Financial Accounting and Reporting Diagnostic Exam Reviewer

9 Questions

Which of the following events would be recorded under the accrual basis of accounting?

Recognition of interest revenue earned but not yet received

In financial accounting, which of the following best describes the term 'amortization'?

Spreading the cost of an intangible asset over its useful life

Which of the following is an essential financial statement used to assess the financial position of a company?

Income statement

What is the effect of recording an expense on the accounting equation?

Decreases assets and decreases equity

Which financial statement reports the financial performance of a company over a specific period of time?

Income Statement

Which of the following is a characteristic of an intangible asset?

Easily measurable fair value

When preparing financial statements, which of the following inventory valuation methods assumes that the cost of the latest items purchased is the cost of goods sold?

LIFO (Last-In, First-Out)

What is the impact on the financial statements when a company capitalizes an expenditure as an asset instead of expensing it immediately?

Increased total assets and net income in the current period

Which of the following is a characteristic of a contingent liability?

Reasonably possible and related to a future event

Study Notes

Accrual Basis of Accounting

Events that would be recorded under the accrual basis of accounting include revenues and expenses that have been earned or incurred, but not yet received or paid.

Amortization

Amortization is the process of allocating the cost of an intangible asset over its useful life.

Financial Statements

The balance sheet is an essential financial statement used to assess the financial position of a company.

Accounting Equation

Recording an expense decreases assets or increases liabilities, which in turn decreases equity.

Financial Performance

The income statement reports the financial performance of a company over a specific period of time.

Intangible Assets

A characteristic of an intangible asset is that it lacks physical existence.

Inventory Valuation

The Last-In, First-Out (LIFO) method assumes that the cost of the latest items purchased is the cost of goods sold.

Capitalizing Expenditure

Capitalizing an expenditure as an asset instead of expensing it immediately increases assets and equity, and does not affect net income in the current period.

Contingent Liability

A characteristic of a contingent liability is that it is a potential liability that may arise depending on the outcome of a future event.