ABA Accounting Principles 2 — Questions and Answers
Question 1: Under the matching principle, when should the cost of goods sold be recognized?
- When cash is collected from the customer
- In the same period as the related revenue is earned (Correct answer)
- When the inventory is purchased
- At the end of the fiscal year
Correct answer: In the same period as the related revenue is earned
The matching principle requires expenses to be recognized in the same period as the revenues they help generate.
Question 2: Which accounting concept requires businesses to record transactions in the currency of the country in which they operate?
- Economic entity assumption
- Monetary unit assumption (Correct answer)
- Time period assumption
- Going concern assumption
Correct answer: Monetary unit assumption
The monetary unit assumption states that only transactions expressible in a stable monetary unit are recorded.
Question 3: A company pays $24,000 for a two-year insurance policy. Under accrual accounting, how much expense is recognized in the first month?
- $24,000
- $12,000
- $1,000 (Correct answer)
- $2,000
Correct answer: $1,000
$24,000 divided by 24 months equals $1,000 of insurance expense per month.
Question 4: Which principle states that financial statements should disclose all information necessary for users to make informed decisions?
- Materiality principle
- Full disclosure principle (Correct answer)
- Conservatism principle
- Consistency principle
Correct answer: Full disclosure principle
The full disclosure principle requires that all relevant information be disclosed in the financial statements or accompanying notes.
Question 5: A company uses FIFO for inventory in one year and switches to LIFO the next. Which accounting principle is violated?
- Materiality
- Conservatism
- Consistency (Correct answer)
- Going concern
Correct answer: Consistency
The consistency principle requires companies to use the same accounting methods from period to period.
Question 6: Under the economic entity assumption, which of the following transactions should NOT be recorded in the business's books?
- Owner's capital contribution
- Business loan repayment
- Owner's personal mortgage payment (Correct answer)
- Employee salary payment
Correct answer: Owner's personal mortgage payment
The economic entity assumption keeps personal transactions of the owner separate from the business's financial records.
Question 7: Which concept justifies recording assets at their original purchase price rather than current market value?
- Going concern
- Historical cost principle (Correct answer)
- Revenue recognition principle
- Materiality
Correct answer: Historical cost principle
The historical cost principle requires assets to be recorded at their original acquisition cost, which is verifiable and objective.
ABA Accounting Principles 2
Under the matching principle, when should the cost of goods sold be recognized?