,1. Multiple Choice: What is the effect of a stock split on a
company's retained earnings?
a) Increase
b) Decrease
c) No effect
d) Doubles
Answer: c) No effect. Rationale: A stock split does not affect the
retained earnings as it is merely a division of shares and does not
involve cash flow or income changes.
2. Fill-in-the-Blank: The process of allocating the cost of tangible
assets to expense in a systematic and rational manner to those
periods expected to benefit from the use of the asset is known as
____________.
Answer: Depreciation. Rationale: Depreciation spreads the cost
of an asset over its useful life, matching the expense with the
revenue it generates.
3. True/False: The equity method of accounting for investments
requires the investor to record dividends received as revenue.
Answer: False. Rationale: Under the equity method, dividends
received are considered a return on investment and reduce the
carrying value of the investment.
, 4. Multiple Response: Which of the following are considered
intangible assets? (Select all that apply)
a) Trademarks
b) Buildings
c) Patents
d) Goodwill
Answers: a) Trademarks, c) Patents, d) Goodwill. Rationale:
Intangible assets are identifiable non-monetary assets without
physical substance. Buildings are tangible assets.
5. Multiple Choice: In a period of rising prices, which inventory
valuation method would result in the highest net income?
a) FIFO
b) LIFO
c) Weighted Average
d) Specific Identification
Answer: a) FIFO. Rationale: FIFO (First-In, First-Out) assumes
that the oldest inventory items are sold first, which, during inflation,
leads to lower cost of goods sold and higher net income.
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