Bcom Bachelor of Commerce Bachelor of Commerce: Financial Accounting 2 — Questions and Answers
Question 1: Under the accrual basis of accounting, revenue is recognized when:
- Cash is received from the customer
- It is earned, regardless of when cash is received (Correct answer)
- The invoice is mailed to the customer
- Management decides to record it
Correct answer: It is earned, regardless of when cash is received
Accrual accounting recognizes revenue when earned (goods/services delivered), not when cash changes hands.
Question 2: Which depreciation method results in the highest depreciation expense in the early years of an asset's life?
- Straight-line method
- Units-of-production method
- Double declining balance method (Correct answer)
- Sum-of-years-digits method
Correct answer: Double declining balance method
Double declining balance applies double the straight-line rate to the book value, front-loading depreciation in early years.
Question 3: A company purchases $10,000 of inventory on credit. Which journal entry is correct?
- Debit Inventory $10,000; Credit Accounts Payable $10,000 (Correct answer)
- Debit Accounts Payable $10,000; Credit Inventory $10,000
- Debit Cash $10,000; Credit Inventory $10,000
- Debit Inventory $10,000; Credit Cash $10,000
Correct answer: Debit Inventory $10,000; Credit Accounts Payable $10,000
Buying inventory on credit increases the asset Inventory (debit) and creates a liability Accounts Payable (credit).
Question 4: The allowance for doubtful accounts is classified on the balance sheet as:
- A current liability
- A contra-asset account (Correct answer)
- An operating expense
- A long-term asset
Correct answer: A contra-asset account
The allowance for doubtful accounts offsets Accounts Receivable, making it a contra-asset that reduces the net receivable balance.
Question 5: Which financial statement shows a company's revenues and expenses over a period of time?
- Balance sheet
- Statement of cash flows
- Income statement (Correct answer)
- Statement of retained earnings
Correct answer: Income statement
The income statement (profit and loss statement) summarizes revenues, expenses, and net income for a specific accounting period.
Question 6: FIFO inventory costing assumes that:
- The most recently purchased items are sold first
- The oldest inventory items are sold first (Correct answer)
- Average cost is assigned to all units sold
- Inventory is valued at current market price
Correct answer: The oldest inventory items are sold first
FIFO (First-In, First-Out) assumes the earliest purchased inventory units are the first ones sold.
Question 7: Goodwill arises on the balance sheet when a company:
- Has a strong brand reputation in the market
- Acquires another business for more than the fair value of its net assets (Correct answer)
- Develops patents and trademarks internally
- Reports above-average earnings for five consecutive years
Correct answer: Acquires another business for more than the fair value of its net assets
Goodwill is recognized in a business combination when the purchase price exceeds the fair value of the identifiable net assets acquired.
Bcom Bachelor of Commerce Bachelor of Commerce: Financial Accounting 2
Under the accrual basis of accounting, revenue is recognized when: