Theory Base of Accounting Test

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Theory Base of Accounting Test - 33

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Weekly Quiz Competition

Question 1
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Which of the following is/are example(s) of application of conservatism concept?

A
Not providing for discount of creditors

B
Charging small value capital items as revenue expenses

C
Amortization of intangible assets like goodwill which has indefinite life

D
All the three

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 2
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Revenue is generally recognized when earning process is virtually complete and significant risks and rewards have been exchanged. This is an application of _________ principle.

A
Consistency

B
Matching

C
Realization

D
Conservatism

Solution

This concept defines that revenue is recognized only when there is a transfer or exchange of goods or assets. Sale is complete only when the title of goods is passed on to the buyer.
Question 3
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What is the underlying principle that supports the immediate recognition of a loss?

A
Matching

B
Conservatism

C
Consistency

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 4
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Going concern concept is not followed ________.

A
By Banks

B
By Co-operative societies

C
In Joint Venture Accounting

D
Depreciation Accounting

Solution

Joint venture is created by two firms for completing a particular project, or for a definite period of time. Hence, going concern concept is not followed in such case.
Question 5
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Depreciating fixed assets over its useful life is an example of which of the following concept/convention ________________.

A
Money measurement

B
Going concern

C
Cost concept

D
Matching 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. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be low fire-sale prices.
Question 6
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When inventory is valued at the lower of cost or market,price, we are under the influence of________.

A
Conservatism concept

B
Consistency concept

C
Materiality concept

D
Cost concept

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 of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.
On the basis of this concept, inventories should be valued at the lower of, cost and net realisable value.
Question 7
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The lower of cost and market basis of valuing inventories is an example of________.

A
Comparability

B
The cost principle

C
Conservatism

D
Consistency

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 of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.
On the basis of this concept, inventories should be valued at the lower of, cost and net realisable value.
Question 8
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Net realizable value means:--

A
Estimated selling price

B
Actual selling price

C
Actual or estimated selling price in the ordinary course of business less cost of completion and estimated cost necessary to be incurred to make the sale.

D
Actual selling price less sales commission.

Solution

Net realizable value means actual or estimated selling price in the ordinary course of business less cost of completion and estimated cost necessary to be incurred to make the sale.
Net realizable value (NRV) is a method of valuation of inventory.
Question 9
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At what price goods pending approval or return as on the last day of accounting year are valued?

A
Cost price

B
Selling price

C
Average price

D
Latest price

Solution

The goods pending approval or return are valued at cost at the end of the accounting year. In case of Goods sent on approval goods are treated as sales only when they are actually approved.
When they are sent, its not actual sale its mere transfer of possession. Hence, if they aren't approved they will be added to closing stock at cost.
Question 10
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Inventory valuation method is guided by which of the following accounting concept ______________.

A
Business entity

B
Conservatism

C
Materiality

D
Double entry

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 of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.
On the basis of this concept, inventories should be valued at the lower of, cost and net realisable value.

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Re-Attempt Weekly Quiz Competition

Theory Base of Accounting Test - 33

Result

Theory Base of Accounting Test - 33

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SHARING IS CARING

Question 1

Not providing for discount of creditors

Charging small value capital items as revenue expenses

Amortization of intangible assets like goodwill which has indefinite life

All the three

Solution

Question 2

Consistency

Matching

Realization

Conservatism

Solution

Question 3

Matching

Conservatism

Consistency

Materiality

Solution

Question 4

By Banks

By Co-operative societies

In Joint Venture Accounting

Depreciation Accounting

Solution

Question 5

Money measurement

Going concern

Cost concept

Matching concept

Solution

Question 6

Conservatism concept

Consistency concept

Materiality concept

Cost concept

Solution

Question 7

Comparability

The cost principle

Conservatism

Consistency

Solution

Question 8

Estimated selling price

Actual selling price

Actual or estimated selling price in the ordinary course of business less cost of completion and estimated cost necessary to be incurred to make the sale.

Actual selling price less sales commission.

Solution

Question 9

Cost price

Selling price

Average price

Latest price

Solution

Question 10

Business entity

Conservatism

Materiality

Double entry

Solution

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