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web.groovymark@gmail.com
- December 12, 2024
Question 01
What is the purpose of the balance sheet?
A) To summarize revenues and expenses
B) To provide a snapshot of a company’s financial position at a specific time
C) To report cash flows from operations
D) To show changes in equity over a period
Answer: B) To provide a snapshot of a company's financial position at a specific time
Explanation: The balance sheet displays the company's assets, liabilities, and equity as of a specific date, reflecting its financial health.
Question 02
Which financial statement provides information about a company’s liquidity?
A) Income Statement
B) Balance Sheet
C) Statement of Cash Flows
D) Statement of Changes in Equity
Answer: B) Balance Sheet
Explanation: The balance sheet shows the company's assets and liabilities, which helps assess its ability to meet short-term obligations.
Question 03
What does the term “liquidity” refer to in accounting?
A) The profitability of a company
B) The ability to convert assets into cash quickly
C) The overall debt levels of a company
D) The cash flow from operations
Answer: B) The ability to convert assets into cash quickly
Explanation: Liquidity measures how readily a company can meet its short-term obligations using its current assets.
Question 04
Which of the following is classified as a current asset?
A) Land
B) Machinery
C) Inventory
D) Long-term investments
Answer: C) Inventory
Explanation: Inventory is considered a current asset because it is expected to be sold or used within one year.
Question 05
What classification does “accounts payable” fall under on the balance sheet?
A) Current Assets
B) Long-term Liabilities
C) Current Liabilities
D) Stockholders’ Equity
Answer: C) Current Liabilities
Explanation: Accounts payable represents amounts owed to suppliers and is due within the current operating cycle, making it a current liability.
Question 06
What are “intangible assets”?
A) Physical assets that can be touched
B) Long-lived assets with no physical substance
C) Current assets held for sale
D) Cash and cash equivalents
Answer: B) Long-lived assets with no physical substance
Explanation: Intangible assets, such as patents and trademarks, lack physical form but still provide economic benefits.
Question 07
Which of the following is a component of stockholders’ equity?
A) Accounts Payable
B) Capital Stock
C) Inventory
D) Long-term Debt
Answer: B) Capital Stock
Explanation: Capital stock represents the ownership shares issued by a company to its shareholders and is part of stockholders' equity.
Question 08
What is the significance of the “matching principle” in accounting?
A) It determines the value of assets.
B) It states that expenses should be recognized in the same period as the revenues they help generate.
C) It provides a method for valuing inventory.
D) It is used to calculate cash flows.
Answer: B) It states that expenses should be recognized in the same period as the revenues they help generate.
Explanation: The matching principle ensures that financial statements reflect the appropriate relationship between revenues and expenses.
Question 09
How is “working capital” calculated?
A) Total Assets – Total Liabilities
B) Current Assets – Current Liabilities
C) Current Assets + Current Liabilities
D) Total Equity – Total Liabilities
Answer: B) Current Assets - Current Liabilities
Explanation: Working capital is a measure of a company's short-term financial health and is calculated by subtracting current liabilities from current assets.
Question 10
What is the primary role of the Statement of Cash Flows?
A) To summarize income and expenses
B) To report cash inflows and outflows during a specific period
C) To assess the value of assets and liabilities
D) To provide information about equity changes
Answer: B) To report cash inflows and outflows during a specific period
Explanation: The Statement of Cash Flows details how cash is generated and spent across operating, investing, and financing activities.
Question 11
Which of the following best describes “current liabilities”?
A) Obligations due in one year or one operating cycle
B) Long-term debts
C) Equity investments
D) Cash reserves
Answer: A) Obligations due in one year or one operating cycle
Explanation: Current liabilities are financial obligations that a company must settle within the near term, typically within a year.
Question 12
What is meant by “equity financing”?
A) Borrowing funds to invest in the business
B) Issuing shares to raise capital
C) Using retained earnings for business expansion
D) Paying off debts
Answer: B) Issuing shares to raise capital
Explanation: Equity financing involves raising capital through the sale of shares, giving investors a claim on the company's assets and earnings.
Question 13
What does the term “accumulated depreciation” refer to?
A) The initial cost of an asset
B) The total depreciation expense that has been recognized against an asset over time
C) The market value of an asset
D) The current value of a company’s equity
Answer: B) The total depreciation expense that has been recognized against an asset over time
Explanation: Accumulated depreciation represents the cumulative amount of an asset's cost that has been allocated as an expense over its useful life.
Question 14
What is the adjusting journal entry for accrued salaries?
A) Debit Salaries Expense; Credit Cash
B) Debit Salaries Payable; Credit Salaries Expense
C) Debit Salaries Expense; Credit Salaries Payable
D) Debit Cash; Credit Salaries Expense
Answer: C) Debit Salaries Expense; Credit Salaries Payable
Explanation: This entry recognizes salaries that have been incurred but not yet paid at the end of the accounting period.
Question 15
What does the term “financial flexibility” mean?
A) The ability to invest in a range of projects
B) The capacity to quickly convert assets to cash
C) The ability to respond and adapt to financial adversity
D) The profitability of a company
Answer: C) The ability to respond and adapt to financial adversity
Explanation: Financial flexibility refers to a company's ability to navigate unexpected financial challenges and opportunities effectively.
Question 16
Which of the following describes a “trial balance”?
A) A summary of income and expenses
B) A list of all accounts and their balances at a specific time
C) A report of cash flows for a period
D) An analysis of stockholders’ equity
Answer: B) A list of all accounts and their balances at a specific time
Explanation: The trial balance is prepared to verify that total debits equal total credits before financial statements are generated.
Question 17
What does “deferred revenue” represent?
A) Cash received for services not yet performed
B) Revenue that has been recognized in the current period
C) Cash paid for future services
D) A liability that has been paid off
Answer: A) Cash received for services not yet performed
Explanation: Deferred revenue is a liability that arises when payment is received before the delivery of goods or services.
Question 18
How should “allowance for doubtful accounts” be recorded?
A) As a current asset
B) As a contra asset account
C) As a liability
D) As an equity account
Answer: B) As a contra asset account
Explanation: The allowance for doubtful accounts reduces the total accounts receivable reported on the balance sheet to reflect expected uncollectible amounts.
Question 19
What is the effect of an increase in accounts receivable on cash flows?
A) It increases cash flows.
B) It decreases cash flows.
C) It has no effect on cash flows.
D) It reflects a cash inflow.
Answer: B) It decreases cash flows.
Explanation: An increase in accounts receivable indicates that more sales have been made on credit, which means cash has not been collected, reducing cash flows.
Question 20
What should be done when an asset is sold for more than its book value?
A) The gain is ignored in the cash flow statement.
B) The gain is recorded in the operating activities section.
C) The gain is subtracted from net income in the cash flow statement.
D) The gain is included in investing activities.
Answer: C) The gain is subtracted from net income in the cash flow statement.
Explanation: Gains on the sale of assets need to be deducted in the cash flow from operating activities to adjust for non-cash income.
