortcoming of business entity concept?

Answer 33

No clear definition for separate entity.

Question 34

What is the definition of going concern concept?

Answer 34

Companies are assumed to operate for a foreseeable future. Therefore, assets should be recorded at historical cost in fiscal statement.

Question 35

What are the keywords of going concern concept?

Answer 35

1. Dissolve/ Discontinue. 2. Fiscal statement. 3. IPO 4. Market value/ price.

Question 36

What are the examples of going concern concept?

Answer 36

NCA

Question 37

What is the shortcomings of going concern concept?

Answer 37

Going concern is not defined and may subject to interpretations.

Question 38

What is the definition of money measurement concept?

Answer 38

Only transactions and events that can be expressed in monetary basis can be recorded.

Question 39

What are the key words and examples of money measurement concept?

Answer 39

1. Staff morale/ royalty/ relationship 2. Staff expert/ experience

Question 40

What is the shortcomings of money measurement concept?

Answer 40

Non-monetary items may alter decision significantly. E.g. relationship with customers