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web.groovymark@gmail.com
- December 12, 2024
Question 21
What is the role of the auditor in financial accounting?
A) To prepare financial statements
B) To assess the accuracy of financial statements
C) To manage the company’s finances
D) To provide investment advice
Answer: B) To assess the accuracy of financial statements
Explanation: Auditors review financial statements to ensure they are accurate and comply with accounting standards and regulations.
Question 22
Which accounting principle emphasizes that financial statements should be based on actual transactions?
A) Realization principle
B) Cost principle
C) Going concern principle
D) Full disclosure principle
Answer: B) Cost principle
Explanation: The cost principle states that transactions should be recorded at their actual cost at the time of the transaction.
Question 23
What is “capital stock”?
A) The total assets of a company
B) The total liabilities of a company
C) The equity stake owned by shareholders
D) The retained earnings of a company
Answer: C) The equity stake owned by shareholders
Explanation: Capital stock represents the total shares issued by a corporation, signifying ownership by shareholders.
Question 24
Which type of account is “accounts payable”?
A) Asset
B) Liability
C) Equity
D) Revenue
Answer: B) Liability
Explanation: Accounts payable represents amounts owed by the company to suppliers or creditors for goods and services received.
Question 25
What is the purpose of financial ratios?
A) To prepare financial statements
B) To assess a company’s financial performance and condition
C) To calculate tax obligations
D) To audit financial records
Answer: B) To assess a company's financial performance and condition
Explanation: Financial ratios provide insights into various aspects of a company's financial health, allowing for comparisons over time or with other companies.
Question 26
Which of the following is NOT a characteristic of a sole proprietorship?
A) Unlimited liability
B) Single ownership
C) Separate legal entity
D) Simple tax structure
Answer: C) Separate legal entity
Explanation: A sole proprietorship is not a separate legal entity; the owner is personally liable for the business's debts.
Question 27
What is the definition of “retained earnings”?
A) The total income generated in a specific period
B) The cumulative earnings retained in the business after dividends are paid
C) The total equity invested by shareholders
D) The current year’s profits
Answer: B) The cumulative earnings retained in the business after dividends are paid
Explanation: Retained earnings represent the portion of net income that is retained in the company rather than distributed to shareholders as dividends.
Question 28
Which financial statement shows cash inflows and outflows for a specific period?
A) Income statement
B) Cash flow statement
C) Balance sheet
D) Statement of equity
Answer: B) Cash flow statement
Explanation: The cash flow statement provides a detailed account of all cash transactions within a company over a specified period.
Question 29
What is “deferred revenue”?
A) Revenue that has been earned but not yet received
B) Revenue received in advance for services not yet performed
C) Revenue recognized in the current period
D) Revenue that has been recognized but not yet collected
Answer: B) Revenue received in advance for services not yet performed
Explanation: Deferred revenue represents payments received before services are delivered or goods are provided, creating a liability until earned.
Question 30
What is the effect of a stock dividend on total equity?
A) Increases total equity
B) Decreases total equity
C) No effect on total equity
D) Changes total equity to liabilities
Answer: C) No effect on total equity
Explanation: A stock dividend redistributes equity without affecting the overall total; it simply increases the number of shares while reducing retained earnings.
Question 31
Which financial ratio is used to evaluate a company’s profitability?
A) Current ratio
B) Debt to equity ratio
C) Return on assets (ROA)
D) Price to earnings (P/E) ratio
Answer: C) Return on assets (ROA)
Explanation: Return on assets (ROA) measures how efficiently a company utilizes its assets to generate profit.
Question 32
What is the primary function of the statement of changes in equity?
A) To summarize cash inflows and outflows
B) To show changes in the ownership interest over a period
C) To provide a snapshot of assets and liabilities
D) To report revenues and expenses
Answer: B) To show changes in the ownership interest over a period
Explanation: The statement of changes in equity details the movement in equity components, including capital contributions, dividends, and retained earnings over a specific period.
Question 33
Which of the following accounts is a permanent account?
A) Revenue
B) Expense
C) Assets
D) Drawings
Answer: C) Assets
Explanation: Permanent accounts, such as assets, liabilities, and equity, carry their balances into the next accounting period, while temporary accounts are closed at period end.
Question 34
What does “financial flexibility” refer to?
A) The ability to convert short-term assets into cash
B) The ability to adjust financial plans to meet unexpected needs
C) The capacity to maintain liquidity
D) The capability to generate profit
Answer: B) The ability to adjust financial plans to meet unexpected needs
Explanation: Financial flexibility is essential for responding to changes in market conditions, enabling a company to manage its finances proactively.
Question 35
What is the function of the “cash flow from investing activities” section?
A) To track cash received from customers
B) To record cash spent on acquiring or selling long-term assets
C) To monitor cash raised from equity financing
D) To account for cash payments to suppliers
Answer: B) To record cash spent on acquiring or selling long-term assets
Explanation: Investing activities include transactions related to the purchase and sale of physical and financial assets, affecting long-term investment decisions.
Question 36
Which accounting method allows for the recognition of expenses when they are incurred?
A) Cash basis accounting
B) Modified cash basis accounting
C) Accrual basis accounting
D) Tax basis accounting
Answer: C) Accrual basis accounting
Explanation: Accrual basis accounting recognizes expenses in the period they are incurred, regardless of when cash is paid.
Question 37
What is “market capitalization”?
A) The total debt of a company
B) The total value of a company’s outstanding shares
C) The total assets minus total liabilities
D) The company’s annual revenue
Answer: B) The total value of a company's outstanding shares
Explanation: Market capitalization is calculated by multiplying the current share price by the total number of outstanding shares, reflecting the company's market value.
Question 38
Which of the following is an example of an operating activity?
A) Selling equipment
B) Issuing stock
C) Paying salaries to employees
D) Purchasing land
Answer: C) Paying salaries to employees
Explanation: Operating activities include transactions related to the core business operations, such as paying employees and collecting revenue.
Question 39
What is “net income”?
A) Total revenue minus total expenses
B) Total assets minus total liabilities
C) Total cash inflows minus total cash outflows
D) Total equity of the company
Answer: A) Total revenue minus total expenses
Explanation: Net income represents the profit of a company after all expenses have been deducted from total revenue, reflecting overall financial performance.
Question 40
What does the “going concern” principle assume?
A) The company will liquidate its assets soon
B) The company will continue to operate for the foreseeable future
C) The company will not be profitable
D) The company will distribute all profits to shareholders
Answer: B) The company will continue to operate for the foreseeable future
Explanation: The going concern principle assumes that a business will continue its operations indefinitely, which affects how assets and liabilities are valued.
