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Question 41

When does a company recognize revenue according to the revenue recognition principle?

  1. A) When cash is received
  2. B) When the product is delivered or the service is performed
  3. C) When the invoice is sent
  4. 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?

  1. A) A gain is recorded
  2. B) A loss is recorded
  3. C) No impact on equity
  4. 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?

  1. A) Overstated net income
  2. B) Understated liabilities
  3. C) Overstated assets
  4. 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?

  1. A) Debit accounts payable, credit cash
  2. B) Credit accounts payable, debit cash
  3. C) Credit accounts payable, debit the relevant expense account
  4. 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?

  1. A) Net income is reduced by the amount of dividends paid
  2. B) Dividends have no effect on net income
  3. C) Net income increases
  4. 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?

  1. A) A use of cash
  2. B) A source of cash
  3. C) No effect on cash flow
  4. 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”?

  1. A) Revenue
  2. B) Expense
  3. C) Contra-revenue
  4. 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?

  1. A) Debit accounts payable, credit cash
  2. B) Debit expense, credit accounts payable
  3. C) Debit accounts payable, credit expense
  4. 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?

  1. A) The bond liability account increases
  2. B) The bond liability account decreases
  3. C) The bond liability account remains unchanged
  4. 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?

  1. A) Balance sheet
  2. B) Statement of cash flows
  3. C) Income statement
  4. 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.

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