Financial Accounting ACCT 2000 LSU
- Exam 1 Comprehensive Questions
And Well Graded Solutions With
Rationales Updated 2026 2027
Ace your Financial Accounting ACCT 2000 Exam 1 with this comprehensive 350-question
practice test bank. Designed specifically for Professor Lowe-Ardoin's curriculum at LSU
and transferable to major business schools. Covers forms of business organization,
business activities, the basic accounting equation, the four financial statements,
debits/credits, T-accounts, bank reconciliations, and the complete adjusting/closing
process. Includes clear bolded correct answers and rationales.
Q1. Which form of business organization is characterized as a separate legal entity
owned by stockholders?
Option A: Sole Proprietorship
Option B: Partnership
Option C: Corporation
Option D: Limited Partnership
Answer: Option C
Rationale: A corporation is organized as a separate legal entity under state law,
which grants limited liability protection to its stockholders.
Q2. What is a primary disadvantage of operating a business as a corporation?
Option A: Unlimited personal liability
Option B: Difficulty transferring ownership
Option C: Double taxation of earnings
Option D: Harder to raise large amounts of capital
1|Page
,Answer: Option C
Rationale: Corporations suffer from double taxation, meaning the corporate net
income is taxed at the corporate level, and dividends distributed to shareholders are
taxed again on individual tax returns.
Q3. In which type of business organization is the owner personally liable for all debts
of the business?
Option A: Sole Proprietorship
Option B: Publicly Traded Corporation
Option C: S-Corporation
Option D: Limited Liability Company
Answer: Option A
Rationale: A sole proprietorship is not a separate legal entity from its owner, resulting
in unlimited personal liability for business debts.
Q4. Which of the following groups is considered an external user of financial
accounting information?
Option A: Production managers
Option B: Bank loan officers
Option C: Chief Financial Officers
Option D: Marketing directors
Answer: Option B
Rationale: Bank loan officers are external users (creditors) who analyze financial
statements to determine whether a company qualifies for a loan.
Q5. Internal users of accounting information utilize financial data primarily to do
which of the following?
Option A: Determine whether to buy a company's stock
Option B: Evaluate whether the company complies with tax laws
Option C: Plan, organize, and run business operations
Option D: Decide whether to extend credit to a customer
Answer: Option C
Rationale: Internal users include management, who require financial data to execute
internal business plans and control daily operations.
Q6. What regulatory body in the United States is primarily responsible for
establishing Generally Accepted Accounting Principles (GAAP)?
Option A: Internal Revenue Service (IRS)
Option B: Financial Accounting Standards Board (FASB)
Option C: Securities and Exchange Commission (SEC)
Option D: International Accounting Standards Board (IASB)
Answer: Option B
Rationale: The FASB is the primary private-sector body given the authority to write
and update GAAP in the United States.
Q7. Which group of users utilizes financial accounting info to evaluate whether a firm
can pay its suppliers on time?
Option A: Marketing teams
Option B: Creditors and suppliers
Option C: Human resource managers
Option D: Internal auditors
Answer: Option B
2|Page
,Rationale: Suppliers are external short-term creditors who use financial reports to
gauge a customer's short-term liquidity.
Q8. Which statement is true regarding partnerships?
Option A: They must have only one owner.
Option B: They are subject to corporate double taxation.
Option C: They dissolve automatically upon the entry or exit of any partner.
Option D: They provide limited liability to all active general partners.
Answer: Option C
Rationale: Under traditional partnership law, a partnership has a limited life and
dissolves or must be renegotiated when the mix of partners changes.
Q9. Which accounting field is directed primarily at providing information to external
users?
Option A: Managerial accounting
Option B: Financial accounting
Option C: Cost accounting
Option D: Budgetary accounting
Answer: Option B
Rationale: Financial accounting focuses on generating general-purpose financial
statements intended for external users like investors and lenders.
Q10. Congress passed the Sarbanes-Oxley Act (SOX) to achieve which primary
objective?
Option A: Eliminate all corporate income taxes
Option B: Reduce unethical corporate behavior and prevent accounting fraud
Option C: Force all US companies to adopt international standards
Option D: Allow companies to keep secret financial records
Answer: Option B
Rationale: SOX was enacted to increase the accountability of corporate executives,
strengthen internal controls, and improve the reliability of financial disclosures.
The Three Business Activities (Questions 11–20)
Q11. Borrowing money from a bank by signing a three-year note payable is an
example of what type of activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
Option D: Revenue activity
Answer: Option C
Rationale: Financing activities involve raising capital from creditors (debt) or owners
(equity) to fund the business.
Q12. Purchasing a delivery truck for use in business operations represents which
type of activity?
Option A: Operating activity
3|Page
, Option B: Investing activity
Option C: Financing activity
Option D: Expense activity
Answer: Option B
Rationale: Investing activities involve purchasing or selling long-term resources
(assets) necessary to operate a business.
Q13. Collecting cash from a customer for services provided this month is classified
as what kind of activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
Option D: Capital activity
Answer: Option A
Rationale: Operating activities encompass the core daily cash-generating behaviors
of a business, including revenues and operating expenses.
Q14. Which of the following is considered an investing activity on the Statement of
Cash Flows?
Option A: Selling shares of common stock to investors
Option B: Paying cash dividends to shareholders
Option C: Selling a warehouse building for cash
Option D: Paying monthly office rent
Answer: Option C
Rationale: Selling long-term physical assets, such as a warehouse or machinery, is
categorized as a cash inflow from an investing activity.
Q15. Paying monthly salaries to employees is classified under which type of
business activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
Option D: Liquidating activity
Answer: Option A
Rationale: Paying employees is a standard operating expense, which makes it an
operating cash outflow.
Q16. Issuing new shares of common stock to investors for cash represents which
business activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
Option D: Equity revenue activity
Answer: Option C
Rationale: Issuing common stock is a method of raising equity capital from owners,
which makes it a financing activity.
Q17. Purchasing inventory on account from a supplier is driven by which type of
business activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
4|Page
- Exam 1 Comprehensive Questions
And Well Graded Solutions With
Rationales Updated 2026 2027
Ace your Financial Accounting ACCT 2000 Exam 1 with this comprehensive 350-question
practice test bank. Designed specifically for Professor Lowe-Ardoin's curriculum at LSU
and transferable to major business schools. Covers forms of business organization,
business activities, the basic accounting equation, the four financial statements,
debits/credits, T-accounts, bank reconciliations, and the complete adjusting/closing
process. Includes clear bolded correct answers and rationales.
Q1. Which form of business organization is characterized as a separate legal entity
owned by stockholders?
Option A: Sole Proprietorship
Option B: Partnership
Option C: Corporation
Option D: Limited Partnership
Answer: Option C
Rationale: A corporation is organized as a separate legal entity under state law,
which grants limited liability protection to its stockholders.
Q2. What is a primary disadvantage of operating a business as a corporation?
Option A: Unlimited personal liability
Option B: Difficulty transferring ownership
Option C: Double taxation of earnings
Option D: Harder to raise large amounts of capital
1|Page
,Answer: Option C
Rationale: Corporations suffer from double taxation, meaning the corporate net
income is taxed at the corporate level, and dividends distributed to shareholders are
taxed again on individual tax returns.
Q3. In which type of business organization is the owner personally liable for all debts
of the business?
Option A: Sole Proprietorship
Option B: Publicly Traded Corporation
Option C: S-Corporation
Option D: Limited Liability Company
Answer: Option A
Rationale: A sole proprietorship is not a separate legal entity from its owner, resulting
in unlimited personal liability for business debts.
Q4. Which of the following groups is considered an external user of financial
accounting information?
Option A: Production managers
Option B: Bank loan officers
Option C: Chief Financial Officers
Option D: Marketing directors
Answer: Option B
Rationale: Bank loan officers are external users (creditors) who analyze financial
statements to determine whether a company qualifies for a loan.
Q5. Internal users of accounting information utilize financial data primarily to do
which of the following?
Option A: Determine whether to buy a company's stock
Option B: Evaluate whether the company complies with tax laws
Option C: Plan, organize, and run business operations
Option D: Decide whether to extend credit to a customer
Answer: Option C
Rationale: Internal users include management, who require financial data to execute
internal business plans and control daily operations.
Q6. What regulatory body in the United States is primarily responsible for
establishing Generally Accepted Accounting Principles (GAAP)?
Option A: Internal Revenue Service (IRS)
Option B: Financial Accounting Standards Board (FASB)
Option C: Securities and Exchange Commission (SEC)
Option D: International Accounting Standards Board (IASB)
Answer: Option B
Rationale: The FASB is the primary private-sector body given the authority to write
and update GAAP in the United States.
Q7. Which group of users utilizes financial accounting info to evaluate whether a firm
can pay its suppliers on time?
Option A: Marketing teams
Option B: Creditors and suppliers
Option C: Human resource managers
Option D: Internal auditors
Answer: Option B
2|Page
,Rationale: Suppliers are external short-term creditors who use financial reports to
gauge a customer's short-term liquidity.
Q8. Which statement is true regarding partnerships?
Option A: They must have only one owner.
Option B: They are subject to corporate double taxation.
Option C: They dissolve automatically upon the entry or exit of any partner.
Option D: They provide limited liability to all active general partners.
Answer: Option C
Rationale: Under traditional partnership law, a partnership has a limited life and
dissolves or must be renegotiated when the mix of partners changes.
Q9. Which accounting field is directed primarily at providing information to external
users?
Option A: Managerial accounting
Option B: Financial accounting
Option C: Cost accounting
Option D: Budgetary accounting
Answer: Option B
Rationale: Financial accounting focuses on generating general-purpose financial
statements intended for external users like investors and lenders.
Q10. Congress passed the Sarbanes-Oxley Act (SOX) to achieve which primary
objective?
Option A: Eliminate all corporate income taxes
Option B: Reduce unethical corporate behavior and prevent accounting fraud
Option C: Force all US companies to adopt international standards
Option D: Allow companies to keep secret financial records
Answer: Option B
Rationale: SOX was enacted to increase the accountability of corporate executives,
strengthen internal controls, and improve the reliability of financial disclosures.
The Three Business Activities (Questions 11–20)
Q11. Borrowing money from a bank by signing a three-year note payable is an
example of what type of activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
Option D: Revenue activity
Answer: Option C
Rationale: Financing activities involve raising capital from creditors (debt) or owners
(equity) to fund the business.
Q12. Purchasing a delivery truck for use in business operations represents which
type of activity?
Option A: Operating activity
3|Page
, Option B: Investing activity
Option C: Financing activity
Option D: Expense activity
Answer: Option B
Rationale: Investing activities involve purchasing or selling long-term resources
(assets) necessary to operate a business.
Q13. Collecting cash from a customer for services provided this month is classified
as what kind of activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
Option D: Capital activity
Answer: Option A
Rationale: Operating activities encompass the core daily cash-generating behaviors
of a business, including revenues and operating expenses.
Q14. Which of the following is considered an investing activity on the Statement of
Cash Flows?
Option A: Selling shares of common stock to investors
Option B: Paying cash dividends to shareholders
Option C: Selling a warehouse building for cash
Option D: Paying monthly office rent
Answer: Option C
Rationale: Selling long-term physical assets, such as a warehouse or machinery, is
categorized as a cash inflow from an investing activity.
Q15. Paying monthly salaries to employees is classified under which type of
business activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
Option D: Liquidating activity
Answer: Option A
Rationale: Paying employees is a standard operating expense, which makes it an
operating cash outflow.
Q16. Issuing new shares of common stock to investors for cash represents which
business activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
Option D: Equity revenue activity
Answer: Option C
Rationale: Issuing common stock is a method of raising equity capital from owners,
which makes it a financing activity.
Q17. Purchasing inventory on account from a supplier is driven by which type of
business activity?
Option A: Operating activity
Option B: Investing activity
Option C: Financing activity
4|Page
