ACCOUNTING CONCEPTS PAST PAPERS WITH ANSWERS

QUESTION 1 : It is considered acceptable practice to deviate from generally accepted accounting principles (GAAP) in which of the following circumstances?

It is common practice in the industry to give particular transactions a specific accounting treatment
Adherence to GAAP would produce misleading results
There is concern that assets or income would be overstated
All of the above

The question of when it is appropriate to stray from generally accepted accounting principles (GAAP) is a matter of professional judgment; there is no clear-cut set of circumstances that justify such a departure. It can be assumed that adherence to GAAP almost always results in financial statements that are fairly presented. However, the standardsetting bodies recognize that, upon occasion, there might be an unusual circumstance when the literal application of GAAP would render the financial statements misleading. In these cases, a departure from GAAP is the proper Departures from GAAP can be justified in the following circumstances: It is common practice in the entity’s industry for a transaction to be reported in a particular way. The substance of the transaction is better reflected (and, therefore, the financial statements are more fairly presented) by not strictly following GAAP. If a transaction is considered immaterial (i.e., it would not affect a decision made by a prudent reader of the financial statements), then it need not be reported. There is concern that assets or income would be overstated and expenses or liabilities would be understated (the conservatism constraint requires that when there is any doubt, one should avoid overstating assets and income or understating expenses and liabilities). The results of departure appear reasonable under the circumstances, especially when strict adherence to GAAP will produce misleading financial statements and the departure is properly disclosed.

QUESTION 2 : When looking at a set of financial statements, on which statement would you find notes payable, current assets, retained earnings, and accumulated depreciation?

Statement of changes in owners’ equity
Balance sheet
Statement of cash flows
Income statement

Notes payable, current assets, retained earnings, and accumulated depreciation can all be found on the balance sheet. The balance sheet is an expansion of the accounting equation, Assets = Liabilities + Owners’ Equity . That is, it lists a company’s assets on one side and its liabilities and owners’ equity on the other side. Assets are classified as either current or noncurrent. Current assets consist of cash or other liquid assets that are expected to be converted to cash, sold, or used up, usually within a year or less. Current assets listed on the balance sheet include cash, accounts receivable, inventory, supplies, and prepaid expenses. Following the current assets are the long-term assets, or those assets that will likely not be converted to cash within one year, such as fixed assets and intangible assets. A company’s fixed assets are presented net of accumulated depreciation, an amount that represents the Liabilities are presented in order of maturity. Like current assets, current liabilities are those obligations that are expected to be paid within one year, such as accounts payable (the amount owed to vendors by a company for purchases on credit), accrued expenses (e.g., taxes payable or salaries payable), and the portion of long-term debts that will come due within the next year. Those liabilities that are not due for more than a year are listed under the heading long-term liabilities . The most common liabilities in this group are bonds, notes, and mortgages payable.

QUESTION 3 : Which of the following statements is TRUE regarding the balance sheet?

The balance sheet shows the financial performance of a company over a certain period of time, such as a quarter or a year.
Assets are generally presented on the balance sheet in order of liquidity.
The accounts that appear on the balance sheet include revenues and expenses.
Balance sheets are usually manipulated by understating assets or overstating liabilities.

The balance sheet , or statement of financial position , shows a “snapshot” of a company’s financial situation at a specific point in time, generally the last day of the accounting period. The balance sheet is an expansion of the accounting equation, Assets = Liabilities + Owners’ Equity . That is, it lists a company’s assets on one side and its Assets are the resources owned by a company. Generally, assets are presented on the balance sheet in order of liquidity (i.e., how soon they are expected to be converted to cash). Generally, in a financial statement fraud scheme, the balance sheet is manipulated to appear stronger by overstating assets and/or understating liabilities.

QUESTION 4 : Debits increase asset and liability accounts.

True
False

Entries to the left side of an account are referred to as debits, and entries to the right side of an account are referred to as credits. Debits increase asset and expense accounts, whereas credits decrease these accounts. On the other side of the equation, credits increase liabilities, revenue, and owners’ equity accounts. Conversely, debits decrease While debits do in fact increase assets, they reduce liabilities

QUESTION 5 : Chapman Inc. has always used the first-in, first-out (FIFO) inventory valuation method when calculating its cost of goods sold. This is also the standard inventory valuation method for other comparable entities in Chapman’s industry. Chapman’s controller wants to change to the weighted-average cost method because it will make Chapman’s net income appear much larger than FIFO valuation will. After several years of poor performance, management wants to boost the company’s appearance to potential investors. However, Chapman must continue to use the FIFO inventory valuation method. This is reflected in which of the qualitative characteristics of financial

Comparability
Going concern
Relevance
Valuation

Users of financial statements base their decisions on comparisons between different entities and on similar information from a single entity for another reporting period. Comparability is the qualitative characteristic that enables users to identify and understand similarities and differences between such items. Consistency, although related to comparability, is not the same. Consistency refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Comparability is the goal; However, both comparability and consistency do not prohibit a change in an accounting principle previously employed. An entity’s management is permitted to change an accounting policy only if the change is required by a standard or interpretation or results in the financial statements providing more reliable and relevant information about the effects of transactions; other events; or conditions on the entity’s financial position, financial performance, or cash flows. The entity’s financial statements must include full disclosure of any such changes. Standards used to value inventory, depreciate assets, or accrue expenses should be consistent from one accounting period to the next. Any changes in accounting policy or procedures must be disclosed in the supplemental notes to the financial statements. The desire to project an artificially strong performance is not a justifiable reason for a change in accounting principle

QUESTION 6 : Which of the following is the best description of what is shown on a company’s income statement?

The company’s sources and uses of cash during a particular period of time
The changes in the total owners’ equity amount listed on the balance sheet
How much profit (or loss) the company earned over a particular period of time
The company’s financial position at a specific point in time

Whereas the balance sheet shows a company’s financial position at a specific point in time, the income statement , or statement of profit or loss and other comprehensive income , details how much profit (or loss) a company earned during a period of time, such as a quarter or a year. The statement of changes in owners’ equity details the changes in the total owners’ equity amount listed on the balance sheet. The statement of cash flows reports a company’s sources and uses of cash during a particular period of time.

QUESTION 7 : Which of the following is the correct accounting model?

Assets + Liabilities = Owners’ Equity
Assets = Liabilities – Owners’ Equity
Assets = Liabilities + Owners’ Equity
None of the above

Accounting is based on the following model or accounting equation: Assets = Liabilities + Owners’ Equity .

QUESTION 8 : Credits decrease asset and expense accounts.

True
False

QUESTION 9 : The assumption that a business will continue indefinitely is reflected in the accounting concept of:

Going concern
Objective evidence
Comparability
Relevance

A company’s management is required to provide disclosures when existing events or conditions indicate that it is more likely than not that the entity might be unable to meet its obligations within a reasonable period of time after the financial statements are issued. There is an underlying assumption that an entity will continue as a going concern; that is, the life of the entity will be long enough to fulfill its financial and legal obligations.

QUESTION 10 : Which of the following statements is NOT true regarding the statement of cash flows?

There are three types of cash flows: cash flows from operating activities, from investing activities, and from financing activities.
The statement of cash flows reports a company’s sources and uses of cash during the accounting period.
The statement of cash flows is often used in tandem with the income statement to determine a company’s true financial performance.
The statement of cash flows shows a company’s financial position at a specific point in time.

The statement of cash flows reports a company’s sources and uses of cash during the accounting period. This statement is often used by potential investors and other interested parties in tandem with the income statement to determine a company’s true financial performance during the period being reported. The statement of cash flows is broken down into three sections: cash flows from operating activities, cash flows from investing activities, and cash The balance sheet shows a company’s financial position at a specific point in time.

QUESTION 11 : Which of the following could be used to balance the accounting equation if cash were stolen?

Reducing a liability
Reducing revenue
Increasing another asset
All of the above

The accounting equation, Assets = Liabilities + Owners’ Equity , is the basis for all double-entry accounting. If an asset (e.g., cash) is stolen, the equation can be balanced by increasing another asset, reducing a liability, reducing an owners’ equity account, reducing revenues (and thus retained earnings)

QUESTION 12 : Which of the following statements is TRUE with regard to gross margin?

Gross margin is equal to net sales less cost of goods sold.
Gross margin is another term for net income.
Gross margin is the top line of the income statement.
Gross margin is equal to revenues less operating expenses.

Two basic types of accounts are reported on the income statement—revenues and expenses. Revenues represent amounts received from the sale of goods or services during the accounting period. Most companies present net sales as the first line item on the income statement. The term net means that the amount shown is the company’s total sales minus any sales refunds, returns, discounts, or allowances. From net sales, an expense titled cost of goods sold or cost of sales is deducted. Regardless of the industry, this expense denotes the amount a company spent (in past, present, and/or future accounting periods) to produce the goods or services that were sold during the current period.

QUESTION 13 : As a sale is made, the appropriate charges for cost of goods sold, or other expenses directly corresponding to the sale, should be recorded in the same accounting period.

True
False

Expenses are recognized in the income statement on the basis of a direct association between the costs incurred and the earning of specific items of income. This process, commonly referred to as the matching principle , involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events; for example, the various components of expense making up the cost of goods sold are recognized at the same time as the income derived from the sale of the goods.

QUESTION 14 : If compliance with generally accepted accounting principles (GAAP) would be significantly more expensive than a different method that isn’t GAAP, use of an alternative method is permitted.

True
False

QUESTION 15 : Julia runs a printing company and has an antique printing press that she uses in her business. She purchased the press from a friend for $5,000. Similar presses are selling on the market today for about $8,000. Julia has a colleague who recently paid $9,000 for an antique printing press. According to the historical cost basis of asset measurement, how much should Julia initially record the printing press for on her books?

$9,000
$3,000
$8,000
$5,000

According to the historical cost basis of asset measurement, assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. This basis is the one most commonly adopted by entities in preparing their financial statements. In this example, Julia should list the printing press on her balance sheet for the amount she originally purchased it for—$5,000.

QUESTION 16 : According to the going concern disclosure requirements, if there is substantial doubt about a company’s ability to fulfill its financial obligations over a reasonable period of time, it must be disclosed in the company’s financial

True
False

QUESTION 17 : Which of the following is an acceptable justification for a departure from generally accepted accounting principles (GAAP)?

Departing from GAAP would make the company appear more profitable
The literal application of GAAP would render the financial statements misleading
Adhering to GAAP is significantly more expensive than using an alternative method
None of the above

The question of when it is appropriate to stray from generally accepted accounting principles (GAAP) is a matter of professional judgment; there is no clear-cut set of circumstances that justify such a departure. However, the fact that complying with GAAP would be more expensive or would make the financial statements look weaker is not a reason to use a non-GAAP method of accounting for a transaction. It can be assumed that adherence to GAAP almost always results in financial statements that are fairly presented. However, the standard-setting bodies recognize that, upon occasion, there might be an unusual circumstance when the literal application of GAAP would render the financial statements misleading. In these cases, a departure from GAAP is the proper accounting treatment. Departures from GAAP can be justified in the following circumstances: It is common practice in the entity’s industry for a transaction to be reported in a particular way. The substance of the transaction is better reflected (and, therefore, the financial statements are more fairly presented) by not strictly following GAAP. If a transaction is considered immaterial (i.e., it would not affect a decision made by a prudent reader of the financial statements), then it need not be reported. There is concern that assets or income would be overstated and expenses or liabilities would be understated (the conservatism constraint requires that when there is any doubt, one should avoid overstating assets and income or understating expenses and liabilities). The results of departure appear reasonable under the circumstances, especially when strict adherence to GAAP will produce misleading financial statements and the departure is properly disclosed.

QUESTION 18 : Generally speaking, _________________ is the proper basis for initially recording a piece of equipment on a company’s books.

Appraised value
Current market value
Estimated replacement value
Historical cost

Standard accounting principles require that property, plant, and equipment be initially recognized at historical cost. According to the historical cost basis of asset measurement, assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition.

QUESTION 19 : The ____________ details how much profit (or loss) a company earned over a particular period of time.

Statement of changes in owners’ equity
Statement of cash flows
Balance sheet
Income statement

QUESTION 20 : If a fraudster wants to conceal the removal of a liability from the books, which of the following actions will NOT balance the accounting equation?

Increasing revenue
Increasing an asset
Increasing a different liability
Increasing owners’ equity

The accounting equation, Assets = Liabilities + Owners’ Equity , is the basis for all double-entry accounting. Suppose that in order to make an organization appear that it has less debt, an accountant fraudulently removes a liability. This would leave the accounting equation unbalanced since the assets side would be greater than liabilities plus owners’ equity. In this particular case, the equation can be balanced by decreasing an asset, increasing a different liability, increasing an owners’ equity account, increasing revenues (and thus retained earnings), or reducing an expense (and thus increasing retained earnings). Increasing an asset would only make the equation further out of balance.

QUESTION 21 : Which accounting principle requires corresponding expenses and revenue to be recorded in the same accounting period?

Comparability
Going concern
Matching
Faithful representation

QUESTION 22 : Assets, liabilities, and owners’ equity are all items that appear on a company’s balance sheet.

True
False

QUESTION 23 : The qualitative financial reporting characteristic of comparability prohibits any change in an accounting principle previously employed.

True
False

Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Information about a company is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. Although a single economic occurrence can be faithfully represented in multiple ways, permitting alternative accounting methods for the same economic occurrence diminishes comparability. Consistency, although related to comparability, is not the same. Consistency refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Comparability is the goal; consistency helps to achieve that goal. However, both comparability and consistency do not prohibit a change in an accounting principle previously employed. An entity’s management is permitted to change an accounting policy only if the change is required by a standard or interpretation or results in the financial statements providing more reliable and relevant information about the effects of transactions; other events; or conditions on the entity’s financial position, financial performance, or cash flows. The entity’s financial statements must include full disclosure of any such changes. Examples of changes in accounting principles include a change in the method of inventory pricing, a change in the depreciation method for previously recorded assets, and a change in the method of accounting for long-term construction contracts.

QUESTION 24 : Which of the following statements is TRUE with regard to the statement of cash flows?

There are four types of cash flows: cash flows from operating activities, from investing activities, from financing activities, and from revenue activities.
The statement of cash flows shows a company’s financial position at a specific point in time.
The statement of cash flows is not always necessary because most companies operate under cash-basis accounting rather than accrual accounting.
The statement of cash flows is often used in tandem with the income statement to determine a company’s true financial performance.

The statement of cash flows reports a company’s sources and uses of cash during the accounting period. This statement is often used by potential investors and other interested parties in tandem with the income statement to determine a company’s true financial performance during the period being reported. The nature of accrual accounting allows (and often requires) the income statement to contain many noncash items and subjective estimates that make it difficult to fully and clearly interpret a company’s operating results. However, it is much harder to falsify the amount of cash that was received and paid during the year, so the statement of cash flows enhances the The balance sheet shows a company’s financial position at a specific point in time.

QUESTION 25 : Which of the following statements is NOT true regarding the statement of changes in owners’ equity?

It lists the major company shareholders and the change in their ownership equity over the fiscal year.
It serves a similar purpose to the statement of retained earnings.
It shows how amounts on the income statement flow through to the balance sheet.
It acts as the connecting link between the balance sheet and the income statement.

The statement of changes in owners’ equity details the changes in the total owners’ equity amount listed on the balance sheet. Because it shows how the amounts on the income statement flow through to the balance sheet, it acts as the connecting link between the two statements. The balance of the owners’ equity at the beginning of the year is the starting point for the statement. The transactions that affect owners’ equity are listed next and are added together. The result is added to (or subtracted from, if negative) the beginning-of-the-year balance, which provides the end-ofThe statement of changes in owners’ equity is a summary overview of the effects of owner investment and company net income on the owners’ equity balance. It does not name any shareholders or their individual ownership stake in Some companies present a statement of retained earnings rather than a statement of changes in owners’ equity. Similar to the statement of changes in owners’ equity, the statement of retained earnings starts with the retained earnings balance at the beginning of the year.

QUESTION 26 : Delta, a Certified Fraud Examiner, was hired to serve as an expert accounting witness in a case of alleged financial statement fraud. As part of her expert testimony, Delta explained how, under International Financial Reporting Standards (IFRS), management must make every effort to ensure that the company’s financial statements are complete, neutral, and free from error. Delta was explaining the concept of:

Going concern
Comparability
Faithful representation
None of the above

Financial information must faithfully represent the economic data of the enterprise that it purports to represent. Every effort shall be made to maximize the qualities of perfectly faithful representation: complete, neutral, and free from error. A complete depiction includes all information necessary to understand the data presented. A neutral depiction is without bias in the selection or presentation of financial information.

QUESTION 27 : David runs a local catering company. He keeps his books on a calendar year and uses the accrual basis of accounting. In December of Year 1, a customer placed an order with him to cater the food for a party that would take place in February of Year 2. The contract was signed and the balance was paid in full when the order was placed in December. When should David report the revenue from this party and the associated expenses of catering it?

Both the revenue and expenses should be recorded in December.
The revenue should be recorded in December when David received the cash, and the expenses should be recorded in February after the party takes place.
Both the revenue and expenses should be recorded in February.
It doesn’t matter; it is up to David to decide whether he reports the revenue and expenses in December or February.

QUESTION 28 : Which of the following types of accounts are increased by credits?

Revenue
Owners’ equity
Liability
All of the above

QUESTION 29 : Which of the following types of accounts are decreased by debits?

Owners’ equity
Liabilities
Revenue
All of the above

QUESTION 30 : Revenue should not be recognized for work that is to be performed in subsequent accounting periods, even though the work might currently be under contract.

True
False

In general, revenue is recognized or recorded when it becomes realized or realizable and earned. According to the revenue recognition principle, revenue should not be recognized for work that is to be performed in subsequent accounting periods, even though the work might currently be under contract. In general, revenue should be recognized in the period in which the work is performed.

QUESTION 31 : At the end of each fiscal year, the accounts reflected on the income statement are reduced to a zero balance.

True
False

The accounts reflected on the income statement are temporary; at the end of each fiscal year, they are reduced to a zero balance (closed), with the resulting net income (or loss) added to (or subtracted from) retained earnings on the

QUESTION 32 : In double-entry accounting, every transaction in the accounting records will have both a debit and a credit side, and these sides will always be equal.

True
False

Entries to the left side of an account are debits, and entries to the right side of an account are credits. Debits increase asset and expense accounts, while credits decrease them. Conversely, credits increase liability, owners’ equity, and revenue accounts; debits decrease them. Every transaction recorded in the accounting records will have both a debit and a credit, thus the term double-entry accounting .

QUESTION 33 : The statement of cash flows includes the following categories: cash flows from strategic activities, cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

True
False

QUESTION 34 : Which of the following appears on the balance sheet?

Cost of goods sold
Current assets
Revenues
Expenses

The balance sheet , or statement of financial position , is an expansion of the accounting equation, Assets = Liabilities + Owners’ Equity . That is, it lists a company’s assets on one side and its liabilities and owners’ equity on the other side. Assets are classified as either current or noncurrent. Current assets consist of cash or other liquid assets that are expected to be converted to cash, sold, or used up, usually within a year or less. Current assets listed on the balance sheet include cash, accounts receivable, inventory, supplies, and prepaid expenses. Revenues, expenses, and cost of goods sold are all items that appear on a company’s income statement.

QUESTION 35 : Entries to the left side of an account are referred to as credits, while entries to the right side of an account are debits.

True
False

Entries to the left side of an account are referred to as debits, and entries to the right side of an account are referred to as credits. Asset and expense accounts are increased with debits and decreased with credits, while liabilities, owners’ equity, and revenue accounts are increased with credits and decreased with debits

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Written by MJ