C213 Accounting for Decision Makers Practice Questions - Set 2 - Part 1

Correct Answer: b) International Accounting Standards Board (IASB)

Explanation: The IASB was created to develop a single set of globally accepted accounting standards, known as International Financial Reporting Standards (IFRS). It aims to harmonize accounting standards worldwide.

Correct Answer: a) Assets = Liabilities + Equity

Explanation: The accounting equation represents the relationship between a company’s assets, liabilities, and equity. It is the foundation of the double-entry bookkeeping system.

Correct Answer: c) Securities and Exchange Commission (SEC)

Explanation: The SEC regulates U.S. stock exchanges, enforcing securities laws to ensure that investors have access to accurate and fair information when buying and selling stocks.

Correct Answer: b) Conservatism

Explanation: The conservatism principle ensures that financial statements are prepared cautiously, recognizing potential losses immediately while deferring gains until they are certain to provide a prudent view of the company’s financial health.

Correct Answer: a) The ability to convert assets into cash quickly

Explanation: Liquidity refers to how easily an asset can be converted into cash. Current assets like cash and accounts receivable are more liquid than long-term assets like property and equipment.

Correct Answer: c) Accounts Payable

Explanation: Accounts payable is classified as a current liability because it represents obligations that are typically due within a year, such as money owed to suppliers for goods or services.

Correct Answer: c) Current Ratio

Explanation: The current ratio is calculated by dividing current assets by current liabilities, providing a measure of a company's liquidity and its ability to pay off short-term obligations.

Correct Answer: b) Only significant amounts that could affect decisions need to be disclosed

Explanation: Materiality allows accountants to ignore insignificant amounts that would not influence the decision-making of users of financial statements. Only material information is required to be disclosed.

Correct Answer: b) Income Statement

Explanation: The income statement summarizes a company's financial performance by showing its revenues, expenses, and net income or loss over a specific period, such as a quarter or year.

Correct Answer: b) It reports a company’s financial position at a specific point in time

Explanation: The balance sheet presents a snapshot of a company's financial position by listing its assets, liabilities, and equity at a specific date, unlike the income statement, which covers a period of time.

Correct Answer: a) Asset

Explanation: Inventory is considered an asset because it represents goods that a company owns and plans to sell in the normal course of business. It is reported on the balance sheet under current assets.

Correct Answer: a) Matching expenses with the revenues they helped generate

Explanation: The matching principle requires that expenses be recognized in the same period as the revenues they help to generate. This ensures that a company’s profitability is accurately reflected in each period.

Correct Answer: d) Statement of Cash Flows

Explanation: The statement of cash flows categorizes a company's cash flows into operating, investing, and financing activities, providing a comprehensive view of how the company generates and uses cash.

Correct Answer: b) To establish accounting rules in the United States

Explanation: The FASB establishes accounting standards in the U.S., known as Generally Accepted Accounting Principles (GAAP), which guide how financial information is reported.

Correct Answer: b) Revenues minus cost of goods sold

Explanation: Gross profit is calculated as revenues from sales minus the cost of goods sold (COGS). It reflects the profit made from selling goods before other operating expenses are subtracted.

Correct Answer: a) Return on Equity (ROE)

Explanation: Return on Equity measures how efficiently a company uses shareholders’ equity to generate profits. It is a key indicator of profitability and is calculated as net income divided by shareholders' equity.

Correct Answer: a) Balance Sheet

Explanation: The balance sheet is sometimes called the "statement of financial position" because it presents the financial position of a company by listing its assets, liabilities, and equity at a specific point in time.

Correct Answer: b) Issuing stock to raise capital

Explanation: Issuing stock is a financing activity because it involves raising funds from investors. Buying machinery and raw materials are investing and operating activities, respectively.

Correct Answer: b) Entity Concept

Explanation: The entity concept requires that the financial transactions of a business be kept separate from the personal transactions of its owners. This ensures the financial statements accurately reflect the business's financial position.

Correct Answer: c) Debt-to-Equity Ratio

Explanation: The debt-to-equity ratio measures a company’s financial leverage by comparing its total liabilities to shareholders’ equity. It provides insight into a company’s long-term solvency and risk level.