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FINANCIAL ACCOUNTING - FINANCIAL STATEMENTS -2026–
2027 COMPLETE STUDY GUIDE :100 QUESTIONS WITH
DETAILED RATIONALES
Financial Accounting / Financial Statement Analysis
Exam coverage:
❖ Section 1 (Q1–20): Foundations of financial accounting, the
accounting equation, transaction analysis, and the effects of
business transactions.
❖ Section 2 (Q21–40): The balance sheet, asset and liability
classification, liquidity ratios, and working capital.
❖ Section 3 (Q41–60): The income statement, revenue and
expense recognition, profitability ratios, and earnings per
share.
❖ Section 4 (Q61–80): The statement of cash flows, indirect
and direct methods, and free cash flow analysis.
❖ Section 5 (Q81–100): Financial statement analysis, return on
assets, return on equity, turnover ratios, and integrated
topics.
Section 1: Foundations of Financial Accounting & the
Accounting Equation (Questions 1–20)
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Question 1
A new staff accountant is reviewing the fundamental principles
of financial accounting. The accountant must understand the
basic accounting equation and how business transactions
affect it. Which of the following correctly states the basic
accounting equation?
A. Assets + Liabilities = Stockholders' Equity
B. Assets = Liabilities – Stockholders' Equity
C. Assets = Liabilities + Stockholders' Equity
D. Stockholders' Equity = Assets + Liabilities
CORRECT ANSWER: C
RATIONALE: The fundamental accounting equation is Assets =
Liabilities + Stockholders' Equity. This equation must always
balance and forms the foundation of the double-entry
accounting system. Options A, B, and D misstate the
relationship.
Question 2
A company is organized as a separate legal entity owned by
stockholders. The accountant must classify this form of
business organization correctly. Which of the following best
describes a corporation?
A. A business owned by one person
B. A business owned by two or more persons
C. A business organized as a separate legal entity owned by
stockholders
D. A business that is not recognized as a separate legal entity
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CORRECT ANSWER: C
RATIONALE: A corporation is a business organized as a separate
legal entity owned by stockholders. A sole proprietorship (A) is
owned by one person. A partnership (B) is owned by two or more
persons. Option D is incorrect because a corporation is a
separate legal entity.
Question 3
A company reports total assets of $500,000 and total liabilities
of $200,000. The accountant needs to calculate the
stockholders' equity. What is the amount of stockholders'
equity?
A. $200,000
B. $300,000
C. $500,000
D. $700,000
CORRECT ANSWER: B
RATIONALE: Using the accounting equation (Assets = Liabilities
+ Stockholders' Equity), Stockholders' Equity = Assets –
Liabilities = $500,000 – $200,000 = $300,000.
Question 4
A company purchases equipment for $50,000, paying $20,000 in
cash and signing a note payable for the remaining $30,000. The
accountant must determine how this transaction affects the
accounting equation. Which of the following best describes the
effect on the accounting equation?
A. Assets increase by $50,000; Liabilities increase by $30,000;
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Equity increases by $20,000
B. Assets increase by $30,000; Liabilities increase by $30,000
C. Assets increase by $50,000; Liabilities increase by $30,000;
Equity decreases by $20,000
D. Assets increase by $30,000; Equity decreases by $30,000
**CORRECT ANSWER: B **
**RATIONALE:** The equipment (an asset) increases by
$50,000. Cash (an asset) decreases by $20,000, resulting in a
net increase in assets of $30,000. Liabilities (note payable)
increase by $30,000. The accounting equation remains
balanced: Assets (+$30,000) = Liabilities (+$30,000) + Equity (no
change).
Question 5
A company records $10,000 of revenue on account. The
accountant must determine how this transaction affects the
accounting equation. Which of the following best describes the
effect?
A. Assets increase by $10,000; Equity increases by $10,000
B. Assets increase by $10,000; Liabilities increase by $10,000
C. Assets decrease by $10,000; Equity decreases by $10,000
D. No effect on the accounting equation
**CORRECT ANSWER: A **
**RATIONALE:** Recording revenue on account increases
Accounts Receivable (an asset) by $10,000. Revenue also
increases net income, which increases Retained Earnings (part
of Stockholders' Equity) by $10,000.
FINANCIAL ACCOUNTING - FINANCIAL STATEMENTS -2026–
2027 COMPLETE STUDY GUIDE :100 QUESTIONS WITH
DETAILED RATIONALES
Financial Accounting / Financial Statement Analysis
Exam coverage:
❖ Section 1 (Q1–20): Foundations of financial accounting, the
accounting equation, transaction analysis, and the effects of
business transactions.
❖ Section 2 (Q21–40): The balance sheet, asset and liability
classification, liquidity ratios, and working capital.
❖ Section 3 (Q41–60): The income statement, revenue and
expense recognition, profitability ratios, and earnings per
share.
❖ Section 4 (Q61–80): The statement of cash flows, indirect
and direct methods, and free cash flow analysis.
❖ Section 5 (Q81–100): Financial statement analysis, return on
assets, return on equity, turnover ratios, and integrated
topics.
Section 1: Foundations of Financial Accounting & the
Accounting Equation (Questions 1–20)
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Question 1
A new staff accountant is reviewing the fundamental principles
of financial accounting. The accountant must understand the
basic accounting equation and how business transactions
affect it. Which of the following correctly states the basic
accounting equation?
A. Assets + Liabilities = Stockholders' Equity
B. Assets = Liabilities – Stockholders' Equity
C. Assets = Liabilities + Stockholders' Equity
D. Stockholders' Equity = Assets + Liabilities
CORRECT ANSWER: C
RATIONALE: The fundamental accounting equation is Assets =
Liabilities + Stockholders' Equity. This equation must always
balance and forms the foundation of the double-entry
accounting system. Options A, B, and D misstate the
relationship.
Question 2
A company is organized as a separate legal entity owned by
stockholders. The accountant must classify this form of
business organization correctly. Which of the following best
describes a corporation?
A. A business owned by one person
B. A business owned by two or more persons
C. A business organized as a separate legal entity owned by
stockholders
D. A business that is not recognized as a separate legal entity
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CORRECT ANSWER: C
RATIONALE: A corporation is a business organized as a separate
legal entity owned by stockholders. A sole proprietorship (A) is
owned by one person. A partnership (B) is owned by two or more
persons. Option D is incorrect because a corporation is a
separate legal entity.
Question 3
A company reports total assets of $500,000 and total liabilities
of $200,000. The accountant needs to calculate the
stockholders' equity. What is the amount of stockholders'
equity?
A. $200,000
B. $300,000
C. $500,000
D. $700,000
CORRECT ANSWER: B
RATIONALE: Using the accounting equation (Assets = Liabilities
+ Stockholders' Equity), Stockholders' Equity = Assets –
Liabilities = $500,000 – $200,000 = $300,000.
Question 4
A company purchases equipment for $50,000, paying $20,000 in
cash and signing a note payable for the remaining $30,000. The
accountant must determine how this transaction affects the
accounting equation. Which of the following best describes the
effect on the accounting equation?
A. Assets increase by $50,000; Liabilities increase by $30,000;
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Equity increases by $20,000
B. Assets increase by $30,000; Liabilities increase by $30,000
C. Assets increase by $50,000; Liabilities increase by $30,000;
Equity decreases by $20,000
D. Assets increase by $30,000; Equity decreases by $30,000
**CORRECT ANSWER: B **
**RATIONALE:** The equipment (an asset) increases by
$50,000. Cash (an asset) decreases by $20,000, resulting in a
net increase in assets of $30,000. Liabilities (note payable)
increase by $30,000. The accounting equation remains
balanced: Assets (+$30,000) = Liabilities (+$30,000) + Equity (no
change).
Question 5
A company records $10,000 of revenue on account. The
accountant must determine how this transaction affects the
accounting equation. Which of the following best describes the
effect?
A. Assets increase by $10,000; Equity increases by $10,000
B. Assets increase by $10,000; Liabilities increase by $10,000
C. Assets decrease by $10,000; Equity decreases by $10,000
D. No effect on the accounting equation
**CORRECT ANSWER: A **
**RATIONALE:** Recording revenue on account increases
Accounts Receivable (an asset) by $10,000. Revenue also
increases net income, which increases Retained Earnings (part
of Stockholders' Equity) by $10,000.
