Theory Base of Accounting Test

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Theory Base of Accounting Test - 32

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Question 1
1 / -0

Provision for doubtful debts is made because of ________.

A
Materiality

B
Prudence

C
Going concern

D
Accrual

Solution

The concept of conservatism (also called prudence) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe.
The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated. If the profits ascertained are more than the actual, it may lead to reduction in the capital of the enterprise.
The concept of conservatism requires that profits should not be recorded until realised but all losses, even those which may have a remote possibility, are to be provided for in the books of accounts.
Question 2
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The 'Revenue Recognition' principle refers to ________.

A
The process of matching of expenses and revenue

B
The process of identifying those transactions that result in an inflow of cash from customers

C
The earning process which gives rise to revenue realization

D
The process of determination of the income of enterprise.

Solution

Revenue Recognition principle is based on accounting period concept. It assumes that all transactions relating to income and expenses must be recorded in the books of account based on the accounting period followed by the business. Hence if any amount which is not paid but the service is already taken must be recorded as an adjustment.
Question 3
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Changes in accounting policies can be made only _________.

A
To comply with accounting standards

B
To ensure better presentation of the financial statement

C
To comply with law

D
All of the above

Solution

Consistency is the basic assumption and it is assumed that various policies or methods adopted by the firm while preparing the financial statement are consistent from one period to another.
However, changes in the policies can be made if this is required to comply with law, to comply with the accounting standards or to ensure better presentation. In case of changes, a disclosure has to be given with the financial statement.
Question 4
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An Accounting information is said to be "______" if its inclusion or exclusion effect the decision of the users of the accounting information.

A
Reliable

B
Verifiable

C
Objective

D
Material

Solution

Materiality concepts says that firm should give importance to those details which are material in nature and ignore the insignificant details.
In accounting, materiality refers to the relative size of an amount. Determining materiality requires professional judgement.
For instance, a $20,000 amount will likely be immaterial for a large corporation with a net income of $900,000.
Question 5
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Provision for bad debts is the application of _________ concept/convention.

A
Conservatism

B
Dual concept

C
Going concern

D
Materiality

Solution

The convention of conservatism mean that the convention of caution, or the policy of playing safe. This principle requires that in the situation of uncertainty and doubt, the business transactions should be recorded in such a manner that the profits and assets are not overstated and losses and liabilities are not understated. The following are some examples:

1. Closing stock is valued at cost price or Net realisable value, whichever is lower.

2. Joint life insurance policy is shown only at surrender value as against the amount paid.

3. Provision for doubtful debt is created in anticipation of bad debts etc.

4. Provision for pending law suit against the firm, which may either be decided in its favour.
Question 6
1 / -0

Matching principle requires __________.

A
expenses and revenue should be incurred simultaneously

B
expenses incurred in an accounting period should be matched with the revenue recognized in that period

C
expenses should not exceed revenue

D
expenses should be commensurate with income

Solution

Concept is based on the periodicity concept. This implies that incomes and expenses must be recorded in books of account based on the accounting period followed by the firm. There should be a match between the expenses and revenue in reference to the period of accounting.
Question 7
1 / -0

The determination of expenses for an accounting period is based on principle of __________.

A
Cost

B
Objectivity

C
Matching

D
Materiality

Solution

Concept is based on the periodicity concept. This implies that incomes and expenses must be recorded in books of account based on the accounting period followed by the firm.
Question 8
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Going concern concept assumes that____________________.

A
The business entity would continue to operate independent of the life of the proprietor/owner

B
Duration of the business is limited to the life span of the owner/proprietor

C
Life of the business is defined by the contractual agreement

D
Business is for short term

Solution

The basic accounting concepts are referred to as the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities developed by the accounting profession.
The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated in the foreseeable future. This is an important assumption of accounting as it provides the very basis for showing the value of assets in the balance sheet.
Question 9
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Under the business entity concept ________.

A
Business is treated as a unit or entity different from its owner, manager and partner

B
No distinction is made between business and its owner

C
All the transactions are recorded in the books of account from the point of view of businessmen/owner

D
None of the above

Solution

The concept of business entity assumes that the business has a distinct and separate entity from its owners, managers and partners. It means that, for the purposes of accounting, the business and its owners are to be treated a two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. The accounting records are made in the book of accounts from the point of view of the business unit, and not that of the owner.
Question 10
1 / -0

Allocating the cost of an asset over its useful life is an application of __________.

A
Going concern concept

B
Matching concept

C
Accounting period concept

D
Cost concept

Solution

The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated in the foreseeable future. This is an important assumption of accounting as it provides the very basis for showing the value of assets in the balance sheet.

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Theory Base of Accounting Test - 32

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Theory Base of Accounting Test - 32

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Question 1

Materiality

Prudence

Going concern

Accrual

Solution

Question 2

The process of matching of expenses and revenue

The process of identifying those transactions that result in an inflow of cash from customers

The earning process which gives rise to revenue realization

The process of determination of the income of enterprise.

Solution

Question 3

To comply with accounting standards

To ensure better presentation of the financial statement

To comply with law

All of the above

Solution

Question 4

Reliable

Verifiable

Objective

Material

Solution

Question 5

Conservatism

Dual concept

Going concern

Materiality

Solution

Question 6

expenses and revenue should be incurred simultaneously

expenses incurred in an accounting period should be matched with the revenue recognized in that period

expenses should not exceed revenue

expenses should be commensurate with income

Solution

Question 7

Cost

Objectivity

Matching

Materiality

Solution

Question 8

The business entity would continue to operate independent of the life of the proprietor/owner

Duration of the business is limited to the life span of the owner/proprietor

Life of the business is defined by the contractual agreement

Business is for short term

Solution

Question 9

Business is treated as a unit or entity different from its owner, manager and partner

No distinction is made between business and its owner

All the transactions are recorded in the books of account from the point of view of businessmen/owner

None of the above

Solution

Question 10

Going concern concept

Matching concept

Accounting period concept

Cost concept

Solution

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