What Are Accounting Foundations?
Accounting Foundations refer to the essential principles, processes, and concepts that underpin all financial recordkeeping and reporting. They serve as the bedrock for understanding how businesses track, manage, and communicate their financial performance.
Part A: Multiple Choice Questions
What new lease accounting rule took effect in the United States in 2019?
(A) The appreciation of a lease will be considered revenue.
(B) Leases with lease terms greater than one year will be reported on the balance sheet. ✅
(C) Leases will be depreciated over the length of the lease.
(D) Long-term leases will no longer be reported on the balance sheet.
What is the operating cycle for a company that sells an item 30 days after obtaining it and receives cash from the sale after another 45 days?
(A) 15
(B) 45
(C) 75 ✅
(D) 30
Reporting the sources of a company's financing is the purpose of which financial document?
(A) Profit and loss statement
(B) Income statement
(C) Statement of cash flows
(D) Balance sheet ✅
If a company sells 5,000,000 shares of stock for $2 per share, and the value rises to $3 per share, what is the market capitalization?
(A) 5,000,000
(B) 30,000,000
(C) 15,000,000 ✅
(D) 10,000,000
How is net income calculated?
(A) Revenues minus expenses ✅
(B) Revenues minus liabilities
(C) Equity plus revenues
(D) Equity minus liabilities
Which company has the longest operating cycle?
(A) Nike ✅
(B) Any consulting firm
(C) McDonald's
(D) Walmart
The debt ratio for a large company should be around _____ percent.
(A) 20
(B) 55 ✅
(C) 90
(D) 75
When should revenue be recognized?
(A) When the contract price has been allocated among obligations
(B) As the obligations are satisfied ✅
(C) As the sale is finalized
(D) When the obligations are identified
What is the correct order for preparing journal entries, trial balances, and financial statements?
(A) Journal entries, trial balances, financial statements ✅
(B) Trial balances, journal entries, financial statements
(C) Journal entries, financial statements, trial balances
Why are common-size financial statements used?
(A) To compare companies of different sizes ✅
(B) To utilize financial ratios
(C) To comply with accounting rules
What is the primary purpose of a common-size statement?
(A) To calculate market capitalization
(B) To compare companies of different sizes ✅
(C) To determine the profitability of small companies
Which inventory method is banned under international accounting rules?
(A) FIFO
(B) Average cost
(C) Total cost
(D) LIFO ✅
If a company’s cost of sales divided by total sales is 70%, how much does it pay for an item that sells for $100?
(A) $70 ✅
(B) $100
(C) $30
(D) $66
What is the first step when preparing a journal entry?
(A) List the account being credited first
(B) Ensure debits and credits are equal
(C) Determine whether the account has increased or decreased
(D) Identify the account involved ✅
If you buy stock for $1 and it rises to $3, how do you report the income tax when you sell the share?
(A) As income tax
(B) As a deferred income tax liability
(C) As realized gain
(D) As a short-term capital gain ✅
What is typically the largest expense on the income statement of a retail company?
(A) Cost of goods sold ✅
(B) Loan payments
(C) Wages
(D) Utilities
Where are unrealized gains and losses from investment securities displayed?
(A) Statement of cash flows
(B) Balance sheet ✅
(C) Profit and loss statement
(D) Income statement
Which is a subcategory of retained earnings?
(A) Inventory
(B) Accounts payable
(C) Cash
(D) Sales revenue ✅
