Question 1

Which of the following best describes the primary purpose of accounting in business?

Accepted Answer

To measure, process, and communicate financial information to decision makers.

Question 2

Which of the following is NOT a user of financial accounting information?

Accepted Answer

Company managers preparing budgets.

Question 3

A business organized as a corporation is characterized by which of the following?

Accepted Answer

Ownership by stockholders and limited liability for owners.

Question 4

Which accounting principle requires that assets be recorded at their actual cost on the date of purchase?

Accepted Answer

Historical Cost Principle

Question 5

Given the following: Assets = $$120,000, Liabilities = 45$$,000. What is Equity?

Accepted Answer

$75,000

Question 6

Which equation correctly represents the accounting equation?

Accepted Answer

$$Assets = Liabilities + Equity$$

Question 7

Which of the following is an example of a current asset?

Accepted Answer

Inventory

Question 8

Which financial statement reports a company’s revenues and expenses for a period?

Accepted Answer

Income Statement

Question 9

If a company has beginning retained earnings of $$10,000, net income of 5$$,000, and dividends of $2,000, what is the ending retained earnings?

Accepted Answer

$$13,000$$

Question 10

Which of the following best describes the flow of information among the financial statements?

Accepted Answer

Income Statement → Statement of Retained Earnings → Balance Sheet → Statement of Cash Flows

Question 11

Which of the following is NOT a component of retained earnings?

Accepted Answer

Paid-in capital

Question 12

Which of the following activities is classified as a financing activity on the statement of cash flows?

Accepted Answer

Borrowing money from a bank

Question 13

Which assumption states that the dollar’s purchasing power is stable over time?

Accepted Answer

Stable-Monetary-Unit Assumption

Question 14

A company reports the following: Revenues = $$80,000, Expenses = 60$$,000, Dividends = $10,000. What is net income?

Accepted Answer

$$20,000$$

Question 15

Which of the following is a characteristic of a partnership?

Accepted Answer

Income and losses flow through to partners’ personal tax returns.

Question 16

Which organization is responsible for formulating Generally Accepted Accounting Principles (GAAP) in the United States?

Accepted Answer

Financial Accounting Standards Board (FASB)

Question 17

Which of the following is an example of a long-term liability?

Accepted Answer

Long-term bonds payable

Question 18

Which of the following best describes the entity assumption?

Accepted Answer

An organization stands apart from other organizations and individuals as a separate economic unit.

Question 19

Which of the following is a tool or technology commonly used in accounting to improve decision making?

Accepted Answer

Spreadsheets such as Excel

Question 20

A company has cash of $$50,000, accounts receivable of 30$$,000, inventory of $$20,000, land of 60$$,000, and accounts payable of $25,000. What are the total assets?

Accepted Answer

$$160,000$$

Chapter 1: The Financial Statements – Foundations of Financial Accounting

Study Guide - Practice Questions

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