Accounting Online Program Accounting Principles 5 — Questions and Answers
Question 1: Which of the following would be a violation of the economic entity assumption?
- Paying employees from a company bank account
- Recording the owner's mortgage payment as a business expense (Correct answer)
- Depreciating company equipment over its useful life
- Recognizing accrued salaries at year-end
Correct answer: Recording the owner's mortgage payment as a business expense
Recording the owner's personal mortgage as a business expense mixes personal and business finances, violating the economic entity assumption.
Question 2: Which accounting principle most directly prevents companies from delaying the recognition of obvious losses?
- Matching principle
- Conservatism principle (Correct answer)
- Revenue recognition principle
- Consistency principle
Correct answer: Conservatism principle
The conservatism principle requires that losses be recognized as soon as they are probable, preventing the artificial inflation of reported earnings.
Question 3: For information to be faithfully represented, it must be complete, neutral, and:
- Timely
- Material
- Free from error (Correct answer)
- Comparable
Correct answer: Free from error
Faithful representation under the FASB framework requires financial information to be complete, neutral, and free from material error.
Question 4: A law firm records legal service revenue when the case is won and the fee is collectible, not when cash arrives. This is an example of:
- Cash basis accounting
- The objectivity principle
- Accrual accounting and revenue recognition (Correct answer)
- The going concern principle
Correct answer: Accrual accounting and revenue recognition
Recognizing revenue when earned (case won, fee collectible) rather than when collected is the core of accrual accounting and the revenue recognition principle.
Question 5: Which of the following represents a going concern issue that would require disclosure?
- A company's revenue increased 10% year-over-year
- A company has substantial debt maturing within 12 months with no financing plan (Correct answer)
- A company changed its fiscal year-end
- A company acquired a subsidiary during the year
Correct answer: A company has substantial debt maturing within 12 months with no financing plan
Substantial debt due soon with no refinancing plan raises serious doubt about the entity's ability to continue operating, requiring going concern disclosure.
Question 6: Under the cost-benefit constraint in financial reporting, information should only be provided when:
- The auditor requests it
- It is material to total assets
- The benefits of the information outweigh the costs of providing it (Correct answer)
- Management deems it necessary
Correct answer: The benefits of the information outweigh the costs of providing it
The cost-benefit constraint holds that the usefulness of financial information must justify the cost of preparing and presenting it.
Question 7: Which principle requires that a company disclose the accounting methods it uses, such as straight-line vs. declining-balance depreciation?
- Matching principle
- Objectivity principle
- Full disclosure principle (Correct answer)
- Historical cost principle
Correct answer: Full disclosure principle
The full disclosure principle requires companies to reveal their chosen accounting policies, typically in the notes to financial statements.
Accounting Online Program Accounting Principles 5
Which of the following would be a violation of the economic entity assumption?