Tag: elements of accounts

Questions Related to elements of accounts

Two primary qualitative characteristics of financial statements are _________.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. understandability and materiality

  2. relevance and reliability

  3. relevance and understandability

  4. materiality and reliability

Show answer
Correct Option: B
Explanation:

Two primary qualitative characteristics are: - 1. relevance and reliability. 
Secondary qualitative characteristics are:- 1. Understandability 2. Verifiability 3. Timeliness 4. Comparability. 
Relevance refers to how useful the information is for financial decision making processes. 
Reliability refers to the extent to which information accurately reflects company's resources. 
Relevance and reliability are primary characteristics because if information is not helpful for decision making or not providing accurate information then understandability , timeliness of information is of no use.  

Which of the following is a limitation of financial statements?

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. Does not reflect current situation

  2. Assets may not realise

  3. Bias

  4. All of the above

Show answer
Correct Option: D
Explanation:

Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which show the financial position of business concern in an organised manner.

Some of limitations of financial statements are as follows

Accounting information is sometimes based on estimates which may be unrealistic.

Window dressing may lead to faulty results. Window dressing means manipulation of accounts and Show easy picture of financial statements

Accounting ignores the effect of price level changes. Transactions recorded on historical cost. Examples, fixed assets recorded at historical cost.

Accounting information can be manipulated and thus cannot be considered as the true test of performance.

Accounting information may be Biased accounting information is not without personal influences or bias of accountant.

Financial statements can be used by ___________.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. Owners

  2. Creditors

  3. Investors

  4. All of the above

Show answer
Correct Option: D
Explanation:

The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users who need it in different decision situations. There are two main user group viz. internal users, mainly management, who needs timely information on cost of sales, profitability, etc. for plaining, controlling and decision making and external users who have limited authority, ability and resources to obtain the necessary information and have to rely on financial statements (Balance sheet, profit and loss account)

Financial statements are prepared on the basis of _________ cost.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. marlet

  2. historical

  3. material

  4. net realizable

Show answer
Correct Option: B
Explanation:

As per “Generally Accepted Accounting Principles (GAAP)” one of the important rule is to record all transactions on the basis of historical cost, which is verifiable from the documents such as cash receipt for the money paid. This brings in objectivity in the process of recording and makes the accounting statements more acceptable to various users.

Financial statements are the outcome of recorded facts, accounting concepts and conventions used and personal judgement made in different situations by the _________.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. owners

  2. accountants

  3. managers

  4. dierctors

Show answer
Correct Option: B
Explanation:

Financial statements are the outcome of recorded facts, accounting concepts and conventions used and personal judgements made in different situations by the accountants. Hence, bias may be observed in the results, and the financial position depicted in financial statements may not be realistic.

As financial statements do not show aggregate information, it may not help the ________ in decision-making much.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. owners

  2. users

  3. customers

  4. both a and b

Show answer
Correct Option: B
Explanation:

A financial statement is a collection of data organised according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm.

Financial statements show aggregate information but not detailed information. Hence, they may not help the users in decision-making much. 

Since the purchasing power of money is changing, the value of assets and liabilities shown in financial statement does not reflect ________ market situation.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. past

  2. future

  3. current

  4. both a and c

Show answer
Correct Option: C
Explanation:

As Financial statements are prepared on the basis of historical cost.

It creates a demerit of financial statements. Since the purchasing power of money is changing, the values of assets and liabilities shown in financial statement do not reflect current market situation.

Which of the following is not an use and importance of financial statements?

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. Report on stewardship function

  2. Basic for prospective investors

  3. Bias

  4. Basis for granting of credit

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Correct Option: C

The financial statements enable the ___________ to judge the financial position of different concerns and take decisions about the prices to be quoted.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. owners

  2. shareholders

  3. stock brokers

  4. managers

Show answer
Correct Option: C
Explanation:

Financial statements help the stock exchanges to understand the extent of transparency in reporting on financial performance and enables them to call for required information to protect the interest of investors. 

The financial statements enable the Stock brokers to judge the financial position of different concerns and take decisions about the prices to be quoted.

____________ may develop standard ratios and design uniform system of accounts.

elements of accounts introduction of financial statement of company general instructions for preparation of balance sheet tools of financial statements uses, importance, and limitation of financial statements

  1. Owners association

  2. Trade associations

  3. Company association

  4. Both a and b

Show answer
Correct Option: B
Explanation:

A financial statement is a collection of data organized according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm.

One of the importance of financial statement is it aids trade associations in helping their members as Trade associations may analyse the financial statements for the purpose of providing service and protection to their members. They may develop standard ratios and design uniform system of accounts.