MGT 8803 EXAM 1 FINANCIAL
ACCOUNTING 320 MULTIPLE CHOICE
QUESTIONS WITH ANSWERS AND
RATIONALES
SECTION 1: ACCOUNTING PRINCIPLES & CONCEPTS (Questions 140)
1. Which of the following is NOT a basic element of a balance sheet?
A) Assets
B) Liabilities
C) Revenues
D) Equity
Correct Answer: C
Rationale: Revenues appear on the income statement, not the balance sheet. The
basic elements of a balance sheet are assets, liabilities, and equity (owner's
equity/shareholders' equity).
2. The accounting equation is:
A) Assets = Liabilities Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities + Equity
D) Assets = Revenues Expenses
,Correct Answer: C
Rationale: The fundamental accounting equation is Assets = Liabilities + Owner's
Equity. This equation must always balance and forms the foundation of doubleentry
bookkeeping.
3. If total liabilities increase by $10,000 and total equity decreases by $5,000,
total assets will:
A) Increase by $5,000
B) Decrease by $5,000
C) Increase by $15,000
D) Remain unchanged
Correct Answer: A
Rationale: Assets = Liabilities + Equity. Change in assets = +$10,000 $5,000 =
+$5,000. Therefore, total assets will increase by $5,000.
4. Paying a utility bill with cash affects the accounting equation by:
A) Decreasing assets and decreasing equity
B) Increasing liabilities and decreasing equity
C) Decreasing assets and increasing liabilities
D) Increasing assets and increasing expenses
Correct Answer: A
Rationale: Cash (an asset) decreases. The utility expense reduces retained earnings,
which is a component of equity. Therefore, both assets and equity decrease.
5. Which financial statement is prepared first?
A) Balance sheet
,B) Statement of cash flows
C) Income statement
D) Statement of retained earnings
Correct Answer: C
Rationale: The income statement is prepared first because net income from the
income statement is needed to calculate retained earnings for the statement of
retained earnings and the balance sheet.
6. The personal assets of the owner of a company will not appear on the company's
balance sheet. This reflects which accounting principle?
A) Cost principle
B) Matching principle
C) Separate entity principle
D) Conservatism principle
Correct Answer: C
Rationale: The separate entity principle requires that the business's financial records
be kept separate from the personal finances of its owners. The business is viewed as
a distinct economic entity.
7. A company's balance sheet reports land at the amount the company paid to
acquire it, even if the land could be sold today at a significantly higher amount. This
reflects which principle?
A) Conservatism
B) Cost principle
C) Matching principle
D) Revenue recognition principle
, Correct Answer: B
Rationale: The cost (historical cost) principle directs companies to record assets at
their original cost, not at their current market value. This provides objective and
verifiable evidence of the transaction.
8. Accountants might recognize losses but not gains in certain situations. For
example, a company might writedown the cost of inventory but will not writeup the
cost of inventory. This reflects which principle?
A) Cost principle
B) Matching principle
C) Revenue recognition principle
D) Conservatism
Correct Answer: D
Rationale: The conservatism principle dictates that when faced with uncertainty,
accountants should choose the method that is least likely to overstate assets or
income. This means recognizing potential losses but not potential gains until they are
realized.
9. A corporation pays its annual property tax bill of approximately $12,000 in
January, but matches the expense across the entire year. This reflects which
principle?
A) Cost principle
B) Matching principle
C) Revenue recognition principle
D) Separate entity principle
Correct Answer: B
ACCOUNTING 320 MULTIPLE CHOICE
QUESTIONS WITH ANSWERS AND
RATIONALES
SECTION 1: ACCOUNTING PRINCIPLES & CONCEPTS (Questions 140)
1. Which of the following is NOT a basic element of a balance sheet?
A) Assets
B) Liabilities
C) Revenues
D) Equity
Correct Answer: C
Rationale: Revenues appear on the income statement, not the balance sheet. The
basic elements of a balance sheet are assets, liabilities, and equity (owner's
equity/shareholders' equity).
2. The accounting equation is:
A) Assets = Liabilities Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities + Equity
D) Assets = Revenues Expenses
,Correct Answer: C
Rationale: The fundamental accounting equation is Assets = Liabilities + Owner's
Equity. This equation must always balance and forms the foundation of doubleentry
bookkeeping.
3. If total liabilities increase by $10,000 and total equity decreases by $5,000,
total assets will:
A) Increase by $5,000
B) Decrease by $5,000
C) Increase by $15,000
D) Remain unchanged
Correct Answer: A
Rationale: Assets = Liabilities + Equity. Change in assets = +$10,000 $5,000 =
+$5,000. Therefore, total assets will increase by $5,000.
4. Paying a utility bill with cash affects the accounting equation by:
A) Decreasing assets and decreasing equity
B) Increasing liabilities and decreasing equity
C) Decreasing assets and increasing liabilities
D) Increasing assets and increasing expenses
Correct Answer: A
Rationale: Cash (an asset) decreases. The utility expense reduces retained earnings,
which is a component of equity. Therefore, both assets and equity decrease.
5. Which financial statement is prepared first?
A) Balance sheet
,B) Statement of cash flows
C) Income statement
D) Statement of retained earnings
Correct Answer: C
Rationale: The income statement is prepared first because net income from the
income statement is needed to calculate retained earnings for the statement of
retained earnings and the balance sheet.
6. The personal assets of the owner of a company will not appear on the company's
balance sheet. This reflects which accounting principle?
A) Cost principle
B) Matching principle
C) Separate entity principle
D) Conservatism principle
Correct Answer: C
Rationale: The separate entity principle requires that the business's financial records
be kept separate from the personal finances of its owners. The business is viewed as
a distinct economic entity.
7. A company's balance sheet reports land at the amount the company paid to
acquire it, even if the land could be sold today at a significantly higher amount. This
reflects which principle?
A) Conservatism
B) Cost principle
C) Matching principle
D) Revenue recognition principle
, Correct Answer: B
Rationale: The cost (historical cost) principle directs companies to record assets at
their original cost, not at their current market value. This provides objective and
verifiable evidence of the transaction.
8. Accountants might recognize losses but not gains in certain situations. For
example, a company might writedown the cost of inventory but will not writeup the
cost of inventory. This reflects which principle?
A) Cost principle
B) Matching principle
C) Revenue recognition principle
D) Conservatism
Correct Answer: D
Rationale: The conservatism principle dictates that when faced with uncertainty,
accountants should choose the method that is least likely to overstate assets or
income. This means recognizing potential losses but not potential gains until they are
realized.
9. A corporation pays its annual property tax bill of approximately $12,000 in
January, but matches the expense across the entire year. This reflects which
principle?
A) Cost principle
B) Matching principle
C) Revenue recognition principle
D) Separate entity principle
Correct Answer: B
