CPB / BookKeeping Financial Statement Preparation 5 — Questions and Answers
Question 1: Which principle requires that expenses be recorded in the same period as the revenues they help generate?
- Revenue recognition principle
- Matching principle (Correct answer)
- Cost principle
- Full disclosure principle
Correct answer: Matching principle
The matching principle requires expenses to be recognized in the same accounting period as the revenues they helped produce.
Question 2: A company with $80,000 in current assets and $50,000 in current liabilities has working capital of:
- $130,000
- $50,000
- $30,000 (Correct answer)
- $80,000
Correct answer: $30,000
Working capital equals current assets minus current liabilities: $80,000 − $50,000 = $30,000.
Question 3: Which of the following would cause a timing difference between book income and taxable income?
- Using the same depreciation method for both
- Using straight-line depreciation for books and MACRS for taxes (Correct answer)
- Recording cash sales identically on both
- Paying salaries that are deductible in both periods
Correct answer: Using straight-line depreciation for books and MACRS for taxes
Using different depreciation methods for financial reporting versus tax purposes creates temporary differences that lead to deferred tax assets or liabilities.
Question 4: Which type of audit opinion indicates that financial statements are presented fairly in all material respects?
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion
- Unmodified (clean) opinion (Correct answer)
Correct answer: Unmodified (clean) opinion
An unmodified (clean) opinion is issued when the auditor concludes the financial statements are presented fairly in all material respects under the applicable framework.
Question 5: On the statement of cash flows, proceeds from issuing long-term bonds are reported under:
- Operating activities
- Investing activities
- Financing activities (Correct answer)
- Non-cash supplemental disclosures
Correct answer: Financing activities
Proceeds from issuing long-term debt are classified as financing activities because they relate to raising capital from creditors.
Question 6: If a company uses the allowance method for bad debts, what entry is made when a specific account is written off?
- Debit bad debt expense; credit accounts receivable
- Debit allowance for doubtful accounts; credit accounts receivable (Correct answer)
- Debit accounts receivable; credit allowance for doubtful accounts
- Debit cash; credit accounts receivable
Correct answer: Debit allowance for doubtful accounts; credit accounts receivable
Under the allowance method, writing off a specific account debits the allowance (previously established) and credits accounts receivable, with no impact on net income.
Question 7: Which of the following transactions increases total assets and total liabilities equally?
- Collecting cash on account
- Purchasing inventory on credit (Correct answer)
- Paying a cash dividend
- Recording depreciation expense
Correct answer: Purchasing inventory on credit
Purchasing inventory on credit increases inventory (asset) and accounts payable (liability) by equal amounts, keeping the accounting equation balanced.
CPB / BookKeeping Financial Statement Preparation 5
Which principle requires that expenses be recorded in the same period as the revenues they help generate?