Senior Secondary (HKDSE) · Business, Accounting and Financial Studies
5 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Accounting Assumptions, Principles and Conventions.
A company's marketing manager argues that the highly successful 'rebranding' campaign completed this year should be recorded as a non-current asset valued at \(HK\$2,000,000\) because it is expected to increase sales for the next five years. However, the accountant refuses to record it in the Statement of Financial Position. Which accounting concept supports the accountant's decision?
A retail company is involved in a major legal dispute. Its lawyers advise that there is a 70% chance the company will have to pay damages of \(HK\$1,500,000\) next year. Although no cash has been paid yet, the company records a provision for this liability in the current year's financial statements. Which accounting principle or convention is being applied?
Which of the following items would not be included in the financial statements of a fashion retailer, even if it is considered a vital factor for the company's future success?
Mr. Lee, the sole proprietor of a grocery store, used the store's delivery van to transport his family to a holiday resort. He also used his personal savings to pay for a new refrigerator installed in the store. He instructed the accountant to ignore both events as they 'cancel each other out'. Which accounting concept is violated here?
A company has been using the straight-line method to depreciate its motor vehicles for the past five years. This year, the new financial controller suggests switching to the reducing balance method simply because it would result in a lower depreciation charge and higher reported net profit for the current year. If the company follows this suggestion without a valid reason, which accounting convention is violated?
A company used the straight-line method for depreciating its machinery for several years but decided to switch to the reducing-balance method this year without disclosing the change. Which accounting principle has been violated, and why is this principle important for financial reporting?
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A furniture store received a \(HK\$50,000\) deposit from a customer for a custom-made sofa set, which is expected to be delivered in two months. According to the Realisation Concept, when should this revenue typically be recognised by the store?
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Mr. Wong, a sole proprietor, often pays his personal utility bills directly from his business bank account. Explain how this practice violates the Business Entity Concept and its impact on the reliability of the business's financial statements.
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Mr. Wong, a sole proprietor, owns a small restaurant. He regularly pays his personal utility bills from the restaurant's bank account and sometimes takes cash from the till for his family's groceries, without recording these transactions separately in the business books.
(a) Identify the fundamental accounting assumption that Mr. Wong is violating.
(b) Explain the importance of this assumption to the financial reporting of the restaurant.
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Gamma Ltd. is evaluating a potential lawsuit settlement of \(HK\$500,000\). Their legal counsel believes there is a high probability (over 90%) that the company will lose the case and have to pay this amount. However, the exact amount is yet to be finalised by the court.
(a) Explain how the Prudence Principle would guide the accounting treatment of this potential liability in the current financial statements.
(b) What would be the accounting treatment if the probability of losing the case was very low (e.g., 10%)? Discuss the implications for financial reporting.
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