IU KELLY A100 FINAL EXAM TESTBANK| ALL QUESTIONS AND
ANSWERS 2026/2027 | VERIFIED ANSWERS PLUS RATIONALES
GRADED Q&A COMPREHENSIVE STUDY GUIDE | VERIFIED
LATEST 2027
1. Which of the following fundamental financial statements reports a company's financial
position at a specific point in time?
A. Income Statement
B. Statement of Cash Flows
C. Balance Sheet
D. Statement of Stockholders' Equity
The balance sheet reports a company's assets, liabilities, and stockholders' equity at a specific
point in time, unlike the income statement or statement of cash flows, which cover a period of
time.
2. A manufacturing enterprise purchases raw materials on account from a primary
supplier. How does this specific business transaction immediately affect the company's
accounting equation?
A. Total assets increase and total liabilities decrease
B. Total assets increase and total liabilities increase
C. Total assets remain unchanged and total liabilities increase
D. Total assets decrease and stockholders' equity increases
Purchasing materials on account increases inventory (an asset) and accounts payable (a
liability) by the exact same dollar amount, maintaining the balance of the accounting
equation.
3. In accordance with the revenue recognition principle under US GAAP, when should
revenue typically be recognized by a service-providing corporation?
A. When cash is physically collected from the client
B. When the service contract is signed by both parties
C. When the performance obligations are satisfied
D. When the corporate board approves the quarterly budget
The revenue recognition principle dictates that revenue must be recognized when the goods
or services are transferred to customers in an amount that reflects the consideration expected
in exchange.
,4. A corporation prepays twelve months of comprehensive commercial insurance coverage.
What is the immediate journal entry recorded on the transaction date?
A. Debit Insurance Expense, Credit Cash
B. Debit Prepaid Insurance, Credit Cash
C. Debit Cash, Credit Unearned Insurance Revenue
D. Debit Prepaid Insurance, Credit Accounts Payable
Prepaying an expense creates an asset called Prepaid Insurance. Cash decreases as the asset
account increases, leaving net assets unchanged initially.
5. Which underlying accounting assumption assumes that a business entity will continue to
operate indefinitely into the foreseeable future without entering liquidation?
A. Economic Entity Assumption
B. Monetary Unit Assumption
C. Periodicity Assumption
D. Going Concern Assumption
The going concern assumption presumes that the enterprise will remain in business long
enough to fulfill its existing commitments, obligations, and planned objectives.
6. During an accounting period, a firm provides consulting services to a client, billing them
$5,000 to be paid within 30 days. Which entry correctly records this event?
A. Debit Accounts Receivable \$5,000, Credit Service Revenue \$5,000
B. Debit Cash \$5,000, Credit Service Revenue \$5,000
C. Debit Service Revenue \$5,000, Credit Accounts Receivable \$5,000
D. Debit Accounts Payable \$5,000, Credit Service Revenue \$5,000
Providing services on credit increases an asset (Accounts Receivable) and simultaneously
increases revenue (Service Revenue) under accrual accounting rules.
7. Which of the following accounts normally carries a credit balance?
A. Equipment
B. Salaries Expense
C. Accumulated Depreciation
D. Dividends
Accumulated depreciation is a contra-asset account, meaning it carries a normal credit
balance that offsets the historical cost of the related asset accounts.
8. If a company fails to record accrued wages at the end of the accounting period, what is
the resulting impact on the financial statements?
,A. Net income is understated and liabilities are overstated
B. Net income is overstated and liabilities are understated
C. Net income is understated and assets are understated
D. Net income and liabilities are both correctly stated
Failing to record incurred but unpaid wages leaves expenses understated, which artificially
inflates net income, while simultaneously understating liabilities.
9. What is the primary purpose of closing entries at the end of a fiscal year?
A. To adjust asset balances to current fair market values
B. To transfer temporary account balances to retained earnings
C. To reconcile the bank statement with internal cash records
D. To prepare the adjusted trial balance for tax authorities
Closing entries reset the balances of temporary accounts (revenues, expenses, and dividends)
to zero and transfer their net effect into permanent equity accounts like retained earnings.
10. Which qualitative characteristic of accounting information ensures that users can
comprehend the financial reports and compare them across different periods and
companies?
A. Relevance and Faithful Representation
B. Timeliness and Verifiability
C. Comparability and Understandability
D. Materiality and Conservatism
Comparability and understandability are key enhancement characteristics that allow financial
statement users to identify similarities, differences, and meaningful trends.
11. An entity purchases office equipment for $24,000 cash, with an estimated useful life of 5
years and a residual value of $4,000. Using straight-line depreciation, what is the annual
depreciation expense?
A. \$4,000
B. \$4,800
C. \$5,600
D. \$6,000
Straight-line annual depreciation is calculated as (Cost minus Residual Value) divided by
Useful Life, which equals $(\$24,000 - \$4,000) / 5 = \$4,000$ per year.
12. When physical inventory is counted at year-end and found to be lower than the
perpetual inventory records, what adjustment is required?
A. Debit Inventory, Credit Cost of Goods Sold
, B. Debit Cost of Goods Sold, Credit Inventory
C. Debit Purchases, Credit Accounts Payable
D. Debit Inventory, Credit Retained Earnings
An inventory shortage or shrinkage represents lost or stolen merchandise, which requires
writing down the inventory balance and increasing Cost of Goods Sold.
13. Under a periodic inventory system, how is Cost of Goods Sold determined at the end of
the accounting period?
A. Beginning Inventory plus Net Purchases minus Ending Inventory
B. Ending Inventory plus Net Purchases minus Beginning Inventory
C. Cost of Goods Available for Sale plus Ending Inventory
D. Sales Revenue minus Gross Profit
The periodic formula calculates Cost of Goods Sold by taking what was available at the start
plus new purchases, then subtracting what remains physically on hand at the end.
14. Which inventory valuation method assigns the most recent purchase costs to Cost of
Goods Sold 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
LIFO assumes that the last items purchased are the first ones sold, matching recent higher
costs against current revenues during inflationary environments.
15. A company writes off an uncollectible customer account using the allowance method.
What is the immediate impact on total assets and net income?
A. Total assets decrease and net income decreases
B. Total assets increase and net income increases
C. Total assets and net income both remain unchanged
D. Total assets decrease and net income increases
Writing off an account against the Allowance for Doubtful Accounts reduces both Accounts
Receivable and the contra-asset allowance by the exact same amount, leaving net assets and
net income unaffected.
16. Which internal control principle is violated when a single employee is responsible for
opening customer mail, depositing checks, recording payments in the ledger, and
reconciling the bank account?
ANSWERS 2026/2027 | VERIFIED ANSWERS PLUS RATIONALES
GRADED Q&A COMPREHENSIVE STUDY GUIDE | VERIFIED
LATEST 2027
1. Which of the following fundamental financial statements reports a company's financial
position at a specific point in time?
A. Income Statement
B. Statement of Cash Flows
C. Balance Sheet
D. Statement of Stockholders' Equity
The balance sheet reports a company's assets, liabilities, and stockholders' equity at a specific
point in time, unlike the income statement or statement of cash flows, which cover a period of
time.
2. A manufacturing enterprise purchases raw materials on account from a primary
supplier. How does this specific business transaction immediately affect the company's
accounting equation?
A. Total assets increase and total liabilities decrease
B. Total assets increase and total liabilities increase
C. Total assets remain unchanged and total liabilities increase
D. Total assets decrease and stockholders' equity increases
Purchasing materials on account increases inventory (an asset) and accounts payable (a
liability) by the exact same dollar amount, maintaining the balance of the accounting
equation.
3. In accordance with the revenue recognition principle under US GAAP, when should
revenue typically be recognized by a service-providing corporation?
A. When cash is physically collected from the client
B. When the service contract is signed by both parties
C. When the performance obligations are satisfied
D. When the corporate board approves the quarterly budget
The revenue recognition principle dictates that revenue must be recognized when the goods
or services are transferred to customers in an amount that reflects the consideration expected
in exchange.
,4. A corporation prepays twelve months of comprehensive commercial insurance coverage.
What is the immediate journal entry recorded on the transaction date?
A. Debit Insurance Expense, Credit Cash
B. Debit Prepaid Insurance, Credit Cash
C. Debit Cash, Credit Unearned Insurance Revenue
D. Debit Prepaid Insurance, Credit Accounts Payable
Prepaying an expense creates an asset called Prepaid Insurance. Cash decreases as the asset
account increases, leaving net assets unchanged initially.
5. Which underlying accounting assumption assumes that a business entity will continue to
operate indefinitely into the foreseeable future without entering liquidation?
A. Economic Entity Assumption
B. Monetary Unit Assumption
C. Periodicity Assumption
D. Going Concern Assumption
The going concern assumption presumes that the enterprise will remain in business long
enough to fulfill its existing commitments, obligations, and planned objectives.
6. During an accounting period, a firm provides consulting services to a client, billing them
$5,000 to be paid within 30 days. Which entry correctly records this event?
A. Debit Accounts Receivable \$5,000, Credit Service Revenue \$5,000
B. Debit Cash \$5,000, Credit Service Revenue \$5,000
C. Debit Service Revenue \$5,000, Credit Accounts Receivable \$5,000
D. Debit Accounts Payable \$5,000, Credit Service Revenue \$5,000
Providing services on credit increases an asset (Accounts Receivable) and simultaneously
increases revenue (Service Revenue) under accrual accounting rules.
7. Which of the following accounts normally carries a credit balance?
A. Equipment
B. Salaries Expense
C. Accumulated Depreciation
D. Dividends
Accumulated depreciation is a contra-asset account, meaning it carries a normal credit
balance that offsets the historical cost of the related asset accounts.
8. If a company fails to record accrued wages at the end of the accounting period, what is
the resulting impact on the financial statements?
,A. Net income is understated and liabilities are overstated
B. Net income is overstated and liabilities are understated
C. Net income is understated and assets are understated
D. Net income and liabilities are both correctly stated
Failing to record incurred but unpaid wages leaves expenses understated, which artificially
inflates net income, while simultaneously understating liabilities.
9. What is the primary purpose of closing entries at the end of a fiscal year?
A. To adjust asset balances to current fair market values
B. To transfer temporary account balances to retained earnings
C. To reconcile the bank statement with internal cash records
D. To prepare the adjusted trial balance for tax authorities
Closing entries reset the balances of temporary accounts (revenues, expenses, and dividends)
to zero and transfer their net effect into permanent equity accounts like retained earnings.
10. Which qualitative characteristic of accounting information ensures that users can
comprehend the financial reports and compare them across different periods and
companies?
A. Relevance and Faithful Representation
B. Timeliness and Verifiability
C. Comparability and Understandability
D. Materiality and Conservatism
Comparability and understandability are key enhancement characteristics that allow financial
statement users to identify similarities, differences, and meaningful trends.
11. An entity purchases office equipment for $24,000 cash, with an estimated useful life of 5
years and a residual value of $4,000. Using straight-line depreciation, what is the annual
depreciation expense?
A. \$4,000
B. \$4,800
C. \$5,600
D. \$6,000
Straight-line annual depreciation is calculated as (Cost minus Residual Value) divided by
Useful Life, which equals $(\$24,000 - \$4,000) / 5 = \$4,000$ per year.
12. When physical inventory is counted at year-end and found to be lower than the
perpetual inventory records, what adjustment is required?
A. Debit Inventory, Credit Cost of Goods Sold
, B. Debit Cost of Goods Sold, Credit Inventory
C. Debit Purchases, Credit Accounts Payable
D. Debit Inventory, Credit Retained Earnings
An inventory shortage or shrinkage represents lost or stolen merchandise, which requires
writing down the inventory balance and increasing Cost of Goods Sold.
13. Under a periodic inventory system, how is Cost of Goods Sold determined at the end of
the accounting period?
A. Beginning Inventory plus Net Purchases minus Ending Inventory
B. Ending Inventory plus Net Purchases minus Beginning Inventory
C. Cost of Goods Available for Sale plus Ending Inventory
D. Sales Revenue minus Gross Profit
The periodic formula calculates Cost of Goods Sold by taking what was available at the start
plus new purchases, then subtracting what remains physically on hand at the end.
14. Which inventory valuation method assigns the most recent purchase costs to Cost of
Goods Sold 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
LIFO assumes that the last items purchased are the first ones sold, matching recent higher
costs against current revenues during inflationary environments.
15. A company writes off an uncollectible customer account using the allowance method.
What is the immediate impact on total assets and net income?
A. Total assets decrease and net income decreases
B. Total assets increase and net income increases
C. Total assets and net income both remain unchanged
D. Total assets decrease and net income increases
Writing off an account against the Allowance for Doubtful Accounts reduces both Accounts
Receivable and the contra-asset allowance by the exact same amount, leaving net assets and
net income unaffected.
16. Which internal control principle is violated when a single employee is responsible for
opening customer mail, depositing checks, recording payments in the ledger, and
reconciling the bank account?
