Accounting Principles Explained

Which of the following best exemplifies the application of the business entity concept in accounting?

A company's research and development team has made a significant scientific discovery. While this discovery is expected to generate substantial future revenue, it is difficult to reliably quantify its monetary value immediately. According to the money measurement concept, how should the company treat this discovery in its current financial statements?

A company purchased a piece of land 10 years ago for $50,000. Today, the land is appraised at $250,000. According to the cost concept, at what value should the land be reported on the company's balance sheet?

A manufacturing company experiences a temporary shutdown due to a natural disaster. Despite the disruption, management expects the business to resume operations within a few months. Which accounting concept justifies the continuation of depreciating the company's fixed assets during the shutdown period?

A small business owner takes out a personal loan to purchase a new car. He deposits the loan amount into his personal bank account but uses some of the funds to pay for business expenses. How does the dual aspect concept apply to this scenario?

A real estate company receives a large, non-refundable deposit from a client for a property that will be transferred in six months. Under the realization concept, when should the company recognize the revenue?

A consulting firm performs services for a client in December, but the client doesn't pay the invoice until January. According to the accrual concept, when should the consulting firm recognize the revenue?

A company prepares its financial statements on December 31st. Rent for the month of December was paid on January 5th of the following year. How does the accounting period concept interact with the accrual concept in this scenario?

A software company incurs significant marketing expenses to promote a new product in the current accounting period. While the product is expected to generate revenue for several years, initial sales are low. How should the company apply the revenue match concept in this situation?

A company changes its depreciation method from straight-line to declining balance. According to the convention of consistency, what disclosure is required in the financial statements?

A company discovers a significant lawsuit has been filed against it, with a high probability of an unfavorable outcome. How should the company apply the convention of disclosure in its financial statements?

A company is valuing its inventory at the end of the year. The cost of the inventory is $100,000, but the market value is $80,000. How should the company apply the convention of conservatism?

A large corporation purchases a $20 stapler. Applying the convention of materiality, how should the company account for the stapler?

A new startup is deciding on whether to lease office space or have all staff work remotely. Regardless of the financial benefits of each option, the CEO feels it is essential to have all staff working together. Which accounting principle might the CEO be disregarding?

A major retailer has a huge amount of promotions being offered in the current accounting period to try and boost sales. How does the revenue match concept impact this accounting period?

A tech company is in a very competitive landscape, with new innovations always being developed. There is constant potential for their products to be obsolete. Which type of accounting convention is most affected?

How should a company account for potential warranty claims for a product they sell? Which accounting concept is most relevant?

Give an example of how Consistency accounting conventions can be limited. I.e. when might you consider changing the accounting systems in place?

How do accounting conventions and accounting concepts differ?

What is the main benefit of accounting concepts?

What is the link between the going concern concept and depreciation calculation?

What are the limitations of the money measurement concept?

A business owner owns a business that is running a lot of debt. What is the danger of ignoring the business entity concept, in this scenario?

An energy company stores barrels of oil in the event some of the equipment breaks down. How does the cost concept apply?

If a company is not deemed to be a "going concern", how does this affect the asset valuation?

Explain the link between assets, liabilities and capital in the dual aspect concept. If assets increase but liabilities remain stable, what happens to an entity's capital? (Assets = Liabilities + Capital)

A business signs a contract with a big client. When should the business recognize the contract?

Consider the accrual concept. The concept dictates that revenue should be measured between revenues and expenses. How would you describe this?

If a business splits their life into specific segments, what is this known as?

Which of the following is the best definition of 'matching' under the revenue match concept?

The Consistency financial convention implies which of the following?

What is the main importance of disclosure within financial statements?

There are two important items that occur from conservatism. What is one of them?

Following on from the previous question, give an example of conservatism?

What happens if an item is deemed to be material?

Following on from that, how should materiality be judged for items in the income statement?

A multi-national technology company discovers multiple fraud cases in their accounting filings. Due to how substantial these numbers are, the company decides to quietly fire the individuals involved and omit this from their accounting filings. Which accounting concepts are they breaching?

A business is in a growing market. As such, a number of clients are in financial distress. As an accountant, what decision best describes the accounting convention of conservatism?