Chapter 2: Accounting Concepts and Principles

Question 1

True or False
Accounting concepts and principles, in the basic sense, are guidelines that accountants follow when recording and communicating accounting information

Answer 1

True

Question 2

True or False
The application of the separate entity concept is necessary so that the financial position and performance of a business can be measured reliably

Answer 2

True

Question 3

True or False

The opposite of going concern is coming concern

Answer 3

False

Question 4

True or False

According to the accrual basis of accounting, a business should record a sale only when the sale price is collected

Answer 4

False

Question 5

True or False

Financial statements are prepared at least annually because of the matching concept

Answer 5

False

Question 6

True or False
A reporting or accounting period that starts on July 1 of the current year and ends on June 30 of the following year is called a calendar year period

Answer 6

False

Question 7

True or False
The government ordered the shutting of Entity A’s factories because of noncompliance with regulations. Entity A is a going concern

Answer 7

False

Question 8

True or False

The accounting standards used in the Philippines are the same as the standards used internationally

Answer 8

True

Question 9

True or False

The Conceptual Framework is a standard

Answer 9

False

Question 10

True or False
According to the materiality concept, an item that is considered material by one business is considered material by all other businesses.

Answer 10

False

Question 11

True or False
Entity B is going out of business because its business owner lost all the money in the casino. Entity B is a going concern

Answer 11

False

Question 12

True or False

The purpose of the separate entity concept is to report a true and fair picture of business financial affairs

Answer 12

True

Question 13

True or False
The accountant of Entity A, a big corporation, rounded-off amounts in the financial statements into nearest millions. This is an acceptable method of reporting because of the concept of materiality

Answer 13

True

Question 14

True or False

Consistency means like transactions must be accounted for in like manner

Answer 14

True

Question 15

True or False
The cost of processing and communicating financial information should exceed the expected benefits to be derived from its use

Answer 15

False

Question 16

True or False
Information is considered material if its omission or misstatement could influence the decisions of financial statements users

Answer 16

True

Question 17

True or False
When reporting information in its financial statements, Entity A strives for a balance between detail and conciseness - having in mind that neither too much detail nor too little information helps users make good decisions. This is an application of the accrual basis of accounting

Answer 17

False

Question 18

True or False
After becoming an accountant, Mr. A worked as an external auditor in one of the biggest auditing firms in our country. Two years later, an international auditing firm offered Mr. A an external audit job abroad, which Mr. A accepted. Mr. A will be applying different accounting standards in his new job compared to those that he has applied in his previous job.

Answer 18

False

Question 19

True or False
The process of establishing international accounting standards (on which the accounting standards used in the Philippines are based) is a democratic process in that a majority of practicing accountants around the world must agree with a standard before it becomes implemented.

Answer 19

True

Question 20

True or False
Information that does not affect the decision-making of users is considered irrelevant and immaterial. Accordingly, that information is not reported in the financial statements.

Answer 20

True

Question 21

Preparing financial statements at least annually is an application pf which of the following accounting concepts?

a. historical cost
b. accrual basis
c. stable monetary unit
d. time period

Answer 21

d. time period

Question 22

Which of the following statements is incorrect regarding accounting concepts?

a. under the accrual basis of accounting, income is recognized when earned, not when cash is collected, and expenses are recognized when incurred, not when cash is disbursed
b. under the going concern concept, the business entity is assumed to carry on its operations for an indefinite period of time
c. under the separate entity concept, the business is treated separately from its owners
d. under the time period concept, the life of the business is divided into series of reporting periods
e. under the cost-benefit concept, the cost of processing and communicating information should exceed the benefit expected to be derived

Answer 22

e. under the cost-benefit concept, the cost of processing and communicating information should exceed the benefit expected to be derived

Question 23

Entity A acquires a stapler. Instead of recognizing the cost of the stapler as an asset to be subsequently depreciated, Entity A immediately charges it as an expense. This is an application of which one of the following concepts?

a. prudence
b. materiality
c. cost-benefit
d. b and c

Answer 23

d. b and c

Question 24

What concept justifies the use of the accrual basis and historical cost concepts?

a. going concern assumption
b. materiality constraint
c. consistency characteristics
d. monetary unit assumption

Answer 24

a. going concern assumption

Question 25

Entity A prepares annual financial statements every December 31. Entity A uses what type of reporting or accounting period

a. calendar year
b. fiscal year
c. interim year
d. christmas season

Answer 25

a. calendar year

Question 26

The assumption that a business entity will not be sold or liquidate in the near future is known as the

a. economic entity assumption
b. monetary unit assumption
c. conservatism assumption
d. going concern

Answer 26

d. going concern

Question 27

Valuing assets at their liquidation values rather than their cost is inconsistent with the

a. periodicity assumption
b. matching principle
c. materiality constraint
d. historical cost principle

Answer 27

d. historical cost principle

Question 28

Under this concept, amounts in financial statements are stated in terms of a common unit of measure, and inflation is generally ignored

a. prudence
b. materiality
c. stable monetary unit
d. ignoring concept

Answer 28

c. stable monetary unit

Question 29

When recording business transactions in the books of accounts, the accountant of Entity A rounds-off amounts into nearest pesos. For example, the accountant records a 1,983.45 amount as 1,983. Which of the following statements is correct?

a. the recording method of Entity A’s accountant is acceptable under the materiality concept
b. the recording method of Entity A’s accountant is acceptable under the historical concept
c. the recording method of Entity A’s accountant is not appropriate
d. the accountant should be fired

Answer 29

a. the recording method of Entity A’s accountant is acceptable under the materiality concept

Question 30

The term “standards” is used in the practice of accounting to refer to which of the following?

a. basic accounting concepts
b. conceptual framework
c. PFRSs
d. CPA

Answer 30

c. PFRSs

Question 31

Mr. A owns a cafe. When Mr. A drinks coffee from his cafe, he pays for it even though he is the owner. Mr. A is most likely to be applying which of the following accounting concepts?

a. prudence
b. accrual basis
c. separate entity
d. coffee-drinking concept

Answer 31

c. separate entity

Question 32

Ms. B acquires inventories worth 100,000. However because Ms. B acquired in bulk, the supplier gave Ms. B a discount of 10,000. Under the historical cost concept, Ms. B should initially record the inventories purchased at

a. 110,000
b. 100,000
c. 90,000
d. 10,000

Answer 32

c. 90,000

Question 33

Entity A acquires merchandise inventory. Entity A initially records the acquisition cost of the inventory as an asset rather than an outright expense. When the inventory is subsequently sold, Entity A recognizes the cost of the inventory sold as an expense, in the same period the sale revenue is recognized. This an application of which of the following accounting concepts?

a. stable monetary unit
b. materiality
c. matching
d. proprietary

Answer 33

c. matching

Question 34

On Day 1, a customer buys goods form Entity A and promises to pay the sale price on Day 30. Entity a recognized sales revenue on Day 1 rather than on Day 30. This is an application of which of the following accounting concepts?

a. prudence
b. accrual basis
c. consistency
d. materiality

Answer 34

b. accrual basis

Question 35

Entity A is owned by Mr. X and Ms. Y. Which of the following transactions does not violate the separate entity concept and therefore is appropriately recorded in the accounting records of Entity A?

a. Mr. X purchases groceries for his home consumption
b. Mr. X gives Ms. Y chocolate and flowers on Valentine’s Day
c. Ms. Y provides capital to Entity A
d. Ms. Y provides capital to Entity B, another entity.

Answer 35

c. Ms. Y provides capital to Entity A

Question 36

You went to Aling Nena’s Sari-Sari Store to buy “patis”. You don’t have cash so you promised to pay Aling Nena net week. Upon giving you the “patis”, Aling Nena records the sale in a notebook. She even reminded you that you have not yet paid for the 1 bottle of soy sauce and 3,000 cans of sardines that you purchased last month. By recording your unpaid purchases, Aling Nena is applying which of the following accounting concepts?

a. prudence
b. accrual bass
c. separate entity
d. listahan concept

Answer 36

b. accrual bass

Question 37

You went abroad and forgot to pay Aling Nena. Aling Nena contacted you 10,000 times on your Facebook reminding you of your debt but you repeatedly ignored her; you even unfriended her. Feeling hopeless and with a teary-eyed and stuffy nose, Aling Nena reluctantly crossed out dues in her notebook. Aling Nena is applying which of the following accounting concepts?

a. prudence
b. historical cost
c. separate entity
d. no conscience concept

Answer 37

a. prudence

Question 38

Entity A, an established business, purchases two staplers costing 300 each. Entity A chargess the cost of one of the staplers as an expense but recognizes the cost of the other stapler as an asset. which of the following concepts is violated?
a. materiality
b. historical cost
c. consistency
d, stapler concept

Answer 38

c. consistency

Question 39

Entity A, a big corporation. purchase a calculator for 500. Entity A immediately charges the cost as an expense. This is acceptable under which of the following concepts?

a. prudence
b. cost-benefit
c. materiality
d. b and c

Answer 39

d. b and c

Question 40

Accounting information is reported in the financial statements only if they are deemed useful to users. the usefulness of information as assessed in terms of its

a. qualitative characteristics
b. cuteness
c. prettiness
d. all of these

Answer 40

a. qualitative characteristics