A-AS Level (CIE) Accounting Paper-1: Specimen Questions with Answers 6 - 7 of 93

Question 6

Question

MCQ▾

In accordance with the principle of Conservatism, closing stock is valued

Choices

Choice (4)

a.

at cost price or realizable value whichever is more

b.

at realizable value

c.

at cost price

d.

at cost price or realizable value whichever is less

Answer

d.

Explanation

According to the principle of conservatism, provision is created even though amount cannot be determined with certainty for all known liabilities and. Similarly, when there is different substitute for recording a transaction, the transaction having least favorable immediate effect on profits or capital should be adopted. Following are the examples of the application of the principle of conservatism:

  • Closing stock is valued at cost price or realizable value whichever less is.
  • Provision for doubtful debts is created in anticipation of actual bad-debts.
  • Joint life insurance policy is shown only at surrender value as against the amount paid.
  • Provision for a pending lawsuit against the firm, which may either, be decided in its favor.

Question 7

Question

MCQ▾

Assumption that a business enterprise will not be sold or liquidated soon is known as the

Choices

Choice (4)

a.

Going Concern Concept

b.

Business entity concept

c.

Accounting period concept

d.

Principle of Conservatism

Answer

a.

Explanation

According to the concept it is defined that the business will continue to exist for a longer period in the future. The transactions are recorded on the assumption that the business is a going concern i.e.. it is a continuing enterprise. Based on this assumption business entities record fixed assets at their original cost and depreciation is charged on these assets without considering to the market value of the assets. The market value of fixed asset is irrelevant and is not recorded in the balance sheet, as these assets are not going to be sold soon. It is because of the going concern assumption that outside parties enter long term contracts with the enterprise.

🎯 Select Paper