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Chapter 2: GAAP and Accounting Standards

Multiple Choice Questions

1. Satnam & Company, a proprietorship firm paid an annual rent of `600,000 for the premises. The premises is used 2/3rd for official purposes and 1/3rd for the residence of the proprietor. The entire amount paid is recoded as business expense. Which of the accounting concept is violated: a. Accounting period b. Conservatism c. Money Measurement d. Separate Entity e. Materiality 2. Accounting Standards in India are set by: a. Ministry of Corporate Affairs b. Securities Exchange Board of India c. Reserve Bank of India d. Institute of Company Secretaries of India e. Institute of Chartered Accountants of India 3. Inventories are valued at `lower of cost or realizable value. Which accounting principle in applicable here: a. Money Measurement b. Conservatism c. Historical Cost d. Materiality

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

e. None of the above 4. On 1st July 2011 Tea-Pot Limited paid `600,000 towards annual maintenance contract of its computer for a period of one year from 1st July 2011 to 30 June 2012. Assuming financial year to be the accounting period of the company, the AMC charges will be shown as expenses: a. Either in 2011-12 or 2012-13 at the discretion of the management b. In 2011-12 as payment has been made in that year c. In 2012-13 as AMC expires in that year d. 3/4th of charges in 2011-12 and 1/4th in 2012-13 e. None of the above 5. As on 31st December 2011 the total assets of the company are `5,600,000 whereas the total liabilities are `3,100,000. The capital of the firm as on that date is: a. `2,500,000 b. `8,700,000 c. (` 2,500,000) d. Cant be determined based upon the information given 6. For inter-period comparison which of the following accounting principle is most important: a. Accrual b. Conservatism c. Consistency d. Materiality e. Going Concern 7. Which of the followings is not a fundamental accounting assumption as per AS-1 a. Going Concern b. Materiality

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

c. Consistency d. Accrual e. None of the above 8. Which of the following is not one of the requirement of AS-1: a. All significant accounting policies must be disclosed b. Any change in accounting policies must be disclosed c. If Going Concern, Accrual and Consistency have been followed, the same must be mentioned along with financial statements d. Choice of accounting policies is guided by prudence, materiality and substance over form e. None of the above 9. The number of existing AS issued by ICAI so far: a. 28 b. 29 c. 30 d. 31 e. 32 10. Which of the following statement is true: a. Upon convergence Indian accounting standards will cease to exist and will be replaced by IFRSs b. The transition to IFRS for all the companies will happen on 1st April 2011 c. For convergence the Indian accounting standards will be changed in line with IFRS d. IFRS convergence is applicable only to listed companies e. IFRS convergence is applicable to all companies listed or unlisted

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

Objective type questions:

1. Name the accounting principle for each of the following statements: a. Accounting methods are based on the true intent of the transaction and not on its legal form b. It is advisable to under-report profits and assets rather that over report.

c. For the purpose of accounting the business and businessman are two different entities d. To ascertain profits, cost should be matched against the revenue earned e. Revenue is recorded when earned and expenses are recorded when incurred f. Enterprise will continue to operate indefinitely

g. Financial statements usually cover a period of twelve months. h. Any information relevant to the users for making economic decision should be disclosed however irrelevant details should be avoided. i. j. Accounting deals only with those events which can be expressed in terms of money Accounting policies once chosen must be followed period after period unless there are strong reasons to deviate k. Fixed assets are shown at their historical cost l. Every transaction affects at least two accounts in such a way that Assts = Capital + Liabilities 2. True of False a. Accounting standards ensures comparability of financial statements across the globe b. Indian accounting standards are established by the Ministry of Corporate Affairs c. Accounting Standards are usually recommendatory in nature in the initial period

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

d. e.

GAAP stands for Globally Accepted Accounting Principles ICAI is an industry association like FICCI or CII

Answers to Multiple Choice Questions

1. d: Rent paid towards part of premises used for the residence of proprietor is not a business expense. 2. e: ICAI is responsible for setting and enforcing accounting standards in India. 3. b: ignore probable gains but record probable losses 4. d: As AMC covers 9 months of 2010-11 and 3 months of 2011-12, charges should be appropriated in the same proportion. 5. a: Assets = Capital + Liabilities 6. c: Consistency ensures that same accounting policies are followed year after year 7. b: Going Concern, Accrual and Consistency are fundamental accounting assumptions 8. c: If fundamental accounting assumptions are not followed, it need to be disclosed. 9. e: 32 10. c: India is following convergence model i.e. changing the accounting standards in line with IFRS.

Answers to Objective Type Questions

1. Name the accounting principles: a. Substance over Form b. Conservatism c. Separate Entity d. Matching e. Accrual f. Going Concern g. Accounting Period h. Materiality or Relevance i. Money Measurement j. Consistency k. Cost l. Dual Aspect 2. True or False a. False: Accounting standards are country specific b. False: The ICAI is responsible for setting accounting standards c. True: They are recommendatory initially d. False: GAAP stands for Generally Accepted Accounting Principles e. False: ICAI is a professional institute formed under an act of parliament

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

Sanjay Dhamija

Financial Accounting for Managers