Accounting Equation Effects Test 42

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Accounting Equation Effects Test 42

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Weekly Quiz Competition

Question 1
1 / -0

Making the provision for doubtful debts in anticipation of actual bad debts is on the basis of ___________.

A
Convention of disclosure

B
Convention of consistency

C
Convention of conservatism

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.
4. Provision for pending law suit against the firm, which may either be decided in its favour.
Question 2
1 / -0

The proprietor is treated as a creditor to the extent of his capital according to __________.

A
Cost concept

B
Business entity concept

C
Going concern concept

D
All of the above

Solution

According to Business Entity Concept, a business is treated as a separate entity and is distinct from it's owners. When a proprietor introduces capital in his own business, the capital is considered as liability from business point of view. Similarly, when he withdraws any money for personal use it is treated as reduction in the liability of business.
Question 3
1 / -0

On 1st January 08, X paid Rs. 120,000 being rent upto 31.12.08. If the accounts are closed on 31.03.08. Rs. 90,000 will be shown as..........

A
Accrued rent

B
Prepaid rent/Expenses

C
Accrued expenses

D
Accrued income

Solution
Question 4
1 / -0

The use of an accelerated method of depreciation is based on _________.

A
convention of disclosure

B
convention of consistency

C
convention of conservatism

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.

4. Provision for pending law suit against the firm, which may either be decided in its favour.
Question 5
1 / -0

The accounting principle that confirm to the tendency of accountants to resolve uncertainty and doubt in favor of understating assets and revenues and overstating liabilities and expenses is known as ____________.

A
Conservatism

B
Materiality

C
Practice in the Industry

D
Consistency

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

A businessman purchased goods for Rs. $$30,00,000$$ and sold $$80$$% of such goods are sold during the accounting year ended 31st March 2005. The market value of the remaining goods was Rs. $$5,00,000$$. He has not valued the closing stock at market price. He has violated the concept of _________.

A
Money Measurement

B
Conservatism

C
Cost

D
Periodicity

Solution

As per conservatism. Stock is valued at a lower cost or market price whichever is ever.
Here, Cost of Closing Stock = 30,00,000 x 20% = 600,000
The market price of closing stock = 500,000
Therefore, as per conservatism, the stock should be valued at a market price i.e., 500,000.
Question 7
1 / -0

Fixed assets are reported in the balance sheet at historical cost basis. This is done in order to comply with _________.

A
Cost concept

B
Conservatism concept

C
Constant money value

D
Realization concept

Solution

Fixed assets are reported in the balance sheet at their historical costs. This is done in order to comply with cost concept.
According to cost concept, the cost of the asset is to recorded at historical cost in the books of accounts.
Historical cost is the cost at which the asset is acquired at the time of purchase.
Question 8
1 / -0

The cost of machinery purchased on 10th April 2005, is Rs. 10,00,000. Its market value as of 31st March 2006, is Rs. 12,00,000. As of 31st March 2006, if the company values the machinery at Rs. 12,00,000, which of the following valuation principles is being violated?

A
Historical cost

B
Present value

C
Realizable value

D
Current cost

Solution

As per the Historical cost concept, an asset should be recorded in the books of the accounts at its purchase price or cost i.e., 10,00,000 but here asset is recorded at realizable value i.e., 12,00,000.
Therefore, the historical cost concept is being violated.
Question 9
1 / -0

A machinery was purchased on 1st April, 2005, for Rs. $$10,00,000$$. Its installation charges were Rs. $$1,00,000$$. But its market value as on 31st March 2006, was Rs. $$13,00,000$$. If the company shows the machinery at Rs. $$13,00,000$$ in its B/S, which of the following concepts is not followed by the company?

A
Cost concept

B
Matching concept

C
Realisation concept

D
Periodicity concept

Solution

As per the Historical cost concept, an asset is recorded in the books of the accounts at its cost +installation charges i.e., 11,00,000 but here asset is recorded at realizable value i.e., 13,00,000.
Therefore, the historical cost concept is being violated.
Therefore, the asset should be recorded at 11,00,000.
Question 10
1 / -0

Which one of the following statement is false?

A
Accounting is commonly treated as language of business

B
There are many views about accounting principles

C
There is no application of conservatism principle in accounting

D
Accounting is based on accounting equation

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.

Hence, the conservatism principle is applicable in accounting.

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Accounting Equation Effects Test 42

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Question 1

Convention of disclosure

Convention of consistency

Convention of conservatism

None of the above

Solution

Question 2

Cost concept

Business entity concept

Going concern concept

All of the above

Solution

Question 3

Accrued rent

Prepaid rent/Expenses

Accrued expenses

Accrued income

Solution

Question 4

convention of disclosure

convention of consistency

convention of conservatism

none of the above

Solution

Question 5

Conservatism

Materiality

Practice in the Industry

Consistency

Solution

Question 6

Money Measurement

Conservatism

Cost

Periodicity

Solution

Question 7

Cost concept

Conservatism concept

Constant money value

Realization concept

Solution

Question 8

Historical cost

Present value

Realizable value

Current cost

Solution

Question 9

Cost concept

Matching concept

Realisation concept

Periodicity concept

Solution

Question 10

Accounting is commonly treated as language of business

There are many views about accounting principles

There is no application of conservatism principle in accounting

Accounting is based on accounting equation

Solution

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