CH AP TE R4

CON CEP TUA L FRA MEWO RK

Elem ents of fin'a .n cial stat eme nts
QUES TION 4-1
What is the mea ning of recogn ition?
ANSWER 4-1
Recog nition is a term \vhich means the proces s of report ing
an asset. liabili ty, incom e or expen se on the face of the
financial statem ents of an entity .
In other words , recogn ition involv es the inclus ion of peso
amount in the financ ial statem ents.
QUESTION 4-2
What are the eleme nts of the financ ial statem ents?
ANSWER 4-2
The elem ents of finan cial state ment s refer to the
quanti tative inform ation shown in the statem ent of financ ial
position and statem ent of compr ehensi ve incom e.
~he eleme nts direct ly relate d to the meas ur'e ment of
financial positio n are assets , liabili ties and equity .
T,he eleme nts direct ly relate d to the meas urem ent of
,inanc ial pe,-for niance are incom e and expen ses. •
Tb he eleme nts of financ ial statem ents are the "build ing
1ocks" from which financ ial statem ents are constr
ucted.
The eleme nts of financ ial statem ents are broad classe s of
events ';)r trans~ ctions that are group ed accord ing to their
economic charac teristi cs. ·

65
 >
QUEST ION 4-5
QUEST ION 4-3
·lit.}' equity , income a nd c xpen!'le. Explain the a s se t recognit ion principl e.
D e (jm e asse t, li a b 1 ,
ANSWE R 4-6
ANSWE R 4-3
Asset is defined as r eso urce controU~tl h~ th e e n t ity as 8 An asset is 1·ecogniz ed in the stateme nt of financia l position
a. result of past eve n t and from whi ch_ tu tu re eco nomic when it is probable that future economi c benefits will flow to
benefit are expected to flow to the e ntity the entity and the asset has a cost or value that can be measure d
reliably.
b. Liabilit y is presen t obligat ~on ho~ thhe e ntitj tet>rdis;ng from
past event t he settle ment o._w " : is e ...:pee -0 t eoult
'fhus, two conditio ns must be present for the recognit ion of an
in an outflow from the e n tity ot r eso u rces e m bodying
asset:
economic benefits .
8. It is probable that future economi c benefits wiU flow to the
c. Equity is the residual inte~es~ ~n. t he as se ts cf the entity entity.
after deductin g all of the h a b1hties.
b. The cost or value of the asset can be measure d reliably.
d. Income is in crease in econo m ic bene fi t during the
accounti ng period in the form of an inflow or _increase of
asset or decrease of lia bility t ha t results in inci:ease in QUEST ION 4-6
equity, other than contribu toin from equity particip ants. What is the cost principl e?
e. Expens e is decrea se in econom ic benefit during t he
accounti ng period in t he form of an outflow or decrease ANSWE R 4-6
of asset or increase of liability that results in decreas e in
equity, other th a. n distribu tion to equity particip ants. Inheren t in asset recogni tion is the cost principl e.
This principl e require s that assets shall be recorde d initially
QUESTION 4-4
at original acquisit ion cost.
What are the conditio ns that must be presen t· for the
recognit ion of an item that meets the definiti on of an The initial cost may be carried withou t change , may be
element ? changed by depreci ation, amortiz ation or writeoff , or may
be shifted to other categor ies as in the case of raw materia ls
ANSWE R 4-4 being convert ed into finished goods.
An item that meets the definitio n of 'an elemen t shall be
recogniz ed when: In other words, the financia l stateme nts shall be based on
histori cal cost rather than market value.
l. It is probable that any future economi c benefit associat ed·
with the item will flow to or from- the entity. The reason is that cost is objectiv e and therefor e verifiab le
2. T~e. it~n:i has a cos t or value tha't can be m e asured with while market value is subjecti ve.
rc1liab11I ty.

67
66
 ►
QUESTION 4-7 QUEST ION 4-9
E'll."l)lain the liability recognition principl e. Distingui~h income from revenue and gains.
ANSWE R 4-7
l position ANSWE R 4-9
· gru·,.,,d in the statemefnt of financia
A li 8 bi.ti.ty 1s reco ""' fl ,
when it is probable that an out_ o,dv ~ r:hour~f tl ~<';~not ~tg
b d ·
ba
The definition of income encomp asses both revenue and gains.
economic benefits will be requir~ iof r l e bsli tic!·
present obligatio n a nd the amount o t 10 o ga ion can e Revenu e arises in the course of the ordinary regular activitie s
measure d reliably. and il:l referred to by a variety of differen t names includin g sales,
fees, interei:1t, dividends, royalties and rent.
111US, two condition
rJ'\.. s must be present for the recognition of a
liability: · The essence of revenue i.s regular ity.
It is probable that an outflow of economic ~ene?ts will be Gains represen t other items that meet the definitio n of income
a. required for the settleme nt of a present obligation. and do not arise in the course of the ordinary regular activities.
b. The amount of obligatio n can be measure d reliably.
QUEST ION 4-10
QUESTION 4-8
Explain the recogni tion of reve nue fro m interest ,. r~yaltie s,
Exp lain the income recogni tion princip le or realizat ion dividends, installa tion fees, s ubscript ion fees, adm1ss1on fees
principl e. and tuition fees.
ANSWER 4-8 ANSWER 4-10
The basic principle is that "income shall be recognized when 1. Interest revenue shall be recognized on a time proporti on
earned". basis that takes into account the effectiv e yield on the asset.
But the question is when is in.come considered to be earned? 2. Royalti es shall be recogni zed on an accrual basis in
The Conceptu al Framew ork provides that income is recognized accordance with the substan ce of the relevant agreeme nt.
when it is probable that a11 increase in future economic benefits
related to an increase in an asset or a decrease in a liability has 3. Dividen ds shall be recogni zed as revenue when the
arisen and tha t the increase in econom ic benefits can be shareho lder's right to receive paymen t is establis hed,
measured reliably. meaning , when th~ dividend s are declared .
'.fhus, two conditions must be present for the recognit ion of 4. Installa tion fees are recognized as revenue over the period
income: of installat ion by reference to the stage of completion.
a. It is probable that future economic benefits will flow to the 5. Subscri ption fees should be recogni zed as r evenue on a
entity as a result of an increase in an asset or a decrease in straight line basis over the subscrip tion period .
a liability.
6. Admissi on fees are recognized as revenue when the event
b. The economfo benefits can be ·measur ed reliably. takes place.
Undoubtedly, both conditions are present at the point of sale. 7. Tuition fees are recogniz ed as revenue over the period in
Accordingly, the point of saJe is the point of revenue recognition. which tuition is provided.

68 69
QUEST ION 4-11
- QUESTION 4- 18
Explain the expense recognition principle.
Wha t do you underst11nd by the matchin g principl e?
ANSWER 4-11 ANSWER 4-18
T he Co nceptu al Framew ork provide s that expe_nses a re
recognized when it is p robable th a t a d~c rease m fut ure The expense recogni tion principl e is the applica tion of the
economi c benefits rela ted to a decreas e rn an ~ssct or an matchi ng princip le. ·
increase in liability has occurred and the decrease m economic
The generati on of revenue is not without any cost. There has
benefits can be measure d reliably.
got to be some emit in earning a revenue .
Thus, two conditions must be present for the recognit ion of
"There is no gain if there is no pain".
expenses:

a. It is probable that a decrease in future economic benefits The matchin g principle requires that those costs and exp enses
has occurred . incurred in earning a revenue should be reported in the same
period.
b. The decrease in economic benefits can be measure d reliably.
In other words, there should be simulta neous or combin ed
QUESTION 4-12 recognit ion of revenue s and expense s that result directly from
the same transact ions and events.
Distinguish expenses and losses:
In other words, there should be simulta neous or combin ed
ANSWE R 4-12 recognit ion of revenue and expense s that result directly from
The definiti on of expense encompasses losses as well as those the same transact ions and events.
ex~e?~es that arise in the course of the ordinar y regular
act1V1t1es of the entity. The basic expense recognit ion principl e means that "expens es
are recogniz ed when incurred".
Expenses that arise in the course of ordinary regular activitie s
?f the entity include, for example, cost of sales wages and But the question is when are expenses incurred?,
depreciation. '
Expense s are incurred in conform ity with the three applica tions
Losses represe nt other items that mee t the definiti on of of the matchin g principl e namely:
ex~e~~es and do not arise in the course of the ordinary regular
act1V1t1cs of the entity. a. Cause and effect associat ion
b. Systema tic and rational allocatio n
Examples include losses resulting from disaster s such as fire c. Immedi ate recognit ion
• fro
and flooc as well as th ose a n·smg .
assets. ' m disposal of noncurr ent

70 71
QUESTION 4-14
. the cause d effect association principle.
Explam QUESTIO N 4-1 6
nn
Explain the . immediate recognition principle.
ANSWER 4-14
ANSWER 4-16
The cause and effect associatio n prin?iple means that the
•
expense 1s reco gnized when the
. revenue ·1st alreudy
· f hrecogm.,,,.d
..._
Under immed iate recognitio n principle , the cost incurred
on the basis of a presumed direct assocrn wn o t e expense is expensed o utright becau se of uncertain ty of future
with specific revenue. economic benefits or difficulty of reliably associating certain
costs with future revenue.
The cause and ~ffect association principle is actually the "strict
matching concept". Actually, t his principle reflects a conservati ve or prudent
approach which is t he accountant 's general guide for dealing
The best example is the cost of merchandi se inventory. Such with uncertain situations.
cost is considered as an asset in the meantime that the
merchandise is on hand. An expense is recognized immediate ly when an expenditur e
produces no future economic benefits or when ~uture
When the merchandise is sold, the cost thereof is e>.l)ensed in economic benefits do not qualify, or cease to qualify for
the form of "cost of sales" because at such time revenue may be recognition in the statement of financial position as an asset.
recognized.
QUESTIO N 4-17
Other examples include doubtful accounts, warranty expense
and sales commissions. Give examples of expenses that are recognized immediate ly.

QUESTION 4-15 ANSWER 4-17

Explain the systematic and rational allocation principle. Examples include officers' salaries and most administra tive
expenses, advertisin g and most distributio n costs, amount
ANSWER 4-15 to settle lawsuit and worthless intangible assets.
Many losses, such as loss from disposal of building, loss from
Under the systemati c and rational allocation principle , sale of investmen ts, and casualty loss, are immediate ly
so~e costs al'e expensed by simply allocating them over the recognized because they are not directly ,related to specific
periods benefited.
revenue .
The reason for this principle is that the cost incurred will
QUESTIO N 4-18
benefit future periods and that there is an absence of a direct
or clear association of the expense with specific revenue. Explain "mea sureme nt" of the elements of financial
statement s.
Wl,~n economic benefits are expected to arise ouer several accounting
f!Crt~ and the ~sociation with income can only be broadly or ANSWER 4-18
uidirectl:'(' determuied, e."Cpenses are recogn'i.zed on the basi,s 1
0
systematic and all-Ocation procedures. Measurem ent is the process of determinin g the monetary
a mounts at which the elements of the financial statement s
Concrete examples include d a re to be recognized and carried in the statement of fin a ncial
a llocation of prepaymen ts. epreciation , amortizat ion an d
position and income statement .

72 73
QUESTION 4-19 QUESTION 4-20 Multiple choice (ACP)
Explain the four measurement bases or financial attributes.
1. The e lements directly r elated to the measurement of
financial pos ition are
ANSWER 4-19
a. Assets, liabilities, equity, income and expense
The four measurement bases are historical cost, current cost, b. Assets, liabilities and equity
realizable value and present value. c. Income and expense
d. Assets and liabilities
Historical cost is the amount of cash or cash equivalent
paid or the fair value of the consideration given to acquire 2. The elements directly related to the measurement of
an asset at the time of acquisition. financial performance are
a. Assets, liabilities, equity, income and expense
Historical cost is also known as "past purchase exchange b. Assets, liabilities and equity
price." c. Income and expense
d. Sales and cost of goods sold
Historical cost is the measurement basis most commonly
adopted by entities in preparing their financial statements. 3. It is a resource controlled by the entity as a result of past
event and from which future economic benefits are expected
Current cost is the amount of cash or cash equivalent that to flow to the entity.
would have to be paid if the same or an equivalent asset was a. Asset
acquired currently. b. Liability
c. Equity
Current cost is also known as "current purchase exchange d. Income
price".
4. It is a present obligation of an entity arising from past
Realizable value is the amount of ca8h or cash equivalent event the settlement of which is expected to result in an
that could currently be obtained by selling the asset in an outflow from the entity of resources embodying economic
orderly disposal. benefits.
a. Asset
Re_ali.~able value is also known as "current sale exchange b. Liability
pnce. c. Equity
d. Expense
~resent value is the discounted value of the future net cash
inflows that the item is expected to generate in the normal 5. It is th~ residual interest in the assets of the entity aftet
course of business. deducting all of the liabilities.
a. Income
Present value is also known as "future exchange price".• b. Expense
c. Net income
d. Equity

74 75
 · an increase
6 . I t 1s · 1·n economic benefit during t hed accounting
•
· d l 8 t d to a n increase in asset or a ecrease 1n QUESTION 4-21 Multiple choice (ACP)
peno e
liabilityrethat results in increase rn·
equi Y othc t· th an
't
1. It is the process of incorporating in the stateme nt of
contribution from owners. financial position or statement of comprehensive income
an item that meets the definition of an eleme nt of the
a. Asset financial statements.
b. Liability
c. Income a. Recognition
d. Expense b. Measurement
c. Realization
7. It is a decrease in economic be~efit dutng the _accounti1_1g d. Allocation
period related to a decrease m as~e or ~n increase in
liability that r esults in decrease m equity other than 2. When should a n item that meets the definition of an
element be recognized?
distribution to owners. ·
a. When "it is probable that any future economic benefit
a. Asset associated with the item will flow to or from the
b. Liability entity.
c. Income b. When the element has a cost or value that can be
d. Expense measurfed with reliability.
c. When the entity obtains control of the rights or
8. This arises in the course of ordinary regular activities obligations associated with the item. .
and is referred to by a variety of different names including d. When it is probable that any future economic bene_fit
sales, fees, interest, dividends, royalties and rent. associated with the item will flo~ to or from the entity
and the item has a cost or value that can be measured
a. Income with reliability.
b. Revenue
c. Profit 3. An asset is recognized when
d. Gain a. It is probable that future economic benefit will flow
to the entity.
9, Which statement in relation to income is true?
a. Income encompasses both revenue and gain.
~'. +g: ~~~!:
the asset.
ili;
;baf:i~~~~1:iet:;.8~i r~:hl:!!~~~!~!~ ~lfh
.
b. Revenue encompasses both income and gain. d. It is probable that future economic benefit will flobw
c. Gain encompasses both income and revenue. to the entity and the cost or value of the asset can e
d. Income is the same as rever.ue . measm·ed reliably.

ANSWER 4-20 4. A liability is recognized when

1. b 6. C
a. It is probable that an outflow of futu~e e~oriomic
2. C 7. benefit will be required to settle the obligation:
d b. The amount of the obligation can measured rebabl:r.
3. a 8. b C. It is probable that an outflow of futur~ e~onom1c
4. b 9. a benefit will be required to settle an obligatio~ and
5. d the amount of the obligation can be measurE:d rt:hably.
d. When the entity obtains control of the obligation.

76 n
5. An income is recognized when 9. An expense is recognized immediately
It is probable that future econom_ic benefi~ will flow
a. to the entity and the economic benefit can be a. When an expenditure produces no future economic
benefit.
measured reliably. . fi ·u fl
· poss1'ble that future economic bene bt w1 ow to b. When cost incurred ceases to qualify as an asset. ·
b. I t 1s .
the entity and the economic bene 6 t can e measured c. When an expenditure produces future economic
benefit.
reliably. l f h f t .
c. The entity obtains contro o t e u ure economic d. When an expenditure produces no future economic
benefit and when cost incurred ceases to quality as
d. ~t~efu~~re economic benefit can be measured reliably. an asset.

6. An expense is recognized when 10. It is the process of determining the monetary amounts
a-. It is probable that a decrease in future economic at which the elements of the financial statements are
benefit has occurred. recognized in the financial statementi;.
b. The decrease in future economic benefit can be
measured reliably. a. Measurement
c. It is probable that a decrease in future economic b. Recognition
benefit has occurred and the decrease in the future c. Presentation
economic benefit can be measured reliably. d. Recording
d. It is probable that an increase in future economic
benefit has occurred and the increase in future
ANSWER 4-21
economic benefit can be meas ured reliably.

7. It is the process that involves the simultaneous or 1. a 6. C

combined recognition of revenue and expenses that result 2. d 7. a
directly from the same transactions and other events. 3. d 8. b
4. C 9. . d
a. Matching of cost with revenue 5. a 10. a
b. Matching of revenue with cost
c. Systematic and rational allocation
d. Immediate recognition

8. When economic benefits are expected to arise over

several accounting periods and the association with
income can only be indirectly determined, expenses are
recognized on the basis of

a. Cause and effect association

b. Systematic and rational allocation
c. Immediate recognition
d. Realization

78 79
 QUESTION 4-22 Multiple choice (IAA)
QUESTION 4-23 Multiple choice (IAA)
1. Which measurement is n ot currently used in practice?
1. Asset measurements in financial stateme nts
a. Present value
b. Net realizable value a. Are confined to historical cost
c. Current replacemen t cost b. Are confined to historical cost and current cos t
c. Rl':! flect several financial attributes
d. Inflation-adjusted cost d. Do not reflect output value
2 _ Which measurement attribute is the mos t relevant?
2. Which of the· following should be considered a curre nt
a. P resent value value measure?
b. Exit value
c. Curren t cost a. Replacement cost and exit value --. ,
d., Historical cost b. Rep lacement cost a nd discounted cash flow
c. Exit value a nd discounted cash flow
3. It is the amount of cash that would have to be paid if d. Replacement cost, exit value and discounted cash flow
asset was acquired currently.
a. Historical cost 3. The primary measurement bas is is
b. Current cost a . The current market pi-ice if the asset currently held was
d. Realizable value sold on the open market.
d. Present value b. The curre n t market price if the asset held was
purchased on the open market.
4. Which term best describe~ the amount that represents c. The present value of the cash flows that the asset is
the immediate purchase cost of an asset? · expected to g1:::nerate.
a. Historical cost d . The market price at the date the asset was acquired.
b. Realizable value
c. Present value 4. Which measurement basis is currently used in financial
d. Current cost statements?

5. It is the amount of cash that could currently be obtained a. Present value

by selling the asset in an orderly _disposal. b. Present value and settlement value
c. Settlement value and fair value
a. Realizable value d. Present value, :3ettlement value and fair value
b. Fair value
c. Market value ANSWER '4-23
d. Present value
1. C
ANSWER 4-22
2. d
I. d 3. b 5. a 3. d
2. a 4. d 4. d

80 81
QUEST ION 4-24 Multipl e choice (IAA)
6. \\'hich of the following may not be an accepta ble deviatio n
1. Which stateme nt describ es the reve nue recogni tion from recognizing revenue at the point of sale?
principl e?
a. Upon receipt of cash
a Cash is received.
· I 15
• b ble that future economi·c bene fi t w ill fl ow to b. During product ion
b. th Pt:'tya nd c. Upon receipt of order
t e entl a tlie amount can be measure
·
d reliably.
f d. End of product ion
c. Production is complete and there 1s an ac 1ve market
for the product.
d. Production is complete. 7. Whic h of the followin g is not an accepte d basis for
recognition of revenue ?
2. The revenue princip le states that revenu e shall be
recognized at a point when a. Passage of time
b. Perform ance of service
a. An exchange transact ion has occurred and the earning
c. Comple tion of percenta ge of a project
process is essentially complete. . . d. Upon signing of contract
b. An order for shipmen t of merchandise has been received.
c. A contract between buyer and seller has been signed.
d. The seller has shipped merchan dise under terms that 8. Which of the followin g repre se nts the least desirab le
the customer need not pay until sold. choice for t he recogni tion of revenue ?

3. Generally, revenue is recognized a. During product ion o- ·

b. When a sale occurs
a. At the point of sale. c. When cash is collecte d
b. When cause and effect are associated. d. When product ion is comple ted
c. At the point of cash collection.
d. At appropriate points through out the operatin g cycle. 9. Revenue from an artistic perform ance _is recognized when
4. Normally, revenue from sale of goods is recognized a. The audienc e register for the event online.
a. When the customer order is received. b. The tickets for the concert are sold.
b. When the customer order is accompanied by a check. c. Cash has been received from the ticket sales.
c. Only if the transaction will create an account receivable. d. The event takes place.
d. Wh~n the title to the goods changes. ·
ANSWER 4-24
5. Revenue may be recognized
1. b 6. C
a. At the point of sale 2. a 7. d
b. During production 3. a 8. C
c. At the end of production 4. d 9. d
d. All of the choices may be . 5. d
recognition accepta ble for revenu e

82
83
QUESTIO N 4-25 Multiple choice (IAA)
QUCSTIO N 4-26 Multiple cho ice (IAA)
• d
1. Income recognize usin g the insta1llm en t method of
· r d b 1. The installmen t method. of recogni2.ing revenue
accounting equals cash collected mu tip ie y
a. Should be used when no reasonable basis exis ts for
es ti1,1ating t he collcctibili ty .
8 Net profit rate •bl b. Is not a gener:.illy accepted accou nting principle under
b.· Net pro fit ra te adJ·usted for uncollecti e accounts ;:w v circumA tances.
Gross profit rate . C. S hould be used for tax purposes.
~-- Gross profit rate adjusted for uncollect1ble accounts d. ls a n accept able alte rnative accounting principle.
z. UnclE: r which circumsta nce is the insta llment method
2. U n der the installmen t method of
. daccounting
. . , gross profit appropi-ia lc for thE:: recog nition of revenue?
on an installment sale is recogmre m income
a. For any sa le s where collection is s pread over a
a . On the date of sale. reasona ble long periou of time.
b: On the date the final cash collec_tion is received. b. In any situation wh ere manageme nt wishes to delay the
c. In proportion to the cash collection. recognition of reven ue in order to smooth income.
C. For saJe3 where collection is spread over a reasonable
d. After cash collections equal to the c~st of goods sold long period of time and significant doub~ exists about
have been received. ultimate collection of installme nts receivable .
d. For sales where collection is spread over a reasonable
3. Under the cost recovery method of accounting , gross profit long period of time a~d no ~ignifican t doubt_ exists
on an installmen t sale is recognired about ultimate collect1on of installmen ts receivable.

a. After cash collections equal to the cost of goods sold 3. When using the installmen t method
have been received a . Gross profit is deferred until a ll cash is received. ·
b. In proportion to the cash collection . b. Gross profit is recognized only a fte r the amount of
c. On the date the final cash collection is received cash collected exceeds the cost of goods sold.
d. On the date.of sale · c. Revenue, costs and gross profit are recognize d
proportion ally as ca sh is received from the sale.
d. Total revenue ,;md costs are r ecognized at the point
4. Which statement justifies the use of the cost recovery of sale but gross profi t is deferred in proportion to
method to account for installmen t sales? the cash that is uncolJecte d from the sale.
a. The sales contract provides that title only passes to the 4. The cost recovery method of revenue recognition
purchaser when all payments have been made.
b. No cash payments are due until one year. a. Is used only when ci.rcuQ1stances surromulin g a sale are
c. Sales are subject to a high rate of return. so uncertain that earlier recognition i3 impossible.
d. There is no reasonable basis for estimating collectibility. b. Is used in accounting for real estate sales.
c. Is similar to percentage of completion accounting .
ANSWER 4-25 d. Is never acceptable under GAAP.

1. C ANSWER 4-26
2. C 1. a
3. a 2. C
4. d 3. d
4. a

84 85
QUESTION 4-27 Multiple choice (AICPA Adnpted)
6. Which statement confo1·ms lo the realization concept?
l. 1'ht> term "t'\.'vcn.nc i-eco~ni tion" conventionally refors to
a. Deprecia tion was assigned to product unit cost
a. f'l'h
i
-~ f identilYing. trnnsuctionR
f' pi•ocC'::-~ t1 .· d
to be recot·ded b. Eequipme nt was sold in excha nge for a note receivable
·,s revenutl in an »ccountmg pet 10 • . c. Cash was collected on Accounts receivable
~ The process of measuri ng a nd rdatmg r~venue and d. Product unit cos ts were assigned to cost of goods sold
. , s of an ent.i ty for an acoount m~ pE:noci.
expen$e •h · . se t o 1•cvenue
c 'l'he ea rning process w 111c g1ves 11 7. Revenue muy result from
realization. · 1
d. The process of identifyi ng t hose tran~n~t1ons t u1t result A decrease in an as8et from primary operations.
11 •
in a n inflow of assets from customers. b. An increase in an asset from incidental transactions.
c. An increase in a liability from incidental transactions.
2. Under what. condition is it proper to recognize revenue prior
to the· sale oft.he merchandise?
d. A decrease in a liability from primary operations.

a. When the concept of consistency is oomplied with. 8. When s hould an entity use the insta llm e nt method of
b. When the revenue is to be reported asdan installment sale. revenue recognition?
c. When the ultimate sale of the goo s is at an assured
sales price. a . When collectibility of installment accounts receivable
d. When management has A long-es~blished policy. is reasonably predictable.
b. When repossessions of merchandise on the installment
3. Which term means the process of converting noncash plan may result in a future gain or loss.
resources and nghts into cash or claims to cash? c. When t here is no reasonable basis for e stimating
a. Allocation collectibili ty.
b. Collection d. When collection expenses are deemed immaterial.
c. Recognition
d. Realization 9. The installme nt method of accounting may be u·s ed if the

4. Gains on assets unsold are identified in a pr ecise sense by 2. Collection periotl extends over more than 12 months
the term b. Installments are due in different years
a. Un recorded c. Ultimate amount collectible is indeterminate
b. Unrealized d. Percentage of completion method is inappropriate
c. Unrecognized
d. Unalloca ted ANSWER 4-27
1. a 6. b
5. The. term "recognized" is synonymous with the tA=rm 2. C 7. d
a. Recor ded 3. d 8. C
b. Realized 4. h 9. C
c. Matched 5. a
d. AlJocAted

86 87
QUFSTION 4-28 Multiple c hoice (AICPA Adapted)
6. Which of the following should be expensed under th,
l. Cost s thAt can be reasonifiablyroadsusc:i: ~~~;r'~~h spe cific principle of systematic and rational allocation?
revenue but not with spec c P
a. Sa lesmen's monthly salaries
Charged to ex-pense in the period incurred. .
a. All t d to specific products based on the best estunat.e b. Insurance premiums
b. oca e . tun
· c. F reight out
of the product process~g ~-
c. Expen~d in the period m which the related revenue is d. Electricity to light cffice building
recognized. . b
d. Capitalized and then amortized over a reasone le period 7. Which of the following would be matched with current
revenue on a basis other than association of cause and effect'?
2_ Why are certain costs dof doin~ btusdiness capitalizet_
· d when
incurred and then eprec1a e or amor 1ze over a. Goodwill
subsequent accounting periods? b. Sales commission
a. To reduce the income tax liability c. (',ost of goods sold
b. To aid management in the decision-making process d. Purchases on account
c. To match the costs of production with revenue
d. To adhere to the accounting concept of conservatism 8. Which of the following is not a theoretical basis for the
allocation of expense?
3. Which of the following is an example of the expense
recognition principle of associating cause and effect? a. Summarization
a. Allocation of insurance cost b. Classification
b. Sales commissions c. Profit maximization
c. Depreciation of property, plant and equipmen t d. Immediate recognition
d. Officers' salaries
9. What is an example of cost that cannot be directly related lo
4. Which principle best describes the conceptual rationale for particular revenue but incwTed to obtain benefits that are
the method of matching deprer:iation with revenue? exhausr.ed in the period when the cost is incw-red?
a. Associating ca use and effect a. Sales commission
b. Systematic and rational alloca tion h. Sales salary
c. Immediate recognition c. Freight in
d. Partial recognition d. Prepaid insurance

5. Which of the following is an application of the principle of ANSWER 4-28

systematic an<l rational allocation?
l. C 6. b
a. Amortization of inta ngiblP asset ...
? C 7. a
b. Sales commissions 3. b 8. C
c. Re:;earch a nd dew-!lopmen t cost 4. b 9. b
d. Officers' salaries 5. a

88 09
 QUESTION 4-29 Multiple choice (IAA)
6. Whic~ ?at~gory of expenses is subject to immediate
1. The matching principle is best demonstra ted by recogrution m the income statement?
A. Not rccogniz.i ng any expense unless some revenue is a. Utilities expense for the production line of a
manufacturer
rea lized .
b. Associating effort :with accomJ:>lisdhment b. Repairs and maintenance expense incurre d on
c. Recognizing prepaid ren~ r~ce1ve as ~evenue production equipment of a manufacturer
d . Establishing an approprrnt1011 for contmge ncy c. The salary of the production foreman
d. The salary of the president
2. Which accou nting principle is being o bserved ~bvhen an
accountant charges to expense a cost t 1mt contri u ted to 7. "':7hic~ pri_nciple best describes the ratio.nalc for matching
revenue during a period? drntnbut1on costs and admi nistrative expenses with
revenue of the current period?
a. Revenue realization a. DirP.ct matching
b. Matching b. Systematic and rational allocation
c. Monetary unit c. Immediate recognition
d. Conserrntism
d. Partial recognition
3. Which of the following is not an acceptable basis for the
recognition of expense? 8. What is the general approach as t.o when product costs are
recognized as expenses?
a. Systematic and r ationa l allocation
b. Cause and effect association a. In the period when tht:: expenses are paid.
c. Immediate recognition b. In the period when the expenses are jncurred.
d. Cash disbursement c. In the period when the vendor invoice is received.
d.. In the period when the related revenue is recognized.
4. Bad debt expense is recognized according to which expense
recognition principle? 9. When should an expenditure be recorded as an asset rather
than an expense?
a. Direct matching
b. Immediate recognition a. Never
c. Systematic and rational allocation b. Always
d. Critical event recognition c. If the amount is material
d. When future benefit exists
5. An example of direct matching of an ex:penoe with revenue
would be ANSWER 4-29

a. Depreciation expense 1. b 6. d
b. Office salaries expense 2. b 7. C
c. Direct labor cost incur red to produce inventory sold 3. d 8. d
during a period 4. a 9. d
d. Advertising expense 5. C

90 91
QUE STIO N 4~30 Mult iple choic e (A.IC PA Adap ted)

1. A decre ase in asset arisin g from perip heral or incidental

transa ction is called
a. Capit al expen diture
b. Cost
c. Loss
d. Expe nse
2. An outflow of asset based on an activi ty that repre sents the
majo r opera tions is called ·
a. Loss
b. Liabi lity
c. Expe nse
·d. Equit y

3. The prima ry distinction between reven ue and gain is

a. The mater ialitv of the amou nt.
b. The likelih ood that the transa ctic,n will recur in lhe
future .
c. The natur e of the activ ity that gives rise to the
transa ction.
d. The m~tho d of dii;closing the transaction..

4. Whic h state ment in relati on to the term "expe nse" is

incor rect?
a. All expen ses and losses sre expir ed costs but not all
expired costs are expe11ses or losses.
b. All expen_ses decn; ase owne rs' equit y but not all
decre ase s_ 1n owners equity are expen ses.
c. E :Kp_e?s~ 1s synon ymou s with expen ditu1e .
d. Entiti es do not incur expen ses per·se but initia lly acquire
8 f3Sets. '

ANbW ER 4-30
1. C
2. C
3. C
4. C

9l