A100
A100 Midterm Exam 2025
The basic accounting concept that we should always separately record the transactions
of a business and its owners. Otherwise, there is a considerable risk that the
transactions of the two will become intermingled. - Correct Ans-separate entity
assumption
if you have a business and the business owns a building, that building, according to the
cost principle, shows up on your balance sheet at its historical cost; you don't adjust the
values in an accounting system for changes in a fair market value. - Correct Ans-historic
cost principle
revenues are recorded when earned not (just) when cash is received - Correct Ans-
revenue recognition principle
ex: For example, a snow plowing service completes the plowing of a company's parking
lot for its standard fee of $100. It can recognize the revenue immediately upon
completion of the plowing, even if it does not expect payment from the customer for
several weeks.
requires that revenues and any related expenses be recognized together in the same
period. Thus, if there is a cause-and-effect relationship between revenue and the
expenses, record them at the same time.
for example: if you own a hot dog stand, you should count the expense of a hot dog and
the expense of a bun on the day you sell that hot dog and bun. don't count the expense
when you buy the buns and the dogs. Count the expense when you sell them. In other
words, match the expense of the item with the revenue of the item. - Correct Ans-
matching principle
means that you record revenue when a sale is made and record expenses when goods
are used or services are received. - Correct Ans-accrual-based accounting
external users may assume the following:
when reading financial statements, the financial figures are reported for a period of 12
months.
when reading financial statements, the financial figures shown only occurred in that
specific 12 month time period.
by reporting financial figures on a yearly basis, external users can easily compare how a
company is doing each year.
this creates consistency for all businesses and allows the reporting to be simple, clear,
understandable and accurate. - Correct Ans-time period assumption
A100
, A100
caution must be used when preparing financial statements - Correct Ans-conservatism
principle
Example: applying conservatism to losses.
A business owns inventory that was bought for $12,000. it has gone down in value and
is now worth just $8,000 e.g. winter coats in January.
Should we recognize this loss and value the inventory at $8,000? - Correct Ans-yes, the
loss is expected to occur.
A business owns a building that originally cost $500,000.
But growth in the property market means the building is now values at $600,000 if it
were to be sold.
Should the firm value the building at $600,000 and record the revenue (gain) of
$100,000? - Correct Ans-no. conservatism states that this gain should not be recorded
until it is certain to occur, i.e. when the building is sold.
the concept of _______ allows you to violate another accounting principle if the amount
it so small that the reader of the financial statements will not be misled. - Correct Ans-
materiality
when reading financial statements, one may assume the business plans to continue
operation into the foreseeable future and doesn't intend to close down or liquidate by
selling off all their assets - Correct Ans-going concern assumption
the ______ states that the cost of providing financial information in the financial
statements must not outweigh the benefit of that information to the users. Financial
information is not free, companies spend millions of dollars every year gathering and
organizing financial information to assemble into financial statements. - Correct Ans-
cost-benefit principle
example: - Correct Ans-- Big Towing, Inc. issues financial statements in January for its
prior year. These statements correct an error in the previous year's financial statements.
The error was estimated to be $200,000. The exact error amount is unknown and would
cost approximately $50M to exactly pinpoint. The cost benefit principle states that Big
Towing does not have to find the exact amount of the error. A reasonable estimate is
acceptable due to the high cost of researching the actual cost of the error.
- Paul's Retail, LLC discovered that an employee was stealing from its cash register.
The amount is suspected to be over $1,000, but Paul is not sure. It's estimated that Paul
would pay his accountant and attorney $5,000 to dig through his records and discover
the exact amount of the theft. In this case, it would not be beneficial for Paul to do
further research and sue his former employee.
A100
A100 Midterm Exam 2025
The basic accounting concept that we should always separately record the transactions
of a business and its owners. Otherwise, there is a considerable risk that the
transactions of the two will become intermingled. - Correct Ans-separate entity
assumption
if you have a business and the business owns a building, that building, according to the
cost principle, shows up on your balance sheet at its historical cost; you don't adjust the
values in an accounting system for changes in a fair market value. - Correct Ans-historic
cost principle
revenues are recorded when earned not (just) when cash is received - Correct Ans-
revenue recognition principle
ex: For example, a snow plowing service completes the plowing of a company's parking
lot for its standard fee of $100. It can recognize the revenue immediately upon
completion of the plowing, even if it does not expect payment from the customer for
several weeks.
requires that revenues and any related expenses be recognized together in the same
period. Thus, if there is a cause-and-effect relationship between revenue and the
expenses, record them at the same time.
for example: if you own a hot dog stand, you should count the expense of a hot dog and
the expense of a bun on the day you sell that hot dog and bun. don't count the expense
when you buy the buns and the dogs. Count the expense when you sell them. In other
words, match the expense of the item with the revenue of the item. - Correct Ans-
matching principle
means that you record revenue when a sale is made and record expenses when goods
are used or services are received. - Correct Ans-accrual-based accounting
external users may assume the following:
when reading financial statements, the financial figures are reported for a period of 12
months.
when reading financial statements, the financial figures shown only occurred in that
specific 12 month time period.
by reporting financial figures on a yearly basis, external users can easily compare how a
company is doing each year.
this creates consistency for all businesses and allows the reporting to be simple, clear,
understandable and accurate. - Correct Ans-time period assumption
A100
, A100
caution must be used when preparing financial statements - Correct Ans-conservatism
principle
Example: applying conservatism to losses.
A business owns inventory that was bought for $12,000. it has gone down in value and
is now worth just $8,000 e.g. winter coats in January.
Should we recognize this loss and value the inventory at $8,000? - Correct Ans-yes, the
loss is expected to occur.
A business owns a building that originally cost $500,000.
But growth in the property market means the building is now values at $600,000 if it
were to be sold.
Should the firm value the building at $600,000 and record the revenue (gain) of
$100,000? - Correct Ans-no. conservatism states that this gain should not be recorded
until it is certain to occur, i.e. when the building is sold.
the concept of _______ allows you to violate another accounting principle if the amount
it so small that the reader of the financial statements will not be misled. - Correct Ans-
materiality
when reading financial statements, one may assume the business plans to continue
operation into the foreseeable future and doesn't intend to close down or liquidate by
selling off all their assets - Correct Ans-going concern assumption
the ______ states that the cost of providing financial information in the financial
statements must not outweigh the benefit of that information to the users. Financial
information is not free, companies spend millions of dollars every year gathering and
organizing financial information to assemble into financial statements. - Correct Ans-
cost-benefit principle
example: - Correct Ans-- Big Towing, Inc. issues financial statements in January for its
prior year. These statements correct an error in the previous year's financial statements.
The error was estimated to be $200,000. The exact error amount is unknown and would
cost approximately $50M to exactly pinpoint. The cost benefit principle states that Big
Towing does not have to find the exact amount of the error. A reasonable estimate is
acceptable due to the high cost of researching the actual cost of the error.
- Paul's Retail, LLC discovered that an employee was stealing from its cash register.
The amount is suspected to be over $1,000, but Paul is not sure. It's estimated that Paul
would pay his accountant and attorney $5,000 to dig through his records and discover
the exact amount of the theft. In this case, it would not be beneficial for Paul to do
further research and sue his former employee.
A100
