Accounting Principles Quiz

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Questions and Answers

According to the accounting principles, which action violates the objectivity principle?

Recording minor transactions, such as the purchase of paper clips, as expenses.
Disclosing potential financial risks to stakeholders, like pending lawsuits.
Using estimated values for accounts payable and receivable instead of actual records. (correct)
Recording equipment at its original purchase price, despite a decrease in market value.

Which of the following scenarios best exemplifies the full disclosure principle in accounting?

A grocery store selling ready-made goods to customers.
A business reporting potential financial risks, such as a pending lawsuit, to its stakeholders. (correct)
An accountant using actual records instead of estimates for financial reports.
A car factory purchasing metal and parts to assemble cars.

How does a manufacturing business differ from a merchandising business?

A manufacturing business buys and sells ready-made items, while a merchandising business converts raw materials into products.
A manufacturing business converts raw materials into products, while a merchandising business buys and sells ready-made items. (correct)
A manufacturing business provides services, while a merchandising business produces goods.
A manufacturing business focuses on selling services, while a merchandising business focuses on selling goods.

Which of the following examples illustrates the application of the materiality principle?

A business records the purchase of office supplies as an expense rather than depreciating them as assets. (D) Signup and view all the answers

What is a primary disadvantage of running a car manufacturing factory compared to a merchandising business?

Higher investment in machinery and labor. (C) Signup and view all the answers

In a limited partnership, what distinguishes general partners from limited partners?

General partners share equal liability, while limited partners have limited liability. (C) Signup and view all the answers

Which of the following scenarios would most likely cause a company's financial statements to no longer accurately reflect the going concern assumption?

A government ban that prevents the company from continuing its primary operations. (B) Signup and view all the answers

A clothing store records its transactions in accordance with the time period concept. If the store chooses a fiscal year instead of a calendar year, which of the following periods could it select?

February 1 - January 31 (D) Signup and view all the answers

According to the monetary unit concept, which of the following assets should be recorded on a company's balance sheet?

Cash (D) Signup and view all the answers

A manufacturing company purchased raw materials for $50,000. Due to an oversupply in the market, the current replacement cost of these materials is $40,000. According to the cost principle, at what value should the raw materials be recorded on the company's balance sheet?

$50,000 (A) Signup and view all the answers

Which of the following best illustrates the concept of limited liability in a corporate structure?

A shareholder's personal assets are protected from being used to pay off the corporation's debts. (C) Signup and view all the answers

Which business structure is most likely to be negatively affected by the death of its owner?

Sole Proprietorship (A) Signup and view all the answers

A partnership is considering expansion but is hesitant due to potential personal liability. What type of partnership could mitigate this concern?

Limited Partnership (D) Signup and view all the answers

Why might a corporation be subject to 'double taxation'?

Because it pays taxes on its profits, and shareholders pay taxes on dividends received. (D) Signup and view all the answers

Which of the following is the LEAST likely advantage of a sole proprietorship?

Ability to raise large amounts of capital (C) Signup and view all the answers

A new law firm is formed by three partners. All partners will share in profits, losses, and management responsibilities. Which type of business organization is this?

General Partnership (A) Signup and view all the answers

Which of the following sequences accurately depicts the steps in a service business?

Start with cash, pay employees, perform service, receive payment. (A) Signup and view all the answers

What is a key distinction between a service business and other types of businesses?

Service businesses sell intangible services instead of physical goods. (A) Signup and view all the answers

Which of the following best describes the fundamental principle of double-entry bookkeeping introduced by Luca Pacioli?

Ensuring that every transaction affects at least two accounts to maintain the accounting equation. (D) Signup and view all the answers

In the context of accounting, the debit side of a transaction represents what?

Increase in assets or decrease in liabilities/equity. (B) Signup and view all the answers

If a store buys $500 worth of supplies on credit, what is the correct double-entry bookkeeping entry?

Debit Supplies $500, Credit Accounts Payable $500 (B) Signup and view all the answers

Which of the following is the primary role of auditors in accounting?

To review and verify the accuracy of financial statements. (B) Signup and view all the answers

How can a creditor primarily use accounting information?

To assess the company's ability to repay debts. (A) Signup and view all the answers

In a joint venture, what is the primary characteristic that defines this type of business arrangement?

A temporary partnership created for a specific project. (C) Signup and view all the answers

What is the key distinction between a general partner and a limited partner in a partnership?

A general partner has unlimited liability and manages daily operations, while a limited partner has limited liability and involvement. (C) Signup and view all the answers

How do investors primarily utilize accounting information when considering investing in a company?

To analyze the financial health and potential profitability of the company. (D) Signup and view all the answers

Twirlie Company purchased office supplies on credit. Which of the following journal entries correctly reflects this transaction?

Debit: Office Supplies; Credit: Accounts Payable (A) Signup and view all the answers

Why is it important for companies to maintain accurate books of accounts?

To ensure accuracy and provide insights for decision-making. (B) Signup and view all the answers

How does the journal contribute to the accounting cycle?

It is where transactions are initially recorded in chronological order. (C) Signup and view all the answers

How do special journals enhance the efficiency of the accounting process?

They categorize similar, repetitive transactions to streamline recording. (D) Signup and view all the answers

What is the fundamental accounting equation, and why is it important?

Assets = Liabilities + Equity; it provides a framework for recording and summarizing financial data. (C) Signup and view all the answers

Which of the following is the correct journal entry when a business uses cash to purchase unused office supplies?

Debit: Supplies; Credit: Cash (C) Signup and view all the answers

A business provides consulting services and receives payment immediately. Which accounts are affected, and how are they affected?

Debit: Cash; Credit: Service Revenue (D) Signup and view all the answers

What is the purpose of a subsidiary ledger?

To provide detailed records for specific general ledger accounts with high transaction volume. (B) Signup and view all the answers

Which of the following accounts would be classified as a non-current asset?

Equipment (C) Signup and view all the answers

A company pays for a two-year insurance policy in advance. How should this be recorded?

As a prepaid expense. (C) Signup and view all the answers

Which scenario best represents the correct application of the 'Drawings' account?

The owner withdraws cash from the business for personal use. (B) Signup and view all the answers

A business purchases a printer for Php 15,000 on credit. Which of the following is the correct entry in the ledger?

Equipment Account: Increases by Php 15,000; Accounts Payable Account: Increases by Php 15,000 (C) Signup and view all the answers

Which of the following is an example of revenue?

Service Revenue (D) Signup and view all the answers

Flashcards

Ancient Accounting

The origins of accounting trace back to ancient civilizations like Mesopotamia (2500 BCE) and China (423 BCE).

Luca Pacioli

Known as the Father of Accounting, he introduced double-entry bookkeeping in 1493 CE.

Double-Entry Bookkeeping

A system where every transaction affects two accounts, keeping the equation balanced (debit = credit).

Internal Users of Accounting

People within a business, such as management and employees, using financial reports for decision-making.