CPA Excel 6: Assumptions, Accounting Principles questions with correct answers

Entity Assumption CORRECT ANSWER There is a separate accounting entity for each business organization. Owners and the corporation are separate. Going Concern Assumption CORRECT ANSWER, A business is assumed to have an indefinite life. It is why items aren't at liquidation or exit values. Supports the historical cost principle for many assets. Income measurement is based on historical cost of assets because assets provide value through use, rather than disposal. Unit-of-Measure Assumption CORRECT ANSWER Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated. Price level changes cause the application of this assumption to weaken the relevance of certain disclosures. Capital maintenance CORRECT ANSWER when the firm has positive earnings for the year, assuming no changes in price levels. When a firm has income, it has recognized revenue sufficient to replace all the resources used in generating that revenue (return of capital), and has resources left over in addition (income, which is return on capital). Income could be distributed as dividends without eroding the net assets (capital) existing at the beginning of the year. "Physical" capital maintenance CORRECT ANSWER Earnings cannot be recognized until the firm has provided for the physical capital used up during the period. To measure the capital used up, changes in price level must be considered. Time Period Assumption CORRECT ANSWER indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes. For accounting information to be relevant, it must be timely. The reliability of the information often must be sacrificed to provide relevant disclosures. The use of estimates is required for timely reporting but also implies a possible loss of reliability.