Financial Accounting Exam 1 ACTUAL UPDATED QUESTIONS AND CORRECT
ANSWERS
What is the primary objective of financial accounting? To provide relevant and reliable financial information to external users for
informed decision-making.
What must financial information be free from to be Error or bias.
considered reliable?
, Who must audit financial statements for credibility? A Certified Public Accountant (CPA).
What is the difference between financial and managerial Financial accounting is for external decision makers and follows GAAP, while
accounting? managerial accounting is for internal decision makers and has no set rules.
What is the cash basis of accounting primarily used for? To calculate taxable income and taxes owed for the year.
What are some challenges with current accounting One-size-fits-all information, complexity of regulations, lack of non-financial
standards? indicators, and timeliness of information.
What are the essential characteristics of accounting? 1. record business transactions
2. prepare 4 financial statements
3. make good business decisions using financial statements
What are the four main financial statements? Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement
of Cash Flow.
What does an Income Statement summarize? All revenues and expenses for a period of time, showing net income or net loss.
What is the role of notes to the financial statements? To provide full disclosure of relevant information and additional detail that is
cumbersome to include in the financial statements.
Who are considered internal users of financial Board of Directors, President, Managers, Treasurer, Controller, and Employees.
information?
Who are considered external users of financial Potential investors, current investors, banks/lenders, suppliers, customers, and
information? unions.
What is the primary concern of creditors regarding Whether the business will be able to repay loans on time with the required
financial statements? interest.
What is a Sole Proprietorship? A business owned by one person, simple to establish, with unlimited personal
liability.
What is a Partnership? A business with more than one owner, offering a broader skill set and access to
financial resources, but with unlimited personal liability.
What are the characteristics of a Corporation? More difficult to establish, subject to more government regulation, double
taxation, and limited personal liability.
What is a Limited Liability Corporation (LLC)? Easier to establish than a corporation, with no double taxation and limited
personal liability.
What is the Corporate Federal Tax Rate? 21% flat tax.
What is a flat tax? A tax that applies the same rate to all taxable income regardless of the amount.
What is a progressive tax? A tax that applies a higher rate as taxable income increases.
ANSWERS
What is the primary objective of financial accounting? To provide relevant and reliable financial information to external users for
informed decision-making.
What must financial information be free from to be Error or bias.
considered reliable?
, Who must audit financial statements for credibility? A Certified Public Accountant (CPA).
What is the difference between financial and managerial Financial accounting is for external decision makers and follows GAAP, while
accounting? managerial accounting is for internal decision makers and has no set rules.
What is the cash basis of accounting primarily used for? To calculate taxable income and taxes owed for the year.
What are some challenges with current accounting One-size-fits-all information, complexity of regulations, lack of non-financial
standards? indicators, and timeliness of information.
What are the essential characteristics of accounting? 1. record business transactions
2. prepare 4 financial statements
3. make good business decisions using financial statements
What are the four main financial statements? Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement
of Cash Flow.
What does an Income Statement summarize? All revenues and expenses for a period of time, showing net income or net loss.
What is the role of notes to the financial statements? To provide full disclosure of relevant information and additional detail that is
cumbersome to include in the financial statements.
Who are considered internal users of financial Board of Directors, President, Managers, Treasurer, Controller, and Employees.
information?
Who are considered external users of financial Potential investors, current investors, banks/lenders, suppliers, customers, and
information? unions.
What is the primary concern of creditors regarding Whether the business will be able to repay loans on time with the required
financial statements? interest.
What is a Sole Proprietorship? A business owned by one person, simple to establish, with unlimited personal
liability.
What is a Partnership? A business with more than one owner, offering a broader skill set and access to
financial resources, but with unlimited personal liability.
What are the characteristics of a Corporation? More difficult to establish, subject to more government regulation, double
taxation, and limited personal liability.
What is a Limited Liability Corporation (LLC)? Easier to establish than a corporation, with no double taxation and limited
personal liability.
What is the Corporate Federal Tax Rate? 21% flat tax.
What is a flat tax? A tax that applies the same rate to all taxable income regardless of the amount.
What is a progressive tax? A tax that applies a higher rate as taxable income increases.
