Test Bank: Understanding Custom Apps and User Access - 2026

What is the primary purpose of a balance sheet? A. To show a company’s revenue over time B. To display cash inflows and outflows C. To present a company’s assets, liabilities, and equity at a specific date D. To calculate profit and loss Rationale: The balance sheet shows what a business owns and owes at a specific point in time. The other choices refer to other financial statements. Which business ownership structure offers limited liability while allowing profits to pass directly to owners’ personal income? A. Sole proprietorship B. Limited liability company (LLC) C. General partnership D. Franchise Rationale: An LLC protects owners’ personal assets and allows profits to be reported on personal tax returns. Sole proprietorships and partnerships do not provide liability protection. Gross profit is calculated by subtracting: A. Operating expenses from net income B. Total assets from total liabilities C. Cost of goods sold from net sales D. Taxes from revenue Rationale: Gross profit is the difference between net sales and the cost of goods sold. Operating expenses and taxes are excluded from this calculation. Which accounting concept ensures that personal and business finances are recorded separately? A. Accrual principle B. Business entity concept C. Consistency principle D. Conservatism principle Rationale: The business entity concept separates personal financial activities from business transactions to ensure accurate reporting. What does corporate social responsibility (CSR) emphasize in business operations? A. Maximizing short-term profit only B. Reducing government regulation C. Operating ethically and contributing to society and the environment D. Increasing employee workload Rationale: CSR focuses on ethical behavior, environmental sustainability, and societal well-being alongside profit-making. In accounting, depreciation is used to: A. Increase asset value over time B. Allocate the cost of a fixed asset over its useful life C. Measure cash flow from operations D. Record an increase in revenue Rationale: Depreciation spreads the cost of an asset across its useful life rather than expensing it all at once. Which economic system is driven mainly by supply, demand, and minimal government intervention? A. Command economy B. Market economy C. Traditional economy D. Mixed economy Rationale: A market economy allows businesses and consumers to make most economic decisions with limited government involvement. Retained earnings represent: A. Loans taken by the business B. Profits kept in the business after dividends are paid C. Total amount of revenue earned D. Cash available in the company bank Rationale: Retained earnings are the portion of net income that a company keeps rather than distributing to shareholders. Why do companies perform a SWOT analysis? A. To record financial transactions B. To calculate taxes owed C. To evaluate strengths, weaknesses, opportunities, and threats D. To determine employee salaries Rationale: SWOT analysis helps businesses identify internal capabilities and external factors that could impact success. Which of the following is considered a liability on the balance sheet? A. Accounts receivable B. Inventory C. Accounts payable D. Owner’s equity Rationale: Accounts payable is money the company owes to suppliers, making it a liability. Accounts receivable and inventory are assets. What is the main goal of financial accounting? A. To support internal management decisions B. To provide financial information to external stakeholders C. To manage employee performance D. To control inventory levels Rationale: Financial accounting is designed to give accurate information to external users such as investors, lenders, and regulatory bodies. Which of the following is an example of a current asset? A. Office equipment B. Accounts receivable C. Mortgage payable D. Owner’s capital Rationale: Accounts receivable is expected to be converted into cash within a year, making it a current asset. Which financial statement shows a company’s profitability over a period of time? A. Balance sheet B. Statement of cash flows C. Income statement D. Trial balance Rationale: The income statement shows revenue, expenses, and profit or loss over a defined period. What is double-entry accounting? A. Recording every transaction twice B. Filing two separate financial reports C. Recording each transaction with equal debits and credits D. Balancing only cash accounts Rationale: In double-entry accounting, every transaction affects at least two accounts, keeping the accounting equation balanced. Which of the following best defines liabilities? A. Resources owned by the business B. Obligations the business owes to others C. Owner’s investment in the business D. Future profits Rationale: Liabilities are obligations such as loans or accounts payable that a business must settle. The matching principle in accounting states that: A. Revenues should equal expenses B. Assets must match liabilities C. Expenses should be recorded in the same period as related revenues D. Accounts must be balanced weekly Rationale: The matching principle ensures accurate profit measurement by aligning expenses with the revenues they generate. What is corporate governance? A. Managing customer relations B. Creating marketing strategies C. The system of rules and practices by which a company is controlled and directed D. Paying employee salaries Rationale: Corporate governance defines how decisions are made and how accountability is maintained in a company. A business plan is primarily used to: A. Pay employees B. Outline business goals and strategies C. File tax returns D. Record daily transactions Rationale: A business plan provides direction and structure for operations and helps secure funding. What is the formula for the accounting equation? A. Assets + Expenses = Revenue B. Assets = Liabilities + Owner’s Equity C. Assets - Liabilities = Profit D. Revenue = Expenses + Equity Rationale: The accounting equation ensures all financial transactions remain balanced. Which of the following is an ethical business practice? A. Manipulating financial data B. Hiding product defects C. Providing honest information to customers and stakeholders D. Avoiding tax payments Rationale: Ethical practices include honesty and transparency, which build trust. What does liquidity refer to in accounting? A. Profitability of a business B. Total equity C. Ability to convert assets into cash quickly D. Long-term loan repayment Rationale: Liquidity measures how easily assets can be turned into cash to meet short-term obligations.