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web.groovymark@gmail.com
- December 8, 2024
Question 21
What does the term “par value” refer to?
- A) The market value of a stock
- B) The stated value assigned to a share of stock
- C) The dividend amount per share
- D) The book value of equity
Answer: B) The stated value assigned to a share of stock
Explanation: Par value is a nominal value assigned to shares of stock in the company's charter.
Question 22
Which accounting principle allows for the recording of expenses when incurred, regardless of cash flow?
- A) Cash basis accounting
- B) Accrual basis accounting
- C) Hybrid accounting
- D) Historical cost accounting
Answer: B) Accrual basis accounting
Explanation: Accrual basis accounting records expenses when incurred and revenues when earned, not necessarily when cash is exchanged.
Question 23
What does a negative cash flow from operating activities indicate?
- A) Increased revenues
- B) Decreased expenses
- C) A potential financial issue
- D) Increased investments
Answer: C) A potential financial issue
Explanation: Negative cash flow from operations may signal that a company is not generating enough cash from its core business activities.
Question 24
How is “Retained Earnings” affected by net income and dividends?
- A) Increased by net income and decreased by dividends
- B) Decreased by net income and increased by dividends
- C) Increased by both net income and dividends
- D) Decreased by both net income and dividends
Answer: A) Increased by net income and decreased by dividends
Explanation: Retained earnings increase with net income and decrease when dividends are paid out.
Question 25
What is the journal entry when a company incurs a payroll expense?
- A) Debit payroll expense, credit cash
- B) Debit payroll expense, credit salaries payable
- C) Debit cash, credit payroll expense
- D) Debit salaries payable, credit payroll expense
Answer: B) Debit payroll expense, credit salaries payable
Explanation: The payroll expense increases, creating a liability until it is paid.
Question 26
What financial metric shows the relationship between a company’s sales and its expenses?
- A) Gross profit margin
- B) Return on equity
- C) Operating margin
- D) Debt to equity ratio
Answer: C) Operating margin
Explanation: Operating margin measures the percentage of revenue remaining after covering operating expenses, showing profitability relative to sales.
Question 27
In the context of internal controls, what does segregation of duties refer to?
- A) Combining tasks to improve efficiency
- B) Assigning different responsibilities to different individuals
- C) Ensuring that all tasks are completed by one employee
- D) Reducing the number of employees involved in a transaction
Answer: B) Assigning different responsibilities to different individuals
Explanation: Segregation of duties minimizes the risk of fraud and errors by ensuring that no single individual has control over all aspects of a financial transaction.
Question 28
What does the term “working capital” refer to?
- A) Total assets minus total liabilities
- B) Current assets minus current liabilities
- C) Total current liabilities
- D) Total revenues minus total expenses
Answer: B) Current assets minus current liabilities
Explanation: Working capital measures a company's short-term liquidity and operational efficiency.
Question 29
How are contingent liabilities recorded in financial statements?
- A) As current liabilities
- B) As long-term liabilities
- C) Not recorded until certain
- D) As an expense
Answer: C) Not recorded until certain
Explanation: Contingent liabilities are only recorded if the likelihood of payment is probable and the amount can be reasonably estimated.
Question 30
What effect does depreciation have on the income statement?
- A) Increases net income
- B) Decreases net income
- C) Has no effect on net income
- D) Increases retained earnings
Answer: B) Decreases net income
Explanation: Depreciation expense reduces net income as it represents a cost of using long-term assets.
Question 31
When a company sells merchandise on credit, what happens to accounts receivable?
- A) It decreases
- B) It increases
- C) It remains the same
- D) It is written off
Answer: B) It increases
Explanation: Selling merchandise on credit creates a receivable, increasing accounts receivable.
Question 32
What type of financial statement is the balance sheet?
- A) A statement of performance
- B) A statement of cash flow
- C) A statement of position
- D) A statement of changes in equity
Answer: C) A statement of position
Explanation: The balance sheet is also known as the statement of financial position, summarizing assets, liabilities, and equity.
Question 33
What is the accounting treatment for research and development costs?
- A) Capitalized as an asset
- B) Expensed in the period incurred
- C) Deferred until future benefit is realized
- D) Amortized over a period
Answer: B) Expensed in the period incurred
Explanation: R&D costs are typically expensed immediately, as their future benefits are uncertain.
Question 34
Which financial ratio measures the profitability of a company relative to its total assets?
- A) Return on equity
- B) Current ratio
- C) Return on assets
- D) Gross profit margin
Answer: C) Return on assets
Explanation: Return on assets (ROA) indicates how effectively a company utilizes its assets to generate profit.
Question 35
What is the journal entry for a purchase of inventory on account?
- A) Debit inventory, credit cash
- B) Debit inventory, credit accounts payable
- C) Debit accounts payable, credit inventory
- D) Debit cash, credit inventory
Answer: B) Debit inventory, credit accounts payable
Explanation: Purchasing inventory on account increases inventory and creates a liability.
Question 36
How are dividends treated on the balance sheet?
- A) They are reported as an asset
- B) They are reported as a liability when declared
- C) They are not reported on the balance sheet
- D) They are included in retained earnings
Answer: B) They are reported as a liability when declared
Explanation: Dividends become a liability once declared by the board of directors until they are paid.
Question 37
What type of financial analysis involves comparing financial data over multiple periods?
- A) Vertical analysis
- B) Horizontal analysis
- C) Ratio analysis
- D) Trend analysis
Answer: B) Horizontal analysis
Explanation: Horizontal analysis compares financial statement items over different periods to identify trends.
Question 38
What is the primary objective of internal controls?
- A) Enhance profitability
- B) Safeguard assets and ensure accuracy of financial reporting
- C) Increase sales
- D) Reduce expenses
Answer: B) Safeguard assets and ensure accuracy of financial reporting
Explanation: Internal controls help protect assets and maintain the integrity of financial information.
Question 39
What is the purpose of a bank reconciliation?
- A) To compare cash balances with bank statements
- B) To summarize transactions for the month
- C) To prepare the income statement
- D) To assess financial performance
Answer: A) To compare cash balances with bank statements
Explanation: Bank reconciliation ensures that a company's cash records align with those reported by the bank.
Question 40
Which accounting concept requires that businesses report financial results consistently over time?
- A) Monetary unit assumption
- B) Consistency principle
- C) Going concern assumption
- D) Time period concept
Answer: B) Consistency principle
Explanation: The consistency principle mandates that businesses use the same accounting methods from one period to another.
