Accountancy MCQs
Topic Notes: Accountancy
General Description
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
111
What is the fundamental assumption underlying the going concern concept in accounting?
Answer:
The entity continues running for foreseeable future
The going concern concept assumes that a business entity will continue its operations for the foreseeable future, meaning it has neither the intention nor the necessity to liquidate or curtail its operations significantly. This assumption is crucial for valuing assets at historical cost rather than liquidation value.
112
What is the term for the specific time interval into which a business's lifespan is divided for financial reporting purposes?
Answer:
Accounting period
The accounting period is a fundamental concept where the continuous life of a business is segmented into discrete intervals, such as months, quarters, or years. This segmentation allows stakeholders to measure performance, assess financial health, and compare results consistently across different timeframes, ensuring transparency and accountability in financial reporting.
113
What is the term for the practice of maintaining consistency in financial reporting across different periods for an entity?
Answer:
conventions of horizontal consistency
The convention of consistency requires that accounting policies and methods remain unchanged from one period to the next. This ensures that financial statements are comparable over time, allowing stakeholders to analyze trends accurately. While 'horizontal consistency' is a descriptive term, it aligns with the accounting principle of consistency in financial reporting.
114
Which accounting concept assumes that a business entity will continue its operations indefinitely?
Answer:
Going concern system
The going concern concept is a fundamental accounting principle that assumes a business will remain in operation for the foreseeable future. This assumption justifies the valuation of assets at historical cost rather than liquidation value and supports the deferral of expenses over multiple accounting periods.
115
Does the prudence concept permit a business to create excessive reserves or provisions beyond what is reasonably necessary?
Answer:
No
The prudence concept requires that financial statements do not overstate assets or income. However, it does not justify the creation of 'secret reserves' or excessive provisions, as this would lead to an understatement of financial performance.