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

Question 1

Which of the following best describes the accounting equation used in financial accounting?

Accepted Answer

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

Question 2

A company borrows $1,000 from a bank. How does this transaction affect the accounting equation?

Accepted Answer

Increase assets by $$1,000 and increase liabilities by 1$$,000

Question 3

Which financial statement shows a company’s financial position at a specific point in time?

Accepted Answer

Balance Sheet

Question 4

Which of the following is NOT considered an operating activity?

Accepted Answer

Repaying the principal of a loan

Question 5

If a company issues stock for $2,000 cash, what is the effect on the accounting equation?

Accepted Answer

Increase assets by $$2,000 and increase shareholders' equity by 2$$,000

Question 6

Which type of business is owned by shareholders and can issue stock?

Accepted Answer

Corporation

Question 7

A company purchases equipment for $900 cash. How does this transaction affect the accounting equation?

Accepted Answer

No net effect on total assets; cash decreases by $$900, equipment increases by 900$$

Question 8

Which of the following is a financing activity?

Accepted Answer

Issuing stock to investors

Question 9

What is the primary purpose of the income statement?

Accepted Answer

To report the company’s revenues and expenses over a period of time

Question 10

Which account is decreased when a company pays wages to employees?

Accepted Answer

Shareholders' Equity

Question 11

A company sells inventory for $$1,500 that originally cost 1$$,000. What is the effect on retained earnings?

Accepted Answer

Increase by $500

Question 12

Which of the following is NOT a characteristic of a sole proprietorship?

Accepted Answer

Ownership is divided among shareholders

Question 13

Which financial statement reports cash received and paid during a period?

Accepted Answer

Statement of Cash Flows

Question 14

If a company pays $400 cash for inventory, which accounts are affected?

Accepted Answer

Decrease cash by $$400, increase inventory by 400$$

Question 15

Which of the following is a non-current asset?

Accepted Answer

Equipment

Question 16

What is the effect of recording depreciation expense on the accounting equation?

Accepted Answer

Decrease assets and decrease shareholders' equity

Question 17

Which of the following transactions would increase both assets and shareholders' equity?

Accepted Answer

Issuing stock for cash

Question 18

A company declares and pays a dividend. What is the effect on the accounting equation?

Accepted Answer

Decrease assets and decrease shareholders' equity

Question 19

Which of the following is a characteristic of a partnership?

Accepted Answer

Ownership is shared by two or more individuals

Question 20

Which account is credited when a company borrows money from a bank?

Accepted Answer

Notes Payable

Module 1: Foundations of Financial Accounting

Study Guide - Practice Questions