Accounting for Decision Makers (C213)
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Free Accounting for Decision Makers (C213) Questions
Which technique describes the practice of incurring debt but fully paying the debt over time?
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Liability deferral
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Accounting management
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Profit control
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Income smoothing
Explanation
Explanation
Correct answer: (A.) Liability deferral
Liability deferral is a technique where a company incurs a liability (debt) but pays it off over time, allowing the company to use resources immediately while delaying cash outflows. This is common in practices such as issuing bonds or taking loans with scheduled repayments. The other options—accounting management, profit control, and income smoothing—relate to financial reporting strategies rather than the timing of debt repayment.
Which of the following would be considered a long-term liability?
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Mortgage payable
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Land
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Wages payable
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Accounts payable
Explanation
Correct Answer
A. Mortgage payable
Explanation
A long-term liability is a financial obligation that extends beyond one year. Mortgage payable is a long-term liability because it represents a debt related to property that is typically repaid over multiple years. Businesses and individuals take out mortgages to finance the purchase of real estate, and the repayment schedule often spans decades.
Why Other Options Are Wrong
B. Land – Land is not a liability; it is an asset. Assets provide value to an entity, whereas liabilities represent obligations. Since land is something that a business or individual owns, it does not qualify as a liability.
C. Wages payable – Wages payable are considered a current liability because they must be paid within a short period, usually within the next payroll cycle. Businesses typically settle wage obligations on a weekly, biweekly, or monthly basis, making them short-term in nature.
D. Accounts payable – Accounts payable is also a current liability because it consists of short-term debts owed to suppliers. These obligations are usually due within a few months. Unlike mortgage payable, accounts payable does not have a long-term repayment structure.
Which cash flow ratio reflects a company's ability to make its interest payments from cash generated through operations?
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Cash flow adequacyCash flow adequacy
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Cash times interest earned
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Cash flow to operating profit
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Cash flow to net income
Explanation
Correct Answer
B. Cash times interest earned
Explanation
The cash times interest earned ratio measures a company’s ability to pay interest obligations using cash generated from operations. It is calculated as:
This ratio helps assess whether a business has sufficient cash flow to meet its debt obligations, making it an important indicator of financial stability.
Why Other Options Are Wrong
A. Cash flow adequacy This is incorrect because cash flow adequacy measures whether a company generates enough cash to cover essential needs such as capital expenditures, debt repayments, and dividends. It does not specifically assess interest payment ability.
C. Cash flow to operating profit This is incorrect because this ratio compares cash flow to operating profit, helping to evaluate earnings quality but not interest coverage.
D. Cash flow to net income This is incorrect because this ratio assesses the relationship between net income and cash flow, rather than the company’s ability to meet interest payments.
Purchases: Oct $125,000, Nov $250,000, Dec $30,000. Payment pattern: 50 % month of purchase, 35 % next, 15 % second. What are forecasted October cash payments?
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$18,750
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$62,500
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$78,750
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$152,500
Explanation
Explanation
Correct answer: (B.) \(62,500 Forecasted cash payments for a month are calculated based on the payment pattern applied to purchases of that month and prior months. For October, only October purchases affect payments because earlier months are not listed. October payments are 50% of October purchases:\)125,000 × 0.50 = $62,500. Payments for November and December purchases occur in their respective months according to the schedule.
When using common-size statements
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Data may be selected for the same business as of different dates, or for two or more businesses as of the same date
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Relationships should be stated in terms of ratios
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Dollar changes are reported over a period of at least three years
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All of these are correct
Explanation
Correct Answer
A. Data may be selected for the same business as of different dates, or for two or more businesses as of the same date
Explanation
Common-size statements express financial statement items as percentages of a base amount, such as total assets for a balance sheet or total sales for an income statement. This standardization allows for comparisons across different time periods for a single company or across multiple companies within an industry.
Why Other Options Are Wrong
B. Relationships should be stated in terms of ratios - This option is incorrect because common-size statements use percentages, not just ratios. While ratios are useful in financial analysis, common-size statements specifically express financial items as a percentage of a base amount rather than just as ratios.
C. Dollar changes are reported over a period of at least three years - This option is incorrect because common-size statements do not focus on dollar changes over time. Instead, they standardize financial data for better comparison, whereas dollar changes are analyzed in trend analysis or horizontal analysis.
D. All of these are correct - This option is incorrect because not all the statements are correct. While common-size statements allow comparisons across different periods and companies, they do not necessarily use ratios exclusively, nor do they focus on dollar changes over multiple years.
A company manufactures and sells widgets. Total fixed costs per month are $300,000. Variable cost per widget is $50 and each widget sells for $100. How many widgets must be sold each month to break even?
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2,000
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3,000
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4,500
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6,000
Explanation
Which role do ethical standards have in management accounting?
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Provide ability to know whether a person will act ethically
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Prevent all unethical behavior of anyone the accountant works with
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Guide resolution of possible ethical dilemmas the accountant may encounter
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Enable the accountant to work only with companies following strict ethical principles
Explanation
Explanation
Correct answer: (C.) Guide resolution of possible ethical dilemmas the accountant may encounter
Ethical standards in management accounting serve as a guide for accountants when facing ethical dilemmas in their work, such as conflicts of interest, reporting pressures, or confidentiality issues. They do not guarantee that others will act ethically or prevent all unethical behavior, but they provide a framework for making responsible and professional decisions in challenging situations.
Vital information that CANNOT be captured solely by dollar amounts is reported in a firm's
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Notes to financial statements
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Balance sheet
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Statement of retained earnings
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Income statement
Explanation
Correct Answer
A. Notes to financial statements
Explanation
The notes to financial statements provide additional context and explanations that numerical data alone cannot convey. These notes include disclosures about accounting policies, contingencies, legal matters, and other essential details that influence financial interpretation. Without these notes, stakeholders may misunderstand financial data since certain important qualitative factors, such as legal disputes or changes in accounting methods, cannot be represented purely by numbers.
Why Other Options Are Wrong
B. Balance sheet. – The balance sheet presents a company's financial position at a specific point in time using quantitative data. However, it does not explain policies, contingencies, or non-monetary details that may affect financial decision-making. The balance sheet alone is insufficient to convey all critical business information.
C. Statement of retained earnings. – This statement primarily tracks the changes in retained earnings over a period, including net income, dividends, and adjustments. It does not provide additional explanations about company policies, potential liabilities, or qualitative financial information.
D. Income statement. – The income statement details revenue, expenses, and profitability over a period, but it only presents numerical data. It does not include supplementary disclosures about accounting policies, potential risks, or non-monetary considerations that are critical to understanding a company’s financial health.
What is the impact on costs as sales volume decreases?
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Total variable costs decrease in direct proportion
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Total fixed costs increase in direct proportion
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Total fixed costs decrease in direct proportion
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Total variable costs increase in direct proportion
Explanation
Explanation
Correct answer: (A.) Total variable costs decrease in direct proportion
Variable costs change in direct proportion to sales volume. As sales volume decreases, the total variable costs decrease because fewer units are produced or sold. Fixed costs, on the other hand, remain constant regardless of sales volume, so they are not affected by changes in production or sales levels.
What does it mean if a company has a debt ratio of 101.5%?
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The company has 1.5% more total liabilities than net income
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The company has 1.5% more current liabilities than current assets
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The company has 1.5% more total liabilities than gross sales
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The company has 1.5% more total liabilities than total assets
Explanation
Explanation
Correct answer: (D.) The company has 1.5% more total liabilities than total assets
The debt ratio measures the proportion of a company’s total liabilities to total assets, calculated as:
Debt Ratio = (Total Liabilities/Total Assets)* 100%
A debt ratio of 101.5% means that total liabilities slightly exceed total assets—the company owes more than it owns. This indicates high leverage and potential financial risk. The ratio does not relate to net income, sales, or only current liabilities and assets.
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