Free AFC Basic Accounting Questions and Answers — Questions and Answers

Question 1: Which activity is covered in accounting information?

Accounting Function
Reporting Information
Identifying Information
Recording Information
All of these (Correct answer)

Correct answer: All of these

Explanation: The accounting function encompasses all three activities: reporting information (preparing financial statements), identifying information (recognizing relevant transactions and events), and recording information (entering transactions into the accounting system). Each of these activities is integral to the overall accounting process.

Question 2: Earnings Per Share (EPS) is calculated by:

Net Profit / No. of Ordinary Shares Outstanding (Correct answer)
Gross Profit / No. of Equity Shareholders
Gross Profit / No. of Ordinary Shares Outstanding
Net Profit / No. of Equity Shareholders

Correct answer: Net Profit / No. of Ordinary Shares Outstanding

Explanation: Earnings Per Share (EPS) is a measure of a company's profitability and is calculated by dividing the net profit (or net income) by the number of ordinary shares outstanding. This ratio provides insight into how much profit is attributable to each share of stock. The other options incorrectly use gross profit or the number of equity shareholders, which are not part of the standard EPS calculation.

Question 3: Which of the following accounting practice, is the accounting practice of reporting less revenue and a lower asset amount:

Money Measurement
Cost convention
Conservatism (Correct answer)
None of these

Correct answer: Conservatism

Explanation: The accounting practice of conservatism involves reporting less revenue and lower asset amounts to ensure that potential expenses and liabilities are not understated. This principle aims to provide a cautious approach to financial reporting, prioritizing reliability and prudence by recognizing expenses and liabilities as soon as possible, but only recognizing revenues and assets when they are assured of being received.

Question 4: What is the benefit of the accounting standards?

Facilitate comparison of financial statements
Eliminate confusing variations
Call for disclosure beyond that required by law
All of these (Correct answer)

Correct answer: All of these

Explanation: Accounting standards provide multiple benefits, including: Facilitate comparison of financial statements across companies. Eliminate confusing variations in accounting practices. Require additional disclosures beyond legal requirements.

Question 5: Where do the financial transactions are first recorded?

Balance Sheet
Ledgers
Rough Sheet
Journals (Correct answer)

Correct answer: Journals

Explanation: Financial transactions are first recorded in journals, which are also known as the books of original entries. This is where transactions are initially documented before being posted to the ledgers.

Question 6: Which accounting method, recognizes and records revenue and expenses when the product or service is actually sold to customers?

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

Correct answer: Accrual Accounting

Explanation: Accrual accounting recognizes and records revenue and expenses when they are earned or incurred, not when cash is received or paid. This method matches revenues to the periods in which they are earned and matches expenses to the periods in which they are incurred.

Question 7: Which financial statement, shows what a company owns and owes and its shareholders' equity?

Income Statement
Balance Sheet (Correct answer)
Cash Flow Statement
None of these

Correct answer: Balance Sheet

Explanation: The Balance Sheet provides a snapshot of a company's financial position at a specific point in time. It lists what a company owns (assets), what it owes (liabilities), and the shareholders' equity. Therefore, it shows what a company owns and owes, as well as its shareholders' equity.

Question 8: What do financial statements reflect?

Liquidity
Financial Position
Profitability
All of these (Correct answer)

Correct answer: All of these

Explanation: Financial statements reflect various aspects of a company's financial performance and position, including: Liquidity: Ability to meet short-term obligations. Financial Position: Assets, liabilities, and equity at a specific point in time. Profitability: Ability to generate profits from operations.

Question 9: Capital employed is equal to:

Fixed Assets - Current Assets - Current Liabilities
Fixed Assets + Current Assets + Current Liabilities
Fixed Assets + Current Assets - Current Liabilities (Correct answer)
Fixed Assets - Current Assets + Current Liabilities

Correct answer: Fixed Assets + Current Assets - Current Liabilities

Explanation: Capital employed represents the total amount of funds used in a business to generate revenue. It includes both long-term and short-term sources of funds. Therefore, it is calculated as Fixed Assets plus Current Assets minus Current Liabilities. This formula considers the investment in fixed assets and the working capital required to operate the business.

Question 10: What is the aim of accounting standards?

Lower the accounting dissimilarities
Standardize diverse accounting policies
Ensuring comparability of financial statements
All of these (Correct answer)

Correct answer: All of these

Explanation: Accounting standards aim to achieve several objectives, including: Lowering the accounting dissimilarities: By providing uniform guidelines, accounting standards reduce variations in accounting practices. Standardizing diverse accounting policies: They establish consistent rules for recording and reporting financial transactions. Ensuring comparability of financial statements: Standardized accounting practices enable easier comparison of financial information across companies and periods.

Question 11: Prior to making adjusting entries, which trial balance is prepared?

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

Correct answer: Unadjusted trial balance

Explanation: Prior to making adjusting entries, accountants typically prepare the unadjusted trial balance. This trial balance lists all the accounts and their balances before any adjustments have been made at the end of the accounting period. Adjusting entries are then made to update account balances for accruals, deferrals, depreciation, and other adjustments. After adjustments, the adjusted trial balance is prepared to ensure that total debits equal total credits before financial statements are finalized.

Free AFC Basic Accounting Questions and Answers

Which activity is covered in accounting information?