C213 Accounting for Decision Makers Practice Questions - Set 5 - Part 2

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: The cumulative profits that have been reinvested in the business rather than paid out as dividends

Retained earnings represent the profits that a company has chosen to reinvest in the business instead of distributing to shareholders as dividends.

Correct Answer: Issuing common stock

Issuing common stock is classified as a financing activity because it involves raising capital through equity financing. Purchasing land is an investing activity, while collecting cash and paying wages are operating activities.

Correct Answer: Personal financial transactions should be kept separate from business financial transactions

The entity concept ensures that a business's financial activities are reported separately from the personal financial activities of its owners, allowing for accurate financial reporting.

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: Collecting cash from customers

Collecting cash from customers is an operating activity because it is part of the company’s daily business operations involving revenue generation. Repurchasing stock and paying dividends are financing activities, while purchasing equipment is an investing activity.

Correct Answer: Goodwill

Goodwill is considered an intangible asset because it represents non-physical factors like a company's brand, customer relationships, and reputation.

Correct Answer: Bonds Payable

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

Correct Answer: Matching Principle

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

Correct Answer: Bonds Payable

Bonds payable are classified as non-current liabilities because they represent long-term obligations typically due in more than one year.

Correct Answer: Issuing common stock

Issuing common stock is classified as a financing activity because it involves raising capital through equity financing. Collecting cash, paying wages, and purchasing inventory are operating activities.

Correct Answer: Balance Sheet

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

Correct Answer: Matching Principle

The matching principle prohibits recognizing revenue and the related expenses in the same period to accurately reflect profitability.

Correct Answer: Statement of Cash Flows

The statement of cash flows categorizes cash inflows and outflows into operating, investing, and financing activities, offering a clear view of a company’s cash management.

Correct Answer: Notes Payable due in 6 months

Notes payable due in 6 months are classified as current liabilities because they represent obligations due within one year. Bonds payable, equipment, and land are classified as long-term liabilities and assets, respectively.

Correct Answer: 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, providing a reliable basis for financial reporting.

Correct Answer: Income Statement

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

Correct Answer: Asset Turnover

Asset turnover measures how efficiently a company uses its assets to generate sales, calculated by dividing sales by total assets.

Correct Answer: Income Statement

The income statement provides a detailed report of a company’s revenues and expenses, leading to net income over a specific period.

Correct Answer: Balance Sheet

The balance sheet provides a summary of a company’s total liabilities alongside addresses for assets and equity at a specific point in time.