Module 1 - Chapter 6

Question 1

Bias

Answer 1

Exists when accounting measurements are consistently too high or too low.

Question 2

Business entity concept

Answer 2

The specific unit for which accounting information is gathered.
Business entities have a separate existence from owners, creditors, employees, customers, other
interested parties, and other businesses.

Question 3

Comparability

Answer 3

A qualitative characteristic of accounting information; when information is comparable, it reveals differences and similarities that are real and are not the result of differing accounting treatments.

Question 4

Completed-contract method

Answer 4

A method of recognizing revenue on long-term projects under
which no revenue is recognized until the period in which the project is completed; similar to recognizing revenue upon the completion of a sale.

Question 5

Completeness

Answer 5

A qualitative characteristic of accounting information; requires disclosure of all significant information in a way that aids understanding and does not mislead; sometimes called
the full disclosure principle.

Question 6

Conservatism

Answer 6

Being cautious or prudent and making sure that net assets and net income are not overstated.

Question 7

Consistency

Answer 7

Requires a company to use the same accounting principles and reporting practices through time.

Question 8

Cost-benefit consideration

Answer 8

Determining whether benefits of including information in
financial statements exceed costs.

Question 9

Cost principle

Answer 9

See Exchange-price principle.

Transfers of resources are recorded at prices agreed on
by the parties at the time of the exchange.

Question 10

Earning principle

Answer 10

The requirement that revenue be substantially earned before it is
recognized (recorded).

Question 11

Exchange-price (or cost) principle

Answer 11

Transfers of resources are recorded at prices agreed on
by the parties at the time of the exchange.

Question 12

Feedback value

Answer 12

A qualitative characteristic that information has when it reveals the relative success of users in predicting outcomes.

Question 13

Financial reporting objectives

Answer 13

The broad overriding goals sought by accountants engaging
in financial reporting.

Question 14

Full disclosure principle

Answer 14

Information important enough to influence the decisions of an
informed user of the financial statements should be disclosed.

Question 15

Gain and loss recognition principle

Answer 15

Gains may be recorded only when realized, but losses should be recorded when they first become evident.

Question 16

Going-concern (continuity) assumption

Answer 16

The assumption that an entity will continue to operate indefinitely unless strong evidence exists that the entity will terminate.

Question 17

Historical cost

Answer 17

The amount paid, or the fair market value of a liability incurred or other resources surrendered, to acquire an asset and place it in a condition and position for its intended use.

Question 18

Installment basis

Answer 18

A revenue recognition procedure in which the percentage of total gross margin recognized in a period on an installment sale is equal to the percentage of total cash from the sale that is received in that period.

Question 19

Liquidation

Answer 19

Terminating a business by ceasing business operations and selling off its assets.

Question 20

Matching principle

Answer 20

Expenses should be recognized as they are incurred to produce revenues.

Question 21

Materiality

Answer 21

A modifying convention that allows the accountant to deal with immaterial (unimportant) items in an expedient but theoretically incorrect manner; also a qualitative characteristic specifying that financial accounting report only information significant enough to
influence decisions or evaluations.

Question 22

Modifying conventions

Answer 22

Customs emerging from accounting practice that alter the results
obtained from a strict application of accounting principles; conservatism is an example.

Question 23

Money measurement

Answer 23

Use of a monetary unit of measurement, such as the dollar, instead of physical or other units of measurement—feet, inches, grams, and so on.

Question 24

Neutrality

Answer 24

A qualitative characteristic that requires accounting information to be free of measurement method bias.

Question 25

Percentage-of-completion method

Answer 25

A method of recognizing revenue based on the estimated stage of completion of a long-term project. The stage of completion is measured by comparing actual costs incurred in a period with total estimated costs to be incurred in all periods.

Question 26

Period costs

Answer 26

Costs that cannot be traced to specific products and are expensed in the period incurred.

Question 27

Periodicity (time periods) assumption

Answer 27

An assumption of the accountant that an entity’s life can be divided into time periods for reporting its economic activities.

Question 28

Predictive value

Answer 28

A qualitative characteristic that information has when it improves users’ abilities to predict outcomes of events.

Question 29

Product costs

Answer 29

Costs incurred in the acquisition or manufacture of goods. Product costs are accounted for as if they were attached to the goods, with the result that they are charged to expense when the goods are sold.

Question 30

Qualitative characteristics

Answer 30

Characteristics that accounting information should possess to be
useful in decision making.

Question 31

Realization principle

Answer 31

A principle that directs that revenue is recognized only after the seller acquires the right to receive payment from the buyer.

Question 32

Relevance

Answer 32

A qualitative characteristic requiring that information be pertinent to or affect a decision.

Question 33

Reliability

Answer 33

A qualitative characteristic requiring that information faithfully depict for users what it purports to represent.

Question 34

Representational faithfulness

Answer 34

A qualitative characteristic requiring that accounting statements on economic activity correspond to the actual underlying activity.

Question 35

Revenue recognition principle

Answer 35

The principle that revenues should be earned and realized
before they are recognized (recorded).

Question 36

Stable dollar assumption

Answer 36

An assumption that the dollar is a reasonably stable unit of
measurement.

Question 37

Timeliness

Answer 37

A qualitative characteristic requiring that accounting information be provided at a time when it may be considered before making a decision.

Question 38

Verifiability

Answer 38

A qualitative characteristic of accounting information; information is verifiable when it can be substantially duplicated by independent measurers using the same measurement
methods.