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

Correct Answer: d) Property, Plant, and Equipment

Property, Plant, and Equipment (PPE) are considered long-term assets because they are used in the operations of a business for more than one year. Cash, accounts receivable, and inventory are current assets.

Correct Answer: c) A company's solvency

The debt-to-equity ratio measures a company’s long-term solvency by comparing its total liabilities to shareholders' equity. A high ratio may indicate a higher risk of insolvency.

Correct Answer: c) To provide information to external users such as investors and creditors

Financial accounting focuses on providing accurate financial information to external users like investors, creditors, and regulators to help them make informed decisions.

Correct Answer: b) Paying interest on a loan

Paying interest on a loan is considered an operating activity because it is part of the company’s day-to-day operations. Purchasing equipment is an investing activity, and issuing stock or repaying debt are financing activities.

Correct Answer: b) Matching Principle

The matching principle ensures that expenses are recorded in the same period as the revenues they help generate, regardless of when the cash is actually paid. This provides a clearer picture of a company’s profitability.

Correct Answer: b) Retained Earnings

Retained earnings are part of owners' equity and represent the cumulative profits of a company that have been reinvested in the business rather than distributed as dividends.

Correct Answer: c) Income Statement

The income statement reports a company’s revenues, expenses, and net income or loss over a specific period of time, such as a quarter or a year, reflecting the company’s financial performance.

Correct Answer: c) Issuing bonds

Issuing bonds is a financing activity because it involves raising funds through borrowing. Purchasing inventory and paying wages are operating activities, while selling goods is part of operating activities.

Correct Answer: b) To improve the accuracy and reliability of corporate financial reporting

The Sarbanes-Oxley Act was enacted to enhance the accuracy and reliability of financial reporting for publicly traded companies in response to accounting scandals, ensuring more transparency for investors.

Correct Answer: c) Inventory

Inventory is classified as a current asset because it is expected to be sold or used within a year. Land and buildings are long-term assets, while patents are intangible assets.

Correct Answer: c) Revenue is recognized when earned, and expenses are recognized when incurred

Accrual accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash is exchanged. This method provides a more accurate reflection of a company’s financial position.

Correct Answer: c) Statement of Cash Flows

The statement of cash flows provides information on how a company generates and uses cash by categorizing cash flows into operating, investing, and financing activities, offering insight into its liquidity and cash management.

Correct Answer: a) To report a company’s financial position at a specific point in time

The balance sheet presents a company’s assets, liabilities, and equity at a specific point in time, providing a snapshot of its financial position.

Correct Answer: a) A lease that transfers ownership of an asset at the end of the lease term

A capital lease is treated as if the lessee has purchased the asset, as it typically results in the transfer of ownership by the end of the lease term. It is different from operating leases, which are temporary.

Correct Answer: c) All significant financial facts and circumstances must be disclosed in the financial statements

The full disclosure principle requires that all relevant information that could impact decision-making be disclosed in the financial statements, ensuring transparency and completeness.

Correct Answer: c) Purchasing equipment

Purchasing equipment is considered an investing activity because it involves the acquisition of long-term assets. Paying wages, receiving interest, and collecting cash are operating activities.

Correct Answer: c) Purchasing equipment

Purchasing equipment is considered an investing activity because it involves the acquisition of long-term assets. Paying wages, receiving interest, and collecting cash are operating activities.