Question 1

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

Accepted Answer

To provide relevant and accurate financial information to decision makers outside of an organization.

Question 2

Which equation correctly represents the accounting equation?

Accepted Answer

$$Assets = Liabilities + Stockholder's\ Equity$$

Question 3

A company purchases equipment for $10,000 cash. Which of the following is the correct effect on the accounting equation?

Accepted Answer

Increase equipment (asset), decrease cash (asset); total assets remain unchanged.

Question 4

Which financial statement would you use to determine how much cash a company generated and spent during the year?

Accepted Answer

Statement of cash flows

Question 5

If a company earns $$50,000 in revenue and incurs 30$$,000 in expenses, what is its net income?

Accepted Answer

$$Net\ income = Revenue - Expenses = 50,000 - 30,000 = 20,000$$

Question 6

Which of the following transactions will increase both assets and equity?

Accepted Answer

Owner invests cash into the business.

Question 7

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

Accepted Answer

Verifiability

Question 8

A company declares and pays $5,000 in dividends. What is the effect on retained earnings?

Accepted Answer

$$Retained\ Earnings$$ decrease by $$5,000$$

Question 9

Which business organization form exposes its owners to unlimited personal liability?

Accepted Answer

Proprietorship

Question 10

Which principle requires that assets be recorded at the amount paid for them at the time of purchase?

Accepted Answer

Historical cost principle

Question 11

A company receives an invoice for $500 for treadmill servicing to be paid in the future. What is the correct journal entry?

Accepted Answer

Debit Repairs Expense $$500; Credit Accounts Payable 500$$

Question 12

Which of the following is NOT a current asset?

Accepted Answer

Equipment

Question 13

Which financial statement explains the changes in retained earnings during a period?

Accepted Answer

Statement of retained earnings

Question 14

If Silver’s Gym receives $$4,000 cash as partial payment for a 10$$,000 invoice, what is the effect on the accounts?

Accepted Answer

Debit Cash $$4,000; Credit Accounts Receivable 4$$,000

Question 15

Which of the following is a disadvantage of the corporate form of business?

Accepted Answer

Double taxation of income

Question 16

Which assumption states that the business will continue to operate for the foreseeable future?

Accepted Answer

Continuity (going-concern) assumption

Question 17

A company pays $$600 for rent and 1$$,000 for salaries in cash. What is the effect on the accounting equation?

Accepted Answer

Decrease assets by $$1,600; decrease equity by 1$$,600

Question 18

Which organization is responsible for formulating U.S. GAAP?

Accepted Answer

Financial Accounting Standards Board (FASB)

Question 19

Which of the following best describes the effect of earning revenue on account?

Accepted Answer

Increase assets (Accounts Receivable); increase equity (Revenue)

Question 20

Which qualitative characteristic ensures that financial information is clear enough for reasonably informed users to understand?

Accepted Answer

Understandability

Chapter 1: The Financial Statements – Foundations of Financial Accounting

Study Guide - Practice Questions