Accounting Equation Effects Test 38

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Accounting Equation Effects Test 38

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Question 1
1 / -0

The cost of three small files (of Rs. 4 each) was charged to expenses when purchased even though they had a useful life of several years. This was done according to the concept of __________.

A
Cost principle

B
Conservatism principle

C
Full disclosure

D
Materiality

Solution

Materiality concepts defines that all business transaction must be recorded in the business by verifying the value of the transaction in comparison to the operations carried out in the business.
Business entity has to distinguish between the material and immaterial transactions as per the materiality concept. The transactions which have small values comparatively will not be considered material and are recorded as revenue items.
Question 2
1 / -0

Cost of asset should always be equal to the cost of the liabilities. This concept is _________________.

A
Matching Concept

B
Dual Aspect Concept

C
Consistency

D
Money Measurement Concept

Solution

Accounting is based on the dual system, hence for every debit, there will be a credit. In such a situation cost of assets will always be equal to the cost of liabilities.
Question 3
1 / -0

Concept of Realisation implies _____________.

A
When cash is received from debtors

B
When goods are delivered to customer

C
When order is received

D
None of the Above

Solution

Realization concept assumes that revenue is recognized only when there is a sale or transfer of the goods. Sales is complete only when title of the goods is passed on to the buyer.
Question 4
1 / -0

Land was reported at its selling price which is substantially higher than its cost. The increase in value was included in the income statement, which accounting principle is violated?

A
Cost principle

B
Going concern concept

C
Entity concept

D
Conservatism

Solution

The concept of conservatism provides guidance for recording transactions so that conscious approach can be adopted in ascertaining income so that profits of the enterprise are not overstated. Recording of the increase in the value in the income statement will overstate the profits and hence, the concept is violated.
Question 5
1 / -0

The convention of conservation is applicable in ____________.

A
providing for discount on creditors

B
making provision for bad debts and doubtful debts

C
making provision for depreciation

D
making provision for contingencies

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

If no information is available, the General Rule for valuation of stock for balance sheet is _______________.

A
Replacement Cost

B
Realizable Value

C
Historical Cost

D
Standard Cost

Solution

Historical cost is a measure of value used in accounting in which the price of of stock on the balance sheet is based on its nominal or original cost when acquired by the company.
Question 7
1 / -0

According to the money measurement concept, the following will be recorded in the books of accounts of the business ____________________.

A
Health of the managing director of the company

B
Quality of company goods

C
Value of plant and machinery

D
Health of labour in factory

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.
Hence, the value of plant and machinery, being expressable in terms of money, will be recorded, and the others cannot be recorded.
Question 8
1 / -0

Under which concept it is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of operation?

A
Revenue realization concept

B
Matching cost concept

C
Going concern concept

D
None of these

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 very low fire-sale prices.
Question 9
1 / -0

The convention of conservatism when applied to the balance sheet results in _________________.

A
Understating the asset

B
Understating the liabilities

C
Overstatement of capital

D
None of these

Solution

The conservatism concept defines that the business should record all anticipated or future losses, but ignore the anticipated revenue or future revenue until it is realized.
Valuation of inventory on the basis of cost or realizable value is one of the examples of the conservatism policy. Not recording the appreciation in the value of land is another example. In both the cases, assets are understated.
Question 10
1 / -0

Showing purchased office equipments in financial statements is the application of which accounting concept?

A
Historical cost convention

B
Materiality

C
Prudence

D
Matching concept

Solution

According to the materiality convention, the business must report all the transactions which are of material nature and ignore the insignificant items. The firm has to make a distinction between the material and immaterial matters.
Purchase of office equipment is a material in nature and to be shown in the financial statement.

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Accounting Equation Effects Test 38

Result

Accounting Equation Effects Test 38

Score

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Rank

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SHARING IS CARING

Question 1

Cost principle

Conservatism principle

Full disclosure

Materiality

Solution

Question 2

Matching Concept

Dual Aspect Concept

Consistency

Money Measurement Concept

Solution

Question 3

When cash is received from debtors

When goods are delivered to customer

When order is received

None of the Above

Solution

Question 4

Cost principle

Going concern concept

Entity concept

Conservatism

Solution

Question 5

providing for discount on creditors

making provision for bad debts and doubtful debts

making provision for depreciation

making provision for contingencies

Solution

Question 6

Replacement Cost

Realizable Value

Historical Cost

Standard Cost

Solution

Question 7

Health of the managing director of the company

Quality of company goods

Value of plant and machinery

Health of labour in factory

Solution

Question 8

Revenue realization concept

Matching cost concept

Going concern concept

None of these

Solution

Question 9

Understating the asset

Understating the liabilities

Overstatement of capital

None of these

Solution

Question 10

Historical cost convention

Materiality

Prudence

Matching concept

Solution

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