Question

4. Which of the following are limitations of an entity’s Statement of Financial Position?

I. The Statement of Financial Position prepared at the end of the financial period may not be representative of the financial position at other times during the financial period.

II. The Statement of Financial Position may not include all items that create value for the entity.

III. The Statement of Financial Position is a historical representation of an entity’s financial position and does not consider the entity’s future growth potential.     Group of answer

choices

1. II and III
2. I and III,
3. II and III
4. I and III

5. Which of the following statements relates to the accounting period convention?

Group of answer choices

1. The value of employee loyalty and motivation is not recorded in the financial statements.
2. The amount of inventory recorded in the financial statements is based on suppliers’ billings.
3. Unless there is specific information to the contrary, the business is expected to continue operations for the foreseeable future.
4. The business is required to prepare financial statements every year.

6. The requirement for the accounts of the business to be kept separate from the personal accounts of the owners illustrates the:

Group of answer choices

A. Accounting entity concept

B. Business entity concept

C. Legal entity concept

D. Economic entity concept

7.  An entity’s financial year ends on 31 December. On 1 October it pays a 24-month magazine subscription of $600. Under the accrual system of accounting how much of the subscription will be recognized as an expense for the current year ended 31 December, and how much will be treated as an asset (prepaid subscription)?

Answer 1

Answer 4. I and III
The limitations of an entity’s Statement of Financial Position are that it is based on histroical costs and doesn't consider inflation rate.

Answer 5. The business is required to prepare financial statements every year
The  accounting period convention is: time period used to analyse entity financial position and performance.

Answer 6. Option B. Business Entity Concept
As per the business entity concept the accounts for business and the owners should be kept separate. For example, any personal expenses by the owner are treated separately and cannot be treated as business expenses charged to the company. In terms of naming conventions Business Enity might also be generically referred to as Economic Entity etc. but it is preferable for this concept to be referred as Business Entity

Answer 7. The 24-month magazine subscription 0f $600 will result in an average expense of $25 per month. Thus, the accrued subscription expense for the months of October, November and December will be $75. The remaining amount, i.e. $525 ($600-$75), will be treated as an asset (prepaid subscription)