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Accounting Equation Effects Test 24

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Accounting Equation Effects Test 24
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  • Question 1
    1 / -0
    In stock variation, application of the principle 'at cost price or market price, whichever is lower' will result in the valuation of stock sometimes at cost price and at other times are market price. This is an application of the principle of _____________________.
    Solution
    Accounting is based on certain concepts and conventions. One of the convention 'conservatism " defines that firm should make a provision for all future losses while making the financial statement. On this concept only, stocks are valued at cost or market price whichever is lower.
  • Question 2
    1 / -0
    Closing stock is valued at ______________.
    Solution

    As per AS-2, Valuation of inventories prescribed the accounting treatment for inventories and sets the guidance to determine the value at which the inventories are carried in the financial statement. 

    Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs. 

    The cost of inventories should comprise all costs of purchase, Costs of conversion and other costs incurred in bringing  the inventories to their present location and condition. 

    Hence, as per AS-2, "Inventories should be valued at the lower of cost and net realisable value."

  • Question 3
    1 / -0
    Recording of capital contributed by the owner as liability ensures the adherence of principle of ______________.
    Solution
    The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as 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. 
    Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit). 
    Similarly, when the owner withdraws any money from the business for his personal expenses(drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business. 
    Hence, 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 4
    1 / -0
    According to money measurement concept, the following will be recorded in the books of account_________________.
    Solution
    The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts. 
    All such transactions or happenings which can not be expressed in monetary terms, for example, the appointment of a manager, do not find a place in the accounting records of a firm. 
    Another important aspect of the concept of money measurement is that the records of the transactions are to be kept not in the physical units but in the monetary unit.
    Hence, in the above case, only value of building will be recorded in the books of accounts.
  • Question 5
    1 / -0
    According to going concern, a business is viewed having ______________.
    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
    1 / -0
    Recognition of revenues does not occur until __________________.
    Solution
    The accounting principle regarding revenue recognition states that revenues are recognized when they are earned (transfer of value between buyer and seller has occurred) and realized or realizable (collection is reasonably assured).
  • Question 7
    1 / -0
    Mr. A purchased a machinery costing Rs. $$1,00,000$$ on $$1^{st}$$ October, $$2005$$. Transportation and installation charges were incurred amounting Rs. $$10,000$$ and Rs. $$4,000$$ respectively. Dismantling charges of the old machine in place of which new machine was purchased amounted Rs. $$10,000$$. Market value of the machine was estimated at Rs. $$1,20,000$$ on $$31^{st}$$ March $$2006$$. While finalising the annual accounts, A values the machinery at Rs. $$1,20,000$$ in his books.
    Which of the following concepts are violated by A?
    Solution
    As per Cost Concept, an asset is always recorded at its historical cost.
    Here, Historical cost includes 
    Cost of Machinery = 100,000
    Transportation Charges = 10000
    Installation Charges = 4000
    Dismantling Charges = 10,000
    Total Cost = 124,000

    However, here it is recorded at the market value which implies that the Cost concept is being violated
  • Question 8
    1 / -0
    It is given that the cost of stock is Rs. $$100$$. However, its market price is Rs. $$98$$ (buying) and Rs. $$140$$ (selling). If the market price is interpreted as the selling price, then the stock should be valued at _______________.
    Solution
    As per Conservatism Concept, Stock is valued at cost or market price whichever is lower.
    Here, Cost is 100 and market price is 140.
    Therefore, the stock should be valued at 100 i.e., cost

  • Question 9
    1 / -0
    Valuing the stock in trade at market price or cost price, whichever is less, is an example of the convention of ___________.
    Solution

    The convention of conservatism is 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 10
    1 / -0
    The determination of expenses for an accounting period is based on the principle of _______________.
    Solution
    The matching Principle helps in determining the net profit for any particular accounting period.
    Under Matching Principle, Expenses are matched with their respective revenues of the same period to ascertain profits or losses made by the business.
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