Matching Principle
Q. True or False. The matching principle requires that expenses be recognized only when the cash is paid, regardless of when the revenue is earned.
False
Which of the following best describes the consistency principle in accounting?
a) The principle that requires a company to use the same accounting methods from period to period.
b) The principle that dictates companies must follow the latest accounting standards.
c) The principle that allows companies to change their accounting methods when needed.
d) The principle that ensures financial statements are prepared using generally accepted accounting principles (GAAP).
a) The principle that requires a company to use the same accounting methods from period to period.
True or False: The revenue recognition principle states that it is not essential for revenue to be stated on the financial accounting report to provide an excellent image for the company.
Answer: False
A soccer team spends $400 on new jerseys. The sponsorship return is $250, and the intangible benefit is improved team morale. Based on the cost-benefit principle, what should the team consider?
A) Buy the jerseys because the intangible benefits justify the cost.
A Salon around the area that provides necessary services for facials, manicures, acrylic nails, and haircuts. It charges its clients for the services provided through cash or card, a customer comes in for a hair cut which is roughly $35, and once the client proceeds to leave the salon, she pays the price for the haircut through credit card and the company’s computer system record this information and purchase. Which GAAP is related to this scenario and how?
Revenue Recognition
The matching principle is applied to ________ like wages, rent, and utilities.
Expenses
True or False: The consistency principle allows businesses to change their accounting methods freely without requiring any explanation or disclosure.
False!
Revenue recognition is beneficial to companies because it
a. Delays financial reporting
b. Confirms their inventory levels
c. Provides a better picture of their financial status
d. It avoids recording sales during the accounting period
c. Provides a better picture of their financial status
Your team is considering upgrading its practice equipment for $300. The benefits include improved performance and a potential $200 sponsorship. What should the team do based on the cost-benefit principle?
Buy the equipment because the benefits outweigh the costs.
Apple. Inc has been valuing its inventory using the FIFO method. However, starting this year, the company decided to use the LIFO method instead. The change is explained in the financial statement notes, but only applied starting this year. Which GAAP is being used, and has it been applied properly?
The consistency principle is being used in this scenario. The GAAP is not being used correctly, since the company did indicate that they would only apply these changes starting this year. But the GAAP states that the changes must be applied to all prior periods' to ensure consistency and comparability remains throughout.
A company buys $10,000 machine with a 5-year lifespan. Using the matching principle, the company records $2000 as depreciation expense over 5 months. Is this right or wrong and why?
Wrong- Since the lifespan is 5 years and not 5 months, the expense should be recorded over those years because the machine is helping to earn revenue throughout all 5 years.
Which of the following is a reason why the consistency principle is important?
a) It helps companies avoid financial fraud.
b) It requires companies to apply the most conservative approach to financial reporting.
c) It ensures that users of financial statements can compare financial information over time.
d) It allows companies to adopt new accounting methods without restriction.
c) It ensures that users of financial statements can compare financial information over time.
The revenue recognition convention states that revenue must be recorded at this specific time.
a. When the product is delivered
b. When the transaction is completed
c. When the customer places the order
d. At the end of the accounting period
b. When the transaction is completed
The cost-benefit principle suggests you should always pursue an action if the benefits are greater than the costs.
Answer: True
Scenario: Smith Apparel launched a new marketing campaign in April, spending $10,000 on advertisements. The campaign ran throughout April, but the payment for the ads was made in March. Because of this, Smith Apparrel's owner, John Smith records the $10,000 advertising expense in March to match with the time the money was paid. Which GAAP does this scenario apply to and was it followed?
Matching principle->No, the matching principle states the expense should be record in the same time that the revenue was earned, in this case, the expense is being recorded when the money was paid.
A company reporting an expense on the income statement in the same period when it earns the revenue, provides an ______ picture of its operations
Accurate
True or False: If a company changes its accounting method, it must provide a detailed explanation in the financial statement footnotes about the reason for the change and its impact.
4. A company agrees to provide goods to a customer what would this be classified as
a. Transaction commitment
b. Performance obligation
c. Financial obligation
d. Contractual clause
b. Performance obligation
A school business club is planning an event that costs $500 to organize. The expected revenue from ticket sales and donations is $750. Should the event be held, and why?
Answer: Yes, because the expected benefits ($750) outweigh the costs ($500), resulting in a net benefit of $250.
Your soccer team needs new jerseys, costing $600. A sponsor offers $400 for logo placement. The current jerseys are usable but outdated.
Question: Based on the cost-benefit principle, should your team buy the new jerseys? Why or why not?
The jerseys cost $600, but you gain $400 from sponsorship, leaving a $200 gap. Intangible benefits like improved team spirit and better appearance can justify the cost. If your team values these benefits and can fundraise, buying the jerseys is worth it.