Horngren’s Financial and Managerial Accounting, 6e (Miller-Nobles)
1) The consistency principle states that a business should use the same accounting methods and
procedures from period to period.
2) A company reports in its financial statements that it uses the FIFO method of inventory costing. This is
an example of the disclosure principle.
3) A company should not change the inventory costing method each period in order to maximize net
income. This is an example of the disclosure principle.
4) A company changes its inventory costing method each period in order to maximize net income. This is
a violation of the consistency principle.
5) A company is uncertain whether a complex transaction should be recorded as an asset or an expense.
Under the conservatism principle, it should choose to treat it as an asset.
6) A company is uncertain whether a complex transaction should be recorded as a gain or loss. Under the
conservatism principle, it should choose to treat it as a loss.
7) A company is uncertain whether a complex transaction should result in an asset being recorded at
$100,000 or at $150,000. Under the conservatism principle, it should choose to show it at $100,000.
8) The consistency principle states that businesses should report the same amount of ending merchandise
inventory from period to period.
9) The disclosure principle states that a company should report enough information for outsiders to make
knowledgeable decisions about the company.
10) A company discovers that its cost of goods sold is understated by an insignificant amount. It does not
need to correct the error because of the conservatism principle.
11) The accounting principles followed for a $5,000 cost in a small company must be the same as the
accounting principles followed for a $5,000 cost in a large company.
12) Which of the following states that the business should use the same accounting methods from period
to period?
A) materiality concept
B) consistency principle
C) conservatism
D) disclosure principle
13) Which of the following states that a company must perform strictly proper accounting only for items
that are significant to the business’s financial statements?
A) conservatism
B) materiality concept
C) disclosure principle
D) consistency principle
14) A company decides to ignore a very small error in its inventory balance. This is an example of the
application of the ________.
A) conservatism
B) materiality concept
C) disclosure principle
D) consistency principle
15) Changing the method of valuing inventory ignores the principle of ________.
A) conservatism
B) consistency
C) disclosure
D) materiality
16) Which of the following principles states that a business’s financial statements must report enough
information for outsiders to make knowledgeable decisions about the company?
A) conservatism
B) materiality concept
C) disclosure principle
D) consistency principle
17) The goal of reporting realistic figures and never overstating assets or net income applies to the
________.
A) conservatism principle
B) materiality concept
C) disclosure principle
D) consistency principle
18) Which of the following is an application of conservatism?
A) reporting inventory at the lower of cost or market
B) reporting only material amounts in the financial statements
C) reporting all relevant information in the financial statements
D) using the same depreciation method from period to period
19) Which of the following principles states that a business should NOT report anticipated gains?
A) conservatism
B) materiality concept
C) disclosure
D) consistency
20) The disclosure principle states that a company should disclose all major accounting methods and
procedures in the ________.
A) balance sheet
B) income statement
C) footnotes to the financial statements
D) internal accounting documents
21) The materiality concept states that a company must ________.
A) report only such information that enhances the financial position of the company
B) perform strictly proper accounting only for significant items
C) report enough information for outsiders to make knowledgeable decisions about the company
D) use the same accounting methods and procedures from period to period
22) Provide a definition for each of the following accounting principles.
Accounting Principle
Definition
Disclosure
Materiality Concept
situation.
23) Provide a definition for each of the following accounting principles.
Accounting Principle
Definition
Consistency
Conservatism
Consistency
from period to period.
options are presented.
26) Which of the following statements is true of a good merchandise inventory control system?
A) It eliminates the need for authorization of merchandise purchases.
B) It ensures that a physical count of inventory is not required.
C) It often prevents the company from a stockout.
D) It eliminates the need to examine inventory purchases for damage.
27) The tracking of inventory shrinkage due to theft, damage, or errors is done with the help of a(n)
________ of inventory.
A) authorization
B) sale
C) physical count
D) delivery
28) List and briefly discuss three measures that can be taken to maintain good controls over merchandise
inventory.
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6.2 Learning Objective 6-2
1) Ending inventory is calculated by multiplying the number of units on hand by the unit cost.
2) Ending inventory equals the cost of goods available for sale less beginning inventory.
3) Companies determine the number of units on hand from perpetual inventory records backed up by a
physical count.
4) Each inventory costing method matches the flow of inventory costs in a business and is used to
determine ending inventory and cost of goods sold.
5) Which of the following is NOT an inventory costing method?
A) specific identification
B) lower of cost or market
C) last-in, first-out
D) first-in, first-out
6) Which of the following is NOT included in a perpetual inventory record?
A) identification of the inventory item
B) cost per unit
C) unit selling price
D) quantity on hand
7) The specific identification method of inventory costing is required to be used by businesses that sell
unique, easily identified inventory items.
8) The specific identification method of inventory requires businesses to keep detailed records of
inventory sales and purchases and to also be able to carefully identify the inventory that is sold.