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web.groovymark@gmail.com
- December 8, 2024
Question 01
Which financial statement reports a company’s financial position at a specific point in time?
- A) Income statement
- B) Balance sheet
- C) Statement of cash flows
- D) Statement of retained earnings
Answer: B) Balance sheet
Explanation: The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific date.
Question 02
What happens when a company purchases inventory on account?
- A) Assets and liabilities increase
- B) Assets increase and equity decreases
- C) Assets and liabilities decrease
- D) Liabilities increase and expenses increase
Answer: A) Assets and liabilities increase
Explanation: Inventory is an asset, and accounts payable (a liability) increases when purchasing inventory on credit.
Question 03
How are dividends classified on the statement of cash flows?
- A) Operating activity
- B) Financing activity
- C) Investing activity
- D) Non-cash activity
Answer: B) Financing activity
Explanation: Dividends are considered financing activities as they represent cash outflows to shareholders.
Question 04
What type of account is accumulated depreciation?
- A) Asset
- B) Contra-asset
- C) Liability
- D) Equity
Answer: B) Contra-asset
Explanation: Accumulated depreciation is a contra-asset that reduces the value of fixed assets on the balance sheet.
Question 05
Which method of accounting for bad debts involves estimating uncollectible accounts in the same period as the related sales?
- A) Direct write-off method
- B) Allowance method
- C) Percentage of completion method
- D) Accrual method
Answer: B) Allowance method
Explanation: The allowance method estimates bad debt expense in the same period as the sales, matching expenses with revenues.
Question 06
What is the effect on the accounting equation when a company issues bonds at a premium?
- A) Assets and liabilities increase
- B) Assets increase and equity increases
- C) Liabilities decrease and equity increases
- D) Assets decrease and liabilities increase
Answer: A) Assets and liabilities increase
Explanation: Cash (asset) increases from the bond issuance, and bonds payable (liability) increases as well.
Question 07
Which of the following is not classified as a current asset?
- A) Inventory
- B) Cash
- C) Accounts receivable
- D) Goodwill
Answer: D) Goodwill
Explanation: Goodwill is an intangible asset and is considered a long-term asset, not a current asset.
Question 08
What is the journal entry when a company records depreciation expense for the year?
- A) Debit accumulated depreciation, credit depreciation expense
- B) Debit depreciation expense, credit cash
- C) Debit depreciation expense, credit accumulated depreciation
- D) Debit equipment, credit accumulated depreciation
Answer: C) Debit depreciation expense, credit accumulated depreciation
Explanation: Depreciation expense is recorded by debiting depreciation expense and crediting accumulated depreciation, a contra-asset.
Question 09
What is the result of an adjusting entry to accrue interest expense?
- A) Liabilities and equity increase
- B) Assets increase and equity decreases
- C) Liabilities increase and equity decreases
- D) Liabilities and assets decrease
Answer: C) Liabilities increase and equity decreases
Explanation: Accruing interest increases interest payable (liability) and decreases net income, which lowers equity.
Question 10
Which method of depreciation results in higher depreciation expense in the earlier years of an asset’s life?
- A) Straight-line method
- B) Double-declining balance method
- C) Units-of-production method
- D) Sum-of-the-years’-digits method
Answer: B) Double-declining balance method
Explanation: The double-declining balance method is an accelerated depreciation method that results in higher depreciation expense in the early years.
Question 11
What is the journal entry to record an expense incurred but not yet paid?
- A) Debit cash, credit accounts payable
- B) Debit expense, credit accounts payable
- C) Debit expense, credit accounts receivable
- D) Debit accounts payable, credit cash
Answer: B) Debit expense, credit accounts payable
Explanation: The expense is recorded with a debit, and the unpaid amount is recorded as accounts payable (credit).
Question 12
What is the purpose of the post-closing trial balance?
- A) To ensure that the revenue and expense accounts have been properly closed
- B) To summarize all of the transactions for the period
- C) To test the equality of debits and credits after closing entries are made
- D) To prepare financial statements for external users
Answer: C) To test the equality of debits and credits after closing entries are made
Explanation: The post-closing trial balance ensures that debits equal credits after the closing entries are posted.
Question 13
What is the result of recording revenue earned but not yet received?
- A) Increase in liabilities and equity
- B) Increase in assets and equity
- C) Decrease in assets and liabilities
- D) Decrease in equity and liabilities
Answer: B) Increase in assets and equity
Explanation: Accounts receivable (asset) increases and revenue (equity) increases when revenue is earned but not yet received.
Question 14
What is the primary purpose of adjusting entries?
- A) To correct errors in the financial statements
- B) To ensure that revenues and expenses are recorded in the correct accounting period
- C) To close temporary accounts
- D) To transfer net income to retained earnings
Answer: B) To ensure that revenues and expenses are recorded in the correct accounting period
Explanation: Adjusting entries align revenues and expenses with the correct accounting period, following the matching principle.
Question 15
How is the net income or loss from the income statement carried to the balance sheet?
- A) As retained earnings
- B) As capital stock
- C) As accounts receivable
- D) As cash
Answer: A) As retained earnings
Explanation: Net income increases retained earnings, while a net loss decreases retained earnings.
Question 16
What is the effect of declaring and paying dividends on the accounting equation?
- A) Decreases assets and increases liabilities
- B) Decreases assets and decreases equity
- C) Increases assets and increases liabilities
- D) Increases liabilities and decreases equity
Answer: B) Decreases assets and decreases equity
Explanation: Dividends reduce assets (cash) and decrease retained earnings (a component of equity).
Question 17
What type of account is unearned revenue classified as on the balance sheet?
- A) Asset
- B) Liability
- C) Equity
- D) Revenue
Answer: B) Liability
Explanation: Unearned revenue is a liability because it represents an obligation to deliver goods or services in the future.
Question 18
Which of the following transactions increases both assets and equity?
- A) Purchasing supplies on account
- B) Issuing common stock
- C) Borrowing cash from a bank
- D) Paying dividends
Answer: B) Issuing common stock
Explanation: Issuing common stock increases cash (asset) and stockholders’ equity.
Question 19
How are dividends paid to shareholders classified on the statement of cash flows?
- A) Operating activity
- B) Investing activity
- C) Financing activity
- D) Non-cash activity
Answer: C) Financing activity
Explanation: Dividends paid to shareholders are classified as a financing activity because they involve the distribution of funds to owners.
Question 20
Which account is credited when a company purchases office equipment with cash?
- A) Cash
- B) Accounts payable
- C) Office equipment
- D) Accumulated depreciation
Answer: A) Cash
Explanation: Purchasing office equipment with cash reduces the cash balance, so cash is credited.
