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

Correct Answer: To show how retained earnings have changed over time

The statement of retained earnings explains the changes in retained earnings during a period, including the impact of net income and dividends on the balance of retained earnings.

Correct Answer: Buildings

Buildings are considered non-current assets because they are long-term resources that provide economic benefits over multiple years. Current assets, like cash and inventory, are expected to be used or converted within a year.

Correct Answer: Going Concern Assumption

The going concern assumption assumes that a company will continue to operate for the foreseeable future unless there is evidence to suggest otherwise. This assumption is important for financial reporting.

Correct Answer: Paying taxes

Paying taxes is classified as an operating activity because it relates to the day-to-day operations of the business. Paying dividends and borrowing money are financing activities, while selling a building is an investing activity.

Correct Answer: Net income plus or minus other wealth changes, like currency exchange rates

Comprehensive income includes net income as well as other gains and losses that are not part of the company's regular operations, such as changes in foreign currency exchange rates and changes in the value of financial instruments.

Correct Answer: Asset Turnover

The asset turnover ratio measures how efficiently a company is using its assets to generate revenue. It is calculated by dividing sales by total assets and indicates how productive the company's assets are.

Correct Answer: Matching Principle

The matching principle ensures that expenses are recorded in the same period as the revenues they contribute to, which helps provide a more accurate picture of a company's profitability.

Correct Answer: Loss from a natural disaster

Extraordinary items are unusual and infrequent events that significantly affect the company's financial position, such as a loss from a natural disaster. Depreciation and interest expenses are considered regular operating expenses.

Correct Answer: The net income attributed to each share of stock

Earnings per share (EPS) represents the portion of a company's net income that is attributed to each share of common stock. It is an important measure for investors to evaluate the profitability of a company.

Correct Answer: Income Statement

The income statement reports a company’s revenues, expenses, and gross profit, which is calculated by subtracting the cost of goods sold from total sales revenue.

Correct Answer: Goodwill

Goodwill is an intangible asset that represents the value of a company’s reputation, brand, and customer relationships, and it arises when one company acquires another for more than its net identifiable assets.

Correct Answer: Current Ratio

The current ratio measures a company's liquidity by comparing its current assets to its current liabilities. It indicates whether the company can meet its short-term obligations.

Correct Answer: Interest expense

Interest expense is considered a non-operating item because it is related to the company's financing activities rather than its core business operations. Cost of goods sold and wages are operating expenses.

Correct Answer: Conservatism

The conservatism principle ensures that financial statements provide a cautious outlook by recognizing potential losses early and deferring recognition of gains until they are realized.

Correct Answer: It is focused on future projections

Managerial accounting is forward-looking and focuses on providing information for internal decision-making and future planning. It is not regulated by GAAP and is typically used by company management.

Correct Answer: Purchasing inventory

Purchasing inventory is considered an operating activity, as it is part of the day-to-day operations of a business. Issuing bonds, paying dividends, and borrowing money are all financing activities.

Correct Answer: Balance Sheet

The balance sheet provides insight into a company's solvency by showing its assets, liabilities, and equity, which can help assess the company’s ability to meet its long-term obligations.

Correct Answer: Prepaid Expenses

Prepaid expenses are considered current assets because they represent payments made for goods or services to be received within the next year. Land, equipment, and patents are non-current assets.

Correct Answer: A lease where the lessee has the option to purchase the asset at the end of the lease term

A capital lease is treated as if the lessee has purchased the asset because it typically transfers ownership of the asset to the lessee by the end of the lease term, unlike operating leases, which are temporary.

Correct Answer: To allocate the cost of a long-term asset over its useful life

Depreciation allocates the cost of a tangible asset, such as equipment or buildings, over its useful life. It reflects the wear and tear on the asset and helps match the expense to the periods in which the asset is used.