1. Which of the following best describes `accrual accounting′?
A. Recognizing revenue when cash is received and expenses when cash is paid.
B. Recognizing revenue when earned and expenses when incurred, regardless of cash flow.
C. Accounting only for cash transactions.
D. Deferring all revenue and expense recognition until the end of the fiscal year.
2. Which of the following is NOT a characteristic of `relevance′ as a qualitative characteristic of financial information?
A. Predictive value
B. Confirmatory value
C. Materiality
D. Verifiability
3. What does `double-entry bookkeeping′ mean?
A. Every transaction is recorded twice in the same account.
B. Every transaction affects at least two accounts.
C. Transactions are entered in two different currencies.
D. Financial statements are prepared in two languages.
4. Paying off accounts payable would be classified as what type of activity on the statement of cash flows?
A. Investing Activity
B. Operating Activity
C. Financing Activity
D. Non-cash Activity
5. Under which inventory costing method would the cost of goods sold (COGS) be closest to the current market value during a period of inflation?
A. Weighted-Average Method
B. First-In, First-Out (FIFO)
C. Last-In, First-Out (LIFO)
D. Specific Identification Method
6. Accumulated Depreciation is best described as:
A. An expense on the income statement.
B. A contra-asset account that reduces the book value of assets.
C. A liability representing future depreciation expense.
D. An equity account reflecting the total depreciation of all assets.
7. What is the `matching principle′ in accounting?
A. Matching assets with liabilities on the balance sheet.
B. Matching revenues and expenses in the same accounting period.
C. Matching cash inflows with cash outflows.
D. Matching the book value of assets with their market value.
8. Which financial statement reports a company′s financial performance over a period of time?
A. Balance Sheet
B. Statement of Cash Flows
C. Income Statement
D. Statement of Retained Earnings
9. Depreciation is the process of allocating the cost of which type of asset over its useful life?
A. Current Assets
B. Intangible Assets
C. Property, Plant, and Equipment (PP&E)
D. Inventory
10. Which of the following is a limitation of financial ratios?
A. They are too complex to understand.
B. They are based on historical data and may not predict future performance.
C. They are always consistent across different industries.
D. They provide exact answers to financial questions.
11. A company′s net income is $100,000 and its average total assets are $500,000. What is the Return on Assets (ROA)?
A. 2%
B. 5%
C. 20%
D. 50%
12. What is the impact of recording depreciation expense on the financial statements?
A. Increases assets and decreases equity.
B. Decreases assets and increases equity.
C. Decreases assets and decreases equity.
D. Increases assets and increases equity.
13. What is the primary purpose of financial accounting?
A. To prepare tax returns for a company.
B. To provide financial information to internal management for decision-making.
C. To provide financial information to external stakeholders such as investors and creditors.
D. To manage the day-to-day cash flow of a company.
14. What type of account is `Accounts Receivable′?
A. Liability
B. Equity
C. Revenue
D. Asset
15. Which of the following is considered a fundamental accounting equation?
A. Revenue - Expenses = Net Income
B. Assets + Liabilities = Equity
C. Assets = Liabilities + Equity
D. Cash Inflow - Cash Outflow = Net Cash Flow
16. Why is the statement of cash flows considered important?
A. It shows the profitability of a company.
B. It provides a snapshot of a company′s assets, liabilities, and equity at a point in time.
C. It helps assess a company′s ability to generate cash and meet its obligations.
D. It calculates the net income for a period.
17. Which of the following ratios is used to assess a company′s ability to meet its short-term obligations?
A. Debt-to-Equity Ratio
B. Profit Margin Ratio
C. Current Ratio
D. Return on Assets Ratio
18. Which of the following is an example of an intangible asset?
A. Equipment
B. Inventory
C. Patent
D. Land
19. What is the `going concern′ assumption in accounting?
A. The assumption that a company will always be profitable.
B. The assumption that a company will operate indefinitely.
C. The assumption that assets will always be valued at cost.
D. The assumption that financial statements are prepared annually.
20. What is the effect on the cash flow statement when a company sells equipment for cash at a gain?
A. Increase in Operating Activities.
B. Increase in Financing Activities.
C. Increase in Investing Activities.
D. No effect on the cash flow statement.
21. Which inventory costing method assumes that the first units purchased are the first units sold?
A. Weighted-Average Method
B. Last-In, First-Out (LIFO)
C. First-In, First-Out (FIFO)
D. Specific Identification Method
22. Which of the following is an example of a financing activity in the statement of cash flows?
A. Purchase of equipment
B. Sale of goods to customers
C. Issuance of bonds payable
D. Payment of salaries
23. What is the purpose of `closing entries′ at the end of an accounting period?
A. To adjust account balances for errors.
B. To prepare the trial balance.
C. To transfer balances of temporary accounts to retained earnings.
D. To record daily transactions for the next period.
24. Why is ethical conduct crucial in financial accounting?
A. To ensure higher profits for the company.
B. To maintain the trust of stakeholders and the integrity of financial information.
C. To simplify the accounting process.
D. To reduce tax liabilities.
25. What is the effect on the accounting equation when a company purchases supplies on credit?
A. Assets and Equity increase.
B. Assets increase and Liabilities decrease.
C. Assets and Liabilities increase.
D. Liabilities and Equity decrease.
26. If a company uses the FIFO inventory method and prices are rising, which of the following is true?
A. Cost of Goods Sold will be higher than under LIFO.
B. Net Income will be lower than under LIFO.
C. Ending Inventory will be valued at older, lower prices.
D. Cost of Goods Sold will be lower than under LIFO.
27. What is the purpose of `adjusting entries′ in the accounting cycle?
A. To record daily transactions.
B. To correct errors found in the trial balance.
C. To ensure revenues and expenses are recognized in the correct period.
D. To prepare the initial trial balance.
28. What is `unearned revenue′?
A. Revenue that has been earned but not yet collected in cash.
B. Revenue that has been collected in cash but not yet earned.
C. Revenue that is expected to be earned in the future.
D. Revenue that has been earned and collected in cash.
29. What is the primary difference between financial accounting and managerial accounting?
A. Financial accounting is used for internal reporting, while managerial accounting is for external reporting.
B. Financial accounting follows GAAP or IFRS, while managerial accounting is more flexible.
C. Financial accounting focuses on future projections, while managerial accounting looks at historical data.
D. Financial accounting is mandatory for all companies, while managerial accounting is optional.
30. What is the purpose of a `trial balance′?
A. To prepare the financial statements.
B. To list all transactions for a period.
C. To verify that debits equal credits in the general ledger.
D. To calculate net income for the period.
