Accounting Principles Overview Quiz

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Questions and Answers

Which of the following is a defining characteristic of "general purpose accounting information"?

It focuses on providing information for tax purposes.

It emphasizes the needs of internal management.

It is designed for a specific user group, such as investors or creditors.

It is governed by the Philippine Financial Reporting Standards. (correct)

What is the key principle behind the "stable monetary unit" concept?

The value of the currency used is constantly adjusted for inflation.

Financial statements should reflect changes in purchasing power.

The value of the currency used is assumed to be constant. (correct)

Financial statements should be prepared using the most recent exchange rates.

Which of the following situations exemplifies the concept of "valuation by opinion"?

Calculating the amount of depreciation expense using a predetermined rate.

Estimating the value of a company's inventory based on market prices. (correct)

Determining the amount of cash on hand by counting the physical cash present.

Recording the cost of a newly purchased computer based on the invoice.

What is the primary purpose of the "double-entry system" in accounting?

To ensure that the total debits always equal the total credits. (C) Signup and view all the answers

Which of the following is a key aspect of the "going concern" concept?

The entity's operations will continue indefinitely. (C) Signup and view all the answers

Which accounting concept emphasizes the importance of considering the costs and benefits before processing any information?

Cost-benefit concept (A) Signup and view all the answers

What is the primary objective of accounting?

To provide information to support informed economic decisions. (A) Signup and view all the answers

Which of the following best describes "special purpose accounting information"?

Information that is designed to meet the needs of a particular user group. (B) Signup and view all the answers

Which accounting principle suggests that assets should be recorded at their original purchase price?

Historical cost concept (B) Signup and view all the answers

What is the primary focus of management accounting?

Providing specialized financial reports for internal decision-making (A) Signup and view all the answers

Which accounting principle emphasizes the importance of financial statements providing sufficient detail to be informative without being overly complex?

Full disclosure principle (A) Signup and view all the answers

What is the primary objective of the 'fund theory' in accounting?

Protecting and administering financial resources (A) Signup and view all the answers

According to the 'Matching principle', when should costs be recognized as expenses?

When related revenue is recognized (D) Signup and view all the answers

Which accounting principle encourages the use of caution when making estimations under uncertain conditions?

Prudence (Conservatism) (D) Signup and view all the answers

What is the primary purpose of 'Realization' in accounting?

Converting non-cash assets into cash or claims for cash (A) Signup and view all the answers

Which of these accounting concepts focuses on the interrelationship between different components of a company's financial statements?

Concept of Articulation (D) Signup and view all the answers

What does the term 'generally acceptable' mean in the context of accounting standards?

Principles broadly accepted due to longstanding practice and proven usefulness. (A) Signup and view all the answers

Which of the following best describes the process of establishing financial accounting standards?

A collaborative process involving various stakeholders. (A) Signup and view all the answers

What is the primary focus of financial accounting?

Preparing general-purpose financial statements for external users. (B) Signup and view all the answers

Which statement is TRUE regarding general-purpose financial statements?

They are designed to meet the common information needs of a wide range of users. (A) Signup and view all the answers

What is the primary responsibility of selecting appropriate accounting policies?

The entity's management team. (A) Signup and view all the answers

Which of the following correctly defines the term 'accounting' as described in the provided text?

Accounting is the process of identifying, measuring, and communicating economic information to aid informed judgments and decisions by users. (A) Signup and view all the answers

What is the primary purpose of the 'measuring' activity in accounting?

To assign monetary values to economic transactions and events. (C) Signup and view all the answers

Which of the following is an example of an external event that involves a non-reciprocal transfer?

A company receiving a government grant. (D) Signup and view all the answers

Which of the following best describes the concept of 'present value' as a measurement basis in accounting?

The amount of future cash flows an asset is expected to generate discounted to their current value. (A) Signup and view all the answers

Which of the following is NOT a measurement basis commonly used in accounting?

Net present value (C) Signup and view all the answers

What is a key reason for the importance of a uniform set of financial reporting standards?

To ensure consistency and comparability of financial information across entities. (C) Signup and view all the answers

Which of the following is an example of an internal event that would be recorded in accounting?

A company manufacturing a new product. (B) Signup and view all the answers

Which accounting measurement basis is most widely used in practice?

Historical cost (C) Signup and view all the answers

What is the primary focus of government accounting?

Managing public funds and ensuring accountability (D) Signup and view all the answers

Which of the following is NOT a practice area within the profession of accountancy?

Practice in Technology (D) Signup and view all the answers

What is the primary purpose of Philippine Financial Reporting Standards (PFRSs)?

To ensure consistency and comparability of financial reporting (C) Signup and view all the answers

What is the primary objective of an audit?

To evaluate the compliance of assertions with established criteria (A) Signup and view all the answers

What are the three components of Philippine Financial Reporting Standards (PFRSs)?

Philippine Financial Reporting Standards (PFRSs), Philippine Accounting Standards (PASs), and Interpretations (C) Signup and view all the answers

What is the primary role of a CPA in the practice of Commerce and Industry?

To apply professional accounting knowledge in decision-making roles (D) Signup and view all the answers

Why is it important for entities to follow a uniform set of reporting standards when preparing financial statements?

To facilitate the comparison of financial information across different entities (A) Signup and view all the answers

What is the main difference between 'Practice in Commerce and Industry' and 'Practice in Public Accountancy'?

The type of clients served (B) Signup and view all the answers

Study Notes

Overview of Accounting

Accounting is the process of identifying, measuring, and communicating economic information to enable informed decisions by users of that information.
The purpose of accounting is to provide information about economic activities intended for use in economic decision-making.

Definition of Accounting

Accounting is defined as "the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information."

Three Important Activities

Identifying: Analyzing events and transactions to determine if they should be recorded. Only the effects of accountable events are recorded.
Measuring: Assigning numerical values (usually monetary) to economic transactions and events.
Communicating: Transforming economic data into useful accounting information, such as financial statements, for users.

Types of Events

External events: Involve an external party.
- Exchange (reciprocal transfer): Reciprocal giving and receiving.
- Non-reciprocal transfer: "One-way" transaction.
- External event other than transfer: Changes in economic resources or obligations of an entity due to an external party, but no transfer involved.
Internal events: Do not involve an external party.
- Production: Process of transforming resources into finished goods.
- Casualty: Unexpected loss from disasters or similar events.

Measurement

Common measurement bases in accounting include:
- Historical cost
- Fair value
- Present value
- Realizable value
- Current cost
- Inflation-adjusted costs
Historical cost is most commonly used, often combined with other bases.

Valuation

Items valued by opinion are affected by estimates.
Items valued by fact are unaffected by estimates.

Communicating (Three Aspects)

Recording: Recording identified and measured accountable events through journal entries.
Classifying: Grouping similar and related items into their respective classes through ledger postings.
Summarizing: Putting together recorded and classified transactions and events in a condensed form. This leads to the preparation of financial statements.

Basic Purpose of Accounting

The basic purpose of accounting is to provide information about economic activities intended to be useful for economic decision-making.

Types of Accounting Information

General purpose: Meets common needs of most statement users; governed by Philippine Financial Reporting Standards (PFRSs).
Special purpose: Meets specific needs of particular statement users; provided by other accounting types (e.g., managerial accounting, tax basis accounting).

Basic Accounting Concepts

Double-entry system: Each accountable event is recorded in two parts—debit and credit.
Going concern: The entity is assumed to operate indefinitely.
Separate entity: The entity is treated separately from its owners.
Stable monetary unit: Amounts in financial statements are stated in a common unit of measure; changes in purchasing power are ignored.
Time period: The life of the business is divided into reporting periods.
Materiality: Information is material if its omission or misstatement could influence economic decisions.
Cost-benefit: The cost of processing information should not exceed the benefits derived from it.
Accrual basis of accounting: Effects of transactions are recognized when they occur (not when cash is exchanged), relating them to the accounting periods they concern.
Historical cost concept: An asset's value is determined based on its acquisition cost.
Concept of articulation: All parts of complete financial statements are interrelated.
Full disclosure: Financial statements contain sufficient detail to inform users, while remaining concise.
Consistency concept: Financial statements use consistent accounting policies.
Matching: Costs are recognized as expenses when related revenue is recognized.
Systematic and rational allocation: Costs not directly related to revenue are allocated over the period of their economic benefits.
Immediate or outright recognition: Events that do not meet the asset definition are recorded immediately.
Residual equity theory: In entities with two class shares, Ordinary Equity is calculated as Assets - Liabilities – Preferred Equity.
Fund theory: Accounting focuses on the custody and administration of funds.
Realization: The process of converting non-cash assets into cash or cash equivalents.
Prudence (Conservatism): Cautious estimates of assets/income or liabilities/expenses are made, avoiding overstating or understating values.

Common Branches of Accounting

Financial accounting: Focuses on general purpose financial statements.
Management accounting: Focuses on special-purpose financial statements for management.
Cost accounting: Systematic recording and analysis of costs of materials, labor, and overhead in production.
Auditing: Evaluating the correspondence of assertions with criteria and providing an opinion.
Tax accounting: Preparing tax returns and providing tax advice.
Government accounting: Focuses on the custody, use, and responsibility for public funds.

Four Sectors in Accountancy Practice

Public accountancy: Rendering audit or accounting services to multiple clients.
Commerce and industry: Private sector positions involving decision-making with accounting knowledge (often requiring CPA certification).
Education/Academe: Teaching accounting, auditing, and related subjects.
Government: Accounting positions in government or government-related organizations where accounting knowledge and/or CPA certification may be needed.

Accounting Standards in the Philippines

Philippine Financial Reporting Standards (PFRSs): Standards and Interpretations from the Financial Reporting Standards Council (FRSC).
- Philippine Financial Reporting Standards (PFRSs)
- Philippine Accounting Standards (PASs)
- Interpretations

Need for Reporting Standards

Uniform standards/guidelines are necessary to ensure financial statements are reliable and not misleading.
Standards are established by authorized bodies or they gain widespread use over time.
The process of establishing standards involves a democratic process to gain consensus among practicing accountants.

True or False Statements (from Presentation)

True - Only transactions affecting assets, liabilities, equity, income, or expenses are recorded.
False - Identifying is the process of analyzing transactions, not assigning values.
True - Financial accounting focuses on generally accepted accounting principles.
False - General purpose financial statements cater to common needs, not every user.
False - Financial statements are one tool, but not the only source of information in decision-making.

Additional Information (from Presentation)

Financial statements are based on source documents from accounting records.
Fiscal years beginning May 1 end May 31 of the following year.
Bookkeeping and accounting are closely related but not identical.
Accounting standards are revised to meet changing user needs.
The accountant (or entity's governing body) is responsible for selecting accounting policies.

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Description

Test your knowledge of essential accounting principles and concepts with this comprehensive quiz. Explore topics such as general purpose accounting information, the stable monetary unit concept, and the double-entry system. Perfect for students and professionals looking to reinforce their understanding of accounting fundamentals.