Financial Account JAMB Past Questions And Answers (Objectives and Theory)
Multiple-choice questions along with 5 theory questions for financial accounting:
Section A: Multiple Choice Questions
What is the primary purpose of financial accounting?
a) Record-keeping
b) Decision-making
c) Tax planning
d) Marketing
Answer: a) Record-keeping
Which of the following financial statements shows a company’s financial position at a specific point in time?
a) Income statement
b) Cash flow statement
c) Balance sheet
d) Statement of retained earnings
Answer: c) Balance sheet
What does GAAP stand for in the context of financial accounting?
a) Generally Accepted Accounting Practices
b) Generally Acknowledged Accounting Principles
c) Generally Accepted Accounting Principles
d) Generally Acknowledged Accounting Practices
Answer: c) Generally Accepted Accounting Principles
What is the accounting equation?
a) Assets = Liabilities – Equity
b) Assets = Liabilities + Equity
c) Assets = Liabilities × Equity
d) Assets = Liabilities / Equity
Answer: b) Assets = Liabilities + Equity
Which of the following is considered an asset in accounting?
a) Accounts payable
b) Equipment
c) Salaries payable
d) Rent expense
Answer: b) Equipment
What does the term “depreciation” refer to in accounting?
a) The increase in value of an asset over time
b) The decrease in value of an asset over time
c) The amount of money owed to suppliers
d) The cost of goods sold
Answer: b) The decrease in value of an asset over time
What is the purpose of the income statement in financial accounting?
a) To show the cash flow of a company
b) To report the financial performance of a company over a period
c) To summarize the changes in equity of a company
d) To provide details about a company’s assets and liabilities
Answer: b) To report the financial performance of a company over a period
Which of the following represents revenue in financial accounting?
a) Money owed to suppliers
b) Money owed by customers
c) Money earned from sales
d) Money spent on rent
Answer: c) Money earned from sales
What does the term “accounts payable” refer to in accounting?
a) Money owed by customers
b) Money owed to suppliers
c) Money earned from sales
d) Money spent on rent
Answer: b) Money owed to suppliers
What is the purpose of the statement of cash flows in financial accounting?
a) To show the cash inflows and outflows of a company
b) To report the financial position of a company at a specific point in time
c) To summarize the changes in equity of a company
d) To provide details about a company’s assets and liabilities
Answer: a) To show the cash inflows and outflows of a company
Section B: Theory Questions
Define financial accounting and explain its role in business operations.
Answer: Financial accounting is the process of recording, summarizing, and reporting the financial transactions of a business entity in accordance with generally accepted accounting principles (GAAP). Its primary role is to provide stakeholders, such as investors, creditors, management, and government agencies, with accurate and reliable information about the financial performance and position of the company. Financial accounting helps in decision-making, assessing the profitability and solvency of the business, evaluating its financial health, and complying with legal and regulatory requirements.
Describe the components of the balance sheet and explain their significance.
Answer: The balance sheet, also known as the statement of financial position, presents a company’s financial position at a specific point in time. It consists of three main components: assets, liabilities, and equity. Assets represent the resources owned or controlled by the company, such as cash, accounts receivable, inventory, and property. Liabilities are the obligations owed by the company to creditors, such as accounts payable, loans, and bonds payable. Equity represents the residual interest in the company’s assets after deducting liabilities and reflects the owners’ claims to the company’s assets. The balance sheet provides valuable information about a company’s liquidity, solvency, and financial health.
Explain the concept of accrual accounting and its importance in financial reporting.
Answer: Accrual accounting is an accounting method that recognizes revenue and expenses when they are earned or incurred, regardless of when cash is received or paid. It matches revenues with expenses in the period in which they occur, providing a more accurate representation of a company’s financial performance and position. Accrual accounting allows for better decision-making, as it provides a more comprehensive view of a company’s profitability and financial health compared to cash-basis accounting. It is also required for compliance with GAAP and provides transparency and comparability in financial reporting.
Discuss the difference between cash flow and profit in financial accounting.
Answer: Cash flow refers to the movement of cash into and out of a business over a specific period. It represents the liquidity of a company and its ability to meet its short-term obligations. Profit, on the other hand, refers to the excess of revenues over expenses during a specific period, also known as net income. Profit is an accounting concept that reflects the profitability of a company’s operations. While profit is important for assessing long-term sustainability and growth potential, cash flow is crucial for ensuring the day-to-day operations and financial stability of the business. A company can be profitable but still face cash flow problems if it does not manage its cash inflows and outflows effectively.
Explain the purpose of financial ratios in financial analysis and provide examples of commonly used ratios.
Answer: Financial ratios are tools used to analyze and evaluate a company’s financial performance, position, and efficiency. They provide insights into various aspects of a company’s operations, such as liquidity, solvency, profitability, and efficiency. Commonly used financial ratios include liquidity ratios (e.g., current ratio, quick ratio), profitability ratios (e.g., return on equity, profit margin), leverage ratios (e.g., debt-to-equity ratio, interest coverage ratio), and efficiency ratios (e.g., inventory turnover ratio, accounts receivable turnover ratio). Financial ratios help stakeholders make informed decisions, assess the financial health of a company, compare performance against industry benchmarks, and identify areas for improvement.
