Financial Accounting Fundamentals Practice Quiz (20 questions)

All questions and answers

1. Which statements describe the purpose of accounting?

Accounting identifies, measures, and communicates financial information to support informed user decisions.
Accounting communicates financial information so users can make informed judgments and decisions.
Accounting records financial information mainly to establish the personal wealth of an entity’s owner.
Accounting measures economic activity without communicating information to users.
Accounting provides financial information to replace users’ own judgments and decisions.

Accounting identifies, measures, and communicates financial information to support informed user decisions. · Accounting communicates financial information so users can make informed judgments and decisions.

Explanation

Accounting identifies, measures, and communicates financial information to support informed decisions. It enables users to make judgments rather than replacing their judgment, and its purpose is not limited to establishing an owner’s personal wealth.

2. An investor is reviewing a company’s reports before deciding whether to invest. Which information does accounting provide?

Accounting reports financial position, tax rates, and production capacity as its core financial outputs.
Accounting provides information about profitability, financial position, and cash flows.
Accounting provides information about profitability and cash flows, but not financial position.
Accounting reports profitability, market share, and employee satisfaction as its three financial outputs.
Accounting provides information about an entity’s financial position and cash flows.

Accounting provides information about profitability, financial position, and cash flows. · Accounting provides information about an entity’s financial position and cash flows.

Explanation

Accounting provides information about profitability, financial position, and cash flows; these reports can inform an investor’s decision. Market share, employee satisfaction, tax rates, and production capacity are not the three specified financial outputs.

3. An accounting board uses a set of principles to guide new reporting practices and assess existing ones. Which statements describe this framework?

A conceptual framework offers generally accepted guidance for developing reporting practices.
A conceptual framework provides guidance limited to internal reports for managers.
A conceptual framework provides principles for evaluating existing reporting practices.
A conceptual framework replaces the need to develop new reporting practices.
A conceptual framework sets transaction prices for every entity using its rules.

A conceptual framework offers generally accepted guidance for developing reporting practices. · A conceptual framework provides principles for evaluating existing reporting practices.

Explanation

A conceptual framework is a statement of principles offering generally accepted guidance for developing new practices and challenging or evaluating existing ones. It does not set every transaction price, eliminate practice development, or apply only to internal reports.

4. A business prepares reports for lenders who do not take part in its day-to-day operations. Which statements apply to this reporting?

This reporting is designed for people managing the business from day to day.
This reporting is classified as management accounting because lenders use it.
This is external reporting, also called financial accounting.
This reporting serves people outside the business’s day-to-day operations.
This is internal reporting, also called management accounting.

This is external reporting, also called financial accounting. · This reporting serves people outside the business’s day-to-day operations.

Explanation

Reports for lenders outside day-to-day operations are external reporting, also called financial accounting. Internal or management accounting is intended for people managing the business day to day.

5. A business manager uses specialized reports to guide daily operating decisions. Which statements describe this accounting activity?

It reports to lenders who have no role in day-to-day management.
It uses special techniques for people managing the business day to day.
It is external reporting, also called financial accounting.
It is internal reporting, also called management accounting.
It serves people outside the business’s daily operations as its primary audience.

It uses special techniques for people managing the business day to day. · It is internal reporting, also called management accounting.

Explanation

Internal reporting, or management accounting, uses special techniques for people managing a business day to day. Reporting to outside parties such as lenders is external or financial accounting, not the activity described.

6. A proprietor keeps personal expenses distinct from the business’s accounts. Which statements reflect the business-entity concept?

A business entity is separate from the personal affairs of its owner.
A business entity is treated as separate from its owner’s personal affairs.
A business entity is defined by having several owners.
A business entity combines its owner’s personal affairs with business affairs.
The owner’s personal affairs are distinct from those of the business entity.

A business entity is separate from the personal affairs of its owner. · A business entity is treated as separate from its owner’s personal affairs. · The owner’s personal affairs are distinct from those of the business entity.

Explanation

The business-entity concept treats the business as separate from its owner’s personal affairs. This separation does not imply that the business has several owners, nor does it combine personal and business affairs.

7. A firm is organized as a limited company and its owners have limited liability. Which statements characterize this corporation?

A corporation has no obligations governing its conduct of business affairs.
A corporation gives its owners unlimited liability for company obligations.
A corporation faces obligations governing how it conducts its affairs.
A corporation is a limited company whose owners have limited liability.
A corporation combines limited liability for owners with company operating obligations.

A corporation faces obligations governing how it conducts its affairs. · A corporation is a limited company whose owners have limited liability. · A corporation combines limited liability for owners with company operating obligations.

Explanation

A corporation is a limited company whose owners have limited liability, while the company remains subject to obligations governing its affairs. Limited liability does not mean that owners have unlimited liability or that the company has no obligations.

8. Which statement best describes the information shown by a balance sheet?

It reports assets, liabilities, and owners’ equity at a particular date.
It depicts how cash changed during a designated accounting period.
It reports net income as the difference between cash receipts and payments.
It gives a snapshot of the entity’s financial position at a specific date.
It summarizes revenues and expenses across a designated accounting period.

It reports assets, liabilities, and owners’ equity at a particular date. · It gives a snapshot of the entity’s financial position at a specific date.

Explanation

A balance sheet lists assets, liabilities, and owners’ equity as of a specific date, so it is a snapshot of financial position. Revenue and expenses belong to the income statement, cash changes to the statement of cash flows, and net income is the difference between revenues and expenses.

9. A business is preparing a report covering its operations from January through March. Which report summarizes its revenue and expenses for that period?

An income statement summarizing revenue and expenses from January through March.
A statement of cash flows summarizing revenues earned during the quarter.
A statement of cash flows listing cash changes on March 31.
A balance sheet presenting owners’ equity at the start of January.
A balance sheet showing assets and obligations on March 31.

An income statement summarizing revenue and expenses from January through March.

Explanation

An income statement summarizes revenue and expenses for a specified period, such as January through March. A balance sheet reports a position on a particular date, while a statement of cash flows depicts cash changes during a period.

10. A statement of cash flows depicts which aspect of an entity’s finances?

The movement in cash over a specified period.
How cash changed during a designated period.
The entity’s assets and liabilities at a particular date.
Cash changes across a defined reporting interval.
Revenue and expenses summarized for a specific period.

The movement in cash over a specified period. · How cash changed during a designated period. · Cash changes across a defined reporting interval.

Explanation

A statement of cash flows depicts how cash changed during a designated period, so the descriptions of cash movement over a specified interval are correct. Assets and liabilities at a date describe a balance sheet, while revenue and expenses for a period describe an income statement.

11. A company controls equipment acquired in a past transaction, and the equipment is expected to provide future economic benefits. How should the equipment be classified?

As owners’ equity, because equipment represents the owners’ residual claim.
As a liability, because resources obtained in past events are obligations.
As an asset, because control arose from a past event and benefits are expected.
As an asset, because it is a controlled resource expected to provide future benefits.
As a liability, because acquiring equipment creates an expected future outflow of resources.

As an asset, because control arose from a past event and benefits are expected. · As an asset, because it is a controlled resource expected to provide future benefits.

Explanation

An asset is a resource controlled by the entity as a result of past events and expected to provide future economic benefits. A liability is a present obligation expected to cause an outflow, and owners’ equity is the residual claim after liabilities are deducted.

12. Which description identifies owners’ equity on a balance sheet?

The cash expected to flow out when the entity settles its obligations.
The revenues earned by the entity during its current accounting period.
The total resources controlled by the entity and expected to yield future benefits.
The amount the business owes creditors for obligations arising from past events.
The owners’ residual claim after the entity’s liabilities are deducted from its assets.

The owners’ residual claim after the entity’s liabilities are deducted from its assets.

Explanation

Owners’ equity is the owners’ claim against business assets and equals assets minus liabilities. Amounts owed to creditors are liabilities, controlled resources are assets, and revenues are reported for a period in the income statement.

13. A company has assets of $92,000 and liabilities of $37,000. Using the accounting equation, what is its owners’ equity?

$37,000, equal to the company’s liabilities.
$129,000, found by adding assets and liabilities.
$55,000, found by subtracting liabilities from assets.
$55,000, found by subtracting assets from liabilities.
$92,000, equal to the company’s total assets.

$55,000, found by subtracting liabilities from assets.

Explanation

The equation is assets minus liabilities equals owners’ equity. Substituting the values gives $92,000 − $37,000 = $55,000; adding them gives total liabilities plus equity, not equity alone.

14. An owner invests $6,000 in a business in exchange for shares. What is the immediate effect on cash and capital stock?

Cash and capital stock each increase by the investment amount.
Cash increases by $6,000, and accounts payable increases by $6,000.
Cash increases by $6,000, and owners’ equity increases through capital stock.
Cash increases by $6,000, and capital stock increases by $6,000.
Cash increases by $6,000, while retained earnings increase by $6,000.

Cash and capital stock each increase by the investment amount. · Cash increases by $6,000, and owners’ equity increases through capital stock. · Cash increases by $6,000, and capital stock increases by $6,000.

Explanation

An owner’s investment in exchange for shares increases cash and capital stock by $6,000, and capital stock is part of owners’ equity. The transaction does not increase accounts payable, decrease cash, or increase retained earnings.

15. A business buys a $12,000 vehicle, pays $3,000 cash, and signs a note for the balance. Which transaction effects follow?

Vehicle assets increase by $12,000, and cash decreases by $3,000.
Cash decreases by $12,000, and notes payable increase by $3,000.
The vehicle purchase is financed partly with cash and partly with a note payable.
Cash decreases by $3,000, and notes payable increase by $9,000.
Vehicle assets increase by $12,000, and accounts payable increases by $9,000.

Vehicle assets increase by $12,000, and cash decreases by $3,000. · The vehicle purchase is financed partly with cash and partly with a note payable. · Cash decreases by $3,000, and notes payable increase by $9,000.

Explanation

The vehicle is recorded at its $12,000 cost, cash falls by the $3,000 down payment, and the remaining $9,000 is recorded as a note payable. The unpaid balance is not accounts payable in this transaction, and the cash and note amounts are not reversed.

16. A retailer holds goods for sale and keeps a delivery vehicle to provide services to its business. Which classification is correct?

A delivery vehicle retained to provide business services is classified as a current asset.
A vehicle retained to provide services rather than for resale is a fixed asset.
Assets expected to become cash within the trading cycle are classified as fixed assets.
Goods expected to be converted into cash through sale within the trading cycle are current assets.
An asset held for resale to customers is classified as a fixed asset.

A vehicle retained to provide services rather than for resale is a fixed asset. · Goods expected to be converted into cash through sale within the trading cycle are current assets.

Explanation

Goods held for sale are current assets because they are expected to be converted into cash within the trading cycle. A vehicle retained to provide business services is a fixed asset; the other statements reverse these classifications.

17. Which examples are identified as current liabilities?

Long-term loans and warranty provisions are examples of current liabilities.
Short-term investments and cash at bank are examples of current liabilities.
Accounts payable and bank overdrafts are examples of current liabilities.
Accounts receivable and prepayments are examples of current liabilities.
Division-closure provisions and long-term loans are examples of current liabilities.

Accounts payable and bank overdrafts are examples of current liabilities.

Explanation

Accounts payable, described as creditors, and bank overdrafts are examples of current liabilities. The other options list long-term liabilities or asset categories instead.

18. During an accounting period, a business sells goods and provides services. Which statements describe the resulting revenue?

Revenue is the cost of goods and services used up while earning income.
Revenue is the price of goods sold and services rendered during the accounting period.
Revenue increases the owners’ equity of the business.
Revenue refers to the amount of cash paid for business expenses during the period.
Revenue decreases owners’ equity in the same way as an expense.

Revenue is the price of goods sold and services rendered during the accounting period. · Revenue increases the owners’ equity of the business.

Explanation

Revenue is the price of goods sold and services rendered during an accounting period, and it increases owners’ equity. Costs used up in earning revenue are expenses, which decrease owners’ equity; cash paid for expenses is not the definition of revenue.

19. A business uses supplies and services while earning revenue during the period. Which statements characterize these costs?

The costs are revenue because they arise while the business earns income.
The costs increase owners’ equity as the business provides services.
The costs are expenses because goods and services have been used up in earning revenue.
The costs represent the selling price of goods delivered to customers.
The costs decrease owners’ equity as expenses are incurred.

The costs are expenses because goods and services have been used up in earning revenue. · The costs decrease owners’ equity as expenses are incurred.

Explanation

An expense is the cost of goods and services used up in earning revenue, and expenses decrease owners’ equity. The selling price of goods or services is revenue, which increases owners’ equity.

20. A profitable business reports net income for an accounting period. Which statements describe its effect and classification?

Net income represents an increase in owners’ equity arising from profits.
Net income can increase the owners’ claim on the business.
Net income is itself classified as an asset on the balance sheet.
Net income decreases owners’ equity in the manner of an expense.
Net income from business profits increases owners’ equity.

Net income represents an increase in owners’ equity arising from profits. · Net income can increase the owners’ claim on the business. · Net income from business profits increases owners’ equity.

Explanation

Net income from business profits increases owners’ equity and represents an increase in the owners’ claim on the business. It is not itself an asset, and unlike an expense, it does not decrease owners’ equity.

Study with flashcards

Lock in the answers with 63 flashcards on Financial Accounting Fundamentals.

What is accounting?

The process of identifying, measuring, and communicating an entity’s financial information for informed user decisions.

What does accounting link decision makers with?

Economic activities and the results of their decisions.

What three areas does accounting provide information about?

Profitability, financial position, and cash flows.

See the flashcards →

Read the study guide

Go over the full study guide for Financial Accounting Fundamentals.

Read the study guide →

Related classes

Business Finance and Accounting

Comptabilité

Business Ownership Structures

Conhecimentos Específicos de Administração Pública

Gestion

The Short Run

Macroéconomie

The Short Run: Goods Market

Macroéconomie

EMS Entrepreneurship and Economy

Make your own practice quizzes

Upload your class notes and Revizly writes a practice quiz with explained answers in about a minute.

Quiz maker