CB Accounting Principles and Financial Statements — Questions and Answers
Question 1: What is the fundamental accounting equation?
- Assets = Liabilities - Owner’s Equity
- Assets = Liabilities + Owner’s Equity (Correct answer)
- Revenue = Expenses + Owner’s Equity
- Liabilities = Assets + Owner’s Equity
Correct answer: Assets = Liabilities + Owner’s Equity
The basic accounting equation represents the relationship between assets, liabilities, and owner's equity.
Question 2: Which financial statement provides a snapshot of a company's financial position at a specific point in time?
- Income Statement
- Balance Sheet (Correct answer)
- Statement of Cash Flows
- Statement of Retained Earnings
Correct answer: Balance Sheet
The balance sheet reports a company's assets, liabilities, and equity at a specific date, providing a snapshot of financial health.
Question 3: What does an income statement show?
- A summary of cash transactions
- A report on the company's net income or loss (Correct answer)
- A listing of all assets and liabilities
- Changes in owner's equity
Correct answer: A report on the company's net income or loss
The income statement summarizes a company's revenues and expenses over a period of time, showing net profit or loss.
Question 4: What is the purpose of double-entry accounting?
- To minimize tax liabilities
- To maintain accurate financial records by recording transactions in at least two accounts (Correct answer)
- To ensure all transactions are cash-based
- To keep track of payroll expenses
Correct answer: To maintain accurate financial records by recording transactions in at least two accounts
Double-entry accounting ensures that every financial transaction affects at least two accounts, maintaining balance in the accounting equation.
Question 5: What is the purpose of adjusting entries?
- To correct errors in financial statements
- To align financial records with the accrual basis of accounting (Correct answer)
- To eliminate accounts payable
- To create financial projections
Correct answer: To align financial records with the accrual basis of accounting
Adjusting entries are used to record revenues and expenses in the correct accounting period, following the accrual basis of accounting.
Question 6: Which financial statement explains changes in cash flow from operating, investing, and financing activities?
- Income Statement
- Statement of Cash Flows (Correct answer)
- Balance Sheet
- Statement of Retained Earnings
Correct answer: Statement of Cash Flows
The statement of cash flows categorizes cash inflows and outflows into operating, investing, and financing activities.
CB Accounting Principles and Financial Statements
What is the fundamental accounting equation?