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web.groovymark@gmail.com
- December 12, 2024
Question 01
What is the primary purpose of financial accounting?
A) To manage internal operations
B) To prepare tax returns
C) To provide financial information to external users
D) To track employee performance
Answer: C) To provide financial information to external users
Explanation: Financial accounting focuses on creating reports and statements that communicate the financial position and performance of a company to external stakeholders like investors and creditors.
Question 02
. Which accounting method recognizes revenue when it is earned, regardless of when cash is received?
A) Cash basis accounting
B) Accrual basis accounting
C) Modified cash basis accounting
D) Tax basis accounting
Answer: B) Accrual basis accounting
Explanation: Accrual basis accounting records revenues and expenses when they are earned or incurred, not when cash is exchanged.
Question 03
What is “accounts receivable”?
A) Money owed to the company by its customers
B) Money the company owes to suppliers
C) Cash on hand
D) An expense incurred
Answer: A) Money owed to the company by its customers
Explanation: Accounts receivable represent outstanding invoices or amounts customers owe to the company for goods or services provided.
Question 04
What does “depreciation” measure?
A) The increase in asset value
B) The reduction in asset value over time
C) The total cost of an asset
D) The cash flow from asset sales
Answer: B) The reduction in asset value over time
Explanation: Depreciation accounts for the wear and tear or obsolescence of tangible assets over their useful lives.
Question 05
Which financial statement shows the company’s financial position at a specific point in time?
A) Income statement
B) Cash flow statement
C) Statement of retained earnings
D) Balance sheet
Answer: D) Balance sheet
Explanation: The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific date.
Question 06
What does the term “liquidity” refer to in finance?
A) The ability to convert assets into cash quickly
B) The amount of cash on hand
C) The profitability of a company
D) The total debt of a company
Answer: A) The ability to convert assets into cash quickly
Explanation: Liquidity measures how easily an asset can be converted into cash without significantly affecting its price.
Question 07
What is the accounting equation?
A) Assets = Liabilities + Equity
B) Assets = Revenue – Expenses
C) Assets = Liabilities – Equity
D) Assets = Expenses + Liabilities
Answer: A) Assets = Liabilities + Equity
Explanation: The accounting equation represents the relationship between a company's assets, liabilities, and shareholders' equity, and it must always be in balance.
Question 08
Which of the following is considered a current asset?
A) Land
B) Equipment
C) Accounts payable
D) Inventory
Answer: D) Inventory
Explanation: Current assets are expected to be converted into cash or used up within one year, and inventory is included in this category.
Question 09
What is the purpose of a trial balance?
A) To determine the profitability of a company
B) To ensure that debits equal credits
C) To prepare financial statements
D) To track cash flow
Answer: B) To ensure that debits equal credits
Explanation: A trial balance lists all account balances to verify that total debits equal total credits, ensuring the accuracy of the ledger.
Question 10
Which financial ratio measures a company’s ability to pay its short-term obligations?
A) Debt to equity ratio
B) Current ratio
C) Return on equity
D) Gross margin ratio
Answer: B) Current ratio
Explanation: The current ratio compares a company's current assets to its current liabilities, indicating its ability to meet short-term financial obligations.
Question 11
What type of account is “accumulated depreciation”?
A) Asset
B) Liability
C) Contra asset
D) Equity
Answer: C) Contra asset
Explanation: Accumulated depreciation is a contra asset account that reduces the book value of fixed assets on the balance sheet.
Question 12
What does the “matching principle” require?
A) Revenue must be recognized when cash is received
B) Expenses should be matched with the revenues they help generate
C) All assets should be recorded at historical cost
D) Liabilities must be paid off within the accounting period
Answer: B) Expenses should be matched with the revenues they help generate
Explanation: The matching principle ensures that expenses are recorded in the same period as the revenues they contribute to, providing a more accurate financial picture.
Question 13
Which of the following is NOT a component of the balance sheet?
A) Assets
B) Liabilities
C) Revenue
D) Equity
Answer: C) Revenue
Explanation: The balance sheet summarizes a company's assets, liabilities, and equity at a specific point in time, while revenue is reported on the income statement.
Question 14
What is the primary focus of managerial accounting?
A) External reporting to shareholders
B) Internal decision-making and management
C) Tax compliance
D) Regulatory compliance
Answer: B) Internal decision-making and management
Explanation: Managerial accounting provides financial and non-financial information to managers for decision-making, planning, and controlling operations.
Question 15
What is the purpose of an income statement?
A) To show the financial position of a company at a specific date
B) To report revenues and expenses over a period of time
C) To summarize cash inflows and outflows
D) To track changes in equity
Answer: B) To report revenues and expenses over a period of time
Explanation: The income statement provides information about a company's profitability by summarizing revenues and expenses over a specific period.
Question 16
Which type of expense is considered “fixed”?
A) Variable expenses that fluctuate with production levels
B) Rent that remains constant regardless of production
C) Utility costs that vary with usage
D) Commissions based on sales
Answer: B) Rent that remains constant regardless of production
Explanation: Fixed expenses do not change with the level of production or sales; they remain constant over a certain period.
Question 17
What does “solvency” refer to in a financial context?
A) The ability to generate profit
B) The ability to meet long-term obligations
C) The ability to convert assets into cash
D) The ability to maintain liquidity
Answer: B) The ability to meet long-term obligations
Explanation: Solvency measures a company's capacity to meet its long-term debts and financial obligations.
Question 18
What is “working capital”?
A) The total value of assets
B) Current assets minus current liabilities
C) Total liabilities
D) Cash reserves available for investment
Answer: B) Current assets minus current liabilities
Explanation: Working capital is a measure of a company's short-term financial health, indicating its ability to cover short-term obligations with short-term assets.
Question 19
What is the “cost principle” in accounting?
A) Assets are recorded at their fair market value
B) Assets are recorded at their historical cost
C) Expenses should be recorded when incurred
D) Revenues should be recognized when earned
Answer: B) Assets are recorded at their historical cost
Explanation: The cost principle states that assets should be recorded on the balance sheet at their original purchase cost, regardless of their current market value.
Question 20
Which of the following best describes “intangible assets”?
A) Physical items that can be touched
B) Assets that have no physical existence
C) Current assets like cash and inventory
D) Long-term liabilities
Answer: B) Assets that have no physical existence
Explanation: Intangible assets are non-physical assets such as patents, trademarks, and goodwill that provide value to a company.
