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A100 Final Exam IU VERSION 2
QUESTIONS AND CORRECT ANSWERS
(VERIFIED ANSWERS) PLUS RATIONALES
- What is the primary purpose of financial accounting? A. To calculate taxes B. To provide financial information to external users C. To track company operations D. To monitor employee performance Financial accounting focuses on providing information to external parties like investors and creditors.
- Which of the following is reported on the income statement? A. Dividends B. Accounts receivable
C. Revenues D. Retained earnings Revenues are reported on the income statement as they show performance over a period.
- Which account has a normal debit balance? A. Accounts Payable B. Cash C. Service Revenue D. Common Stock Assets like Cash have a normal debit balance.
- The accounting equation is: A. Assets = Liabilities – Equity B. Assets = Liabilities + Equity C. Assets = Revenue – Expenses D. Assets = Liabilities + Retained Earnings The foundational accounting equation is Assets = Liabilities + Equity.
- If a company purchases equipment with cash, what is the impact on the accounting equation?
The Balance Sheet provides a snapshot of assets, liabilities, and equity at a specific date.
- Accrual accounting recognizes revenues: A. When cash is received B. At the end of the fiscal year C. When earned, regardless of cash D. Only for credit sales Under accrual accounting, revenues are recognized when earned, not when cash is received.
- Which account is closed at the end of the accounting period? A. Supplies B. Accounts Payable C. Service Revenue D. Retained Earnings Temporary accounts like Service Revenue are closed to Retained Earnings.
- An adjusting journal entry to record depreciation includes: A. Debit Depreciation Expense; Credit Accumulated Depreciation B. Debit Equipment; Credit Cash
C. Debit Accumulated Depreciation; Credit Equipment D. Debit Equipment; Credit Depreciation Expense Depreciation Expense is debited and the contra-asset Accumulated Depreciation is credited.
- Which concept requires expenses to be matched with revenues? A. Revenue recognition B. Materiality C. Conservatism D. Matching principle The matching principle ensures that expenses are recorded in the same period as related revenues.
- The Sarbanes-Oxley Act was enacted primarily to: A. Reduce taxes B. Increase profitability C. Improve corporate accountability D. Increase investor risk SOX improves internal controls and transparency in financial reporting.
- Which is an example of an internal control?
- Which of the following transactions increases total assets? A. Paying off a loan B. Declaring dividends C. Providing services on account D. Purchasing supplies with cash When services are provided on account, Accounts Receivable increases, which increases total assets.
- Which account is increased by a credit? A. Prepaid Rent B. Common Stock C. Dividends D. Salaries Expense Common Stock is an equity account and increases with a credit.
- What does the trial balance prove? A. Revenues equal expenses B. Debits equal credits C. Net income is accurate D. Assets equal liabilities The trial balance confirms that total debits equal total credits in the ledger.
- What is the impact of recording depreciation? A. Increase in cash B. Increase in expenses C. Increase in revenue D. Decrease in liabilities Depreciation increases expenses, reducing net income.
- Which statement best explains the purpose of adjusting entries? A. To prepare the trial balance B. To record revenues and expenses in the correct period C. To close temporary accounts D. To record external transactions Adjusting entries ensure accrual-based accounting is followed, recording items in the correct period.
- Revenue is recognized: A. When cash is collected B. When earned C. When a customer places an order D. After dividends are paid
C. Statement of Retained Earnings D. Statement of Cash Flows (operating section) Dividends reduce retained earnings and appear on the statement of retained earnings.
- An increase in supplies is recorded with a: A. Credit to Supplies B. Debit to Supplies C. Debit to Supplies Expense D. Credit to Accounts Payable Supplies is an asset and increases with a debit.
- Which account would be included in the post-closing trial balance? A. Accounts Payable B. Service Revenue C. Rent Expense D. Dividends Permanent accounts like liabilities remain after closing.
- Which section of the cash flow statement includes buying equipment? A. Operating B. Investing C. Financing D. Equity Purchasing equipment is an investing activity.
- A company receives payment before providing services. This creates: A. Prepaid revenue B. Unearned revenue C. Accounts receivable D. Service revenue Receiving cash before earning it creates a liability: unearned revenue.
- Which of the following is a financing activity? A. Paying rent B. Issuing common stock C. Purchasing inventory D. Receiving interest
C. Service Revenue D. Notes Payable Accounts Receivable is an asset and increases with a debit.
- Which of the following accounts is not found in the general ledger? A. Accounts Payable B. Retained Earnings C. Journal Entry D. Cash Journal entries are recorded in the journal, not the ledger.
- The matching principle relates most closely to: A. Cash basis accounting B. Accrual basis accounting C. Asset recognition D. Time-period assumption Matching is part of accrual accounting—expenses are matched with revenues.
- If a company forgets to record depreciation:
A. Assets are understated B. Revenues are overstated C. Net income is overstated D. Liabilities are overstated Omitting depreciation understates expenses and overstates income.
- Which of the following is NOT a component of stockholders’ equity? A. Common Stock B. Accounts Receivable C. Retained Earnings D. Dividends Accounts Receivable is an asset, not part of equity.
- What is the entry for issuing $10,000 of stock? A. Debit Dividends, Credit Cash B. Debit Cash, Credit Common Stock C. Debit Revenue, Credit Cash D. Debit Accounts Receivable, Credit Common Stock Cash increases (debit), and equity increases (credit to stock).
- The periodic inventory method: A. Tracks every purchase in real time B. Updates inventory at the end of the period C. Requires barcoding D. Is illegal under GAAP Under the periodic method, inventory is updated at the end of the period via physical count.
- Gross Profit = A. Net Income – Operating Expenses B. Revenue – Total Expenses C. Revenue – Cost of Goods Sold D. Assets – Liabilities Gross Profit is calculated before expenses: Revenue – COGS.
- If a company receives a utility bill but hasn’t paid it yet, the journal entry is: A. Debit Utilities Expense, Credit Accounts Payable B. Debit Cash, Credit Utilities Payable C. Debit Utilities Payable, Credit Utilities Expense D. No entry needed
This is an accrued expense—expense incurred but not paid.
- A classified balance sheet organizes assets and liabilities into: A. Current and non-current B. Operating and non-operating C. Tangible and intangible D. Real and nominal Classified balance sheets separate items by time horizon: current vs long- term.
- Which of the following is considered a current asset? A. Equipment B. Land C. Inventory D. Notes Payable Inventory is expected to be sold within a year.
- Which of the following is not a typical adjustment? A. Accrued expenses B. Issuing stock
C. After journalizing D. After closing entries The adjusted trial balance is used to prepare financial statements.
- Which account is not closed at the end of the period? A. Service Revenue B. Rent Expense C. Equipment D. Dividends Equipment is a permanent account and is not closed.
- What is the effect of an accrued revenue adjusting entry? A. Decreases liabilities B. Increases assets and revenues C. Increases expenses and revenues D. Decreases equity Accrued revenue entries debit Accounts Receivable (asset) and credit Revenue.
- A debit to Dividends and a credit to Cash reflects:
A. Paying dividends B. Declaring dividends C. Receiving a loan D. Issuing common stock Paying dividends reduces both equity (Dividends) and assets (Cash).
- Which of the following increases stockholders’ equity? A. Payment of salaries B. Earned service revenue C. Purchase of supplies D. Utilities expense Revenue increases retained earnings, which is part of stockholders' equity.
- The revenue recognition principle dictates that: A. Cash is recorded when received B. Revenue is recorded when earned C. Revenue is matched with expenses D. Revenue is recorded after customer payment Revenue is recorded when earned, regardless of when cash is received.
