Accounting Equation Effects Test 41

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Accounting Equation Effects Test 41

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Question 1
1 / -0

Accounting policies should not be changed from one period to another period is based on the principle of __________.

A
Consistency

B
Full disclosure

C
Conservatism

D
Matching

Solution

The accounting information provided by the financial statements would be useful in drawing conclusions regarding the working of an enterprise only when it allows comparisons over a period of time as well as with the working of other enterprises.
Thus, both inter-firm and inter-period comparisons are required to be made. This can be possible only when accounting policies and practices followed by enterprises are uniform and are consistent over the period of time.
Question 2
1 / -0

Cost concept assumes __________.

A
All the business assets to be recorded at cost price

B
Cost is the basis of all subsequent accounting for the assets

C
None of the above

D
Both (a) & (b)

Solution

The cost concept requires that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.
The concept of cost is historical in nature as it is something, which has been paid on the date of acquisition and does not change after year. However, an important limitation of the historical cost basis is that it does not show true worth of the business and may lead to hidden profits.
During the period of rising prices, the market value or the cost at which the assets can be replaced are higher than the value at which these are shown in the books of accounts leading to hidden profits.
Question 3
1 / -0

When the effect of strike is not directly disclosed in financial statements _________ accounting system is applied.

A
Matching

B
Revenue recognition

C
Money Measurement

D
Cost

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 books of accounts.
Another important aspect of the concept of money measurement is that the records of the transactions are to be kept not in physical units but in the monetary unit.
When the effect of strike is not directly disclosed in financial statements, money measurement accounting system is applied.
Question 4
1 / -0

The accounting policy for inventory of an enterprise discloses that inventories are valued at lower of cost determined on weighted average basis or net realizable value, is the application of _________ concept.

A
Prudence

B
Materiality

C
Substance over form

D
All of the above

Solution

The prudence concept is basically conservatism. This concept makes sure that, the assets and incomes of the business are not be overstated and the liabilities and expense are not understated. Inventories valued on cost or the net realizable value, whichever less, is one of the example of prudence concept.
Question 5
1 / -0

All are correct except __________.

A
Profit or loss belongs to the business only

B
Only business transaction rather than personal transaction of the owner/proprietor are subject-matter of accounting

C
Personal property/assets of the businessmen are not recorded as business property.

D
Business entity concept is applicable to corporate bodies only

Solution

For all accounting purposes, business and business man are considered two different entities. All business transactions are recorded in business books and personal transaction done from business are considered as decrease in owners equity. This concept is applicable to all business entities.
Question 6
1 / -0

Three months rent of the next financial year is paid in advance, how this transaction effects accounting equation

A
Total assets remains unchanged, total liabilities remains unchanged.

B
Total assets increases, total liabilities decreases.

C
Total assets decreases, total liabilities increases.

D
Total assets increases but total liabilities remains the same.

Solution

The Entry for Above transaction will be
Prepaid Rent a/c Dr.
To Cash

Both are assets therefore, there will be no change in the assets and liabilities
Question 7
1 / -0

Provision for bad debts is the application of..........Concept.

A
Cost concept

B
Dual concept

C
Conservatism

D
Going run concern

Solution
Question 8
1 / -0

The convention of conservatism is applicable in ___________.

A
Providing for discount on creditors

B
Adopting straight line method as the basis for providing depreciation

C
Showing joint life policy at surrender value as against the amount paid

D
None of the above

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.
Question 9
1 / -0

How does depreciation effect basic accounting equation

A
Leads to decreases in assets and shareholders equity

B
Leads to decrease in assets only

C
Leads to increase in liability and decrease in assets

D
Leads to decrease in shareholders equity

Solution

Depreciation is an expense on the income statement it effects shareholders' equity through net income which can impact the assets.
The higher the depreciation implies the lower the net income and assets, thus lower owners' equity.
Depreciation leads to increase in the assets and the shareholder's equity.
Question 10
1 / -0

________ principles require that revenues which are recognized through the application of the realization principle are then related to relevant and appropriate historical cost.

A
Accounting period

B
Cost concept

C
Matching

D
Realization

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Accounting Equation Effects Test 41

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Accounting Equation Effects Test 41

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SHARING IS CARING

Question 1

Consistency

Full disclosure

Conservatism

Matching

Solution

Question 2

All the business assets to be recorded at cost price

Cost is the basis of all subsequent accounting for the assets

None of the above

Both (a) & (b)

Solution

Question 3

Matching

Revenue recognition

Money Measurement

Cost

Solution

Question 4

Prudence

Materiality

Substance over form

All of the above

Solution

Question 5

Profit or loss belongs to the business only

Only business transaction rather than personal transaction of the owner/proprietor are subject-matter of accounting

Personal property/assets of the businessmen are not recorded as business property.

Business entity concept is applicable to corporate bodies only

Solution

Question 6

Total assets remains unchanged, total liabilities remains unchanged.

Total assets increases, total liabilities decreases.

Total assets decreases, total liabilities increases.

Total assets increases but total liabilities remains the same.

Solution

Question 7

Cost concept

Dual concept

Conservatism

Going run concern

Solution

Question 8

Providing for discount on creditors

Adopting straight line method as the basis for providing depreciation

Showing joint life policy at surrender value as against the amount paid

None of the above

Solution

Question 9

Leads to decreases in assets and shareholders equity

Leads to decrease in assets only

Leads to increase in liability and decrease in assets

Leads to decrease in shareholders equity

Solution

Question 10

Accounting period

Cost concept

Matching

Realization

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