Accounting Ratios and Interpretation

Accounting Ratios and Interpretation - Problem Set

Q. What is the effect of an overstatement of ending inventory on the financial statements?

Solution

An overstatement of ending inventory leads to an understatement of cost of goods sold, resulting in overstated net income.

Correct Answer: B — Overstated net income

Q. What is the journal entry to record depreciation expense?

Solution

The correct entry is to debit Depreciation Expense to recognize the expense and credit Accumulated Depreciation to reduce the asset's book value.

Correct Answer: A — Debit Depreciation Expense, Credit Accumulated Depreciation

Q. Which accounting principle requires that expenses be matched with revenues?

Solution

The Matching Principle requires that expenses be recognized in the same period as the revenues they help to generate.

Correct Answer: B — Matching Principle

Q. Which accounting standard governs the valuation of inventory?

Solution

IAS 2 is the accounting standard that deals specifically with the valuation of inventory.

Correct Answer: B — IAS 2

Q. Which of the following is a liquidity ratio?

Solution

The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations.

Correct Answer: B — Current Ratio

Q. Which of the following is not a component of the accounting equation?

Solution

Revenue is not a component of the accounting equation; the equation is Assets = Liabilities + Equity.

Correct Answer: D — Revenue

Q. Which of the following methods is NOT used for inventory valuation?

Solution

Net Realizable Value is not a method of inventory valuation; it is a measure used to assess the value of inventory.

Correct Answer: D — Net Realizable Value

Q. Which ratio measures a company's ability to pay short-term obligations?

Solution

The Current Ratio measures a company's ability to pay its short-term liabilities with its short-term assets.

Correct Answer: A — Current Ratio

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