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web.groovymark@gmail.com
- December 8, 2024
Question 41
When does a company recognize revenue according to the revenue recognition principle?
- A) When cash is received
- B) When the product is delivered or the service is performed
- C) When the invoice is sent
- D) At the end of the accounting period
Answer: B) When the product is delivered or the service is performed
Explanation: Revenue is recognized when the earnings process is substantially complete, typically when goods or services are delivered.
Question 42
What happens when an asset is sold for more than its book value?
- A) A gain is recorded
- B) A loss is recorded
- C) No impact on equity
- D) An expense is recorded
Answer: A) A gain is recorded
Explanation: Selling an asset for more than its book value results in a gain, which increases net income.
Question 43
What is the primary effect of an error that understates expenses?
- A) Overstated net income
- B) Understated liabilities
- C) Overstated assets
- D) No effect on the balance sheet
Answer: A) Overstated net income
Explanation: Understating expenses leads to higher net income than it should be, as expenses reduce income.
Question 44
How is an increase in accounts payable recorded in the journal?
- A) Debit accounts payable, credit cash
- B) Credit accounts payable, debit cash
- C) Credit accounts payable, debit the relevant expense account
- D) Debit accounts payable, credit the relevant expense account
Answer: C) Credit accounts payable, debit the relevant expense account
Explanation: An increase in accounts payable indicates that the company incurred an expense on credit, thus crediting accounts payable.
Question 45
What is the outcome of a company’s net income for the year if it pays dividends?
- A) Net income is reduced by the amount of dividends paid
- B) Dividends have no effect on net income
- C) Net income increases
- D) Dividends are added to net income
Answer: B) Dividends have no effect on net income
Explanation: Dividends are paid from net income but do not impact the income statement; they are a distribution of profits.
Question 46
In the statement of cash flows, what does a decrease in inventory represent?
- A) A use of cash
- B) A source of cash
- C) No effect on cash flow
- D) An increase in cash outflow
Answer: B) A source of cash
Explanation: A decrease in inventory indicates that inventory has been sold, generating cash inflow.
Question 47
What type of account is “Sales Returns and Allowances”?
- A) Revenue
- B) Expense
- C) Contra-revenue
- D) Asset
Answer: C) Contra-revenue
Explanation: Sales Returns and Allowances reduce total revenue and are classified as a contra-revenue account.
Question 48
What is the journal entry to record an expense that has been incurred but not yet paid?
- A) Debit accounts payable, credit cash
- B) Debit expense, credit accounts payable
- C) Debit accounts payable, credit expense
- D) Debit cash, credit expense
Answer: B) Debit expense, credit accounts payable
Explanation: When an expense is incurred but not paid, it is recorded as a liability (accounts payable) and the related expense.
Question 49
When a company issues a bond at a premium, what is the effect on the bond liability account?
- A) The bond liability account increases
- B) The bond liability account decreases
- C) The bond liability account remains unchanged
- D) The bond liability account is written off
Answer: A) The bond liability account increases
Explanation: Issuing bonds at a premium means the company receives more cash than the face value, increasing the bond liability.
Question 50
What financial statement provides information about a company’s profitability?
- A) Balance sheet
- B) Statement of cash flows
- C) Income statement
- D) Statement of retained earnings
Answer: C) Income statement
Explanation: The income statement summarizes revenues and expenses to show a company's profitability over a period.
