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

4. The correct answer will be I and III. It is because the limitations of an entity’s Statement of Financial Position are that 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 and 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. The other options are not correct because Statement II is not a limitation.

5. The correct answer will be option (c) Unless there is specific information to the contrary, the business is expected to continue operations for the foreseeable future. It is because accounting period convention states that the business is expected to continue operations for the foreseeable future except if there is explicit information present. The other options (a) , (b) and (d) are not correct because of the above reason.

6. The correct answer will be option (b) Business entity concept. It is because the business entity concept states the requirement for the accounts of the business to be kept separate from the personal accounts of the owners. The other options (a) , (c) and (d) are not correct because of the above reason.

7. Subscription recognized as expense for the current year= (Number of months magazine used in current year/Number of months magazines is bought)* Amount paid

Number of months magazine used in current year= 3 months(from October 1 to December 31)

Number of months magazines is bought=24

Amount paid= $600

Subscription recognized as expense for the current year= (Number of months magazine used in current year/Number of months magazines is bought)* Amount paid

=(3/24)*600

=$75

Prepaid Subscription= Amount paid-Subscription recognized as expense for the current year

=$600-$75

=$525