Accounting Terminology Quiz (True or False Questions with Answers)

Accounting Terminology True or False Quiz (50 Questions with Answers and Detailed Explanations)

Question 1

Assets represent resources owned or controlled by a business that are expected to provide future economic benefits.

✅ Answer: True

Explanation:
Assets are one of the fundamental accounting elements. They include cash, inventory, equipment, accounts receivable, and other resources that help a business generate future revenue and benefits.

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Question 2

Liabilities are resources owned by a company.

❌ Answer: False

Explanation:
Liabilities are obligations or debts owed to external parties. Examples include loans payable, accounts payable, and accrued expenses. Resources owned by a company are classified as assets.

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Question 3

Equity represents the owner’s residual interest in a company’s assets after liabilities are deducted.

✅ Answer: True

Explanation:
Equity is the amount remaining after subtracting liabilities from assets. It represents the owners’ claim on the business.

Accounting Equation:
Assets = Liabilities + Equity

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Question 4

Revenue refers to income earned from normal business operations.

✅ Answer: True

Explanation:
Revenue is generated through the sale of goods or services and is reported on the income statement as a primary source of income.

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Question 5

Expenses increase a company’s profit.

❌ Answer: False

Explanation:
Expenses reduce profit because they represent costs incurred to generate revenue, such as salaries, rent, and utilities.

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Question 6

Accounts Receivable represents money owed by customers to the business.

✅ Answer: True

Explanation:
Accounts receivable arise when goods or services are sold on credit. It is classified as a current asset.

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Question 7

Accounts Payable is classified as an asset account.

❌ Answer: False

Explanation:
Accounts payable is a liability because it represents amounts owed to suppliers and vendors.

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Question 8

Inventory consists of goods held for sale in the ordinary course of business.

✅ Answer: True

Explanation:
Inventory is a current asset and includes raw materials, work-in-process, and finished goods intended for sale.

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Question 9

Depreciation allocates the cost of a tangible asset over its useful life.

✅ Answer: True

Explanation:
Depreciation helps match the cost of an asset with the periods benefiting from its use.

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Question 10

Cash is generally considered a current asset.

✅ Answer: True

Explanation:
Cash is the most liquid asset and is classified as a current asset because it is available for immediate use.

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Question 11

A journal entry is the first formal record of a business transaction.

✅ Answer: True

Explanation:
Transactions are initially recorded in the journal before being posted to the ledger.

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Question 12

The general ledger contains detailed records of all company accounts.

✅ Answer: True

Explanation:
The general ledger serves as the primary accounting record from which financial statements are prepared.

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Question 13

A trial balance is prepared to verify that total debits equal total credits.

✅ Answer: True

Explanation:
The trial balance helps identify recording errors before financial statements are prepared.

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Question 14

Net Income equals Revenue minus Expenses.

✅ Answer: True

Explanation:
This calculation determines whether the company earned a profit or incurred a loss during the period.

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Question 15

Accrual accounting records transactions only when cash is received or paid.

❌ Answer: False

Explanation:
Accrual accounting records transactions when they occur, regardless of when cash changes hands.

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Question 16

Working Capital equals Current Assets minus Current Liabilities.

✅ Answer: True

Explanation:
Working capital measures short-term liquidity and operational efficiency.

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Question 17

Liquidity refers to a company’s ability to meet short-term obligations.

✅ Answer: True

Explanation:
Businesses with strong liquidity can pay their current debts as they come due.

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Question 18

Solvency focuses on a company’s long-term financial stability.

✅ Answer: True

Explanation:
Solvency measures the ability to meet long-term debt obligations and continue operations.

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Question 19

Fixed assets are normally purchased for resale.

❌ Answer: False

Explanation:
Fixed assets are acquired for use in operations, not for resale. Examples include buildings and machinery.

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Question 20

Capital refers to the owner’s investment in a business.

✅ Answer: True

Explanation:
Capital increases owner’s equity and provides funding for business activities.

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Question 21

Drawings increase owner’s equity.

❌ Answer: False

Explanation:
Drawings reduce owner’s equity because they represent withdrawals made by the owner for personal use.

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Question 22

Cost of Goods Sold (COGS) represents the direct cost of products sold.

✅ Answer: True

Explanation:
COGS includes costs directly related to producing or purchasing goods sold during the period.

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Question 23

Gross Profit equals Revenue minus Cost of Goods Sold.

✅ Answer: True

Explanation:
Gross profit measures profitability before operating expenses are deducted.

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Question 24

Retained Earnings represent accumulated profits kept in the business.

✅ Answer: True

Explanation:
Retained earnings increase when profits are retained and decrease when dividends are distributed.

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Question 25

An audit is an independent examination of financial records.

✅ Answer: True

Explanation:
Audits enhance the credibility and reliability of financial statements.

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Question 26

Materiality refers to the significance of information to users of financial statements.

✅ Answer: True

Explanation:
Material information can influence economic decisions made by investors and creditors.

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Question 27

GAAP stands for Generally Accepted Accounting Principles.

✅ Answer: True

Explanation:
GAAP provides standardized accounting guidelines primarily used in the United States.

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Question 28

IFRS is used in many countries around the world.

✅ Answer: True

Explanation:
International Financial Reporting Standards promote global consistency in financial reporting.

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Question 29

Amortization applies primarily to intangible assets.

✅ Answer: True

Explanation:
Examples include patents, trademarks, copyrights, and software licenses.

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Question 30

Goodwill is a tangible asset.

❌ Answer: False

Explanation:
Goodwill is an intangible asset arising from business acquisitions.

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Question 31

Unearned Revenue is considered a liability.

✅ Answer: True

Explanation:
The company has received payment but still owes goods or services to the customer.

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Question 32

An accrued expense is an expense incurred but not yet paid.

✅ Answer: True

Explanation:
Examples include accrued wages, utilities, and interest expenses.

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Question 33

Prepaid expenses are initially recorded as assets.

✅ Answer: True

Explanation:
The future economic benefit makes prepaid expenses an asset until consumed.

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Question 34

Bad debt represents receivables that are unlikely to be collected.

✅ Answer: True

Explanation:
Companies recognize bad debt expense to reflect expected credit losses.

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Question 35

A credit memo generally reduces the amount owed by a customer.

✅ Answer: True

Explanation:
Credit memos are issued for returns, discounts, or billing corrections.

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Question 36

A debit memo always decreases a customer’s balance.

❌ Answer: False

Explanation:
A debit memo generally increases the amount owed by a customer.

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Question 37

Bank reconciliation compares accounting records with bank records.

✅ Answer: True

Explanation:
It helps identify errors, omissions, and unauthorized transactions.

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Question 38

Double-entry accounting requires every transaction to affect at least two accounts.

✅ Answer: True

Explanation:
This system ensures that debits always equal credits.

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Question 39

Accumulated Depreciation is a contra asset account.

✅ Answer: True

Explanation:
It reduces the carrying amount of related fixed assets.

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Question 40

Book Value equals the original cost of an asset less accumulated depreciation.

✅ Answer: True

Explanation:
Book value represents the asset’s carrying amount on the balance sheet.

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Question 41

The break-even point occurs when total revenue equals total costs.

✅ Answer: True

Explanation:
At this point, the business earns neither a profit nor a loss.

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Question 42

Budgeting involves planning future financial activities.

✅ Answer: True

Explanation:
Budgets help organizations allocate resources and control costs.

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Question 43

Variance is the difference between actual and planned results.

✅ Answer: True

Explanation:
Variance analysis helps management evaluate performance and identify issues.

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Question 44

Internal controls help protect company assets and improve accuracy.

✅ Answer: True

Explanation:
Strong internal controls reduce fraud risk and accounting errors.

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Question 45

The Going Concern assumption assumes a business will continue operating in the foreseeable future.

✅ Answer: True

Explanation:
Most accounting measurements rely on this assumption.

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Question 46

The Consistency Principle encourages companies to use the same accounting methods over time.

✅ Answer: True

Explanation:
Consistency improves comparability between accounting periods.

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Question 47

The Matching Principle requires expenses to be recognized in the same period as related revenues.

✅ Answer: True

Explanation:
This principle improves the accuracy of profit measurement.

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Question 48

The Conservatism Principle encourages recognizing potential losses earlier than gains.

✅ Answer: True

Explanation:
This approach reduces the risk of overstating profits and assets.

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Question 49

Financial statements are prepared using information from accounting records.

✅ Answer: True

Explanation:
Financial statements summarize the financial performance and position of a business.

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Question 50

Accounting terminology helps users understand and communicate financial information effectively.

✅ Answer: True

Explanation:
A strong understanding of accounting terminology is essential for accountants, students, investors, auditors, and financial analysts because it creates a common language for interpreting and discussing financial information accurately.

Here is a comprehensive list of 50 True or False questions focusing strictly on Accounting Terminology. Each question includes the correct answer and a detailed explanation to ensure you master the exact meaning and application of these terms.

Part 1: Basic Terms and Financial Statements

Q1: “Accounts Payable” is classified as a current asset on the balance sheet.

• Answer: False

• Explanation: Accounts Payable represents the money a company owes to its suppliers or vendors for goods or services purchased on credit. Because it is an obligation to pay within a short period (usually a year), it is classified as a Current Liability, not an asset.

Q2: “Revenue” and “Net Income” are synonymous terms in accounting.

• Answer: False

• Explanation: Revenue (often called sales or the “top line”) is the total amount of money brought in by a company’s operations. Net Income (the “bottom line”) is what remains after subtracting all expenses, taxes, interest, and costs from the revenue.

Q3: The term “Liquidity” refers to how quickly an asset can be converted into cash without significant loss in value.

• Answer: True

• Explanation: Liquidity measures a company’s ability to meet its short-term obligations. Cash is the most liquid asset, while inventory and real estate are considered less liquid because they take more time to convert to cash.

Q4: “Retained Earnings” represents the total amount of cash a company has kept since its inception.

• Answer: False

• Explanation: Retained Earnings represents the cumulative net income retained by the company after distributing dividends to shareholders. It is an equity account, not a cash pool; the actual cash may have already been reinvested in equipment, inventory, or other assets.

Q5: “Goodwill” is an example of a tangible asset.

• Answer: False

• Explanation: Goodwill is an Intangible Asset. It arises when one company acquires another for a price higher than the fair market value of its net identifiable assets, representing reputation, brand recognition, and customer loyalty.

Q6: A “Trial Balance” is a formal financial statement prepared for external users like investors.

• Answer: False

• Explanation: A Trial Balance is an internal working document used by accountants to ensure that total debits equal total credits. It is a step in the accounting cycle, not a formal financial statement published for external investors (unlike the Balance Sheet or Income Statement).

Q7: “Depreciation” is the process of valuation used to determine the current market value of a fixed asset.

• Answer: False

• Explanation: Depreciation is a process of cost allocation, not valuation. It allocates the original cost of a tangible asset over its useful life to match expenses with revenues; it does not attempt to reflect the actual changing market value of the asset.

Q8: “Accrued Expenses” are expenses that have been incurred but not yet paid or recorded.

• Answer: True

• Explanation: Under the accrual basis of accounting, Accrued Expenses (such as salaries earned by employees but not yet paid at the end of the month) must be recognized in the period they occur, creating a liability.

Q9: “Gross Profit” is calculated by subtracting Operating Expenses from Revenue.

• Answer: False

• Explanation: Gross Profit is calculated as $\text{Revenue} – \text{Cost of Goods Sold (COGS)}$. Subtracting Operating Expenses from Gross Profit yields Operating Income (or EBIT).

Q10: The “Ledger” is known as the book of original entry.

• Answer: False

• Explanation: The Journal is the book of original entry because transactions are recorded there first in chronological order. The Ledger (or General Ledger) is the book of final entry where transactions are posted to individual accounts.

Part 2: Accounting Principles and Concepts

Q11: The “Going Concern Principle” assumes that a business will continue to operate indefinitely into the foreseeable future.

• Answer: True

• Explanation: The Going Concern Principle justifies recording long-term assets at historical cost rather than liquidation value, assuming the business is not about to go bankrupt or dissolve.

Q12: Under “Accrual Accounting,” revenue is recognized only when cash is received from the customer.

• Answer: False

• Explanation: This describes Cash Basis Accounting. Under Accrual Accounting, revenue is recognized when it is earned (goods delivered or services performed), regardless of when the cash is actually received.

Q13: The “Matching Principle” states that expenses must be reported in the same period as the revenues they helped generate.

• Answer: True

• Explanation: The Matching Principle (part of expense recognition) ensures that financial statements accurately reflect the profitability of a specific period by linking cause (expense) and effect (revenue).

Q14: “Materiality” means that all accounting errors, no matter how small, must be corrected immediately using complex adjustment entries.

• Answer: False

• Explanation: The Materiality Concept states that an item is material if its omission or misstatement could influence the economic decisions of users. If an amount is so small that it wouldn’t impact anyone’s decision (e.g., misplacing a $2 stapler), strict accounting rules can be ignored for convenience.

Q15: The “Conservatism Principle” dictates that when two acceptable accounting options exist, the accountant should choose the option that is least likely to overstate assets and income.

• Answer: True

• Explanation: Conservatism guides accountants to anticipate potential losses but never anticipate gains. It ensures that financial statements do not present an overly optimistic view of a company’s financial health.

Q16: “Historical Cost” refers to the price an asset would fetch if it were sold in the open market today.

• Answer: False

• Explanation: Historical Cost is the original nominal purchase price paid to acquire an asset. The value in the open market today is known as Fair Market Value or Current Market Value.

Q17: The “Economic Entity Assumption” states that the financial activities of a business must be kept separate from the personal financial activities of its owners.

• Answer: True

• Explanation: Regardless of the legal structure (even for a sole proprietorship), the Economic Entity Assumption requires that the business records treat the company as a distinct entity separate from the owner’s personal wallet.

Q18: “Monetary Unit Assumption” implies that accountants can easily adjust financial statements to reflect the impact of inflation over time.

• Answer: False

• Explanation: The Monetary Unit Assumption states that transaction data can only be expressed in terms of money and assumes that the currency remains stable. Traditionally, it ignores inflation, meaning the purchasing power of the currency unit is assumed to be constant.

Part 3: Assets, Liabilities, and Equity

Q19: “Prepaid Insurance” is classified as an expense on the income statement when it is first purchased.

• Answer: False

• Explanation: When paid in advance, Prepaid Insurance is an Asset (Current Asset) because it represents a future economic benefit. It only becomes an expense (Insurance Expense) gradually over time as the insurance coverage expires.

Q20: “Unearned Revenue” is classified as a liability on the balance sheet.

• Answer: True

• Explanation: Unearned Revenue represents money received from a customer before the service or good has been delivered. The company owes a performance obligation to the customer, making it a liability until the work is done.

Q21: “Treasury Stock” is an asset representing shares of stock that a company has purchased from other corporations.

• Answer: False

• Explanation: Treasury Stock is a company’s own stock that it has issued and subsequently repurchased. It is not an asset; instead, it is classified as a Contra-Equity account, which reduces total Stockholders’ Equity.

Q22: A “Contra-Asset” account has a normal credit balance.

• Answer: True

• Explanation: Regular asset accounts have a normal debit balance. A Contra-Asset account (like Accumulated Depreciation or Allowance for Doubtful Accounts) works in reverse to reduce the asset’s value, meaning it carries a normal credit balance.

Q23: “Net Assets” is another term for Stockholders’ Equity.

• Answer: True

• Explanation: Based on the accounting equation:

  $$\text{Assets} = \text{Liabilities} + \text{Equity}$$

  If you rearrange it:

  $$\text{Assets} – \text{Liabilities} = \text{Equity}$$

  Therefore, Net Assets (Assets minus Liabilities) is exactly equal to Equity.

Q24: “Working Capital” is calculated by subtracting Long-Term Liabilities from Current Assets.

• Answer: False

• Explanation: Working Capital is a measure of operational liquidity calculated as:

  $$\text{Working Capital} = \text{Current Assets} – \text{Current Liabilities}$$

Q25: “Allowance for Doubtful Accounts” is a management estimate of accounts receivable that will likely not be collected.

• Answer: True

• Explanation: This is a Contra-Asset account linked to Accounts Receivable. It reduces the total receivable balance to show the Net Realizable Value—the amount the company genuinely expects to collect from its debtors.

Part 4: Debits, Credits, and the Accounting Cycle

Q26: An increase in an expense account is recorded with a credit entry.

• Answer: False

• Explanation: Expense accounts follow the same rule as assets. An increase in an Expense is recorded with a Debit, while a decrease is recorded with a credit.

Q27: Dividends decrease Stockholders’ Equity and have a normal debit balance.

• Answer: True

• Explanation: Because Dividends distribute earnings away from the corporation to shareholders, they reduce Retained Earnings (Equity). Therefore, they carry a normal debit balance to offset equity’s normal credit balance.

Q28: “Posting” is the process of transferring transaction information from the General Ledger to the Journal.

• Answer: False

• Explanation: The process goes the opposite way. Posting is transferring data from the Journal (where it is first written) to the General Ledger (where accounts are grouped).

Q29: “Adjusting Entries” are required at the end of an accounting period to bring accounts up to date under accrual accounting rules.

• Answer: True

• Explanation: Adjusting Entries ensure that revenues are recorded when earned and expenses when incurred. Without them, items like unbilled revenues, unpaid wages, and expired prepaid expenses would be missing from the financial reports.

Q30: “Closing Entries” are performed to reset permanent accounts (like Assets and Liabilities) to zero at the end of the fiscal year.

• Answer: False

• Explanation: Closing entries are performed to reset Temporary Accounts (Revenues, Expenses, and Dividends) to zero so they can start fresh next period. Permanent Accounts (Assets, Liabilities, and Equity) are never closed; their balances carry forward into the next year.

Part 5: Cost Accounting and Inventory Terminology

Q31: Under the FIFO (First-In, First-Out) inventory method, the oldest costs are assigned to the Cost of Goods Sold (COGS).

• Answer: True

• Explanation: FIFO assumes that the first goods purchased are the first goods sold. Therefore, the older costs flow into the income statement as COGS, while the most recent costs remain in Ending Inventory on the balance sheet.

Q32: “LIFO” (Last-In, First-Out) generally results in lower reported net income during periods of inflation compared to FIFO.

• Answer: True

• Explanation: In inflationary times, newer inventory costs more. Because LIFO assigns the newest (and highest) costs to COGS, expenses look higher, which artificially lowers reported net income, subsequently reducing tax burdens.

Q33: “Direct Materials” and “Direct Labor” are prime examples of indirect costs.

• Answer: False

• Explanation: Direct Materials and Direct Labor can be easily and cost-effectively traced directly to a specific product. Therefore, they are classified as Direct Costs (and specifically, Prime Costs).

Q34: “Overhead Costs” (Factory Overhead) include costs that are necessary for production but cannot be directly traced to a specific unit of product.

• Answer: True

• Explanation: Manufacturing Overhead includes items like factory utilities, factory rent, depreciation on machinery, and wages for supervisors. They support production but are indirect costs.

Q35: “Sunk Costs” are highly relevant when making future business decisions because they involve large sums of money.

• Answer: False

• Explanation: Sunk Costs are past costs that have already been incurred and cannot be recovered by any future decision. In managerial accounting, they should be ignored when making future choices.

Q36: “Opportunity Cost” represents the potential benefit lost when one alternative is chosen over another.

• Answer: True

• Explanation: An Opportunity Cost is not recorded in formal accounting ledgers, but it is a critical terminology item in decision-making representing the foregone value of the next best alternative.

Part 6: Advanced and Miscellaneous Terminology

Q37: “Amortization” is the term used for allocating the cost of intangible assets over their useful life.

• Answer: True

• Explanation: While Depreciation is used for tangible physical assets (like buildings or machinery) and Depletion is used for natural resources (like timber or oil), Amortization is the specific terminology for intangible assets (like patents or copyrights).

Q38: A “Cash Equivalent” is a short-term, highly liquid investment that is readily convertible to known amounts of cash with an original maturity of 12 months or less.

• Answer: False

• Explanation: While the liquid definition is correct, the original maturity limit for a Cash Equivalent (e.g., Treasury bills, money market funds) must be 3 months (90 days) or less, not 12 months.

Q39: “Solvency” refers to a company’s ability to pay its long-term obligations and debts.

• Answer: True

• Explanation: Do not confuse this with liquidity. Liquidity is short-term survival; Solvency is the long-term structural ability of a firm to maintain operations, service debt, and survive far into the future.

Q40: “Contingent Liabilities” must always be recorded on the balance sheet as an official liability, regardless of how likely they are to happen.

• Answer: False

• Explanation: A Contingent Liability (like a pending lawsuit) is only recorded on the balance sheet if the loss is probable AND can be reasonably estimated. If it is only possible, it is merely disclosed in the footnotes. If it is remote, it is ignored entirely.

Q41: “FOB Shipping Point” means the buyer assumes ownership and responsibility for transportation costs as soon as the goods leave the seller’s premises.

• Answer: True

• Explanation: Under FOB (Free on Board) Shipping Point, title transfers to the buyer at the shipping dock. Thus, the goods in transit belong to the buyer’s inventory, and the buyer pays the freight charges.

Q42: “FOB Destination” means the title of goods passes to the buyer only when the goods reach the buyer’s location.

• Answer: True

• Explanation: Under FOB Destination, the seller retains ownership and risk of loss while the goods are in transit. The seller is responsible for shipping costs until delivery is finalized.

Q43: The term “Salaries Expense” represents the compensation paid to factory workers who physically assemble a product.

• Answer: False

• Explanation: Factory workers who physically assemble goods are classified as Direct Labor (a product cost built into inventory). Salaries Expense typically describes administrative, sales, or managerial staff pay, which are period costs.

Q44: “Variance” in cost accounting refers to the difference between an actual cost and a standard (budgeted) cost.

• Answer: True

• Explanation: A Variance analysis helps managers monitor performance. If actual costs are higher than standard, it is an Unfavorable Variance; if actual costs are lower, it is a Favorable Variance.

Q45: “EBIT” stands for Earnings Before Interest and Taxes, and is often referred to as Operating Income.

• Answer: True

• Explanation: EBIT isolates the profitability of core business activities by removing the effects of capital structure financial choices (Interest) and government levies (Taxes).

Q46: “Internal Controls” are policies implemented solely to catch employees stealing money.

• Answer: False

• Explanation: While fraud prevention is part of it, Internal Controls have a much broader definition: they are processes designed to ensure reliable financial reporting, effective and efficient operations, and compliance with laws and regulations.

Q47: “Audit Opinion” is a certification by an auditor guaranteeing that a company’s financial statements are 100% free from any errors whatsoever.

• Answer: False

• Explanation: An auditor provides reasonable assurance (not a 100% guarantee) that financial statements are free from material misstatement. No audit can guarantee absolute perfection due to testing samples and management estimates.

Q48: “Capital Expenditure” (CapEx) is an expenditure recorded immediately on the income statement as an operational expense.

• Answer: False

• Explanation: A Capital Expenditure provides long-term benefits beyond the current year (like buying a building). It is capitalized, meaning it is recorded as an asset on the balance sheet and depreciated over time. Regular operational costs are Revenue Expenditures.

Q49: “Mark-up” and “Gross Profit Margin” are identical expressions of profitability.

• Answer: False

• Explanation: They use different denominators. Mark-up is the profit percentage calculated relative to Cost ($\frac{\text{Profit}}{\text{Cost}}$), whereas Gross Margin is the profit percentage calculated relative to the Selling Price ($\frac{\text{Profit}}{\text{Revenue}}$).

Q50: The term “Chart of Accounts” is a directory listing all the account names and numbers available for recording transactions in a company’s accounting system.

• Answer: True

• Explanation: The Chart of Accounts acts as the foundation blueprint for the entire bookkeeping system, organizing assets, liabilities, equity, revenues, and expenses into numbered categories for systematic entry.

Accounting Terminology Quiz – True or False (50 Questions)

Question 1: Accrual accounting records revenues and expenses only when cash is received or paid. Answer: False Explanation: Accrual accounting records revenues when earned and expenses when incurred, regardless of cash movement. This follows the matching principle and is required under GAAP and IFRS.

Question 2: Amortization is the process of allocating the cost of intangible assets over their useful lives. Answer: True Explanation: Amortization is similar to depreciation but applies specifically to intangible assets such as patents, copyrights, and trademarks.

Question 3: Depreciation is a non-cash expense that reduces the value of tangible fixed assets over time. Answer: True Explanation: It systematically allocates the cost of assets like machinery and buildings to expense accounts over their useful lives.

Question 4: GAAP stands for Generally Accepted Accounting Principles. Answer: True Explanation: GAAP is the standard set of accounting rules and procedures used in the United States.

Question 5: IFRS stands for International Federation of Revenue Services. Answer: False Explanation: IFRS stands for International Financial Reporting Standards, used in more than 140 countries.

Question 6: The Balance Sheet shows the financial performance of a company over a period of time. Answer: False Explanation: The Balance Sheet (Statement of Financial Position) shows the financial position at a specific point in time.

Question 7: Working Capital is calculated as Current Assets minus Current Liabilities. Answer: True Explanation: It measures a company’s short-term liquidity and ability to pay its short-term obligations.

Question 8: In double-entry bookkeeping, every transaction affects only one account. Answer: False Explanation: Every transaction affects at least two accounts (one debit and one credit) to keep the accounting equation balanced.

Question 9: A contra account has a balance opposite to its related main account. Answer: True Explanation: Examples include Accumulated Depreciation (contra asset) and Allowance for Doubtful Accounts.

Question 10: Revenue is recognized only when cash is received from the customer. Answer: False Explanation: Under accrual accounting, revenue is recognized when it is earned (goods delivered or services performed).

Question 11: Liabilities represent the owner’s residual interest in the assets of the business. Answer: False Explanation: Liabilities are present obligations arising from past events. Equity represents the owner’s residual interest.

Question 12: Equity = Total Assets – Total Liabilities. Answer: True Explanation: This is the basic accounting equation.

Question 13: Accounts Payable is money owed to the company by its customers. Answer: False Explanation: Accounts Payable is money the company owes to its suppliers.

Question 14: Goodwill arises when a company acquires another for less than the fair value of its net assets. Answer: False Explanation: Goodwill is recorded when the purchase price exceeds the fair value of identifiable net assets.

Question 15: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Answer: True Explanation: It is a key measure of operating performance.

Question 16: FIFO means First In, First Out. Answer: True Explanation: It assumes the oldest inventory items are sold first.

Question 17: LIFO is allowed under both US GAAP and IFRS. Answer: False Explanation: LIFO is allowed under US GAAP but prohibited under IFRS.

Question 18: Prepaid expenses are recorded as liabilities. Answer: False Explanation: Prepaid expenses are recorded as assets because the benefit will be received in the future.

Question 19: Accrued expenses are expenses that have been incurred but not yet paid. Answer: True Explanation: They are recorded as liabilities on the balance sheet.

Question 20: Deferred revenue is a liability until the company delivers the goods or services. Answer: True Explanation: It represents cash received in advance for unearned revenue.

Question 21: A Trial Balance proves that the accounting records are completely error-free. Answer: False Explanation: It only proves that total debits equal total credits. Other errors may still exist.

Question 22: The General Journal is used to record transactions in chronological order. Answer: True Explanation: It is the book of original entry.

Question 23: Materiality means that only large transactions need to be recorded. Answer: False Explanation: Materiality considers whether the information could influence users’ economic decisions.

Question 24: The Conservatism Principle suggests recording potential gains as soon as possible. Answer: False Explanation: It requires recognizing potential losses early but gains only when realized.

Question 25: The Going Concern Assumption assumes the business will continue operating indefinitely. Answer: True Explanation: It allows assets and liabilities to be valued on a going-concern basis rather than liquidation value.

Question 26: The Consistency Principle allows companies to change accounting methods every year. Answer: False Explanation: Companies should use the same methods from period to period for comparability.

Question 27: Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. Answer: True Explanation: An impairment loss must be recognized in this case.

Question 28: Capital Expenditure is immediately expensed in the income statement. Answer: False Explanation: Capital expenditures are capitalized and depreciated over time.

Question 29: Retained Earnings represent cumulative profits not distributed as dividends. Answer: True Explanation: They are part of shareholders’ equity.

Question 30: Dividends are expenses that reduce net income. Answer: False Explanation: Dividends are distributions of profits and are recorded as a reduction in retained earnings.

Question 31: The Cash Flow Statement has three main sections: Operating, Investing, and Financing. Answer: True Explanation: This classification helps users understand cash generation sources.

Question 32: Petty Cash is used for large business expenditures. Answer: False Explanation: Petty Cash is a small amount kept for minor daily expenses.

Question 33: Bank Reconciliation ensures the company’s books match the bank statement. Answer: True Explanation: It identifies timing differences and errors.

Question 34: The Break-even Point is where total revenues equal total costs. Answer: True Explanation: At this point, the company makes neither profit nor loss.

Question 35: Gross Margin is calculated as Revenue minus Cost of Goods Sold. Answer: True Explanation: It represents profit after direct production costs.

Question 36: Accounts Receivable is a liability account. Answer: False Explanation: It is a current asset representing money owed by customers.

Question 37: The Ledger contains summarized balances of all accounts. Answer: True Explanation: It is the principal book of accounts.

Question 38: Adjusting entries are made at the beginning of the accounting period. Answer: False Explanation: They are made at the end of the period to ensure proper accrual accounting.

Question 39: Closing entries transfer balances from revenue and expense accounts to Retained Earnings. Answer: True Explanation: This prepares the books for the next accounting period.

Question 40: Depletion is used for intangible assets. Answer: False Explanation: Depletion is used for natural resources such as oil, timber, and minerals.

Question 41: A contingent liability is always recorded on the balance sheet. Answer: False Explanation: It is recorded only if it is probable and can be reasonably estimated.

Question 42: The Full Disclosure Principle requires all relevant information to be disclosed in the financial statements and notes. Answer: True Explanation: This ensures transparency for users.

Question 43: The Current Ratio is Total Assets divided by Total Liabilities. Answer: False Explanation: Current Ratio = Current Assets / Current Liabilities.

Question 44: The Quick Ratio (Acid-Test Ratio) includes inventory in its calculation. Answer: False Explanation: It excludes inventory and prepaid expenses for a stricter liquidity measure.

Question 45: Fixed Assets are also called Property, Plant, and Equipment (PP&E). Answer: True Explanation: These are long-term tangible assets used in operations.

Question 46: Net Book Value is the original cost of an asset. Answer: False Explanation: It is Original Cost minus Accumulated Depreciation/Amortization.

Question 47: A journal entry must always have equal debits and credits. Answer: True Explanation: This is the core of double-entry bookkeeping.

Question 48: Subsidiary ledgers provide detailed information supporting the general ledger control accounts. Answer: True Explanation: Examples include Accounts Receivable and Accounts Payable subsidiary ledgers.

Question 49: The Matching Principle requires matching cash receipts with cash payments. Answer: False Explanation: It requires matching revenues with the expenses incurred to generate them in the same period.

Question 50: Under the Historical Cost Principle, assets are recorded at their original purchase cost. Answer: True Explanation: This principle provides objective and verifiable financial information.