Afab 110 midterm study guide
units 1- 8 Questions With
Complete Solutions
Course
Afab 110
AFAB 110 Midterm Study Guide (Units 1–8) – Practice Questions with Complete Solutions
1. Which of the following best describes the primary purpose of accounting?
A. To prepare tax returns only
B. To provide financial information that helps users make informed economic decisions
C. To calculate employee salaries only
D. To determine product prices only
Answer: B. To provide financial information that helps users make informed economic
decisions
Explanation:
Accounting is often called the language of business because it records, summarizes, analyzes,
and communicates financial information to users such as managers, investors, creditors, and
government agencies. This information supports planning, investing, lending, and operational
decisions.
2. Which accounting assumption states that a business is separate from its owner?
A. Monetary Unit Assumption
B. Business Entity Assumption
C. Going Concern Assumption
D. Periodicity Assumption
Answer: B. Business Entity Assumption
Explanation:
The Business Entity Assumption requires that business transactions be recorded separately from
the owner's personal transactions. This ensures accurate financial reporting and prevents personal
expenses from being mixed with business activities.
3. Assets are best defined as:
,A. Amounts owed to creditors
B. Economic resources owned or controlled by a business that are expected to provide future
benefits
C. Owner withdrawals
D. Business expenses
Answer: B. Economic resources owned or controlled by a business that are expected to
provide future benefits
Explanation:
Assets include cash, accounts receivable, inventory, equipment, buildings, and other resources
that contribute to future business operations or generate revenue.
4. Which accounting equation is always true?
A. Assets = Revenue − Expenses
B. Assets = Liabilities + Owner's Equity
C. Revenue = Expenses + Assets
D. Liabilities = Assets − Revenue
Answer: B. Assets = Liabilities + Owner's Equity
Explanation:
The accounting equation forms the foundation of double-entry accounting. Every business
transaction affects this equation while keeping it balanced.
5. A company purchases office equipment for cash. What is the effect on the accounting
equation?
A. Assets increase and liabilities increase.
B. One asset increases while another asset decreases; total assets remain unchanged.
C. Owner's equity increases.
D. Liabilities decrease.
Answer: B
Explanation:
Cash decreases while equipment increases by the same amount. Total assets remain unchanged
because one asset is exchanged for another.
,6. Which financial statement reports a company's revenues and expenses over a specific
period?
A. Balance Sheet
B. Income Statement
C. Statement of Owner's Equity
D. Statement of Cash Flows
Answer: B. Income Statement
Explanation:
The Income Statement measures financial performance by reporting revenues earned and
expenses incurred during an accounting period. Net income equals revenues minus expenses.
7. Which account normally has a debit balance?
A. Accounts Payable
B. Service Revenue
C. Cash
D. Owner's Capital
Answer: C. Cash
Explanation:
Asset accounts normally carry debit balances because increases in assets are recorded with
debits.
8. What is the purpose of preparing a trial balance?
A. Calculate income taxes
B. Verify that total debits equal total credits before preparing financial statements
C. Determine inventory value only
D. Close temporary accounts
Answer: B
Explanation:
A trial balance helps detect mathematical errors in recording transactions. Although equal debits
and credits do not guarantee complete accuracy, they confirm that the ledger is mathematically
balanced.
, 9. Which journal entry records payment of rent in cash?
A. Debit Cash; Credit Rent Expense
B. Debit Rent Expense; Credit Cash
C. Debit Accounts Payable; Credit Cash
D. Debit Rent Expense; Credit Accounts Payable
Answer: B
Explanation:
Rent is an operating expense. Paying rent decreases cash and increases rent expense.
Journal Entry:
Debit Rent Expense
Credit Cash
10. Why are adjusting entries prepared at the end of an accounting period?
A. To correct every accounting error
B. To ensure revenues and expenses are recognized in the proper accounting period according to
the accrual basis of accounting
C. To prepare tax returns only
D. To close permanent accounts
Answer: B
Explanation:
Adjusting entries update account balances for accrued revenues, accrued expenses, prepaid
expenses, depreciation, and unearned revenues. They ensure financial statements accurately
reflect the company's financial position and operating results for the period.
11. A company provides services worth $4,500 on account.
Which journal entry is correct?
A.
Debit Cash $4,500
Credit Service Revenue $4,500
B.
units 1- 8 Questions With
Complete Solutions
Course
Afab 110
AFAB 110 Midterm Study Guide (Units 1–8) – Practice Questions with Complete Solutions
1. Which of the following best describes the primary purpose of accounting?
A. To prepare tax returns only
B. To provide financial information that helps users make informed economic decisions
C. To calculate employee salaries only
D. To determine product prices only
Answer: B. To provide financial information that helps users make informed economic
decisions
Explanation:
Accounting is often called the language of business because it records, summarizes, analyzes,
and communicates financial information to users such as managers, investors, creditors, and
government agencies. This information supports planning, investing, lending, and operational
decisions.
2. Which accounting assumption states that a business is separate from its owner?
A. Monetary Unit Assumption
B. Business Entity Assumption
C. Going Concern Assumption
D. Periodicity Assumption
Answer: B. Business Entity Assumption
Explanation:
The Business Entity Assumption requires that business transactions be recorded separately from
the owner's personal transactions. This ensures accurate financial reporting and prevents personal
expenses from being mixed with business activities.
3. Assets are best defined as:
,A. Amounts owed to creditors
B. Economic resources owned or controlled by a business that are expected to provide future
benefits
C. Owner withdrawals
D. Business expenses
Answer: B. Economic resources owned or controlled by a business that are expected to
provide future benefits
Explanation:
Assets include cash, accounts receivable, inventory, equipment, buildings, and other resources
that contribute to future business operations or generate revenue.
4. Which accounting equation is always true?
A. Assets = Revenue − Expenses
B. Assets = Liabilities + Owner's Equity
C. Revenue = Expenses + Assets
D. Liabilities = Assets − Revenue
Answer: B. Assets = Liabilities + Owner's Equity
Explanation:
The accounting equation forms the foundation of double-entry accounting. Every business
transaction affects this equation while keeping it balanced.
5. A company purchases office equipment for cash. What is the effect on the accounting
equation?
A. Assets increase and liabilities increase.
B. One asset increases while another asset decreases; total assets remain unchanged.
C. Owner's equity increases.
D. Liabilities decrease.
Answer: B
Explanation:
Cash decreases while equipment increases by the same amount. Total assets remain unchanged
because one asset is exchanged for another.
,6. Which financial statement reports a company's revenues and expenses over a specific
period?
A. Balance Sheet
B. Income Statement
C. Statement of Owner's Equity
D. Statement of Cash Flows
Answer: B. Income Statement
Explanation:
The Income Statement measures financial performance by reporting revenues earned and
expenses incurred during an accounting period. Net income equals revenues minus expenses.
7. Which account normally has a debit balance?
A. Accounts Payable
B. Service Revenue
C. Cash
D. Owner's Capital
Answer: C. Cash
Explanation:
Asset accounts normally carry debit balances because increases in assets are recorded with
debits.
8. What is the purpose of preparing a trial balance?
A. Calculate income taxes
B. Verify that total debits equal total credits before preparing financial statements
C. Determine inventory value only
D. Close temporary accounts
Answer: B
Explanation:
A trial balance helps detect mathematical errors in recording transactions. Although equal debits
and credits do not guarantee complete accuracy, they confirm that the ledger is mathematically
balanced.
, 9. Which journal entry records payment of rent in cash?
A. Debit Cash; Credit Rent Expense
B. Debit Rent Expense; Credit Cash
C. Debit Accounts Payable; Credit Cash
D. Debit Rent Expense; Credit Accounts Payable
Answer: B
Explanation:
Rent is an operating expense. Paying rent decreases cash and increases rent expense.
Journal Entry:
Debit Rent Expense
Credit Cash
10. Why are adjusting entries prepared at the end of an accounting period?
A. To correct every accounting error
B. To ensure revenues and expenses are recognized in the proper accounting period according to
the accrual basis of accounting
C. To prepare tax returns only
D. To close permanent accounts
Answer: B
Explanation:
Adjusting entries update account balances for accrued revenues, accrued expenses, prepaid
expenses, depreciation, and unearned revenues. They ensure financial statements accurately
reflect the company's financial position and operating results for the period.
11. A company provides services worth $4,500 on account.
Which journal entry is correct?
A.
Debit Cash $4,500
Credit Service Revenue $4,500
B.
