Free AFC Accounting Principles and Concepts Questions and Answers — Questions and Answers

Question 1: Which financial statement displays the revenues and expenses of a company for a period of time?

Income Statement (Correct answer)
Balance Sheet
Cash Flow Statement
Statement of Stockholder's Equity

Correct answer: Income Statement

Explanation: The income statement displays all revenues and expenses recorded in a period in a single report.

Question 2: What is the main purpose of financial accounting?

Organize financial information
Provide useful, financial information to outsiders (Correct answer)
Keep track of company expenses
Minimize company taxes

Correct answer: Provide useful, financial information to outsiders

Explanation: The purpose of financial accounting is to provide useful information for outside investors, creditors, and others.

Question 3: Which of these is not included as a separate item in the basic accounting equation?

Assets
Revenues (Correct answer)
Liabilities
Stockholder's Equity

Correct answer: Revenues

Explanation: Revenues are not included in the basic accounting equation: Assets = Liabilities + Owner’s Equity.

Question 4: The accrual basis of accounting records revenues when they are:

Collected
Earned (Correct answer)
Contracted
Readily available for use

Correct answer: Earned

Explanation: The accrual basis of accounting recognizes revenues when they are earned, regardless of when the cash is actually received. This means that revenues are recorded at the time the goods are delivered or services are performed, aligning the recognition of revenues with the associated expenses. This method provides a more accurate picture of a company's financial position because it matches revenues generated during a period with the expenses related to generating those revenues, regardless of when cash transactions occur.

Question 5: The account format that displays debits, credits, balances, and headings:

General Journal
General Ledger
T- Account (Correct answer)
Ledger Account

Correct answer: T- Account

Explanation : A T-account is a way to format accounting transactions that display debits on the left and credits on the right.

Question 6: Asset accounts have what type of balance?

Debit (Correct answer)
Credit
Contract
All of the above

Correct answer: Debit

Explanation: Asset accounts have a debit balance. Debit is the side of an account that shows increases in assets and decreases in liabilities and equity. In accounting, assets are recorded on the debit side of the balance sheet, indicating that they have a positive value. Therefore, the correct answer is debit.

Question 7: Which account is not a liability account?

Accounts payable
Accrued Expenses
Cash (Correct answer)
Notes Payable

Correct answer: Cash

Explanation: Liabilities include resources owned by creditors such as accounts payable, accrued expenses, and notes payable. Cash is an asset.

Question 8: A ___________ is used to record a business event as they occur throughout the year.

Journal Entry (Correct answer)
Ledger
Trial Balance
Bank Reconciliation Statement

Correct answer: Journal Entry

Explanation: A journal entry is used to record a business event as they occur throughout the year. It is a chronological record of all the financial transactions of a business, including the date, description, and amount of each transaction. Journal entries are an important part of the accounting process as they provide a detailed and organized record of all the financial activities of a business, which can be used to prepare financial statements and analyze the financial performance of the business.

Question 9: The __________ summarizes the accounting equation in report format.

Trial Balance
Balance Sheet (Correct answer)
Journal
Ledger

Correct answer: Balance Sheet

Explanation: The balance sheet summarizes the accounting equation in report format. It provides a snapshot of a company's financial position at a specific point in time by showing its assets, liabilities, and shareholders' equity. The balance sheet is an essential financial statement that helps stakeholders understand the company's financial health and its ability to meet its obligations. Unlike the trial balance, journal, and ledger, which are used for recording and organizing transactions, the balance sheet presents a summary of these transactions in a clear and concise format.

Question 10: Which trial balance is prepared after the closure of temporary accounts?

Post-closing trial balance (Correct answer)
Unadjusted trial balance
Adjusted trial balance
None of these

Correct answer: Post-closing trial balance

Explanation: The post-closing trial balance is prepared after the closure of temporary accounts, such as revenue, expense, and dividend accounts. These accounts are closed out at the end of the accounting period to prepare for the next period. The post-closing trial balance lists all remaining permanent accounts (assets, liabilities, and equity) after the closing entries have been made. It ensures that the accounting equation remains in balance and that only permanent accounts are reflected.

Question 11: Which accounting method, recognizes revenue when the cash is received?

Debit Accounting
Cash Accounting (Correct answer)
Accrual Accounting
Credit Accounting

Correct answer: Cash Accounting

Explanation: Cash accounting recognizes revenue when cash is received and expenses when cash is paid. This method does not consider when the revenue is earned or when the expenses are incurred, making it simpler but less accurate for measuring a company's financial performance compared to accrual accounting, which recognizes revenue when it is earned and expenses when they are incurred.

Free AFC Accounting Principles and Concepts Questions and Answers

Which financial statement displays the revenues and expenses of a company for a period of time?