IKM - International Knowledge Measurement Core Financial Accounting Questions and Answers 1 — Questions and Answers
Question 1: Which of the following accounting principles requires that the expenses incurred to generate revenue be recorded in the same period as the revenue?
- Matching Principle (Correct answer)
- Going Concern Principle
- Cost Principle
- Full Disclosure Principle
Correct answer: Matching Principle
The Matching Principle is a core concept of accrual accounting that directs a company to report an expense on its income statement in the same period as the related revenue. This provides a more accurate picture of the company's profitability for the period.
Question 2: A company performs services for a client in December but does not receive payment until January of the following year. According to the revenue recognition principle under accrual basis accounting, when should the company record the revenue?
- In January, when the cash is received.
- In December, when the services are performed. (Correct answer)
- Spread evenly between December and January.
- At the end of the fiscal year in which the payment is received.
Correct answer: In December, when the services are performed.
The revenue recognition principle, a key part of accrual accounting, dictates that revenue should be recognized when it is earned, regardless of when cash is received. Since the services were performed (earned) in December, the revenue must be recorded in December.
Question 3: Which of the following financial statements provides a snapshot of a company's financial position at a specific point in time?
- Income Statement
- Statement of Cash Flows
- Balance Sheet (Correct answer)
- Statement of Retained Earnings
Correct answer: Balance Sheet
The Balance Sheet is the only financial statement that reports a company's assets, liabilities, and equity as of a specific date (e.g., "as of December 31, 202X"). The Income Statement, Statement of Cash Flows, and Statement of Retained Earnings all report financial performance or changes over a period of time.
Question 4: A corporation issues common stock to investors in exchange for $50,000 in cash. What is the immediate effect of this transaction on the company's accounting equation?
- Assets decrease and Liabilities increase.
- Assets increase and Liabilities increase.
- Liabilities decrease and Equity increases.
- Assets increase and Equity increases. (Correct answer)
Correct answer: Assets increase and Equity increases.
The company receives cash, which is an Asset, so Assets increase by $50,000. The company issues common stock, which is a component of Equity, so Equity increases by $50,000. The accounting equation (Assets = Liabilities + Equity) remains in balance as both sides increase equally ($50,000 = $0 + $50,000).
Question 5: A company purchases a new machine for $100,000 with a useful life of 10 years and no salvage value. Using the straight-line depreciation method, what is the impact on the company's financial statements in the first year of the machine's use?
- Cash decreases by $100,000 and equity decreases by $100,000.
- Expenses increase by $100,000 and assets decrease by $100,000.
- Net income decreases by $10,000 and the asset's book value decreases by $10,000. (Correct answer)
- Revenue decreases by $10,000 and liabilities increase by $10,000.
Correct answer: Net income decreases by $10,000 and the asset's book value decreases by $10,000.
Straight-line depreciation is calculated as (Cost - Salvage Value) / Useful Life. In this case, ($100,000 - $0) / 10 years = $10,000 per year. This $10,000 is recorded as Depreciation Expense on the Income Statement, which reduces net income. The asset's book value on the Balance Sheet is reduced by the accumulated depreciation of $10,000.
Question 6: In the double-entry accounting system, which of the following accounts is increased with a debit?
- Assets (Correct answer)
- Liabilities
- Owner's Equity
- Revenue
Correct answer: Assets
In double-entry bookkeeping, Debits increase Assets, Expenses, and Dividends (or Drawings). Credits increase Liabilities, Equity, and Revenue. Therefore, Assets are the account type among the choices that is increased with a debit.
IKM - International Knowledge Measurement Core Financial Accounting Questions and Answers 1
Which of the following accounting principles requires that the expenses incurred to generate revenue be recorded in the same period as the revenue?