Accounting Online Program Accounting Principles 4 — Questions and Answers
Question 1: A company is unsure whether to record a contingent liability. Under conservatism, it should record the liability when the loss is:
- Possible and the amount is unknown
- Remote and estimable
- Probable and reasonably estimable (Correct answer)
- Possible and remote
Correct answer: Probable and reasonably estimable
ASC 450 requires a contingent liability to be accrued only when the loss is probable and the amount can be reasonably estimated.
Question 2: Which principle is most directly related to recording prepaid insurance as an asset rather than an immediate expense?
- Revenue recognition principle
- Matching principle (Correct answer)
- Objectivity principle
- Full disclosure principle
Correct answer: Matching principle
Prepaid insurance is an asset because the matching principle requires the expense to be recognized over the periods the coverage benefits.
Question 3: The FASB's conceptual framework identifies two fundamental qualitative characteristics of useful financial information. They are:
- Comparability and timeliness
- Relevance and faithful representation (Correct answer)
- Reliability and consistency
- Objectivity and materiality
Correct answer: Relevance and faithful representation
The FASB framework identifies relevance and faithful representation as the two fundamental qualitative characteristics.
Question 4: Which of the following scenarios best illustrates the revenue recognition principle under ASC 606?
- Record revenue when the customer pays the invoice
- Record revenue when the contract is signed
- Record revenue when control of goods or services is transferred to the customer (Correct answer)
- Record revenue when production is complete
Correct answer: Record revenue when control of goods or services is transferred to the customer
ASC 606 requires revenue to be recognized when (or as) a performance obligation is satisfied, which occurs when control transfers to the customer.
Question 5: Which accounting principle supports recording a building at $500,000 even though it has appreciated to $750,000 in market value?
- Conservatism principle
- Historical cost principle (Correct answer)
- Fair value principle
- Materiality principle
Correct answer: Historical cost principle
The historical cost principle requires assets to remain on the books at their original acquisition cost unless a specific exception applies.
Question 6: A small gift shop expenses its $15 wastebasket purchases immediately. Which concept justifies this treatment?
- Matching principle
- Going concern principle
- Materiality principle (Correct answer)
- Full disclosure principle
Correct answer: Materiality principle
Materiality permits companies to expense minor items immediately because capitalizing them would not affect any user's financial decisions.
Question 7: Financial statements are prepared with the assumption that the purchasing power of the dollar is stable. This relates to which assumption?
- Economic entity assumption
- Going concern assumption
- Monetary unit assumption (Correct answer)
- Time period assumption
Correct answer: Monetary unit assumption
The monetary unit assumption treats the dollar as a stable unit of measure, which means traditional GAAP statements do not adjust for inflation.
Accounting Online Program Accounting Principles 4
A company is unsure whether to record a contingent liability.
Under conservatism, it should record the liability when the loss is: