1
What does the term 'going concern' refer to in financial statements?
Explanation
Going concern assumes that the entity will continue its operations for the foreseeable future.
2
What is accrual accounting primarily concerned with?
Explanation
Accrual accounting records the effects of transactions in the periods they occur, regardless of cash movements.
3
In accrual accounting, when should a sale be recorded?
Explanation
A sale is recorded when the transaction occurs, not when cash changes hands.
4
What are receivables in accounting?
Explanation
Receivables refer to amounts that the entity expects to receive due to past transactions.
5
What does the concept of materiality in financial reporting mean?
Explanation
Information is material if its omission or misstatement could influence decision-making by users.
6
What does consistency in financial reporting ensure?
Explanation
Consistency allows for easier comparisons by using the same methods across periods and entities.
7
How should consistency be applied according to the definition provided?
Explanation
Consistency should be applied both from period to period and across different entities.
8
What does the principle of prudence in accounting advocate?
Explanation
Prudence requires careful judgment to avoid overstating assets and income or understating liabilities.
9
What is meant by the term 'duality' in accounting?
Explanation
Duality means every transaction has a dual aspect, requiring both a debit and a credit entry.
10
What is the basis of the accounting equation?
Explanation
The accounting equation is based on the principle that total debits must equal total credits.
11
When should prepaid expenses be recognized in financial statements?
Explanation
Prepaid expenses should be recognized when the service or benefit is consumed, not when cash is paid.
12
What is the main purpose of the consistency principle?
Explanation
The consistency principle enhances comparability by requiring similar items to be treated in the same way.
13
What is the result of applying the principle of prudence incorrectly?
Explanation
Improper application of prudence can lead to the overstatement of assets and income.
14
What is the relationship between debits and credits in double-entry accounting?
Explanation
In double-entry accounting, the total value of debits must equal the total value of credits for each transaction.
15
What must financial statements describe if the entity is not a going concern?
Explanation
If the entity is not a going concern, financial statements must describe the basis on which they are prepared.
16
What are accrued expenses?
Explanation
Accrued expenses are costs that have been incurred but not yet paid as of the reporting date.
17
What does materiality ensure in financial reporting?
Explanation
Materiality ensures that only information that could influence user decisions is reported.
18
Which of the following is NOT a qualitative characteristic of useful financial information?
Explanation
Complexity is not a qualitative characteristic; comparability, materiality, and consistency are.
19
What should be done when there is uncertainty in estimates for financial statements?
Explanation
Caution must be exercised when making judgments under uncertainty to avoid misstatements.
20
Why is double entry accounting considered fundamental?
Explanation
Double entry accounting is fundamental due to its basis in duality, where each transaction affects two accounts.
21
How does consistency contribute to financial reporting?
Explanation
Consistency contributes to financial reporting by providing comparability of financial information across periods and entities.
22
What should be done if a business owner is inclined to be optimistic about results?
Explanation
The principle of prudence must be followed to avoid optimistic bias that could misstate financial results.
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