$\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$

$\text{Assets} = \text{Liabilities} + \text{Stock} + \text{Retained Earnings}$

Question 1

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

Accepted Answer

To measure and communicate business activities to external parties for decision-making.

Question 2

Which equation represents the basic accounting equation?

Accepted Answer

$	ext{Assets} = 	ext{Liabilities} + 	ext{Stockholders' Equity}$

Question 3

Under accrual-basis accounting, when are revenues recorded?

Accepted Answer

When goods or services are provided to customers, regardless of when cash is received.

Question 4

Which of the following is NOT a qualitative characteristic of useful financial information according to the conceptual framework?

Accepted Answer

Profitability

Question 5

A company purchases equipment for $120,000. Under historical cost accounting, at what value is the equipment recorded?

Accepted Answer

$120,000

Question 6

Which financial statement reports the financial position of a company at a specific point in time?

Accepted Answer

Balance Sheet

Question 7

If a company has revenues of $72,000 and expenses of $64,000, what is its net income?

Accepted Answer

$8,000

Question 8

Which of the following is an assumption underlying GAAP that requires a business to continue operating indefinitely?

Accepted Answer

Going Concern

Question 9

Which of the following is NOT considered an asset?

Accepted Answer

Accounts Payable

Question 10

Which statement best describes the role of auditors in financial accounting?

Accepted Answer

Auditors ensure management has appropriately applied GAAP and add credibility to financial statements.

Question 11

Which of the following is a component of stockholders' equity?

Accepted Answer

Retained Earnings

Question 12

Which of the following is NOT a measurement principle in financial accounting?

Accepted Answer

Profit maximization

Question 13

Which financial statement details the changes in cash by the business activities of a company over an interval of time?

Accepted Answer

Statement of Cash Flows

Question 14

Which of the following is the expanded accounting equation?

Accepted Answer

$	ext{Assets} = 	ext{Liabilities} + 	ext{Stock} + 	ext{Retained Earnings}$

Question 15

Which of the following is NOT a function of financial accounting?

Accepted Answer

Setting company strategy and goals

Question 16

Which of the following is a real-world example of how financial accounting information supports decision-making?

Accepted Answer

Managers use net income trends to decide on production expansion.

Question 17

If a company distributes $14,000 in dividends to its owners, how does this affect retained earnings?

Accepted Answer

Retained earnings decrease by $14,000.

Question 18

Which of the following is NOT a component of the statement of cash flows?

Accepted Answer

Stockholders' Equity Cash Flows

Question 19

Which of the following best describes the concept of 'conservatism' in financial accounting?

Accepted Answer

Expenses and liabilities are recognized as soon as possible when there is uncertainty about the outcome.

Question 20

A company has assets of $150,000 and liabilities of $40,000. What is its stockholders' equity?

Accepted Answer

$110,000

Financial Accounting Framework: Chapter 1 Study Notes

Study Guide - Practice Questions