Generally Accepted Accounting Principles (GAAP) MCQs (Chapterwise Multiple Choice Questions)

You declare a dividend. What happens on the cash flow statement and in which section?

Cash increases - Operating section

Cash increases - Financing section

Cash decreases - Investing section

No change

Answer & Explanation

Correct Answer: No change

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Which of the following best describes Going Concern?

The decrease in goodwill that follows a decrease in revenue

The assumption that a company will operate indefinitely

The law of diminishing returns

The interest on accounts payable

Answer & Explanation

Correct Answer: The assumption that a company will operate indefinitely

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Why would a company issue stock dividend?

Because shareholders prefer stock to cash

Because they can issue the stock of any corporation to the shareholders

Because it involves lower tax impact to both the shareholders and the corporation

Because no cash outlay is required while the shareholders are still rewarded

Answer & Explanation

Correct Answer: Because no cash outlay is required while the shareholders are still rewarded

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Which of the following is an Investing Activity as per US GAAP classification?

Taxes Paid

Sales proceed from fixed assets

Interest Paid

Cash paid to employees

Answer & Explanation

Correct Answer: Sales proceed from fixed assets

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What is the accounting treatment of stock dividend when it is issued (not declared)?

Dr: Cash, Cr: Stock Expense

Dr: Stock Expense, Cr: Cash

Dr: Equity, Cr: Dividend Payable

Dr: Dividend Payable Cr: Common Stock

Answer & Explanation

Correct Answer: Dr: Dividend Payable Cr: Common Stock

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What entries are made to correct an error?

Dr: Revenue, Cr: COGS

Depends on the correction, can impact any account

Dr: Cash, Cr: Expense

Dr: Equity, Cr: Liabilities

Answer & Explanation

Correct Answer: Depends on the correction, can impact any account

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Which of the following would be considered a discontinued operation?

A dog food manufacturer decides to stop offering low fat dog food because it doesn't make money.

A library decides to stop carrying kids' novels.

A stock brokerage goes out of business.

A jacket manufacturer decides to sell its rain coat division which has its own plant.

Answer & Explanation

Correct Answer: A jacket manufacturer decides to sell its rain coat division which has its own plant.

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What is "earnings per share"?

The total earnings of the company

The ratio of a company's earnings to the number of shares outstanding

Earnings of the company less any dividends

Earnings of the company divided by the number of preferred shares outstanding

Answer & Explanation

Correct Answer: The ratio of a company's earnings to the number of shares outstanding

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Which of the following is a method of testing for impairment?

Net Income potential method

Discounted cash flow value compared to carrying value

Asking management what a fair value is

Looking at the historical cost

Answer & Explanation

Correct Answer: Discounted cash flow value compared to carrying value

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When applying the full accrual method in retail land sales, which of the following conditions are required by GAAP?

(All of these)

Receivable are collectible

Receivables should not be subjected to subordination

Expiry of the refund period

Answer & Explanation

Correct Answer: (All of these)

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