Instant Download with all chapters and Answers
Sample Chapters
*you will get test bank in PDF in best viewable format after buy*
Chapter 02 Accounting Judgements
Student: ___________________________________________________________________________
1. Recognition requires the measurement of an item for inclusion in the financial statements.
True False
2. The use of historical cost, rather than liquidation value, is supported by the continuity
assumption.
True False
3. The use of fair value rather than historical cost increases both the relevance and verifiability of
the financial statements.
True False
4. The separate entity assumption has more validity for a larger corporation than it would for a sole
proprietorship.
True False
5. The unit of measure assumption holds that all aspects of a company’s business operations can
be readily quantified.
True False
6. The goal of maximizing shareholder wealth is consistent with the entity concept.
True False
7. The continuity assumption holds that a business will carry on indefinitely.
True False
8. Legally, as well as for accounting statement purposes, a corporation is treated as a separate
entity apart from its stockholders, whereas a partnership is treated as one entity including the
owners.
True False
9. The time period concept dictates that the reporting period or fiscal period of an entity must be for
12 months.
True False
10. Under the productive capacity capital maintenance approach, a profit is assumed to have been
earned only if enough financial capital has been recovered by the end of the year to enable the
business to operate at the same level as at the beginning of the year.
True False
11. Information is reliable when it is in agreement with the actual underlying transactions and events,
the agreement is capable of independent verification and the information is reasonably free from
error and bias.
True False
12. The going concern principal does not apply if a company is expected to be liquidated in the next
24 months.
True False
13. Relevance is of primary importance in financial reporting, whereas comparability is of secondary
importance.
True False
14. Interperiod comparability is significantly enhanced when two similar companies use the same
accounting methods during a single reporting period.
True False
15. Information is neutral when it is free from bias that would lead users towards making decisions
that are influenced by the way the information is measured or presented.
True False
16. Accounting transactions must always be realized prior to being recognized.
True False
17. Accounting should provide information that is useful in assessing the “value” of an entity;
however, accounting information does not necessarily report the actual “value” of the entity.
True False
18. The nominal dollar capital maintenance approach is the mostly widely used application of the
stable currency assumption in North American practice.
True False
19. The nominal dollar capital maintenance approach implicitly recognizes that inflation is under
control, and thus ignores inflation in the preparation of financial statements.
True False
20. The constant dollar capital maintenance approach adjusts for the decline in the asset’s productive
capacity when reporting earnings.
True False
21. The nominal dollar capital maintenance approach adjusts for the replacement cost of the assets
when reporting earnings.
True False
22. At times, reliability must be sacrificed in order to enhance the relevance of accounting
information.
True False
23. To Recording periodic depreciation on assets such as buildings or machinery is an application of
the matching principle.
True False
24. The matching concept is the name applied to the process of associating expenses with
revenues.
True False
25. An example of the full disclosure principle would be a firm signing a major contract in November
to construct custom machinery for a client. Work in the current year is nil, yet the notes to the
firm’s financial statements discuss the nature and dollar amount of the contract.
True False
26. The understandability concept states that the information contained in financial statements should
be understandable to persons who have a reasonable understanding of business and economic
conditions and are willing to study the information with reasonable diligence.
True False
27. One of the objectives of financial reporting is to help users assess the amounts, timing and
uncertainty of prospective cash flows of the enterprise.
True False
28. The continuity assumption holds that the entity will continue in business for the foreseeable future
but it does not mean that it will be a going concern forever.
True False
29. Revenue is recognized when service is rendered and collection is probable.
True False
30. Materiality is one of the underlying constraints in the application of the IFRS conceptual
framework.
True False
31. Under IFRS, a change in accounting policy must result in information that is more reliable and
relevant.
True False
32. Under IFRS 13, Level 3 inputs are deemed to be more reliable than Level 2 inputs.
True False
33. In order to recognize sales revenue, collection of cash from the buyer is not necessary; however,
collection must be reasonably assured.
True False
34. No revenue whatsoever from the performance of a service can be recognized until all of the
service has been performed.
True False
35. Warranty expense on goods sold should be recognized in the period of the sale, even though the
costs to fulfill warranty claims will not be incurred until two or three years later.
True False
36. The full disclosure principle asserts that the financial reports of a business enterprise should
disclose all reliable information relating to its economic affairs.
True False
37. Relevance and representation faithfulness are the fundamental qualities under IFRS.
True False
38. The separate entity assumption applies only to legally separate entities such as corporations; it
does not apply to proprietorships or other unincorporated businesses.
True False
39. Under IFRS 13, a publicly quoted share price would be an example of a Level 1 Input.
True False
40. Comparability is an enhancing quality under IFRS and ASPE.
True False
41. The cost-benefit trade-off is a persuasive constraint under both IFRS and ASPE.
True False
42. Materiality is a component of representational faithfulness under IFRS.
True False
43. Verifiability focuses on the correct application of a basis of measurement rather than its
appropriateness.
True False
44. Under IFRS and ASPE, both assets and liabilities are mostly arises from past events.
True False
45. The quality of information that gives assurance that it is reasonably free of error and bias and is a
faithful representation is relevance.
True False
46. A furniture builder accepts a purchase order from a client to build a customized dresser. The
acceptance of this contract on that date is executory in nature and the builder must thus record a
liability on that date.
True False
47. Comparability is sometimes sacrificed for consistency.
True False
48. Interperiod tax allocation is the process of spreading the income tax expense across periods
benefited.
True False
49. In classifying the elements of financial statements, the primary distinction between revenues and
gains is the materiality of the amounts involved.
True False
50. The going concern or continuity assumption is critical to financial accounting. The assumption
A. Is always maintained for all firms for all years.
B. Supports the use of historical cost valuation for assets rather than market values.
C. Means that a corporation has a definite ending date.
D. Requires that we immediately expense prepaid accounts because they do not represent a
future cash inflow.
51. The objective of financial reporting is:
A. To provide the market value of a firm at a point in time.
B. To provide the total market value of its common stock.
C. To provide information useful for decision making by investors and creditors.
D. To require all companies to comply with GAAP.
52. A firm’s accounting policy is to immediately expense the cost of metal wastebaskets it purchases
for use by its employees at their desks. The total cost of wastebaskets in any year is $1,000 and
the firm has $6 billion in total assets. The firm expects the wastebaskets to last indefinitely. The
firm
A. Is violating GAAP
B. Is invoking the materiality constraint
C. Is invoking the conservatism constraint
D. Is violating the relevance principle
E. None of these answers are correct.
53. The sales manager of a firm has the use of a blue company-owned automobile to use to visit
potential customers. The sales manager also owns her own identical car except that it is red. The
manager paid for the red car with funds earned from her employment as sales manager. The firm
will report the cost of the blue auto in its balance sheet, but not the red auto. This is an example
of:
A. Reliability
B. Matching
C. Separate entity
D. Going concern
E. None of these answers are correct.
54. Preparation of financial statements with adequate notes is primarily based on the:
A. separate entity assumption.
B. full-disclosure principle.
C. cost principle.
D. cost/benefit constraint.
E. reliability quality.
55. Which of the following accounting concepts best justifies the use of accruals and deferrals?
A. Cost/benefit constraint
B. Unit-of-measure assumption
C. Continuity assumption
D. Materiality constraint
56. Accounting traditionally has been influenced by conservatism because of the:
A. probability of undetected errors in the financial statements.
B. difficulty in measuring net income on the accrual basis.
C. inherent uncertainties of many accounting measurements.
D. difficulty in making certain calculations.
E. large number of transactions recorded in any one period.
57. The continuity assumption is the basis for the rule that:
A. the income statement should not include material gains and losses that are both unusual and
infrequent.
B. treasury stock should not be reported in the balance sheet as an asset.
C. the cost of installing a machine should not be included in the recorded cost of the machine, but
rather expensed immediately.
D. the cost of operational assets should be allocated to expense systematically and rationally
over their useful lives.
58. S Corporation offered to issue 5,000 shares of its no par value common shares to another
company in exchange for a building at a time when there were 1,000,000 shares already
outstanding and were selling for $4.00 per share at the time. The owner of the building had the
opportunity to sell it to a competing buyer for $26,000. However, because the seller wanted the S
Corporation shares, S’s offer was accepted. At what amount should the building be reported in
S’s financial statements?
A. $26,000
B. $10,000
C. $20,000
D. $16,000
59. C Corporation exchanged 20,000 shares of its nonconvertible preferred shares for land owned by
B Corporation. A competing buyer previously had offered $150,000 cash for the land. Because of
tax consequences, the cash offer was not accepted and the lot was exchanged for the shares. C
Corporation previously had sold only 100 shares of its preferred shares at $9 per share several
months ago. Based on the cost principle, at what amount should the land be reported on C’s
financial statements?
A. $180,000
B. $165,000
C. $150,000
D. $160,000
60. The list price of a new van was $30,000 at a local car dealership. However, a customer convinced
the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier). The
van would cost the dealer $24,000 today. Inflation is 5% per year. The amount of profit that would
be recognized by the dealer as a result of the sale using the nominal dollar approach is:
A. $10,000
B. $2,500
C. $5,000
D. $6,000
61. The list price of a new van was $30,000 at a local car dealership. However, a customer convinced
the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier). The
van would cost the dealer $24,000 today. Inflation is 5% per year. The amount of profit that would
be recognized by the dealer as a result of the sale using the constant dollar financial capital
maintenance approach is:
A. $10,000
B. $4,000
C. $5,000
D. $9,000
62. The list price of a new van was $30,000 at a local car dealership. However, a customer convinced
the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier). The
van would cost the dealer $24,000 today. Inflation is 5% per year. The amount of profit that would
be recognized by the dealer as a result of the sale using the physical capital maintenance
approach is:
A. $1,000
B. $2,500
C. $5,000
D. $6,000
63. Accounting information is considered to be relevant when it
A. can be depended on to represent the economic conditions and events that it is intended to
represent.
B. is capable of making a difference to a decision-maker.
C. is understandable by reasonably informed users of accounting information.
D. is verifiable and neutral.
64. The quality of information that gives assurance that it is reasonably free of error and bias and is a
faithful representation is
A. relevance.
B. reliability.
C. verifiability.
D. neutrality.
E. None of these answers are correct.
65. Timeliness is an ingredient of the qualitative criteria of
A. Choice 1
B. Choice 2
C. Choice 3
D. Choice 4
66. Verifiability is an ingredient of the qualitative criteria of
A. Choice 1
B. Choice 2
C. Choice 3
D. Choice 4
67. Neutrality is an ingredient of the qualitative criteria of
A. Choice 1
B. Choice 2
C. Choice 3
D. Choice 4
68. Predictive value is an ingredient of the qualitative criteria of
A. Choice 1
B. Choice 2
C. Choice 3
D. Choice 4
69. Representational faithfulness is an ingredient of the qualitative criteria of
A. Choice 1
B. Choice 2
C. Choice 3
D. Choice 4
70. A primary objective of financial reporting is to:
A. assist investors in predicting prospective cash flows.
B. assist investors in analyzing the economy.
C. assist suppliers in determining an appropriate discount to offer a particular company.
D. enable banks to determine an appropriate interest rate for their commercial loans.
71. If, in year 1, a company used LIFO; year 2, FIFO; and in year 3, moving average cost for
inventory valuation, which of the following assumptions, constraints, or principles would be
violated:
A. cost.
B. time period.
C. matching.
D. consistency.
E. materiality.
72. Which of the following qualities does the cost principle primarily support?
A. Predictive value
B. Conservatism
C. Verifiability
D. Timeliness
