What Is The Primary Purpose Of Financial Accounting? Exam Quiz

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  • Which financial accounting number impacts stock prices more than any other single piece of information?

    • Retained Earnings
    • Net Income
    • Common Stock
    • Total Assets
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Financial Accounting Quizzes & Trivia
About This Quiz

Explore the essentials of financial accounting in this Exam Quiz, focusing on key concepts such as net income, adjusted trial balances, transaction analysis, and the differences between accrual and cash-basis accounting. This quiz is designed to assess and enhance your understanding of financial accounting principles.

Questions and Answers
  • 2. 

    A list of all accounts and their balances after updating account balances for adjusting entries is referred to as:

    • A trial balance

    • An adjusted trial balance

    • A post-closing trial balance

    • An accounting trial balance

    Correct Answer
    A. An adjusted trial balance
    Explanation
    An adjusted trial balance is a list of all accounts and their balances after adjusting entries have been made. Adjusting entries are made to ensure that the financial statements accurately reflect the financial position of the company. Therefore, an adjusted trial balance provides a more accurate representation of the company's financial position compared to a regular trial balance. It helps in identifying any errors or discrepancies in the accounting records before preparing the financial statements.

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  • 3. 

    Which of the following is not part of measuring external transactions?

    • Using source documents to analyze accounts affected

    • Recording transactions

    • Making payments on all amounts owed

    • Analyzing transactions for their effect on the accounting equation

    Correct Answer
    A. Using source documents to analyze accounts affected
    Explanation
    Using source documents to analyze accounts affected is not part of measuring external transactions. Measuring external transactions involves recording transactions, making payments on amounts owed, and analyzing transactions for their effect on the accounting equation. However, using source documents to analyze accounts affected is a step that occurs before measuring external transactions and involves examining the documents to determine which accounts are impacted by the transactions.

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  • 4. 

    The primary difference between accrual-basis and cash-basis accounting is:

    • The timing of when revenues and expenses are recorded

    • Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting

    • Accrual-basis accounting violates both the revenue recognition and matching principles

    • Adjusting entries are only a necessary part of cash-basis accounting

    Correct Answer
    A. The timing of when revenues and expenses are recorded
    Explanation
    Accrual-basis accounting records revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid. Cash-basis accounting, on the other hand, records revenues and expenses only when the cash is received or paid. Therefore, the primary difference between accrual-basis and cash-basis accounting is the timing of when revenues and expenses are recorded.

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  • 5. 

    External events include all of the following except:

    • Paying employee salaries

    • Purchasing equipment

    • Using office supplies

    • Collecting and account receivable

    Correct Answer
    A. Using office supplies
    Explanation
    External events refer to transactions or activities that involve interactions between a company and entities outside of the company. Paying employee salaries, purchasing equipment, and collecting accounts receivable are all examples of external events as they involve financial interactions with external parties. However, using office supplies is an internal event as it does not involve any external party.

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  • 6. 

    Receiving assets from customers before services are performed results in:

    • Prepaid assets

    • Service revenue

    • Unearned revenue

    • Accounts receivable

    Correct Answer
    A. Unearned revenue
    Explanation
    Receiving assets from customers before services are performed results in unearned revenue. This is because unearned revenue represents the amount of money received in advance for goods or services that have not yet been provided. It is considered a liability on the balance sheet until the services are performed or the goods are delivered, at which point it is recognized as revenue.

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  • 7. 

    What is the primary purpose of financial accounting?

    • Determine the amount of tax liability owed to the government

    • Communicate business transactions to internal management

    • Measure business transactions and communicate those measures to external users to make decisions

    • Measure the profitability of the company in order to assist in employees with making decisions

    Correct Answer
    A. Measure business transactions and communicate those measures to external users to make decisions
    Explanation
    The primary purpose of financial accounting is to measure business transactions and communicate those measures to external users to make decisions. Financial accounting involves recording, summarizing, and reporting financial information to stakeholders such as investors, creditors, and regulators. This information helps external users assess the financial performance, position, and cash flows of a company, enabling them to make informed decisions regarding investments, lending, and other business transactions.

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  • 8. 

    Receiving cash from an account receivable:

    • Increases a revenue and decreases an asset

    • Decreases a liability and increases an asset

    • Increases an asset and increases a revenue

    • Increases one asset and decreases another asset

    Correct Answer
    A. Increases one asset and decreases another asset
    Explanation
    When cash is received from an account receivable, it means that a customer has paid their outstanding debt. This transaction increases the cash asset as the company receives cash, and decreases the accounts receivable asset as the customer's debt is cleared. Therefore, this answer choice correctly states that it increases one asset (cash) and decreases another asset (accounts receivable).

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  • 9. 

    The form of business organization that is legally separate from its owners is a: 

    • Partnership

    • Sole Proprietership

    • Corporation

    • Separate Entity

    Correct Answer
    A. Corporation
    Explanation
    A corporation is a form of business organization that is legally separate from its owners. This means that the corporation is treated as a separate legal entity, distinct from its shareholders or owners. This separation provides limited liability protection to the owners, meaning that their personal assets are generally protected from the debts and liabilities of the corporation. Additionally, a corporation has perpetual existence, meaning that it can continue to exist even if ownership changes or shareholders pass away. This form of organization also allows for easier transfer of ownership through the buying and selling of shares.

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  • 10. 

    When a payment is made on an account payable:

    • Assets and stockholders' equity decrease

    • Assets and liabilities decrease

    • Liabilities and revenues decrease

    • Assets and expenses decrease

    Correct Answer
    A. Assets and liabilities decrease
    Explanation
    When a payment is made on an account payable, both assets and liabilities decrease. This is because the payment reduces the amount owed on the account payable, which is a liability for the company. Additionally, the company's assets decrease because the cash used for the payment is no longer available. Therefore, both the assets and liabilities of the company decrease as a result of making a payment on an account payable.

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  • 11. 

    Liabilities normally carry a____balance and are shown in the____

    • Debit; Statement of Stockholders' Equity

    • Debit; Income Statement

    • Credit; Balance Sheet

    • Debit; Balance Sheet

    Correct Answer
    A. Credit; Balance Sheet
    Explanation
    Liabilities normally carry a credit balance and are shown in the balance sheet. The balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. Liabilities represent the company's obligations or debts, which are typically owed to external parties. Since liabilities have a credit balance, they increase on the credit side of the balance sheet, along with the company's equity and liabilities.

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  • 12. 

    On April 1, a $4,800 premium on a one year insurance policy on equipment was paid and charged to Prepaid Insurance. At the end of the year, the financial statements would report:

    • Insurance Expense $4800; Prepaid Insurance $0

    • Insurance Expense $3600; Prepaid Insurance $1200

    • Insurance Expense $3650; Prepaid Insurance $4800

    • Insurance Expense $1200; Prepaid Insurance $3600

    Correct Answer
    A. Insurance Expense $3600; Prepaid Insurance $1200
    Explanation
    At the end of the year, the financial statements would report Insurance Expense of $3600 and Prepaid Insurance of $1200. This is because the $4800 premium paid at the beginning of the year is initially recorded as a prepaid expense under Prepaid Insurance. As time passes, the prepaid expense is gradually recognized as an expense, which is why $3600 is reported as Insurance Expense. The remaining $1200 is still considered as a prepaid expense and is reported under Prepaid Insurance on the financial statements.

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  • 13. 

    Net income can best be describes as:

    • Net cash received by a company during the year

    • Revenues minus expenses

    • The amount of profits retained in a company for the year

    • Resources owned by a company

    Correct Answer
    A. Revenues minus expenses
    Explanation
    Net income is the amount of profit that a company retains after deducting all its expenses from its revenues. It is a measure of the company's profitability and represents the amount of money the company has earned during the year. By subtracting expenses from revenues, the company can determine its net income, which is an important financial metric used to assess the company's financial health and performance.

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  • 14. 

    The retained earnings account had a beginning credit balance of $26000. During the period, the business had a net loss $12000 and the company paid dividends of $8000. The ending balance in the retained earnings account is:

    • $6000

    • $30000

    • $22000

    • $14000

    Correct Answer
    A. $6000
    Explanation
    The retained earnings account began with a credit balance of $26,000. A net loss of $12,000 and dividend payments of $8,000 decrease the balance by a total of $20,000. Therefore, the ending balance in the retained earnings account is $6,000 ($26,000 - $20,000).

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  • 15. 

    Childers Service Company provides services to customers totaling $3000, for which it billed customers. How would the transaction be recorded?

    • Debit Cash $3000, Credit Service Revenue $3000

    • Debit Accounts Receivable $3000, Credit Service Revenue $3000

    • Debit Accounts Receivable $3000, Credit Cash $3000

    • Debit Service Revenue $3000, Credit Accounts Receivable $3000

    Correct Answer
    A. Debit Accounts Receivable $3000, Credit Service Revenue $3000
    Explanation
    The transaction would be recorded by debiting Accounts Receivable for $3000, which represents the amount owed by customers, and crediting Service Revenue for $3000, which represents the revenue earned from providing services to customers. This reflects an increase in the company's assets (Accounts Receivable) and an increase in its revenue (Service Revenue).

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  • 16. 

    At the beginning of December, Global Corporation had $2000 in supplies on hand. During the month, supplies purchased amounted to $3000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry?

    • Debit Cash $4200, Credit Supplies $4200

    • Debit Supplies $4200, Credit Supplies Expense $4200

    • Debit Supplies Expense $4200, Credit Supplies $4200

    • Debit Cash $800, Credit Supplies $800

    Correct Answer
    A. Debit Supplies Expense $4200, Credit Supplies $4200
    Explanation
    The appropriate month-end adjusting entry is to debit Supplies Expense for $4200 and credit Supplies for $4200. This is because the supplies purchased during the month ($3000) exceed the supplies balance at the end of the month ($800), indicating that $4200 worth of supplies were used or consumed during the month. Therefore, the expense should be recognized and the supplies account should be reduced by the same amount.

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  • 17. 

    Assume that cash is paid for rent to cover the next year. The appropriate debit and credit are:

    • Debit Rent Expense, Credit Cash

    • Debit Prepaid Rent, Credit Rent Expense

    • Debit Prepaid Rent, Credit Cash

    • Debit Cash, Credit Prepaid Rent

    Correct Answer
    A. Debit Prepaid Rent, Credit Cash
    Explanation
    When cash is paid for rent to cover the next year, it is considered as a prepayment of rent. This means that the rent expense is not recognized immediately but is recorded as an asset called prepaid rent. The debit entry is made to the Prepaid Rent account to increase the asset, and the credit entry is made to the Cash account to decrease the cash balance. Therefore, the appropriate debit and credit are Debit Prepaid Rent, Credit Cash.

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  • 18. 

    The two categories of stockholders' equity usually found in the balance sheet of a corporation are: 

    • Common Stock

    • Assets and Liabilities

    • Common Stock and Retained Earnings

    • Revenues and Expenses

    Correct Answer
    A. Common Stock and Retained Earnings
    Explanation
    The two categories of stockholders' equity usually found in the balance sheet of a corporation are common stock and retained earnings. Common stock represents the initial investment made by shareholders in exchange for ownership in the company. Retained earnings, on the other hand, represent the accumulated profits of the company that have not been distributed to shareholders as dividends. These two categories provide information about the financial position of the company and the shareholders' claims on the company's assets.

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  • 19. 

    When a company makes and end-of-period adjusting entry which includes a credit to Prepaid Rent, the debit is usually made to:

    • Cash

    • Rent Expense

    • Rent Payable

    • Rent Receivable

    Correct Answer
    A. Rent Expense
    Explanation
    When a company makes an end-of-period adjusting entry that includes a credit to Prepaid Rent, the debit is usually made to Rent Expense. This is because the adjusting entry is recognizing the portion of prepaid rent that has been used up or expired during the period as an expense. By debiting Rent Expense, the company is reducing its prepaid rent asset and recording the expense in the income statement for the period. This ensures that the financial statements accurately reflect the company's expenses and the matching principle is followed.

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  • 20. 

    When a company pays $2500 dividends to its stockholders, the transaction should be recorded as:

    • Debit Cash; Credit Dividends

    • Debit Retained Earnings; Credit Dividends

    • Debit Dividends; Credit Cash

    • Debit Dividends; Credit Accounts Payable

    Correct Answer
    A. Debit Dividends; Credit Cash
    Explanation
    When a company pays dividends to its stockholders, it should be recorded as a debit to the Dividends account to decrease the balance of retained earnings and a credit to the Cash account to reflect the outflow of cash from the company. This transaction represents the distribution of profits to the stockholders, resulting in a decrease in the company's retained earnings and an outflow of cash.

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  • 21. 

    On July 7, 2012, Saints Inc. received $10,000 in cash from a customer for services to be provided on October 10, 2012. Which of the following describes how the transaction should be recorded on July 7, 2012?

    • Debit Cash $10,000; Credit Service Revenue $10,000

    • Debit Accounts Receivable $10,000; Credit Service Revenue $10,000

    • Debit Cash $10,000, Credit Unearned Revenue $10,000

    • Debit Unearned Revenue $10,000, Credit Cash $10,000

    Correct Answer
    A. Debit Cash $10,000, Credit Unearned Revenue $10,000
    Explanation
    On July 7, 2012, Saints Inc. received $10,000 in cash from a customer for services to be provided on October 10, 2012. Since the services have not been provided yet, the revenue cannot be recognized as Service Revenue. Instead, the transaction should be recorded as Debit Cash $10,000 to reflect the increase in cash and Credit Unearned Revenue $10,000 to represent the liability created for the services that will be provided in the future. This ensures that the revenue is recognized in the correct accounting period when the services are actually performed.

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  • 22. 

    Transactions of a company that include the purchase and sale of long-term productive assets are referred to as: 

    • Investing activities

    • Financing activities

    • Expenditure activities

    • Operating activities

    Correct Answer
    A. Investing activities
    Explanation
    Transactions involving the purchase and sale of long-term productive assets are categorized as investing activities. Investing activities refer to the acquisition and disposal of assets that are expected to generate future income or provide long-term benefits to the company. These activities include the purchase of property, plant, and equipment, as well as the purchase and sale of investments such as stocks and bonds. By engaging in investing activities, a company aims to enhance its productive capacity and generate returns on its investments.

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  • 23. 

    Which of the following accounting principles states that expenses are recognized in the same period as the revenues they help to generate?

    • Accounting equation

    • Revenue recognition

    • Matching principle

    • Conservatism

    Correct Answer
    A. Matching principle
    Explanation
    The matching principle is the accounting principle that states that expenses should be recognized in the same period as the revenues they help to generate. This principle ensures that the financial statements accurately reflect the financial performance of a company by matching the expenses incurred to generate revenue with the revenue earned in the same period. By following this principle, companies can provide a more accurate picture of their profitability and financial health.

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  • 24. 

    Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting?

    • Received $600 from customers for services to be provided in May

    • Paid $1800 for a six-month insurance policy covering the period July 1--December 31

    • Paid $700 for an advertisement that appeared in the April 17 edition of the Las Vegas Sun newspaper

    • Received $300 from customers for services performed in March.

    Correct Answer
    A. Paid $1800 for a six-month insurance policy covering the period July 1--December 31
    Explanation
    The payment of $1800 for a six-month insurance policy would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting. This is because the payment for the insurance policy is considered an expense, which would be recognized in the income statement in April regardless of when the actual coverage period begins. The timing of the cash payment does not affect the recognition of the expense in the income statement.

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  • 25. 

    On July 31, ALOE Inc. received $5000 cash from a customer who previously purchased ALOE's products on account. What should ALOE Inc. record at the time it receives cash?

    • Debit Accounts Receivable, $5000; Credit Cash $5000

    • Debit Cash $5000; Credit Accounts Receivable $5000

    • Debit Cash $5000; Credit Accounts Payable $5000

    • Debit Cash $5000; Credit Service Revenue $5000

    Correct Answer
    A. Debit Cash $5000; Credit Accounts Receivable $5000
    Explanation
    When ALOE Inc. receives $5000 cash from a customer who previously purchased their products on account, they should record a debit to the Cash account for $5000 to show the increase in cash. They should also credit the Accounts Receivable account for $5000 to reduce the amount owed by the customer since they have now paid in cash. This transaction reflects the conversion of accounts receivable (an asset) into cash, resulting in an increase in the cash balance and a decrease in the accounts receivable balance.

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  • 26. 

    When a company provides services on account, which of the following would be recorded using cash-basis accounting?

    • Debit to cash

    • Debit to service revenue

    • Credit to unearned revenue

    • No entry would be recorded

    Correct Answer
    A. No entry would be recorded
    Explanation
    In cash-basis accounting, transactions are only recorded when cash is received or paid. Since the company is providing services on account, meaning they are not receiving cash immediately, no entry would be recorded in cash-basis accounting. This is because cash has not been received, and therefore, there is no transaction to record.

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  • 27. 

    A company receives a $50,000 cash deposit from a customer on October 15 but will not provide services until November 20. Which of the following statements is true?

    • The company records service revenue on October 15

    • The company records cash collection November 20

    • The company records an unearned revenue on October 15

    • The company records nothing on October 15

    Correct Answer
    A. The company records an unearned revenue on October 15
    Explanation
    When a company receives a cash deposit from a customer but has not yet provided the services, it is considered as unearned revenue. This is because the company has received the payment in advance but has not yet earned it by providing the services. Therefore, the correct statement is that the company records an unearned revenue on October 15.

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  • 28. 

    Which of the following is true about adjusting entries?

    • Entries are necessary due to the conservatism principle

    • Entries can be done at the beginning or end of the accounting period

    • They zero the balance of all income statement accounts

    • They are a necessary part of accrual-basis accounting

    Correct Answer
    A. They are a necessary part of accrual-basis accounting
    Explanation
    Adjusting entries are necessary in accrual-basis accounting because they ensure that revenues and expenses are recorded in the period in which they are earned or incurred, regardless of when the cash is received or paid. These entries help to accurately match revenues with expenses, and bring the financial statements in line with the accrual accounting principles. By making these adjustments, the income statement accounts are updated to reflect the correct balances, which ultimately results in accurate financial reporting.

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  • 29. 

    Making insurance payments in advance is an example of:

    • An accrued revenue

    • An accrued expense

    • An unearned revenue

    • A prepaid expense

    Correct Answer
    A. A prepaid expense
    Explanation
    Making insurance payments in advance is an example of a prepaid expense because the payment is made before the actual benefit or service is received. In this case, the insurance coverage is paid for in advance, and the expense is recorded as an asset on the balance sheet until the coverage period begins. As the coverage period progresses, the prepaid expense is gradually recognized as an expense on the income statement.

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  • 30. 

    The closing entry for expenses includes:

    • A debit to dividends and a credit to all expense accounts

    • A debit to retained earnings and a credit to all expense accounts

    • A debit to revenues and a credit to retained earnings

    • A debit to revenues and a credit to all expense accounts

    Correct Answer
    A. A debit to retained earnings and a credit to all expense accounts
    Explanation
    The closing entry for expenses involves debiting the retained earnings account and crediting all expense accounts. This entry is made to transfer the total amount of expenses incurred during the accounting period to the retained earnings account, which is a component of the equity section of the balance sheet. By debiting retained earnings, the expenses are subtracted from the company's accumulated profits, reducing the overall equity. Simultaneously, crediting the expense accounts reduces their balances to zero, preparing them for the next accounting period. This closing entry ensures that all expenses are properly accounted for and reflected in the financial statements.

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  • 31. 

    The following amounts are reported in the ledger of Mariah Company: Assets                                               $80,000 Liabilities                                            36,000 Retained Earnings                            12,000 What is the balance of the Common Stock account?

    • $44,000

    • $32,000

    • $48,000

    • $42,000

    Correct Answer
    A. $32,000
    Explanation
    The balance of the Common Stock account can be calculated by subtracting the total of liabilities and retained earnings from the total assets. In this case, the total liabilities and retained earnings amount to $48,000 ($36,000 + $12,000). Subtracting this from the total assets of $80,000 gives us a balance of $32,000 for the Common Stock account.

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  • 32. 

    The primary purpose of closing entries is to:

    • Prove the equality of the debit and credit entries in the general journal

    • Ensure that all assets and liabilities are recognized in the appropriate period

    • Update the balance of retained earnings and prepare revenue, expense, and dividend accounts for next period's transactions

    • Assure that adjusting entries balance

    Correct Answer
    A. Update the balance of retained earnings and prepare revenue, expense, and dividend accounts for next period's transactions
    Explanation
    Closing entries are made at the end of an accounting period to transfer the balances of temporary accounts such as revenue, expense, and dividend accounts to the retained earnings account. This process updates the balance of retained earnings and prepares the revenue, expense, and dividend accounts for the next period's transactions. By closing these temporary accounts, the company ensures that only the balances of permanent accounts, such as assets and liabilities, are carried forward to the next accounting period. Therefore, the correct answer is "Update the balance of retained earnings and prepare revenue, expense, and dividend accounts for next period's transactions."

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  • 33. 

    The closing process includes which of the following?

    • Closing the balance of the retained earnings account to 0

    • Closing the balance of the only dividends account to 0

    • Closing the balances of only revenue and expense accounts to 0

    • Closing the balances of revenue, expense and dividend accounts to 0

    Correct Answer
    A. Closing the balances of revenue, expense and dividend accounts to 0
    Explanation
    The closing process in accounting involves closing the temporary accounts, such as revenue, expense, and dividend accounts, to zero. This is done by transferring the balances of these accounts to the retained earnings account. By closing these accounts to zero, it allows for a fresh start in the next accounting period and ensures that the income and expenses are properly recorded.

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  • 34. 

    Generally Accepted Accounting Principles (GAAP) re best defined as:

    • Standards or methods for presenting financial accounting information

    • Government-mandated rules that companies must follow

    • Rules that best estimate profitability for a company

    • The group of individuals that create and enforce all accounting rules

    Correct Answer
    A. Standards or methods for presenting financial accounting information
    Explanation
    GAAP refers to Generally Accepted Accounting Principles, which are a set of standards and guidelines for financial accounting. These principles provide a framework for how financial information should be presented, ensuring consistency and comparability in financial statements. GAAP is not government-mandated rules, rules for estimating profitability, or a group of individuals, but rather a set of standards and methods that dictate how financial accounting information should be reported.

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  • 35. 

    A list of all accounts and their balances after posting closing entries is referred to as: 

    • A trial balance

    • An adjusted trial balance

    • A post-closing trial balance

    • An accounting trial balance

    Correct Answer
    A. A post-closing trial balance
    Explanation
    After posting closing entries, a post-closing trial balance is prepared. This trial balance includes all the accounts and their balances, but only includes permanent accounts. Permanent accounts are those that are not closed at the end of the accounting period, such as asset, liability, and equity accounts. The purpose of the post-closing trial balance is to ensure that the closing entries were properly made and that the balances of the permanent accounts are correct before starting the next accounting period.

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  • 36. 

    Which statement below best describes the accounting equation?

    • The change in retained earnings equals net income less dividends

    • Equality of revenue and expense transactions over time

    • Resources of the company equal creditors' and owners' claims to those resources

    • Financing activities equal investing and operating activities

    Correct Answer
    A. Resources of the company equal creditors' and owners' claims to those resources
    Explanation
    The accounting equation states that the resources (assets) of a company are equal to the creditors' and owners' claims to those resources (liabilities and equity). This means that the total value of what a company owns is equal to the total value of what it owes to its creditors and shareholders. It is a fundamental principle in accounting that helps to ensure that the financial statements of a company are accurate and balanced.

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  • 37. 

    The revenue recognition principle states that: 

    • Revenue should be recognized in the period the cash is received

    • Revenue should be recognized in the period earned

    • Revenue should be recognized in the balance sheet

    • Revenue is a component of common stock

    Correct Answer
    A. Revenue should be recognized in the period earned
    Explanation
    The correct answer is "Revenue should be recognized in the period earned." This means that revenue should be recorded and reported in the financial statements in the period in which it is actually earned, regardless of when the cash is received. This principle ensures that financial statements accurately reflect the company's performance and helps to provide a more accurate picture of the company's financial position.

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  • 38. 

    If a company has stockholders' equity of $60,000 at the end of the year, which of the following statements must be true?

    • The company;s assets exceed liabilities by $60,000

    • The company has issued $60,000 of common stock

    • Net income for the year equals $60,000

    • Total revenues earned during the year equal $60,000

    Correct Answer
    A. The company;s assets exceed liabilities by $60,000
    Explanation
    If a company has stockholders' equity of $60,000 at the end of the year, it means that the company's assets exceed its liabilities by $60,000. Stockholders' equity is calculated by subtracting liabilities from assets, so if the stockholders' equity is positive, it indicates that the company's assets are greater than its liabilities. Therefore, the statement "The company's assets exceed liabilities by $60,000" must be true.

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  • 39. 

    Which of the following describes the purpose(s) of closing entries?

    • Adjust the balances of asset and liability accounts for unrecorded activity during the period

    • Transfer the balances of temporary accounts to common stock

    • Reduce the balances of the temporary accounts to 0 to prepare them for measuring activity in the next period

    • Both b and c

    Correct Answer
    A. Adjust the balances of asset and liability accounts for unrecorded activity during the period
    Explanation
    Closing entries are made at the end of an accounting period to adjust the balances of asset and liability accounts for any unrecorded activity that occurred during the period. This ensures that the financial statements accurately reflect the company's financial position. By closing these accounts, any remaining balances are transferred to the retained earnings or common stock account, which is part of the equity section of the balance sheet. This process also reduces the balances of temporary accounts, such as revenue and expense accounts, to zero in preparation for measuring activity in the next accounting period. Therefore, the correct answer is "Adjust the balances of asset and liability accounts for unrecorded activity during the period."

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  • 40. 

    Posting is the process of:

    • Analyzing the impact of the transaction of the accounting equation

    • Obtaining information about external transactions from source documents

    • Transferring the debit and credit information from the journal to individual accounts in the general ledger

    • Listing all accounts and their balances at a particular date

    Correct Answer
    A. Transferring the debit and credit information from the journal to individual accounts in the general ledger
    Explanation
    The correct answer is transferring the debit and credit information from the journal to individual accounts in the general ledger. This process of posting involves taking the information recorded in the journal for each transaction and transferring it to the respective accounts in the general ledger. The general ledger contains all the accounts of a company and is used to keep track of the financial transactions. By posting the information from the journal to the general ledger, the balances of individual accounts are updated and the overall financial position of the company can be determined.

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  • 41. 

    Limited liability means:

    • Stockholders of a corporation are not obligated to pay the corporation's debts out of their own pocket

    • Liabilities of a company cannot exceed its assets

    • Companies are not allowed to borrow unless they're profitable

    • Companies are less likely to be sued if they are formed as a corporation

    Correct Answer
    A. Stockholders of a corporation are not obligated to pay the corporation's debts out of their own pocket
    Explanation
    Limited liability means that the stockholders of a corporation are not personally responsible for paying the corporation's debts. This means that if the corporation fails or accumulates debts, the stockholders' personal assets are protected and they are not obligated to use their own money to pay off the debts. Limited liability is one of the main advantages of forming a corporation as it provides a level of financial protection to the shareholders.

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  • 42. 

    The owners' interest in a corporation is called

    • Dividends

    • Assets

    • Liabilities

    • Stockholders' equity

    Correct Answer
    A. Stockholders' equity
    Explanation
    Stockholders' equity refers to the owners' interest in a corporation. It represents the residual interest in the assets of the company after deducting liabilities. This equity represents the amount of capital contributed by the owners, as well as any retained earnings or profits that have been reinvested in the business. It reflects the ownership stake and the financial value that the owners hold in the corporation.

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  • 43. 

    Adjusting entries: 

    • Often include the cash account

    • Usually are recorded at the beginning of the accounting period

    • Always involve at least one income statement account and one balance sheet account

    • Adjust the balance of revenue and expense accounts to 0

    Correct Answer
    A. Always involve at least one income statement account and one balance sheet account
    Explanation
    Adjusting entries are necessary to ensure that the financial statements accurately reflect the company's financial position and performance. These entries are made at the end of an accounting period to record transactions or events that have occurred but have not yet been recorded. Adjusting entries always involve at least one income statement account and one balance sheet account because they are used to update both the revenue and expense accounts (income statement) and the asset, liability, and equity accounts (balance sheet). By making these adjustments, the balances of the revenue and expense accounts are brought to zero, ensuring that the income statement reflects the correct net income or loss for the period.

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  • 44. 

    Which of the following best describes a revenue?

    • Resources owned

    • Cash received from a customer

    • Amounts earned from providing goods and services to a customer

    • Dividends paid to stockholders

    Correct Answer
    A. Amounts earned from providing goods and services to a customer
    Explanation
    A revenue is the amount of money earned by a company from providing goods and services to its customers. It represents the income generated by the company's primary operations and is a key indicator of its financial performance. The revenue is not related to resources owned, cash received from customers, or dividends paid to stockholders.

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  • 45. 

    Which of the accounts are decreased on the debit side and increased on the credit side?

    • Liabilities, stockholders' equity, and revenues

    • Dividends, liabilities, and assets

    • Expenses, dividends, and stockholders' equity

    • Assets, dividends, and expenses

    Correct Answer
    A. Liabilities, stockholders' equity, and revenues
    Explanation
    Liabilities, stockholders' equity, and revenues are accounts that are decreased on the debit side and increased on the credit side. This is because in double-entry bookkeeping, these accounts have a normal credit balance. When there is an increase in these accounts, it is recorded on the credit side, and when there is a decrease, it is recorded on the debit side. This helps maintain the accounting equation (Assets = Liabilities + Stockholders' Equity) and ensures accurate financial reporting.

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  • 46. 

    The financial statement that represents activity over the entire life of the company is the:

    • Income statement

    • Statement of financial accounting

    • Balance sheet

    • Statement of cash flows

    Correct Answer
    A. Balance sheet
    Explanation
    The balance sheet represents the financial position of a company at a specific point in time, showing its assets, liabilities, and shareholders' equity. It provides a snapshot of the company's financial health and includes information about its long-term assets and liabilities. Unlike the income statement, which shows the company's financial performance over a specific period, the balance sheet reflects the accumulated activity and financial position of the company throughout its entire existence. Therefore, the balance sheet is the financial statement that represents activity over the entire life of the company.

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  • 47. 

    Which of the following is the correct order for preparing the financial statements?

    • Balance sheet, statement of stockholders' equity, and income statement

    • Balance sheet, income statement, and statement of stockholders' equity

    • Statement of stockholders' equity, income statement, and balance sheet

    • Income statement, statement of stockholders' equity, and balance sheet

    Correct Answer
    A. Income statement, statement of stockholders' equity, and balance sheet
    Explanation
    The correct order for preparing financial statements is the income statement, followed by the statement of stockholders' equity, and finally the balance sheet. The income statement shows the company's revenues, expenses, and net income or loss for a specific period. The statement of stockholders' equity shows the changes in the company's equity accounts, including stock issuance, dividends, and net income or loss. Finally, the balance sheet provides a snapshot of the company's assets, liabilities, and shareholders' equity at a specific point in time. This order ensures that the financial statements are prepared in a logical sequence, starting with the income statement and ending with the balance sheet.

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  • 48. 

    A trial balance can best be explained as a list of:

    • The income statement accounts used to calculate net income

    • Revenue, expense, and dividend accounts used to show the balances of the components of retained earnings

    • The balance sheet accounts used to show the equality of the accounting equation

    • All accounts and their balances at a particular date

    Correct Answer
    A. All accounts and their balances at a particular date
    Explanation
    A trial balance is a list of all accounts and their balances at a particular date. It is used to ensure that the total debits equal the total credits in the accounting system. By listing all accounts and their balances, it allows for the identification of any errors or discrepancies in the recording of financial transactions. This helps in the preparation of accurate financial statements and ensures the accuracy of the accounting records.

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  • 49. 

    The financial statement(s) that record activity over and interval of time is/are the: 

    • Income statement

    • Balance sheet

    • Balance sheet and income statement

    • Income statement and statement of cash flows

    Correct Answer
    A. Income statement and statement of cash flows
    Explanation
    The income statement records the financial activity of a company over a specific period of time, such as a month, quarter, or year. It shows the company's revenues, expenses, and net income or loss. The statement of cash flows also records the company's financial activity over a period of time, but specifically focuses on the company's cash inflows and outflows from operating, investing, and financing activities. Together, these two financial statements provide a comprehensive view of the company's financial performance and cash flows over a given interval of time.

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Quiz Review Timeline (Updated): Mar 21, 2023 +

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Dec 14, 2013
    Quiz Created by
    Taylor

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