Q: Which of the following is the correct formula for the current ratio?

Current Ratio = $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

Q: What is the correct formula for the debt ratio?

Debt Ratio = $\frac{\text{Total Liabilities}}{\text{Total Assets}}$

Question 1

Which of the following best describes the main difference between accrual accounting and cash-basis accounting?

Accepted Answer

Accrual accounting records revenues when earned and expenses when incurred, regardless of when cash is received or paid, while cash-basis accounting records transactions only when cash changes hands.

Question 2

According to the revenue recognition principle, when should revenue be recorded?

Accepted Answer

When goods are delivered or services are performed for an amount expected to be received.

Question 3

Alladin Travel, Inc. prepays three months’ store rent ($3,000) on June 1. What adjusting entry is required on June 30?

Accepted Answer

Debit Rent Expense $1,000; Credit Prepaid Rent $1,000

Question 4

Which of the following is NOT a purpose of adjusting entries at the end of an accounting period?

Accepted Answer

To record cash transactions that occurred during the period

Question 5

If Alladin Travel, Inc. purchased equipment for $24,000 with a useful life of 5 years, what is the monthly depreciation expense using the straight-line method?

Accepted Answer

Monthly depreciation expense is $400

Question 6

Which account is a contra asset account and has a normal credit balance?

Accepted Answer

Accumulated Depreciation

Question 7

A company receives $400 in advance for services to be performed in the next month. How should this transaction be recorded?

Accepted Answer

Debit Cash $400; Credit Unearned Service Revenue $400

Question 8

Which of the following is the correct formula for calculating net income?

Accepted Answer

Net Income = Revenue - Expenses

Question 9

What is the book value of plant assets for Alladin Travel, Inc. at June 30, given Equipment of $24,000 and Accumulated Depreciation of $400?

Accepted Answer

Book value is $23,600

Question 10

Which of the following is a current liability?

Accepted Answer

Accounts Payable

Question 11

If a company accrues salary expense of $900 at the end of June, which account is credited in the adjusting entry?

Accepted Answer

Salary Payable

Question 12

Which of the following is the correct formula for the current ratio?

Accepted Answer

Current Ratio = $\frac{	ext{Current Assets}}{	ext{Current Liabilities}}$

Question 13

Which of the following transactions would NOT affect a company’s current ratio?

Accepted Answer

Collecting accounts receivable

Question 14

What is the correct formula for the debt ratio?

Accepted Answer

Debt Ratio = $\frac{	ext{Total Liabilities}}{	ext{Total Assets}}$

Question 15

Which of the following accounts is NOT closed at the end of the period?

Accepted Answer

Accounts Receivable

Question 16

Which of the following best describes a prepaid expense?

Accepted Answer

An asset that represents a payment made in advance for a future benefit

Question 17

Which of the following is a multi-step income statement feature that distinguishes it from a single-step format?

Accepted Answer

It separates operating and non-operating items.

Question 18

Which chart type is best for visualizing data over time?

Accepted Answer

Line chart

Question 19

If Alladin Travel, Inc. has current assets of $40,000 and current liabilities of $20,000, what is its current ratio?

Accepted Answer

Current Ratio = $\frac{40,000}{20,000} = 2.0$

Question 20

A company has total assets of $100,000 and total liabilities of $40,000. What is its debt ratio?

Accepted Answer

Debt Ratio = $\frac{40,000}{100,000} = 0.4$

Chapter 3: Accrual Accounting and Income

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