Senior Secondary (HKDSE) · Business, Accounting and Financial Studies
5 multiple-choice questions marked as you go, and 3 written questions with worked solutions. All on Accounting Assumptions, Principles and Conventions .
A manufacturing company decided to change its method of valuing inventory from First-In, First-Out (FIFO) to Weighted Average Cost (WAC) because the management believes WAC provides a more accurate representation of cost flows in a volatile pricing environment. Which accounting principle allows for such a change, provided it is justified and disclosed, and what is the typical disclosure requirement?
On December 31, 2023, the owner of a trading company decided to include a high-value personal automobile as an asset in the company's statement of financial position to improve the company's financial appearance for a loan application. Which accounting principle or convention has been violated by this action?
A company is undergoing severe financial difficulties, with recurring losses and negative cash flows, raising doubts about its ability to continue operations for the foreseeable future. The auditor insists on a specific disclosure in the financial statements regarding these uncertainties. Which accounting assumption is primarily addressed by this auditor's requirement, and what is its implication for the presentation of assets and liabilities?
Which accounting convention suggests that items of low value, such as wastepaper baskets or staplers, should be treated as expenses in the period of purchase rather than as non-current assets, even if they have a useful life of more than one year?
A manufacturing firm uses the reducing balance method for depreciating machinery but uses the straight-line method for office equipment. This practice is continued every year. Which accounting principle is being followed regarding the year-to-year application of these methods?
Identify the accounting convention that requires all business transactions to be expressed in a common monetary unit, and state one specific limitation of this convention regarding the reporting of a company's human resources.
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A company purchased a high-quality electronic calculator for \(\$150\) in January 2023. Although the calculator is expected to be used for 5 years, the accountant decided to record the entire cost as an expense for the year 2023 instead of depreciating it over its useful life.
(a) Name the accounting convention that justifies the accountant's action. (1 point)
(b) Briefly explain why this convention is applied in this specific case. (1 point)
(c) If the company had decided to capitalize and depreciate the calculator, state which accounting principle it would be following. (1 point)
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Mr. Lee is the owner of a small grocery store. In late 2023, he purchased a delivery van for personal use using his own savings. However, his bookkeeper recorded the van as an asset of the business and included the insurance premium for the van in the business expenses.
(a) Identify the accounting principle that has been violated in the above situation. (1 point)
(b) Explain the meaning of the principle identified in (a). (1 point)
(c) State how the purchase of the van and its insurance should have been recorded correctly. (2 points)
Write your answer out first, then check it against the worked solution.
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