IKM Core Financial Accounting 2 — Questions and Answers
Question 1: Which financial statement reports revenues and expenses over a period?
- Balance Sheet
- Income Statement (Correct answer)
- Statement of Cash Flows
- Statement of Retained Earnings
Correct answer: Income Statement
The Income Statement summarizes revenues, expenses, and profits over a reporting period.
The Income Statement matches revenues with expenses during a period. Key components include gross profit, operating income, and net income following a multi-step format.
Question 2: What is the accounting equation?
- Revenue - Expenses = Profit
- Assets = Liabilities + Equity (Correct answer)
- Cash In - Cash Out = Net Cash
- Debits = Credits
Correct answer: Assets = Liabilities + Equity
Assets equal Liabilities plus Equity, the basis for double-entry bookkeeping.
Every transaction affects at least two accounts while keeping this equation in balance. Equity includes contributed capital and retained earnings.
Question 3: Under accrual accounting, when is revenue recognized?
- When cash is received
- When goods or services are delivered (Correct answer)
- When the contract is signed
- At fiscal year end
Correct answer: When goods or services are delivered
Under ASC 606, revenue is recognized when the performance obligation is satisfied.
ASC 606 uses a five-step model: identify contract, identify obligations, determine price, allocate price, recognize revenue when satisfied.
Question 4: What does GAAP stand for?
- General Auditing and Accounting Procedures
- Generally Accepted Accounting Principles (Correct answer)
- Global Accounting and Assurance Protocols
- Governmental Accounting Advisory Panel
Correct answer: Generally Accepted Accounting Principles
GAAP is the set of accounting standards used for U.S. financial reporting.
GAAP is established by FASB and required for publicly traded U.S. companies. It uses a rules-based approach compared to IFRS's principles-based approach.
Question 5: Which depreciation method allocates an equal amount each year?
- Double declining balance
- Sum of years' digits
- Straight-line (Correct answer)
- Units of production
Correct answer: Straight-line
Straight-line divides the depreciable amount equally across the asset's useful life.
Formula: (Cost - Salvage Value) / Useful Life. It is the simplest and most commonly used method.
Question 6: What is the purpose of a trial balance?
- Calculate tax liability
- Verify total debits equal total credits (Correct answer)
- Prepare the tax return
- Reconcile bank statements
Correct answer: Verify total debits equal total credits
A trial balance lists all ledger account balances to verify debits equal credits.
Prepared after posting journal entries. A balanced trial balance does not guarantee accuracy since errors like duplicate entries or wrong accounts will not be detected.
IKM Core Financial Accounting 2
Which financial statement reports revenues and expenses over a period?