Deck 5: Postulates, Principles, and Concepts

Question 1

The lower-of-cost or market valuation of inventories is an example of the disclosure principle.

Answer 1

False

Question 2

Conservatism has been called the dominant principle of accounting.

Answer 2

True

Question 3

A principle contains elements observable by empirical techniques.

Answer 3

False

Question 4

Postulates are generally defined as basic assumptions that cannot be verified.

Question 5

Disclosure will become less important in the future because of market efficiency.

Question 6

Principles are basic assumptions concerning the business environment.

Question 7

Accounting concepts have largely evolved from practical operating necessities, including income tax laws.

Question 8

There are eight broad principles in ARS 3.

Question 9

ARS 1 and ARS 4 represent a milestone in the attempt to provide a unified theoretical underpinning for financial accounting rules by the APB.

Question 10

The APB was the first to successfully derive an underlying framework of postulates and principles.

Question 11

When the business is viewed in the context of accounting as well as in its legal form, it is clear that the entity is identical to its owners.

Question 12

Output-oriented principles are broad rules that guide the accounting function.

Question 13

Some capital markets research has indicated that "bad news" relative to reported earnings has a greater impact upon security prices than "good news."

Question 14

Conservatism, materiality, and disclosure are examples of constraining principles.

Question 15

The time period idea is somewhat artificial because it creates definite segments out of what is a continuing process.

Question 16

One reason ARS 1 and ARS 3 fell short of the goal of obtaining a framework for APB accounting opinions is that the accounting profession refused to abandon historical cost.

Question 17

The key group in Moonitz's set of postulates consists of postulates stemming from accounting itself.

Question 18

The key imperative postulate in ARS 1 appears to be stability of the monetary unit.

Question 19

"Matching" refers to the fact that all expenses can be directly identified with either specific revenues or specific time periods.

Question 20

The going-concern postulate states that unless there is evidence to the contrary, it is assumed that the firm will continue indefinitely.

Question 21

Preferred stockholders are residual equity holders.

Question 22

Which of the following is a true statement regarding Moonitz's approach to ARS 1?

A) He initially rejected an inductive type of approach.
B) He used symbolic terminology and formal methods.
C) He rejected a deductive approach rooted in reasoning alone.
D) He was unconcerned about the experiential and empirical aspects of accounting.

Question 23

Which of the following is not a true statement regarding ARS 1 and ARS 3?

A) The authors were commissioned to find postulates and principles that would lead to a measure of true income.
B) The postulates were not complete and could not exclude all value systems other than the one prescribed in the principles.
C) The authors were able to identify a single concept of income that was superior to others.
D) Nothing is said about the users of accounting information and what their needs and abilities might be.

Question 24

Consistency refers to the degree of reliability users should find in financial statements when evaluating financial condition or the results of operations on an interfirm basis or predicting income or cash flows.

Question 25

Which of the following are defined in the text as general approaches utilized in the recognition and measurement of accounting events?

A) Concepts
B) Principles
C) Postulates
D) Axioms

Question 26

Which of the following is not a true statement?

A) A principle is a statement of a true and generalized nature containing referents to the real world.
B) If a principle could be empirically tested and proven true, it would be capable of becoming a law.
C) The truth of a law or principle means that is should not be replaced by a newer system.
D) Principles are general statements that influence the way we view phenomena and the way we think about problems.

Question 27

Which of the following are defined in the text as basic assumptions concerning the business environment?

A) Concepts
B) Principles
C) Postulates
D) Axioms

Question 28

Which of the following is not a reason why ARS 1 and ARS 3 fell short of the goal of obtaining a framework for APB accounting opinions?

A) The authors refused to abandon historical cost.
B) The postulates were not complete and therefore could not exclude all value systems other than the one prescribed in the principles.
C) At least one of the principles was not derived from any of the postulates.
D) The question of whether valuations of various assets were additive became an issue.

Question 29

Which of the following is not a possible outcome of postulate C-4, stability of the monetary unit?

A) If purchasing power of the monetary unit is not stable, some form of inflation accounting is appropriate.
B) If purchasing power of the monetary unit is not stable, historical cost is still justified.
C) If purchasing power of the monetary unit is stable, a system of current values is justified.
D) If purchasing power of the monetary unit is stable, retention of historical cost is justified.

Question 30

Which of the following statements is true regarding ARS 3?

A) One of its principles states that revenue is earned by the entire process of operations of the firm rather than at the point of sale.
B) All of its principles were derived from the postulates of ARS 1.
C) The asset valuation measures prescribed are additive.
D) One of the main criticisms aimed at ARS 3 relates to its advocating the exit-value approach to asset valuation.

Question 31

Which of the following is an accurate overall label for the terms postulates and principles?

A) Constraints
B) Concepts
C) Axioms
D) Conventions

Question 32

Under entity theory, creditors are considered equity holders.

Question 33

Which of the following are defined in the text as the result of the process of identifying, classifying, and interpreting various phenomena or precepts?

A) Concepts
B) Principles
C) Postulates
D) Axioms

Question 34

Which of the following is a true statement?

A) A principle contains elements observable by empirical techniques.
B) The APB's Special Committee on Research Program defined both postulates and broad principles.
C) A principle is an analytical statement whose truth or falsity is self-contained by its internal logic.
D) Postulates are generally defined as basic assumptions that cannot be verified.

Question 35

The proprietary theory approach largely coincides with the components of income measurement as it is presently construed in historical cost-based systems.

Question 36

Which of the following is not a criticism that has been aimed at ARS 1?

A) Some postulates appear to stem from one of the other postulate categories.
B) Self-evident postulates may not be sufficiently substantive to lead to a unique and meaningful set of accounting principles.
C) The postulates are necessary but not sufficient to lead to a viable outcome.
D) Postulates should have played a less passive role.

Question 37

Proprietary theory assumes that the owners and the firm are virtually identical.

Question 38

Which of the following is not true regarding the imperatives of ARS 1?

A) They are normative in nature.
B) They have developed within the context of accounting practice.
C) They are objectives that should be striven for.
D) The key imperative postulate appears to be consistency.

Question 39

Which of the following is the key group in Moonitz's set of postulates?

A) The Environmental group
B) The Imperatives
C) The Economic group
D) Postulates stemming from accounting itself

Question 40

The balance sheet equation for entity theory is "Total Assets - Total Liabilities = Owners' Equities."

Question 41

What were the reasons for the failure of ARS 1 and ARS 3?

Question 42

_________ refers to the importance of an item to financial statement users in terms of its relevance to decision making.

A) Comparability
B) Materiality
C) Consistency
D) Objectivity

Question 43

Which of the following theories assumes that the firm and its owners are separate beings?

A) Residual equity theory
B) Proprietary theory
C) Entity theory
D) Commander theory

Question 44

Which type of accounting principle is concerned with the comparability of financial statements of different firms?

A) Input-oriented principles
B) Output-oriented principles
C) Constraining principles
D) Both a and c

Question 45

Distinguish between a postulate and a principle as they are used in ARS 1 and ARS 3. Identify the major categories of each that are included in these two studies.

Question 46

Which of the following concepts focuses on preparers of financial information?

A) Comparability
B) Consistency
C) Uniformity
D) Both b and c

Question 47

Which of the following are defined in the text as broad rules that guide the accounting function?

A) Input-oriented principles
B) Output-oriented principles
C) Basic principles
D) Axioms

Question 48

Which of the following concepts applies to users of financial statements?

A) Comparability
B) Consistency
C) Uniformity
D) Both b and c

Question 49

Who are residual equity holders?

A) Preferred stockholders
B) Managers
C) Bondholders
D) Common stockholders

Question 50

Which of the following are the basic postulates underlying historical costing?

A) Going Concern, Time Period, Market Prices, Monetary Unit
B) Objectivity, Time Period, Accounting Entity, Monetary Unit
C) Going Concern, Time Period, Accounting Entity, Monetary Unit
D) Going Concern, Time Period, Financial Statements, Monetary Unit

Question 51

Which of the following postulates is violated when liquidation values for assets and equities are reported under ordinary circumstances?

A) Entities
B) Time period
C) Consistency
D) Going concern

Question 52

Under which of the following theories would the accounting equation be Total Assets = Total Equities (including liabilities)?

A) Residual equity theory
B) Proprietary theory
C) Entity theory
D) Commander theory

Question 53

What is the going-concern postulate of ARS 1, and how has it been criticized?

Question 54

Which of the following postulates states that unless there is evidence to the contrary, it is assumed that the firm will continue indefinitely?

A) Entities
B) Time period
C) Consistency
D) Going concern

Question 55

Which of the following theories assumes that the owners and the firm are virtually identical?

A) Residual equity theory
B) Proprietary theory
C) Entity theory
D) Commander theory

Question 56

Recognition and Matching are examples of:

A) Input-oriented principles
B) Output-oriented principles
C) Constraining principles
D) Both a and c

Question 57

When we view the business entity in the context of accounting, as well as in its legal form, it is clear that:

A) The entity is separate from its owners.
B) The entity is identical to its owners.
C) The pooling method should be used for business combinations.
D) Entities should be considered as one unit as a result of one controlling the other(s).

Question 58

Which type of accounting principle is concerned with general approaches or rules for preparing financial statements and their content?

A) Input-oriented principles
B) Output-oriented principles
C) Constraining principles
D) Both a and c

Question 59

Which of the following is not true regarding the time period postulate?

A) It results in an artificial segmentation of a continuing process.
B) It has led to accrual accounting.
C) It allows different accounting methods to be followed in interim periods.
D) It allows interim reports to include estimates of annual amounts.

Question 60

Under which of the following theories would the accounting equation be Total Assets - Total Liabilities = Owners' Equities?

A) Residual equity theory
B) Proprietary theory
C) Entity theory
D) Commander theory

Question 61

Distinguish between input-oriented principles and output-oriented principles and list at least three principles in each category.

Question 62

Distinguish between proprietary theory and entity theory. Include descriptions of the balance sheet equation used by each and how income is computed.

Question 63

How is conservatism defined from a preparer's orientation? Which conservatism goal should take precedence when conservatism criteria conflict?

Question 64

Discuss the matching principle and how it applies to recognizing expenses. Why is the matching principle currently under attack?

Question 65

Discuss the residual equity theory and its assumptions. Include a description of the accounting equation used and how income would be computed.

Question 66

Discuss the revenue recognition principle and how the terms "critical event," "earned," "realized," and "realizable" apply to revenue recognition.