Accounting Principles

Question 1

Accounting entity

Answer 1

A corporation is considered a ‘living’ enterprise, i.e. a ‘fictional’ being

Question 2

Going concern

Answer 2

A corporation is assumed to remain in existence for the foreseeable future

Question 3

Measurement & units of measure

Answer 3

Financial statements show only measurable activities of a company. Financial statements must be reported in the national monetary unit (U.S. $ for US companies)

Question 4

Periodicity

Answer 4

A companies continuous life can be divided into measured periods of time for which financial statements are prepared. U.S. companies are required to file quarterly (10-Q) and annual (10-K) reports

Question 5

Historical cost

Answer 5

Financial statements report companies resources and obligations at an initial historical cost. This conservative measure precludes constant appraisal and revaluation

Question 6

Revenue recognition

Answer 6

Revenue must be recorded when earned and measurable

Question 7

Matching principle

Answer 7

Costs of a product must be recorded during the same period as revenue from selling it

Question 8

Disclosure

Answer 8

Companies must reveal information determined to make a difference to its users

Question 9

Estimates & judgements

Answer 9

Certain measurements cannot be performed completely accurately, and must therefore utilise conservative estimates and judgements

Question 10

Materiality

Answer 10

Inclusion of certain financial transactions in financial statements hinges on their size and that of a company performing them

Question 11

Consistency

Answer 11

For each company, preparation of financial statements must utilize measurement techniques and assumptions which are consistent from one reporting period to another

Question 12

Conservatism

Answer 12

A downward measurement bias is used in the preparation of financial statements. Assets and revenues should not be overstated while liabilities and expenses should not be understated