Accounting Equation Effects Test 40

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Accounting Equation Effects Test 40

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Question 1
1 / -0

Financial information is said to be __________ if its misstatement influences the decision making of the users on the basis of that information.

A
Relevant

B
Reliable

C
Material

D
Immaterial

Solution

Financial statements items are material if they could influence the economic decisions of users. The materiality concept is the universally accepted accounting principle that all material matters are to be disclosed. Financial information is said to be material if its misstatement influences the decision making of the users on the basis of that information.
Question 2
1 / -0

An old car having a book value of Rs. 50,000 on 1st April 2013 and having a market value of Rs.10,000 as on 31st March 2014 is reported in the financial statement at Rs. 45,000 after charging depreciation of Rs. 5000. The company is following ______ method of valuation.

A
Historical cost

B
Present value

C
Realizable cost

D
Current cost

Solution

Cost concept of accounting defines that all transactions must be recorded in the books of account at cost i.e. cost incurred at the time of incurring the transaction. This cost will be the base for future and shall not be affected by the market value.
Question 3
1 / -0

Contingent liabilities should be recorded in the accounts when ________________.

A
It is probable that the future event will occur

B
The amount of the liability can be reasonably estimated

C
Both A and B

D
Either A or B

Solution

Contingent liability is an estimated liability which may arise due to a future event or incident. The contingent liability to be shown in the notes to account. It should be recorded only when it is based on a probable future event and the amount can reasonably estimated.
Question 4
1 / -0

The following details pertains to purchase of a new office equipment ________.
(i) Basic price of the machine Rs. $$1,70,000$$
(ii) Customs duty Rs. $$20,000$$
(iii) Sea freight Rs. $$20,000$$
(iv) Insurance Rs. $$5,000$$
(v) Erection charges Rs. $$5,000$$
(vi) Trade discount Rs. $$20,000$$
What is the historical cost of the office equipment.

A
Rs. $$2,00,000$$

B
Rs. $$1,75,000$$

C
Rs. $$1,50,000$$

D
Rs. $$1,90,000$$

Solution

Historical cost of any asset is the cost on which the asset is ready to put on use. In a given situation:

Basic Price of the machine: Rs.170000
Less: Trade Discount: Rs.20000
------------------
Net Purchase Price: Rs.150000
Add:
Customs Duty Rs.20000
Sea Fright Rs.20000
Insurance Rs.5000
Erection Charges Rs.5000
-------------------
Historical Cost Rs.200000.
-------------------
Question 5
1 / -0

________ represents the residual interest in the organisation's assets after deducting liabilities.

A
Cash profit

B
Liabilities

C
Net worth

D
Owner's equity

Solution

Owner's equity represents residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise this is the ownership interest. Owner's equity can be calculated using following formula: Owner's equity = Assets - liabilities.
Question 6
1 / -0

Which is an example of business entity concept?

A
Provision for doubtful debts

B
Treating cash withdrawn by the proprietor for personal use or goods taken for self-consumption as drawing

C
Valuation of stock at cost or market prices which ever is less

D
All the three

Solution

For all accounting purposes, business and business man are considered two different entities. All business transactions are recorded in business books. Any personal transaction done from business are considered as drawing which in effect decrease owners equity.
Question 7
1 / -0

In which of the following situations the principle of conservatism is applied?

A
When there are two or more acceptable methods then the one which is most conservative is applied

B
When there is possibility of loss the same is recognized and foreseen profit is ignored

C
None

D
Both (a) & (b)

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.
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.
Question 8
1 / -0

According to _______ concept entries in accounting records and data reported in the financial records should be supported by objective evidence.

A
Reliable

B
Verifiable

C
Objective evidence

D
Material

Solution

The concept of objectivity requires that accounting transaction should be recorded in an objective manner, free from the bias of accountants and others. This can be possible when each of the transaction is supported by verifiable documents or vouchers.
For example, the transaction for the purchase of materials may be supported by the cash receipt for the money paid, if the same is purchased on cash or copy of invoice and delivery challan, if the same is purchased on credit.
Question 9
1 / -0

All are false except _______.

A
Conservatism Concept demands that anticipated income should not be taken into account

B
Consistency demands that same amount of profit and loss be reported every year

C
Disclosure concept requires that all information material or immaterial should be disclosed

D
Business profit always increase cash in hand

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.
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.
Question 10
1 / -0

When advance received from a customer is not recorded as sales, accounting concept _________ is applied.

A
Revenue recognition

B
Cost

C
Consistency

D
Matching

Solution

Revenue recognition principles assumes that the revenue is recognized only when there is sale or transfer of goods. On receiving an advance is not a sale transaction, hence revenue is not recognized.

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Accounting Equation Effects Test 40

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Accounting Equation Effects Test 40

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SHARING IS CARING

Question 1

Relevant

Reliable

Material

Immaterial

Solution

Question 2

Historical cost

Present value

Realizable cost

Current cost

Solution

Question 3

It is probable that the future event will occur

The amount of the liability can be reasonably estimated

Both A and B

Either A or B

Solution

Question 4

Rs. $$2,00,000$$

Rs. $$1,75,000$$

Rs. $$1,50,000$$

Rs. $$1,90,000$$

Solution

Question 5

Cash profit

Liabilities

Net worth

Owner's equity

Solution

Question 6

Provision for doubtful debts

Treating cash withdrawn by the proprietor for personal use or goods taken for self-consumption as drawing

Valuation of stock at cost or market prices which ever is less

All the three

Solution

Question 7

When there are two or more acceptable methods then the one which is most conservative is applied

When there is possibility of loss the same is recognized and foreseen profit is ignored

None

Both (a) & (b)

Solution

Question 8

Reliable

Verifiable

Objective evidence

Material

Solution

Question 9

Conservatism Concept demands that anticipated income should not be taken into account

Consistency demands that same amount of profit and loss be reported every year

Disclosure concept requires that all information material or immaterial should be disclosed

Business profit always increase cash in hand

Solution

Question 10

Revenue recognition

Cost

Consistency

Matching

Solution

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