$$\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$$

Question 1

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

Accepted Answer

To provide information for internal and external users to make informed decisions.

Question 2

Which of the following is an example of an internal user of accounting information?

Accepted Answer

Company manager

Question 3

A company issues common shares to raise capital. This transaction is classified as which type of activity?

Accepted Answer

Financing activity

Question 4

Which of the following statements about a sole proprietorship is FALSE?

Accepted Answer

It is a separate legal entity from its owner.

Question 5

Which accounting equation is always true for any business?

Accepted Answer

$$	ext{Assets} = 	ext{Liabilities} + 	ext{Owner's Equity}$$

Question 6

A company purchases equipment for $50,000 cash. Which financial statement(s) will this transaction affect?

Accepted Answer

Both the statement of financial position and the statement of cash flows

Question 7

Which of the following is NOT a characteristic of a corporation?

Accepted Answer

Unlimited liability for shareholders

Question 8

Why might a private company choose to use IFRS instead of ASPE?

Accepted Answer

To align with competitors using IFRS and facilitate comparison

Question 9

Which of the following best describes the 'reporting entity concept'?

Accepted Answer

Business and owner’s accounts must be kept separate.

Question 10

A company has total assets of $$175,000 and liabilities of 55$$,000. What is the amount of equity?

Accepted Answer

$$120,000$$

Question 11

Which of the following is NOT one of the four main financial statements?

Accepted Answer

Statement of marketing expenses

Question 12

If a company pays dividends of $40,000, what is the effect on retained earnings?

Accepted Answer

Retained earnings decrease by $$40,000$$

Question 13

Which of the following is an example of an investing activity?

Accepted Answer

Purchase of equipment

Question 14

A company’s total assets increase by $$250,000 and total liabilities increase by 80$$,000. By how much does equity change?

Accepted Answer

$$170,000$$ increase

Question 15

Which of the following is a reason why creditors are interested in a company’s financial statements?

Accepted Answer

To assess the company’s ability to repay debts

Question 16

Which of the following is TRUE about Generally Accepted Accounting Principles (GAAP)?

Accepted Answer

They provide a common set of rules for preparing financial statements.

Question 17

Which of the following transactions would NOT affect the statement of cash flows?

Accepted Answer

Declaring dividends but not yet paying them

Question 18

A company’s assets decrease by $$40,000$$ and equity increases by $$20,000. $$What is the change in liabilities?

Accepted Answer

$$60,000$$ decrease

Question 19

Which of the following best describes the main purpose of the statement of income?

Accepted Answer

To show the company’s revenues and expenses over a period, resulting in net income or loss

Question 20

Which of the following is a key difference between a partnership and a corporation?

Accepted Answer

A corporation is a separate legal entity, while a partnership is not.

Introduction to Financial Accounting: Users, Organizations, Activities, and Financial Statements

Study Guide - Practice Questions