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

Correct Answer: a) Issuing bonds

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

Correct Answer: a) To report changes in retained earnings over time

The statement of retained earnings shows how retained earnings have changed during a specific period, including the impact of net income and dividends on the retained earnings balance.

Correct Answer: c) Entity Concept

The entity concept requires that personal and business financial transactions be kept separate to ensure accurate financial reporting for the business. This concept is fundamental to maintaining the integrity of financial statements.

Correct Answer: b) Accounts Payable

Accounts payable is classified as a current liability because it represents obligations that must be paid within a year, typically for goods or services purchased on credit.

Correct Answer: c) Income Statement

The income statement reports a company’s total revenues, expenses, and net income over a specific period, providing a summary of its financial performance.

Correct Answer: a) Assets should be recorded at their original purchase price

The historical cost principle states that assets should be recorded at their original cost at the time of purchase, which provides a reliable and verifiable basis for financial reporting.

Correct Answer: b) Bonds Payable

Bonds payable are classified as long-term liabilities because they represent debts that are typically due in more than one year. Accounts payable and prepaid expenses are current liabilities and assets, respectively.

Correct Answer: b) Revenue Recognition Principle

The revenue recognition principle ensures that revenue is recorded when it is earned and collection is reasonably assured, regardless of when cash is received. This provides a more accurate picture of a company’s financial performance.

Correct Answer: b) Purchasing land

Purchasing land is considered an investing activity because it involves acquiring long-term assets that will be used in the company’s operations. Paying dividends and issuing stock are financing activities.

Correct Answer: a) Current Ratio

The current ratio measures a company’s ability to meet its short-term obligations by comparing its current assets to its current liabilities. A higher ratio indicates better liquidity.

Correct Answer: b) The company’s net income divided by the number of outstanding shares

Earnings per share (EPS) is a measure of a company’s profitability and is calculated by dividing net income by the number of outstanding shares. It indicates how much profit is attributed to each share of stock.

Correct Answer: c) Statement of Retained Earnings

The statement of retained earnings provides a summary of changes in retained earnings over a specific period, including the impact of net income and dividends on the retained earnings balance.

Correct Answer: b) Accounts Receivable

Accounts receivable are considered current assets because they represent amounts owed to a company by its customers and are expected to be collected within a year.

Correct Answer: b) Matching Principle

The matching principle ensures that expenses are recorded in the same period as the revenues they help to generate, which provides a clearer picture of a company’s profitability for each period.

Correct Answer: a) Repaying a loan

Repaying a loan is a financing activity because it involves using cash to settle a financial obligation. Paying wages and purchasing equipment are operating and investing activities, respectively.

Correct Answer: b) Income Statement

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

Correct Answer: b) Accounts Payable

Accounts payable is classified as a current liability because it represents amounts owed to suppliers for goods or services and is typically due within a year.