1. What is the effect on the accounting equation when a company purchases supplies on credit?
A. Assets increase and Equity increases.
B. Assets increase and Liabilities increase.
C. Assets decrease and Liabilities decrease.
D. Assets decrease and Equity decreases.
2. Which of the following is an example of a `financing activity′ in the Statement of Cash Flows?
A. Purchase of equipment
B. Sale of goods to customers
C. Issuance of bonds payable
D. Payment of salaries
3. Which of the following is NOT a primary financial statement?
A. Balance Sheet
B. Income Statement
C. Statement of Cash Flows
D. Statement of Retained Earnings
4. The accounting equation is best represented as:
A. Assets - Liabilities = Equity
B. Assets + Liabilities = Equity
C. Assets = Liabilities - Equity
D. Revenue - Expenses = Net Income
5. What is the purpose of `Adjusting Entries′ in the accounting cycle?
A. To correct errors in the initial journal entries.
B. To record daily transactions.
C. To update account balances for accruals and deferrals at the end of an accounting period.
D. To prepare the trial balance.
6. Which section of the Statement of Cash Flows reports cash generated from the normal day-to-day activities of a business?
A. Investing Activities
B. Financing Activities
C. Operating Activities
D. Non-cash Activities
7. What does `Conservatism′ in accounting generally mean?
A. Understating assets and overstating liabilities and expenses.
B. Overstating assets and understating liabilities and expenses.
C. Recognizing revenues and expenses immediately.
D. Following the most optimistic estimates.
8. What is the purpose of `Closing Entries′ in the accounting cycle?
A. To adjust account balances at the end of the period.
B. To record daily transactions.
C. To transfer balances of temporary accounts to retained earnings and prepare them for the next period.
D. To prepare the trial balance.
9. Which inventory costing method generally results in the highest cost of goods sold during a period of rising prices?
A. FIFO (First-In, First-Out)
B. Weighted-Average
C. Specific Identification
D. LIFO (Last-In, First-Out)
10. Which of the following best describes `Accrual Accounting′?
A. Recognizing revenues when cash is received and expenses when cash is paid.
B. Recognizing revenues when earned and expenses when incurred, regardless of cash flow.
C. Focusing only on cash transactions.
D. Ignoring non-cash transactions.
11. What type of account is `Accounts Receivable′?
A. Liability
B. Equity
C. Asset
D. Expense
12. What is `Unearned Revenue′?
A. Revenue that has been earned but not yet collected in cash.
B. Revenue that has been collected in cash but not yet earned.
C. Revenue that has been earned and collected in cash.
D. An expense related to future revenue.
13. Why is the `Going Concern′ assumption important in financial accounting?
A. It allows companies to liquidate assets at market value.
B. It justifies the use of historical cost for asset valuation.
C. It ensures that companies will always be profitable.
D. It guarantees the accuracy of financial statements.
14. Which ratio is used to assess a company′s ability to meet its short-term obligations?
A. Debt-to-Equity Ratio
B. Current Ratio
C. Profit Margin
D. Return on Assets
15. What does `Gross Profit′ represent?
A. Revenue minus all operating expenses.
B. Revenue minus cost of goods sold.
C. Revenue minus all expenses including taxes and interest.
D. Revenue minus sales and marketing expenses.
16. What is the impact of recording depreciation expense on the accounting equation?
A. Assets increase and Equity decreases.
B. Assets decrease and Equity decreases.
C. Assets decrease and Liabilities increase.
D. No impact on the accounting equation.
17. Which of the following is NOT a characteristic of useful financial information according to the conceptual framework?
A. Relevance
B. Faithful Representation
C. Comparability
D. Complexity
18. What is the primary difference between financial accounting and managerial accounting?
A. Financial accounting is for internal users; managerial accounting is for external users.
B. Financial accounting follows GAAP; managerial accounting does not have mandatory guidelines.
C. Financial accounting focuses on future projections; managerial accounting focuses on historical data.
D. Financial accounting is optional; managerial accounting is mandatory for all businesses.
19. What is the purpose of a `Trial Balance′?
A. To prepare financial statements.
B. To prove that all transactions are correctly recorded.
C. To verify that debits equal credits after journalizing and posting.
D. To calculate net income.
20. Which of the following is considered a `current asset′?
A. Land
B. Buildings
C. Inventory
D. Equipment
21. What is the primary purpose of financial accounting?
A. To maximize shareholder wealth.
B. To provide financial information to internal management for decision-making.
C. To provide financial information to external stakeholders for decision-making.
D. To ensure compliance with tax regulations.
22. Depreciation is the process of:
A. Valuing an asset at its market price.
B. Allocating the cost of a tangible asset over its useful life.
C. Accumulating cash to replace an asset.
D. Writing off an asset when its market value declines.
23. Which of the following is an example of a contra-asset account?
A. Prepaid Rent
B. Accumulated Depreciation
C. Unearned Revenue
D. Salaries Payable
24. If a company uses the FIFO inventory method, and prices are rising, which statement is true?
A. Cost of Goods Sold will be higher, and Net Income will be lower.
B. Cost of Goods Sold will be lower, and Net Income will be higher.
C. Cost of Goods Sold and Net Income will remain unchanged.
D. Inventory valuation will be lower.
25. The `Matching Principle′ in accounting requires:
A. Matching assets with liabilities on the balance sheet.
B. Matching revenues with the expenses incurred to generate those revenues in the same accounting period.
C. Matching cash inflows with cash outflows.
D. Matching the company′s financial statements with industry standards.
26. What is the formula for calculating the `Debt-to-Equity Ratio′?
A. Total Equity ∕ Total Debt
B. Total Assets ∕ Total Equity
C. Total Debt ∕ Total Equity
D. Total Liabilities ∕ Total Assets
27. Which financial statement provides a snapshot of a company′s financial position at a specific point in time?
A. Income Statement
B. Statement of Cash Flows
C. Balance Sheet
D. Statement of Retained Earnings
28. What is the purpose of `Internal Controls′ in accounting?
A. To maximize profits.
B. To ensure compliance with tax laws only.
C. To safeguard assets, ensure accurate and reliable accounting data, promote operational efficiency, and encourage adherence to policies.
D. To replace external audits.
29. Under the double-entry bookkeeping system, every transaction will affect at least:
A. One account
B. Two accounts
C. Three accounts
D. Four accounts
30. Which accounting principle requires revenue to be recognized when it is earned, regardless of when cash is received?
A. Matching Principle
B. Going Concern Principle
C. Revenue Recognition Principle
D. Cost Principle
