Financial Accounting and Reporting
Chapter 2
Accounting concepts and principles - correct answer-Are a set of logical ideas and
procedures that guide the accountant in recording and communicating economic information.
It provide reasonable assurance that information communicated to users is prepared in a
proper way.
Importance of having a proper way of recording and communicating economic information -
correct answer-To maximize the usefulness of accounting information to the users.
True - correct answer-Accounting is constantly changing and new concepts are continuously
emerging.
Basic Accounting Principles - correct answer-1. Separate entity concept
2. Historical cost concept
3. Going concern assumption
4. Matching
5. Accrual Basis of accounting
6. Prudence
7. Time period
8. Stable monetary unit
9. Materiality concept
10. Cost-benefit
11. Full disclosure principle
12. Consistency concept
Separate entity concept - correct answer-The business is viewed as separate person,
distinct from its owners
Withdrawal of Investment from the business - correct answer-Taking of money or goods from
the business for personal use.
Importance of separate entity concept - correct answer-The financial position and financial
performance of a business can be measured properly.
You can also know if the business has really earned profits or if it has the ability to do so.
Better accounting information led to better business decisions.
Historical cost concept (cost principle) - correct answer-Assets are initially recorded at their
acquisition cost.
, Liquidating concerns - correct answer-Opposite of going concern. This is the case if the
business intends to end its operations or if it has no other choice but to do so (e.g. bankrupt).
The assets of a liquidating concern are measured at net selling price rather than a historical
cost.
Going concern is good, liquidating concern is bad.
Going concern assumption - correct answer-The business is assumed to continue to exist for
an indefinite period of time.
Matching (or association of cause and effect) - correct answer-Some costs are initially
recognized as assets and charged as expenses only when the related revenue is
recognized.
Accrual Basis of accounting - correct answer-Economic events are recorded in the period in
which they occur rather than at the point in time when they affect cash.
Prudence (Conservatism) - correct answer-The accountant observe some degree of caution
when exercising judgements needed in making such accounting estimates under conditions
of uncertainty.
If the accountant needs to choose between a potentially unfavorable outcome versus
potentially favorable outcome, the accountant chooses the unfavorable one.
This is necessary so that assets or income are not overstated and liabilities or expenses are
not understated.
Time Period (Periodicity, Accounting period, or Reporting period) - correct answer-The life of
business is divided into series of reporting periods.
Two types of 12-month accounting period - correct answer-1. Calendar year period
2. Fiscal year period
Calendar year period - correct answer-Starts on January 1 and ends on December 31 of the
same year
Fiscal year period - correct answer-Starts on a date other than January 1, e.g., July 1, 2019
to June 30, 2020
Interim period - correct answer-An Accounting period that is shorter than 12 months
An interim period can be a month, a quarter, or a semiannual period
Stable Monetary Unit - correct answer-Assets, liabilities, equity, income and expenses are
stated in terms of a common unit of measure, which is peso in the Philippines.
Chapter 2
Accounting concepts and principles - correct answer-Are a set of logical ideas and
procedures that guide the accountant in recording and communicating economic information.
It provide reasonable assurance that information communicated to users is prepared in a
proper way.
Importance of having a proper way of recording and communicating economic information -
correct answer-To maximize the usefulness of accounting information to the users.
True - correct answer-Accounting is constantly changing and new concepts are continuously
emerging.
Basic Accounting Principles - correct answer-1. Separate entity concept
2. Historical cost concept
3. Going concern assumption
4. Matching
5. Accrual Basis of accounting
6. Prudence
7. Time period
8. Stable monetary unit
9. Materiality concept
10. Cost-benefit
11. Full disclosure principle
12. Consistency concept
Separate entity concept - correct answer-The business is viewed as separate person,
distinct from its owners
Withdrawal of Investment from the business - correct answer-Taking of money or goods from
the business for personal use.
Importance of separate entity concept - correct answer-The financial position and financial
performance of a business can be measured properly.
You can also know if the business has really earned profits or if it has the ability to do so.
Better accounting information led to better business decisions.
Historical cost concept (cost principle) - correct answer-Assets are initially recorded at their
acquisition cost.
, Liquidating concerns - correct answer-Opposite of going concern. This is the case if the
business intends to end its operations or if it has no other choice but to do so (e.g. bankrupt).
The assets of a liquidating concern are measured at net selling price rather than a historical
cost.
Going concern is good, liquidating concern is bad.
Going concern assumption - correct answer-The business is assumed to continue to exist for
an indefinite period of time.
Matching (or association of cause and effect) - correct answer-Some costs are initially
recognized as assets and charged as expenses only when the related revenue is
recognized.
Accrual Basis of accounting - correct answer-Economic events are recorded in the period in
which they occur rather than at the point in time when they affect cash.
Prudence (Conservatism) - correct answer-The accountant observe some degree of caution
when exercising judgements needed in making such accounting estimates under conditions
of uncertainty.
If the accountant needs to choose between a potentially unfavorable outcome versus
potentially favorable outcome, the accountant chooses the unfavorable one.
This is necessary so that assets or income are not overstated and liabilities or expenses are
not understated.
Time Period (Periodicity, Accounting period, or Reporting period) - correct answer-The life of
business is divided into series of reporting periods.
Two types of 12-month accounting period - correct answer-1. Calendar year period
2. Fiscal year period
Calendar year period - correct answer-Starts on January 1 and ends on December 31 of the
same year
Fiscal year period - correct answer-Starts on a date other than January 1, e.g., July 1, 2019
to June 30, 2020
Interim period - correct answer-An Accounting period that is shorter than 12 months
An interim period can be a month, a quarter, or a semiannual period
Stable Monetary Unit - correct answer-Assets, liabilities, equity, income and expenses are
stated in terms of a common unit of measure, which is peso in the Philippines.
