ACCT 3110 PRACTICE EXAM
120 Multiple-Choice Questions with Answers & Rationales
1. Which body has primary responsibility for setting Generally Accepted
Accounting Principles (GAAP) in the United States?
A. Securities and Exchange Commission (SEC)
B. Financial Accounting Standards Board (FASB)
C. Internal Revenue Service (IRS)
D. American Institute of CPAs (AICPA)
Correct Answer: B
Rationale: The FASB is the private-sector body designated to establish and improve
standards of financial accounting and reporting, i.e., GAAP, in the U.S.
2. Under the FASB's conceptual framework, what is the primary objective of
general-purpose financial reporting?
A. To minimize a company's tax liability
B. To provide information useful to capital providers in making resource allocation
decisions
C. To satisfy internal management reporting needs only
D. To comply strictly with tax regulations
Correct Answer: B
Rationale: The conceptual framework states that the objective of financial reporting is
to provide information useful to present and potential investors, lenders, and other
creditors in making decisions about providing resources to the entity.
,3. Which of the following is a fundamental qualitative characteristic of useful
financial information?
A. Conservatism
B. Relevance
C. Comparability
D. Timeliness
Correct Answer: B
Rationale: Relevance and faithful representation are the two fundamental qualitative
characteristics; comparability, verifiability, timeliness, and understandability are
enhancing characteristics.
4. Faithful representation requires that financial information be:
A. Complete, neutral, and free from error
B. Highly detailed regardless of cost
C. Prepared using only historical cost
D. Approved by external auditors before use
Correct Answer: A
Rationale: Faithful representation means the information is complete, neutral
(unbiased), and free from material error.
5. Which enhancing qualitative characteristic allows users to identify similarities
and differences between two sets of economic phenomena?
A. Verifiability
B. Comparability
C. Timeliness
D. Understandability
Correct Answer: B
Rationale: Comparability enables users to compare a company's financial information
across periods or against other companies.
,6. The going concern assumption presumes that a company:
A. Will be liquidated in the near future
B. Will continue operating long enough to carry out its existing commitments
C. Must be profitable every reporting period
D. Reports only cash-basis transactions
Correct Answer: B
Rationale: Going concern assumes the entity will continue operations into the
foreseeable future, which justifies methods like historical cost and depreciation over an
asset's useful life.
7. Which basis of accounting recognizes revenue when earned and expenses
when incurred, regardless of cash flow timing?
A. Cash basis
B. Accrual basis
C. Modified cash basis
D. Tax basis
Correct Answer: B
Rationale: Accrual-basis accounting recognizes revenues when earned and expenses
when incurred, which is required under GAAP.
8. Materiality is best described as:
A. A rule requiring all transactions to be reported at cost
B. An entity-specific threshold at which an item's omission or misstatement could
influence users' decisions
C. A characteristic only relevant to public companies
D. A fixed percentage applied identically across all industries
Correct Answer: B
Rationale: Materiality is an entity-specific aspect of relevance: information is material if
omitting or misstating it could reasonably influence the decisions of users.
, 9. Which assumption allows a company's life to be divided into artificial time
periods, such as quarters and years, for reporting purposes?
A. Going concern
B. Periodicity (time period) assumption
C. Monetary unit assumption
D. Economic entity assumption
Correct Answer: B
Rationale: The periodicity assumption allows the economic life of an enterprise to be
divided into artificial time periods for financial reporting.
10. Which assumption requires that a company's economic activities be kept
separate from those of its owners and other entities?
A. Monetary unit assumption
B. Economic entity assumption
C. Periodicity assumption
D. Going concern assumption
Correct Answer: B
Rationale: The economic entity assumption states that economic activity can be
identified with a particular unit of accountability, separate from its owners or other
businesses.
11. What is the correct order of the first three steps in the accounting cycle?
A. Post to ledger, journalize transactions, analyze transactions
B. Analyze transactions, journalize transactions, post to the general ledger
C. Prepare trial balance, analyze transactions, journalize transactions
D. Journalize transactions, prepare financial statements, post to ledger
Correct Answer: B
Rationale: The accounting cycle begins with analyzing transactions from source
documents, then journalizing them, and posting the journal entries to the general
ledger.
120 Multiple-Choice Questions with Answers & Rationales
1. Which body has primary responsibility for setting Generally Accepted
Accounting Principles (GAAP) in the United States?
A. Securities and Exchange Commission (SEC)
B. Financial Accounting Standards Board (FASB)
C. Internal Revenue Service (IRS)
D. American Institute of CPAs (AICPA)
Correct Answer: B
Rationale: The FASB is the private-sector body designated to establish and improve
standards of financial accounting and reporting, i.e., GAAP, in the U.S.
2. Under the FASB's conceptual framework, what is the primary objective of
general-purpose financial reporting?
A. To minimize a company's tax liability
B. To provide information useful to capital providers in making resource allocation
decisions
C. To satisfy internal management reporting needs only
D. To comply strictly with tax regulations
Correct Answer: B
Rationale: The conceptual framework states that the objective of financial reporting is
to provide information useful to present and potential investors, lenders, and other
creditors in making decisions about providing resources to the entity.
,3. Which of the following is a fundamental qualitative characteristic of useful
financial information?
A. Conservatism
B. Relevance
C. Comparability
D. Timeliness
Correct Answer: B
Rationale: Relevance and faithful representation are the two fundamental qualitative
characteristics; comparability, verifiability, timeliness, and understandability are
enhancing characteristics.
4. Faithful representation requires that financial information be:
A. Complete, neutral, and free from error
B. Highly detailed regardless of cost
C. Prepared using only historical cost
D. Approved by external auditors before use
Correct Answer: A
Rationale: Faithful representation means the information is complete, neutral
(unbiased), and free from material error.
5. Which enhancing qualitative characteristic allows users to identify similarities
and differences between two sets of economic phenomena?
A. Verifiability
B. Comparability
C. Timeliness
D. Understandability
Correct Answer: B
Rationale: Comparability enables users to compare a company's financial information
across periods or against other companies.
,6. The going concern assumption presumes that a company:
A. Will be liquidated in the near future
B. Will continue operating long enough to carry out its existing commitments
C. Must be profitable every reporting period
D. Reports only cash-basis transactions
Correct Answer: B
Rationale: Going concern assumes the entity will continue operations into the
foreseeable future, which justifies methods like historical cost and depreciation over an
asset's useful life.
7. Which basis of accounting recognizes revenue when earned and expenses
when incurred, regardless of cash flow timing?
A. Cash basis
B. Accrual basis
C. Modified cash basis
D. Tax basis
Correct Answer: B
Rationale: Accrual-basis accounting recognizes revenues when earned and expenses
when incurred, which is required under GAAP.
8. Materiality is best described as:
A. A rule requiring all transactions to be reported at cost
B. An entity-specific threshold at which an item's omission or misstatement could
influence users' decisions
C. A characteristic only relevant to public companies
D. A fixed percentage applied identically across all industries
Correct Answer: B
Rationale: Materiality is an entity-specific aspect of relevance: information is material if
omitting or misstating it could reasonably influence the decisions of users.
, 9. Which assumption allows a company's life to be divided into artificial time
periods, such as quarters and years, for reporting purposes?
A. Going concern
B. Periodicity (time period) assumption
C. Monetary unit assumption
D. Economic entity assumption
Correct Answer: B
Rationale: The periodicity assumption allows the economic life of an enterprise to be
divided into artificial time periods for financial reporting.
10. Which assumption requires that a company's economic activities be kept
separate from those of its owners and other entities?
A. Monetary unit assumption
B. Economic entity assumption
C. Periodicity assumption
D. Going concern assumption
Correct Answer: B
Rationale: The economic entity assumption states that economic activity can be
identified with a particular unit of accountability, separate from its owners or other
businesses.
11. What is the correct order of the first three steps in the accounting cycle?
A. Post to ledger, journalize transactions, analyze transactions
B. Analyze transactions, journalize transactions, post to the general ledger
C. Prepare trial balance, analyze transactions, journalize transactions
D. Journalize transactions, prepare financial statements, post to ledger
Correct Answer: B
Rationale: The accounting cycle begins with analyzing transactions from source
documents, then journalizing them, and posting the journal entries to the general
ledger.
