Accounting & Financial Reporting
Practice Test (FAC1601 Assignment 2;35
QUALITY ANSWERS WITH
EXPLANATIONS) Semester 2 2025
1. Which of the following is NOT a current liability?
a) Unearned revenue
b) Current portion of long-term debt
c) Accounts receivable
d) Accounts payable
✅ Correct Answer: c) Accounts receivable
Explanation: Accounts receivable is an asset. Current liabilities include obligations
like unearned revenue and accounts payable due within one year.
2. When a company buys goods on credit, the transaction increases:
a) Accounts payable
b) Accounts receivable
c) Notes payable
d) Retained earnings
✅ Correct Answer: a) Accounts payable
Explanation: Purchasing on credit increases the liability to suppliers, recorded
under accounts payable.
3. Which of the following best defines accruals?
a) Payments made in advance
b) Revenues and expenses recognized before cash is exchanged
c) Transactions are recorded only when cash is received
d) Liabilities that are already settled
✅ Correct Answer: b) Revenues and expenses recognized before cash is exchanged
Explanation: Accruals follow the accrual basis of accounting, ensuring revenues and
expenses are recognized in the correct period.
4. Which of the following is an example of an accrued expense?
a) Prepaid insurance
b) Unearned revenue
, c) Wages payable
d) Cash sales
✅ Correct Answer: c) Wages payable
Explanation: Wages payable represent salaries owed but not yet paid, a typical
accrual.
5. Notes payable are significant because they:
a) Represent formal borrowing agreements
b) Do not require interest
c) Are always long-term in nature
d) Increase stockholders’ equity
✅ Correct Answer: a) Represent formal borrowing agreements
Explanation: Notes payable are legally binding and may be short-term or long-term,
impacting financial reporting.
6. The portion of a long-term loan due within the next year is classified as:
a) Non-current liability
b) Current portion of long-term debt
c) Owner’s equity
d) Deferred revenue
✅ Correct Answer: b) Current portion of long-term debt
Explanation: This is reclassified as a current liability because it is due within 12
months.
7. Payroll liabilities include all of the following EXCEPT:
a) Social Security tax payable
b) Wages payable
c) Federal income tax withheld
d) Retained earnings
✅ Correct Answer: d) Retained earnings
Explanation: Payroll liabilities are obligations to employees or tax authorities;
retained earnings are equity.
8. Why are payroll liabilities important in financial reporting?
a) They only affect the income statement
b) They represent future cash outflows
c) They are irrelevant since they are temporary
d) They are optional disclosures
✅ Correct Answer: b) They represent future cash outflows
Explanation: Payroll liabilities must be reported since they reduce future cash and
reflect obligations to employees and the government.
Practice Test (FAC1601 Assignment 2;35
QUALITY ANSWERS WITH
EXPLANATIONS) Semester 2 2025
1. Which of the following is NOT a current liability?
a) Unearned revenue
b) Current portion of long-term debt
c) Accounts receivable
d) Accounts payable
✅ Correct Answer: c) Accounts receivable
Explanation: Accounts receivable is an asset. Current liabilities include obligations
like unearned revenue and accounts payable due within one year.
2. When a company buys goods on credit, the transaction increases:
a) Accounts payable
b) Accounts receivable
c) Notes payable
d) Retained earnings
✅ Correct Answer: a) Accounts payable
Explanation: Purchasing on credit increases the liability to suppliers, recorded
under accounts payable.
3. Which of the following best defines accruals?
a) Payments made in advance
b) Revenues and expenses recognized before cash is exchanged
c) Transactions are recorded only when cash is received
d) Liabilities that are already settled
✅ Correct Answer: b) Revenues and expenses recognized before cash is exchanged
Explanation: Accruals follow the accrual basis of accounting, ensuring revenues and
expenses are recognized in the correct period.
4. Which of the following is an example of an accrued expense?
a) Prepaid insurance
b) Unearned revenue
, c) Wages payable
d) Cash sales
✅ Correct Answer: c) Wages payable
Explanation: Wages payable represent salaries owed but not yet paid, a typical
accrual.
5. Notes payable are significant because they:
a) Represent formal borrowing agreements
b) Do not require interest
c) Are always long-term in nature
d) Increase stockholders’ equity
✅ Correct Answer: a) Represent formal borrowing agreements
Explanation: Notes payable are legally binding and may be short-term or long-term,
impacting financial reporting.
6. The portion of a long-term loan due within the next year is classified as:
a) Non-current liability
b) Current portion of long-term debt
c) Owner’s equity
d) Deferred revenue
✅ Correct Answer: b) Current portion of long-term debt
Explanation: This is reclassified as a current liability because it is due within 12
months.
7. Payroll liabilities include all of the following EXCEPT:
a) Social Security tax payable
b) Wages payable
c) Federal income tax withheld
d) Retained earnings
✅ Correct Answer: d) Retained earnings
Explanation: Payroll liabilities are obligations to employees or tax authorities;
retained earnings are equity.
8. Why are payroll liabilities important in financial reporting?
a) They only affect the income statement
b) They represent future cash outflows
c) They are irrelevant since they are temporary
d) They are optional disclosures
✅ Correct Answer: b) They represent future cash outflows
Explanation: Payroll liabilities must be reported since they reduce future cash and
reflect obligations to employees and the government.
