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web.groovymark@gmail.com
- December 8, 2024
Question 41
Which of the following describes cash equivalents?
- A) Accounts receivable
- B) Cash balances in a checking account
- C) Short-term investments maturing in three months or less
- D) Inventory
Answer: C) Short-term investments maturing in three months or less
Explanation: Cash equivalents are short-term, highly liquid investments with maturities of three months or less, such as treasury bills and commercial paper.
Question 42
When a company receives cash in advance of providing services, how is it recorded?
- A) Debit unearned revenue, credit cash
- B) Debit accounts receivable, credit service revenue
- C) Debit cash, credit unearned revenue
- D) Debit service revenue, credit cash
Answer: C) Debit cash, credit unearned revenue
Explanation: When cash is received before services are provided, it creates a liability (unearned revenue) that is credited.
Question 43
What is the effect of a credit to the accumulated depreciation account?
- A) It increases assets
- B) It decreases liabilities
- C) It reduces the book value of an asset
- D) It increases equity
Answer: C) It reduces the book value of an asset
Explanation: Accumulated depreciation is a contra-asset account that reduces the book value of an asset over time.
Question 44
What type of account is unearned revenue?
- A) Asset
- B) Liability
- C) Revenue
- D) Equity
Answer: B) Liability
Explanation: Unearned revenue is a liability because it represents an obligation to provide services or goods in the future.
Question 45
What is the result of purchasing supplies on account?
- A) Increase in assets and liabilities
- B) Increase in assets and decrease in equity
- C) Increase in expenses and liabilities
- D) Decrease in assets and increase in equity
Answer: A) Increase in assets and liabilities
Explanation: Purchasing supplies on account increases assets (supplies) and liabilities (accounts payable).
Question 46
Which financial statement shows how much profit a company has earned during a specific period?
- A) Balance sheet
- B) Statement of cash flows
- C) Income statement
- D) Statement of retained earnings
Answer: C) Income statement
Explanation: The income statement reports a company’s revenues, expenses, and net income or loss over a specific period.
Question 47
What is the effect of issuing common stock on the accounting equation?
- A) Increases assets and decreases liabilities
- B) Increases liabilities and equity
- C) Increases assets and equity
- D) Decreases liabilities and equity
Answer: C) Increases assets and equity
Explanation: Issuing common stock increases cash (an asset) and stockholders' equity.
Question 48
How is a prepaid expense classified before it is used?
- A) As an asset
- B) As a liability
- C) As an equity
- D) As an expense
Answer: A) As an asset
Explanation: Prepaid expenses are classified as assets because they represent future economic benefits that will be used up over time.
Question 49
What happens when a company provides services on account?
- A) Assets and equity increase
- B) Liabilities and equity increase
- C) Assets increase and liabilities decrease
- D) Liabilities and revenue increase
Answer: A) Assets and equity increase
Explanation: When services are provided on account, accounts receivable (asset) increases, and service revenue (equity) also increases.
Question 50
Which of the following accounts is debited when a company writes off an uncollectible account using the allowance method?
- A) Bad debt expense
- B) Accounts receivable
- C) Allowance for doubtful accounts
- D) Sales revenue
Answer: C) Allowance for doubtful accounts
Explanation: Under the allowance method, writing off an uncollectible account reduces the allowance for doubtful accounts (debit), while the accounts receivable account is credited.
