C213 Accounting for Decision Makers Practice Questions - Set 1 - Part 1

Correct Answer: c) Statement of Cash Flows

The statement of cash flows provides a detailed account of how a company has received and spent cash over a given period. It is categorized into operating, investing, and financing activities. The other financial statements do not show cash flow directly.

Correct Answer: b) Gross Profit

Gross profit is calculated as the revenue from sales minus the cost of goods sold. It reflects the profit a company makes before accounting for operating expenses and taxes.

Correct Answer: c) Management

Management is considered an internal user of financial information because they use the information to make decisions related to the operations of the company. Investors, creditors, and regulators are external users.

Correct Answer: b) Balance Sheet

The balance sheet presents the company’s financial position by listing its assets, liabilities, and owners' equity as of a specific date. Other statements like the income statement cover a period of time.

Correct Answer: b) When the work is substantially complete

The revenue recognition principle states that revenue should be recognized when the earning process is complete, which typically occurs when the goods or services are delivered, and collection of payment is reasonably assured.

Correct Answer: b) Assets = Liabilities + Equity

The accounting equation is fundamental to the balance sheet and illustrates the relationship between a company’s resources (assets) and the claims to those resources by creditors (liabilities) and owners (equity).

Correct Answer: c) Financial Accounting Standards Board (FASB)

The FASB is a private organization that establishes financial accounting and reporting standards in the U.S. to ensure that financial statements are accurate and consistent.

Correct Answer: b) Income Statement

The income statement shows a company’s financial performance by reporting its revenues and expenses over a specific period of time, typically a quarter or year, to determine the net income or loss.

Correct Answer: a) Assets - Liabilities

Shareholders' equity is the residual interest in the assets of the company after all liabilities have been deducted. It represents the owners' claim on the assets.

Correct Answer: b) Matching Principle

The matching principle requires that expenses be recorded in the same period as the revenues they help generate to provide an accurate picture of a company’s profitability during a specific period.

Correct Answer: c) Issuing stock

Issuing stock is considered a financing activity as it involves raising funds from investors. Paying wages and purchasing materials are operating activities, while buying equipment is an investing activity.

Correct Answer: a) To protect investors by improving the accuracy and reliability of corporate disclosures

The Sarbanes-Oxley Act was enacted in response to major accounting scandals to increase federal oversight of financial reporting and enhance the transparency and accuracy of corporate disclosures.

Correct Answer: c) Balance Sheet

The balance sheet lists a company’s total assets, liabilities, and equity, providing a snapshot of the company's financial position at a given moment.

Correct Answer: a) The proportion of assets financed by liabilities

The debt ratio measures the percentage of total assets financed by liabilities. It is calculated as total liabilities divided by total assets and helps assess the company's financial leverage.

Correct Answer: b) Recognize all potential losses but defer recognizing gains until they are certain

Conservatism is an accounting principle that ensures financial statements provide a cautious outlook by recognizing potential losses early and deferring recognition of gains until they are assured.

Correct Answer: b) When the expense is recognized

Under the accrual basis of accounting, liabilities are recorded when the related expense is recognized, not necessarily when cash is paid. This ensures expenses match the revenues they help generate.

Correct Answer: a) Purchasing equipment

Purchasing equipment is an investing activity as it involves acquiring long-term assets that will be used in the company’s operations. Paying dividends and issuing stock are financing activities.

Correct Answer: a) Balance Sheet

The balance sheet provides insights into a company’s liquidity by detailing its current assets and current liabilities, which help determine the company’s ability to meet short-term obligations.

Correct Answer: b) Current Ratio

The current ratio is calculated by dividing current assets by current liabilities. It indicates a company's ability to pay off its short-term obligations with its short-term assets.

Correct Answer: b) To inspect audit practices of registered firms