C213 Accounting for Decision Makers Practice Questions - Set 2 - Part 3

Correct Answer: Bonds Payable

Bonds payable are considered long-term liabilities because they represent debts that are typically due in more than one year. Accounts payable are short-term liabilities.

Correct Answer: Time Period Assumption

The time period assumption ensures that financial transactions are recorded for consistent and regular periods, such as months or years, allowing for meaningful comparison of financial performance over time.

Correct Answer: Return on Sales

Return on sales, calculated as net income divided by sales, measures the percentage of revenue that becomes profit. It is a key measure of a company’s profitability.

Correct Answer: Buying equipment

Buying equipment is classified as an investing activity because it involves the purchase of long-term assets. Issuing bonds and borrowing money are financing activities, while paying dividends is a financing activity.

Correct Answer: The amount of money investors are willing to pay for each dollar of earnings

The P/E ratio measures the market’s expectations of a company’s future earnings growth. It reflects how much investors are willing to pay for each dollar of earnings and is used to evaluate a company’s valuation.

Correct Answer: Statement of Retained Earnings

The statement of retained earnings shows changes in a company’s retained earnings over time, including dividends paid to shareholders and net income earned during the period.

Correct Answer: Profits that have been reinvested into the company rather than paid out as dividends

Retained earnings are the cumulative profits that a company has chosen to reinvest in the business rather than distribute as dividends to shareholders.

Correct Answer: Income Statement

The income statement summarizes a company’s financial performance by reporting its revenues and expenses over a specific period, resulting in the net income or loss for that period.

Correct Answer: Return on Sales

Return on sales is a profitability ratio that measures how much profit a company generates from each dollar of sales. It is calculated by dividing net income by total sales.

Correct Answer: To provide insight into a company’s liquidity and cash flows

The statement of cash flows provides information about a company’s cash inflows and outflows, showing how it generates and uses cash. This statement is essential for understanding a company’s liquidity.