Ch4 - Accounting Principles and End-of-Period Adjustments

Question 1

Four groups of requirements which support the preparation of financial statements, which give a true and fair view of a business’ financial performance and situation are:

Answer 1

• OBJECTIVITY (including accounting principles: unit of measurement, basis of valuation, no offsetting)
• QUALITY OF INFORMATION (including accounting principles: materiality, substance over form, faithful representation)
• PERIODICITY (including accounting principles: accounting period, consistency, going concern)
• PRUDENCE (including accounting principles: conservatism / prudence, accrual basis, matching)

Question 2

Accounting principles which assure preparation of OBJECTIVE financial statements are:

Answer 2

• unit of measurement
• basis of valuation
• no offsetting rule

Question 3

Accounting principles which assure QUALITY OF INFORMATION at preparation of financial statements:

Answer 3

• materiality
• substance over form
• faithful representation

Question 4

PERIODICITY is a requirement which consists of three accounting principles:

Answer 4

• accounting period
• going concern
• consistency of presentation

Question 5

Accounting principles which serve to achieve PRUDENCE are:

Answer 5

• conservatism / prudence
• accrual basis
• matching

Question 6

Describe accounting principle UNIT OF MEASUREMENT

Answer 6

Financial accounting only records transactions expressed in financial units. To give the users a complete vision of the history of events, figures of different periods must be compared or aggregated. Accounting must therefore use homogeneous monetary units over time.

Question 7

Describe accounting principle BASIS OF VALUATION AND MEASUREMENT

Answer 7

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. Defining the numbers that describe the effects of a transaction involves the selection of a particular basis of measurement:

• historical cost
• current (replacement) cost
• realizable (also settlement, liquidation) value
• value in use (also present value)
• fair value

Question 8

Describe accounting principle NO OFFSETTING

Answer 8

No offsetting is an accounting principle that an entity shall not offset assets and liabilities or income and expenses, unless explicitly required or permitted by an IFRS. Offsetting of opposite net effects of different transactions could hide some of the richness of the situation accounting is supposed to report on.

Question 9

Describe MATERIALITY

Answer 9

Information is material if its non-disclosure could influence the economic decisions of users taken on the basis of the financial statements.
Materiality depends on the size and nature of the omission or misstatement judged in the circumstances.

Question 10

Describe accounting principle SUBSTANCE OVER FORM

Answer 10

Transactions should be accounted for and presented in accordance with their substance and economic reality and not merely their legal form.

Question 11

Describe accounting principle ACCRUAL BASIS

Answer 11

An entity shall prepare its financial statements, except for cash flow statement, under the accrual basis. Financial statements must only reflect revenues, expenses, and income that relate to a given accounting period. That means that entity recognizes or records an event when it occurs and not when the cash transaction it induces has been completed. The resulting difference between cash transactions and amounts recognized under the accrual basis must be shown as accrued expenses, prepaid expenses, accrued revenue or prepaid revenue.

Question 12

Describe MATCHING principle in accounting

Answer 12

Matching principle is a corollary of the accrual basis. Matching principle requires from entities to recognize in the income statement simultaneously revenues and expenses that arise from the same transactions or events.

Question 13

Describe GOING CONCERN accounting principle

Answer 13

Financial statements are prepared assuming that a business entity will be carrying on its business throughout the following financial year(s).
The going concern principle is a key reason for valuing assets and resources or liabilities at their historical cost rather than at their liquidation value.

Question 14

List main categories of end-of-period entries

Answer 14

• adjusting entries
• change in value of fixed assets
• change in value of current assets
• change in value of liabilities
• closing entries
• correction of errors