Deck 2

Question 1

Realization Concept

Answer 1

An asset is reported only when a product or service is sold (but receipt of cash is not necessary)

Question 2

Duality Concept

Answer 2

Sum of total assets = sum of total claims

Question 3

Historic Cost Concept

Answer 3

Assets must be valued at their original historic cost

Question 4

Matching concept

Answer 4

The matching concept states that the revenues and expenses of a transaction should be shown together (matched) in the same accounting period regardless of the actual timing of their cash settlement.

Question 5

Accruals concept

Answer 5

This states that when dealing with revenues and expenses it is important to reflect rights and obligations to make and receive cash, and not the actual cash flows themselves. Thus, for example, revenue in the income statement shows not only cash receipts from customers but also those sales on credit that have been made during the period.

Question 6

Conservatism concept

Answer 6

The conservatism concept (also known as the prudence concept) holds that accountants should always take a cautious approach when producing financial statements. For example:

That accounts recognise expected future losses immediately, subject to the test that this results in reporting a more reliable figure for profit.
That whenever there are alternative procedures or values, the accountant will choose the one that results in a lower profit, a lower asset value and a higher liability value.
For example, if a firm knows that some stock with a cost of £4,000 is only worth £3,000 due to obsolescence or damage, it should charge £1,000 to the income statement immediately rather than wait until the sale to recognise this loss. On the other hand, if a firm is involved in a legal litigation, which it is expected to succumb after the year end, an item called provision must be reported in the balance sheet among the liabilities to indicate that a liability will most likely arise in the future. However, the value of the provision will not reflect the worst case scenario, but the most likely one; because the principle of reliability prevails over that of prudence.

Question 7

Turnover

Answer 7

Sales Revenue

Question 8

Cash Transaction

Answer 8

Payment was made immediately

Question 9

Credit Transaction

Answer 9

Payment was made after sale of purchase

Question 10

Drawings

Answer 10

Withdrawal of cash or assets for personal use, usually by owner.

Question 11

The Accounting Equation

Answer 11

A = L + OE

Question 12

Current Assets (5 items)

Answer 12

Cash and Cash equivalents, Marketable securities, accounts receivable, Inventory, prepaid expenses.

Question 13

Long-Term Assets (3 items)

Answer 13

long-term investments, fixed assets, intangible assets.

Question 14

Intangible Assets

Answer 14

Could be intellectual property, goodwill, or logo/trademark (if acquired, and not created in house).