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web.groovymark@gmail.com
- December 23, 2024
Question 21
What effect does issuing bonds have on a company’s balance sheet?
a) Increases liabilities
b) Increases assets
c) Decreases equity
d) Decreases cash
Answer: a) Increases liabilities
Explanation: Issuing bonds raises capital but also increases long-term liabilities on the balance sheet.
Question 22
Which financial statement shows a company’s profitability over time?
a) Statement of cash flows
b) Income statement
c) Balance sheet
d) Statement of retained earnings
Answer: b) Income statement
Explanation: The income statement shows revenues, expenses, and net income, providing a picture of profitability over a specific period.
Question 23
What is the primary focus of liquidity ratios?
a) To assess long-term profitability
b) To measure a company’s ability to meet short-term obligations
c) To assess a company’s overall debt levels
d) To evaluate shareholders’ equity
Answer: b) To measure a company’s ability to meet short-term obligations
Explanation: Liquidity ratios, such as the current ratio and quick ratio, assess a company’s ability to meet short-term obligations with its available assets.
Question 24
How does selling equipment for a gain affect the income statement?
a) Increases revenue
b) Increases net income
c) Decreases liabilities
d) No effect on income
Answer: b) Increases net income
Explanation: A gain on the sale of equipment increases net income on the income statement.
Question 25
Which of the following is included in cash flow from operating activities?
a) Cash received from issuing bonds
b) Cash paid for dividends
c) Cash received from customers
d) Cash paid for equipment
Answer: c) Cash received from customers
Explanation: Cash flows from operating activities include the cash received and used in the company’s core business operations, such as sales revenue.
Question 26
What is the effect of depreciation on net income and cash flow?
a) Reduces both net income and cash flow
b) Reduces net income but has no effect on cash flow
c) Reduces cash flow but has no effect on net income
d) Increases both net income and cash flow
Answer: b) Reduces net income but has no effect on cash flow
Explanation: Depreciation is a non-cash expense that reduces net income but does not directly impact cash flow.
Question 27
Which of the following is considered a current asset?
a) Land
b) Equipment
c) Accounts receivable
d) Long-term investments
Answer: c) Accounts receivable
Explanation: Accounts receivable are current assets because they are expected to be converted into cash within one year.
Question 28
How does repurchasing shares affect the equity section of the balance sheet?
a) Increases retained earnings
b) Decreases retained earnings
c) Increases shareholders’ equity
d) Decreases shareholders’ equity
Answer: d) Decreases shareholders' equity
Explanation: Repurchasing shares reduces the total number of outstanding shares, decreasing shareholders' equity.
Question 29
Which financial ratio measures how much profit a company makes from its revenue?
a) Price-to-earnings ratio
b) Gross profit margin
c) Current ratio
d) Debt-to-equity ratio
Answer: b) Gross profit margin
Explanation: The gross profit margin measures the percentage of revenue that exceeds the cost of goods sold, indicating profitability.
Question 30
What is the effect of an increase in accounts receivable on cash flow?
a) Increases cash flow
b) Decreases cash flow
c) No effect on cash flow
d) Increases liabilities
Answer: b) Decreases cash flow
Explanation: An increase in accounts receivable means the company has made sales on credit, reducing cash flow from operations.
Question 31
Which of the following increases shareholders’ equity?
a) Paying dividends
b) Repurchasing shares
c) Earning net income
d) Issuing bonds
Answer: c) Earning net income
Explanation: Earning net income increases retained earnings, which in turn increases shareholders' equity.
Question 32
What effect does a decrease in inventory have on working capital?
a) Increases working capital
b) Decreases working capital
c) No effect on working capital
d) Increases cash flow
Answer: a) Increases working capital
Explanation: A decrease in inventory frees up cash or reduces the amount of current assets tied up in inventory, increasing working capital.
Question 33
Which financial statement provides a summary of cash inflows and outflows?
a) Income statement
b) Balance sheet
c) Statement of cash flows
d) Statement of retained earnings
Answer: c) Statement of cash flows
Explanation: The statement of cash flows provides a detailed breakdown of a company’s cash inflows and outflows from operating, investing, and financing activities.
Question 34
What is the formula for calculating the debt-to-equity ratio?
a) Total liabilities divided by total assets
b) Total liabilities divided by total equity
c) Current liabilities divided by current assets
d) Total debt divided by retained earnings
Answer: b) Total liabilities divided by total equity
Explanation: The debt-to-equity ratio measures the proportion of a company’s liabilities to its shareholders' equity.
Question 35
How does purchasing inventory on credit affect the balance sheet?
a) Increases liabilities and decreases equity
b) Increases liabilities and increases assets
c) Decreases cash and increases inventory
d) Increases liabilities and decreases cash
Answer: b) Increases liabilities and increases assets
Explanation: Purchasing inventory on credit increases both liabilities (accounts payable) and assets (inventory).
Question 36
Which financial metric measures a company’s profitability in relation to its shareholders’ equity?
a) Return on equity (ROE)
b) Gross margin
c) Quick ratio
d) Asset turnover ratio
Answer: a) Return on equity (ROE)
Explanation: ROE measures how effectively a company uses its shareholders’ equity to generate profit.
Question 37
What is the purpose of the matching principle in accounting?
a) To match liabilities with equity
b) To ensure expenses are recorded in the same period as the revenues they help generate
c) To match revenue with cash inflows
d) To match assets with liabilities
Answer: b) To ensure expenses are recorded in the same period as the revenues they help generate
Explanation: The matching principle requires that expenses be recognized in the same period as the related revenues to provide a more accurate picture of profitability.
Question 38
How does paying down long-term debt affect the balance sheet?
a) Increases assets
b) Decreases liabilities
c) Increases equity
d) Decreases retained earnings
Answer: b) Decreases liabilities
Explanation: Paying down long-term debt reduces the company’s liabilities on the balance sheet.
Question 39
Which of the following is an example of a non-operating expense?
a) Cost of goods sold
b) Research and development expenses
c) Interest expense
d) Salaries and wages
Answer: c) Interest expense
Explanation: Interest expense is considered a non-operating expense because it is related to financing activities rather than core business operations.
Question 40
What is the effect of an increase in wages payable on the balance sheet?
a) Increases assets
b) Increases liabilities
c) Decreases cash
d) Increases retained earnings
Answer: b) Increases liabilities
Explanation: An increase in wages payable indicates that the company owes more in wages, increasing current liabilities.
