ABA Accounting Principles 3 — Questions and Answers
Question 1: The conservatism principle in accounting means that when in doubt, accountants should:
- Choose the method that results in higher net income
- Choose the method that results in higher assets
- Choose the method that least overstates assets and income (Correct answer)
- Choose the method that maximizes shareholder equity
Correct answer: Choose the method that least overstates assets and income
Conservatism (or prudence) directs accountants to recognize potential losses immediately while deferring potential gains until realized.
Question 2: Which assumption underlies the practice of preparing monthly or quarterly financial statements?
- Going concern assumption
- Monetary unit assumption
- Time period assumption (Correct answer)
- Economic entity assumption
Correct answer: Time period assumption
The time period assumption divides the business's continuous life into distinct periods for reporting purposes.
Question 3: A business records revenue of $5,000 for services performed even though the customer has not yet paid. This follows which principle?
- Cash basis accounting
- Accrual basis / revenue recognition principle (Correct answer)
- Matching principle
- Historical cost principle
Correct answer: Accrual basis / revenue recognition principle
Under the accrual basis revenue recognition principle, revenue is recorded when earned, regardless of when cash is received.
Question 4: A small business expenses a $15 stapler rather than depreciating it. This decision is justified by the:
- Going concern principle
- Consistency principle
- Materiality principle (Correct answer)
- Full disclosure principle
Correct answer: Materiality principle
The materiality principle allows immaterial items to be expensed immediately since their effect on financial statements is insignificant.
Question 5: Which of the following best describes the going concern assumption?
- A business will continue operating indefinitely into the future (Correct answer)
- A business records only cash transactions
- A business must disclose all financial information
- A business separates owner and entity finances
Correct answer: A business will continue operating indefinitely into the future
The going concern assumption presumes a business will continue to operate long enough to fulfill its obligations and objectives.
Question 6: Under GAAP, which accounting basis is required for publicly traded companies?
- Cash basis
- Modified cash basis
- Accrual basis (Correct answer)
- Tax basis
Correct answer: Accrual basis
GAAP requires publicly traded companies to use accrual basis accounting, which records revenues and expenses when earned or incurred.
Question 7: Which principle requires that the same accounting treatment be applied to similar items each accounting period?
- Matching principle
- Disclosure principle
- Consistency principle (Correct answer)
- Cost principle
Correct answer: Consistency principle
The consistency principle ensures that accounting methods are applied uniformly across periods to enable meaningful comparisons.
ABA Accounting Principles 3
The conservatism principle in accounting means that when in doubt, accountants should: