Question 1

Which of the following best describes the primary purpose of financial accounting?

Accepted Answer

To report financial information to external users such as investors and creditors

Question 2

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

Accepted Answer

Financial Accounting Standards Board (FASB)

Question 3

A corporation is characterized by which of the following?

Accepted Answer

Separate legal entity from its owners

Question 4

Which qualitative characteristic ensures that financial information can be checked for accuracy and reliability?

Accepted Answer

Verifiability

Question 5

According to the historical cost principle, how should a company record the purchase of land for $$50,000 if its value increases to 60$$,000 after one year?

Accepted Answer

Record the land at $50,000

Question 6

Which of the following is NOT a required financial statement under GAAP?

Accepted Answer

Statement of Budgeted Expenses

Question 7

If a company has assets of $$80,000 and liabilities of 50$$,000, what is its equity?

Accepted Answer

$30,000

Question 8

Which of the following accounts is classified as an asset?

Accepted Answer

Prepaid Expenses

Question 9

Which underlying assumption in financial accounting states that the business will continue to operate indefinitely?

Accepted Answer

Going Concern

Question 10

A company has liabilities of $$40,000 and equity of 25$$,000. What are the company’s assets?

Accepted Answer

$65,000

Question 11

Which of the following best describes the full disclosure principle?

Accepted Answer

Companies must disclose all events that would impact users’ decision making

Question 12

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

Accepted Answer

Accounts Payable

Question 13

Which of the following is NOT a qualitative characteristic that enhances the usefulness of financial information?

Accepted Answer

Faithful Representation

Question 14

Which of the following best describes the economic entity assumption?

Accepted Answer

The company’s financial records are kept separate from those of its owners and other entities

Question 15

A company purchases equipment for $$25,000 by paying 5$$,000 cash and signing a $20,000 note payable. How does this transaction affect the accounting equation?

Accepted Answer

Assets increase by $$25,000; Liabilities increase by 20$$,000; Assets decrease by $5,000

Question 16

Which of the following is NOT considered an expense account?

Accepted Answer

Dividends

Question 17

Which of the following best describes the periodicity assumption?

Accepted Answer

The economic life of a company can be divided into artificial time periods for reporting

Question 18

If a company has assets of $$120,000 and equity of 70$$,000, what are its liabilities?

Accepted Answer

$50,000

Question 19

Which of the following is an example of a real-world application of the fair value principle?

Accepted Answer

Reporting Apple stock at its current market value

Question 20

Which of the following best describes retained earnings?

Accepted Answer

The amount of income accumulated and not distributed as dividends

Chapter 1: The Financial Statements – Foundations of Financial Accounting

Study Guide - Practice Questions

Study Guide - Flashcards