1. **Which of the following best defines financial accounting?**
- A) The process of recording only expenses of a business.
- B) The method of measuring and communicating financial information about a
business.
- C) The process of recording daily transactions only.
- D) The process of forecasting future earnings.
2. **What is one main characteristic of a corporation?**
- A) Owned by only one person.
- B) Liability is limited to the owner's personal assets.
- C) Owners are personally liable for business debts.
- D) Ownership is separated from management.
3. **What is the accounting equation?**
- A) Assets + Liabilities = Equity
- B) Assets = Liabilities + Equity
- C) Revenue - Expenses = Net Income
- D) Revenue = Assets + Equity
4. **In the accounting equation, 'Liabilities' represents:**
- A) The owner’s share in the company.
- B) The debts or obligations the business owes.
- C) The total resources of the company.
- D) Money invested by the owner.
5. **Which of these is a current asset?**
- A) Land
- B) Accounts Receivable
- C) Equipment
- D) Patent
6. **How is net income calculated?**
- A) Revenue + Liabilities
- B) Revenue - Expenses
- C) Assets - Liabilities
- D) Equity + Withdrawals
7. **Which financial statement shows a company’s financial position on a specific date?**
- A) Income Statement
- B) Statement of Cash Flows
- C) Balance Sheet
- D) Statement of Retained Earnings
8. **In which order are financial statements typically prepared?**
- A) Balance Sheet, Income Statement, Cash Flows, Retained Earnings
- B) Income Statement, Balance Sheet, Cash Flows, Retained Earnings
- C) Income Statement, Retained Earnings, Balance Sheet, Cash Flows
- D) Balance Sheet, Cash Flows, Income Statement, Retained Earnings
9. **A journal entry to record cash received for services provided would involve:**
- A) Debit Cash, Credit Revenue
- B) Debit Revenue, Credit Cash
- C) Debit Cash, Credit Accounts Receivable
- D) Debit Accounts Payable, Credit Cash
10. **When goods are bought on account, which accounts are affected?**
- A) Accounts Receivable and Revenue
- B) Cash and Inventory
- C) Accounts Payable and Inventory
- D) Revenue and Cash
11. **Accounts Receivable is classified as:**
- A) An expense
- B) A liability
- C) An asset
- D) Equity
12. **What is a ledger in accounting?**
- A) A record of all accounts and balances.
- B) A statement of cash flows.
- C) A report of revenues and expenses.
- D) A list of accounts in numerical order.
13. **Which statement is true for a credit balance?**
- A) Credits increase assets.
- B) Credits decrease liabilities.
- C) Credits increase equity.
- D) Credits increase expenses.
14. **When using accrual accounting, revenue is recognized when:**
- A) Cash is received.
- B) An invoice is issued.
- C) The service is performed.
- D) Cash is deposited in the bank.
15. **Which entry adjusts a prepaid expense account at year-end?**
- A) Debit Prepaid Expense, Credit Cash
- B) Debit Expense, Credit Prepaid Expense
- C) Debit Cash, Credit Expense
- D) Debit Prepaid Expense, Credit Liability
16. **Depreciation is calculated as:**
- A) Asset Cost - Salvage Value / Useful Life
- B) Total Assets - Total Liabilities
- C) Revenue - Expenses
- D) Liabilities + Equity
17. **Interest expense on a loan taken in the current year but paid in the next year should
be recorded as:**
- A) A debit to Cash
- B) A credit to Accounts Receivable
- C) A debit to Interest Expense
- D) A credit to Revenue
18. **Which entry is used to record salaries payable at year-end?**
- A) Debit Salaries Expense, Credit Salaries Payable
- B) Debit Salaries Payable, Credit Salaries Expense
- C) Debit Cash, Credit Salaries Payable
- D) Debit Salaries Payable, Credit Cash
19. **Which of the following is considered a long-term asset?**
- A) Cash
- B) Inventory
- C) Equipment
- D) Accounts Receivable
20. **Liquidity refers to:**
- A) A company’s profitability.
- B) How quickly an asset can be converted to cash.
- C) The value of intangible assets.
- D) The difference between assets and liabilities.
21. **Which of the following is an intangible asset?**
- A) Building
- B) Patent
- C) Inventory
- D) Equipment
22. **Which financial statement shows revenues and expenses?**
- A) Balance Sheet
- B) Income Statement
- C) Statement of Cash Flows
- D) Trial Balance
23. **Temporary accounts are closed at the end of the period to:**
- A) Retained Earnings
- B) Income Summary
- C) Balance Sheet
- D) Cash Flow Statement
24. **The adjusted trial balance includes:**
- A) Only temporary accounts
- B) Only permanent accounts
- C) Both adjusted and unadjusted accounts
- D) Accounts with adjusted balances only
25. **The accounting cycle begins with:**
- A) Preparing the trial balance
- B) Analyzing transactions
- C) Closing entries
- D) Posting to the ledger
26. **A merchandiser sells:**
- A) Raw materials
- B) Finished goods
- C) Manufactured products
- D) Inventory to wholesalers only
27. **A periodic inventory system requires inventory counts:**
- A) At the end of each month
- B) After every sale
- C) Periodically, like monthly or yearly
- D) Every time inventory is received
28. **What does “freight out” refer to?**
- A) Costs of transporting goods to customers
- B) Costs of receiving goods from suppliers
- C) Manufacturing costs
- D) Overhead expenses
29. **What does 2/10, n/30 mean?**
- A) 2% discount if paid within 10 days; balance due in 30 days
- B) Payment due in 2 months
- C) 10% discount if paid within 30 days
- D) Invoice is due in 2 days
30. **FOB shipping point means:**
- A) Seller pays the freight costs
- B) Buyer pays the freight costs
- C) Goods are delivered to the buyer's location
- D) Seller takes full responsibility for delivery
31. **Under a perpetual inventory system, inventory is:**
- A) Counted monthly
- B) Updated in real-time with each purchase or sale
- C) Counted only at year-end
- D) Recorded in the periodical ledger
32. **Net sales are calculated as:**
- A) Gross sales + Returns
- B) Gross sales - Discounts - Returns
- C) Gross sales - Operating Expenses
- D) Sales Revenue - Liabilities
33. **Operating income is:**
- A) Net Sales - Cost of Goods Sold
- B) Net Sales - Operating Expenses
- C) Gross Sales - Net Income
- D) Total Revenue + Expenses
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### **Chapter 1: Foundations of Financial Accounting**
1. Which of the following best describes the purpose of financial accounting?
- A. To assist management in making day-to-day decisions
- B. To provide information primarily to external stakeholders
- C. To prepare budgets for future planning
- D. To record transactions for internal users
2. Which is an example of an asset?
- A. Service Revenue
- B. Accounts Payable
- C. Cash
- D. Withdrawals
3. What is the correct application of the accounting equation in the case where liabilities
increase by $2,000 and assets increase by $5,000?
- A. Equity increases by $3,000
- B. Equity decreases by $3,000
- C. Equity remains unchanged
- D. Equity decreases by $5,000
4. If total revenue is $10,000 and total expenses are $6,000, what is the net income?
- A. $16,000
- B. $4,000
- C. $10,000
- D. $6,000
5. Which of the following transactions involves an entry that will increase both cash and
revenue?
- A. Received money for services provided
- B. Paid off amount due to supplier
- C. Purchased equipment on account
- D. Paid for rent in the current month
(Additional questions should include preparing journal entries for common business
transactions, understanding financial statements, and calculating owners' capital.)
---
### **Chapter 2: Recording Business Transactions**
1. What classification does the "Accounts Receivable" account fall under?
- A. Liability
- B. Asset
- C. Equity
- D. Expense
2. In which order does the accounting data flow?
- A. Trial balance, ledger, journal
- B. Journal, ledger, trial balance
- C. Ledger, trial balance, journal
- D. Ledger, journal, trial balance
3. When cash is received in advance of services being provided, what type of account is
credited?
- A. Revenue
- B. Prepaid Expense
- C. Unearned Revenue
- D. Accounts Payable
4. How is an increase to an expense account recorded?
- A. Debit
- B. Credit
- C. Either debit or credit, depending on the nature of the account
- D. None of the above
(Additional questions can cover journal entries, calculation of account balances, and
differentiation between debit and credit balances.)
---
### **Chapter 3: Adjusting Entries and Accruals**
1. Under accrual accounting, when is revenue recognized?
- A. When cash is received
- B. When the service is performed or the goods are delivered
- C. At the end of the accounting period
- D. When expenses are paid
2. Which of the following entries is an example of an adjusting entry?
- A. Debit Cash, Credit Service Revenue
- B. Debit Prepaid Expense, Credit Expense
- C. Debit Expense, Credit Prepaid Expense
- D. Debit Cash, Credit Accounts Receivable
3. Which of the following describes depreciation?
- A. Allocation of the cost of a tangible asset over its useful life
- B. Recording of assets at fair market value
- C. Decrease in asset value due to market conditions
- D. Adjusting an asset to reflect its current value
4. If $1,000 interest is accrued on a loan at the end of the accounting period, what adjusting
entry is required?
- A. Debit Interest Expense $1,000; Credit Interest Payable $1,000
- B. Debit Interest Payable $1,000; Credit Interest Expense $1,000
- C. Debit Cash $1,000; Credit Interest Expense $1,000
- D. Debit Interest Expense $1,000; Credit Cash $1,000
---
### **Chapter 4: Completing the Accounting Cycle**
1. Which of the following is an example of a current liability?
- A. Mortgage payable due in 15 years
- B. Notes payable due in 2 months
- C. Land
- D. Equipment
2. What is liquidity?
- A. Ability to convert assets to cash quickly
- B. Ability to increase equity
- C. Process of closing temporary accounts
- D. Long-term profitability of a business
3. The adjusted trial balance includes:
- A. Only revenue and expense accounts
- B. Only permanent accounts Closing trial balance
- C. All accounts with adjusted balances
- D. Only assets and liabilities
4. When temporary accounts are closed, to which account are they usually closed?
- A. Retained Earnings
- B. Cash
- C. Income Summary
- D. Equity
---
### **Chapter 5: Merchandising Operations**
1. Which of the following describes a perpetual inventory system?
- A. Inventory levels are updated only at the end of the year
- B. Inventory levels are updated continuously as items are bought or sold
- C. Inventory is calculated based on periodic physical counts
- D. Inventory costs are estimated
2. What does "2/10, n/30" mean in credit terms?
- A. 2% discount if paid within 10 days, full amount due in 30 days
- B. 10% discount if paid within 2 days, full amount due in 30 days
- C. 2% discount on all purchases made within 10 days
- D. Full amount due within 30 days with no discount
3. Which entry is made when goods are sold on account under a perpetual system? Sold
cost
- A. Debit Accounts Receivable, Credit Sales Revenue; Debit Cost of Goods Sold,
Credit Inventory
- B. Debit Inventory, Credit Accounts Receivable
- C. Debit Sales Revenue, Credit Accounts Payable
- D. Debit Cash, Credit Sales Revenue
4. Freight-out is classified as:
- A. An inventory cost
- B. A selling expense
- C. A purchase discount
- D. A liability
5. Operating income is calculated as:
- A. Gross profit minus operating expenses
- B. Sales minus cost of goods sold
- C. Total revenue minus total expenses
- D. Net sales minus dividends
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