This document contains a 25 question multiple choice test on accounting theory concepts for a VCE Accounting Unit 3 chapter. The test covers key accounting principles like historical cost, entity, consistency and qualitative characteristics such as reliability and comparability. It provides scenarios and asks students to apply the principles and characteristics to determine the appropriate accounting treatment in each case. The document is copyrighted and requires permission for external use.

1. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 1
Accounting Theory – Test
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Total /25 marks

2. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 2
Chapter 1 Accounting Theory – Test
1. Marvin Alberto’s business has a large amount of money invested in the share market. The
original amount invested was $25,000. Marvin’s stock broker has just advised him that the
value of the firm’s shares is now $53,000. Which accounting principle requires Marvin to value
the shares at $25,000?
a) Historical Cost
b) Monetary Unit
c) Reliability
d) Relevance
2. The qualitative characteristic of Reliability means that:
a) Only relevant information must be included in accounting reports – all irrelevant information
is excluded
b) The same accounting methods must be used every year to prepare financial reports
c) Financial reports should be prepared so that users can understand their meaning
d) Accounting reports should be free of bias and personal opinions and estimates as much as
possible
Mario Elie purchased a vehicle for his business three years ago for $12,000. A friend who operates a
car yard has advised him that the vehicle is now only worth $9,000. Mario has no intention of selling
the car, but his brother has said that, if he were to sell it, he would give Mario $9,500.
3. Under the Historical Cost principle, Mario should value the car at which value?
a) $9,500
b) $12,000
c) $9,000
d) $500
4. Under the Conservatism principle, Mario should value the car at which value?
a) $9,500
b) $12,000
c) $9,000
d) $500

3. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 3
5. A firm has paid for $30,000 of advertising to be used up next year. At the end of the current
year, the $30,000 of advertising would be classified as a:
a) Asset
b) Liability
c) Expense
d) Revenue
6. Which qualitative characteristic supports the theory that cents can be omitted from accounting
reports?
a) Relevance
b) Monetary Unit
c) Comparability
d) Reliability
Oliver Miller runs a sporting wholesale business. The firm’s forklift has broken down and can’t be
repaired. A friend of Oliver’s has decided to lend him his forklift that originally cost $5,000 when
bought two years ago. The current value is $3,000. Oliver can keep the forklift until his friend needs
it again, although this is likely to not be for a number of years.
7. The value of the forklift Asset to Oliver’s business is:
a) $8,000
b) $5,000
c) $3,000
d) The firm does not have an Asset
8. The definition of an Expense is:
a) The outflow of economic benefits in the form of either a decrease in Assets or an increase in
Liabilities
b) The inflow of economic benefits in the form of either a decrease in Assets or an increase in
Liabilities
c) The outflow of economic benefits in the form of either an increase in Assets or a decrease in
Liabilities
d) The inflow of economic benefits in the form of either an increase in Assets or a decrease in
Liabilities

4. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 4
Sandrine Ceballos runs a painting business. Her clients pay upfront for painting services to be
rendered. A particular client has paid her $60,000 upfront for a job to be completed over the next
three years – 2015, 2016 and 2017.
9. At the end of 2015, the firm will have a Liability to the value of:
a) $60,000
b) $20,000
c) $40,000
d) The firm does not have a Liability
10. Jack Taylor owns and operates three businesses – a bookkeeping service, a retail store and a
tutoring service. The Entity principle requires him to:
a) Treat his personal income and that of each business as one entity for tax purposes
b) Always record the each of the firms transactions in Australian dollars
c) Collect and retain source documents to verify the transactions of each business
d) Keep the transactions of each business separate from the others by preparing separate
records and financial reports
11. Which accounting principle helps support the qualitative characteristic of Comparability?
a) Consistency
b) Reliability
c) Entity
d) Going concern
12. The qualitative characteristic of Comparability can be achieved through:
a) Using the same accounting methods every period
b) Applying the Historical Cost Principle consistently every period
c) Using the same formatting of accounting reports each period
d) All of the above
13. Under the Conservatism Principle, caution is used by recognising losses when expected and
gains when certain, so that:
a) Assets and Revenues are not overstated and Liabilities and Expenses are not overstated
b) Assets and Revenues are not understated and Liabilities and Expenses are not understated
c) Assets and Revenues are not overstated and Liabilities and Expenses are not understated
d) Assets and Revenues are not understated and Liabilities and Expenses are not overstated

5. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 5
14. Which of the following is NOT a qualitative characteristic of accounting?
a) Reliability
b) Comparability
c) Historical cost
d) Understandability
15. Which of the following items is NOT an Asset?
a) Computer
b) Wages
c) Premises
d) Debtors
16. The Materiality Test means that:
a) Transactions are considered material if their amount exceeds $10
b) Items can be excluded from the firm’s financial reports if their omission will not significantly
affect decision-making
c) Items can be excluded from the firm’s financial reports if all items of the same or a lesser
amount are also excluded
d) All of the above
17. Rhonda recorded the payment of her daughter’s orthodontist’s fees as a business expense.
Which qualitative characteristic has been breached in this situation?
a) Relevance
b) Entity
c) Comparability
d) Reliability
Kimberley Roberts has run a business for the past five years. She does not have an accounting
background and is unsure how to prepare financial reports. Because of this Kimberley has only
prepared two Income Statements since she began the business.
18. Which accounting principle has been breached in this situation?
a) Reporting Period
b) Going Concern
c) Consistency
d) Comparability

6. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 6
A small business has decided to purchase stock from a different supplier. One supplier has provided
the firm with an estimate of stock prices for future orders, which will be purchased on credit. For
1,000 units the price will be $5 per unit, but for bulk orders of 2,000 units the price will be $4 per
unit.
19. As it stands, the firm has a Liability to the value of:
a) $5,000
b) $3,000
c) $8,000
d) The firm does not have a Liability
During 2015, Jean Simons discovered an invoice dated 20 April 2013 that had not been entered for
that year. Jean decided to record the invoice as revenue for 2015.
20. Which accounting principle has been breached in this situation?
a) Relevance
b) Reporting Period
c) Consistency
d) Comparability
21. Which of the following items is NOT an Expense?
a) Wages
b) Rent
c) Electricity
d) Drawings
22. A firm has purchased computers to the value of $40,000. These computers were purchased on
credit with the amount owing to be paid next year. At the end of the current year, the amount
owing for the computers would be classified as a:
a) Asset
b) Liability
c) Revenue
d) Expense

7. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
© Michael Allison
Author’s express permission required for external or professional use
Page | 7
Jamie Jackson runs a small business and is in the process of preparing this year’s Balance Sheet.
During the year Jamie’s office experienced water damage and all of his financial records were
destroyed. In order to complete this year’s Balance Sheet, Jamie has decided to estimate the value
of some Balance Sheet items in today’s current values.
23. Which qualitative characteristic has been breached in this situation?
a) Historical Cost
b) Reliability
c) Relevance
d) Comparability
24. Which of the following is NOT an accounting principle?
a) Consistency
b) Entity
c) Historical cost
d) Comparability
25. A business purchased stationary to the value of $12,000 during the current year. At the end of
the year, there is $1 of stationary left. Under the qualitative characteristic of Relevance, the
amount of stationary that should be recorded as an Asset is:
a) $0
b) $12,000
c) $11,999
d) $1