C213 Accounting for Decision Makers Practice Questions - Set 1 - Part 3

Correct Answer: a) To show how retained earnings changed over a period

The statement of retained earnings shows the changes in a company’s retained earnings over a period, including the impact of net income and dividends.

Correct Answer: b) Reporting net income

Retained earnings increase when a company reports net income, as profits that are not distributed as dividends are retained within the company.

Correct Answer: a) Full Disclosure Principle

The full disclosure principle requires that companies disclose all material information that could influence the decision-making of users of financial statements.

Correct Answer: d) Equipment

Equipment is considered a non-current asset because it is expected to provide economic benefits for more than one year. Current assets, like cash and inventory, are typically used or converted within a year.

Correct Answer: b) Income Statement

The income statement reports a company’s profitability by summarizing its revenues and expenses over a specific period, such as a quarter or year.

Correct Answer: b) Paying dividends to shareholders

Paying dividends is a financing activity because it involves returning capital to shareholders. Purchasing machinery is an investing activity, while selling goods is an operating activity.

Correct Answer: b) Going Concern Assumption

The going concern assumption assumes that a business will continue to operate for the foreseeable future, unless there is evidence to the contrary. This assumption is crucial for financial reporting.

Correct Answer: c) Loss due to a natural disaster

Extraordinary items, such as losses due to natural disasters, are rare and unusual events that are reported separately on the income statement. Ordinary expenses like taxes and depreciation are not extraordinary.

Correct Answer: b) Inventory

Inventory is considered a current asset because it is expected to be sold or used within a year. Equipment is a non-current asset, and bonds payable are a liability.

Correct Answer: c) Statement of Cash Flows

The statement of cash flows provides insights into a company’s ability to generate and manage cash by categorizing cash flows into operating, investing, and financing activities.