Bcom Bachelor of Commerce Bachelor of Commerce: Financial Accounting 3 — Questions and Answers
Question 1: The matching principle in accounting requires that:
- Assets must equal liabilities plus equity
- Expenses be recognized in the same period as the revenues they help generate (Correct answer)
- Financial statements be prepared on a consistent basis each year
- All transactions be recorded at their original cost
Correct answer: Expenses be recognized in the same period as the revenues they help generate
The matching principle links expenses to the revenues they generate, ensuring accurate period profitability measurement.
Question 2: A bank reconciliation is used to:
- Reconcile total assets with total liabilities and equity
- Identify differences between a company's cash records and the bank statement (Correct answer)
- Calculate the ending balance of accounts receivable
- Determine the correct depreciation rate for fixed assets
Correct answer: Identify differences between a company's cash records and the bank statement
Bank reconciliations explain discrepancies between the company's cash book and the bank's records, such as outstanding checks and deposits in transit.
Question 3: Which of the following is NOT included in operating activities on the cash flow statement (indirect method)?
- Net income
- Depreciation expense
- Changes in accounts receivable
- Proceeds from issuing common stock (Correct answer)
Correct answer: Proceeds from issuing common stock
Proceeds from issuing common stock is a financing activity; operating activities relate to core business operations.
Question 4: A trial balance that is in balance (debits = credits) guarantees that:
- There are no errors in the accounting records
- The total debits equal total credits in the ledger (Correct answer)
- All transactions have been recorded correctly
- The financial statements are free from fraud
Correct answer: The total debits equal total credits in the ledger
A balanced trial balance only confirms that total debits equal total credits; it does not detect all types of errors such as omissions or incorrect account classifications.
Question 5: Under GAAP, research and development costs are generally:
- Capitalized as intangible assets on the balance sheet
- Expensed as incurred in the period they occur (Correct answer)
- Amortized over the useful life of the research project
- Treated as a long-term investment
Correct answer: Expensed as incurred in the period they occur
GAAP requires R&D costs to be expensed immediately because the future benefits are too uncertain to capitalize as assets.
Question 6: Which ratio measures a company's ability to pay short-term obligations using only its most liquid assets?
- Current ratio
- Debt-to-equity ratio
- Quick ratio (Correct answer)
- Return on assets
Correct answer: Quick ratio
The quick ratio (acid-test ratio) excludes inventory and prepaid expenses from current assets, focusing on cash, marketable securities, and receivables.
Question 7: When a company declares a cash dividend, which accounts are affected?
- Debit Retained Earnings; Credit Dividends Payable (Correct answer)
- Debit Dividends Expense; Credit Cash
- Debit Cash; Credit Retained Earnings
- Debit Common Stock; Credit Dividends Payable
Correct answer: Debit Retained Earnings; Credit Dividends Payable
Declaring a cash dividend reduces Retained Earnings (debit) and creates a current liability Dividends Payable (credit).
Bcom Bachelor of Commerce Bachelor of Commerce: Financial Accounting 3
The matching principle in accounting requires that: