Chapter 3
The Measurement Fundamentals of Financial Accounting
MULTIPLE CHOICE QUESTIONS
1. When preparing the financial statements, we assume that the life of the entity will
continue beyond the current period. Which assumption are we most likely following?
a. Stable dollar theory.
b. Going concern assumption.
c. Economic entity assumption.
d. Fiscal period assumption.
2. By recognizing the economic effects of inflation on the accounting financial statements,
which accounting assumption is ignored?
a. Economic entity assumption
b. Going concern assumption
c. Stable dollar assumption
d. Fiscal period assumption
3. A company prepares financial statements once every year. What practice does this
assumption illustrate?
a. Going concern assumption
b. Fiscal period assumption
c. The five-year moving theory
d. Stable dollar assumption
4. Which assumption is applied when Laramie recognizes the operations of its wholly
owned subsidiary, Big Sky, separately and distinctly from its own operations?
a. Economic entity assumption
b. Going concern assumption
c. Fiscal period assumption
d. The subsidiary stability assumption
3-2 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-3
5. Recognition of increases in purchasing power of monetary units is inconsistent with the:
a. economic entity assumption.
b. going concern assumption.
c. consistency principle.
d. stable dollar assumption.
6. Most companies prepare annual financial statements:
a. with a fiscal ending date of June 30.
b. on the calendar year.
c. at a different date each year.
d. every two weeks.
7. Which one of the following assumptions is violated when a company pays for its CEO’s
personal groceries using the company’s bank account?
a. Stable dollar
b. Economic entity
c. Going concern
d. Ethical principle of accounting
8. The fiscal period assumption states that the operating life of an economic entity:
a. is generally for a period of one year.
b. can be any period management decides it to be.
c. must be an entity separately distinct from its owners.
d. can be divided into time periods over which measures of performance and financial
position can be developed and applied.
9. As fiscal periods become shorter, the application of certain accounting methods become:
a. more arbitrary and subjective.
b. more objective.
c. more accurate.
d. more conservative.
3-4 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
10. The stable dollar assumption assumes that:
a. the monetary unit is the functional currency of any country in which a company
operates.
b. inflationary effects should be recognized in the financial statements
c. economic wealth is not measurable.
d. the monetary unit is stable across time.
11. The monetary unit that a company uses to measure economic transactions is primarily
determined by the:
a. stable dollar concept adjusted for inflationary effects.
b. markets in which a company operates.
c. fiscal period a company has chosen.
d. decision by management to elect to use a given currency.
12. Morgan Shipping held cash of $1 million throughout 2017 when the general price level
decreased by over 30 percent. Morgan Shipping:
a. has more than $1 million of purchasing power at the end of the period.
b. has less than $1 million purchasing power at the end of the period.
c. must recognize the gain due to general price level increases in its income statement.
d. has the same $1 million purchasing power at the end of the period as at the
beginning of the period.
13. Everett, Inc.’s reporting period ends on June 30th every year. This is an example of:
a. matching.
b. fiscal period.
c. materiality.
d. relevance.
14. Ten years after a company purchases a plot of land, it is reported on the balance sheet
at its cost from the year it was purchased instead of its current selling price. This
accounting practice is justified by the:
a. financial period assumption.
b. going concern assumption.
c. fiscal period assumption.
d. original cost base.
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-5
15. Why must measures of performance and financial position be available on a timely
basis?
a. For the users of the financial information to make decisions
b. For the SEC to determine whether the company should be shut down or not
c. FASB requires this information to be submitted to them for approval
d. For management to have time to manipulate income
16. Expensing the cost of a pencil holder that cost $1.25 instead of capitalizing it as a plant
asset and depreciating it over its estimated useful life of 10 years:
a. violates the economic entity assumption.
b. violates GAAP since pencil holders are important assets.
c. is justified because of materiality.
d. is appropriate because of the stable dollar assumption.
17. Original cost may be defined as the:
a. cash price of the asset when purchased.
b. discounted future cash flows.
c. selling price.
d. price paid by the consumer when it was first released for consumer sales.
18. Today’s fair market value would be the same as:
a. the cash price of the asset when it was originally purchased.
b. the current price paid for an item in the input market.
c. the value of an item in the output market or sales price.
d. the discounted future cash flows from input and output markets.
19. Sales price is:
a. the input price of liabilities.
b. a form of market value.
c. a present value concept.
d. the current input cost.
3-6 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
20. Present value is defined as:
a. the cash price of the asset when it was purchased.
b. the present price of any given product or service.
c. the selling price.
d. the discounted value of future cash flows.
21. The valuation basis used to measure long-term liabilities is:
a. present value.
b. replacement cost.
c. fair market value.
d. historical cost.
22. The valuation basis used to measure accounts payable is:
a. fair value.
b. replacement cost.
c. face value.
d. market value.
23. Which one of the following is violated when a firm measures property, plant, and
equipment at its estimated selling price?
a. Objectivity
b. Economic entity assumption
c. Materiality
d. Input markets
24. The shareholders’ equity section of the balance sheet is:
a. a residual interest of the shareholders or the book value of the company.
b. the amount for which the owner could sell the company.
c. valued at the present value of the dividends paid to shareholders.
d. the difference between the fair market value and the original cost of the company’s
assets.
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-7
25. The valuation basis used to measure short-term investments is:
a. fair market value.
b. replacement cost.
c. original cost.
d. present value.
26. The valuation basis used to measure accounts receivable is:
a. the original cost of the goods sold.
b. current input cost
c. Present value.
d. replacement cost.
27. The valuation basis used to measure equipment and other plant assets on the balance
sheet is:
a. the dollar amount for which the assets can be sold.
b. the cash expected to be received in the future.
c. the original cost adjusted for depreciation.
d. the assets’ net realizable value.
28. Technically, the valuation basis used to measure shareholders’ equity is:
a. original cost adjusted to net book value.
b. replacement value.
c. net realizable value.
d. None of these answer choices are correct.
29. Which one of the following reflects the proper inventory valuation on a company’s
balance sheet?
a. Lower of original cost or face value
b. Net realizable value
c. Lower of cost or market
d. Expected selling price
3-8 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
30. Which one of the following is violated when a firm reports its long-term debt at the
present value of the cash flows associated with that debt?
a. Matching
b. No violations occurred. This accounting is correct.
c. Revenue recognition
d. Gross value of the debt
31. A business entity operates in two general markets. They are:
a. a producer and a consumer market.
b. an economic and a fiscal market.
c. an input and an output market.
d. a profit and a non-profit market.
32. Which one of the following is violated when a sole proprietorship records its magazine
stand at the present value of the cash flows expected to be earned from the sale of
magazines over the expected life of the stand?
a. Original cost
b. Fair market value
c. Going concern
d. Revenue recognition
33. Which one of the following is considered an unrealistic assumption in accounting?
a. Economic entity
b. Stable dollar
c. Going concern
d. Fiscal period concept
34. Which one of the following statements best describes objectivity?
a. When uncertainty exists, understating assets, overstating liabilities, accelerating
recognition of losses, and delaying recognition of gains is preferred.
b. The measurement of an event is verifiable and reliable.
c. Different firms use identical accounting measurement methods for similar events.
d. Objectives are laid out that are conservative or too aggressive by management.
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-9
35. Objective accounting information:
a. cannot be used in the financial statements.
b. requires that values of transactions and related assets and liabilities created by them
be arbitrarily determined.
c. ensures that revenue matches expenses for every accounting period.
d. states that financial accounting information must be reliable and verifiable.
36. Which one of the following statements best describes the concept of consistency?
a. When uncertainty exists, understating assets, overstating liabilities, accelerating
recognition of losses, and delaying recognition of gains is preferred.
b. Accounting numbers are consistently market value.
c. Different firms use identical accounting measurement methods for similar events.
d. Similar events are measured using identical accounting procedures from period to
period.
37. Which one of the following is violated when a department store records revenue for gift
certificates sold to customers that are not expected to be redeemed until next year?
a. Matching
b. Revenue recognition criteria
c. Going concern
d. Expense versus revenue concept
38. Which one of the following is violated when a retail store records revenue for a bank
credit card sale prior to receiving the money from the bank?
a. No violation occurred
b. Objectivity
c. Going concern
d. Revenue recognition criteria
39. Which one of the following is violated when a company recognizes revenue upon the
receipt of cash from a customer who has paid in advance for services?
a. Expense policy
b. Objectivity
c. Matching
d. Revenue recognition
3-10 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
40. Which one of the following is violated when a company records cost of goods sold
expense at the time when inventory is purchased?
a. Relevance
b. Historical cost
c. Matching
d. Revenue recognition criteria
41. The matching principle states that:
a. expenses should be recognized in the period that the related revenue is recognized.
b. after expenses have been identified in a particular accounting period in which they
were incurred, revenues can be recognized.
c. each company should use the same accounting principles as other companies use.
d. for every dollar of revenue recognized, the company should recognize a
corresponding dollar of expenses.
42. The most common point of revenue recognition is:
a. when the cash is collected from the customer.
b. when the customer elects to issue the check to pay for goods shipped.
c. when the goods are delivered to the customer.
d. as the goods are being produced.
43. The principle of consistency states that:
a. companies should choose a set of accounting methods and use them from one
period to the next.
b. once a company selects an accounting method, it must use that method throughout
the company’s entire existence.
c. a company may change any accounting method, provided the SEC approves the
change.
d. companies should elect to use methods that consistently inflate profits.
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-11
44. Which of the following represents two of the four criteria that must be met before
revenue can be included in the income statement?
a. The amount of revenue must be objectively measurable and the cash must be
collected.
b. The company elects to record the revenue and the cash for payment is relatively
certain.
c. The company must intend to transfer the goods or services to the buyer and the
collection of cash must be reasonably assured.
d. The collection of cash must be reasonably assured and the amount of revenue can
be objectively measured.
45. Why would a company recognize the cost of an asset on its balance sheet rather than
treat it as an expense on the date it is acquired?
a. Conservatism requires this recognition.
b. Matching requires costs to be matched against the related revenues of the asset.
c. Strictly to record the amount in the most economically favorable manner possible for
the company.
d. The stable dollar concept will not allow inflation to be added to expenses, but does
allow inflation to be added to assets.
46. Which one of the following is most likely violated if a firm increases the dollar amount
reported for unsold inventory on the balance sheet to a cost it anticipates it will have to
pay for future inventory items?
a. Consistency
b. Conservatism
c. Going concern
d. Economic entity
47. Which one of the following is violated when a firm has a policy of accelerating the
recognition of depreciation expense during good years and decreasing depreciation
expense during lean years?
a. Relevance
b. Matching
c. Consistency
d. Conservatism
3-12 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
48. Which one of the following statements best describes the concept of conservatism?
a. Profits should be accelerated in all cases.
b. The measurement of an event is verifiable and reliable.
c. The value of goods and services provided is recognized when earned.
d. When uncertainty exists, understating assets, overstating liabilities, accelerating
recognition of losses, and delaying recognition of gains is preferred.
49. Which one of the following is violated when a firm measures accounts receivable at its
face amount even though knowing some customers may not pay the amounts due?
a. Consistency
b. Conservatism
c. Materiality
d. Revenue recognition criteria
50. Information is considered material if:
a. it would have a bearing on decisions of those who use the financial statements.
b. there is a substantial likelihood that a reasonable investor would not be concerned
about the information.
c. an item is so insignificant that users would likely ignore it.
d. the FASB explicitly rules the transaction or item to be material.
51. Which of the following are exceptions to financial accounting measurement?
a. Consistency and conservatism
b. Objectivity and materiality
c. Going concern and materiality
d. Conservatism and materiality
52. When in doubt, financial statements should:
a. understate assets, overstate liabilities, delay the recognition of gains, and accelerate
the recognition of losses.
b. understate assets and liabilities and delay the recognition of gains and losses.
c. understate assets, overstate liabilities, and delay the recognition of gains and losses.
d. overstate assets and understate liabilities.
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-13
53. Equipment with an original cost of $78,000 has a fair market value of $68,000, current
replacement cost of $82,000, and a depreciated value of $74,000 on December 31,
2018. At what amount would net equipment be measured on the December 31, 2018
balance sheet?
a. $76,000
b. $74,000
c. $82,000
d. $78,000
54. Short-term investments have an original cost of $30,000 and a fair market vallue of
$31,000 at December 31, 2018. At what amount would the investments be measured on
the December 31, 2018 balance sheet?
a. $30,000
b. $31,000
c. ($2,000)
d. $2,000
55. Sheena Company has accounts receivable of $13,000, with a present value of $10,000
on December 31, 2018. At what amount would the accounts receivable be measured on
the December 31, 2018 balance sheet?
a. $2,000
b. $13,000
c. $10,000
d. ($2,000)
56. Seinfeld Company has land with an original cost of $70,000 and a fair market value of
$81,000. Seinfeld has considered selling its business next year and listing the land with
a realtor for $100,000. At what amount would land be measured on the December 31,
2018 balance sheet?
a. $100,000
b. $81,000
c. $15,000
d. $70,000
3-14 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
57. Three years ago, Astro Masters, Inc. purchased the three assets listed in the following
table. The chief financial officer, Bill Moss, is presently trying to decide what to do with
each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it
and replace it with an equivalent asset. The following information is provided to aid his
decision.
Asset
Original
Cost
Replacement
Cost
Fair
Market
Value
Present Value of Future
Cash Flows Produced
by Old Asset
Present Value of
Future Cash Flows
of Equivalent Asset
A
$4,500
$1,500
$2,000
$3,000
$5,000
B
$2,000
$2,500
$1,000
$3,000
$4,500
C
$2,500
$4,000
$3,500
$3,000
$6,000
Based on your calculations of total cash flows, which of the following options is the best
for Bill to pursue with respect to Asset A?
a. Option 1
b. Option 2
c. Option 3
d. Both Options 2 & 3 provide the same total cash flows.
Solution:
Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting 3-15
58. Three years ago, Astro Masters, Inc. purchased the three assets listed in the following
table. The chief financial officer, Bill Moss, is presently trying to decide what to do with
each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it
and replace it with an equivalent asset. The following information is provided to aid his
decision.
Asset
Original
Cost
Fair
Market
Value
Present Value of Future
Cash Flows Produced
by Old Asset
Present Value of
Future Cash Flows
of Equivalent Asset
A
$4,500
$2,000
$3,000
$5,000
B
$2,000
$1,000
$3,000
$4,500
C
$2,500
$3,500
$3,000
$6,000
Based on your calculations, what would be the total cash flows associated with selling
and replacing Asset C with an equivalent asset?
a. $2,500
b. $5,500
c. $5,000
d. $4,500
59. Three years ago, Astro Masters, Inc. purchased the three assets listed in the following
table. The chief financial officer, Bill Moss, is presently trying to decide what to do with
each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it
and replace it with an equivalent asset. The following information is provided to aid his
decision.
Asset
Original
Cost
Fair
Market
Value
Present Value of Future
Cash Flows Produced
by Old Asset
Present Value of
Future Cash Flows
of Equivalent Asset
A
$4,500
$2,000
$3,000
$5,000
B
$2,000
$1,000
$3,000
$4,500
C
$2,500
$3,500
$3,000
$6,000
Based on your calculations of total cash flows, which of the following options is the best
for Bill to pursue with respect to Asset B?
a. Option 1
b. Option 2
c. Option 3
d. Both Options 2 & 3 provide the same total cash flows.
Solution:
3-16 Test Bank – Chapter 3 – The Measurement Fundamentals of Financial Accounting
60. Three years ago, Astro Masters, Inc. purchased the three assets listed in the following
table. The chief financial officer, Bill Moss, is presently trying to decide what to do with
each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it
and replace it with an equivalent asset. The following information is provided to aid his
decision.
Asset
Original
Cost
Replacement
Cost
Fair
Market
Value
Present Value of Future
Cash Flows Produced
by Old Asset
Present Value of
Future Cash Flows
of Equivalent Asset
A
$4,500
$1,500
$2,000
$3,000
$5,000
B
$2,000
$2,500
$1,000
$3,000
$4,500
C
$2,500
$4,000
$3,500
$3,000
$6,000
On December 31, 2018, just before preparing the company’s financial statements, Bill
decides to replace Asset A and keep both Assets B and C. According to generally
accepted accounting principles, at what dollar amount should he report each of these
respective assets on the balance sheet?
a. $4,500; $2,000; $2,500
b. $1,500; $2,000; $2,500
c. $2,000; $1,000; $3,500
d. $1,500; $2,500; $4,000
61. On October 1, 2018, $30,000 of annual magazine subscriptions were sold by Cat World
Magazines. The subscribed magazines are delivered on the first day of each month
beginning on October 1, 2018. The total cost of the subscribed magazines is $18,000,
equal to $1,500 per month. What is the amount of revenue to be recognized during
2018?
a. $30,000
b. $4,500
c. $7,500
d. $12,600