FA 1 - The Accounting Principles

Which of the following would cause a decrease to liabilities? Select all that apply.

A company pays $550, which is the current portion due on a long term bank loan is correct This event would cause a decrease in cash and a decrease in notes payable, which is a liability account. A company pays off the remaining amount of their mortgage loan is correct This event would cause a decrease in cash and a decrease in mortgage loan payable, which is a liability account. After one month, a company recognizes revenue equal to 1/12 of an annual magazine subscription they sold to a customer is correct This event would cause a decrease in deferred revenue, a liability account, and an increase in subscription revenue.

Which of the following transactions would be recorded on the books of the respective business entity? Select all that apply.

Donez from Cardullo's had some shelving at home that she decided to sell to the store. Cardullo's paid her $300 for the shelving. is correct Cardullo's paid for the shelving so this is a business transaction that would be recorded on Cardullo's books.

A packaged foods distribution company owns several warehouses in Indiana. Because of a new highway being built that will improve transportation throughout the Midwest, real estate in the area has increased significantly. The CEO approaches the CFO to ask if the company can update the books to reflect the higher value of the land and buildings. In explaining why the company cannot do that, the CFO's answer should refer to which accounting principle?

Historical Cost

Which of the following is an example of a revenue? Select all that apply.

Polar Caps designs and manufactures cold-weather hats, hoods, and protective headgear. They shipped and invoiced $6,000 worth of product to a large retailer in Anchorage. is correct The revenue has been earned because the goods were delivered. Maria owns a yoga studio. A customer attended a walk-in class, and at the time of the class, Maria was paid in cash $15 for the class and $5 for rental towels and mat and a bottle of water. is correct The revenue has been both earned (because the class and rental towels, mat, and water were provided) and realized (because the cash was received). Advelonics, an electronics company in Singapore, received an order valued at 100,000 Singapore Dollars. They also received 20,000 Singapore Dollars as a down payment. Revenue has not been earned in this case despite the fact that a portion of the order value has been collected. Advelonics has not delivered the goods and/or services at this point. The cash is an asset and the obligation to deliver the product is a liability at this point.

Which of the following demonstrates the historical cost principle?

Real Estate prices in Orderville have increased dramatically over the last five years. Although the land under Chad's office building is currently believed to be worth $500,000, it is recorded at $250,000 because that is the price he paid for it. is correct The idea that assets are recorded at their original cost underlies the historical cost principle, so the land under Chad's office being recorded at the price he paid for it is an example of the historical cost principle.

Which of the following scenarios demonstrates the historical cost principle? Select all that apply.

Real estate prices in Orderville have increased dramatically over the last five years. Although the land under Chad's office building is currently believed to be worth $500,000, it is recorded at $250,000 because that is the price he paid for it. is correct Transactions are recorded at the actual price or cost that existed at the time the transaction occurred. In the case of assets, it means that their value is shown at historical cost.

Suppose you are CEO of a pharmaceutical company and there are early reports of potential bad reactions to one of your drugs. This information would be regarded as more:

Relevant is correct Depending on the severity of the reactions, this may be relevant for both financial and health reasons.

Which of the following is an example of a liability? Select all that apply.

Short-term loan from a bank to purchase needed inventory is correct The loan is an obligation to pay back the bank based on a transaction that has already occurred, so this is a liability.

In a multi-national company or a large company with several subsidiaries, the company's financial management must know the legal structure of the company so that the financial records can be kept at the correct levels and financial reporting can be done properly. This relates to which of the following accounting principles?

The Entity Concept relates to defining what an entity is for the purpose of financial reporting.

Which of the following demonstrates the Money Measurement principle? Select all that apply.

The catch-phrase for Carl's Consulting Company (CCC) is "Our employees are our biggest asset." However, if you look at the Balance Sheet of CCC, there is no such asset. is correct The value of good employees cannot be accurately represented in monetary terms on the company's books. After winning a prestigious supplier of the year award, Mack Manufacturing saw an increase in their stock price. This increase does not appear on the company's financial statements. is correct The increase in stock price cannot be accurately represented in monetary terms on the company's books.

Which of the following is an example of an expense? Select all that apply.

The cost of a grocery store's inventory that has spoiled and is thrown away This is an expense related to the ongoing operations of a grocery store. Electricity used last month in a company's warehouse is correct This is an expense related to an ongoing activity of the business.

Many companies keep a small amount of cash on hand to reimburse employees for small expenses that arise in the course of business. This account is called Petty Cash and is accounted for at the end of a period, with expenses grouped together by accounts such as Office Supplies, Meals, Travel, and Other Expenses, rather than record each individual expense that is reimbursed. The reasoning behind recording the transactions in this manner relates to which of the following accounting principles?

The decision about the level of detail in grouping transactions into financial accounts is related to how significant, or material, the transactions are.

A cold-weather clothing store has always had a generous return policy on all jackets and coats. Jackets can be returned for a full refund up to a year from the date of purchase. Historical data has shown that 8% of customers will return their jackets and the company maintains a reserve for returns to account for this. The CEO is looking for ways to boost its bottom line and would like to get rid of this reserve in the current year. The most important accounting principle to consider in this case is:

The principle of Consistency requires that the accounting methods be consistently applied by the company over time in recording and reporting unless there is a sound reason to change them. Since it sounds like the motivation is related to increasing net income and is not to utilize a more accurate accounting, the company should probably choose to stay consistent with the accounting practices they have been using.

Universal Graphics has used straight-line depreciation on all its copiers and printers since its inception in 1943. This year, the CFO wants to change the method to double declining balance for all machinery because she believes it more accurately reflects how the machines are used up. From the options given below, which accounting principle is most important to consider before possibly making this change?

The principle of Consistency requires that the accounting methods be consistently applied by the company over time in recording and reporting unless there is a sound reason to change them. If the motivation is to more accurately match expenses to revenues, the company may find this reason more compelling than consistency and decide to make the change.

Which of the following examples demonstrates the Money Measurement Principle? Select all that apply.

You are the founder of an independent film company and your first film release has received very good reviews and has also been nominated for several awards. You are hopeful that this will help financially but your accountant has not recorded anything related to this good publicity. is correct This is an example of the money measurement principle. The value of the good publicity cannot be reliably estimated in monetary terms.

Which of the following scenarios demonstrates the conservatism principle? Select all that apply.

Your business produces circles and squares and keeps stocks of finished goods inventory for both. Demand for circles has skyrocketed recently, raising the price at which you can sell them. Squares, on the other hand, are now seen as obsolete. You are required to lower the asset value of your square inventory, but cannot increase the value of your circle inventory. is correct Conservatism requires that you record expenses or losses when they are probable but only record gains or revenue when they are realized (turned into cash or cash equivalents or good receivables).

Which of the following is an example of an asset? Select all that apply.

A customer's promise to pay for a previously delivered new couch is correct The promise represents future cash inflow and the delivery of the couch occurred in the past. Since the bread has become moldy, it most likely won't be able to be sold for cash, so it is not an asset.

Which of the following is an example of a proper application of materiality?

A microfinance institution has been relying on government collateral subsidies to finance start-ups in rural areas. However, the government has cut the program recently. The company reports this situation in its financial statements as this might affect the decisions of stakeholders. is correct The idea that certain information may affect the decisions of users of the financial statements underlies the concept of materiality, so this description of a microfinance institution is an example of a proper application of materiality. A microfinance institution has been relying on government collateral subsidies to finance start-ups in rural areas. However, the government has cut the program recently. The company reports this situation in its financial statements as this might affect the decisions of stakeholders. is correct The idea that certain information may affect the decisions of users of the financial statements underlies the concept of materiality, so this description of a microfinance institution is an example of a proper application of materiality.

Which of the following is an example of a liability?

A note payable for a bank loan is correct This is an example of a liability because it is an obligation to pay.

Which of the following demonstrates the going concern concept?

AQG Industries purchases $20,000 of product on credit from RSI Manufacturing. AQG records the purchase as an increase in inventory and an increase in accounts payable. AQG feels that they will be able to realize the value from the inventory and settle the obligation to RSI in the weeks to come. is correct The idea that a company will be able to realize the benefits from its assets and settle any obligations from its liabilities underlies the going concern concept, so this description of AQG recording the transaction with RSI is an example of the going concern concept. AQG Industries sold $20,000 of product on credit to SSA Manufacturing. SSA did not pay on time. AQG decides that it is fruitless to pursue collection so they write off the receivable from SSA. This is not an example of the going concern. The going concern concept relates to the accounting for your own business, not to the business of others.

Suppose you are CEO of a pharmaceutical company and there are early reports of potential bad reactions to one of your drugs. What would be the most effective way for financial management to react to this information?

Aggressively investigate the situation to determine the reliability of the information. is correct Management will want to know the facts and the source of information for both financial and health reasons.

Suppose that before 2012 Apple recognized revenue on domestic sales when the goods were shipped and recognized revenue on international sales when the goods were delivered to the customer. Let's also suppose that in 2012 Apple began recognizing revenue on all sales, domestic and international, when they were shipped. Which of the following is true?

Apple's accounting in 2012 violated the consistency principle. is correct Apple's accounting in 2012 violated the consistency principle because it started using different revenue recognition policies than it had used in the previous year.

Which of the following examples best illustrates the concept of materiality? Select all that apply.

As Tyler is reviewing his business' financial information at the end of the year, he realizes that no information was recorded throughout the year about the glue used to fix odds and ends around the office. Tyler decides that the cost of the glue wasn't enough to worry about figuring out. is correct Tyler feels that the cost of the glue was not significant enough to keep track of separately.

Which of the following examples demonstrates the going concern concept? Select all that apply.

Cardullo's carries some items that have limited shelf lives. If they went out of business tomorrow, they would have to write-off quite a bit of merchandise if it could not be disposed of in a "fire sale". However, since they anticipate staying in business for the foreseeable future, Cardullo's does not record anything for this potential loss. is correct This does demonstrate the Going Concern concept. Because Cardullo's anticipates staying in business, it is considered a going concern.

Which of the following is an example of a revenue? Select all that apply.

Gopher Co. is a designer and manufacturer of promotional clothing and accessories. Gopher delivered T-shirts to a customer and sent an invoice to the customer for $2,000. is correct The revenue has been earned because the goods were delivered. Lauren owns a coffee shop. A customer came to the shop and purchased a cappuccino and a bag of coffee beans. The customer paid $40 at the time of purchase. is correct The revenue has been both earned (because the cappuccino and a bag of coffee beans were provided) and realized (because the cash was received).

Companies may include a footnote in their financial statements regarding key market and industry risks that affect their business because users of the financial statements would likely consider such information to be:

Information that may affect a reasonable user's decision-making is considered relevant.

Which of the following is an example of consistency?

John is wondering which method of accounting for inventory in his bike shop would be most appropriate. He decides that he should use the same method that he has been using for the last few years, since his business has been operating essentially the same way. is correct John appears to adhere to the Consistency Principle in his accounting because he uses the same methods from period to period over time.

Party Planners, an event planner and producer, records and tracks every cost in detail and provides an itemized invoice for $150,000 to Ivy University for their services at the commencement ceremony. However, Ivy University simply records the entire amount of the invoice as part of their overall Event Expenses account. The reason for the different levels of detail between the two entities is related to the accounting principle of:

Materiality The decision about the level of detail in grouping transactions into financial accounts is related to how significant, or material, the transactions are. This often means large and small companies group transactions differently.

Victory Inc. sells custom trophies, medallions, and ribbons. For over 20 years, Victory, Inc. has had a special relationship with the city's Parks and Recreation Department and is the exclusive supplier of trophies for all their youth sports leagues. The founder of the company estimates this relationship is worth $100,000 in revenue each year and would like to record that amount as expected revenue for the coming year. The controller argues that such a relationship cannot be valued in dollars. This debate relates to which of the following principles?

Money Measurement The Money Measurement principle refers to the fact that only values that can be measured in monetary terms get recorded in the financial statements. A relationship is not something whose value can be measured in monetary terms.

Which of the following is an example of owners' equity? Select all that apply.

Net income for the first six months of the fiscal year is correct All revenues and expenses, and therefore Net Income, are part of the owners' equity of the business.