ACC 344 Lecture Notes - Lecture 4: Historical Cost, Net Income, Accounting
The historical cost principle states that:
(a) assets should be initially recorded at cost and adjusted when the fair value changes.
(b) activities of an entity are to be kept separate and distinct from its owner.
(c) assets should be recorded at their cost.
(d) only transaction data capable of being expressed in terms of money be included in the accounting
records.
(c) assets should be recorded at their cost.
The historical cost principle states that assets should be recorded at their cost. The other choices are
incorrect because (a) the historical cost principle does not say that assets should be adjusted for
changes in fair value, (b) describes the economic entity assumption, and (d) describes the monetary unit
assumption.
Which of the following statements about basic assumptions is correct?
(a) Basic assumptions are the same as accounting principles.
(b) The economic entity assumption states that there should be a particular unit of accountability.
(c) The monetary unit assumption enables accounting to measure employee morale.
(d) Partnerships are not economic entities.
(b) The economic entity assumption states that there should be a particular unit of accountability.
The economic entity assumption states that there should be a particular unit of accountability. The
other choices are incorrect because (a) basic assumptions are not the same as accounting principles, (c)
the monetary unit assumption allows accounting to measure economic events, and (d) partnerships are
economic entities.
The three types of business entities are:
(a) proprietorships, small businesses, and partnerships.
(b) proprietorships, partnerships, and corporations.
(c) proprietorships, partnerships, and large businesses.
(d) financial, manufacturing, and service companies.
(b) proprietorships, partnerships, and corporations.
Proprietorships, partnerships, and corporations are the three types of business entities. Choices (a) and
(c) are incorrect because small and large businesses only denote the sizes of businesses. Choice (d) is
incorrect because financial, manufacturing, and service companies are types of businesses, not business
entities.
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Net income will result during a time period when:
(a) assets exceed liabilities.
(b) assets exceed revenues.
(c) expenses exceed revenues.
(d) revenues exceed expenses.
(d) revenues exceed expenses.
Net income results when revenues exceed expenses. The other choices are incorrect because (a) assets
and liabilities are not used in the computation of net income; (b) revenues, not assets, are included in
the computation of net income; and (c) when expenses exceed revenues, a net loss results.
As of December 31, 2019, Reed Company has assets of $3,500 and stockholders' equity of $1,500. What
are the liabilities for Reed Company as of December 31, 2019?
(a) $1,500.
(b) $1,000.
(c) $2,500.
(d) $2,000.
(d) $2,000.
Using a vaiation of the asi aounting euation, Assets − Stokholdes' euity = Liailities, $3,500 −
$1,500 = $2,000. Therefore, choices (a) $1,500, (b) $1,000, and (c) $2,500 are incorrect.
Performing services on account will have the following effects on the components of the basic
accounting equation:
(a) increase assets and decrease stockholders' equity.
(b) increase assets and increase stockholders' equity.
(c) increase assets and increase liabilities.
(d) increase liabilities and increase stockholders' equity.
(b) increase assets and increase stockholders' equity.
When services are performed on account, assets are increased and stockholders' equity is increased.
The other choices are incorrect because when services are performed on account (a) stockholders'
equity is increased, not decreased; (c) liabilities are not affected; and (d) stockholders' equity is
increased and liabilities are not affected.
Which of the following events is not recorded in the accounting records?
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Document Summary
The historical cost principle states that assets should be recorded at their cost. The other choices are incorrect because (a) the historical cost principle does not say that assets should be adjusted for changes in fair value, (b) describes the economic entity assumption, and (d) describes the monetary unit assumption. The economic entity assumption states that there should be a particular unit of accountability. The other choices are incorrect because (a) basic assumptions are not the same as accounting principles, (c) the monetary unit assumption allows accounting to measure economic events, and (d) partnerships are economic entities. The three types of business entities are: (a) proprietorships, small businesses, and partnerships. (b) proprietorships, partnerships, and corporations. (c) proprietorships, partnerships, and large businesses. (d) financial, manufacturing, and service companies. (b) proprietorships, partnerships, and corporations. Proprietorships, partnerships, and corporations are the three types of business entities. Choices (a) and (c) are incorrect because small and large businesses only denote the sizes of businesses.
