Accounting Principles Study Guide (2026/2027 Syllabus)
Section 1: Foundational Accounting Principles & Concepts
This section covers the core assumptions, principles, and constraints that form the
framework of financial accounting.
Question 1: The personal assets of a business owner are not included on the company's
balance sheet. Which principle/guideline does this follow?
ANSWER ✓ Economic Entity Assumption. This principle states that a business is a
distinct entity separate from its owners and any other business. Therefore, personal
transactions of the owner are not mixed with the business's financial records .
Question 2: A company's balance sheet reports land at the original purchase price of
$50,000, even though its current market value is $150,000. Which principle is being
applied?
ANSWER ✓ Cost Principle (Historical Cost). This principle requires assets to be recorded
at their original historical cost, which is verifiable and objective .
Question 3: Which principle allows a company to ignore the change in the purchasing
power of the dollar over time when preparing financial statements?
ANSWER ✓ Monetary Unit Assumption. This assumes the currency used is stable and
reliable, meaning inflation or deflation is ignored, and transactions are recorded in a
consistent monetary unit .
Question 4: A company includes extensive footnotes in its financial statements to
provide details about its accounting policies and potential liabilities. This is an
application of which principle?
ANSWER ✓ Full Disclosure Principle. This principle requires that all information that
would make a difference to financial statement users should be disclosed in the main
body of the statements or in the notes .
Question 5: A large corporation expenses the purchase of a $100 stapler immediately
rather than recording it as an asset and depreciating it. Which principle justifies this?
ANSWER ✓ Materiality. This constraint allows accountants to ignore other accounting
principles if the amount in question is insignificant (immaterial) and would not influence
the decision of a reasonable person .
, Question 6: The accountant is preparing financial statements under the assumption that
the business will continue operating indefinitely and will not go out of business in the
near future. What concept is being used?
ANSWER ✓ Going Concern Assumption. This assumption presumes the business will
remain in operation for the foreseeable future, allowing for the deferral of costs like
depreciation .
Question 7: A company decides to record a potential loss from a lawsuit but will not
record a potential gain from a different lawsuit. Which principle guides this decision?
ANSWER ✓ Conservatism. This constraint dictates that when uncertainty and doubt
exist, accountants should choose the option that is least likely to overstate assets and
income. It means recognizing expenses and liabilities sooner rather than later, but
recognizing revenues only when they are certain .
Question 8: A public utility company lists its plant assets before its current assets on its
balance sheet, which is the opposite of a typical manufacturer. This is acceptable due to
which principle?
ANSWER ✓ Industry Practices. This concept acknowledges that unique reporting
practices in certain industries (often regulated) are acceptable even if they differ from
standard accounting practices .
Question 9: A company prepares financial statements every year to show how it
performed during that specific period. This is an application of which assumption?
ANSWER ✓ Time Period (Periodicity) Assumption. This allows the long life of a company
to be divided into artificial, shorter time periods (e.g., months, quarters, years) for
reporting purposes .
Question 10: A company recognizes revenue when it ships goods to a customer, not
when it receives the cash payment a month later. Which principle does this follow?
ANSWER ✓ Revenue Recognition Principle. This principle states that revenue should be
recognized when it is earned (goods or services are provided) and realized or realizable,
not necessarily when cash is received .
Question 11: A company pays its annual insurance premium in one lump sum but
records insurance expense evenly over the 12 months of the policy. Which principle
requires this?
ANSWER ✓ Matching Principle (Expense Recognition). This principle dictates that
expenses should be recognized in the same period as the revenues they helped
generate. It is the foundation for accrual accounting .
Question 12: A highly skilled CEO, who is personally responsible for the company's
success, is not recorded as an asset on the balance sheet. Which principle prevents this?
Section 1: Foundational Accounting Principles & Concepts
This section covers the core assumptions, principles, and constraints that form the
framework of financial accounting.
Question 1: The personal assets of a business owner are not included on the company's
balance sheet. Which principle/guideline does this follow?
ANSWER ✓ Economic Entity Assumption. This principle states that a business is a
distinct entity separate from its owners and any other business. Therefore, personal
transactions of the owner are not mixed with the business's financial records .
Question 2: A company's balance sheet reports land at the original purchase price of
$50,000, even though its current market value is $150,000. Which principle is being
applied?
ANSWER ✓ Cost Principle (Historical Cost). This principle requires assets to be recorded
at their original historical cost, which is verifiable and objective .
Question 3: Which principle allows a company to ignore the change in the purchasing
power of the dollar over time when preparing financial statements?
ANSWER ✓ Monetary Unit Assumption. This assumes the currency used is stable and
reliable, meaning inflation or deflation is ignored, and transactions are recorded in a
consistent monetary unit .
Question 4: A company includes extensive footnotes in its financial statements to
provide details about its accounting policies and potential liabilities. This is an
application of which principle?
ANSWER ✓ Full Disclosure Principle. This principle requires that all information that
would make a difference to financial statement users should be disclosed in the main
body of the statements or in the notes .
Question 5: A large corporation expenses the purchase of a $100 stapler immediately
rather than recording it as an asset and depreciating it. Which principle justifies this?
ANSWER ✓ Materiality. This constraint allows accountants to ignore other accounting
principles if the amount in question is insignificant (immaterial) and would not influence
the decision of a reasonable person .
, Question 6: The accountant is preparing financial statements under the assumption that
the business will continue operating indefinitely and will not go out of business in the
near future. What concept is being used?
ANSWER ✓ Going Concern Assumption. This assumption presumes the business will
remain in operation for the foreseeable future, allowing for the deferral of costs like
depreciation .
Question 7: A company decides to record a potential loss from a lawsuit but will not
record a potential gain from a different lawsuit. Which principle guides this decision?
ANSWER ✓ Conservatism. This constraint dictates that when uncertainty and doubt
exist, accountants should choose the option that is least likely to overstate assets and
income. It means recognizing expenses and liabilities sooner rather than later, but
recognizing revenues only when they are certain .
Question 8: A public utility company lists its plant assets before its current assets on its
balance sheet, which is the opposite of a typical manufacturer. This is acceptable due to
which principle?
ANSWER ✓ Industry Practices. This concept acknowledges that unique reporting
practices in certain industries (often regulated) are acceptable even if they differ from
standard accounting practices .
Question 9: A company prepares financial statements every year to show how it
performed during that specific period. This is an application of which assumption?
ANSWER ✓ Time Period (Periodicity) Assumption. This allows the long life of a company
to be divided into artificial, shorter time periods (e.g., months, quarters, years) for
reporting purposes .
Question 10: A company recognizes revenue when it ships goods to a customer, not
when it receives the cash payment a month later. Which principle does this follow?
ANSWER ✓ Revenue Recognition Principle. This principle states that revenue should be
recognized when it is earned (goods or services are provided) and realized or realizable,
not necessarily when cash is received .
Question 11: A company pays its annual insurance premium in one lump sum but
records insurance expense evenly over the 12 months of the policy. Which principle
requires this?
ANSWER ✓ Matching Principle (Expense Recognition). This principle dictates that
expenses should be recognized in the same period as the revenues they helped
generate. It is the foundation for accrual accounting .
Question 12: A highly skilled CEO, who is personally responsible for the company's
success, is not recorded as an asset on the balance sheet. Which principle prevents this?
