Question 1

Which of the following best describes the primary objective of financial reporting according to FASB?

Accepted Answer

To provide information that is useful in making investment and lending decisions, only if it is relevant and faithfully represents economic reality.

Question 2

Which qualitative characteristic of accounting information is enhanced when information is prepared in a way that allows it to be compared with information from other companies in the same period?

Accepted Answer

Comparability

Question 3

A company purchases equipment for $50,000. According to the historical cost principle, at what amount should the equipment be recorded in the financial statements?

Accepted Answer

$50,000

Question 4

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

Accepted Answer

Double taxation of distributed profits

Question 5

Which accounting assumption states that a business will continue to operate long enough to meet its obligations and commitments?

Accepted Answer

Continuity (going-concern) assumption

Question 6

A company reports the following balances: Assets = $$120,000; Liabilities = 45$$,000. What is the amount of Equity?

Accepted Answer

$75,000

Question 7

Which of the following is NOT considered an asset on the balance sheet?

Accepted Answer

Accounts payable

Question 8

Which financial statement shows a company’s revenues and expenses over a period of time?

Accepted Answer

Income statement

Question 9

If a company has beginning retained earnings of $$20,000, net income of 5$$,000, and dividends paid of $2,000, what is the ending retained earnings?

Accepted Answer

$23,000

Question 10

Which of the following is a qualitative characteristic that enhances the usefulness of accounting information by making it possible to check for accuracy, completeness, and reliability?

Accepted Answer

Verifiability

Question 11

A business owner is personally liable for all debts of the business. Which form of business organization does this describe?

Accepted Answer

Sole proprietorship

Question 12

Which of the following is an example of a liability?

Accepted Answer

Accounts payable

Question 13

Which financial statement reports cash receipts and cash payments for operating, investing, and financing activities?

Accepted Answer

Statement of cash flows

Question 14

If a company issues common stock for $10,000 cash, what is the effect on the accounting equation?

Accepted Answer

Assets increase by $$10,000; Equity increases by 10$$,000

Question 15

Which of the following is NOT a fundamental qualitative characteristic of accounting information?

Accepted Answer

Timeliness

Question 16

A company has the following account balances: Revenues = $$80,000; Expenses = 65$$,000. What is the net income?

Accepted Answer

$15,000

Question 17

Which of the following best describes the entity assumption in accounting?

Accepted Answer

Business transactions are kept separate from the personal transactions of the owners.

Question 18

Which of the following is a reason why only material information needs to be separately disclosed in financial statements?

Accepted Answer

To ensure that decision makers are not overwhelmed by irrelevant details.

Question 19

A company pays $3,000 for rent in advance. How should this transaction be recorded?

Accepted Answer

Increase prepaid expenses (asset) by $$3,000; decrease cash (asset) by 3$$,000

Question 20

Which of the following is a component of retained earnings?

Accepted Answer

Net income earned by income-producing activities and kept for use by the business

Financial Accounting: Foundations, Assumptions, and Financial Statements

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