Accounting Principles Flashcards

A company receives a $6,000 advance payment for services to be provided over 6 months. After 2 months, how much should be recognized as revenue?

Answer: $2,000

$6,000 divided by 6 months equals $1,000/month; after 2 months, $2,000 of revenue has been earned.

Which accounting concept explains why land purchased for $50,000 in 1990 is still carried at $50,000 on the balance sheet today?

Answer: Historical cost principle

The historical cost principle requires assets to remain recorded at their original purchase price unless an impairment occurs.

When a company anticipates a loss from a lawsuit, it should record the loss:

Answer: When it is probable and can be reasonably estimated

Under conservatism and GAAP, contingent losses are recorded when they are probable and the amount can be reasonably estimated.

The concept that presumes the dollar is a stable unit of measure, ignoring effects of inflation, is the:

Answer: Monetary unit assumption

The monetary unit assumption treats the dollar as a stable measure, so inflation adjustments are generally not made in GAAP financial statements.

A company recognizes depreciation expense each year on its equipment. This practice follows the:

Answer: Matching principle

Depreciation allocates the cost of equipment over its useful life to match the expense with the revenues the asset helps generate.

Which principle requires that an item be recorded in financial statements only if its omission would influence the decision of a reasonable user?

Answer: Materiality

The materiality principle states that information is material if its omission or misstatement could influence economic decisions of users.

A startup company that expects to cease operations in 6 months should NOT apply which accounting assumption?

Answer: Going concern assumption

If a company is not expected to continue operating, the going concern assumption is violated and assets should be reported at liquidation value.