C213 Accounting for Decision Makers Practice Questions - Set 4 - Part 1

Correct Answer: Interest Expense

Interest expense is a cost associated with borrowing money and is deducted from revenues to calculate net income. Dividends and stock-related transactions are not included in the calculation of net income.

Correct Answer: It shows a company’s assets, liabilities, and equity at a specific point in time

The balance sheet provides a snapshot of a company’s financial position by listing its assets, liabilities, and equity at a specific date, showing the company's financial health at that moment.

Correct Answer: Matching Principle

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

Correct Answer: Land

Land is considered a non-current asset because it is a long-term investment that is expected to provide economic benefits over multiple years. Current assets like cash and inventory are expected to be used or converted within a year.

Correct Answer: Return on Equity

Return on Equity (ROE) measures the profitability of a company by comparing net income to shareholders' equity. It indicates how efficiently a company is using its equity to generate profits.

Correct Answer: Goodwill

Goodwill is considered an intangible asset because it represents non-physical factors like a company's brand, customer relationships, and reputation. It is typically recognized when one company acquires another for more than its net identifiable assets.

Correct Answer: Paying suppliers for inventory

Paying suppliers for inventory is classified as an operating activity because it is part of the company’s day-to-day operations. Paying dividends, repurchasing stock, and issuing bonds are financing activities.

Correct Answer: Statement of Retained Earnings

The statement of retained earnings shows changes in retained earnings over a period, including how net income and dividends have affected the balance.

Correct Answer: Assets are recorded at their original purchase price

The historical cost principle dictates that assets should be recorded at their original purchase price, providing a reliable and verifiable basis for financial reporting, regardless of changes in market value.

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 has enough short-term assets to cover its short-term obligations.

Correct Answer: Securities and Exchange Commission (SEC)

The SEC oversees the regulation of U.S. stock exchanges, ensuring compliance with securities laws and protecting investors by requiring full disclosure of financial information from publicly traded companies.

Correct Answer: Repurchasing common stock

Repurchasing common stock is a financing activity because it involves a company returning capital to its shareholders. Purchasing a building is an investing activity, while paying wages and interest are operating activities.

Correct Answer: Income Statement

The income statement shows a company’s revenues, expenses, and net income or loss over a specific period, providing insight into its financial performance.

Correct Answer: Accounts Receivable

Accounts receivable are classified as current assets because they represent amounts owed to the company by customers and are expected to be collected within one year.

Correct Answer: Expenses should be recognized when they contribute to revenue

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

Correct Answer: Notes Payable due in 5 years

Notes payable due in 5 years are classified as non-current liabilities because they represent long-term obligations that are not due within one year.

Correct Answer: Buildings

Buildings are classified as long-term assets because they provide economic benefits for more than one year, unlike current assets like cash and accounts receivable.

Correct Answer: Return on Sales

Return on Sales (ROS) measures how efficiently a company generates profit from its sales, showing how much profit is made for each dollar of sales.

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

The full disclosure principle requires that all material information that could influence the decision-making of financial statement users be disclosed.

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

The P/E ratio reflects investors’ expectations of future earnings growth and indicates how much they are willing to pay for each dollar of a company’s earnings.