ACCOUNTING AS AN INFORMATION SYSTEM

Q.1. Historical cost is the only basis for the measurement of transactions and events,

Ans. False : Historical cost is simply one of the bases for measurement. Other alternate bases are current cost, realisable value, replacement cost and present value.

Q.2. Accounting can be viewed as an information system which has its input processing methods and output.

Ans. True : Accounting is a process of identifying, measuring and communicating information to permit informed judgement and decisions. It covers the preparation of financial statements and communication to the users of accounts. There is a link between the
business transactions and decision makers in the following manner :

(a) Identification of business transactions and events (inputs).
(b) Recording of business transactions through accounting process in conformity with the generally accepted accounting principles and specific accounting standards. The processing is done in such a manner or format as to make the information
more useful.
(c) The processed and prepared information (output) is presented in the form of financial statements.
(d) And then the financial statements are used as a means of communication of accounting information to the decision makers. In fact this last step makes the accounting as an information system. It links an information source (an accountant), a channel of communication (the financial statements) and a set of receivers (decision makers).

Q.3. The value of human resources is generally shown as an asset in the Balance Sheet.

Ans. False: The value of human resources cannot be measured in monetary terms. Thus it will not be shown in the balance sheet as per money measurement concept.

Q.4. Accounting involves communication.
Ans. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgement and decisions by the users of accounts. Hence accounting involves communication.

Q.5. Cash basis of accounting is most suitable for business enterprises,
Ans. Cash system in normally followed by professionals, educational institutions or not-forprofit making organisations. Mercantile system is a generally accepted accounting system by business entities.

Q.6. Short term creditors and long term lenders require same type of accounting information,
Ans. False : Short term creditors are more interested in the immediate liquidity position while long term lenders are primarily concerned with overall financial position and earning capacity of the business enterprise.

Q.7. Relevant accounting information is necessarily reliable,

Ans. False : Accounting information is relevant when it influences the economic decisions of the users by helping them to evaluate past, present or future events; on the other hand, accounting information is reliable when it is free from material error and personal bias. In fact the reliable accounting information is relevant.

Q.8. Accounting and book keeping have the same meaning,
Ans. False : Book-keeping is the first stage of accounting work namely recording, classifying and summarising of business transactions. The work of accountant begins when the work of book-keeper ends.

Q.9. Current cost gives an alternative measurement base.
Ans. True: Generally the value of an asset is determined on the basis of acquisition cost. Current cost is another alternative measurement basis according to which assets are carried at the amount of cash or cash equivalents required to be paid if the same or an equivalent asset has to be acquired currently.

Q.10. Accrual concept implies accounting on cash basis,
Ans. False : Accrual concept implies accounting on due or earned or accrual basis. Accrual basis of accounting involves recognition of revenues and costs as they are earned (revenues) and payable (costs) irrespective of receipts or payments.

Q.11. Limited Companies can keep their accounts under cash basis.
Ans. False : It is mandatory (compulsory) for companies to keep their accounts under accrual basis in accordance with the provisions of the Companies Act.