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
41
When two companies treat the purchase of identical equipment differently based on the significance of the cost relative to their size, which accounting concept are they applying?
Answer:
materiality
The materiality concept allows for deviations from strict accounting standards if the amount involved is insignificant. What is considered material for a small business might be immaterial for a large corporation, justifying different treatments for the same type of expenditure.
42
Under the accrual basis of accounting, when is revenue typically recognized?
Answer:
The sale in made
Revenue recognition principle dictates that revenue should be recognized when it is earned, which generally occurs at the point of sale when the goods are transferred or services are rendered to the customer, regardless of when the cash is actually received.
43
Which term describes the specific time span into which a business's life is divided for financial reporting purposes?
Answer:
Accounting period
The accounting period concept dictates that the indefinite life of a business is divided into shorter, equal intervals, such as a year or a quarter, to facilitate the timely preparation of financial statements and performance evaluation.
44
What does the concept of conservatism (prudence) take into account when preparing financial statements?
Answer:
All future losses but leave all future profits
The principle of conservatism, or prudence, dictates that businesses should anticipate all possible future losses but should not recognize future profits until they are actually realized. This approach ensures that financial statements do not overstate the financial position or performance of the company, providing a more cautious and realistic view to stakeholders.
45
According to the going concern concept, how is the life of a business entity perceived?
Answer:
Indefinite life
The going concern concept assumes that a business will continue its operations for the foreseeable future. It implies that the entity has an indefinite life, meaning it is not expected to liquidate or cease operations in the near term, which justifies the valuation of assets at historical cost rather than liquidation value.
46
Accounting is primarily defined as the process of matching which two financial elements?
Answer:
Revenue and costs
The matching principle in accounting dictates that revenues earned during a specific period must be matched against the expenses incurred to generate those revenues. This ensures that the net profit or loss for the period is accurately determined by aligning the financial efforts with the resulting accomplishments.
47
Under which accounting system are outstanding expenses and accrued income recognized when determining profit or loss?
Answer:
Mercantile system of accounting
The mercantile system, also known as the accrual basis of accounting, recognizes revenue when earned and expenses when incurred, regardless of when cash is actually received or paid. This ensures that the financial statements reflect the economic reality of the period, including all obligations and rights.
48
Calculate the flexible budget variance given an actual cost of $265,000 and a flexible budget cost of $156,000.
Answer:
$109,000
The flexible budget variance is determined by calculating the difference between the actual costs incurred and the costs allowed by the flexible budget for the actual level of output. In this scenario, the calculation is $265,000 minus $156,000, which equals $109,000. This variance represents the deviation from the expected costs at the actual production volume achieved during the period.
49
Which of the following principles is NOT associated with the Money Measurement Concept?
Answer:
Business is treated as separate from the proprietor
The Money Measurement Concept dictates that only transactions measurable in monetary terms are recorded. The concept that a business is distinct from its owner is known as the Business Entity Concept. Therefore, option B is unrelated to the Money Measurement Concept, as it describes a different fundamental accounting principle.
50
Which accounting convention justifies creating a provision for doubtful debts before actual losses occur?
Answer:
Convention of conservation
The convention of conservation, also known as prudence, dictates that businesses should anticipate potential losses but not potential gains. By creating a provision for doubtful debts, a company ensures that its assets are not overstated and that future losses are recognized as soon as they become probable.