OA Exams
When does a company recognize revenue according to the revenue recognition principle?
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.
What happens when an asset is sold for more than its book value?
Answer: A) A gain is recorded
Explanation: Selling an asset for more than its book value results in a gain, which increases net income.
What is the primary effect of an error that understates expenses?
Answer: A) Overstated net income
Explanation: Understating expenses leads to higher net income than it should be, as expenses reduce income.
How is an increase in accounts payable recorded in the journal?
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.
What is the outcome of a company’s net income for the year if it pays dividends?
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.
In the statement of cash flows, what does a decrease in inventory represent?
Answer: B) A source of cash
Explanation: A decrease in inventory indicates that inventory has been sold, generating cash inflow.
What type of account is “Sales Returns and Allowances”?
Answer: C) Contra-revenue
Explanation: Sales Returns and Allowances reduce total revenue and are classified as a contra-revenue account.
What is the journal entry to record an expense that has been incurred but not yet paid?
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.
When a company issues a bond at a premium, what is the effect on the bond liability account?
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.
What financial statement provides information about a company’s profitability?
Answer: C) Income statement
Explanation: The income statement summarizes revenues and expenses to show a company's profitability over a period.