Exam 1 Practice MC Questions

Income Statement

A financial statement that summarizes a company's revenues and expenses over a specific period, showing the net profit or loss.

Accrual Basis Accounting

An accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash transactions occur.

Retained Earnings

The cumulative amount of net income that a company retains, rather than distributing it as dividends.

Financial Accounting

The field of accounting that focuses on providing information to external parties such as investors and creditors.

Current Asset

An asset that is expected to be converted into cash or used up within one year.

Liability

An obligation that a company owes to outsiders, which usually involves the future payment of cash or services.

Deferred Expense

An expense that has been paid but not yet incurred, requiring adjustment in the accounting period in which it is incurred.

Financing Activity

A business transaction that results in changes to the equity or liabilities of a company, such as issuing stock or taking on a loan.

Investing Activity

Transactions related to the purchase and sale of long-term assets and investments.

Permanent Account

An account that carries its balance into the next accounting period, such as assets, liabilities, and equity accounts.

Auditing

The process of examining and verifying a company's financial statements and accounting records.

Accrued Revenue

Revenue that has been earned but not yet received in cash or recorded in the accounts.

PCAOB

Public Company Accounting Oversight Board; a nonprofit corporation that oversees the audits of public companies.

GAAP

Generally Accepted Accounting Principles; a framework of accounting standards and practices used in financial reporting.

CPA

Certified Public Accountant; a professional designation given to accountants who pass the CPA exam and meet additional state requirements.

Dividends

Distribution of profits to shareholders, typically in the form of cash or additional shares.

Equipment

The physical goods owned by a company that are used in production or operations.

Prepaid Rent

Rent that has been paid in advance for future periods, considered a current asset until it is used.

Common Stock

Equity ownership in a corporation, representing a claim on a portion of the company’s assets and earnings.

Accounts Payable

Liabilities representing amounts a company owes to its suppliers or creditors.

Cash Flow

The total amount of money being transferred into and out of a business, affecting its liquidity.

Adjusting Entry

An entry made at the end of an accounting period to update account balances prior to preparing financial statements.