ANSWERS
1. d) Accounts Payable
- Description: Accounts Payable is a liability because it represents the amount a company owes to its creditors/suppliers for goods or services purchased on credit.
2. c) Revenue Recognition Principle
- Description: The Revenue Recognition Principle dictates that revenue should be recognized when it is earned, regardless of when the payment is received.
3. a) A $100 cash drawing by the owner is debited to the Owner's Capital account and credited to Cash.
- *Description: Drawing by the owner should be debited to the Drawing account and not the Owner's Capital account. Crediting the cash is correct, but the debit is misplaced, causing the trial balance to be out of balance.
4. c) Goodwill
- Description: Goodwill is an intangible asset that represents the value of a business's reputation, brand, and other non-physical factors that contribute to its overall value.
5. b) Allocating the cost of tangible assets over its useful life.
- Description: Depreciation is the systematic allocation of the cost of a tangible asset over its estimated useful life. It reflects the wear and tear or obsolescence of the asset.
6. c) Provide assurance that financial statements are free from material misstatement.
- Description: The primary objective of financial auditing is to provide an independent opinion on whether the financial statements are free from material misstatement, and thus provide a true and fair view.
7. b) Balance Sheet
- Description: The Balance Sheet (or Statement of Financial Position) provides a snapshot of a company's financial position at a specific point in time, detailing its assets, liabilities, and equity.
Read More: Test No. 129
8. b) Deducted from the bank statement balance.
- Description: Outstanding checks are checks that have been written and recorded in the company's books but have not yet cleared the bank. Therefore, they are deducted from the bank statement balance in a reconciliation.
9. b) Expenses to be matched with revenues.
- Description: The matching principle in accounting dictates that expenses should be recorded in the same period as the revenues they helped generate.
10. d) Unqualified opinion.
- Description: An unqualified opinion (or clean opinion) is given when an auditor determines that the financial statements of a company are presented fairly in all material respects.
11. a) Sales - Cost of Goods Sold.
- Description: Gross profit is calculated by subtracting the cost of goods sold (COGS) from total sales. It represents the profit a company makes after deducting the costs directly associated with producing its products or services.
12. b) Revenue to be recognized when earned and expenses when incurred.
- Description: Accrual accounting requires companies to record revenues and expenses when they are earned or incurred, irrespective of when the cash is received or paid.
13. c) Profits that have been reinvested in the business.
- Description: Retained earnings represent the accumulated profits of a company that have not been distributed as dividends and are reinvested in the business.
14. a) Physical examination, external confirmation, documentation, analytical procedures.
- Description: In terms of the quality of evidence, physical examination typically provides the highest assurance, followed by external confirmations, then documentation, and lastly, analytical procedures.
15. b) Accumulated Depreciation.
- Description: Accumulated Depreciation is a contra asset account which represents the total depreciation expense charged against an asset since its acquisition. It reduces the book value of an asset.
16. a) Cost Principle.
- Description: The cost principle states that assets should be recorded at their historical cost or purchase price when acquired.
17. c) Accounts payable.
- Description: Accounts payable are short-term liabilities arising from purchases made on credit, making them a current liability.
18. c) Each time a sale is made.
- Description: In a perpetual inventory system, inventory and cost of goods sold are updated continuously with each sale or purchase.
19. d) Express an opinion on the fairness of the financial statements.
- Description: The primary responsibility of an independent external auditor is to express an unbiased opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.
20. a) Assets = Liabilities + Equity.
- Description: This is the basic accounting equation. It represents the relationship between a company's assets, liabilities, and owners' equity. Assets are resources owned by the company, liabilities are obligations owed by the company, and equity represents the owners' interest in the company.