Deck 14: Accounting Principles and Reporting Standards

Question 1

The matching principle is being applied when the cost of equipment is depreciated over its useful life.

Answer 1

True

Question 2

The accountant records an expense for wages earned by employees during the last four days of the year,even though the wages will not be paid in that year.The accountant is following the ____________________ principle.

Answer 2

accrual (or matching

Question 3

The concept of realization permits a company to recognize income whenever there is an increase in the market value of the assets it holds.

Answer 3

False

Question 4

Financial accounting rules affect the recording of data used to prepare financial reports that go to ____________________ and creditors.

Question 5

The separate entity assumption permits businesses to record property and equipment as assets that will provide benefits in future periods.

Question 6

The SEC has authority to define accounting terms and to prescribe accounting procedures used by all ____________________ held corporations.

Question 7

Revenue should not be recorded until it is ____________________;that is,until new assets are created in the form of money or claims against others.

Question 8

If an expenditure that is expected to benefit future periods is made during one accounting period,the cost should be divided and charged as an expense during each period benefited.

Question 9

The matching principle requires that all known costs be charged to the current period of operations.

Question 10

If too much of the cost of an asset is charged as depreciation expense in the present period,the firm's net income will be understated in later periods.

Question 11

The ____________________ assumption,which assumes that a firm will continue to operate indefinitely,permits carrying forward a portion of the cost of assets that will be used in future periods.

Question 12

If an important fact that would have an effect on an investor's decisions is omitted from the financial statements,the ____________________ principle has been violated.

Question 13

Most businesses follow the general rule that revenue is recognized when cash is received.

Question 14

Assets are carried on the books at historical cost.

Question 15

For convenience,accountants assume that the value of money is stable or that changes in its value are not great enough to affect the recorded financial data.

Question 16

An accountant generally assumes that a firm is a(n)____________________ and will continue to operate indefinitely.

Question 17

Accountants use footnotes to financial statements to disclose information that may influence investor decisions.

Question 18

Assets are recorded at cost when they are purchased,but the asset accounts are adjusted each year to reflect changes in market value.

Question 19

The ____________________ principle requires that if income is to be properly measured,all expired costs associated with the earning of revenue must be deducted from the revenue in the same accounting period.

Question 20

Because financial statements must be objective and based on verifiable evidence,data obtained from estimates cannot be presented.

Question 21

If the ____________________ basis of accounting is used,income is recorded in the period in which it is earned.

Question 22

The Financial Accounting Standards Board is

A) a branch of the AICPA.
B) a branch of the IRS.
C) an independent organization.
D) a branch of the SEC.

Question 23

The Cervantes Company uses the same method of depreciation for its equipment in each fiscal period.This practice is an example of

A) conservatism.
B) consistency.
C) materiality.
D) matching.

Question 24

Which of the following important types of documents are not issued by the Accounting Standards Executive Committee

A) accounting and auditing guides.
B) statements of position.
C) practice bulletins.
D) tax authority guidelines.

Question 25

The Statements of Financial Accounting Standards that automatically become generally accepted accounting principles are issued by

A) the IRS.
B) the SEC.
C) the FASB.
D) the AICPA.

Question 26

The SEC's 2003 report to the Congress on "principles-based" accounting observed that the first characteristic of objectives-based standards,as dictated by the Sarbanes-Oxley Act,is that any standard must be based on

A) the cost-benefit test.
B) an improved and consistently applied framework.
C) qualitative characteristics.
D) transparency.

Question 27

When Tamar Snyder opened a shoe store,her accountant did not include the cash in her personal savings account as one of the assets of the business.This is an example of

A) the separate entity assumption.
B) the conservatism constraint.
C) the materiality constraint.
D) industry practice constraint.

Question 28

The basic financial reports of a business DO NOT provide users information about

A) profits.
B) economic resources (assets).
C) claims against the assets (liabilities and owner's equity).
D) competitors of a business.

Question 29

Accounting information that is capable of making a difference in a decision by the user of the report is

A) comparable.
B) reliable.
C) relevant.
D) neutral.

Question 30

Identify the statement below that is incorrect.

A) Information about profits appears in the income statement.
B) Information about assets,liabilities and owner's equity is provided primarily in the balance sheet.
C) Information about how cash is used as well as when cash is received can be found on a business's balance sheet.
D) Meaningful information about the financial condition of a business can be determined by analyzing a business's financial statements.

Question 31

The monetary unit assumption assumes that:

A) the business will continue to operate indefinitely.
B) revenues and expenses of a business can be separated into separate time periods.
C) the idea that expressing financial facts and events is meaningful only when they can be expressed in monetary terms.
D) the value of money is not stable.

Question 32

The modifying constraint of ____________________ concerns the significance of an item in relation to the particular situation of which it is a part.

Question 33

In its conceptual framework,the FASB concluded that financial reporting rules should concentrate on providing information that is helpful to

A) current and potential investors and creditors in making investment and credit decisions.
B) company management and owners.
C) tax authorities.
D) regulating agencies.

Question 34

Because of the modifying constraint of ____________________,assets are understated rather than overstated if any uncertainty exists.

Question 35

The separate economic entity assumption assumes that:

A) financial events are meaningful only when they can be expressed in economic terms.
B) the business will continue to operate indefinitely.
C) the financial statements of a business reflect the affairs of the business-not the affairs of the owners.
D) a business's life can be separated into time periods with income being reported within one economic time period.

Question 36

Each year there was an increase in the market value of some stock owned by the Mudstream Company,but the accountant did not record the increase in asset value and equity until the stock was sold.In this situation,the accountant

A) followed the matching principle.
B) followed the realization principle.
C) violated the accrual principle.
D) violated the matching principle.

Question 37

Keeping the personal assets of the owner of a business separate from the assets of the firm is an example of

A) following the going concern assumption.
B) applying the realization principle.
C) following the separate entity assumption.
D) applying the conservatism constraint.

Question 38

Which of the following statements is not correct?

A) The Securities and Exchange Commission (SEC)issues the Statements of Financial Accounting Standards.
B) Statements issued by the Financial Accounting Standards Board (FASB)are binding on the members of the American Institute of Certified Public Accountants (AICPA).
C) An act of law gave the SEC the authority to determine the form and content of accounting reports filed by companies under its jurisdiction.
D) The Financial Accounting Standards Board is an independent organization.

Question 39

In order to ensure that they are meaningful and useful,financial statements should be prepared

A) in accordance with section 108 of the Sarbanes-Oxley Act.
B) on a daily basis.
C) on a timely basis.
D) using generally accepting accounting principles (GAAP).

Question 40

Which of the following statements is correct?

A) Under the accrual basis of accounting,revenue is recorded in the period in which it is earned.
B) Under the accrual basis of accounting,expenses are recorded in the period in which they are paid.
C) Under the accrual basis of accounting,revenue is recorded in the period in which it is received.
D) Under the accrual basis of accounting,revenue is recorded in the period in which it is paid.

Question 41

Paige Turner Publishing receives cash from its subscribers in advance for a one year subscription.Under the revenue recognition principle,Paige Turner Publishing should recognize the revenue from the subscriptions

A) at the time the cash is received.
B) after the one year subscription has expired.
C) in equal installments over the one year subscription period,as it is earned.
D) in two equal installments,six months apart.

Question 42

When a new company was formed,one partner contributed some used equipment he owned.The equipment was appraised at $44,000 and $50,000 by two different dealers.The accountant entered the equipment at $44,000 in the financial records of the partnership.This is an example of

A) the materiality constraint.
B) the conservatism constraint.
C) the matching principle.
D) industry practice constraint.

Question 43

A deviation from generally accepted accounting principles is

A) permissible if the amount involved is material.
B) permissible if the amount involved is immaterial.
C) never allowed.
D) permissible only if its required in order to conform to the monetary unit assumption.

Question 44

Holly Day Company purchased a piece of land 10 years ago for $50,000.Holly Day Company is considering selling the land.The piece of land was recently appraised for $120,000,they received an offer from a prospective buyer for $105,000,and a similar piece of land 5 block away recently sold for $113,000.How much should Holly Day Company report on its balance sheet for the piece of land?

A) $120,000
B) $50,000
C) $113,000
D) $105,000

Question 45

The financial statements in the annual report of a corporation contain footnotes explaining the methods used to depreciate the firm's equipment.This practice is an example of

A) the consistency principle.
B) the conservatism constraint.
C) the full disclosure principle.
D) the accrual principle.

Question 46

Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy.According to the matching principle,if 4 months of the policy has expired by the balance sheet date,how much should Hour Place Clock Repair report as Prepaid Insurance?

A) $0
B) $600
C) $1,200
D) $1,800

Question 47

Paige Turner Publishing's employees worked the last 3 days of December 2016,that they will not be paid for until January 2017.According to the matching principle,Paige Turner Publishing should recognize the wages expense for the last 3 days of 2016

A) in 2016 when the employees worked.
B) in 2017 when they were paid.
C) half in 2016 and half in 2017.
D) in whichever year the management wants to.

Question 48

Which of the following is allowed under generally accepted accounting principles?

A) A company was offered $60,000 for land that it had purchased for $15,000.The company did not sell the land but increased the Land account to $60,000.
B) An owner lists the full cost of his or her personal automobile,which is occasionally used for business purposes,on the company's balance sheet.
C) A large company recorded the $20 cost of a tool as an expense,although the item is expected to be used for 3 years.
D) The Equipment account shows a balance of $55,000.This amount represents the original cost of $75,000 less the accumulated depreciation of $20,000.

Question 49

The materiality constraint refers to:

A) the significance of an item of financial data in relation to other financial data.
B) whether the increased cost of complying with an accounting principle is justified by the benefit that would result.
C) the idea that "when in doubt,take the conservative action."
D) existing accounting practices that have evolved based on the amount of debt that would be incurred by the business.

Question 50

The cost-benefit test constraint refers to:

A) the idea that "when in doubt,take the most beneficial action."
B) the benefit of complying with an accounting principle should outweigh the cost of compliance.
C) the recording of assets at their historical cost rather than their fair market value.
D) the requirement that all benefit transactions must conform to "industry practice".

Question 51

Paige Turner Publishing paid cash in advance for a one year insurance policy.According to the matching principle,Paige Turner Publishing should recognize the policy as insurance expense

A) at the time the cash is paid.
B) after the one year policy has expired.
C) in equal installments over the one year policy period,as the expense is incurred.
D) in two equal installments,six months apart.

Question 52

Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy.According to the matching principle,if 4 months of the policy has expired by the end of the current fiscal year,how much should Hour Place Clock Repair report as Insurance Expense on the Income Statement?

A) $0
B) $600
C) $1,200
D) $1,800

Question 53

The Boston Red Sox receives cash from its season ticket holders in advance for the entire season.Under the revenue recognition principle,the Boston Red Sox should recognize the revenue from the season ticket holders

A) at the time the cash is received.
B) after the season is completed.
C) as each game is played.
D) in two equal installments,six months apart.

Question 54

Under the accrual basis of accounting

A) Revenue is recorded in the period in which it is earned and expenses are recorded in the period in which incurred.
B) Expenses are recorded in the period in which they are incurred and revenue is recorded when payment is received.
C) Revenue and expenses are recorded when cash is received or paid.
D) When revenues and expenses are recorded is up to the owners and/or managers.

Question 55

Hour Place Clock Repair paid $2,400 cash in advance for a six month advertising contract with the local newspaper.According to the matching principle,if 2 months of the contract has expired by the end of the current fiscal year,how much should Hour Place Clock Repair report as Advertising Expense on the Income Statement?

A) $0
B) $400
C) $800
D) $2,400

Question 56

An accountant who records revenue when a credit sale is made rather than waiting for the receipt of cash from the customer is

A) following the accrual principle.
B) following the conservatism constraint.
C) violating generally accepted accounting principles.
D) following the consistency principle.

Question 57

An accountant charged the Repairs Expense account for a tool that cost $12.The tool had an estimated useful life of 5 years;however,the accountant did not choose to depreciate it.The modifying constraint that the accountant followed was

A) materiality.
B) objectivity.
C) conservatism.
D) industry practice.

Question 58

The Garrison Company offers terms of net 30 days for its credit sales.It records the revenue from these sales as soon as the sales are made rather than waiting until cash is received from the customers.This is an example of the

A) realization principle.
B) matching principle.
C) conservatism constraint.
D) consistency principle.

Question 59

Depreciating equipment over its useful life is an example of

A) following the objectivity assumption.
B) applying the matching principle.
C) applying the realization principle.
D) applying the conservatism constraint.

Question 60

Recording land at its cost rather than its appraisal value illustrates

A) the full disclosure principle.
B) the cost basis principle.
C) the realization principle.
D) the matching principle.

Question 61

What is meant by the concept of neutrality in accounting?

Question 62

Which of the following statements is NOT true?

A) The American Institute of CPA's has in the past had strong influence on the development of accounting principles.
B) The Sarbanes-Oxley Act places great emphasis on internal controls and fraud prevention.
C) The SEC has authority to accept or reject financial accounting principles and standards developed by the FASB.
D) Because of the Sarbanes-Oxley Act,it is probable that the FASB's conceptual framework will become less important in developing accounting principles and standards.

Question 63

The income statement shown below was prepared and sent by Jenna Preston,the owner of Preston Gifts,to several of her creditors.The business is a sole proprietorship that sells miscellaneous gifts.An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles.Using the following additional information provided by the owner,prepare an income statement in accordance with generally accepted accounting principles.

Question 64

The income statement shown below was prepared and sent by Curtis Brown,the owner of Curt's Crafts,to several of his creditors.The business is a sole proprietorship that sells crafts and toys.An accountant for one of the creditors looked over the income statement and found that it did not conform to generally accepted accounting principles.Using the following additional information provided by the owner,prepare an income statement in accordance with generally accepted accounting principles.

Question 65

In recent years,it has been reported that several large companies have manipulated business transactions and accounting records to change the net income reported on their income statements.Suggest five concepts,assumptions,principles,or conventions that such manipulation would violate.

Question 66

Carlos Verde owns a small nursery.He recently approached the local bank for a loan to finance an expansion of his nursery.Carlos prepared the balance sheet given below and submitted it with his loan application.The balance sheet does not conform to generally accepted accounting principles.Using the additional information provided by the owner,prepare a corrected balance sheet in accordance with generally accepted accounting principles.

Question 67

Antonio Hanley owns a small automobile service center.He recently approached the local bank for a loan to finance an expansion of his service center.Antonio prepared the balance sheet given below and submitted it with his loan application.The balance sheet does not conform to generally accepted accounting principles.Using the additional information provided by the owner,prepare a corrected balance sheet in accordance with generally accepted accounting principles.