ACCT 201 PRINCIPLES OF ACCOUNTING II (PDF) | 2026
EXAM QUESTIONS AND ANSWERS + RATIONALES | STUDY
GUIDE | 100% CORRECT
ACCT 201 is overwhelmingly a Principles of Financial Accounting course, serving as an
introduction to financial accounting concepts and the preparation of financial statements. While
some institutions may use a similar code for a more advanced topic, the bulk of the evidence
points to this being an introductory-level course focusing on the accounting cycle, financial
statement preparation, and key asset/liability accounting. The following questions reflect the
typical curriculum, covering the accounting cycle, financial statements, merchandising
operations, inventory, receivables, long-term assets, and liabilities.
1. Which of the following best describes the primary purpose of financial accounting as taught in
ACCT 201?
A) To provide detailed cost information for internal management decisions.
B) To provide financial information about a business to external users such as investors and
creditors.
C) To prepare tax returns and ensure compliance with tax laws.
D) To track the daily cash transactions of a business.
Correct Answer: B) To provide financial information about a business to external users such as
investors and creditors.
Rationale: Financial accounting is focused on providing information to external stakeholders,
including investors and creditors, to help them make informed decisions about the business .
Internal management decisions are the domain of managerial accounting.
2. What is the fundamental accounting equation?
A) Assets + Liabilities = Stockholders' Equity.
B) Assets = Liabilities + Stockholders' Equity.
C) Assets + Stockholders' Equity = Liabilities.
D) Liabilities = Assets + Stockholders' Equity.
Correct Answer: B) Assets = Liabilities + Stockholders' Equity.
Rationale: The accounting equation is the foundation of the double-entry bookkeeping system. It
states that a company's assets are financed by its liabilities and its stockholders' equity . This
equation must always balance.
3. The accounting equation forms the basis for which financial statement?
A) The income statement.
B) The statement of cash flows.
C) The balance sheet.
D) The statement of retained earnings.
, Correct Answer: C) The balance sheet.
Rationale: The balance sheet is a snapshot of a company's financial position at a specific point in
time, and it is structured based on the accounting equation, directly reporting a company's assets,
liabilities, and equity .
4. An external user of accounting information would most likely rely on this statement to determine
if a company pays cash dividends.
A) The income statement.
B) The balance sheet.
C) The retained earnings statement.
D) The statement of cash flows.
Correct Answer: C) The retained earnings statement.
Rationale: The retained earnings statement reports the changes in retained earnings over a period,
including net income and dividends paid . An external user can consult this statement to see if a
company paid dividends.
5. A company provides services to a customer on account. According to the rules of debits and
credits, which account is debited?
A) Cash.
B) Service Revenue.
C) Accounts Payable.
D) Accounts Receivable.
Correct Answer: D) Accounts Receivable.
Rationale: Providing services on account increases the company's right to receive cash (Accounts
Receivable), which is an asset. Assets are increased by debits . Service Revenue is a credit
account, increased on the credit side.
6. What is the correct order for listing accounts in the current assets section of a classified balance
sheet?
A) Accounts Receivable, Cash, Inventory, Supplies.
B) Supplies, Inventory, Accounts Receivable, Cash.
C) Cash, Accounts Receivable, Inventory, Supplies.
D) Inventory, Supplies, Cash, Accounts Receivable.
Correct Answer: C) Cash, Accounts Receivable, Inventory, Supplies.
Rationale: On a classified balance sheet, current assets are listed in order of liquidity, meaning
how quickly they are expected to be converted into cash or used within one year. Cash is the
most liquid, followed by accounts receivable, inventory, and then supplies .
7. A company purchases merchandise inventory for $1,200 on account. Which journal entry is
correct?
, A) Debit Inventory, Credit Accounts Payable.
B) Debit Purchases, Credit Cash.
C) Debit Accounts Payable, Credit Inventory.
D) Debit Inventory, Credit Cash.
Correct Answer: A) Debit Inventory, Credit Accounts Payable.
Rationale: Purchasing inventory on credit increases the Inventory account (an asset, debited) and
increases Accounts Payable (a liability, credited). This is the standard entry for a merchandise
purchase under a perpetual inventory system .
8. The flow of costs for inventory through the accounting system is:
A) Beginning Inventory + Purchases = Cost of Goods Available for Sale - Ending Inventory =
Cost of Goods Sold.
B) Beginning Inventory - Purchases = Cost of Goods Available for Sale + Ending Inventory =
Cost of Goods Sold.
C) Ending Inventory + Purchases = Cost of Goods Available for Sale - Beginning Inventory =
Cost of Goods Sold.
D) Beginning Inventory + Ending Inventory = Cost of Goods Available for Sale - Purchases =
Cost of Goods Sold.
Correct Answer: A) Beginning Inventory + Purchases = Cost of Goods Available for Sale -
Ending Inventory = Cost of Goods Sold.
Rationale: The flow of costs for inventory is a fundamental concept. The cost of goods available
for sale is the sum of beginning inventory and net purchases. The cost of goods sold is then
determined by subtracting ending inventory .
9. In a perpetual inventory system, the Cost of Goods Sold account is updated:
A) At the end of the accounting period only.
B) Every time a sale occurs.
C) Annually after the physical inventory count.
D) At the beginning of each month.
Correct Answer: B) Every time a sale occurs.
Rationale: In a perpetual inventory system, the company keeps detailed records of the cost of
each inventory purchase and sale. The Cost of Goods Sold account is continuously updated to
reflect the cost of inventory sold at the time of each sale .
10. Which inventory costing method would result in the highest net income during a period of rising
prices?
A) FIFO (First-In, First-Out).
B) LIFO (Last-In, First-Out).
C) Weighted Average Cost.
D) Specific Identification.
EXAM QUESTIONS AND ANSWERS + RATIONALES | STUDY
GUIDE | 100% CORRECT
ACCT 201 is overwhelmingly a Principles of Financial Accounting course, serving as an
introduction to financial accounting concepts and the preparation of financial statements. While
some institutions may use a similar code for a more advanced topic, the bulk of the evidence
points to this being an introductory-level course focusing on the accounting cycle, financial
statement preparation, and key asset/liability accounting. The following questions reflect the
typical curriculum, covering the accounting cycle, financial statements, merchandising
operations, inventory, receivables, long-term assets, and liabilities.
1. Which of the following best describes the primary purpose of financial accounting as taught in
ACCT 201?
A) To provide detailed cost information for internal management decisions.
B) To provide financial information about a business to external users such as investors and
creditors.
C) To prepare tax returns and ensure compliance with tax laws.
D) To track the daily cash transactions of a business.
Correct Answer: B) To provide financial information about a business to external users such as
investors and creditors.
Rationale: Financial accounting is focused on providing information to external stakeholders,
including investors and creditors, to help them make informed decisions about the business .
Internal management decisions are the domain of managerial accounting.
2. What is the fundamental accounting equation?
A) Assets + Liabilities = Stockholders' Equity.
B) Assets = Liabilities + Stockholders' Equity.
C) Assets + Stockholders' Equity = Liabilities.
D) Liabilities = Assets + Stockholders' Equity.
Correct Answer: B) Assets = Liabilities + Stockholders' Equity.
Rationale: The accounting equation is the foundation of the double-entry bookkeeping system. It
states that a company's assets are financed by its liabilities and its stockholders' equity . This
equation must always balance.
3. The accounting equation forms the basis for which financial statement?
A) The income statement.
B) The statement of cash flows.
C) The balance sheet.
D) The statement of retained earnings.
, Correct Answer: C) The balance sheet.
Rationale: The balance sheet is a snapshot of a company's financial position at a specific point in
time, and it is structured based on the accounting equation, directly reporting a company's assets,
liabilities, and equity .
4. An external user of accounting information would most likely rely on this statement to determine
if a company pays cash dividends.
A) The income statement.
B) The balance sheet.
C) The retained earnings statement.
D) The statement of cash flows.
Correct Answer: C) The retained earnings statement.
Rationale: The retained earnings statement reports the changes in retained earnings over a period,
including net income and dividends paid . An external user can consult this statement to see if a
company paid dividends.
5. A company provides services to a customer on account. According to the rules of debits and
credits, which account is debited?
A) Cash.
B) Service Revenue.
C) Accounts Payable.
D) Accounts Receivable.
Correct Answer: D) Accounts Receivable.
Rationale: Providing services on account increases the company's right to receive cash (Accounts
Receivable), which is an asset. Assets are increased by debits . Service Revenue is a credit
account, increased on the credit side.
6. What is the correct order for listing accounts in the current assets section of a classified balance
sheet?
A) Accounts Receivable, Cash, Inventory, Supplies.
B) Supplies, Inventory, Accounts Receivable, Cash.
C) Cash, Accounts Receivable, Inventory, Supplies.
D) Inventory, Supplies, Cash, Accounts Receivable.
Correct Answer: C) Cash, Accounts Receivable, Inventory, Supplies.
Rationale: On a classified balance sheet, current assets are listed in order of liquidity, meaning
how quickly they are expected to be converted into cash or used within one year. Cash is the
most liquid, followed by accounts receivable, inventory, and then supplies .
7. A company purchases merchandise inventory for $1,200 on account. Which journal entry is
correct?
, A) Debit Inventory, Credit Accounts Payable.
B) Debit Purchases, Credit Cash.
C) Debit Accounts Payable, Credit Inventory.
D) Debit Inventory, Credit Cash.
Correct Answer: A) Debit Inventory, Credit Accounts Payable.
Rationale: Purchasing inventory on credit increases the Inventory account (an asset, debited) and
increases Accounts Payable (a liability, credited). This is the standard entry for a merchandise
purchase under a perpetual inventory system .
8. The flow of costs for inventory through the accounting system is:
A) Beginning Inventory + Purchases = Cost of Goods Available for Sale - Ending Inventory =
Cost of Goods Sold.
B) Beginning Inventory - Purchases = Cost of Goods Available for Sale + Ending Inventory =
Cost of Goods Sold.
C) Ending Inventory + Purchases = Cost of Goods Available for Sale - Beginning Inventory =
Cost of Goods Sold.
D) Beginning Inventory + Ending Inventory = Cost of Goods Available for Sale - Purchases =
Cost of Goods Sold.
Correct Answer: A) Beginning Inventory + Purchases = Cost of Goods Available for Sale -
Ending Inventory = Cost of Goods Sold.
Rationale: The flow of costs for inventory is a fundamental concept. The cost of goods available
for sale is the sum of beginning inventory and net purchases. The cost of goods sold is then
determined by subtracting ending inventory .
9. In a perpetual inventory system, the Cost of Goods Sold account is updated:
A) At the end of the accounting period only.
B) Every time a sale occurs.
C) Annually after the physical inventory count.
D) At the beginning of each month.
Correct Answer: B) Every time a sale occurs.
Rationale: In a perpetual inventory system, the company keeps detailed records of the cost of
each inventory purchase and sale. The Cost of Goods Sold account is continuously updated to
reflect the cost of inventory sold at the time of each sale .
10. Which inventory costing method would result in the highest net income during a period of rising
prices?
A) FIFO (First-In, First-Out).
B) LIFO (Last-In, First-Out).
C) Weighted Average Cost.
D) Specific Identification.
