Ch4

Question 1

The business and its owner(s) are two separate existence entity

Any private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business

Answer 1

Separate Entity

Question 2

Assets should be shown on the balance sheet at the cost of purchase instead of current value

Answer 2

Historical Cost

Question 3

The business is assumed to continue to exist for an indefinite period of time.

This is necessary for accounting measurements to be meaningful.

For example, measuring assets at historical cost is appropriate only when the business is a going concern.

Answer 3

Going Concern Assumption

Question 4

Some costs are initially recognized as assets and charged as expenses only when the related revenue is recognized.

Answer 4

Matching (or Association of cause and effect)

Question 5

Economic events are recorded in the period in which they occur rather than at the point in time when they affect cash.

Income is recorded in the period when it is earned than when it is collected, while expense is recognized in the period when it is incurred rather than when it is paid.

Answer 5

Accrual Basis of Accounting

Question 6

The accountant observes some degree of caution when exercising judgments needed in making accounting estimates under conditions of uncertainty.

If the accountant needs to choose between a potentially unfavorable outcome versus a potentially favorable outcome, the accountant chooses the unfavorable

Answer 6

Prudence (or Conservatism)

Question 7

The periodicity assumption states that an organization can report its financial results within certain designated periods of time. This typically means that an entity consistently reports its results and cash flows on a monthly, quarterly, or annual basis. These time periods are kept the same over time, for the sake of comparability.

Answer 7

Periodicity

Question 8

All transactions of the business are recorded in terms of money

It provides a common unit of measurement

Answer 8

Stable Monetary Unit

Question 9

Immaterial amounts may be aggregated with the amounts of a similar nature or function and need not be presented separately

Materiality depends on the size and nature of the item

Answer 9

Materiality

Question 10

The cost of processing and communicating information should not exceed the benefits to be derived from it.

Answer 10

Cost-Benefit

Question 11

Financial statements should be prepared to reflect a true and fair view of the financial position and performance of the enterprise

All material and relevant information must be disclosed in the financial statements

Answer 11

Adequate Disclosure