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web.groovymark@gmail.com
- December 12, 2024
Question 41
What is “earned capital”?
A) Cash on hand
B) Capital from issuing stocks
C) Retained earnings
D) Total liabilities
Answer: C) Retained earnings
Explanation: Earned capital, also known as retained earnings, consists of profits that are retained in the business rather than distributed as dividends to shareholders.
Question 42
How are “financial ratios” useful in business analysis?
A) They summarize cash flows
B) They provide a measure of profitability only
C) They enable comparisons over time and against benchmarks
D) They determine tax obligations
Answer: C) They enable comparisons over time and against benchmarks
Explanation: Financial ratios help analysts evaluate a company's performance by comparing various financial metrics over time or against industry standards.
Question 43
Which accounting assumption states that a business will continue to operate indefinitely?
A) Going concern assumption
B) Economic entity assumption
C) Monetary unit assumption
D) Time period assumption
Answer: A) Going concern assumption
Explanation: The going concern assumption presumes that a business will continue its operations for the foreseeable future without the intention of liquidation.
Question 44
What is the purpose of an audit?
A) To prepare financial statements
B) To assess the accuracy of financial records
C) To make investment recommendations
D) To calculate tax obligations
Answer: B) To assess the accuracy of financial records
Explanation: Audits are conducted to evaluate the reliability and accuracy of financial statements and ensure compliance with accounting standards.
Question 45
How does the “cost principle” affect asset valuation?
A) Assets are recorded at fair market value.
B) Assets are recorded at historical cost.
C) Assets are valued based on replacement cost.
D) Assets are valued based on their liquidation value.
Answer: B) Assets are recorded at historical cost.
Explanation: The cost principle dictates that assets should be recorded and reported at their original purchase cost, rather than current market value.
Question 46
What is the significance of the “conservatism principle”?
A) To ensure that all profits are recorded
B) To provide a balanced view of financial performance
C) To recognize potential losses and expenses as soon as possible
D) To emphasize revenues over expenses
Answer: C) To recognize potential losses and expenses as soon as possible
Explanation: The conservatism principle suggests that potential losses should be recognized promptly while profits are only recognized when they are assured, promoting caution in financial reporting.
Question 47
Which document is required for external stakeholders to assess the financial health of a company?
A) Sales report
B) Income statement
C) Internal audit report
D) Cash flow statement
Answer: B) Income statement
Explanation: The income statement provides external stakeholders with key insights into a company’s financial performance, summarizing revenues and expenses.
Question 48
What is the primary purpose of internal controls in accounting?
A) To prepare financial statements
B) To ensure compliance with tax regulations
C) To prevent and detect fraud
D) To manage cash flow
Answer: C) To prevent and detect fraud
Explanation: Internal controls are processes designed to safeguard assets, ensure the accuracy of financial records, and prevent fraud within an organization.
Question 49
Which accounting method requires that expenses are recognized only when cash is paid?
A) Accrual basis accounting
B) Cash basis accounting
C) Modified accrual accounting
D) Tax basis accounting
Answer: B) Cash basis accounting
Explanation: Cash basis accounting recognizes expenses only when cash is disbursed, contrasting with accrual accounting, which records expenses when incurred.
Question 50
What is the function of the “retained earnings statement”?
A) To summarize revenues and expenses
B) To report changes in equity
C) To disclose cash flow activities
D) To assess asset valuation
Answer: B) To report changes in equity
Explanation: The retained earnings statement outlines how retained earnings have changed over a specific period, reflecting net income and dividends paid.
