Accounting principles: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
How can a business comply with the accounting principle of prudence? Use the complete source image for the question and answer choices. Source reference: W20 Paper 12, Q34.
Answer: B.
Prudence guards against optimism from both directions. Assets must not be overstated, since an inflated asset makes the business look stronger than it is, and losses must not be understated, since a foreseeable loss should be recognised as soon as it is known. B is correct. A tells the business to avoid overstating losses, which reverses the rule, and C and D would allow assets to be shown too high. Prudence is content for a figure to err on the cautious side, never the flattering one.
Question 2
The financial statements of a business are prepared on the basis that it will continue to operate for many years into the future.
Which accounting principle is being applied?
Answer: B.
Going concern is the assumption that the business will keep trading for the foreseeable future, and it is what justifies carrying assets at cost less depreciation rather than at what they would fetch if sold up tomorrow. B is correct. A, business entity, separates owner from business. C, money measurement, restricts records to what can be expressed in money, and D, realisation, fixes when revenue is earned. None of the three says anything about how long the business will last.
Question 3
When Marina opened a business she purchased a stapler for the office.
She recorded this as office expenses rather than as office equipment.
Which accounting principle did Marina apply?
Answer: C.
A stapler will last for years, so in principle it is office equipment, but its cost is so small that recording it as an asset and depreciating it would cost more effort than the information is worth. Treating it as an expense is materiality in action, and C is correct. A, consistency, is about repeating the same method each year. B, historic cost, is about the value used. D, prudence, is about not overstating, and while the treatment is cautious, it is the SIZE of the item that decides it.
Question 4
At the end of the financial year, a company did not account for the unused stationary valued at $50.
Which accounting principle did the company apply?
Answer: B.
Fifty dollars of unused stationery is far too small to change any reader's view of the accounts, so ignoring it is an application of materiality: the cost of measuring it exceeds the value of the information. B is correct. A, matching, would strictly require the unused part to be carried forward, which is exactly what materiality overrides here. C, money measurement, is satisfied since stationery has a money value, and D, prudence, is not engaged because nothing uncertain is being estimated.
Question 5
Amaira depreciates her non-current assets by the same rate and using the same method every year.
Which group of accounting principles is she applying?
Answer: C.
Three principles are at work in one policy. Using the same method and rate every year is consistency. Spreading the cost of the asset over the years that benefit from it is matching. Writing the asset down as it is used up, rather than leaving it at cost, is prudence, since it stops the asset and the profit being overstated. C is correct. Business entity, in A and B, concerns the separation of owner and business, and realisation, in B and D, concerns when revenue is recognised.
What this practice covers
These questions are drawn from past CIE 0452 Accounting papers and filtered to accounting principles. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on accounting principles, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Saying prudence means deliberately understating profit. It means not overstating it.
- Defining the principle in the abstract when the question gives a scenario. Apply it to the scenario.
- Using going concern to justify the accruals adjustments. Matching is the principle behind those.
- Confusing realisation with the receipt of cash.
- Naming business entity when the answer is money measurement, or the reverse. Business entity is about whose transaction it is; money measurement is about whether it can be measured.
- Giving two principles and hoping one is right. Choose the one the treatment actually rests on.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Accounting principles revision notes.