Ch. 3 - Invented questions

Question 1

What is the accounting equation?

A: Assets - Liabilities = Equity

B: Assets + Liabilities = Equity

C: Assets = Equity - Liabilities

D: Assets + Equity = Liabilities

Answer 1

A

the accounting equation is:

assets = liabilities + equity

Question 2

What does the double-entry system of accounting entail?

A: It involves recording transactions in a single account only to simplify bookkeeping.

B: IIt is a structured approach for recording transactions that necessitates at least two entries in separate accounts to uphold the accounting equation.

C: It mandates the use of cash accounting exclusively for all transactions.

D: It is a method that allows for recording only income and expense transactions without tracking assets and liabilities.

Answer 2

B

The definition is: It is a systematic method for recording transactions that requires at least two entries in different accounts to maintain the accounting equation.

Question 3

What are financial statements?

A: Reports that only show a company’s sales figures for the year.

B: Detailed records of daily transactions for each department.

C: Accounts that provide information solely about employee salaries.

D: Summary accounts that present a firm’s financial position, performance, and liquidity.

Answer 3

D

Financial statements: set of summary accounts to present the firm’s financial position (balance sheet), performance (income statement) and liquidity (cash flow statement

Question 4

What are the three categories of a firm’s cash flows?

A: Revenue, expense, and profit cash flows.

B: Current, fixed, and variable cash flows.

C: Operating, investing, and financing cash flows.

D: Short-term, long-term, and operational cash flows.

Answer 4

C

The firm‘s cash flows are separated into three categories:
▪ operating cash flow - arise from the firm‘s normal business operations.

▪investing cash flow – arise from purchase (and sale) of long-term assets.

▪financing cash flow – arise from acquisitions (and repayments) of capital

Question 5

What is the cash flow formula?

A: Cash inflow + cash outflow = cash flow.

B: Cash inflow - cash outflow = cash flow.

C: Cash inflow - cash position = cash flow.

D: Cash position - cash outflow = cash flow.

Answer 5

B

Cash inflow - cash outflow = cash flow