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web.groovymark@gmail.com
- December 12, 2024
Question 21
What are “cash equivalents”?
A) Long-term investments
B) Cash on hand
C) Short-term, highly liquid investments that are easily convertible to cash
D) Inventory held for sale
Answer: C) Short-term, highly liquid investments that are easily convertible to cash
Explanation: Cash equivalents are investments that can quickly be turned into cash, typically with a maturity of three months or less.
Question 22
What is the adjusting journal entry when inventory is counted and found to be less than what was recorded?
A) Debit Cost of Goods Sold; Credit Inventory
B) Debit Inventory; Credit Cost of Goods Sold
C) Debit Inventory; Credit Cash
D) Debit Cost of Goods Sold; Credit Cash
Answer: A) Debit Cost of Goods Sold; Credit Inventory
Explanation: This entry reflects the loss of inventory, transferring the value to the cost of goods sold for financial reporting.
Question 23
What financial metric indicates the company’s ability to pay its short-term obligations?
A) Debt-to-equity ratio
B) Current ratio
C) Return on equity
D) Earnings per share
Answer: B) Current ratio
Explanation: The current ratio measures a company’s ability to cover its short-term liabilities with its short-term assets.
Question 24
What does a high accounts receivable turnover ratio indicate?
A) Inefficient collection of receivables
B) Effective collection of receivables
C) High levels of uncollectible accounts
D) Declining sales
Answer: B) Effective collection of receivables
Explanation: A high turnover ratio means that a company is collecting its receivables quickly and efficiently.
Question 25
Which principle requires that a company report its financial results in a consistent manner?
A) Economic entity assumption
B) Consistency principle
C) Going concern principle
D) Cost principle
Answer: B) Consistency principle
Explanation: The consistency principle ensures that the same accounting methods are applied throughout financial reporting periods.
Question 26
What should a company do if it has uncollectible accounts receivable?
A) Ignore them in financial statements
B) Write them off directly as an expense
C) Adjust the allowance for doubtful accounts
D) Increase sales forecasts
Answer: C) Adjust the allowance for doubtful accounts
Explanation: Adjusting the allowance for doubtful accounts reflects the estimated uncollectible amounts on the balance sheet.
Question 27
How is “net income” calculated?
A) Total revenues minus total liabilities
B) Total revenues minus total expenses
C) Total assets minus total liabilities
D) Total sales minus total cost of goods sold
Answer: B) Total revenues minus total expenses
Explanation: Net income represents the profit of a company after deducting all expenses from total revenues.
Question 28
What is the adjusting entry for prepaid expenses that have been consumed?
A) Debit Prepaid Expense; Credit Cash
B) Debit Expense; Credit Prepaid Expense
C) Debit Cash; Credit Expense
D) Debit Expense; Credit Accounts Payable
Answer: B) Debit Expense; Credit Prepaid Expense
Explanation: This entry recognizes the expense incurred as a result of consuming a prepaid asset during the period.
Question 29
What does the term “capital stock” refer to?
A) The total liabilities of a company
B) The ownership shares issued to shareholders
C) Retained earnings not distributed as dividends
D) Cash reserves held for investment
Answer: B) The ownership shares issued to shareholders
Explanation: Capital stock reflects the equity ownership in the company, providing shareholders with rights to vote and receive dividends.
Question 30
Which financial statement reports a company’s revenue and expenses over a period of time?
A) Balance Sheet
B) Statement of Cash Flows
C) Income Statement
D) Statement of Changes in Equity
Answer: C) Income Statement
Explanation: The income statement summarizes revenues and expenses, resulting in net income or loss for a specific period.
Question 31
What is “depreciation”?
A) The decrease in value of an asset over time
B) The total cost of an asset
C) The cash paid for an asset
D) The market value of an asset
Answer: A) The decrease in value of an asset over time
Explanation: Depreciation allocates the cost of tangible assets over their useful lives, reflecting the asset's loss of value.
Question 32
Which of the following is a common method of calculating depreciation?
A) Straight-line method
B) Market value method
C) Present value method
D) Cash flow method
Answer: A) Straight-line method
Explanation: The straight-line method spreads the cost of an asset evenly over its useful life.
Question 33
What is the role of an “auditor”?
A) To prepare financial statements
B) To assess the accuracy of financial records
C) To manage company investments
D) To set accounting standards
Answer: B) To assess the accuracy of financial records
Explanation: An auditor reviews financial statements to ensure compliance with accounting principles and the truthfulness of financial reporting.
Question 34
What is “goodwill” in accounting terms?
A) The reputation of a company
B) An intangible asset resulting from business acquisitions
C) The value of physical assets
D) The net worth of a company
Answer: B) An intangible asset resulting from business acquisitions
Explanation: Goodwill arises when a company acquires another for more than the fair value of its net identifiable assets, reflecting the value of its brand and customer relationships.
Question 35
How is the “debt-to-equity ratio” calculated?
A) Total liabilities / Total assets
B) Total equity / Total liabilities
C) Total liabilities / Total equity
D) Total assets / Total equity
Answer: C) Total liabilities / Total equity
Explanation: The debt-to-equity ratio measures a company's financial leverage, indicating the proportion of debt to equity financing.
Question 36
What is the primary purpose of the statement of stockholders’ equity?
A) To report cash flows during a period
B) To summarize revenues and expenses
C) To show changes in equity from transactions with shareholders
D) To assess financial position at a specific time
Answer: C) To show changes in equity from transactions with shareholders
Explanation: The statement of stockholders' equity details changes in equity accounts over a reporting period, including new stock issues and dividend payments.
Question 37
Which of the following represents an outflow of cash?
A) Borrowing funds
B) Receiving cash from sales
C) Paying suppliers
D) Issuing new shares
Answer: C) Paying suppliers
Explanation: Paying suppliers represents a cash outflow as it reduces the company's cash balance.
Question 38
What is a “contingent liability”?
A) An obligation that has been settled
B) A potential obligation that may arise from past events
C) A liability that is guaranteed
D) An asset that will generate future cash flows
Answer: B) A potential obligation that may arise from past events
Explanation: A contingent liability is a potential obligation that depends on future events, such as pending litigation outcomes.
Question 39
What is the “cost principle” in accounting?
A) Assets are reported at their market value
B) Assets are recorded at their historical cost
C) Liabilities are recorded at their future value
D) Revenues are recognized when earned
Answer: B) Assets are recorded at their historical cost
Explanation: The cost principle dictates that assets be recorded at their original purchase price, providing reliability in financial reporting.
Question 40
Which method is used to determine the value of inventory on hand?
A) FIFO
B) LIFO
C) Weighted average cost
D) All of the above
Answer: D) All of the above
Explanation: Different methods, including FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average cost, can be used to value inventory.
