Problem 5-1A

Answer multiple-choice questions regarding accounting theory (L.O. 1-3)

Select the best answer to each of the following questions:

1. A set of basic concepts and assumptions and related principles that explain and guide the accountants actions in identifying, measuring, and communicating economic information is called:

a. Accounting theory.

b. Accounting rules.

c. Accrual basis.

d. Matching concept.

2. Which of the following statements is false?

a. Several separate legal entities properly may be considered to be one accounting entity.

b. The stable dollar assumption is used only when the dollar is absolutely stable.

c. Publicly held corporations generally prepare monthly financial statements for internal management and publish quarterly and annual financial statements for users outside the company.

d. Without the periodicity assumption, a business would have only one time period running from the inception of the business to its termination.

3. Which of the following statements is true?

a. When the substance of a transaction conflicts with the legal form of the transaction, the accountant should be guided by the legal form in recording the transaction.

b. The consistency concept prohibits a change in accounting principle even when such a change would better meet the information needs of financial statement users.

c. Under the double-entry approach, each transaction must be recorded with one debit and one credit of equal dollar amounts.

d. Special-purpose financial information for a specific decision, such as whether or not to purchase a new machine, is best obtained from the detailed accounting records rather than from the financial statements.

4. Which of the following statements is true?

a. All assets are carried indefinitely at their original costs in the financial statements.

b. Liabilities are measured in the cash to be paid or the value of services to be performed to satisfy the liabilities.

c. Accounting principles are derived by merely summarizing accounting practices used to date.

d. Accountants can easily measure all changes in assets and liabilities since they never involve estimates or calculations.

5. Which of the following statements is false?

a. The exchange-price principle is also called the cost principle.

b. The matching principle is closely related to the revenue recognition principle.

c. The installment sales method recognizes revenue sooner than it would normally be recognized.

d. The percentage-of-completion method recognizes revenue sooner than the completed-contract method.