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

Question 1

Which of the following best describes the primary purpose of financial accounting within a business?

Accepted Answer

To measure business activities and communicate results to external decision makers.

Question 2

A company purchases equipment for $50,000. According to the historical cost principle, how should this asset be recorded?

Accepted Answer

At $50,000, the actual cost paid on the date of purchase.

Question 3

Which of the following is NOT a characteristic of the stable monetary unit assumption?

Accepted Answer

Financial statements are adjusted for inflation each year.

Question 4

A partnership differs from a corporation in which of the following ways?

Accepted Answer

Partners are personally liable for the debts of the business.

Question 5

Which equation correctly represents the relationship among assets, liabilities, and equity?

Accepted Answer

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

Question 6

Which of the following is an example of an operating activity in the statement of cash flows?

Accepted Answer

Selling goods and services to customers.

Question 7

A company has beginning retained earnings of $$10,000, net income of 5$$,000, and declares dividends of $2,000. What is the ending retained earnings?

Accepted Answer

$$13,000$$

Question 8

Which of the following best describes the entity assumption?

Accepted Answer

An organization stands apart from other organizations and individuals as a separate economic unit.

Question 9

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

Accepted Answer

Accounts payable

Question 10

If a company distributes assets to its owners, which financial statement account is directly affected?

Accepted Answer

Retained earnings

Question 11

Which of the following is a key qualitative characteristic of useful accounting information?

Accepted Answer

Relevance

Question 12

A company reports the following: assets of $$120,000 and liabilities of 80$$,000. What is the amount of equity?

Accepted Answer

$$40,000$$

Question 13

Which of the following transactions would be classified as a financing activity on the statement of cash flows?

Accepted Answer

Borrowing money from a bank.

Question 14

Which principle requires that assets be recorded at their actual cost on the date of purchase?

Accepted Answer

Historical cost principle

Question 15

Which of the following is NOT a user of financial accounting information?

Accepted Answer

Managers inside the entity

Question 16

A corporation issues new shares of stock. Which part of stockholders' equity is increased?

Accepted Answer

Paid-in capital

Question 17

Which of the following best describes the continuity (going concern) assumption?

Accepted Answer

The entity will continue to operate for the foreseeable future.

Question 18

Which of the following is an example of a liability?

Accepted Answer

Accounts payable

Question 19

If a company has revenues of $$100,000 and expenses of 70$$,000, what is its net income?

Accepted Answer

$$30,000$$

Question 20

Which of the following best describes comparability in accounting information?

Accepted Answer

The ability to compare financial statements to those of other similar companies.

Fundamentals of Financial Accounting: Concepts, Principles, and Business Applications

Study Guide - Practice Questions