1
Financial Accounting Principles Exam
(2025/2026) – Actual Questions with
100% Correct Answers and Detailed
Explanations | Graded A+
Balance Sheets
1. What is the primary purpose of a balance sheet?
A. To report revenues and expenses
B. To provide a snapshot of a company’s financial position at a point in time
C. To detail cash inflows and outflows
D. To summarize net income over a period
Rationale: A balance sheet reports a company’s assets, liabilities, and equity at a specific
date, providing a snapshot of its financial position, per GAAP requirements.
2. A company purchases equipment for $50,000 cash. How is this recorded on the balance
sheet?
A. Increase liabilities by $50,000
B. Increase equipment by $50,000, decrease cash by $50,000
C. Increase revenue by $50,000
D. Decrease equity by $50,000
Rationale: Purchasing equipment with cash increases the asset account (Equipment) and
decreases another asset account (Cash), maintaining the balance sheet equation (Assets =
Liabilities + Equity).
3. Which of the following is classified as a current asset on the balance sheet?
A. Building
B. Accounts Receivable
C. Patents
D. Long-term investments
Rationale: Accounts Receivable is a current asset, as it is expected to be converted to
cash within one year or one operating cycle, per GAAP classification.
4. A company has $100,000 in assets, $40,000 in liabilities, and $60,000 in equity. If assets
increase by $20,000 and liabilities increase by $10,000, what is the new equity?
A. $50,000
B. $70,000
C. $80,000
D. $90,000
Rationale: New assets = $120,000, new liabilities = $50,000. Equity = Assets -
Liabilities = $120,000 - $50,000 = $70,000, per the accounting equation.
5. How are retained earnings reported on the balance sheet?
A. As a liability
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B. As a component of stockholders’ equity
C. As a current asset
D. As an expense
Rationale: Retained earnings represent accumulated profits not distributed to
shareholders and are reported under stockholders’ equity, per GAAP.
6. A company’s balance sheet shows $25,000 in accounts payable. What does this
represent?
A. Amounts owed to the company by customers
B. Amounts the company owes to suppliers
C. Long-term debt obligations
D. Revenue earned but not yet received
Rationale: Accounts payable are short-term liabilities representing amounts owed to
suppliers for goods or services, per GAAP definitions.
7. Which of the following increases total assets on the balance sheet?
A. Payment of accounts payable
B. Issuance of common stock for cash
C. Declaration of cash dividends
D. Depreciation expense
Rationale: Issuing common stock for cash increases cash (an asset) and equity, while
other options either decrease assets or have no immediate asset impact.
8. A company’s balance sheet lists $10,000 in prepaid insurance. How is this classified?
A. Long-term liability
B. Current asset
C. Equity
D. Revenue
Rationale: Prepaid insurance is a current asset, as it represents a payment for future
benefits (insurance coverage) expected within one year, per GAAP.
9. What is the effect of a $5,000 loan repayment on the balance sheet?
A. Increase assets, decrease liabilities
B. Decrease assets, decrease liabilities
C. Increase assets, increase equity
D. Decrease liabilities, increase equity
Rationale: Repaying a loan decreases cash (an asset) and reduces the loan liability,
maintaining the balance sheet equation.
10. A company’s balance sheet shows a negative retained earnings balance. What does this
indicate?
A. Excess dividends paid
B. Accumulated losses exceeding profits
C. High debt levels
D. Increased shareholder investments
Rationale: Negative retained earnings indicate that cumulative losses and/or dividends exceed
profits, reducing equity, per GAAP reporting.
Adjusting Entries
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11. A company pays $12,000 for a one-year insurance policy on January 1. What is the
adjusting entry on March 31?
A. Debit Insurance Expense $12,000, Credit Prepaid Insurance $12,000
B. Debit Insurance Expense $3,000, Credit Prepaid Insurance $3,000
C. Debit Prepaid Insurance $3,000, Credit Cash $3,000
D. Debit Insurance Expense $9,000, Credit Prepaid Insurance $9,000
Rationale: Three months (Jan-Mar) of coverage = $12,000 ÷ 12 × 3 = $3,000. The adjusting
entry recognizes the expired portion as an expense, reducing the prepaid asset, per accrual
accounting.
12. A company records $5,000 of depreciation for equipment. What is the adjusting entry?
A. Debit Equipment $5,000, Credit Cash $5,000
B. Debit Depreciation Expense $5,000, Credit Accumulated Depreciation
$5,000
C. Debit Accumulated Depreciation $5,000, Credit Equipment $5,000
D. Debit Depreciation Expense $5,000, Credit Cash $5,000
Rationale: Depreciation allocates equipment cost over its useful life, increasing Depreciation
Expense (income statement) and Accumulated Depreciation (balance sheet contra-asset), per
GAAP.
13. On December 31, a company estimates $2,000 in uncollectible accounts. What is the
adjusting entry?
A. Debit Accounts Receivable $2,000, Credit Bad Debt Expense $2,000
B. Debit Bad Debt Expense $2,000, Credit Allowance for Doubtful Accounts
$2,000
C. Debit Allowance for Doubtful Accounts $2,000, Credit Accounts Receivable $2,000
D. Debit Bad Debt Expense $2,000, Credit Cash $2,000
Rationale: The allowance method estimates uncollectible receivables, increasing Bad Debt
Expense and the Allowance for Doubtful Accounts (a contra-asset), per GAAP.
14. A company receives $6,000 for services to be performed next month. What is the
adjusting entry on December 31?
A. Debit Unearned Revenue $6,000, Credit Service Revenue $6,000
B. No adjusting entry needed
C. Debit Cash $6,000, Credit Unearned Revenue $6,000
D. Debit Service Revenue $6,000, Credit Accounts Receivable $6,000
Rationale: Cash received for future services is recorded as Unearned Revenue (a liability). No
adjusting entry is needed until services are performed, per the revenue recognition principle.
15. A company accrues $1,500 in salaries unpaid at year-end. What is the adjusting entry?
A. Debit Cash $1,500, Credit Salaries Expense $1,500
Financial Accounting Principles Exam
(2025/2026) – Actual Questions with
100% Correct Answers and Detailed
Explanations | Graded A+
Balance Sheets
1. What is the primary purpose of a balance sheet?
A. To report revenues and expenses
B. To provide a snapshot of a company’s financial position at a point in time
C. To detail cash inflows and outflows
D. To summarize net income over a period
Rationale: A balance sheet reports a company’s assets, liabilities, and equity at a specific
date, providing a snapshot of its financial position, per GAAP requirements.
2. A company purchases equipment for $50,000 cash. How is this recorded on the balance
sheet?
A. Increase liabilities by $50,000
B. Increase equipment by $50,000, decrease cash by $50,000
C. Increase revenue by $50,000
D. Decrease equity by $50,000
Rationale: Purchasing equipment with cash increases the asset account (Equipment) and
decreases another asset account (Cash), maintaining the balance sheet equation (Assets =
Liabilities + Equity).
3. Which of the following is classified as a current asset on the balance sheet?
A. Building
B. Accounts Receivable
C. Patents
D. Long-term investments
Rationale: Accounts Receivable is a current asset, as it is expected to be converted to
cash within one year or one operating cycle, per GAAP classification.
4. A company has $100,000 in assets, $40,000 in liabilities, and $60,000 in equity. If assets
increase by $20,000 and liabilities increase by $10,000, what is the new equity?
A. $50,000
B. $70,000
C. $80,000
D. $90,000
Rationale: New assets = $120,000, new liabilities = $50,000. Equity = Assets -
Liabilities = $120,000 - $50,000 = $70,000, per the accounting equation.
5. How are retained earnings reported on the balance sheet?
A. As a liability
, 2
B. As a component of stockholders’ equity
C. As a current asset
D. As an expense
Rationale: Retained earnings represent accumulated profits not distributed to
shareholders and are reported under stockholders’ equity, per GAAP.
6. A company’s balance sheet shows $25,000 in accounts payable. What does this
represent?
A. Amounts owed to the company by customers
B. Amounts the company owes to suppliers
C. Long-term debt obligations
D. Revenue earned but not yet received
Rationale: Accounts payable are short-term liabilities representing amounts owed to
suppliers for goods or services, per GAAP definitions.
7. Which of the following increases total assets on the balance sheet?
A. Payment of accounts payable
B. Issuance of common stock for cash
C. Declaration of cash dividends
D. Depreciation expense
Rationale: Issuing common stock for cash increases cash (an asset) and equity, while
other options either decrease assets or have no immediate asset impact.
8. A company’s balance sheet lists $10,000 in prepaid insurance. How is this classified?
A. Long-term liability
B. Current asset
C. Equity
D. Revenue
Rationale: Prepaid insurance is a current asset, as it represents a payment for future
benefits (insurance coverage) expected within one year, per GAAP.
9. What is the effect of a $5,000 loan repayment on the balance sheet?
A. Increase assets, decrease liabilities
B. Decrease assets, decrease liabilities
C. Increase assets, increase equity
D. Decrease liabilities, increase equity
Rationale: Repaying a loan decreases cash (an asset) and reduces the loan liability,
maintaining the balance sheet equation.
10. A company’s balance sheet shows a negative retained earnings balance. What does this
indicate?
A. Excess dividends paid
B. Accumulated losses exceeding profits
C. High debt levels
D. Increased shareholder investments
Rationale: Negative retained earnings indicate that cumulative losses and/or dividends exceed
profits, reducing equity, per GAAP reporting.
Adjusting Entries
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11. A company pays $12,000 for a one-year insurance policy on January 1. What is the
adjusting entry on March 31?
A. Debit Insurance Expense $12,000, Credit Prepaid Insurance $12,000
B. Debit Insurance Expense $3,000, Credit Prepaid Insurance $3,000
C. Debit Prepaid Insurance $3,000, Credit Cash $3,000
D. Debit Insurance Expense $9,000, Credit Prepaid Insurance $9,000
Rationale: Three months (Jan-Mar) of coverage = $12,000 ÷ 12 × 3 = $3,000. The adjusting
entry recognizes the expired portion as an expense, reducing the prepaid asset, per accrual
accounting.
12. A company records $5,000 of depreciation for equipment. What is the adjusting entry?
A. Debit Equipment $5,000, Credit Cash $5,000
B. Debit Depreciation Expense $5,000, Credit Accumulated Depreciation
$5,000
C. Debit Accumulated Depreciation $5,000, Credit Equipment $5,000
D. Debit Depreciation Expense $5,000, Credit Cash $5,000
Rationale: Depreciation allocates equipment cost over its useful life, increasing Depreciation
Expense (income statement) and Accumulated Depreciation (balance sheet contra-asset), per
GAAP.
13. On December 31, a company estimates $2,000 in uncollectible accounts. What is the
adjusting entry?
A. Debit Accounts Receivable $2,000, Credit Bad Debt Expense $2,000
B. Debit Bad Debt Expense $2,000, Credit Allowance for Doubtful Accounts
$2,000
C. Debit Allowance for Doubtful Accounts $2,000, Credit Accounts Receivable $2,000
D. Debit Bad Debt Expense $2,000, Credit Cash $2,000
Rationale: The allowance method estimates uncollectible receivables, increasing Bad Debt
Expense and the Allowance for Doubtful Accounts (a contra-asset), per GAAP.
14. A company receives $6,000 for services to be performed next month. What is the
adjusting entry on December 31?
A. Debit Unearned Revenue $6,000, Credit Service Revenue $6,000
B. No adjusting entry needed
C. Debit Cash $6,000, Credit Unearned Revenue $6,000
D. Debit Service Revenue $6,000, Credit Accounts Receivable $6,000
Rationale: Cash received for future services is recorded as Unearned Revenue (a liability). No
adjusting entry is needed until services are performed, per the revenue recognition principle.
15. A company accrues $1,500 in salaries unpaid at year-end. What is the adjusting entry?
A. Debit Cash $1,500, Credit Salaries Expense $1,500
