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Chapter 1Introduction to AccountingReview Questions

1(a) The main purpose of accounting is to present a true and fair view of business activities sothat users may rely on the information for decision-making.

(b) Accounting is not a precise science; alternative methods may be used and judgement andestimates are often necessary in the application of accounting policies and treatment. Hence,those who prepare accounting information may be in a position to manipulate theinformation prepared for their own purposes, no matter how sound an accounting systemmay be. To ensure that the accounting information presented is true and fair, ethics andstrong moral values should govern those who prepare the information.

2. Book-keeping is only one aspect of the accounting process, i.e the recording aspect which isroutine-like and clerical in nature. An accountant does much more than book-keeping and isrequired to have analytical and professional skills. An accountant is trained not only torecord transactions and to prepare the accounts, but to interpret the accounts andcommunicate the accounting information to users for sound decision- making.

3. (a) iv (b) ii (c) i (d) iii

4. (a) iv (b) v (c) iii (d) ii (e) i (f) vii (g) viii (h) vi

5(a) Going Concern concept because since the business is presumed to operate indefinitely, themarket values of assets are irrelevant as assets are expected to be used for the businessoperations and not for sale.

(b) Objectivity concept because transactions which are supported by source documents areverifiable and the values used are objective, i.e. free from biasness.

(c) Accrual concept because income is earned when goods are sold or services are performed,and expenses are incurred when goods or services are consumed, regardless of whether cashis received or paid.

(d) Materiality concept because the amount concerned has no serious effect on profit reportedand thus, has no serious effect on decision-making.

(e) Prudence concept

(f) Entity concept because the business owner and the business are separate entities and theiractivities are recorded separately in their own respective books.

(g) Accounting Period concept because the life of a business is divided into equal timeperiods for periodic measurement of its performance and position.

6. (a) Accounting Entity (b) Prudence (c) Realisation (d) Accrual (e) Materiality(f) Monetary (g) Consistency (h) Matching (i) Going Concern

7(a) Accounting Entity concept

(b) The owner of the business is considered a separate entity from the business, hence, theowner’s personal expenses cannot be treated as business expenses in the business records.

(c) Business expenses should be reduced by $1,400.

(d) The corrected profit should be $35,500 + $1,400 = $36,900.

8(a) Accounting Entity concept because the transactions of each business (Best Fashion andModern Fashion) should be recorded separately in the books of each business as they aretwo distinct accounting entities.
(b) Realisation concept because income should be recorded as earned only when theadvertising services have been performed for clients. The advance payment on thesigning of any contract should not be recorded as income.
(c) Accounting Entity concept because the owner’s personal expenditure cannot be treatedas a business expense.

9.Case Concept Violated
(a) Accrual concept because income should be recognised only when it has beenearned. The sales income is not earned because the goods have not beendelivered yet.

(b) Accrual and Matching concepts because only half of the amount should beexpensed for the current year; the other half has not yet been utilised.

(c) Accounting Entity concept because Lilian’s personal expenditure cannot berecorded as business expenses.

(d) Historical Cost, Objectivity and Going Concern concepts because assetsshould be stated initially at historical costs (Historical Cost concept), based onthe details recorded in the business document (Objectivity concept). They areacquired for use and not for resale as the business is not expected to beliquidated but to operate indefinitely (Going Concern concept).

(e) Accrual concept because income cannot be recognised unless it is earned. Thesix sofa sets were not sold in the current year. Historical Cost and Prudenceconcepts because the sofa sets should not be recorded at their net realisablevalue of $4,000 per set, but should be stated at historical cost of $2,500 per setwhich is lower than the net realisable value