Question 1

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

Accepted Answer

To measure business activities, process data into financial statements, and communicate results to decision makers.

Question 2

Which accounting assumption states that an entity will remain in operation for the foreseeable future?

Accepted Answer

Continuity (going-concern) assumption

Question 3

A company purchased equipment for $$50,000. The equipment has a useful life of 10 years and a residual value of 5$$,000. Using straight-line depreciation, what is the annual depreciation expense?

$$	ext{Depreciation Expense} = \frac{	ext{Cost} - 	ext{Residual Value}}{	ext{Useful Life}}$$

Accepted Answer

$$\4$$,500$

Question 4

Which of the following is NOT classified as a current asset on the balance sheet?

Accepted Answer

Land

Question 5

If a company has total assets of $$500,000, total liabilities of 200$$,000, and total stockholders' equity of $$300,000, which equation is satisfied?

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

Accepted Answer

$$500,000 = 200,000 + 300,000$$

Question 6

Which principle requires that expenses be recorded in the same period as the revenues they help generate?

Accepted Answer

Expense recognition (matching) principle

Question 7

A company receives $12,000 cash in advance for services to be performed next month. How should this transaction be recorded at the time cash is received?

Accepted Answer

Debit Cash $$12,000; Credit Unearned Revenue 12$$,000

Question 8

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

Accepted Answer

Providing services to a customer for cash

Question 9

A company has current assets of $$80,000 and current liabilities of 50$$,000. What is its current ratio?

$$	ext{Current Ratio} = \frac{	ext{Current Assets}}{	ext{Current Liabilities}}$$

Accepted Answer

$$1.6$$

Question 10

Which of the following is an example of an accrued liability?

Accepted Answer

Interest payable that has been incurred but not yet paid

Question 11

Which financial statement reports a company's revenues and expenses for a period of time?

Accepted Answer

Income Statement

Question 12

If a company pays $5,000 cash for rent in advance, how does this transaction affect the accounting equation?

Accepted Answer

Decrease one asset (cash) and increase another asset (prepaid rent)

Question 13

Which of the following is true regarding the accrual basis of accounting?

Accepted Answer

Revenues are recorded when earned, and expenses are recorded when incurred, regardless of cash flow.

Question 14

A company purchased a truck for $$30,000. After 3 years, the accumulated depreciation is 9$$,000. What is the net book value of the truck?

$$	ext{Net Book Value} = 	ext{Cost} - 	ext{Accumulated Depreciation}$$

Accepted Answer

$$21,000$$

Question 15

Which of the following is NOT a component of stockholders' equity?

Accepted Answer

Accounts payable

Question 16

A company has total revenues of $$120,000 and total expenses of 90$$,000 for the year. What is its net income?

$$	ext{Net Income} = 	ext{Total Revenues} - 	ext{Total Expenses}$$

Accepted Answer

$$30,000$$

Question 17

Which of the following best describes the matching principle?

Accepted Answer

Expenses are recorded in the same period as the revenues they help generate.

Question 18

Which of the following is a limitation of the balance sheet?

Accepted Answer

It reports assets at historical cost, which may not reflect current market value.

Question 19

A company has total current assets of $$40,000, total current liabilities of 25$$,000, and total long-term liabilities of $$35,000. What is the company's net working capital?

$$	ext{Net Working Capital} = 	ext{Total Current Assets} - 	ext{Total Current Liabilities}$

Accepted Answer

$$15,000$$

Question 20

Which of the following is the correct formula for calculating stockholders' equity?

Accepted Answer

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

Financial Accounting Study Notes: Chapters 1–3 (Financial Statements, Transaction Analysis, Accrual Accounting & Income)

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