Financial Accounting Fundamentals (8th Ed.,
Wild) — Comprehensive Exam with answers and
detailed rationale updated 2026
Section 1: Accounting in Business (Chapters 1–2) — Questions 1–30
1. Which of the following is NOT one of the three primary business activities?
A) Operating
B) Investing
C) Marketing
D) Financing
Answer: C
Rationale: The three primary business activities are operating, investing, and financing. Marketing is
a functional area within operating activities, not a separate classification on the statement of cash
flows -5.
2. A corporation's accountant records a $5,000 sale on account. This transaction affects:
A) Only the income statement
B) Only the balance sheet
C) Both the income statement and balance sheet
D) Neither statement
Answer: C
Rationale: Revenue increases on the income statement, and Accounts Receivable increases on the
balance sheet. Every transaction has at least two effects (double-entry accounting) -12.
3. If total assets are $500,000 and total liabilities are $200,000, stockholders' equity equals:
A) $700,000
B) $300,000
C) $200,000
D) $500,000
Answer: B
Rationale: Accounting equation: Assets = Liabilities + Equity. $500,000 – $200,000 = $300,000 -5.
4. Which of the following is a financing activity?
A) Selling goods on account
B) Buying delivery equipment
C) Issuing shares of common stock
D) Buying inventory
Answer: C
Rationale: Issuing stock is a financing activity. Selling goods and buying inventory are operating
activities; buying equipment is an investing activity -5.
5. The business entity assumption means:
A) A business will continue operating indefinitely
,B) A business's activities are separate from its owners
C) Revenue is recognized when earned
D) Assets are recorded at cost
Answer: B
Rationale: The business entity assumption states that a business is accounted for separately from its
owner(s) -1.
6. The revenue recognition principle states that revenue is recognized when:
A) Cash is received
B) The product or service is delivered to the customer
C) The order is placed
D) The invoice is sent
Answer: B
Rationale: Revenue is recognized when goods or services are provided to customers, regardless of
when cash is received -5.
**7. A company purchases office supplies for $500 cash. The journal entry is:**
A) Debit Supplies $500; Credit Cash $500
B) Debit Cash $500; Credit Supplies $500
C) Debit Supplies Expense $500; Credit Cash $500
D) Debit Cash $500; Credit Supplies Expense $500
Answer: A
Rationale: Purchasing supplies increases the asset Supplies (debit) and decreases the asset Cash
(credit) -12.
8. Which of the following is a liability?
A) Accounts Receivable
B) Prepaid Insurance
C) Accounts Payable
D) Common Stock
Answer: C
Rationale: Accounts Payable represents an obligation to pay creditors. Accounts Receivable and
Prepaid Insurance are assets; Common Stock is equity -12.
9. Net income is calculated as:
A) Assets – Liabilities
B) Revenues – Expenses
C) Cash inflows – Cash outflows
D) Assets + Liabilities
Answer: B
Rationale: Net income = Revenues – Expenses. It measures profitability, not cash flow or net worth -
5.
**10. A company has revenues of $75,000, salaries expense of $20,000, and rent expense of
$10,000. Net income is:**
A) $75,000
B) $55,000
,C) $45,000
D) $35,000
Answer: C
Rationale: $75,000 – $20,000 – $10,000 = $45,000 -5.
11. Which financial statement reports assets, liabilities, and equity at a point in time?
A) Income Statement
B) Balance Sheet
C) Statement of Cash Flows
D) Retained Earnings Statement
Answer: B
Rationale: The balance sheet presents information as of a specific date. The income statement and
cash flow statement cover periods of time -5.
12. The normal balance of an asset account is:
A) Credit
B) Debit
C) Zero
D) Either debit or credit
Answer: B
Rationale: Assets have a normal debit balance. Debits increase assets; credits decrease them -12.
13. Which of the following increases stockholders' equity?
A) Declaring dividends
B) Incurring expenses
C) Earning revenues
D) Purchasing equipment
Answer: C
Rationale: Revenues increase net income, which increases retained earnings (equity). Expenses and
dividends decrease equity -5.
14. A company borrows $30,000 from a bank. This transaction:
A) Increases assets and decreases liabilities
B) Increases assets and increases liabilities
C) Decreases assets and increases equity
D) Increases equity and decreases liabilities
Answer: B
Rationale: Cash (asset) increases by $30,000, and Notes Payable (liability) increases by $30,000 -12.
15. Which of the following is an investing activity?
A) Paying employee salaries
B) Purchasing land
C) Issuing bonds
D) Collecting accounts receivable
Answer: B
Rationale: Purchasing land (property, plant, and equipment) is an investing activity. Salaries and
collections are operating; issuing bonds is financing -5.
, 16. If a company has total assets of $3,500 and stockholders' equity of $1,500, total liabilities are:
A) $5,000
B) $2,000
C) $1,500
D) $3,500
Answer: B
Rationale: Assets – Equity = Liabilities. $3,500 – $1,500 = $2,000 -5.
17. The Sarbanes-Oxley Act (SOX) requires:
A) Companies to use IFRS
B) Top management to certify financial statements
C) Auditors to prepare financial statements
D) Companies to pay higher dividends
Answer: B
Rationale: SOX requires top management to certify the accuracy of financial information and
increased penalties for fraudulent activity -5.
18. A proprietorship is:
A) Taxed as a separate entity
B) A separate legal entity
C) Not a separate legal entity
D) Owned by stockholders
Answer: C
Rationale: A proprietorship is not a separate legal entity, is not taxed as a separate entity, and does
not provide limited liability -1.
19. A company pays $2,000 cash for rent. This transaction:
A) Increases expenses and decreases assets
B) Increases assets and increases expenses
C) Decreases expenses and decreases assets
D) Increases liabilities and increases expenses
Answer: A
Rationale: Rent Expense (expense) increases (debit), and Cash (asset) decreases (credit) -12.
20. Which account is increased with a credit?
A) Cash
B) Accounts Receivable
C) Revenue
D) Equipment
Answer: C
Rationale: Revenue accounts have a normal credit balance. Assets (Cash, AR, Equipment) have
normal debit balances -12.
21. The principle that requires assets to be recorded at their original cost is:
A) Revenue Recognition Principle
B) Measurement (Cost) Principle
Wild) — Comprehensive Exam with answers and
detailed rationale updated 2026
Section 1: Accounting in Business (Chapters 1–2) — Questions 1–30
1. Which of the following is NOT one of the three primary business activities?
A) Operating
B) Investing
C) Marketing
D) Financing
Answer: C
Rationale: The three primary business activities are operating, investing, and financing. Marketing is
a functional area within operating activities, not a separate classification on the statement of cash
flows -5.
2. A corporation's accountant records a $5,000 sale on account. This transaction affects:
A) Only the income statement
B) Only the balance sheet
C) Both the income statement and balance sheet
D) Neither statement
Answer: C
Rationale: Revenue increases on the income statement, and Accounts Receivable increases on the
balance sheet. Every transaction has at least two effects (double-entry accounting) -12.
3. If total assets are $500,000 and total liabilities are $200,000, stockholders' equity equals:
A) $700,000
B) $300,000
C) $200,000
D) $500,000
Answer: B
Rationale: Accounting equation: Assets = Liabilities + Equity. $500,000 – $200,000 = $300,000 -5.
4. Which of the following is a financing activity?
A) Selling goods on account
B) Buying delivery equipment
C) Issuing shares of common stock
D) Buying inventory
Answer: C
Rationale: Issuing stock is a financing activity. Selling goods and buying inventory are operating
activities; buying equipment is an investing activity -5.
5. The business entity assumption means:
A) A business will continue operating indefinitely
,B) A business's activities are separate from its owners
C) Revenue is recognized when earned
D) Assets are recorded at cost
Answer: B
Rationale: The business entity assumption states that a business is accounted for separately from its
owner(s) -1.
6. The revenue recognition principle states that revenue is recognized when:
A) Cash is received
B) The product or service is delivered to the customer
C) The order is placed
D) The invoice is sent
Answer: B
Rationale: Revenue is recognized when goods or services are provided to customers, regardless of
when cash is received -5.
**7. A company purchases office supplies for $500 cash. The journal entry is:**
A) Debit Supplies $500; Credit Cash $500
B) Debit Cash $500; Credit Supplies $500
C) Debit Supplies Expense $500; Credit Cash $500
D) Debit Cash $500; Credit Supplies Expense $500
Answer: A
Rationale: Purchasing supplies increases the asset Supplies (debit) and decreases the asset Cash
(credit) -12.
8. Which of the following is a liability?
A) Accounts Receivable
B) Prepaid Insurance
C) Accounts Payable
D) Common Stock
Answer: C
Rationale: Accounts Payable represents an obligation to pay creditors. Accounts Receivable and
Prepaid Insurance are assets; Common Stock is equity -12.
9. Net income is calculated as:
A) Assets – Liabilities
B) Revenues – Expenses
C) Cash inflows – Cash outflows
D) Assets + Liabilities
Answer: B
Rationale: Net income = Revenues – Expenses. It measures profitability, not cash flow or net worth -
5.
**10. A company has revenues of $75,000, salaries expense of $20,000, and rent expense of
$10,000. Net income is:**
A) $75,000
B) $55,000
,C) $45,000
D) $35,000
Answer: C
Rationale: $75,000 – $20,000 – $10,000 = $45,000 -5.
11. Which financial statement reports assets, liabilities, and equity at a point in time?
A) Income Statement
B) Balance Sheet
C) Statement of Cash Flows
D) Retained Earnings Statement
Answer: B
Rationale: The balance sheet presents information as of a specific date. The income statement and
cash flow statement cover periods of time -5.
12. The normal balance of an asset account is:
A) Credit
B) Debit
C) Zero
D) Either debit or credit
Answer: B
Rationale: Assets have a normal debit balance. Debits increase assets; credits decrease them -12.
13. Which of the following increases stockholders' equity?
A) Declaring dividends
B) Incurring expenses
C) Earning revenues
D) Purchasing equipment
Answer: C
Rationale: Revenues increase net income, which increases retained earnings (equity). Expenses and
dividends decrease equity -5.
14. A company borrows $30,000 from a bank. This transaction:
A) Increases assets and decreases liabilities
B) Increases assets and increases liabilities
C) Decreases assets and increases equity
D) Increases equity and decreases liabilities
Answer: B
Rationale: Cash (asset) increases by $30,000, and Notes Payable (liability) increases by $30,000 -12.
15. Which of the following is an investing activity?
A) Paying employee salaries
B) Purchasing land
C) Issuing bonds
D) Collecting accounts receivable
Answer: B
Rationale: Purchasing land (property, plant, and equipment) is an investing activity. Salaries and
collections are operating; issuing bonds is financing -5.
, 16. If a company has total assets of $3,500 and stockholders' equity of $1,500, total liabilities are:
A) $5,000
B) $2,000
C) $1,500
D) $3,500
Answer: B
Rationale: Assets – Equity = Liabilities. $3,500 – $1,500 = $2,000 -5.
17. The Sarbanes-Oxley Act (SOX) requires:
A) Companies to use IFRS
B) Top management to certify financial statements
C) Auditors to prepare financial statements
D) Companies to pay higher dividends
Answer: B
Rationale: SOX requires top management to certify the accuracy of financial information and
increased penalties for fraudulent activity -5.
18. A proprietorship is:
A) Taxed as a separate entity
B) A separate legal entity
C) Not a separate legal entity
D) Owned by stockholders
Answer: C
Rationale: A proprietorship is not a separate legal entity, is not taxed as a separate entity, and does
not provide limited liability -1.
19. A company pays $2,000 cash for rent. This transaction:
A) Increases expenses and decreases assets
B) Increases assets and increases expenses
C) Decreases expenses and decreases assets
D) Increases liabilities and increases expenses
Answer: A
Rationale: Rent Expense (expense) increases (debit), and Cash (asset) decreases (credit) -12.
20. Which account is increased with a credit?
A) Cash
B) Accounts Receivable
C) Revenue
D) Equipment
Answer: C
Rationale: Revenue accounts have a normal credit balance. Assets (Cash, AR, Equipment) have
normal debit balances -12.
21. The principle that requires assets to be recorded at their original cost is:
A) Revenue Recognition Principle
B) Measurement (Cost) Principle
