Accounting Online Program Accounting Principles 3 — Questions and Answers
Question 1: When a company anticipates a loss but not a gain under uncertainty, it is applying:
- Matching principle
- Revenue recognition principle
- Conservatism principle (Correct answer)
- Objectivity principle
Correct answer: Conservatism principle
Conservatism (prudence) directs accountants to recognize potential losses immediately but wait until gains are certain before recording them.
Question 2: Which qualitative characteristic makes financial information useful for comparing two different companies?
- Relevance
- Faithful representation
- Comparability (Correct answer)
- Timeliness
Correct answer: Comparability
Comparability allows users to identify similarities and differences between companies by applying consistent accounting standards.
Question 3: The economic entity assumption states that:
- A business will continue operating indefinitely
- A business's finances must be kept separate from its owner's personal finances (Correct answer)
- All transactions must be recorded in monetary terms
- Revenue is recognized when earned
Correct answer: A business's finances must be kept separate from its owner's personal finances
The economic entity assumption requires that a business's transactions be recorded separately from those of its owners or other entities.
Question 4: Which of the following best describes the monetary unit assumption?
- Only transactions that can be expressed in money are recorded (Correct answer)
- Financial statements must be prepared monthly
- Assets must be listed in order of liquidity
- All currencies must be converted to USD
Correct answer: Only transactions that can be expressed in money are recorded
The monetary unit assumption holds that only economically significant events expressible in money are recorded in the accounts.
Question 5: Under the time period assumption, a company prepares financial statements:
- Only when a major transaction occurs
- At the end of its economic life
- For artificial but equal time intervals (Correct answer)
- Only upon request from investors
Correct answer: For artificial but equal time intervals
The time period assumption divides an entity's continuous life into defined intervals (months, quarters, years) for reporting purposes.
Question 6: If a company switches from FIFO to LIFO inventory costing without disclosure, which principle is violated?
- Matching principle
- Full disclosure principle (Correct answer)
- Historical cost principle
- Revenue recognition principle
Correct answer: Full disclosure principle
Changing accounting methods without disclosure violates the full disclosure principle, which requires reporting all material changes.
Question 7: Which of the following is NOT one of the four enhancing qualitative characteristics under GAAP/FASB frameworks?
- Comparability
- Verifiability
- Timeliness
- Conservatism (Correct answer)
Correct answer: Conservatism
Comparability, verifiability, timeliness, and understandability are the four enhancing qualitative characteristics; conservatism is a constraint, not an enhancing characteristic.
Accounting Online Program Accounting Principles 3
When a company anticipates a loss but not a gain under uncertainty, it is applying: