Expanded Financial Accounting Exam Questions: Chapters 1–4

A comprehensive set of practice flashcards covering chapters 1–4 of Expanded Financial Accounting Exam Questions, including multiple choice and true/false concepts, definitions, and key formulas.

To identify, record, and communicate economic events.

primary purpose of accounting

T/F: Internal users of accounting information include managers and employees.

True.

Which ethical principle emphasizes doing the right thing as if someone is watching?

Ethics.

T/F: Fraud always involves negligent intent.

False.

Which data analysis type asks 'What is likely to happen'?

Predictive

T/F: Proprietorships have unlimited liability for the owner.

True.

What concept requires business records to be separate from the owner’s personal activities?

Reporting Entity Concept.

T/F: Corporations can have an indefinite life.

True.

Which activity involves purchasing long-lived assets?

Investing.

T/F: Revenue is recognized when cash is received under accrual accounting.

False.

What is the formula for the accounting equation?

Assets = Liabilities + Shareholders’ Equity.

T/F: Retained earnings represent cumulative profit less dividends.

True.

Which statement reports cash inflows from operating activities?

Statement of Cash Flows.

T/F: Public corporations must use IFRS.

True.

Why are investors interested in past net income?

To predict future income.

MC: What is the order of current assets on the balance sheet?

By liquidity.

T/F: Trade receivables are amounts owed by clients for core business sales.

True.

MC: How is inventory valued on the balance sheet?

At lower of cost or market value.

T/F: Land is depreciated like other PPE.

False.

MC: What is the formula for straight-line depreciation?

(Cost - Residual Value) / Useful Life.

T/F: Goodwill is tested annually for impairment under IFRS.

True.

MC: What is the formula for goodwill?

Purchase Price - Fair Value of Net Assets.

T/F: Marketing campaigns are always capitalized as assets.

False.

MC: Which liability is due within one year?

Current portion of long-term debt.

T/F: Cumulative preferred shares accumulate unpaid dividends.

True.

MC: What is the formula for debt to total assets?

Total Liabilities / Total Assets.

T/F: Earnings per share (EPS) = Net Income / Weighted Average Common Shares.

False.

MC: What is the purpose of materiality?

To determine significant misstatements.

T/F: Historical cost records assets at original purchase price.

True.

MC: What guides the choice between historical cost and fair value?

Relevance and faithful representation.

MC: What is the accounting information system's primary purpose?

To collect, process, and communicate transaction data.

T/F: All economic events are recorded as accounting transactions.

False.

MC: What is the expanded accounting equation?

Assets = Liabilities + (Common Shares + Retained Earnings (Revenues - Expenses - Dividends)).

T/F: Debit means left side of an account.

True.

MC: Which account has a normal debit balance?

Assets.

T/F: The general journal records transactions chronologically.

True.

MC: What is posting?

Transferring journal entries to ledger accounts.

T/F: A chart of accounts lists all company accounts.

True.

MC: What is the trial balance's primary purpose?

To prove debits = credits.

T/F: A balanced trial balance means no errors exist.

False.

MC: Which standard requires more disclosures?

IFRS.

T/F: Transaction analysis uses source documents.

True.

MC: What is a T-account?

A visual representation of an account.

T/F: Credit balance means credits exceed debits.

True.

MC: What is the general ledger?

Collection of all accounts.

MC: Why do companies divide economic life into time periods?

For immediate performance feedback.

T/F: Revenue is recognized when collection is assured.

True.

MC: For a merchandising company, revenue is recognized at:

Point of sale.

T/F: Expenses are recognized when cash is paid under accrual accounting.

False.

MC: Which basis records revenue when cash is received?

Cash basis.

T/F: Adjusting entries update accounts at period-end.

True.

MC: What is the adjusting entry for prepaid expenses?

Debit Expense, Credit Prepaid Asset.

T/F: Unearned revenues are liabilities until earned.

True.

MC: Accrued revenues increase which accounts?

Asset and Revenue.

T/F: Adjusted trial balance includes all adjustments.

True.

MC: Which accounts are temporary and closed?

Revenues, Expenses, Dividends.

T/F: OCI is recognized under ASPE.

False.

MC: What is the purpose of the post-closing trial balance?

To prove debits = credits after closing.

T/F: Closing entries debit Income Summary for revenues.

False.

MC: Which step closes Income Summary to Retained Earnings?

Step 3.