BOOKKEEPING TEST 01
Bookkeeping: Recording Financial Transaction Test 01 - Instructions
- Format: This exam consists of 100 multiple-choice questions. Each question has one correct answer.
- Answering Questions: Choose the correct answer from the options provided for each question.
- Scoring:
- If your answer is correct, the system will mark it as correct and provide a brief explanation.
- If your answer is incorrect, the system will mark it as wrong and show the correct answer with an explanation.
- Report Card: At the end of the exam, you'll see a report card that summarizes your performance:
- Total Questions Attempted: The number of questions you answered.
- Correct Answers: How many answers were correct.
- Wrong Answers: How many answers were incorrect.
- Percentage: The percentage of correct answers.
- Ongoing Marking: The system will automatically mark your answers as you proceed through the exam, so you will see your results in real-time.
- Technical Issues: If you encounter any problems, please contact support at business@vedastuswatosha.sbs.
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FA1 Recording Financial Transaction Questions
Question 1: What is the correct double-entry bookkeeping entry when a company purchases office supplies worth TZS 500,000 on credit?
A) Debit Cash, Credit Office Supplies
B) Debit Office Supplies, Credit Cash
C) Debit Office Supplies, Credit Accounts Payable
D) Debit Accounts Payable, Credit Office Supplies
Answer: C) Debit Office Supplies, Credit Accounts Payable. In double-entry bookkeeping, office supplies are an asset, and purchasing on credit increases both the asset and the liability (Accounts Payable).
Question 2: Which document is typically issued by a supplier to adjust a previously issued invoice?
A) Sales Invoice
B) Debit Note
C) Delivery Note
D) Credit Note
Answer: D) Credit Note. A credit note is issued by a supplier to reduce or cancel the amount previously billed on a sales invoice.
Question 3: When recording a cash sale of TZS 1,000,000 including VAT, what is the correct double-entry bookkeeping entry?
A) Debit Cash, Credit Accounts Receivable
B) Debit Sales, Credit Cash
C) Debit Cash, Credit Sales and VAT Payable
D) Debit Sales and VAT Payable, Credit Cash
Answer: C) Debit Cash, Credit Sales and VAT Payable. A cash sale increases both the cash account and the liability for VAT while recording the revenue from sales.
Question 4: Which financial statement element represents the residual interest in the assets of the entity after deducting liabilities?
A) Liabilities
B) Equity
C) Revenues
D) Expenses
Answer: B) Equity. Equity represents the owners' claim after all liabilities have been deducted from the assets.
Question 5: Which of the following is a non-current asset?
A) Inventory
B) Accounts Receivable
C) Cash at Bank
D) Property, Plant, and Equipment
Answer: D) Property, Plant, and Equipment. Non-current assets are long-term investments or assets that are not expected to be converted into cash within one year.
Question 6: What is the correct double-entry for recording depreciation of TZS 200,000 on a delivery vehicle?
A) Debit Accumulated Depreciation, Credit Cash
B) Debit Depreciation Expense, Credit Vehicle
C) Debit Vehicle, Credit Depreciation Expense
D) Debit Depreciation Expense, Credit Accumulated Depreciation
Answer: D) Debit Depreciation Expense, Credit Accumulated Depreciation. Depreciation expense is recorded in the income statement, and accumulated depreciation reduces the carrying amount of the asset in the balance sheet.
Question 7: What is the purpose of a trial balance in accounting?
A) To check the mathematical accuracy of the ledger accounts
B) To prepare the statement of financial position
C) To calculate profit and loss for the period
D) To record business transactions
Answer: A) To check the mathematical accuracy of the ledger accounts. A trial balance is used to verify that total debits equal total credits in the accounting system.
Question 8: Which account would normally have a credit balance?
A) Inventory
B) Accounts Payable
C) Prepaid Expenses
D) Office Supplies
Answer: B) Accounts Payable. Accounts Payable is a liability account, and liabilities normally have a credit balance.
Question 9: What is the effect of an accrual adjustment on the financial statements?
A) It reduces expenses and increases revenue
B) It increases both expenses and liabilities
C) It reduces liabilities and increases equity
D) It increases assets and decreases expenses
Answer: B) It increases both expenses and liabilities. An accrual adjustment records expenses incurred but not yet paid, increasing both expenses and liabilities on the balance sheet.
Question 10: Which accounting principle requires that expenses be matched with revenues in the period they are incurred?
A) Matching Principle
B) Revenue Recognition Principle
C) Historical Cost Principle
D) Full Disclosure Principle
Answer: A) Matching Principle. The matching principle ensures that expenses are recorded in the same period as the revenues they help to generate, leading to accurate profit calculation.
Question 11: What is the impact of recording accrued expenses at the end of the period?
A) Increases assets and decreases liabilities
B) Decreases expenses and increases liabilities
C) Increases expenses and liabilities
D) Increases assets and expenses
Answer: C) Increases expenses and liabilities. Accrued expenses are recorded to reflect expenses incurred but not yet paid, which increases both expenses and liabilities on the financial statements.
Question 12: Which of the following is an example of a contra account?
A) Accounts Receivable
B) Accumulated Depreciation
C) Cash at Bank
D) Inventory
Answer: B) Accumulated Depreciation. A contra account reduces the balance of a related account; accumulated depreciation reduces the carrying value of property, plant, and equipment.
Question 13: Which of the following items is typically included in the statement of changes in equity?
A) Revenue
B) Dividends Paid
C) Cost of Goods Sold
D) Income Tax Expense
Answer: B) Dividends Paid. The statement of changes in equity shows changes in equity components, including dividends paid, which reduce retained earnings.
Question 14: How are prepaid expenses recorded in the financial statements?
A) As an asset in the balance sheet
B) As an expense in the income statement
C) As a liability in the balance sheet
D) As equity in the balance sheet
Answer: A) As an asset in the balance sheet. Prepaid expenses represent payments made in advance for goods or services to be received in the future, and they are recorded as assets until they are consumed.
Question 15: What is the accounting equation?
A) Assets = Liabilities + Equity
B) Assets = Liabilities + Revenue
C) Liabilities = Assets + Equity
D) Equity = Assets + Liabilities
Answer: A) Assets = Liabilities + Equity. The accounting equation is the foundation of double-entry bookkeeping and represents the relationship between a company's assets, liabilities, and equity.
Question 16: How is interest earned on a bank deposit recorded in the accounting records?
A) Debit Cash, Credit Interest Revenue
B) Debit Interest Expense, Credit Cash
C) Debit Interest Revenue, Credit Cash
D) Debit Cash, Credit Interest Expense
Answer: A) Debit Cash, Credit Interest Revenue. Interest earned increases cash and is recorded as revenue in the income statement.
Question 17: What is the main purpose of the cash flow statement?
A) To provide information about a company's cash receipts and cash payments during a period
B) To show a company’s profit or loss
C) To measure a company’s financial position at a specific point in time
D) To report changes in equity
Answer: A) To provide information about a company's cash receipts and cash payments during a period. The cash flow statement helps users assess a company’s liquidity and solvency.
Question 18: When is revenue recognized under the accrual basis of accounting?
A) When it is earned, regardless of when cash is received
B) When cash is received
C) When expenses are incurred
D) When liabilities are settled
Answer: A) When it is earned, regardless of when cash is received. Under the accrual basis, revenue is recognized when earned, even if payment has not been received yet.
Question 19: Which financial statement shows a company’s assets, liabilities, and equity at a specific point in time?
A) Income Statement
B) Cash Flow Statement
C) Balance Sheet
D) Statement of Changes in Equity
Answer: C) Balance Sheet. The balance sheet provides a snapshot of a company’s financial position by showing its assets, liabilities, and equity at a specific date.
Question 20: How is a dividend declared but not yet paid recorded in the financial statements?
A) Debit Retained Earnings, Credit Dividends Payable
B) Debit Dividends Expense, Credit Retained Earnings
C) Debit Cash, Credit Dividends Payable
D) Debit Dividends Payable, Credit Cash
Answer: A) Debit Retained Earnings, Credit Dividends Payable. Declaring a dividend reduces retained earnings and creates a liability until the dividend is paid.
Question 21: How is bad debt expense typically recognized in the financial statements?
A) Debit Accounts Receivable, Credit Bad Debt Expense
B) Debit Bad Debt Expense, Credit Cash
C) Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts
D) Debit Allowance for Doubtful Accounts, Credit Bad Debt Expense
Answer: C) Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts. Bad debt expense is recognized by estimating uncollectible accounts and recording an allowance for doubtful accounts.
Question 22: What is the effect of capitalizing an expenditure rather than expensing it?
A) Increases assets and defers expense recognition
B) Decreases assets and defers expense recognition
C) Decreases liabilities and defers expense recognition
D) Increases liabilities and defers expense recognition
Answer: A) Increases assets and defers expense recognition. Capitalizing an expenditure records it as an asset on the balance sheet, and the expense is recognized over time through depreciation or amortization.
Question 23: How is the sale of equipment for a gain recorded in the financial statements?
A) Debit Cash, Debit Accumulated Depreciation, Credit Equipment, Credit Gain on Sale
B) Debit Cash, Credit Equipment, Credit Gain on Sale
C) Debit Equipment, Credit Cash, Credit Gain on Sale
D) Debit Cash, Credit Equipment, Debit Gain on Sale
Answer: A) Debit Cash, Debit Accumulated Depreciation, Credit Equipment, Credit Gain on Sale. The cash received is recorded, and the equipment and accumulated depreciation are removed from the books, with any gain credited to the income statement.
Question 24: Which of the following is NOT a component of the financial statements?
A) Balance Sheet
B) Trial Balance
C) Income Statement
D) Cash Flow Statement
Answer: B) Trial Balance. The trial balance is an internal report used to ensure that total debits equal total credits; it is not part of the published financial statements.
Question 25: How is goodwill recorded in a company’s financial statements?
A) As an intangible asset
B) As a current liability
C) As a contingent liability
D) As part of equity
Answer: A) As an intangible asset. Goodwill is recorded when a company acquires another entity for more than the fair value of its identifiable net assets and is considered an intangible asset.
Question 26: What is the impact of amortizing a bond premium on a company’s financial statements?
A) Increases interest expense over time
B) Decreases the carrying value of the bond over time
C) Decreases interest expense over time
D) Increases the carrying value of the bond over time
Answer: C) Decreases interest expense over time. When a bond is issued at a premium, the premium reduces the effective interest expense recognized in each period, and the carrying value of the bond decreases as the premium is amortized.
Question 27: Which accounting principle requires companies to record expenses in the period in which they are incurred, regardless of when cash is paid?
A) Matching Principle
B) Revenue Recognition Principle
C) Historical Cost Principle
D) Full Disclosure Principle
Answer: A) Matching Principle. The matching principle requires that expenses be recognized in the same period as the revenues they help generate, ensuring that financial statements reflect a company's performance accurately.
Question 28: What is the purpose of a subsidiary ledger?
A) To summarize the balances of all general ledger accounts
B) To report a company’s financial position
C) To provide detailed information about individual accounts, such as accounts receivable and accounts payable
D) To calculate net income
Answer: C) To provide detailed information about individual accounts, such as accounts receivable and accounts payable. A subsidiary ledger contains detailed transactions for specific general ledger accounts, supporting the summary balances in the general ledger.
Question 29: How is a contingent liability that is probable and can be reasonably estimated recorded in the financial statements?
A) As a liability in the balance sheet
B) As an equity adjustment
C) As a footnote disclosure only
D) It is not recorded
Answer: A) As a liability in the balance sheet. A contingent liability that is probable and can be estimated is recognized as a liability in the balance sheet, with a corresponding expense recorded in the income statement.
Question 30: Which accounting principle ensures that financial information is reported in a manner that is complete, neutral, and free from bias?
A) Historical Cost Principle
B) Full Disclosure Principle
C) Matching Principle
D) Going Concern Principle
Answer: B) Full Disclosure Principle. The full disclosure principle requires that all relevant financial information is disclosed in the financial statements, ensuring transparency and completeness.
Question 31: How is the payment of dividends recorded in the financial statements?
A) Debit Retained Earnings, Credit Cash
B) Debit Dividends Payable, Credit Retained Earnings
C) Debit Dividends Payable, Credit Cash
D) Debit Cash, Credit Retained Earnings
Answer: C) Debit Dividends Payable, Credit Cash. The payment of dividends decreases the dividends payable liability and cash on the balance sheet.
Question 32: When inventory is purchased using the periodic inventory system, how is the purchase recorded?
A) Debit Inventory, Credit Accounts Payable
B) Debit Purchases, Credit Accounts Payable
C) Debit Cost of Goods Sold, Credit Inventory
D) Debit Accounts Payable, Credit Purchases
Answer: B) Debit Purchases, Credit Accounts Payable. Under the periodic system, inventory purchases are recorded in the purchases account, and the cost of goods sold is not determined until the end of the period.
Question 33: How are sales made on credit recorded in the financial statements?
A) Debit Sales, Credit Accounts Receivable
B) Debit Accounts Receivable, Credit Sales
C) Debit Cash, Credit Sales
D) Debit Sales, Credit Cash
Answer: B) Debit Accounts Receivable, Credit Sales. When sales are made on credit, the company recognizes the receivable and the revenue simultaneously.
Question 34: What is the effect of issuing shares at a premium?
A) Increases both share capital and share premium
B) Decreases share capital
C) Increases share premium only
D) Increases share capital only
Answer: A) Increases both share capital and share premium. When shares are issued at a premium, the excess amount over the par value is credited to the share premium account, while the par value increases share capital.
Question 35: How is depreciation expense reported in the financial statements?
A) As an expense in the income statement and a reduction in the asset's carrying value in the balance sheet
B) As a liability in the balance sheet
C) As an increase in cash flow from operating activities
D) As an increase in equity
Answer: A) As an expense in the income statement and a reduction in the asset's carrying value in the balance sheet. Depreciation expense reduces net income and also decreases the carrying value of fixed assets.
Question 36: What is the impact of writing off uncollectible accounts on the financial statements?
A) Decreases cash
B) Increases accounts receivable
C) Decreases accounts receivable
D) Increases net income
Answer: C) Decreases accounts receivable. When uncollectible accounts are written off, accounts receivable is reduced without affecting income, as the loss was already recognized in bad debt expense.
Question 37: What does the term 'current liabilities' refer to in financial accounting?
A) Obligations due within one year
B) Obligations due within two years
C) Obligations due within five years
D) Obligations due within ten years
Answer: A) Obligations due within one year. Current liabilities are obligations that a company expects to settle within its operating cycle or within one year, whichever is longer.
Question 38: How is a stock dividend different from a cash dividend?
A) A stock dividend distributes additional shares to shareholders instead of cash
B) A stock dividend reduces the company's liabilities
C) A stock dividend increases the company's cash flow
D) A stock dividend is a liability to the company
Answer: A) A stock dividend distributes additional shares to shareholders instead of cash. Stock dividends increase the number of shares outstanding without affecting the company's cash flow.
Question 39: How is a lease classified as an operating lease treated in the financial statements?
A) As an asset on the balance sheet
B) As a liability on the balance sheet
C) As an expense in the income statement
D) As part of shareholders' equity
Answer: C) As an expense in the income statement. Operating lease payments are recorded as an expense when incurred, without recognizing an asset or liability on the balance sheet.
Question 40: What is the accounting treatment for a contingent gain that is probable but not yet realized?
A) Recognize the gain in the income statement
B) Record the gain in shareholders' equity
C) Record the gain as an asset
D) Disclose the gain in the notes to the financial statements
Answer: D) Disclose the gain in the notes to the financial statements. Contingent gains are not recognized in the financial statements until they are realized, but they are disclosed in the notes if they are probable.
Question 41: How is goodwill created in an acquisition recorded on the balance sheet?
A) As a liability
B) As an expense
C) As an intangible asset
D) As shareholders' equity
Answer: C) As an intangible asset. Goodwill represents the excess of the purchase price over the fair value of the acquired company's identifiable net assets and is recorded as an intangible asset on the balance sheet.
Question 42: What is the accounting treatment for research and development (R&D) costs under IFRS?
A) All R&D costs are capitalized
B) Research costs are expensed, while development costs can be capitalized
C) All R&D costs are expensed
D) Research costs are capitalized, while development costs are expensed
Answer: B) Research costs are expensed, while development costs can be capitalized. Under IFRS, development costs can be capitalized if certain criteria are met, whereas research costs are expensed as incurred.
Question 43: How are sales returns recorded in the accounting records?
A) Debit Sales Returns, Credit Accounts Receivable
B) Debit Sales Returns, Credit Cash
C) Debit Accounts Receivable, Credit Sales Returns
D) Debit Cash, Credit Sales Returns
Answer: A) Debit Sales Returns, Credit Accounts Receivable. Sales returns reduce the revenue recorded in the accounts and decrease the amount owed by customers, hence debiting Sales Returns and crediting Accounts Receivable.
Question 44: What is the effect of recognizing an impairment loss on an asset?
A) Decreases the asset's carrying value and decreases net income
B) Increases the asset's carrying value
C) Increases shareholders' equity
D) Decreases cash
Answer: A) Decreases the asset's carrying value and decreases net income. An impairment loss is recognized when an asset's carrying value exceeds its recoverable amount, leading to a reduction in both the asset's value and net income.
Question 45: How are prepaid expenses recorded in the financial statements?
A) As a current asset
B) As a liability
C) As an expense
D) As shareholders' equity
Answer: A) As a current asset. Prepaid expenses represent payments made in advance for goods or services to be received in the future, and they are classified as current assets until the benefit is realized.
Question 46: What is the effect of recording accrued expenses in the financial statements?
A) Increases expenses and increases liabilities
B) Decreases expenses and decreases liabilities
C) Increases assets and decreases liabilities
D) Increases equity and decreases liabilities
Answer: A) Increases expenses and increases liabilities. Accrued expenses are expenses that have been incurred but not yet paid, leading to an increase in both expenses and liabilities in the financial statements.
Question 47: How are unearned revenues recorded in the financial statements?
A) As an expense
B) As a current asset
C) As a liability
D) As revenue
Answer: C) As a liability. Unearned revenue represents cash received for services not yet performed or goods not yet delivered, and it is recorded as a liability until the revenue is earned.
Question 48: How is the issuance of bonds at a discount recorded in the financial statements?
A) Debit Cash, Debit Discount on Bonds Payable, Credit Bonds Payable
B) Debit Cash, Credit Bonds Payable
C) Debit Bonds Payable, Credit Cash
D) Debit Bonds Payable, Credit Discount on Bonds Payable
Answer: A) Debit Cash, Debit Discount on Bonds Payable, Credit Bonds Payable. The issuance of bonds at a discount means that the cash received is less than the face value of the bonds, with the difference recorded as a discount on bonds payable, a contra-liability account.
Question 49: What is the accounting treatment for bad debts that are estimated but not yet identified?
A) Record an allowance for doubtful accounts
B) Write off the accounts receivable
C) Do nothing until the debt is identified
D) Recognize revenue
Answer: A) Record an allowance for doubtful accounts. Companies estimate bad debts and create an allowance for doubtful accounts, which is a contra-asset account, to reduce accounts receivable to its net realizable value.
Question 50: How is the sale of an asset for more than its carrying value recorded in the financial statements?
A) Debit Cash, Debit Accumulated Depreciation, Credit Asset, Credit Gain on Sale
B) Debit Cash, Credit Gain on Sale
C) Debit Asset, Credit Cash
D) Debit Cash, Debit Accumulated Depreciation, Credit Asset, Credit Loss on Sale
Answer: A) Debit Cash, Debit Accumulated Depreciation, Credit Asset, Credit Gain on Sale. When an asset is sold for more than its carrying value, the cash received is debited, accumulated depreciation is removed, the asset is credited, and the gain on sale is recognized.
Question 51: What accounting principle is used to recognize revenue when it is earned, regardless of when cash is received?
A) Cash accounting
B) Accrual accounting
C) Matching principle
D) Cost accounting
Answer: B) Accrual accounting. The accrual accounting principle dictates that revenue should be recognized when it is earned, regardless of when cash is received, aligning with the revenue recognition principle.
Question 52: How should contingent liabilities be reported in the financial statements?
A) As a liability if not probable
B) As a note disclosure, unless the liability is probable and can be reasonably estimated
C) As income
D) As an asset
Answer: B) As a note disclosure, unless the liability is probable and can be reasonably estimated. Contingent liabilities are reported as a note disclosure unless they meet the criteria for recognition as a liability.
Question 53: What is the primary purpose of preparing a cash flow statement?
A) To assess the company’s market value
B) To determine the company's profitability
C) To show the company's financial position at a specific point in time
D) To provide information about a company’s cash inflows and outflows
Answer: D) To provide information about a company’s cash inflows and outflows. The cash flow statement provides insights into the company's cash inflows and outflows from operating, investing, and financing activities.
Question 54: What is the effect of a stock split on the par value of the stock?
A) It has no effect on the par value
B) It decreases the par value per share
C) It increases the par value per share
D) It converts par value to paid-in capital
Answer: B) It decreases the par value per share. A stock split increases the number of shares outstanding and reduces the par value per share accordingly.
Question 55: What accounting method is used to value inventory when prices are fluctuating?
A) Replacement cost method
B) Weighted average cost method
C) Specific identification method
D) Historical cost method
Answer: B) Weighted average cost method. The weighted average cost method smooths out price fluctuations by averaging the costs of all inventory items available for sale during the period.
Question 56: How should a company account for a long-term asset that is being depreciated?
A) Record depreciation expense periodically and reduce the asset's book value
B) Record the entire cost as an expense immediately
C) Increase the asset's book value periodically
D) Record the asset at its fair market value
Answer: A) Record depreciation expense periodically and reduce the asset's book value. Depreciation expense is recorded periodically to allocate the cost of a long-term asset over its useful life, reducing its book value accordingly.
Question 57: What type of account is "Accumulated Depreciation"?
A) Liability account
B) Contra-asset account
C) Expense account
D) Revenue account
Answer: B) Contra-asset account. Accumulated Depreciation is a contra-asset account that offsets the value of fixed assets to reflect their depreciated value.
Question 58: How is interest expense classified in the financial statements?
A) As an operating expense
B) As a financing activity
C) As an investing activity
D) As a non-operating expense
Answer: A) As an operating expense. Interest expense is typically classified as an operating expense in the income statement, reflecting the cost of borrowing funds.
Question 59: What is the primary difference between operating and non-operating income?
A) Non-operating income is included in gross profit
B) Operating income includes interest income, while non-operating income does not
C) Operating income is generated from primary business activities, while non-operating income is from secondary activities
D) Operating income is always higher than non-operating income
Answer: C) Operating income is generated from primary business activities, while non-operating income is from secondary activities. Operating income comes from the core operations of the business, while non-operating income includes items like interest and investment gains.
Question 60: How are contingent gains reported in the financial statements?
A) As an asset
B) As income
C) As a liability
D) Not recognized until realized
Answer: D) Not recognized until realized. Contingent gains are not recognized in the financial statements until they are realized or virtually certain, in line with conservative accounting practices.
Question 61: What does the term 'liquidity' refer to in financial management?
A) The company's market value
B) The profitability of a company
C) The ease with which assets can be converted to cash
D) The ability to pay off long-term debts
Answer: C) The ease with which assets can be converted to cash. Liquidity refers to how quickly and easily an asset can be converted into cash without significant loss of value.
Question 62: Which financial statement provides a snapshot of a company's financial position at a specific point in time?
A) Income statement
B) Balance sheet
C) Cash flow statement
D) Statement of changes in equity
Answer: B) Balance sheet. The balance sheet provides a snapshot of a company's financial position, showing assets, liabilities, and equity at a specific point in time.
Question 63: In the context of financial statements, what does the term 'amortization' refer to?
A) The gradual write-off of an intangible asset
B) The allocation of interest expense over time
C) The depreciation of fixed assets
D) The increase in the value of an asset
Answer: A) The gradual write-off of an intangible asset. Amortization refers to the process of gradually writing off the cost of an intangible asset over its useful life.
Question 64: How should a company account for a purchase of equipment if it is paid for in installments?
A) Record the total cost of the equipment as an asset and recognize liability for unpaid installments
B) Record each installment as an asset
C) Record the total cost as an expense
D) Record only the first installment as an expense
Answer: A) Record the total cost of the equipment as an asset and recognize liability for unpaid installments. The total cost is capitalized as an asset, and the company records a liability for any installments not yet paid.
Question 65: What is the purpose of a trial balance in accounting?
A) To record all transactions for the period
B) To ensure that total debits equal total credits in the ledger
C) To prepare the income statement
D) To calculate net income
Answer: B) To ensure that total debits equal total credits in the ledger. A trial balance is used to verify that total debits equal total credits, ensuring the accuracy of the accounting records.
Question 66: What is the main difference between 'gross profit' and 'net profit'?
A) Gross profit includes all expenses, while net profit includes only direct costs
B) Gross profit is calculated before operating expenses, while net profit is calculated after
C) Net profit is calculated before taxes, while gross profit is calculated after
D) Gross profit and net profit are the same
Answer: B) Gross profit is calculated before operating expenses, while net profit is calculated after. Gross profit is the revenue remaining after subtracting the cost of goods sold, while net profit includes all expenses and taxes.
Question 67: What does the 'matching principle' in accounting state?
A) Expenses should be matched with revenues in the same period
B) Revenues should be matched with expenses in different periods
C) Assets should be matched with liabilities
D) Depreciation should be matched with asset acquisition
Answer: A) Expenses should be matched with revenues in the same period. The matching principle requires that expenses be recognized in the same period as the revenues they help to generate.
Question 68: How are dividends declared by a company classified in the financial statements?
A) As an asset
B) As an expense
C) As equity
D) As a liability when declared
Answer: D) As a liability when declared. Dividends are recorded as a liability when they are declared by the board of directors, reflecting the obligation to pay shareholders.
Question 69: What is 'deferred revenue' in accounting?
A) Revenue that has been written off
B) Revenue that has been earned but not yet received
C) Money received after earning the related revenue
D) Money received before earning the related revenue
Answer: D) Money received before earning the related revenue. Deferred revenue represents payments received in advance for goods or services that have not yet been provided, and is recorded as a liability until earned.
Question 70: What is the role of the 'chart of accounts' in accounting?
A) It lists all transactions for a period
B) It prepares financial statements
C) It organizes and categorizes all accounts used in the general ledger
D) It tracks accounts payable and receivable
Answer: C) It organizes and categorizes all accounts used in the general ledger. The chart of accounts is a systematic listing of all accounts used by an organization to record transactions in the general ledger.
Question 71: How is 'goodwill' accounted for in financial statements?
A) As a tangible asset
B) As an expense
C) As an intangible asset, subject to annual impairment testing
D) As a liability
Answer: C) As an intangible asset, subject to annual impairment testing. Goodwill is recorded as an intangible asset on the balance sheet and must be tested for impairment annually.
Question 72: What does 'capital budgeting' involve?
A) Managing daily cash flows
B) Budgeting for short-term expenses
C) Evaluating and selecting long-term investments
D) Forecasting annual sales
Answer: C) Evaluating and selecting long-term investments. Capital budgeting involves the process of evaluating and selecting long-term investments or projects that are expected to generate benefits over several years.
Question 73: What is 'depreciation' in accounting?
A) The increase in the value of an asset
B) The process of selling an asset
C) The recording of asset purchases
D) The allocation of the cost of a fixed asset over its useful life
Answer: D) The allocation of the cost of a fixed asset over its useful life. Depreciation is the process of allocating the cost of a tangible fixed asset over its useful life to account for its wear and tear.
Question 74: What does 'working capital' represent?
A) The total assets of a company
B) The total liabilities of a company
C) The difference between current assets and current liabilities
D) The long-term assets of a company
Answer: C) The difference between current assets and current liabilities. Working capital measures a company's operational efficiency and short-term financial health by comparing current assets to current liabilities.
Question 75: What is 'earnings per share (EPS)'?
A) Total revenue divided by the number of shares
B) Gross profit divided by the number of shares
C) Operating income divided by the number of shares
D) Net income divided by the number of outstanding shares
Answer: D) Net income divided by the number of outstanding shares. Earnings per share (EPS) is a financial metric that indicates how much profit is allocated to each outstanding share of common stock.
Question 76: What is 'cost of goods sold (COGS)'?
A) The total costs of all expenses incurred
B) The cost of marketing and sales
C) The cost of administrative expenses
D) The direct costs attributable to the production of goods sold by a company
Answer: D) The direct costs attributable to the production of goods sold by a company. Cost of goods sold (COGS) represents the direct costs associated with the production of goods that are sold by a company.
Question 77: What does the term 'accounts payable' refer to?
A) Amounts a company is owed by its customers
B) Payments made to employees
C) Long-term debts
D) Amounts a company owes to its suppliers
Answer: D) Amounts a company owes to its suppliers. Accounts payable are short-term liabilities that represent amounts a company owes to suppliers for goods and services purchased on credit.
Question 78: What is the purpose of an internal control system?
A) To increase sales and revenue
B) To manage external relationships
C) To conduct market research
D) To safeguard assets, ensure accuracy of financial records, and promote operational efficiency
Answer: D) To safeguard assets, ensure accuracy of financial records, and promote operational efficiency. An internal control system is designed to protect assets, ensure the reliability of financial reporting, and improve operational efficiency.
Question 79: What is 'financial leverage'?
A) The use of personal savings to invest in the company
B) The allocation of company profits to shareholders
C) The process of reducing operational costs
D) The use of borrowed funds to increase the return on equity
Answer: D) The use of borrowed funds to increase the return on equity. Financial leverage involves using borrowed funds to amplify the potential return on equity, which can also increase financial risk.
Question 80: What does the term 'asset turnover ratio' measure?
A) The rate of return on assets
B) The amount of assets per share
C) The ratio of assets to liabilities
D) How efficiently a company uses its assets to generate sales
Answer: D) How efficiently a company uses its assets to generate sales. The asset turnover ratio measures how effectively a company utilizes its assets to produce revenue.
Question 81: What is 'capital structure'?
A) The company's investment portfolio
B) The mix of debt and equity used to finance a company's operations
C) The company's revenue model
D) The company's cash reserves
Answer: B) The mix of debt and equity used to finance a company's operations. Capital structure refers to the way a company finances its operations and growth through a combination of debt and equity.
Question 82: What does the 'quick ratio' measure?
A) A company's long-term solvency
B) The profitability of the company
C) A company's ability to meet short-term obligations with its most liquid assets
D) The efficiency of inventory management
Answer: C) A company's ability to meet short-term obligations with its most liquid assets. The quick ratio, or acid-test ratio, measures the ability to pay off short-term liabilities without relying on inventory sales.
Question 83: What is 'current ratio'?
A) The ratio of total assets to total liabilities
B) The ratio of current assets to current liabilities
C) The ratio of cash to total assets
D) The ratio of net income to total revenue
Answer: B) The ratio of current assets to current liabilities. The current ratio measures a company's ability to cover short-term obligations with its short-term assets.
Question 84: What does 'net working capital' represent?
A) The company's equity
B) The difference between current assets and current liabilities
C) The company's long-term debt
D) The total assets of the company
Answer: B) The difference between current assets and current liabilities. Net working capital measures a company's operational efficiency and short-term financial health.
Question 85: What does 'return on assets (ROA)' measure?
A) The company's revenue growth
B) The cost of debt
C) The efficiency of a company in using its assets to generate profit
D) The return on equity
Answer: C) The efficiency of a company in using its assets to generate profit. Return on assets (ROA) measures how effectively a company uses its assets to generate earnings.
Question 86: What is 'debt to equity ratio'?
A) The ratio of equity to total assets
B) The ratio of current liabilities to equity
C) The ratio of total debt to total equity
D) The ratio of total debt to total assets
Answer: C) The ratio of total debt to total equity. The debt to equity ratio measures the proportion of debt used to finance the company's assets relative to shareholders' equity.
Question 87: How is 'operating income' calculated?
A) Total revenue minus total expenses
B) Revenue minus cost of goods sold
C) Gross profit minus operating expenses
D) Net income minus interest expense
Answer: C) Gross profit minus operating expenses. Operating income represents the profit earned from normal business operations, excluding non-operating income and expenses.
Question 88: What is 'accrued expenses'?
A) Expenses that are paid in advance
B) Expenses that are recorded as assets
C) Expenses that have been incurred but not yet paid or recorded
D) Expenses that have been paid but not yet incurred
Answer: C) Expenses that have been incurred but not yet paid or recorded. Accrued expenses are liabilities for goods or services that have been received but not yet invoiced or paid for.
Question 89: What is 'prepaid expense'?
A) An expense related to depreciation
B) An expense that is recorded as a liability
C) An expense paid in advance, recorded as an asset until it is incurred
D) An expense that is incurred but not yet paid
Answer: C) An expense paid in advance, recorded as an asset until it is incurred. Prepaid expenses are payments made for goods or services to be received in the future, recorded as assets until the expense is incurred.
Question 90: What is 'retained earnings'?
A) The total amount of dividends paid out
B) The company's total revenue
C) The amount of capital invested by shareholders
D) The portion of net income that is retained in the company rather than distributed as dividends
Answer: D) The portion of net income that is retained in the company rather than distributed as dividends. Retained earnings represent the cumulative amount of net income that has been retained in the company for reinvestment rather than paid out as dividends.
Question 91: How is 'net income' calculated?
A) Gross profit minus operating expenses
B) Total revenue minus total expenses
C) Operating income minus taxes
D) Total revenue minus cost of goods sold
Answer: B) Total revenue minus total expenses. Net income is calculated as total revenue minus total expenses, including both operating and non-operating expenses.
Question 92: What is 'dividend payout ratio'?
A) The total amount of dividends paid out to shareholders
B) The ratio of dividends to total revenue
C) The proportion of earnings paid out as dividends to shareholders
D) The ratio of earnings retained in the company
Answer: C) The proportion of earnings paid out as dividends to shareholders. The dividend payout ratio measures the percentage of earnings distributed to shareholders as dividends.
Question 93: What does 'current assets' include?
A) Long-term investments and intangible assets
B) Long-term liabilities and equity
C) Cash, accounts receivable, and inventory
D) Land, buildings, and equipment
Answer: C) Cash, accounts receivable, and inventory. Current assets are assets expected to be converted into cash or used up within one year, including cash, accounts receivable, and inventory.
Question 94: What does 'financial statement analysis' involve?
A) Creating financial statements from accounting records
B) Conducting external audits
C) Evaluating financial statements to assess a company's performance and financial position
D) Preparing tax returns
Answer: C) Evaluating financial statements to assess a company's performance and financial position. Financial statement analysis involves examining financial statements to understand a company's performance, profitability, and financial health.
Question 95: What is the 'price-to-earnings (P/E) ratio'?
A) The ratio of a company's total revenue to its earnings
B) The ratio of net income to total equity
C) The ratio of a company's current share price to its earnings per share
D) The ratio of total assets to total liabilities
Answer: C) The ratio of a company's current share price to its earnings per share. The price-to-earnings (P/E) ratio measures the market's expectation of a company's future earnings by comparing its current share price to its earnings per share.
Question 96: What is 'return on equity (ROE)'?
A) The ratio of net income to total assets
B) The ratio of gross profit to total revenue
C) The ratio of net income to shareholders' equity
D) The ratio of total revenue to shareholders' equity
Answer: C) The ratio of net income to shareholders' equity. Return on equity (ROE) measures how effectively a company uses shareholders' equity to generate profit.
Question 97: What is 'cash flow from operating activities'?
A) Cash spent on purchasing equipment
B) Cash used for paying off long-term debt
C) Cash generated from a company's core business operations
D) Cash received from issuing stock
Answer: C) Cash generated from a company's core business operations. Cash flow from operating activities measures the cash generated or used in the course of a company's regular business operations.
Question 98: What does 'net present value (NPV)' measure?
A) The total value of a company's assets
B) The annual cash inflows of a project
C) The difference between the present value of cash inflows and outflows
D) The future value of cash flows
Answer: C) The difference between the present value of cash inflows and outflows. Net present value (NPV) is a capital budgeting method used to assess the profitability of an investment by calculating the difference between the present value of cash inflows and outflows.
Question 99: What is the 'debt ratio'?
A) The ratio of total liabilities to total equity
B) The ratio of current liabilities to total assets
C) The ratio of total debt to total assets
D) The ratio of total debt to total equity
Answer: C) The ratio of total debt to total assets. The debt ratio measures the proportion of a company's assets that are financed by debt.
Question 100: What does 'return on investment (ROI)' measure?
A) The total amount of revenue generated by an investment
B) The cost of the investment
C) The gain or loss made relative to the investment amount
D) The annual return rate of an investment
Answer: C) The gain or loss made relative to the investment amount. Return on investment (ROI) measures the profitability of an investment relative to its cost.
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