Q. What does the debt-to-equity ratio measure?
A.
Liquidity
B.
Profitability
C.
Leverage
D.
Efficiency
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Solution
The debt-to-equity ratio measures a company's financial leverage by comparing its total liabilities to its shareholders' equity.
Correct Answer:
C
— Leverage
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Q. What is the effect of an overstatement of inventory on the financial statements?
A.
Understates net income
B.
Overstates net income
C.
No effect on net income
D.
Understates total assets
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Solution
An overstatement of inventory leads to an overstatement of net income because it reduces the cost of goods sold.
Correct Answer:
B
— Overstates net income
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Q. What is the primary purpose of adjusting entries?
A.
To close the books
B.
To correct errors
C.
To ensure revenues and expenses are recognized in the correct period
D.
To prepare the trial balance
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Solution
Adjusting entries are made to ensure that revenues and expenses are recognized in the period they occur, following the accrual basis of accounting.
Correct Answer:
C
— To ensure revenues and expenses are recognized in the correct period
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Q. Which inventory valuation method results in the highest ending inventory during periods of rising prices?
A.
FIFO
B.
LIFO
C.
Weighted Average
D.
Specific Identification
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Solution
FIFO (First-In, First-Out) results in the highest ending inventory value during periods of rising prices because the oldest, cheaper costs are matched against current revenues.
Correct Answer:
A
— FIFO
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Q. Which of the following is a characteristic of LIFO inventory valuation?
A.
Matches current costs with current revenues
B.
Results in higher taxes during inflation
C.
Is allowed under IFRS
D.
Is the most commonly used method
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Solution
LIFO (Last-In, First-Out) matches the most recent costs with current revenues, which can lead to lower net income during inflation.
Correct Answer:
A
— Matches current costs with current revenues
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Q. Which of the following ratios is used to assess a company's profitability?
A.
Current Ratio
B.
Quick Ratio
C.
Return on Equity
D.
Debt Ratio
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Solution
Return on Equity (ROE) is a key profitability ratio that measures the amount of net income returned as a percentage of shareholders' equity.
Correct Answer:
C
— Return on Equity
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Q. Which ratio measures a company's ability to meet its long-term obligations?
A.
Current Ratio
B.
Quick Ratio
C.
Debt to Equity Ratio
D.
Gross Profit Margin
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Solution
The Debt to Equity Ratio measures a company's financial leverage and its ability to meet long-term obligations by comparing total liabilities to shareholders' equity.
Correct Answer:
C
— Debt to Equity Ratio
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