Accounting Principles Knowledge Test: Quiz

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  • 1/20 Questions

    Which principle/guideline requires the company's financial statements to have footnotes containing information that is important to users of the financial statements?

    • Conservatism
    • Economic Entity
    • Full Disclosure
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About This Quiz


Do you know anything about accounting principles and knowledge? Could you pass this quiz? Financial accounting is the branch of corporate accounting that identifies, records, and examines financial data for people outside of the company. Any data given by financial accounting includes quarterly and annual income statements, balance sheets, and cash flow statements of general earnings. If it all adds up you will pass this quiz.

Accounting Principles Knowledge Test: Quiz - Quiz

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  • 2. 

    The personal assets of the owner of a company will not appear on the company's balance sheet because of which principle/guideline?

    • Cost

    • Economic Entity

    • Monetary Unit

    Correct Answer
    A. Economic Entity
    Explanation
    The personal assets of the owner of a company will not appear on the company's balance sheet because of the Economic Entity principle/guideline. This principle states that the business entity should be treated separately from its owner(s) and any personal assets or liabilities of the owner(s) should not be mixed with the company's financial statements. This ensures that the financial position and performance of the company are accurately represented and can be evaluated independently.

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  • 3. 

    Which principle/guideline allows a company to ignore the change in the purchasing power of the dollar over time?

    • Cost

    • Economic Entity

    • Monetary Unit

    Correct Answer
    A. Monetary Unit
    Explanation
    The principle of Monetary Unit allows a company to ignore the change in the purchasing power of the dollar over time. This principle assumes that the currency used in financial reporting remains stable and constant, regardless of inflation or deflation. It allows companies to measure and record financial transactions in a single currency unit, typically the local currency, without adjusting for changes in its value over time. This simplifies the accounting process and ensures consistency in financial reporting.

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  • 4. 

    Which principle/guideline is associated with the assumption that the company will continue on long enough to carry out its objectives and commitments?

    • Economic Entity

    • Going Concern

    • Time Period

    Correct Answer
    A. Going Concern
    Explanation
    The principle/guideline associated with the assumption that the company will continue on long enough to carry out its objectives and commitments is "Going Concern". This principle assumes that the company will not be liquidated in the near future and will continue to operate and fulfill its obligations. It implies that the company's financial statements are prepared under the assumption that it will continue to exist and function as a going concern in the foreseeable future.

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  • 5. 

    A company sold merchandise of $8,000 to a customer on December 29, 2010. The company's sales terms require the customer to pay the company by January 28, 2011. The company's income statement reported the sale in December 2010. This is proper under which accounting principle/guideline?

    • Full Disclosure

    • Monetary Unit

    • Revenue Recognition

    Correct Answer
    A. Revenue Recognition
    Explanation
    The correct answer is Revenue Recognition. Revenue recognition is an accounting principle that states that revenue should be recognized when it is earned and realized or realizable, regardless of when the payment is received. In this case, even though the customer is required to pay by January 28, 2011, the company recognized the revenue in December 2010 because the merchandise was sold and the earnings were realized at that time.

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  • 6. 

    Which principle/guideline requires a company's balance sheet to report its land at the amount the company paid to acquire the land, even if the land could be sold today at a significantly higher amount?

    • Cost

    • Economic Entity

    • Monetary Unit

    Correct Answer
    A. Cost
    Explanation
    The principle that requires a company's balance sheet to report its land at the amount the company paid to acquire it, even if the land could be sold today at a significantly higher amount, is the Cost principle. This principle states that assets should be recorded at their historical cost, which is the amount of money paid to acquire them. It focuses on the objective and verifiable nature of historical cost, rather than the current market value of the asset. Therefore, the company should report the land at its cost on the balance sheet, regardless of its current market value.

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  • 7. 

    Which principle/guideline justifies a company violating an accounting principle because the amounts are immaterial?

    • Conservatism

    • Full Disclosure

    • Materiality

    Correct Answer
    A. Materiality
    Explanation
    Materiality is the principle/guideline that justifies a company violating an accounting principle when the amounts involved are immaterial. Materiality refers to the concept that information should only be disclosed if its omission or misstatement could influence the decisions of users of financial statements. In this case, if the amounts are immaterial, it means that they are not significant enough to impact the overall financial statements and therefore, the company can deviate from an accounting principle without compromising the accuracy or reliability of the financial information.

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  • 8. 

    Accountants might recognize losses but not gains in certain situations. For example, the company might write-down the cost of inventory, but will not write-up the cost of inventory. Which principle/guideline is associated with this action?

    • Conservatism

    • Materiality

    • Monetary Unit

    Correct Answer
    A. Conservatism
    Explanation
    The principle of conservatism is associated with recognizing losses but not gains in certain situations. This principle suggests that accountants should be cautious and conservative when recording financial transactions, especially when it comes to recognizing gains. Writing down the cost of inventory is an example of recognizing a loss, which aligns with the principle of conservatism. On the other hand, writing up the cost of inventory to recognize a gain goes against this principle. Therefore, the correct answer is conservatism.

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  • 9. 

    Which principle/guideline directs a company to show all the expenses related to its revenues of a specified period even if the expenses were not paid in that period?

    • Cost

    • Matching

    • Monetary Unit

    Correct Answer
    A. Matching
    Explanation
    The principle of matching directs a company to show all the expenses related to its revenues of a specified period, even if the expenses were not paid in that period. This principle ensures that expenses are properly matched with the revenues they generate, providing a more accurate representation of the company's financial performance. By following the matching principle, companies can avoid distorting their financial statements and provide a clearer picture of their profitability.

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  • 10. 

    Public utilities' balance sheets list the plant assets before the current assets. This is acceptable under which accounting principle/guideline?

    • Conservatism

    • Cost

    • Industry Practices

    Correct Answer
    A. Industry Practices
    Explanation
    The correct answer is Industry Practices. Public utilities typically follow industry practices when preparing their financial statements. In this case, listing plant assets before current assets on the balance sheet is considered acceptable and in line with the practices followed by other companies in the industry. This principle/guideline allows for consistency and comparability among the financial statements of different public utilities.

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  • 11. 

    When the accountant has to choose between two acceptable alternatives, the accountant should select the alternative that will report less profit, less asset amount, or a greater liability amount. This is based upon which principle/guideline?

    • Conservatism

    • Cost

    • Materiality

    Correct Answer
    A. Conservatism
    Explanation
    The principle of conservatism suggests that when faced with two acceptable alternatives, the accountant should choose the one that will report less profit, less asset amount, or a greater liability amount. This principle aims to ensure that financial statements are not overly optimistic and that potential losses or risks are adequately reflected. By selecting the alternative that results in lower profit or higher liability, the accountant is being cautious and conservative in their reporting, which promotes transparency and accuracy in financial statements.

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  • 12. 

    Near the end of the year 2010, a company required a customer to pay $200,000 as a deposit for work that is to begin in early 2011. At the end of 2010 the company reported the $200,000 as a liability on its balance sheet. Which accounting principle/guideline prevented the company from reporting the $200,000 on its 2010 income statement?

    • Going Concern

    • Materiality

    • Revenue Recognition

    Correct Answer
    A. Revenue Recognition
    Explanation
    The accounting principle of Revenue Recognition prevented the company from reporting the $200,000 on its 2010 income statement. Revenue recognition requires that revenue be recognized when it is earned and realized or realizable, and when it can be measured with reasonable certainty. In this case, the work for which the deposit was received had not yet begun, so the revenue had not been earned and therefore should not be recognized on the income statement until the work is actually performed in 2011.

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  • 13. 

    A corporation pays its annual property tax bill of approximately $12,000 in one payment each December 28. During the year, the corporation's monthly income statements report Property Tax Expense of $1,000. This is an example of which accounting principle/guideline?

    • Conservatism

    • Matching

    • Monetary Unit

    Correct Answer
    A. Matching
    Explanation
    The correct answer is Matching. The Matching principle states that expenses should be recognized in the same period as the revenues they help generate. In this case, the corporation recognizes the Property Tax Expense of $1,000 each month to match it with the revenues earned during that period. By doing so, the corporation ensures that the expenses are properly matched with the revenues, providing a more accurate representation of its financial performance.

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  • 14. 

    A retailer wishes to report its merchandise inventory on its balance sheet at its retail value. This would violate which accounting principle/guideline?

    • Cost

    • Full Disclosure

    • Monetary Unit

    Correct Answer
    A. Cost
    Explanation
    Reporting merchandise inventory at its retail value would violate the Cost accounting principle. This principle states that assets should be recorded at their historical cost, which is the original amount paid to acquire them. Retail value represents the current market value of the inventory and does not reflect the historical cost. By reporting inventory at its retail value, the retailer would not be accurately representing the cost of its assets on the balance sheet.

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  • 15. 

    Accrual accounting is based on this principle/guideline.

    • Cost

    • Full Disclosure

    • Matching

    Correct Answer
    A. Matching
    Explanation
    Matching is the principle/guideline that accrual accounting is based on. It states that expenses should be recognized in the same accounting period as the revenues they help generate. This means that when a sale is made, the associated expenses, such as the cost of goods sold, should be recognized in the same period to accurately reflect the financial performance of the business. Matching ensures that the income statement accurately reflects the profitability of the business by aligning revenues and expenses in the appropriate accounting periods.

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  • 16. 

    A company borrowed $100,000 on December 1, 2010, and will make its only payment for interest when the note is paid off on June 1, 2011. The total interest for the six months will be $3,600. On the December 2010 income statement, the accountant reported an Interest Expense of $600. This action was the result of which accounting principle/guideline?

    • Cost

    • Matching

    • Revenue Recognition

    Correct Answer
    A. Matching
    Explanation
    The accountant reported an Interest Expense of $600 on the December 2010 income statement because of the matching principle. The matching principle states that expenses should be recognized in the same period as the revenues they helped to generate. In this case, the interest expense of $600 is recognized in December 2010 to match with the revenue earned during that period. This ensures that the financial statements accurately reflect the expenses incurred in generating the revenue.

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  • 17. 

    An asset with a cost of $120,000 is depreciated over its useful life of 10 years rather than expensing the entire amount when it is purchased. This complies with which principle/guideline?

    • Cost

    • Full Disclosure

    • Matching

    Correct Answer
    A. Matching
    Explanation
    The principle of matching states that expenses should be matched with the revenues they help generate. By depreciating the asset over its useful life of 10 years, the cost of the asset is spread out over the same period of time during which it contributes to generating revenues. This ensures that the expenses associated with the asset are matched with the revenues it helps generate, thus complying with the principle of matching.

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  • 18. 

    A very large corporation's financial statements have the dollar amounts rounded to the nearest $1,000. Which accounting principle/guideline justifies not reporting the amounts to the penny?

    • Full Disclosure

    • Materiality

    • Monetary Unit

    Correct Answer
    A. Materiality
    Explanation
    The accounting principle of materiality justifies not reporting the dollar amounts to the penny in a very large corporation's financial statements. Materiality refers to the concept that information is material if it could influence the decisions of users of the financial statements. In this case, reporting the amounts to the penny may not provide significant value or impact the decisions of users, considering the large size of the corporation. Therefore, rounding the dollar amounts to the nearest $1,000 is a reasonable approach, as it still provides relevant and meaningful information without excessive detail.

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  • 19. 

    A large company purchases a $250 digital camera and expenses it immediately instead of recording it as an asset and depreciating it over its useful life. This practice may be acceptable because of which principle/guideline?

    • Cost

    • Matching

    • Materiality

    Correct Answer
    A. Materiality
    Explanation
    The practice of immediately expensing a $250 digital camera instead of recording it as an asset and depreciating it over its useful life may be acceptable because of the principle of materiality. Materiality refers to the concept that financial information should be disclosed if it could potentially influence the decisions of users of the financial statements. In this case, the cost of the digital camera is relatively low compared to the overall financial position of the company, making it immaterial and therefore acceptable to expense it immediately.

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  • 20. 

    The creative chief executive of a corporation who is personally responsible for numerous inventions and innovations is not reported as an asset on the corporation's balance sheet. The accounting principle/guideline that prevents the corporation for reporting this person as an asset is

    • Conservatism

    • Cost

    • Going Concern

    Correct Answer
    A. Cost
    Explanation
    The accounting principle that prevents the corporation from reporting the creative chief executive as an asset on the balance sheet is "Cost." According to the cost principle, assets are recorded at their historical cost, which is the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the asset. Since the creative chief executive's inventions and innovations are not acquired through a transaction involving cash or consideration, they cannot be recognized as assets on the balance sheet.

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  • Current Version
  • Mar 22, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Dec 04, 2011
    Quiz Created by
    Zsinmakkah
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