IAB Financial Accounting & Reporting 3 — Questions and Answers
Question 1: When a business purchases supplies on credit, the correct journal entry is:
- Debit Cash, Credit Supplies
- Debit Supplies, Credit Accounts Payable (Correct answer)
- Debit Accounts Receivable, Credit Supplies
- Debit Accounts Payable, Credit Supplies
Correct answer: Debit Supplies, Credit Accounts Payable
Purchasing supplies on credit increases Supplies (debit) and creates a liability in Accounts Payable (credit).
Question 2: Which accounting principle requires expenses to be recorded in the same period as the revenues they help generate?
- Revenue Recognition Principle
- Historical Cost Principle
- Matching Principle (Correct answer)
- Full Disclosure Principle
Correct answer: Matching Principle
The Matching Principle dictates that expenses should be recognized in the same accounting period as the related revenues.
Question 3: A company collects $2,000 cash in advance for services to be performed next month. How should this be recorded?
- Debit Cash $2,000; Credit Service Revenue $2,000
- Debit Unearned Revenue $2,000; Credit Cash $2,000
- Debit Cash $2,000; Credit Unearned Revenue $2,000 (Correct answer)
- Debit Accounts Receivable $2,000; Credit Service Revenue $2,000
Correct answer: Debit Cash $2,000; Credit Unearned Revenue $2,000
Cash received before services are rendered creates a liability (Unearned Revenue) until the service is performed.
Question 4: Which of the following is NOT a component of the income statement?
- Net Sales
- Cost of Goods Sold
- Retained Earnings (Correct answer)
- Operating Expenses
Correct answer: Retained Earnings
Retained Earnings appears on the balance sheet and the statement of retained earnings, not the income statement.
Question 5: The straight-line depreciation method calculates annual depreciation as:
- (Cost + Salvage Value) ÷ Useful Life
- (Cost − Salvage Value) ÷ Useful Life (Correct answer)
- Cost × Depreciation Rate × Book Value
- Cost ÷ (Useful Life × 2)
Correct answer: (Cost − Salvage Value) ÷ Useful Life
Straight-line depreciation spreads the depreciable cost (Cost minus Salvage Value) evenly over the asset's useful life.
Question 6: What is the purpose of a bank reconciliation?
- To record all cash sales for the period
- To ensure the company's cash book balance agrees with the bank statement balance (Correct answer)
- To calculate the company's credit rating
- To record outstanding checks as liabilities
Correct answer: To ensure the company's cash book balance agrees with the bank statement balance
A bank reconciliation identifies and explains differences between the company's cash records and the bank's statement to confirm the true cash balance.
Question 7: Under the perpetual inventory system, Cost of Goods Sold is recorded:
- Only at the end of the accounting period
- Each time a sale is made (Correct answer)
- Quarterly during a physical count
- When cash is received from customers
Correct answer: Each time a sale is made
A perpetual system updates inventory and records COGS continuously with every sale transaction.
IAB Financial Accounting & Reporting 3
When a business purchases supplies on credit, the correct journal entry is: