Financial Accounting and Reporting Principles

Posted on Apr 19, 2026 in Mathematics

Financial Accounting Principles

  1. Declaration of cash dividends increases total liabilities. ANSWER: True
  2. Payment of cash dividends decreases total assets and total equity. ANSWER: False
  3. The cumulative effect of the declaration and payment of a cash dividend will decrease total assets and shareholders’ equity on a company’s financial statements. ANSWER: True
  4. Short-term debt which is expected to be refinanced might not be classified as a current liability. ANSWER: True
  5. Accumulated depreciation is a contra-revenue account. ANSWER: False
  6. A loss on disposal of an asset is recognized when the selling price of the asset is less than the cost of the asset. ANSWER: False
  7. The total depreciation expense over the useful life of the asset and the amortizable cost of the asset is the same across all methods of depreciation. ANSWER: True
  8. Unearned revenue is usually a current liability. ANSWER: True
  9. Premium on bonds payable is a contra-liability account while discount on bonds payable is an adjunct-liability account. ANSWER: False
  10. If ending inventory is overstated, the error will affect two income statement periods. ANSWER: True
  11. Freight-out costs for inventory are expensed immediately in the income statement, while freight-in costs are capitalized in inventory. ANSWER: True
  12. Capitalizing an expenditure is adding that expenditure to the cost of an asset. ANSWER: True
  13. Over an asset’s useful life, total depreciation expense equals the depreciable cost of that asset across all methods of depreciation. ANSWER: True
  14. A contingent liability that has a remote chance of occurrence should be disclosed in the financial statement footnotes. ANSWER: False
  15. Using the straight-line method of amortization, interest expense equals the carrying value of bonds payable times the market rate. ANSWER: False
  16. The contractual interest rate is always equal to the market rate of interest on the date bonds are issued. ANSWER: False
  17. The market rate is used to calculate the actual amount of interest the bondholders will receive from the bond issuer. ANSWER: False
  18. If bonds have been issued at a discount, then over the term of the bonds the carrying value of the bonds will increase. ANSWER: True
  19. When a discount bond is redeemed before maturity at a price greater than 100, a loss on redemption will always occur. ANSWER: False
  20. Interest payment will be the same at each interest payment date if the bond discount or premium is amortized using the straight-line method, but it will be different at each interest payment date if the bond discount or premium is amortized using the effective interest method. ANSWER: False
  21. If ending inventory for the year ended December 31, 2020, is overstated by $25,000, net income for 2021 will be understated by $25,000. ANSWER: True
  22. Inventory for a company that uses the perpetual system is destroyed in a fire. That company would need to estimate its inventory using the gross profit percentage. ANSWER: False
  23. Goods held on consignment for sale on commission should not be included in the inventory at year end. ANSWER: True
  24. Company A shipped goods to Company B under the terms FOB shipping point, and the goods were destroyed in transit. Company A would not recognize the loss. ANSWER: True
  25. The purchases account used in a periodic inventory system contains a running balance of the inventory during the accounting period. ANSWER: False
  26. A decrease in gross profit percentage from one year to the next means that the cost of goods sold as a percentage of sales has decreased. ANSWER: False
  27. The sale of long-term assets at a gain does not affect operating income. ANSWER: True
  28. The legal protection for a work of art is acquired through copyrights. ANSWER: True
  29. Expenditures to maintain or restore the working order of a long-term asset are capital expenditures. ANSWER: False
  30. The book (or carrying) value of a capital asset declines more rapidly in the earlier years of the asset’s useful life when an accelerated depreciation method is used than when the straight-line depreciation method is used. ANSWER: True
  31. The carrying value of a bond from the issuing corporation’s standpoint will always move towards its face value, regardless of whether the bond is issued at a premium or a discount. ANSWER: True
  32. All liabilities must have a definite amount owed and must not be contingent on a future event. ANSWER: False
  33. For a liability to be classified as current, it must be expected to be paid within a year by using current assets or through the incurrence of other current liabilities, and management has no intention to refinance the liability in the long run. ANSWER: True
  34. One of the preferences given to preferred shareholders over common shareholders is the right to vote on major corporate issues. ANSWER: False
  35. The declaration of stock dividends will not reduce total shareholders’ equity. ANSWER: False
  36. The entry to record the declaration of a cash dividend includes a credit to retained earnings. ANSWER: False
  37. Most investors only need one year’s worth of financial information to evaluate an organization. ANSWER: False
  38. It is generally considered more useful to know the absolute dollar amount of change in financial statement amounts from year to year than to know the percentage change. ANSWER: False
  39. In line with the matching principle, the purpose of depreciation is to match the book value of the asset to the market value of the asset. ANSWER: False
  40. The total amount of depreciation recorded over the life of a long-term asset depends on the method used to depreciate that asset. ANSWER: False
  41. Capital expenditures refer to recording a cost as an asset when incurred. ANSWER: True
  42. An accelerated depreciation method refers to any method of depreciating a long-term asset that will result in greater amounts being expensed in the early years of an asset’s life and comparatively smaller amounts being expensed in the latter years of the asset’s life. ANSWER: True
  43. If a bond’s interest expense is greater than its interest payment, then the market rate must be lower than the coupon rate. ANSWER: False
  44. Under the straight-line method, both the carrying value and interest expense will increase over time when bonds are issued at a discount. ANSWER: False
  45. Investors will demand a higher return for redeemable bonds than for non-redeemable bonds. ANSWER: True
  46. Declaration and payment of a stock dividend will have no effect on the assets, liabilities, or equity of the company. ANSWER: True
  47. A stock split will have no effect on the company’s financial statements. ANSWER: True
  48. Dividends decrease net income, retained earnings, and equity. ANSWER: False
  49. An error in the valuation of beginning inventory in the current period will affect the following year’s net income. ANSWER: False
  50. Warranty expense should be recorded in the period in which the product under warranty is sold. ANSWER: True