Chapter 19 Accounting Conventions And Policy.pdf

Financial accounting F3 acca Practice questions Financial accounting F3 acca Practice questions Financial accounting F3 acca Practice questions

Accounting Conventions and Policies

Prepared for Educational Purposes

August 14, 2025

Contents

2 Part 2: Answers with Detailed Explanations 8

1

1 Part 1: List of Questions

This section contains 50 multiple-choice questions based on accounting conventions and policies, including concepts like materiality, substance over form, and the role of standard-setting bodies Numbers are left-aligned from 1 to 50

1 Which of the following statements are correct? (1) Materiality means that only items having a physical existence may be recognised as assets (2) The substance over form convention means that the legal form of a transaction must always be shown in financial statements even if this differs from the commercial effect (3) The money measurement concept is that only items capable of being measured in monetary terms can be recognised in financial statements

a 2 only

b 1, 2 and 3

c 1 only

d 3 only

2 Which of the following characteristics of financial information contribute to reliability, according to the IASBs Framework for the Preparation and Presentation of Financial Statements? (Select all that apply)

a Prudence

b Completeness

c Faithful representation

d Neutrality

3 What is the role of the International Financial Reporting Interpretations Committee?

a To create a set of global accounting standards

b To issue guidance on the application of International Financial Reporting Stan-dards

4 The separate entity concept requires that a business is treated as being separate from its owners Is this statement true or false?

a False

b True

5 In times of rising prices, what effect does the use of the historical cost concept have

on a company’s asset values and profit?

a Asset values and profit both understated

b Asset values overstated and profit understated

c Asset values and profit both overstated

d Asset values understated and profit overstated

6 The going concern concept assumes that a business will:

a Cease operations within a year

b Continue operations for the foreseeable future

c Liquidate its assets immediately

d Restrict operations to current activities

7 Which of the following is a qualitative characteristic of financial information under the IASB Framework?

a Timeliness

b Historical cost

c Prudence

d Materiality

8 The accruals concept requires that:

a Transactions are recorded when cash is received or paid

b Revenues and expenses are recognised when they are earned or incurred

c Assets are recorded at market value

d Liabilities are understated in financial statements

9 Which body is responsible for issuing International Financial Reporting Standards (IFRS)?

a International Accounting Standards Board (IASB)

b Financial Accounting Standards Board (FASB)

c International Financial Reporting Interpretations Committee (IFRIC)

d Securities and Exchange Commission (SEC)

10 The consistency concept requires that:

a Accounting policies are changed frequently

b Similar items are treated the same way over time

c Financial statements include non-monetary items

d Assets are revalued annually

11 Which of the following statements about materiality is correct?

a Only tangible assets are considered material

b Materiality depends on the size and nature of an item

c All transactions must be reported regardless of size

d Materiality only applies to revenue items

12 In times of rising prices, the use of current cost accounting would result in:

a Asset values and profit both understated

b Asset values and profit both overstated

c Asset values understated and profit overstated

d Asset values overstated and profit understated

13 The prudence concept involves:

a Overstating assets to improve financial position

b Exercising caution when making estimates under uncertainty

c Recognising all gains immediately

d Ignoring potential liabilities

14 Which of the following enhances the comparability of financial statements?

a Historical cost

b Consistency

c Materiality

d Prudence

15 The money measurement concept excludes which of the following from financial state-ments?

a Employee skills

b Cash balances

c Accounts receivable

d Inventory

16 The substance over form convention applies to:

a Recording transactions based on their legal form only

b Reflecting the economic reality of transactions

c Ignoring commercial effects

d Excluding material transactions

17 The IASBs Conceptual Framework identifies which of the following as a fundamental qualitative characteristic?

a Relevance

b Timeliness

c Comparability

d Consistency

18 The separate entity concept applies to which type of business structure?

a Sole proprietorships only

b Partnerships only

c Corporations only

d All types of businesses

19 Which of the following is NOT a role of the IASB?

a Developing IFRS

b Enforcing compliance with IFRS

c Promoting global adoption of IFRS

d Providing technical advice on IFRS

20 The accruals concept affects the recognition of:

a Cash transactions only

b Revenues and expenses

c Assets only

d Liabilities only

21 In times of falling prices, the historical cost concept results in:

a Asset values and profit both understated

b Asset values and profit both overstated

c Asset values overstated and profit understated

d Asset values understated and profit overstated

22 Which characteristic ensures financial information is free from bias?

a Relevance

b Neutrality

c Completeness

d Timeliness

23 The going concern concept affects the valuation of:

a Assets and liabilities

b Revenues only

c Expenses only

d Equity only

24 Which of the following is an enhancing qualitative characteristic under the IASB Framework?

a Faithful representation

b Relevance

c Comparability

d Materiality

25 The consistency concept ensures that:

a Financial statements are prepared annually

b Accounting policies are applied uniformly over time

c All transactions are recorded at historical cost

d Non-monetary items are included

26 The role of the IFRS Foundation is to:

a Issue accounting standards

b Oversee the IASB and IFRIC

c Enforce compliance with IFRS

d Audit financial statements

27 The substance over form convention is applied in:

a Lease accounting

b Cash flow statements

c Revenue recognition

d Inventory valuation

28 In times of rising prices, the use of fair value accounting would:

a Understate asset values

b Overstate asset values

c Understate profit

d Ignore inflation

29 The prudence concept requires:

a Recognising all gains immediately

b Delaying recognition of losses

c Not overstating assets or income

d Excluding contingent liabilities

30 Which of the following contributes to relevance in financial statements?

a Historical cost

b Predictive value

c Neutrality

d Consistency

31 The money measurement concept applies to:

a Brand reputation

b Customer satisfaction

c Accounts payable

d Employee morale

32 The separate entity concept means that:

a Owners personal transactions are recorded in the business

b Business transactions are recorded separately from owners

c Businesses cannot have liabilities

d Owners are liable for all business debts

33 Which body develops interpretations of IFRS?

a IASB

b IFRIC

c FASB

d SEC

34 The accruals concept ensures that:

a Cash flows match profits

b Revenues are recognised when earned

c Assets are valued at market price

d Expenses are understated

35 In times of stable prices, the historical cost concept results in:

a Asset values and profit both understated

b Asset values and profit both overstated

c Asset values and profit fairly stated

d Asset values understated and profit overstated

36 Which characteristic ensures financial information is verifiable?

a Relevance

b Faithful representation

c Comparability

d Timeliness

37 The going concern concept is relevant to:

a Liquidation accounting

b Financial statement preparation

c Tax reporting

d Budget forecasting

38 The consistency concept applies to:

a Changing accounting policies annually

b Using the same accounting methods over time

c Recording non-monetary transactions

d Valuing assets at fair value

39 The IASBs role includes:

a Auditing financial statements

b Developing IFRS

c Enforcing IFRS compliance

d Issuing tax regulations

40 The substance over form convention is critical in:

a Cash accounting

b Lease agreements

c Tax calculations

d Budget preparation

41 In times of falling prices, fair value accounting would:

a Overstate asset values

b Understate asset values

c Overstate profit

d Ignore deflation

42 The prudence concept affects the recognition of:

a Contingent assets

b Cash balances

c Accounts receivable

d Inventory

43 Which of the following enhances faithful representation?

a Timeliness

b Completeness

c Relevance

d Comparability

44 The money measurement concept excludes:

a Goodwill

b Patents

c Market share

d Trade receivables

45 The separate entity concept is violated when:

a Business assets are used for personal purposes

b Business pays dividends

c Owners invest capital

d Liabilities are recorded

46 The role of IFRIC includes:

a Developing new IFRS

b Issuing guidance on IFRS application

c Enforcing IFRS compliance

d Auditing financial statements

47 The accruals concept is applied in:

a Cash-based accounting

b Revenue recognition

c Asset valuation

d Equity reporting

48 In times of rising prices, current cost accounting affects:

a Asset values only

b Profit only

c Both asset values and profit

d Neither asset values nor profit

49 Which characteristic ensures financial information is useful for decision-making?

a Neutrality

b Relevance

c Consistency

d Prudence

50 The going concern concept assumes that:

a Assets are valued at liquidation value

b The business will continue indefinitely

c Liabilities are settled immediately

d Profits are distributed annually

51 The consistency concept prevents:

a Frequent changes in accounting policies

b Recording monetary transactions

c Valuing assets at historical cost

d Recognising contingent liabilities

52 Which of the following is a fundamental qualitative characteristic?

a Comparability

b Timeliness

c Faithful representation

d Consistency

2 Part 2: Answers with Detailed Explanations

1 d 3 only Explanation: Only the money measurement concept is correctly defined;

materiality and substance over form are misrepresented

2 a, b, c, d Prudence, Completeness, Faithful representation, Neutrality Explana-tion: All four characteristics ensure reliable financial information under the IASB

Framework

3 b To issue guidance on the application of International Financial Reporting

Stan-dards Explanation: IFRIC provides interpretations to clarify IFRS application, not

create standards

4 b True Explanation: The separate entity concept treats the business as distinct

from its owners

5 a Asset values and profit both understated Explanation: Historical cost understates

asset values and economic profits in rising prices

6 b Continue operations for the foreseeable future Explanation: The going concern

concept assumes the business will operate indefinitely

7 a Timeliness Explanation: Timeliness is an enhancing qualitative characteristic;

others are conventions or policies

8 b Revenues and expenses are recognised when they are earned or incurred Explana-tion: The accruals concept matches revenues and expenses to the period they relate

to

9 a International Accounting Standards Board (IASB) Explanation: The IASB

de-velops IFRS; IFRIC issues guidance, FASB dede-velops US GAAP, SEC regulates

10 b Similar items are treated the same way over time Explanation: Consistency

ensures uniform application of accounting policies

11 b Materiality depends on the size and nature of an item Explanation: Materiality

assesses significance based on impact, not physical existence

12 b Asset values and profit both overstated Explanation: Current cost accounting

reflects higher replacement costs, increasing asset values and profits

13 b Exercising caution when making estimates under uncertainty Explanation:

Pru-dence involves cautious judgment to avoid overstating assets or income

14 b Consistency Explanation: Consistency enhances comparability by applying

uni-form policies over time

15 a Employee skills Explanation: Non-monetary items like employee skills are

ex-cluded under the money measurement concept

16 b Reflecting the economic reality of transactions Explanation: Substance over form

prioritizes economic substance over legal form

17 a Relevance Explanation: Relevance is a fundamental qualitative characteristic;

others are enhancing

18 d All types of businesses Explanation: The separate entity concept applies to all

business structures

19 b Enforcing compliance with IFRS Explanation: The IASB develops and promotes

IFRS, but enforcement is by regulators

20 b Revenues and expenses Explanation: The accruals concept governs recognition

of revenues and expenses

21 b Asset values and profit both overstated Explanation: Historical cost overstates

values relative to lower market prices in falling prices

22 b Neutrality Explanation: Neutrality ensures information is free from bias,

en-hancing reliability

23 a Assets and liabilities Explanation: Going concern affects valuation assuming

continued operations

24 c Comparability Explanation: Comparability is an enhancing characteristic; others

are fundamental or conventions

25 b Accounting policies are applied uniformly over time Explanation: Consistency

ensures stable application of policies

26 b Oversee the IASB and IFRIC Explanation: The IFRS Foundation oversees

standard-setting bodies, not enforcement

27 a Lease accounting Explanation: Substance over form is critical in lease accounting

to reflect economic reality

28 b Overstate asset values Explanation: Fair value reflects current market prices,

increasing asset values in rising prices

29 c Not overstating assets or income Explanation: Prudence prevents overstatement

to ensure reliable reporting

30 b Predictive value Explanation: Predictive value contributes to relevance by aiding

decision-making

31 c Accounts payable Explanation: Only monetary items like accounts payable are

included

32 b Business transactions are recorded separately from owners Explanation: The

separate entity concept separates business and personal transactions

33 b IFRIC Explanation: IFRIC develops interpretations; IASB creates standards.

34 b Revenues are recognised when earned Explanation: The accruals concept

recog-nizes revenues when earned, not when cash is received

35 c Asset values and profit fairly stated Explanation: In stable prices, historical cost

reflects current values accurately

36 b Faithful representation Explanation: Faithful representation ensures verifiability

and accuracy

37 b Financial statement preparation Explanation: Going concern is fundamental to

financial reporting assumptions

38 b Using the same accounting methods over time Explanation: Consistency

main-tains uniform accounting practices

39 b Developing IFRS Explanation: The IASBs primary role is developing IFRS.

40 b Lease agreements Explanation: Substance over form is key in lease accounting

to reflect economic substance

41 b Understate asset values Explanation: Fair value reflects lower market prices in

falling prices