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web.groovymark@gmail.com
- December 12, 2024
Question 21
How does the “matching principle” affect financial statements?
A) It requires revenue to be recognized before expenses
B) It matches expenses to revenues in the same period
C) It mandates the use of cash basis accounting
D) It prohibits the recognition of deferred revenue
Answer: B) It matches expenses to revenues in the same period
Explanation: The matching principle ensures that expenses incurred to generate revenue are recorded in the same accounting period as the revenue.
Question 22
What is the accounting equation?
A) Assets = Liabilities + Owner’s Equity
B) Assets + Liabilities = Owner’s Equity
C) Assets = Revenues – Expenses
D) Liabilities = Assets + Owner’s Equity
Answer: A) Assets = Liabilities + Owner’s Equity
Explanation: The accounting equation represents the relationship between a company’s assets, liabilities, and equity, forming the foundation of double-entry accounting.
Question 23
Which of the following is not a component of the cash flow from operating activities?
A) Cash receipts from sales
B) Cash payments to suppliers
C) Cash proceeds from issuing debt
D) Cash payments for wages
Answer: C) Cash proceeds from issuing debt
Explanation: Cash proceeds from issuing debt are classified under financing activities, not operating activities.
Question 24
What is the impact of an increase in inventory on cash flow?
A) It increases cash flow.
B) It decreases cash flow.
C) It has no effect on cash flow.
D) It depends on sales levels.
Answer: B) It decreases cash flow.
Explanation: An increase in inventory indicates that cash has been used to purchase goods, reducing available cash flow.
Question 25
Which type of liability is due within one year?
A) Long-term liability
B) Current liability
C) Contingent liability
D) Non-current liability
Answer: B) Current liability
Explanation: Current liabilities are obligations that a company expects to settle within one year.
Question 26
Which of the following is an example of a cash equivalent?
A) Accounts receivable
B) Stocks
C) Treasury bills
D) Long-term investments
Answer: C) Treasury bills
Explanation: Treasury bills are considered cash equivalents because they are short-term, highly liquid investments that can be quickly converted to cash.
Question 27
What is “accumulated depreciation”?
A) The total value of a company’s assets
B) The reduction in value of an asset over time
C) An expense recorded in the income statement
D) The cash paid for an asset
Answer: B) The reduction in value of an asset over time
Explanation: Accumulated depreciation reflects the total depreciation expense that has been recognized against a fixed asset over its useful life.
Question 28
Which financial statement summarizes a company’s revenues and expenses over a specific period?
A) Income Statement
B) Balance Sheet
C) Statement of Cash Flows
D) Statement of Stockholders’ Equity
Answer: A) Income Statement
Explanation: The income statement summarizes revenues and expenses, indicating the company’s profitability over a particular time frame.
Question 29
What is a “liquidity ratio”?
A) A measure of a company’s profitability
B) A measure of a company’s solvency
C) A measure of a company’s ability to meet short-term obligations
D) A measure of a company’s operational efficiency
Answer: C) A measure of a company's ability to meet short-term obligations
Explanation: Liquidity ratios evaluate a company’s ability to pay off its short-term debts and obligations.
Question 30
What does a high debt-to-equity ratio indicate?
A) The company is less leveraged
B) The company is more leveraged
C) The company has low financial risk
D) The company has high liquidity
Answer: B) The company is more leveraged
Explanation: A high debt-to-equity ratio suggests that a company is relying more on debt financing compared to equity financing, increasing financial risk.
Question 31
What is the purpose of the statement of cash flows?
A) To show changes in equity
B) To summarize revenues and expenses
C) To provide insights into cash inflows and outflows
D) To assess financial position
Answer: C) To provide insights into cash inflows and outflows
Explanation: The statement of cash flows tracks cash movements, providing information about how cash is generated and used within the business.
Question 32
What is “owner’s equity”?
A) The total liabilities of a company
B) The residual interest in the assets of a company after deducting liabilities
C) The total revenue generated
D) The cash available for operations
Answer: B) The residual interest in the assets of a company after deducting liabilities
Explanation: Owner's equity represents the owner's claim on the assets of the business, calculated as total assets minus total liabilities.
Question 33
Which of the following is classified as a long-term liability?
A) Accounts payable
B) Notes payable due in six months
C) Bonds payable due in ten years
D) Accrued expenses
Answer: C) Bonds payable due in ten years
Explanation: Long-term liabilities are obligations that are not due within the next year, such as bonds payable that mature in ten years.
Question 34
What is the significance of the “operating cycle” in accounting?
A) It measures long-term financial stability
B) It assesses cash flow timing
C) It determines capital structure
D) It evaluates inventory turnover
Answer: B) It assesses cash flow timing
Explanation: The operating cycle represents the time taken to convert inventory into cash, impacting cash flow timing and working capital management.
Question 35
What does “retained earnings” represent?
A) Total assets minus total liabilities
B) Cumulative profits that have not been distributed to shareholders
C) Current year’s profits only
D) Total cash available for dividends
Answer: B) Cumulative profits that have not been distributed to shareholders
Explanation: Retained earnings are the portion of net income that is retained by the company instead of being paid out as dividends to shareholders.
Question 36
Which accounting principle ensures that expenses are recorded in the same period as the related revenues?
A) Cost principle
B) Matching principle
C) Revenue recognition principle
D) Full disclosure principle
Answer: B) Matching principle
Explanation: The matching principle requires that expenses incurred to generate revenues are recognized in the same accounting period as the revenues.
Question 37
What is the role of “notes to financial statements”?
A) To summarize key figures
B) To provide additional explanations and context
C) To list accounting policies
D) To detail cash flow
Answer: B) To provide additional explanations and context
Explanation: Notes to financial statements offer supplementary information that enhances the understanding of the financial statements and the company’s financial position.
Question 38
How is “depreciation expense” categorized in the income statement?
A) As a current asset
B) As a liability
C) As an operating expense
D) As revenue
Answer: C) As an operating expense
Explanation: Depreciation expense is classified as an operating expense, reflecting the allocation of an asset’s cost over its useful life.
Question 39
What does a “trial balance” ensure?
A) That total debits equal total credits
B) That revenue exceeds expenses
C) That assets are accurately valued
D) That liabilities are properly reported
Answer: A) That total debits equal total credits
Explanation: A trial balance is used to verify that total debits and credits in the accounting records are equal, ensuring the books are balanced.
Question 40
Which of the following is a characteristic of a corporation?
A) Limited liability for owners
B) Sole proprietorship
C) Unlimited liability for owners
D) Pass-through taxation
Answer: A) Limited liability for owners
Explanation: Corporations provide limited liability protection, meaning owners are not personally liable for the company’s debts beyond their investment.
