Bcom Bachelor of Commerce Bachelor of Commerce: Financial Accounting 5 — Questions and Answers
Question 1: Which of the following best describes the conservatism (prudence) principle in accounting?
- Record revenues early and delay recognizing expenses
- When uncertain, recognize losses and expenses sooner and revenues later (Correct answer)
- Always choose the method that results in the highest net income
- Report all assets at their current market value
Correct answer: When uncertain, recognize losses and expenses sooner and revenues later
Conservatism means accountants err on the side of caution: anticipate potential losses early but do not recognize revenues until they are certain.
Question 2: A contingent liability should be recorded on the balance sheet when:
- It is reasonably possible that a loss will occur
- It is probable that a loss will occur and the amount can be reasonably estimated (Correct answer)
- The company is involved in any litigation
- The auditors require its disclosure
Correct answer: It is probable that a loss will occur and the amount can be reasonably estimated
GAAP requires recording a contingent liability only when a loss is both probable and the amount can be reasonably estimated.
Question 3: The gross profit margin is calculated as:
- Net Income ÷ Net Sales
- (Net Sales − Cost of Goods Sold) ÷ Net Sales (Correct answer)
- Operating Income ÷ Net Sales
- Net Sales ÷ Total Assets
Correct answer: (Net Sales − Cost of Goods Sold) ÷ Net Sales
Gross profit margin measures the percentage of sales remaining after deducting cost of goods sold, indicating production/pricing efficiency.
Question 4: Under the direct write-off method for bad debts:
- An allowance is estimated at the end of each period
- Bad debt expense is recognized when a specific account is deemed uncollectible (Correct answer)
- Accounts receivable are reduced by a percentage of sales
- The method is required under GAAP for large companies
Correct answer: Bad debt expense is recognized when a specific account is deemed uncollectible
The direct write-off method records bad debt expense only when a specific customer account is identified as uncollectible, violating the matching principle.
Question 5: Which of the following transactions increases total assets without affecting liabilities?
- Borrowing cash from a bank
- Purchasing equipment on credit
- Issuing common stock for cash (Correct answer)
- Collecting cash on an account receivable
Correct answer: Issuing common stock for cash
Issuing common stock for cash increases Cash (asset) and Common Stock/Additional Paid-in Capital (equity), with no effect on liabilities.
Question 6: On a multi-step income statement, operating income is calculated as:
- Net Sales minus Cost of Goods Sold
- Gross Profit minus Operating Expenses (Correct answer)
- Net Income plus Interest Expense
- Revenue minus all expenses including taxes
Correct answer: Gross Profit minus Operating Expenses
Operating income = Gross Profit − Operating Expenses, representing income from core business operations before interest and taxes.
Question 7: Which accounting concept requires that the same accounting methods be applied from one period to the next?
- Materiality principle
- Full disclosure principle
- Consistency principle (Correct answer)
- Going concern principle
Correct answer: Consistency principle
The consistency principle requires companies to use the same accounting methods across periods to allow meaningful comparison of financial statements over time.
Bcom Bachelor of Commerce Bachelor of Commerce: Financial Accounting 5
Which of the following best describes the conservatism (prudence) principle in accounting?