Q: Which formula correctly calculates Net Working Capital?

$$\text{Net Working Capital} = \text{Current Assets} - \text{Current Liabilities}$$

Q: If a company has Current Assets of $$50,000 and Current Liabilities of 25$$,000, what is its Current Ratio?

$$\text{Current Ratio} = \frac{50,000}{25,000} = 2.0$$

Question 1

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

Accepted Answer

Accrual accounting records transactions when they occur, regardless of cash flow, while cash-basis accounting records only cash receipts and payments.

Question 2

A company pays $6,000 for a one-year insurance policy on January 1. Using accrual accounting, what adjusting entry should be made at the end of January?

Accepted Answer

Dr Insurance Expense $$500 / Cr Prepaid Insurance 500$$

Question 3

According to the matching principle, when should expenses be recognized?

Accepted Answer

In the same period as the revenues they helped generate.

Question 4

A company purchased equipment for $30,000 with a useful life of 6 years. What is the annual straight-line depreciation expense?

Accepted Answer

Annual Depreciation = $$30,000 \div 6 = 5$$,000

Question 5

Which of the following statements about adjusting entries is TRUE?

Accepted Answer

Adjusting entries are made at the end of the accounting period and affect one income statement account and one balance sheet account.

Question 6

A company receives $1,200 in advance for services to be performed over 6 months. At the end of the first month, what is the correct adjusting entry?

Accepted Answer

Dr Unearned Revenue $$200 / Cr Service Revenue 200$$

Question 7

Which formula correctly calculates Net Working Capital?

Accepted Answer

$$	ext{Net Working Capital} = 	ext{Current Assets} - 	ext{Current Liabilities}$$

Question 8

If a company has Current Assets of $$50,000 and Current Liabilities of 25$$,000, what is its Current Ratio?

Accepted Answer

$$	ext{Current Ratio} = \frac{50,000}{25,000} = 2.0$$

Question 9

Which account is considered a contra account and is used to track the portion of a plant asset's cost that has been used up?

Accepted Answer

Accumulated Depreciation

Question 10

A company earned $2,000 in commission revenue in June but will collect the cash in July. What adjusting entry should be made at the end of June?

Accepted Answer

Dr Accounts Receivable $$2,000 / Cr Commission Revenue 2$$,000

Question 11

Which of the following is the correct sequence for preparing financial statements from the adjusted trial balance?

Accepted Answer

Income Statement → Statement of Retained Earnings → Balance Sheet

Question 12

After closing the books, which accounts will have a zero balance?

Accepted Answer

Revenues, Expenses, and Dividends

Question 13

A company has Total Liabilities of $$40,000 and Total Assets of 100$$,000. What is its Debt Ratio?

Accepted Answer

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

Question 14

Which of the following best illustrates the application of the revenue recognition principle?

Accepted Answer

Recording revenue when the service is performed, even if cash is not yet received.

Question 15

A company pays employees $1,500 every Friday. The accounting period ends on Wednesday. What adjusting entry should be made?

Accepted Answer

Dr Salary Expense $$900 / Cr Salary Payable 900$$

Question 16

Which of the following is NOT a characteristic of cash-basis accounting?

Accepted Answer

Provides a complete financial picture

Question 17

If a company has Revenues of $$80,000 and Expenses of 65$$,000, what is its Net Income?

Accepted Answer

$$	ext{Net Income} = 80,000 - 65,000 = 15,000$$

Question 18

Which of the following best explains why accumulated depreciation is used instead of reducing the asset account directly?

Accepted Answer

It allows analysts to see both the original cost and how much of the asset has been used.

Question 19

A company has plant assets with a cost of $$50,000 and accumulated depreciation of 20$$,000. What is the book value?

Accepted Answer

$$	ext{Book Value} = 50,000 - 20,000 = 30,000$$

Question 20

Which type of chart is best suited for comparing revenue across different companies in a single quarter?

Accepted Answer

Bar/Column Chart

Accrual Accounting and Income: Study Notes

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