FREE AFC Basic Accounting Questions and Answers
Capital employed is equal to:
Explanation:
Capital employed represents the total amount of funds used in a business to generate revenue. It includes both long-term and short-term sources of funds. Therefore, it is calculated as Fixed Assets plus Current Assets minus Current Liabilities. This formula considers the investment in fixed assets and the working capital required to operate the business.
Which of the following accounting practice, is the accounting practice of reporting less revenue and a lower asset amount:
Explanation:
The accounting practice of conservatism involves reporting less revenue and lower asset amounts to ensure that potential expenses and liabilities are not understated. This principle aims to provide a cautious approach to financial reporting, prioritizing reliability and prudence by recognizing expenses and liabilities as soon as possible, but only recognizing revenues and assets when they are assured of being received.
What do financial statements reflect?
Explanation:
Financial statements reflect various aspects of a company's financial performance and position, including:
Liquidity: Ability to meet short-term obligations.
Financial Position: Assets, liabilities, and equity at a specific point in time.
Profitability: Ability to generate profits from operations.
Earnings Per Share (EPS) is calculated by:
Explanation:
Earnings Per Share (EPS) is a measure of a company's profitability and is calculated by dividing the net profit (or net income) by the number of ordinary shares outstanding. This ratio provides insight into how much profit is attributable to each share of stock. The other options incorrectly use gross profit or the number of equity shareholders, which are not part of the standard EPS calculation.
Prior to making adjusting entries, which trial balance is prepared?
Explanation:
Prior to making adjusting entries, accountants typically prepare the unadjusted trial balance. This trial balance lists all the accounts and their balances before any adjustments have been made at the end of the accounting period. Adjusting entries are then made to update account balances for accruals, deferrals, depreciation, and other adjustments. After adjustments, the adjusted trial balance is prepared to ensure that total debits equal total credits before financial statements are finalized.
What is the aim of accounting standards?
Explanation:
Accounting standards aim to achieve several objectives, including:
Lowering the accounting dissimilarities: By providing uniform guidelines, accounting standards reduce variations in accounting practices.
Standardizing diverse accounting policies: They establish consistent rules for recording and reporting financial transactions.
Ensuring comparability of financial statements: Standardized accounting practices enable easier comparison of financial information across companies and periods.
Which activity is covered in accounting information?
Explanation:
The accounting function encompasses all three activities: reporting information (preparing financial statements), identifying information (recognizing relevant transactions and events), and recording information (entering transactions into the accounting system). Each of these activities is integral to the overall accounting process.
What is the benefit of the accounting standards?
Explanation:
Accounting standards provide multiple benefits, including:
Facilitate comparison of financial statements across companies.
Eliminate confusing variations in accounting practices.
Require additional disclosures beyond legal requirements.
Where do the financial transactions are first recorded?
Explanation:
Financial transactions are first recorded in journals, which are also known as the books of original entries. This is where transactions are initially documented before being posted to the ledgers.
Which accounting method, recognizes and records revenue and expenses when the product or service is actually sold to customers?
Explanation:
Accrual accounting recognizes and records revenue and expenses when they are earned or incurred, not when cash is received or paid. This method matches revenues to the periods in which they are earned and matches expenses to the periods in which they are incurred.
Which financial statement, shows what a company owns and owes and its shareholders' equity?
Explanation:
The Balance Sheet provides a snapshot of a company's financial position at a specific point in time. It lists what a company owns (assets), what it owes (liabilities), and the shareholders' equity. Therefore, it shows what a company owns and owes, as well as its shareholders' equity.