IAB Financial Accounting & Reporting 4 — Questions and Answers
Question 1: An adjusting entry to record accrued salaries at year-end would include:
- Debit Salaries Expense; Credit Cash
- Debit Salaries Payable; Credit Salaries Expense
- Debit Salaries Expense; Credit Salaries Payable (Correct answer)
- Debit Cash; Credit Salaries Expense
Correct answer: Debit Salaries Expense; Credit Salaries Payable
Accrued salaries are expensed (debit Salaries Expense) and recorded as a liability (credit Salaries Payable) when earned but not yet paid.
Question 2: Which financial statement reports cash inflows and outflows categorized as operating, investing, and financing activities?
- Balance Sheet
- Income Statement
- Statement of Retained Earnings
- Statement of Cash Flows (Correct answer)
Correct answer: Statement of Cash Flows
The Statement of Cash Flows classifies all cash movements into operating, investing, and financing activities.
Question 3: Goods held on consignment by a retailer on behalf of a supplier should be included in whose inventory?
- The retailer's inventory, since they possess the goods
- The supplier's inventory, since they retain ownership (Correct answer)
- Split equally between retailer and supplier
- Excluded from inventory by both parties
Correct answer: The supplier's inventory, since they retain ownership
Consigned goods remain the property of the supplier (consignor) and are included in the supplier's inventory, not the retailer's.
Question 4: What is 'gross profit'?
- Net Sales minus Operating Expenses
- Net Sales minus Cost of Goods Sold (Correct answer)
- Total Revenue minus Total Expenses
- Operating Income minus Interest Expense
Correct answer: Net Sales minus Cost of Goods Sold
Gross Profit is calculated as Net Sales minus Cost of Goods Sold and represents profit before operating expenses.
Question 5: Which of the following represents a financing activity on the Statement of Cash Flows?
- Purchase of equipment
- Collection of accounts receivable
- Payment of dividends to shareholders (Correct answer)
- Payment of salaries to employees
Correct answer: Payment of dividends to shareholders
Dividend payments relate to equity holders and are classified as financing activities on the cash flow statement.
Question 6: The book value of a long-term asset is calculated as:
- Original Cost + Accumulated Depreciation
- Original Cost − Accumulated Depreciation (Correct answer)
- Market Value − Original Cost
- Replacement Cost − Salvage Value
Correct answer: Original Cost − Accumulated Depreciation
Book value (carrying value) equals original cost less total accumulated depreciation recorded to date.
Question 7: Which of the following best describes the 'going concern' assumption?
- A company will remain in operation long enough to use its assets as intended (Correct answer)
- A company will liquidate all assets within one year
- Financial statements must reflect current market values
- All transactions must be recorded in the same currency
Correct answer: A company will remain in operation long enough to use its assets as intended
The going concern assumption presumes the entity will continue operating for the foreseeable future, justifying carrying assets at cost rather than liquidation value.
IAB Financial Accounting & Reporting 4
An adjusting entry to record accrued salaries at year-end would include: