C213 Accounting for Decision Makers Practice Questions - Set 5 - Part 1

Correct Answer: Cash

Cash is the most liquid current asset because it is immediately available for use. Other current assets, such as inventory and accounts receivable, require time to be converted into cash.

Correct Answer: Reliability Principle

The reliability principle ensures that financial information is complete, neutral, and free from error, which allows users to trust the information presented in financial statements.

Correct Answer: Interest Expense

Interest expense is considered a non-operating expense because it is related to a company’s financing activities, rather than its core operations. Wages and rent are operating expenses.

Correct Answer: To summarize a company’s cash inflows and outflows from operating, investing, and financing activities

The statement of cash flows provides insights into how a company generates and uses cash by categorizing cash flows into operating, investing, and financing activities.

Correct Answer: Losses should be recognized as soon as they are probable, but gains should only be recognized when they are realized

The conservatism principle promotes a cautious approach to financial reporting by ensuring that potential losses are recognized early while gains are only recognized when realized.

Correct Answer: Paying dividends to shareholders

Paying dividends to shareholders is classified as a financing activity because it involves distributing cash to the company’s owners. Purchasing equipment is an investing activity, while collecting cash and paying suppliers are operating activities.

Correct Answer: Return on Equity

Return on Equity (ROE) measures how efficiently a company generates profit using its shareholders' equity, calculated by dividing net income by total equity.

Correct Answer: Land

Land is classified as a non-current asset because it is a long-term investment that is not expected to be used or converted into cash within a year, unlike current assets such as cash and accounts receivable.

Correct Answer: Consistency Principle

The consistency principle requires that companies use the same accounting methods over time, allowing users to compare financial information across periods and between companies.

Correct Answer: A lease that transfers ownership of an asset to the lessee by the end of the lease term

A capital lease is treated as if the lessee has purchased the asset because it typically transfers ownership to the lessee by the end of the lease term.

Correct Answer: Current Ratio

The current ratio measures a company’s liquidity by comparing its current assets to its current liabilities, indicating whether it can meet its short-term obligations.

Correct Answer: Statement of Retained Earnings

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

Correct Answer: To help managers make decisions related to planning, controlling, and managing operations

Managerial accounting focuses on providing detailed financial information to internal users, such as managers, to assist with decision-making and business operations. It differs from financial accounting, which is aimed at external users.

Correct Answer: Purchasing new machinery

Purchasing new machinery is classified as an investing activity because it involves acquiring long-term assets that will be used in the company’s operations. Repaying loans and paying dividends are financing activities.

Correct Answer: Income Statement

The income statement reports a company’s revenues, expenses, and net income over a specific period, providing insight into its profitability.

Correct Answer: Bonds Payable

Bonds payable are classified as long-term liabilities because they represent debt that is typically due in more than one year. Accounts payable, notes payable due within a year, and unearned revenue are current liabilities.

Correct Answer: Revenue should be recognized when the work is substantially complete and payment is reasonably assured

The revenue recognition principle ensures that revenue is recorded when it is earned, providing a more accurate reflection of a company’s financial performance.

Correct Answer: Interest Expense

Interest expense is considered a non-operating activity because it relates to financing rather than the company’s core operations. Cost of goods sold, depreciation, and salaries expenses are operating activities.

Correct Answer: Return on Sales

Return on Sales (ROS) measures the profitability of a company by comparing net income to sales, indicating how efficiently a company converts its sales into profits.

Correct Answer: Balance Sheet

The balance sheet provides a summary of a company’s assets, liabilities, and equity at a specific point in time, allowing users to assess its financial position.