1. What is the primary objective of financial reporting according to GAAP?
• a) Provide information about management's plans.
• b) Provide information that is useful to current and potential investors, lenders, and
creditors.
• c) Present financial statements that avoid taxes.
• d) Allow auditors to identify fraud.
Answer: b) Provide information that is useful to current and potential investors, lenders,
and creditors.
Rationale: The primary objective of financial reporting under GAAP is to provide information
that is useful in making investment, credit, and similar resource allocation decisions.
2. Which organization is responsible for setting GAAP in the United States?
• a) International Accounting Standards Board (IASB)
• b) Securities and Exchange Commission (SEC)
• c) Financial Accounting Standards Board (FASB)
• d) Public Company Accounting Oversight Board (PCAOB)
Answer: c) Financial Accounting Standards Board (FASB)
Rationale: The FASB is responsible for developing and setting accounting principles in the
United States, which are collectively known as GAAP.
3. Which of the following is NOT a characteristic of information under GAAP?
• a) Relevance
• b) Timeliness
• c) Faithful representation
• d) Flexibility
Answer: d) Flexibility
Rationale: Under GAAP, financial information should be relevant, timely, and provide a faithful
representation. Flexibility is not a characteristic promoted by GAAP.
4. The matching principle under GAAP requires that:
, • a) Expenses be matched with revenues in the period in which they are incurred.
• b) Expenses be matched with revenues in the period when payment is made.
• c) Revenues be recorded only when cash is received.
• d) Expenses be recorded only when cash is paid.
Answer: a) Expenses be matched with revenues in the period in which they are incurred.
Rationale: The matching principle requires that expenses be recognized in the same period as
the revenues they help generate, ensuring accurate representation of financial performance.
5. The historical cost principle under GAAP requires that:
• a) Assets and liabilities be recorded at their market value.
• b) Assets and liabilities be recorded at their original purchase price.
• c) Assets be recorded at the replacement cost.
• d) Liabilities be recorded at their settlement value.
Answer: b) Assets and liabilities be recorded at their original purchase price.
Rationale: The historical cost principle requires companies to record assets and liabilities at their
original purchase or acquisition cost, not their current market value.
6. Under the revenue recognition principle, revenue is generally recognized:
• a) When the cash is received.
• b) When the contract is signed.
• c) When the goods or services are provided to the customer.
• d) When management estimates the revenue.
Answer: c) When the goods or services are provided to the customer.
Rationale: The revenue recognition principle requires revenue to be recognized when it is
earned, meaning when goods or services are provided to the customer, regardless of when cash is
received.
7. Which principle states that businesses should continue to operate indefinitely, unless
evidence suggests otherwise?
• a) Going concern principle
• b) Revenue recognition principle
, • c) Matching principle
• d) Historical cost principle
Answer: a) Going concern principle
Rationale: The going concern principle assumes that a business will continue its operations
indefinitely, unless there is evidence to the contrary, such as liquidation or bankruptcy.
8. Which principle emphasizes the importance of not overstating assets or income?
• a) Full disclosure principle
• b) Conservatism principle
• c) Matching principle
• d) Materiality principle
Answer: b) Conservatism principle
Rationale: The conservatism principle directs accountants to choose the accounting method that
is least likely to overstate assets or income, ensuring a more cautious financial outlook.
9. What does the materiality principle state?
• a) All items must be reported in financial statements regardless of size.
• b) Financial statements should omit all insignificant items.
• c) Only information that could influence the economic decisions of users should be
included in the financial statements.
• d) Financial statements should include all information regardless of its relevance.
Answer: c) Only information that could influence the economic decisions of users should be
included in the financial statements.
Rationale: The materiality principle means that only items that are large enough to influence the
economic decisions of users should be included in the financial statements.
10. What is the full disclosure principle?
• a) Companies must disclose any information that impacts their financial position.
• b) Companies must disclose only their net income in financial statements.
• c) Companies can disclose information selectively if it benefits them.
• d) Companies do not have to disclose liabilities unless they are material.
• a) Provide information about management's plans.
• b) Provide information that is useful to current and potential investors, lenders, and
creditors.
• c) Present financial statements that avoid taxes.
• d) Allow auditors to identify fraud.
Answer: b) Provide information that is useful to current and potential investors, lenders,
and creditors.
Rationale: The primary objective of financial reporting under GAAP is to provide information
that is useful in making investment, credit, and similar resource allocation decisions.
2. Which organization is responsible for setting GAAP in the United States?
• a) International Accounting Standards Board (IASB)
• b) Securities and Exchange Commission (SEC)
• c) Financial Accounting Standards Board (FASB)
• d) Public Company Accounting Oversight Board (PCAOB)
Answer: c) Financial Accounting Standards Board (FASB)
Rationale: The FASB is responsible for developing and setting accounting principles in the
United States, which are collectively known as GAAP.
3. Which of the following is NOT a characteristic of information under GAAP?
• a) Relevance
• b) Timeliness
• c) Faithful representation
• d) Flexibility
Answer: d) Flexibility
Rationale: Under GAAP, financial information should be relevant, timely, and provide a faithful
representation. Flexibility is not a characteristic promoted by GAAP.
4. The matching principle under GAAP requires that:
, • a) Expenses be matched with revenues in the period in which they are incurred.
• b) Expenses be matched with revenues in the period when payment is made.
• c) Revenues be recorded only when cash is received.
• d) Expenses be recorded only when cash is paid.
Answer: a) Expenses be matched with revenues in the period in which they are incurred.
Rationale: The matching principle requires that expenses be recognized in the same period as
the revenues they help generate, ensuring accurate representation of financial performance.
5. The historical cost principle under GAAP requires that:
• a) Assets and liabilities be recorded at their market value.
• b) Assets and liabilities be recorded at their original purchase price.
• c) Assets be recorded at the replacement cost.
• d) Liabilities be recorded at their settlement value.
Answer: b) Assets and liabilities be recorded at their original purchase price.
Rationale: The historical cost principle requires companies to record assets and liabilities at their
original purchase or acquisition cost, not their current market value.
6. Under the revenue recognition principle, revenue is generally recognized:
• a) When the cash is received.
• b) When the contract is signed.
• c) When the goods or services are provided to the customer.
• d) When management estimates the revenue.
Answer: c) When the goods or services are provided to the customer.
Rationale: The revenue recognition principle requires revenue to be recognized when it is
earned, meaning when goods or services are provided to the customer, regardless of when cash is
received.
7. Which principle states that businesses should continue to operate indefinitely, unless
evidence suggests otherwise?
• a) Going concern principle
• b) Revenue recognition principle
, • c) Matching principle
• d) Historical cost principle
Answer: a) Going concern principle
Rationale: The going concern principle assumes that a business will continue its operations
indefinitely, unless there is evidence to the contrary, such as liquidation or bankruptcy.
8. Which principle emphasizes the importance of not overstating assets or income?
• a) Full disclosure principle
• b) Conservatism principle
• c) Matching principle
• d) Materiality principle
Answer: b) Conservatism principle
Rationale: The conservatism principle directs accountants to choose the accounting method that
is least likely to overstate assets or income, ensuring a more cautious financial outlook.
9. What does the materiality principle state?
• a) All items must be reported in financial statements regardless of size.
• b) Financial statements should omit all insignificant items.
• c) Only information that could influence the economic decisions of users should be
included in the financial statements.
• d) Financial statements should include all information regardless of its relevance.
Answer: c) Only information that could influence the economic decisions of users should be
included in the financial statements.
Rationale: The materiality principle means that only items that are large enough to influence the
economic decisions of users should be included in the financial statements.
10. What is the full disclosure principle?
• a) Companies must disclose any information that impacts their financial position.
• b) Companies must disclose only their net income in financial statements.
• c) Companies can disclose information selectively if it benefits them.
• d) Companies do not have to disclose liabilities unless they are material.
