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web.groovymark@gmail.com
- December 8, 2024
Question 01
What accounting principle requires that expenses be matched with revenues in the period they are incurred?
- A) Historical cost principle
- B) Matching principle
- C) Revenue recognition principle
- D) Conservatism principle
Answer: B) Matching principle
Explanation: The matching principle ensures that expenses are recorded in the same period as the revenues they help generate.
Question 02
Which of the following is considered a long-term asset?
- A) Accounts receivable
- B) Cash
- C) Inventory
- D) Equipment
Answer: D) Equipment
Explanation: Equipment is a long-term asset used in business operations, whereas accounts receivable, cash, and inventory are typically classified as current assets.
Question 03
When recording a transaction, what does a credit entry typically indicate?
- A) An increase in assets
- B) An increase in expenses
- C) A decrease in liabilities
- D) An increase in liabilities
Answer: D) An increase in liabilities
Explanation: Credit entries generally increase liabilities and equity and can also decrease assets or expenses.
Question 04
What is the primary purpose of the income statement?
- A) To report the financial position of a company at a specific point in time
- B) To summarize cash inflows and outflows for a period
- C) To detail revenues and expenses over a period
- D) To show retained earnings
Answer: C) To detail revenues and expenses over a period
Explanation: The income statement summarizes revenues and expenses to show profitability over a specific period.
Question 05
What type of account is “Accumulated Depreciation”?
- A) Asset
- B) Contra-asset
- C) Liability
- D) Expense
Answer: B) Contra-asset
Explanation: Accumulated depreciation reduces the book value of assets, thus it is classified as a contra-asset account.
Question 06
How is a dividend declared by a corporation typically recorded?
- A) Debit to cash
- B) Credit to dividends payable
- C) Credit to retained earnings
- D) Debit to retained earnings
Answer: D) Debit to retained earnings
Explanation: Declaring a dividend reduces retained earnings and creates a liability in dividends payable.
Question 07
What is the effect of a company buying back its own shares (treasury stock)?
- A) Increase in total assets
- B) Increase in total liabilities
- C) Decrease in total equity
- D) No effect on total equity
Answer: C) Decrease in total equity
Explanation: Buying back shares reduces the total equity of the company since treasury stock is a contra-equity account.
Question 08
Which financial statement reflects a company’s cash position at a specific date?
- A) Income statement
- B) Statement of cash flows
- C) Balance sheet
- D) Retained earnings statement
Answer: C) Balance sheet
Explanation: The balance sheet provides a snapshot of the company's financial position, including cash, at a specific point in time.
Question 09
What does a credit entry in the sales revenue account represent?
- A) An increase in sales
- B) A decrease in cash
- C) A decrease in equity
- D) A decrease in liabilities
Answer: A) An increase in sales
Explanation: A credit entry in the sales revenue account increases total revenue, reflecting higher sales.
Question 10
Which method is used to estimate bad debt expense based on a percentage of sales?
- A) Direct write-off method
- B) Allowance method
- C) Aging method
- D) Percentage of receivables method
Answer: B) Allowance method
Explanation: The allowance method estimates bad debt expense as a percentage of total sales made during the period.
Question 11
What type of account is “Interest Payable”?
- A) Asset
- B) Liability
- C) Equity
- D) Revenue
Answer: B) Liability
Explanation: Interest payable represents an obligation to pay interest on borrowed funds, making it a liability.
Question 12
How is an increase in accounts receivable recorded?
- A) Debit to cash
- B) Debit to accounts receivable
- C) Credit to accounts receivable
- D) Credit to sales revenue
Answer: B) Debit to accounts receivable
Explanation: An increase in accounts receivable indicates that sales have been made on credit, which requires a debit entry.
Question 13
What happens to total liabilities when a company repays a loan?
- A) Total liabilities increase
- B) Total liabilities decrease
- C) Total liabilities remain the same
- D) Total liabilities double
Answer: B) Total liabilities decrease
Explanation: Repaying a loan reduces the total liabilities of the company as the obligation is fulfilled.
Question 14
What is the journal entry to record the sale of inventory on credit?
- A) Debit cash, credit sales revenue
- B) Debit accounts receivable, credit sales revenue
- C) Debit sales revenue, credit accounts receivable
- D) Debit inventory, credit accounts payable
Answer: B) Debit accounts receivable, credit sales revenue
Explanation: Recording a credit sale involves debiting accounts receivable and crediting sales revenue.
Question 15
What is the effect of a stock dividend on retained earnings?
- A) Increases retained earnings
- B) Decreases retained earnings
- C) Has no effect on retained earnings
- D) Transfers retained earnings to common stock
Answer: B) Decreases retained earnings
Explanation: A stock dividend reduces retained earnings as the company distributes shares to shareholders.
Question 16
Which financial statement summarizes a company’s operational cash flows over a period?
- A) Balance sheet
- B) Income statement
- C) Statement of cash flows
- D) Statement of shareholders’ equity
Answer: C) Statement of cash flows
Explanation: The statement of cash flows reports cash inflows and outflows from operating, investing, and financing activities over a specified period.
Question 17
What is a company’s current ratio used to assess?
- A) Profitability
- B) Liquidity
- C) Leverage
- D) Efficiency
Answer: B) Liquidity
Explanation: The current ratio measures a company's ability to pay its short-term obligations, indicating liquidity.
Question 18
What type of inventory system records inventory purchases and sales in real time?
- A) Periodic inventory system
- B) Perpetual inventory system
- C) Annual inventory system
- D) Sequential inventory system
Answer: B) Perpetual inventory system
Explanation: A perpetual inventory system continuously updates inventory records after each purchase or sale.
Question 19
Which of the following accounts would be affected by a sale return?
- A) Cash and retained earnings
- B) Accounts receivable and sales returns
- C) Inventory and cost of goods sold
- D) All of the above
Answer: D) All of the above
Explanation: A sale return affects cash (if returned for cash), accounts receivable, sales returns, and inventory levels.
Question 20
What happens to the net income when a company pays off its debts?
- A) Increases net income
- B) Decreases net income
- C) No effect on net income
- D) Transfers income to equity
Answer: C) No effect on net income
Explanation: Paying off debts affects cash and liabilities but does not directly impact net income.
