Acct 253 Introductory Financial Accounting self-test
questions and answers you’ll find in your exams
2026 update Athabasca University
Chapter 1
1. What is accounting?
The process of identifying, measuring, recording and communications an organizations economic activities
to users.
2. What is the difference between internal and external users of accounting information?
Internal users: work for the organization and are responsible for planning, organizing, and operating the
entity. Examples of the internal users are owners, managers, and employees.
External users: are people outside the business entity who use accounting information. Examples of
external users are suppliers, banks, customers, investors, potential investors and tax authorities
3. What is the difference between managerial and financial accounting?
Managerial Accounting: serves the decision-making needs for internal users
Financial Accounting: is the area of accounting that focuses on the external reporting and meeting the
needs of external users.
4. What is the difference between a business organization and a non-business organization?
Business Organization: Sells products and/or services for profit
Non-Business Organization: exists to meet various societal needs and does not have profit as a goal.
Examples of these organizations can be a charity or hospital
5. What are the three types of business organizations?
Proprietorship: Where the business is owned by one person
Partnership: a business owned by two or more individuals. Like proprietorship, it is not a separate legal
entity and its owners are typically subject to unlimited liability.
Corporation: a business owned by one or more owners. The owners are known as shareholders.
6. What is a PAE? A PE?
PAE – Publicly Accountable Enterprise: A corporation that sells its shares publicly, typically on a stock
exchange
PE – Private Enterprise: A corporation that holds its shares privately and does not sell them publicly
7. What does the term limited liability mean?
1/29
, Limited Liability means the owners or the share holders of a corporation are not responsible for the
corporations debts, meaning that the most they can lose is what they invested in the corporation.
8. Explain how ethics are involved in the practice of accounting.
2/29
, Ethics are involved in the practice of accounting because they are the beliefs that help us differentiate
right from wrong.
9. Describe what GAAP refers to.
Generally Accepted Accounting Principles (GAAP) us the underlying accounting concept or principles that
ensure that information provided to decision makers is useful. GAAP are comprised of qualitative
characteristics and principles including: 1) relevance, 2) faithful representation, 3) compatibility, 4)
verifiability, 5) timeliness and, 6) understandability.
10. Identify and explain the six qualitative characteristics of GAAP.
1) relevance – information that has the ability to make a difference in the decision making process
2) faithful representation – Representation of the information is complete, neutral and free from error
3) compatibility – information which tells users of the information that businesses utilize similar
accounting practices
4) verifiability – others are able to confirm that the information faithfully represents the economic
activities of the business.
5) timeliness – information is available to decision makers in time to be useful
6) understandability – information is clear and concise
11. Identify and explain at least five of the nine principles that support the GAAP qualitative characteristics.
1. Business Entity - Requires that each economic entity maintain separate records.
2. Consistency - Requires that a business use the same accounting policies and procedures from
period to period.
3. Cost - Requires that each economic transaction be based on the actual original cost (also known
as historical cost principle).
4. Full disclosure - Requires that accounting information communicate sufficient information to
allow users to make knowledgeable decisions.
5. Going concern - Assumes that a business will continue for the foreseeable future.
6. Matching - Requires that financial transactions be reported in the period in which they
occurred/were realized.
7. Materiality - Requires a business to apply proper accounting only for items that would affect
decisions made by users.
8. Monetary unit - Requires that financial information be communicated in stable units of money.
9. Recognition - Requires that revenues be recorded when earned and expenses be recorded when
incurred, which is not necessarily when cash is received (in the case of revenues) or paid (in the
case of expenses).
12. How is financial information communicated to external users?
3/29
questions and answers you’ll find in your exams
2026 update Athabasca University
Chapter 1
1. What is accounting?
The process of identifying, measuring, recording and communications an organizations economic activities
to users.
2. What is the difference between internal and external users of accounting information?
Internal users: work for the organization and are responsible for planning, organizing, and operating the
entity. Examples of the internal users are owners, managers, and employees.
External users: are people outside the business entity who use accounting information. Examples of
external users are suppliers, banks, customers, investors, potential investors and tax authorities
3. What is the difference between managerial and financial accounting?
Managerial Accounting: serves the decision-making needs for internal users
Financial Accounting: is the area of accounting that focuses on the external reporting and meeting the
needs of external users.
4. What is the difference between a business organization and a non-business organization?
Business Organization: Sells products and/or services for profit
Non-Business Organization: exists to meet various societal needs and does not have profit as a goal.
Examples of these organizations can be a charity or hospital
5. What are the three types of business organizations?
Proprietorship: Where the business is owned by one person
Partnership: a business owned by two or more individuals. Like proprietorship, it is not a separate legal
entity and its owners are typically subject to unlimited liability.
Corporation: a business owned by one or more owners. The owners are known as shareholders.
6. What is a PAE? A PE?
PAE – Publicly Accountable Enterprise: A corporation that sells its shares publicly, typically on a stock
exchange
PE – Private Enterprise: A corporation that holds its shares privately and does not sell them publicly
7. What does the term limited liability mean?
1/29
, Limited Liability means the owners or the share holders of a corporation are not responsible for the
corporations debts, meaning that the most they can lose is what they invested in the corporation.
8. Explain how ethics are involved in the practice of accounting.
2/29
, Ethics are involved in the practice of accounting because they are the beliefs that help us differentiate
right from wrong.
9. Describe what GAAP refers to.
Generally Accepted Accounting Principles (GAAP) us the underlying accounting concept or principles that
ensure that information provided to decision makers is useful. GAAP are comprised of qualitative
characteristics and principles including: 1) relevance, 2) faithful representation, 3) compatibility, 4)
verifiability, 5) timeliness and, 6) understandability.
10. Identify and explain the six qualitative characteristics of GAAP.
1) relevance – information that has the ability to make a difference in the decision making process
2) faithful representation – Representation of the information is complete, neutral and free from error
3) compatibility – information which tells users of the information that businesses utilize similar
accounting practices
4) verifiability – others are able to confirm that the information faithfully represents the economic
activities of the business.
5) timeliness – information is available to decision makers in time to be useful
6) understandability – information is clear and concise
11. Identify and explain at least five of the nine principles that support the GAAP qualitative characteristics.
1. Business Entity - Requires that each economic entity maintain separate records.
2. Consistency - Requires that a business use the same accounting policies and procedures from
period to period.
3. Cost - Requires that each economic transaction be based on the actual original cost (also known
as historical cost principle).
4. Full disclosure - Requires that accounting information communicate sufficient information to
allow users to make knowledgeable decisions.
5. Going concern - Assumes that a business will continue for the foreseeable future.
6. Matching - Requires that financial transactions be reported in the period in which they
occurred/were realized.
7. Materiality - Requires a business to apply proper accounting only for items that would affect
decisions made by users.
8. Monetary unit - Requires that financial information be communicated in stable units of money.
9. Recognition - Requires that revenues be recorded when earned and expenses be recorded when
incurred, which is not necessarily when cash is received (in the case of revenues) or paid (in the
case of expenses).
12. How is financial information communicated to external users?
3/29
