Q. How is inventory valued under the FIFO method?
A.
Based on the most recent purchases
B.
Based on the oldest purchases
C.
At the average cost of all items
D.
At the lower of cost or market
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Solution
FIFO (First In, First Out) values inventory based on the oldest purchases, assuming that the oldest items are sold first.
Correct Answer:
B
— Based on the oldest purchases
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Q. How is the current ratio calculated?
A.
Current Assets / Current Liabilities
B.
Current Liabilities / Current Assets
C.
Total Assets / Total Liabilities
D.
Total Liabilities / Total Assets
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Solution
The current ratio is calculated by dividing current assets by current liabilities.
Correct Answer:
A
— Current Assets / Current Liabilities
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Q. If a company uses FIFO for inventory valuation, how will rising prices affect the financial statements?
A.
Higher ending inventory and lower cost of goods sold
B.
Lower ending inventory and higher cost of goods sold
C.
No effect on financial statements
D.
Higher cost of goods sold and lower net income
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Solution
Under FIFO, in times of rising prices, the ending inventory will be higher and the cost of goods sold will be lower.
Correct Answer:
A
— Higher ending inventory and lower cost of goods sold
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Q. What is the effect of an error in the trial balance?
A.
It will not affect the financial statements
B.
It will cause the financial statements to be inaccurate
C.
It will always be detected during the audit
D.
It will only affect the balance sheet
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Solution
An error in the trial balance will cause the financial statements to be inaccurate, as the trial balance is the basis for preparing them.
Correct Answer:
B
— It will cause the financial statements to be inaccurate
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Q. What is the impact of using straight-line depreciation on financial statements?
A.
It increases net income in the early years
B.
It decreases net income evenly over the asset's life
C.
It has no impact on cash flow
D.
It increases asset value over time
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Solution
Straight-line depreciation decreases net income evenly over the asset's life, reflecting a consistent expense recognition.
Correct Answer:
B
— It decreases net income evenly over the asset's life
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Q. What is the journal entry for recording depreciation expense on equipment?
A.
Debit Depreciation Expense, Credit Accumulated Depreciation
B.
Debit Accumulated Depreciation, Credit Depreciation Expense
C.
Debit Equipment, Credit Depreciation Expense
D.
Debit Depreciation Expense, Credit Equipment
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Solution
The correct entry is to debit Depreciation Expense and credit Accumulated Depreciation, reflecting the expense incurred and the reduction in asset value.
Correct Answer:
A
— Debit Depreciation Expense, Credit Accumulated Depreciation
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Q. What is the journal entry for the sale of inventory at a profit?
A.
Debit Cash, Credit Sales Revenue
B.
Debit Sales Revenue, Credit Cash
C.
Debit Cost of Goods Sold, Credit Inventory
D.
Debit Inventory, Credit Cost of Goods Sold
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Solution
The correct entry for the sale of inventory at a profit is to debit Cash and credit Sales Revenue.
Correct Answer:
A
— Debit Cash, Credit Sales Revenue
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Q. What is the journal entry to record the depreciation expense for the year?
A.
Debit Depreciation Expense, Credit Accumulated Depreciation
B.
Debit Accumulated Depreciation, Credit Depreciation Expense
C.
Debit Depreciation Expense, Credit Equipment
D.
Debit Equipment, Credit Depreciation Expense
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Solution
The correct entry to record depreciation expense is to debit Depreciation Expense and credit Accumulated Depreciation.
Correct Answer:
A
— Debit Depreciation Expense, Credit Accumulated Depreciation
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Q. What is the journal entry to record the sale of inventory at a profit?
A.
Debit Cash, Credit Sales Revenue
B.
Debit Cost of Goods Sold, Credit Inventory
C.
Debit Cash, Credit Inventory
D.
Debit Sales Revenue, Credit Cash
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Solution
The correct entry is to debit Cash and credit Sales Revenue, reflecting the cash received from the sale.
Correct Answer:
A
— Debit Cash, Credit Sales Revenue
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Q. What is the primary purpose of preparing a statement of cash flows?
A.
To show profitability
B.
To show liquidity
C.
To show financial position
D.
To show changes in equity
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Solution
The primary purpose of preparing a statement of cash flows is to show liquidity.
Correct Answer:
B
— To show liquidity
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Q. Which accounting standard requires the use of fair value for certain financial instruments?
A.
IFRS 9
B.
IAS 2
C.
GAAP
D.
IFRS 15
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Solution
IFRS 9 requires the use of fair value for certain financial instruments, impacting how these assets and liabilities are reported.
Correct Answer:
A
— IFRS 9
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Q. Which inventory valuation method can lead to lower taxes during inflation?
A.
FIFO
B.
LIFO
C.
Weighted Average
D.
Specific Identification
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Solution
LIFO (Last In, First Out) can lead to lower taxes during inflation as it matches the most recent, higher costs against revenues.
Correct Answer:
B
— LIFO
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Q. Which method of depreciation results in higher expenses in the early years of an asset's life?
A.
Straight-Line Method
B.
Declining Balance Method
C.
Units of Production Method
D.
Sum-of-the-Years'-Digits Method
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Solution
The Declining Balance Method results in higher expenses in the early years of an asset's life.
Correct Answer:
B
— Declining Balance Method
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Q. Which of the following ratios is used to assess a company's ability to meet its short-term obligations?
A.
Debt to Equity Ratio
B.
Current Ratio
C.
Return on Equity
D.
Gross Profit Margin
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Solution
The Current Ratio is used to assess a company's ability to meet its short-term obligations.
Correct Answer:
B
— Current Ratio
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