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web.groovymark@gmail.com
- December 8, 2024
Question 21
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: Accounts receivable (asset) increases, and service revenue (equity) also increases.
Question 22
What is the accounting treatment for interest earned but not yet received?
- A) Debit accounts receivable, credit interest income
- B) Debit cash, credit interest income
- C) Debit interest income, credit accounts receivable
- D) Debit interest income, credit cash
Answer: A) Debit accounts receivable, credit interest income
Explanation: Interest earned but not yet received is recorded as a receivable (debit) and interest income (credit).
Question 23
Which of the following is an example of a deferred expense?
- A) Prepaid rent
- B) Accounts payable
- C) Unearned revenue
- D) Accrued interest
Answer: A) Prepaid rent
Explanation: Prepaid rent is a deferred expense because it is paid in advance and expensed over time.
Question 24
What is the journal entry when a company receives cash for services not yet performed?
- A) Debit cash, credit service revenue
- B) Debit service revenue, credit unearned revenue
- C) Debit cash, credit unearned revenue
- D) Debit accounts receivable, credit cash
Answer: C) Debit cash, credit unearned revenue
Explanation: When cash is received for services not yet performed, it is recorded as unearned revenue, a liability.
Question 25
How is the cost of goods sold determined under the periodic inventory system?
- A) By counting inventory at the end of the period
- B) By recording each sale as it happens
- C) By recording purchases and subtracting them from sales
- D) By using the weighted average method
Answer: A) By counting inventory at the end of the period
Explanation: Under the periodic system, inventory is counted at the end of the period to determine the cost of goods sold.
Question 26
What happens to the cost of inventory when a company uses the FIFO method?
- A) The oldest costs are assigned to cost of goods sold
- B) The newest costs are assigned to cost of goods sold
- C) The average cost is assigned to cost of goods sold
- D) The cost is ignored until sold
Answer: A) The oldest costs are assigned to cost of goods sold
Explanation: Under FIFO (First In, First Out), the earliest purchased inventory costs are used to calculate the cost of goods sold.
Question 27
What is the effect on the income statement of writing off an uncollectible account?
- A) No effect on total revenue
- B) Decreases total assets
- C) Increases expenses
- D) Increases net income
Answer: C) Increases expenses
Explanation: Writing off an uncollectible account increases bad debt expense, which reduces net income.
Question 28
What is the primary purpose of a bank reconciliation?
- A) To increase bank profits
- B) To ensure accuracy between bank statements and company records
- C) To close bank accounts
- D) To record bank fees
Answer: B) To ensure accuracy between bank statements and company records
Explanation: Bank reconciliation helps identify discrepancies between the company's cash records and the bank's statements.
Question 29
What type of account is a warranty liability classified as?
- A) Asset
- B) Contra-asset
- C) Liability
- D) Equity
Answer: C) Liability
Explanation: Warranty liability represents an obligation to repair or replace products sold, making it a liability on the balance sheet.
Question 30
What is the primary impact of capitalizing an expenditure?
- A) It increases current expenses
- B) It reduces net income
- C) It increases total assets
- D) It decreases liabilities
Answer: C) It increases total assets
Explanation: Capitalizing an expenditure means it is recorded as an asset, which increases total assets on the balance sheet.
Question 31
What does a debit to the inventory account signify?
- A) An increase in inventory
- B) A decrease in inventory
- C) An increase in expenses
- D) A decrease in liabilities
Answer: A) An increase in inventory
Explanation: Debiting the inventory account signifies that inventory has increased.
Question 32
What is the effect of a stock split on total equity?
- A) It increases total equity
- B) It decreases total equity
- C) It has no effect on total equity
- D) It transfers equity to liabilities
Answer: C) It has no effect on total equity
Explanation: A stock split increases the number of shares but does not change the total equity amount.
Question 33
How is the net cash flow from operating activities determined?
- A) By adding all cash receipts and deducting all cash payments
- B) By subtracting operating expenses from revenues
- C) By using the cash balance from the beginning of the year
- D) By totaling sales and purchases for the year
Answer: A) By adding all cash receipts and deducting all cash payments
Explanation: The net cash flow from operating activities is calculated by summing all cash inflows and outflows related to operations.
Question 34
What is the purpose of a fiscal year in accounting?
- A) To align financial reporting with government regulations
- B) To ensure that all companies follow the same reporting schedule
- C) To divide a company’s operations into regular reporting periods
- D) To provide consistency in tax reporting
Answer: C) To divide a company’s operations into regular reporting periods
Explanation: A fiscal year establishes a 12-month period for reporting and allows companies to manage operations and financial reporting consistently.
Question 35
What is the result of issuing preferred stock?
- A) Increase in liabilities and decrease in assets
- B) Increase in equity without voting rights
- C) Decrease in retained earnings
- D) Increase in cash only
Answer: B) Increase in equity without voting rights
Explanation: Issuing preferred stock increases equity but typically does not provide voting rights to shareholders.
Question 36
How is the purchase of fixed assets classified on the statement of cash flows?
- A) Operating activity
- B) Financing activity
- C) Investing activity
- D) Non-cash activity
Answer: C) Investing activity
Explanation: Purchasing fixed assets is considered an investing activity as it involves acquiring long-term resources.
Question 37
Which accounting principle dictates that expenses should be recognized in the same period as the revenues they help to generate?
- A) Revenue recognition principle
- B) Matching principle
- C) Historical cost principle
- D) Conservatism principle
Answer: B) Matching principle
Explanation: The matching principle ensures that expenses are recorded in the same period as the related revenues.
Question 38
What type of expense is recorded when a company pays for an insurance policy upfront?
- A) Current expense
- B) Deferred expense
- C) Accrued expense
- D) Operating expense
Answer: B) Deferred expense
Explanation: The payment is considered a deferred expense (prepaid insurance) and will be expensed over time as the coverage is used.
Question 39
What happens to the accounting equation when a company pays off a liability?
- A) Assets decrease and liabilities decrease
- B) Assets increase and equity increases
- C) Assets decrease and equity increases
- D) Assets increase and liabilities decrease
Answer: A) Assets decrease and liabilities decrease
Explanation: Paying off a liability reduces both the asset (cash) and the liability (the amount owed).
Question 40
What is an example of a financing activity in the cash flow statement?
- A) Selling goods to customers
- B) Purchasing equipment
- C) Issuing bonds
- D) Paying suppliers
Answer: C) Issuing bonds
Explanation: Issuing bonds is a financing activity that involves obtaining cash from creditors.
