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
31
Which accounting principle requires that depreciation be charged on fixed assets to accurately reflect the cost of generating revenue?
Answer:
Matching concept
The matching concept dictates that expenses incurred to earn revenue should be recognized in the same period as the revenue itself. Since fixed assets help generate revenue over multiple periods, their cost is allocated as depreciation expense over their useful life to match the cost against the revenue earned.
32
Under the accrual basis of accounting, when should revenue be recognized?
Answer:
Earned
The accrual basis of accounting dictates that revenue is recognized when it is earned, regardless of when the actual cash is received. This ensures that the financial statements reflect the economic activity of the period in which the performance obligation was satisfied, providing a more accurate picture of financial performance.
33
What is another term used to describe dysfunctional decision-making?
Answer:
both a and c
Dysfunctional decision-making refers to choices that do not align with the organization's overall goals, often leading to suboptimal performance. Incongruent decision-making is a synonymous term, highlighting the mismatch between individual actions and organizational objectives. Both terms describe processes that fail to contribute positively to the company's strategic success.
34
Which accounting principle justifies reporting leased land on the balance sheet despite the company not holding legal title to the property?
Answer:
Substance over form Concept
The 'Substance over form' concept dictates that the economic reality of a transaction should take precedence over its legal form. Even if a company does not legally own the land, if it controls the asset and derives economic benefits from it through a lease, it must be reported to provide a true and fair view of the financial position.
35
Which accounting concept justifies the disclosure of purchased office equipment in financial statements?
Answer:
Materiality
The materiality concept suggests that financial statements should disclose all information that is significant enough to influence the decisions of users. While historical cost is used for valuation, the decision to report specific equipment is often guided by whether the item is material to the financial position of the business.
36
Which accounting principle requires the creation of a provision for doubtful debts in financial statements?
Answer:
Prudence concept
The Prudence concept, also known as conservatism, dictates that anticipated losses should be recognized immediately, while anticipated gains should not be recorded until realized. Creating a provision for doubtful debts reflects this by acknowledging potential future losses from uncollectible accounts.
37
Under the money measurement concept, which of the following items should be recorded in the business books of account?
Answer:
Value of the plant and machinery
The money measurement concept states that only transactions and events that can be expressed in monetary terms are recorded in the books of account. Qualitative factors like the health of a director or the quality of goods cannot be quantified in currency, whereas the value of plant and machinery is a measurable monetary asset.
38
A business elects to record stationery supplies as an asset only when the value exceeds $100. Which accounting concept justifies this practice?
Answer:
materiality
The materiality concept allows accountants to ignore small, insignificant items that do not influence the economic decisions of users. By setting a threshold of $100, the business simplifies its accounting process without significantly distorting the financial statements, as the impact of expensing smaller amounts is deemed immaterial to the overall financial position.
39
Under what conditions is a revenue item recognized in the financial statements?
Answer:
All of these
Revenue recognition criteria generally require that the inflow of economic benefits is probable and that the amount can be measured reliably. While accrual accounting is the standard, cash basis accounting is also a recognized method for certain entities. Therefore, in a broad context, these conditions collectively define the recognition process.
40
How does the accounting convention of conservatism influence the valuation of assets?
Answer:
Assets are understated
The principle of conservatism (or prudence) dictates that accountants should anticipate all possible losses but not anticipate profits. Consequently, assets are recorded at the lower of cost or market value to ensure they are not overstated. This cautious approach ensures that the financial position of the business is not presented in an overly optimistic light.