Accounting concepts and principles

Topic 5: Accounting Concepts and Principles — 50 Hard MCQs

1. A business receives an order from a customer on 28 December. Goods are delivered on 4 January and cash is received on 20 January.

According to the realisation concept, when should revenue be recognised?

A 28 December
B 31 December
C 4 January
D 20 January

2. A business sells goods on credit on 15 March. The customer pays on 30 April.

Which concept explains why the sale is recorded on 15 March?

A accruals
B business entity
C consistency
D materiality

3. A business pays insurance of $12 000 on 1 October for one year. The financial year ends on 31 December.

Which concept requires only three months’ insurance to be treated as an expense for the year?

A going concern
B matching/accruals
C money measurement
D prudence

4. A business records closing inventory at the lower of cost and net realisable value.

Which accounting concept is mainly applied?

A consistency
B going concern
C prudence
D realisation

5. A business changes depreciation method from straight-line to reducing balance without any valid reason.

Which concept has been broken?

A consistency
B duality
C materiality
D realisation

6. A business owner pays personal holiday costs using the business bank account. The accountant records the payment as drawings.

Which concept is applied?

A accruals
B business entity
C historic cost
D prudence

7. A business buys a building for $300 000. At the year end, its market value is $420 000, but it is still shown at $300 000.

Which concept is applied?

A historic cost
B materiality
C realisation
D substance over form

8. A business expects to continue operating for the foreseeable future.

Which concept allows non-current assets to be depreciated over their useful lives rather than valued at forced sale value?

A business entity
B going concern
C materiality
D prudence

9. A business ignores a $3 error in stationery expense because it would not affect users’ decisions.

Which concept is applied?

A consistency
B duality
C materiality
D realisation

10. A company leases equipment for almost its entire useful life and records it as an asset even though legal ownership remains with the lessor.

Which principle is applied?

A business entity
B historic cost
C money measurement
D substance over form

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A trader values closing inventory at cost of $18 000, although it can now only be sold for $15 500.

Which value should be used?

A $0
B $15 500
C $18 000
D $33 500

12. A trader values closing inventory at cost of $22 000, although it can be sold for $28 000.

Which value should be used?

A $0
B $22 000
C $28 000
D $50 000

13. Goods costing $4000 are sold after the year end for $3600. Additional selling costs are $200.

What is the net realisable value?

A $3400
B $3600
C $3800
D $4000

14. Using the information in Question 13, at what value should the inventory be included in the financial statements?

A $3400
B $3600
C $3800
D $4000

15. A business includes anticipated profit on goods not yet sold.

Which concept has been broken?

A business entity
B prudence
C consistency
D money measurement

16. A business delays recording a loss until the goods are sold, even though the loss is already expected.

Which concept has been broken?

A accruals
B going concern
C materiality
D prudence

17. A business records rent earned during the year, whether or not cash has been received.

Which concept is applied?

A accruals
B historic cost
C materiality
D duality

18. A business treats prepaid rent as an asset.

Which concept supports this treatment?

A accruals
B materiality
C money measurement
D prudence only

19. A business treats rent received in advance as a liability.

Why?

A cash has not been received
B the service has not yet been provided
C it is a capital receipt
D it is an owner’s withdrawal

20. A business includes wages owing at the year end as an expense.

Which concept is applied?

A business entity
B consistency
C accruals
D historic cost

21. Which concept states that each transaction has two equal accounting effects?

A duality
B going concern
C materiality
D prudence

22. A business buys goods for cash.

Which statement best reflects duality?

A assets increase and capital increases
B one asset increases and another asset decreases
C liabilities increase and assets decrease
D expenses increase and income decreases

23. A business buys goods on credit.

Which statement best reflects duality?

A assets increase and liabilities increase
B assets decrease and capital decreases
C liabilities decrease and capital increases
D one asset increases and one asset decreases

24. A business pays a supplier by cheque.

Which statement best reflects duality?

A assets decrease and liabilities decrease
B assets increase and liabilities increase
C capital increases and assets increase
D expenses decrease and liabilities increase

25. A business earns profit for the year.

What is the effect on the accounting equation?

A assets decrease or liabilities increase
B capital increases
C capital decreases
D liabilities must increase

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Which item cannot normally be recorded in the accounting records because of the money measurement concept?

A bank loan
B customer loyalty
C inventory
D trade receivables

27. Which item can be recorded because it can be measured reliably in money?

A employee motivation
B brand reputation created internally
C purchase of machinery
D skill of management team

28. A business has excellent staff morale but does not record it in the financial statements.

Which concept explains this?

A duality
B historic cost
C money measurement
D prudence

29. A business records the owner’s personal car separately from the business delivery van.

Which concept is applied?

A business entity
B matching
C substance over form
D realisation

30. A sole trader argues that business profit is the same as personal income and should not be recorded separately.

Which concept does this ignore?

A business entity
B consistency
C going concern
D historic cost

31. A business has used the straight-line method of depreciation for several years. This year it continues to use the same method.

Which concept is applied?

A consistency
B materiality
C prudence
D realisation

32. A business changes depreciation method because the pattern of asset use has changed significantly.

Which statement is correct?

A consistency is broken in all cases
B the change may be justified if it gives more relevant information
C depreciation must never change
D the old method must continue even if misleading

33. A business writes off a calculator costing $8 immediately rather than treating it as a non-current asset.

Which concept is applied?

A going concern
B materiality
C realisation
D substance over form

34. A business treats a $15 stapler as stationery expense, but capitalises a $15 000 machine.

Which concept best explains the different treatment?

A materiality
B realisation
C duality
D prudence

35. A business recognises revenue only when goods have been delivered, not when an enquiry is received.

Which concept is applied?

A consistency
B materiality
C realisation
D prudence

36. A customer pays a deposit for goods to be delivered next month. The business records it as income immediately.

Which concept is broken?

A business entity
B historic cost
C realisation
D duality

37. A business receives an order for goods in December but delivers the goods in January. The business records revenue in December.

Which concept is broken?

A going concern
B realisation
C materiality
D consistency

38. Which statement best describes prudence?

A profits should be anticipated as early as possible
B losses should be ignored until cash is paid
C assets and profits should not be overstated
D all assets should be recorded at market value

39. Which statement best describes accruals/matching?

A cash receipts are always income of the current year
B expenses are matched against revenue of the same accounting period
C only cash transactions are recorded
D profit is calculated only when cash is received

40. Which statement best describes going concern?

A the business will close at the end of the accounting period
B the business is expected to continue operating for the foreseeable future
C the business must always make profit
D the business has no liabilities

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Which statement best describes historic cost?

A assets are recorded at their original transaction value
B assets are always recorded at replacement cost
C assets are always recorded at selling price
D liabilities are ignored until paid

42. Which statement best describes materiality?

A only cash transactions are recorded
B all errors must be corrected regardless of size
C information is material if it could influence users’ decisions
D profit must always be understated

43. Which statement best describes business entity?

A the business is treated separately from its owner
B the business must be a limited company
C the owner’s personal spending is treated as business expense
D the business must publish financial statements

44. Which statement best describes consistency?

A the same accounting treatment should be used from period to period unless there is a valid reason to change
B inventory must always be valued at selling price
C depreciation must never be charged
D expenses are recorded only when paid

45. Which statement best describes substance over form?

A legal form is always more important than economic reality
B economic reality should be reflected even if legal form differs
C all transactions must be recorded only when cash is paid
D assets must always be recorded at cost

46. A business fails to record accrued electricity of $900 at the year end.

What is the effect?

A profit overstated and liabilities understated
B profit understated and liabilities overstated
C assets overstated and profit understated
D capital understated and expenses overstated

47. A business fails to record prepaid insurance of $600 at the year end.

What is the effect?

A profit understated and assets understated
B profit overstated and liabilities understated
C profit understated and liabilities overstated
D profit overstated and assets overstated

48. A business records income received in advance of $1200 as current year income.

What is the effect?

A profit overstated and liabilities understated
B profit understated and assets overstated
C profit overstated and assets understated
D liabilities overstated and profit understated

49. A business fails to record accrued commission income of $700.

What is the effect?

A profit understated and assets understated
B profit overstated and liabilities understated
C profit understated and liabilities overstated
D profit overstated and assets overstated

50. A business includes the owner’s personal computer as a business asset even though it is never used in the business.

Which concept has been broken?

A business entity
B consistency
C duality
D realisation

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. C — 4 January

• Revenue is recognised when goods are delivered/sold, not when order is received.

• Order on 28 December is not enough.

• Cash receipt on 20 January is too late for realisation.

• Delivery on 4 January is when the sale is realised.

2. A — accruals

• Under accruals, income is recorded when earned, not when cash is received.

• Sale made on 15 March.

• Payment date, 30 April, does not decide revenue recognition.

3. B — matching/accruals

• Insurance covers 12 months from 1 October.

• Financial year ends 31 December.

• Only October, November and December relate to the current year.

• 3 months = current year expense.

• Remaining 9 months = prepayment/current asset.

4. C — prudence

• Inventory is valued at the lower of cost and net realisable value.

• Prudence avoids overstating assets and profit.

5. A — consistency

• The business changed depreciation method without a valid reason.

• Consistency requires the same accounting treatment from period to period unless there is justification.

6. B — business entity

• The owner and business are treated separately.

• Personal holiday costs are not business expenses.

• They are recorded as drawings.

7. A — historic cost

• The building is recorded at its original purchase cost of $300 000.

• The market value increase is not recorded unless revaluation is applied.

8. B — going concern

• Going concern assumes the business will continue operating.

• Assets can therefore be depreciated over useful lives instead of valued at forced sale value.

9. C — materiality

• A $3 error is too small to influence users’ decisions.

• Materiality allows insignificant items to be treated practically.

10. D — substance over form

• Legal ownership is with the lessor.

• Economic reality is that the business controls and uses the asset.

• Substance over form records the real economic effect.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. B — $15 500

• Inventory must be valued at lower of cost and net realisable value.

• Cost = $18 000

• NRV = $15 500

• Lower value = $15 500

12. B — $22 000

• Cost = $22 000

• NRV = $28 000

• Lower value = $22 000

• Prudence prevents recognising unrealised profit.

13. A — $3400

• Selling price = $3600

• Selling costs = $200

• NRV = 3600 – 200

• = $3400

14. A — $3400

• Cost = $4000

• NRV = $3400

• Inventory is valued at lower of cost and NRV.

• Value = $3400

15. B — prudence

• Profit should not be anticipated before it is earned.

• Including expected profit on unsold goods overstates profit and assets.

16. D — prudence

• Expected losses should be recognised as soon as they are known.

• Delaying the loss would overstate profit and inventory.

17. A — accruals

• Rent earned is recorded in the period it is earned.

• Cash receipt date does not control recognition.

18. A — accruals

• Prepaid rent is paid now but relates to a future period.

• It is treated as a current asset until the benefit is used.

19. B — the service has not yet been provided

• Rent/income received in advance is not yet earned.

• The business owes goods/services.

• Therefore, it is a liability.

20. C — accruals

• Wages owing are expenses of the current year.

• They are recorded even though cash has not yet been paid.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. A — duality

• Duality means every transaction has two equal effects.

• This is the basis of double entry.

22. B — one asset increases and another asset decreases

• Goods bought for cash:

  • inventory increases

  • cash decreases

• Total assets do not change.

23. A — assets increase and liabilities increase

• Goods bought on credit:

  • inventory increases

  • trade payables increase

24. A — assets decrease and liabilities decrease

• Paying supplier by cheque:

  • bank decreases

  • trade payables decrease

25. B — capital increases

• Profit increases owner’s capital/equity.

• Loss would reduce capital.

26. B — customer loyalty

• Customer loyalty cannot normally be measured reliably in money.

• Therefore, it is not recorded in the accounting records.

27. C — purchase of machinery

• Machinery has a reliable purchase price.

• It can be measured in monetary terms.

• Staff motivation and internally generated reputation are not normally recorded.

28. C — money measurement

• Staff morale may be valuable.

• But it cannot be measured reliably in money.

• So it is excluded from financial statements.

29. A — business entity

• The owner’s personal car and the business delivery van are separate.

• Only business assets are recorded in the business accounts.

30. A — business entity

• Business profit and personal income must be treated separately.

• The business is accounted for separately from the owner.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A — consistency

• The same depreciation method is used from year to year.

• This allows proper comparison between accounting periods.

32. B — the change may be justified if it gives more relevant information

• Consistency does not mean methods can never change.

• A change is acceptable if there is a valid reason and it improves relevance/reliability.

33. B — materiality

• The calculator cost is too small to justify capitalising and depreciating.

• Treating it as an expense is practical because the amount is immaterial.

34. A — materiality

• A $15 stapler is insignificant.

• A $15 000 machine is material.

• Material items need more careful accounting treatment.

35. C — realisation

• Revenue is recognised when goods are delivered/sold.

• An enquiry or order alone is not a completed sale.

36. C — realisation

• Cash deposit received before delivery is not yet earned revenue.

• It should be treated as income received in advance/current liability.

37. B — realisation

• Order received in December does not create revenue.

• Goods delivered in January means revenue should be recognised in January.

38. C — assets and profits should not be overstated

• Prudence means caution.

• Recognise expected losses.

• Do not recognise unrealised profits.

39. B — expenses are matched against revenue of the same accounting period

• Matching/accruals records income and expenses in the period they relate to.

• Cash timing is not the main rule.

40. B — the business is expected to continue operating for the foreseeable future

• Going concern assumes the business will not close soon.

• This supports depreciation and normal asset valuation.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A — assets are recorded at their original transaction value

• Historic cost records assets at original purchase cost.

• It does not automatically update assets to market value.

42. C — information is material if it could influence users’ decisions

• Material information matters to decision-makers.

• Immaterial items may be treated more simply.

43. A — the business is treated separately from its owner

• Business entity separates owner’s personal transactions from business transactions.

• This applies even to sole traders.

44. A — the same accounting treatment should be used from period to period unless there is a valid reason to change

• Consistency improves comparability.

• It does not ban all changes.

45. B — economic reality should be reflected even if legal form differs

• Substance over form records the real economic effect.

• It stops accounts from being misleading by relying only on legal wording.

46. A — profit overstated and liabilities understated

• Accrued electricity is an unpaid expense.

• If not recorded:

  • expenses are understated

  • profit is overstated

  • liabilities are understated

47. A — profit understated and assets understated

• Prepaid insurance means too much insurance has been charged as expense.

• If not recorded:

  • expenses overstated

  • profit understated

  • current assets understated

48. A — profit overstated and liabilities understated

• Income received in advance is not yet earned.

• If recorded as current year income:

  • income overstated

  • profit overstated

  • liability understated

49. A — profit understated and assets understated

• Accrued commission income has been earned but not received.

• If not recorded:

  • income understated

  • profit understated

  • current assets understated

50. A — business entity

• The owner’s personal computer is not used in the business.

• Including it as a business asset mixes owner and business affairs.

• That breaks the business entity concept.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.