Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
TRUE/FALSE
1. The APB was the first to successfully derive an underlying framework of postulates and
principles.
2. ARS 1 and ARS 4 represent a milestone in the attempt to provide a unified theoretical
underpinning for financial accounting rules by the APB.
3. One reason ARS 1 and ARS 3 fell short of the goal of obtaining a framework for APB accounting
opinions is that the accounting profession refused to abandon historical cost.
4. Postulates are generally defined as basic assumptions that cannot be verified.
5. A principle contains elements observable by empirical techniques.
6. The key group in Moonitz’s set of postulates consists of postulates stemming from accounting
itself.
7. The key imperative postulate in ARS 1 appears to be stability of the monetary unit.
8. There are eight broad principles in ARS 3.
9. Accounting concepts have largely evolved from practical operating necessities, including income
tax laws.
10. Principles are basic assumptions concerning the business environment.
11. Output-oriented principles are broad rules that guide the accounting function.
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
12. The going-concern postulate states that unless there is evidence to the contrary, it is assumed that
the firm will continue indefinitely.
13. The time period idea is somewhat artificial because it creates definite segments out of what is a
continuing process.
14. When the business is viewed in the context of accounting as well as in its legal form, it is clear
that the entity is identical to its owners.
15. “Matching” refers to the fact that all expenses can be directly identified with either specific
revenues or specific time periods.
16. Conservatism, materiality, and disclosure are examples of constraining principles.
17. The lower-of-cost or market valuation of inventories is an example of the disclosure principle.
18. Conservatism has been called the dominant principle of accounting.
19. Some capital markets research has indicated that “bad news” relative to reported earnings has a
greater impact upon security prices than “good news.”
20. Disclosure will become less important in the future because of market efficiency.
21. Consistency refers to the degree of reliability users should find in financial statements when
evaluating financial condition or the results of operations on an interfirm basis or predicting
income or cash flows.
22. Proprietary theory assumes that the owners and the firm are virtually identical.
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
23. The balance sheet equation for entity theory is “Total Assets – Total Liabilities = Owners’
Equities.”
24. The proprietary theory approach largely coincides with the components of income measurement
as it is presently construed in historical cost-based systems.
25. Under entity theory, creditors are considered equity holders.
26. Preferred stockholders are residual equity holders.
MULTIPLE CHOICE
1. Which of the following is not a reason why ARS 1 and ARS 3 fell short of the goal of obtaining a
framework for APB accounting opinions?
a. The authors refused to abandon historical cost.
b. The postulates were not complete and therefore could not exclude all value systems other
than the one prescribed in the principles.
c. At least one of the principles was not derived from any of the postulates.
d. The question of whether valuations of various assets were additive became an issue.
2. Which of the following is a true statement?
a. A principle contains elements observable by empirical techniques.
b. The APB’s Special Committee on Research Program defined both postulates and broad
principles.
c. A principle is an analytical statement whose truth or falsity is self-contained by its internal
logic.
d. Postulates are generally defined as basic assumptions that cannot be verified.
3. Which of the following is not a true statement?
a. A principle is a statement of a true and generalized nature containing referents to the real
world.
b. If a principle could be empirically tested and proven true, it would be capable of becoming a
law.
c. The truth of a law or principle means that is should not be replaced by a newer system.
d. Principles are general statements that influence the way we view phenomena and the way we
think about problems.
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
4. Which of the following is a true statement regarding Moonitz’s approach to ARS 1?
a. He initially rejected an inductive type of approach.
b. He used symbolic terminology and formal methods.
c. He rejected a deductive approach rooted in reasoning alone.
d. He was unconcerned about the experiential and empirical aspects of accounting.
5. Which of the following is the key group in Moonitz’s set of postulates?
a. The Environmental group
b. The Imperatives
c. The Economic group
d. Postulates stemming from accounting itself
6. Which of the following is not a criticism that has been aimed at ARS 1?
a. Some postulates appear to stem from one of the other postulate categories.
b. Self-evident postulates may not be sufficiently substantive to lead to a unique and meaningful
set of accounting principles.
c. The postulates are necessary but not sufficient to lead to a viable outcome.
d. Postulates should have played a less passive role.
7. Which of the following is not true regarding the imperatives of ARS 1?
a. They are normative in nature.
b. They have developed within the context of accounting practice.
c. They are objectives that should be striven for.
d. The key imperative postulate appears to be consistency.
8. Which of the following is not a possible outcome of postulate C-4, stability of the monetary unit?
a. If purchasing power of the monetary unit is not stable, some form of inflation accounting is
appropriate.
b. If purchasing power of the monetary unit is not stable, historical cost is still justified.
c. If purchasing power of the monetary unit is stable, a system of current values is justified.
d. If purchasing power of the monetary unit is stable, retention of historical cost is justified.
9. Which of the following statements is true regarding ARS 3?
a. One of its principles states that revenue is earned by the entire process of operations of the
firm rather than at the point of sale.
b. All of its principles were derived from the postulates of ARS 1.
c. The asset valuation measures prescribed are additive.
d. One of the main criticisms aimed at ARS 3 relates to its advocating the exit-value approach
to asset valuation.
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
10. Which of the following is not a true statement regarding ARS 1 and ARS 3?
a. The authors were commissioned to find postulates and principles that would lead to a
measure of true income.
b. The postulates were not complete and could not exclude all value systems other than the one
prescribed in the principles.
c. The authors were able to identify a single concept of income that was superior to others.
d. Nothing is said about the users of accounting information and what their needs and abilities
might be.
11. Which of the following is an accurate overall label for the terms postulates and principles?
a. Constraints
b. Concepts
c. Axioms
d. Conventions
12. Which of the following are defined in the text as the result of the process of identifying,
classifying, and interpreting various phenomena or precepts?
a. Concepts
b. Principles
c. Postulates
d. Axioms
13. Which of the following are defined in the text as basic assumptions concerning the business
environment?
a. Concepts
b. Principles
c. Postulates
d. Axioms
14. Which of the following are defined in the text as general approaches utilized in the recognition
and measurement of accounting events?
a. Concepts
b. Principles
c. Postulates
d. Axioms
15. Which of the following are defined in the text as broad rules that guide the accounting function?
a. Input-oriented principles
b. Output-oriented principles
c. Basic principles
d. Axioms
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
16. Which of the following are the basic postulates underlying historical costing?
a. Going Concern, Time Period, Market Prices, Monetary Unit
b. Objectivity, Time Period, Accounting Entity, Monetary Unit
c. Going Concern, Time Period, Accounting Entity, Monetary Unit
d. Going Concern, Time Period, Financial Statements, Monetary Unit
17. Which of the following postulates states that unless there is evidence to the contrary, it is
assumed that the firm will continue indefinitely?
a. Entities
b. Time period
c. Consistency
d. Going concern
18. Which of the following postulates is violated when liquidation values for assets and equities are
reported under ordinary circumstances?
a. Entities
b. Time period
c. Consistency
d. Going concern
19. Which of the following is not true regarding the time period postulate?
a. It results in an artificial segmentation of a continuing process.
b. It has led to accrual accounting.
c. It allows different accounting methods to be followed in interim periods.
d. It allows interim reports to include estimates of annual amounts.
20. When we view the business entity in the context of accounting, as well as in its legal form, it is
clear that:
a. the entity is separate from its owners.
b. the entity is identical to its owners.
c. the pooling method should be used for business combinations.
d. entities should be considered as one unit as a result of one controlling the other(s).
21. Who are residual equity holders?
a. Preferred stockholders
b. Managers
c. Bondholders
d. Common stockholders
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
22. Under which of the following theories would the accounting equation be Total Assets = Total
Equities (including liabilities)?
a. Residual equity theory
b. Proprietary theory
c. Entity theory
d. Commander theory
23. Under which of the following theories would the accounting equation be Total Assets – Total
Liabilities = Owners’ Equities?
a. Residual equity theory
b. Proprietary theory
c. Entity theory
d. Commander theory
24. Which of the following theories assumes that the owners and the firm are virtually identical?
a. Residual equity theory
b. Proprietary theory
c. Entity theory
d. Commander theory
25. Which of the following theories assumes that the firm and its owners are separate beings?
a. Residual equity theory
b. Proprietary theory
c. Entity theory
d. Commander theory
26. Which type of accounting principle is concerned with the comparability of financial statements of
different firms?
a. Input-oriented principles
b. Output-oriented principles
c. Constraining principles
d. Both a and c
27. Which type of accounting principle is concerned with general approaches or rules for preparing
financial statements and their content?
a. Input-oriented principles
b. Output-oriented principles
c. Constraining principles
d. Both a and c
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
28. Recognition and Matching are examples of:
a. input-oriented principles.
b. output-oriented principles.
c. constraining principles.
d. both a and c.
29. Which of the following concepts applies to users of financial statements?
a. Comparability
b. Consistency
c. Uniformity
d. Both b and c
30. Which of the following concepts focuses on preparers of financial information?
a. Comparability
b. Consistency
c. Uniformity
d. Both b and c
31. _________ refers to the importance of an item to financial statement users in terms
of its relevance to decision-making.
a. Comparability
b. Materiality
c. Consistency
d. Objectivity
32. _________ refers to a firm’s use of the same accounting methods over consecutive time periods.
a. Comparability
b. Materiality
c. Consistency
d. Objectivity
ESSAY
1. Distinguish between a postulate and a principle as they are used in ARS 1 and ARS 3. Identify
the major categories of each that are included in these two studies.
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
2. What were the reasons for the failure of ARS 1 and ARS 3?
3. What is the going-concern postulate of ARS 1, and how has it been criticized?
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
4. Distinguish between input-oriented principles and output-oriented principles and list at least three
principles in each category.
5. Discuss the revenue recognition principle and how the terms “critical event,” “earned,”
“realized,” and “realizable” apply to revenue recognition.
6. Discuss the matching principle and how it applies to recognizing expenses. Why is the matching
principle currently under attack?
7. How is conservatism defined from a preparer’s orientation? Which conservatism goal should take
precedence when conservatism criteria conflict?
Chapter 5—POSTULATES, PRINCIPLES, AND CONCEPTS
8. Distinguish between proprietary theory and entity theory. Include descriptions of the balance
sheet equation used by each and how income is computed.
9. Discuss the residual equity theory and its assumptions. Include a description of the accounting
equation used and how income would be computed.