FAC1601 - Financial Accounting and Reporting
Exam Prep 2025–2026 | Verified Application
Questions with Correct Answers & Detailed
Rationales | University of South Africa
(UNISA) | Complete Study Guide for Fall
Semester 2025
Question 1:
What is the primary purpose of financial accounting?
A) To prepare tax returns
B) To provide financial information to external users
C) To manage internal operations
D) To evaluate employee performance
Rationale: Financial accounting focuses on producing financial statements for external
stakeholders like investors and creditors.
Question 2:
Which of the following is not a financial statement?
A) Balance Sheet
B) Income Statement
C) Cash Flow Analysis
D) Statement of Changes in Equity
Rationale: Cash flow analysis is not a formal financial statement but is often included
in financial reporting.
Question 3:
What is meant by "accrual accounting"?
A) Recognizing revenue when cash is received
B) Recognizing revenue when earned and expenses when incurred
C) Only recognizing cash transactions
D) Ignoring timing of revenue and expenses
Rationale: Accrual accounting aligns revenue and expenses with the period they occur,
regardless of cash flow.
Question 4:
Which accounting principle requires that expenses be matched with revenues?
,A) Matching Principle
B) Revenue Recognition Principle
C) Historical Cost Principle
D) Full Disclosure Principle
Rationale: The matching principle ensures that expenses are recorded in the same
period as the revenues they help generate.
Question 5:
What does the term "liability" refer to?
A) Owner's equity
B) Obligations of the business to pay debts
C) Revenue earned
D) Assets owned
Rationale: Liabilities are the debts and obligations that a company must settle in the
future.
Question 6:
What is the significance of the "trial balance"?
A) To ensure that total debits equal total credits
B) To prepare the income statement
C) To calculate cash flow
D) To assess profitability
Rationale: The trial balance is an internal report that confirms that the accounting
equation is in balance.
Question 7:
Which of the following is an example of a current asset?
A) Land
B) Accounts Receivable
C) Long-term Investments
D) Equipment
Rationale: Current assets are expected to be converted into cash or consumed within
one year, such as accounts receivable.
Question 8:
What does "depreciation" refer to in accounting?
,A) Increase in asset value
B) Allocation of the cost of tangible assets over their useful lives
C) Cash outflow for asset purchase
D) Loss of asset
Rationale: Depreciation spreads the cost of an asset over its useful life, reflecting its
diminishing value.
Question 9:
What is the purpose of the income statement?
A) To show financial position at a point in time
B) To summarize revenues and expenses over a period
C) To track cash flows
D) To record assets and liabilities
Rationale: The income statement provides a summary of a company’s profitability
during a specific period.
Question 10:
What is meant by "retained earnings"?
A) Cumulative profits not distributed to shareholders
B) Total liabilities
C) Revenue from sales
D) Cash reserves
Rationale: Retained earnings represent the portion of net income that is reinvested in
the business rather than paid out as dividends.
Question 11:
Which of the following is a characteristic of a sole proprietorship?
A) Limited liability
B) Unlimited liability
C) Separate legal entity
D) Complex taxation
Rationale: A sole proprietorship does not offer limited liability protection, meaning the
owner is personally responsible for debts.
Question 12:
What does the "going concern" assumption imply?
, A) The entity will continue its operations for the foreseeable future
B) The company is closing
C) Assets will be liquidated
D) Future profits are guaranteed
Rationale: The going concern assumption is fundamental for financial statements,
indicating that the business will remain operational.
Question 13:
What is included in "operating expenses"?
A) Cost of goods sold
B) Rent, utilities, and salaries
C) Long-term investments
D) Interest income
Rationale: Operating expenses are costs incurred during normal business operations,
excluding the cost of goods sold.
Question 14:
What is the effect of issuing shares on the balance sheet?
A) Decrease in assets
B) Increase in liabilities
C) Increase in equity
D) No effect
Rationale: Issuing shares increases the equity section of the balance sheet,
representing funds raised from shareholders.
Question 15:
Which accounting method recognizes revenue when it is earned?
A) Accrual Basis
B) Cash Basis
C) Modified Cash Basis
D) None of the above
Rationale: The accrual basis of accounting recognizes revenue when it is earned,
regardless of cash receipt.
Question 16:
What does "materiality" refer to in financial reporting?
Exam Prep 2025–2026 | Verified Application
Questions with Correct Answers & Detailed
Rationales | University of South Africa
(UNISA) | Complete Study Guide for Fall
Semester 2025
Question 1:
What is the primary purpose of financial accounting?
A) To prepare tax returns
B) To provide financial information to external users
C) To manage internal operations
D) To evaluate employee performance
Rationale: Financial accounting focuses on producing financial statements for external
stakeholders like investors and creditors.
Question 2:
Which of the following is not a financial statement?
A) Balance Sheet
B) Income Statement
C) Cash Flow Analysis
D) Statement of Changes in Equity
Rationale: Cash flow analysis is not a formal financial statement but is often included
in financial reporting.
Question 3:
What is meant by "accrual accounting"?
A) Recognizing revenue when cash is received
B) Recognizing revenue when earned and expenses when incurred
C) Only recognizing cash transactions
D) Ignoring timing of revenue and expenses
Rationale: Accrual accounting aligns revenue and expenses with the period they occur,
regardless of cash flow.
Question 4:
Which accounting principle requires that expenses be matched with revenues?
,A) Matching Principle
B) Revenue Recognition Principle
C) Historical Cost Principle
D) Full Disclosure Principle
Rationale: The matching principle ensures that expenses are recorded in the same
period as the revenues they help generate.
Question 5:
What does the term "liability" refer to?
A) Owner's equity
B) Obligations of the business to pay debts
C) Revenue earned
D) Assets owned
Rationale: Liabilities are the debts and obligations that a company must settle in the
future.
Question 6:
What is the significance of the "trial balance"?
A) To ensure that total debits equal total credits
B) To prepare the income statement
C) To calculate cash flow
D) To assess profitability
Rationale: The trial balance is an internal report that confirms that the accounting
equation is in balance.
Question 7:
Which of the following is an example of a current asset?
A) Land
B) Accounts Receivable
C) Long-term Investments
D) Equipment
Rationale: Current assets are expected to be converted into cash or consumed within
one year, such as accounts receivable.
Question 8:
What does "depreciation" refer to in accounting?
,A) Increase in asset value
B) Allocation of the cost of tangible assets over their useful lives
C) Cash outflow for asset purchase
D) Loss of asset
Rationale: Depreciation spreads the cost of an asset over its useful life, reflecting its
diminishing value.
Question 9:
What is the purpose of the income statement?
A) To show financial position at a point in time
B) To summarize revenues and expenses over a period
C) To track cash flows
D) To record assets and liabilities
Rationale: The income statement provides a summary of a company’s profitability
during a specific period.
Question 10:
What is meant by "retained earnings"?
A) Cumulative profits not distributed to shareholders
B) Total liabilities
C) Revenue from sales
D) Cash reserves
Rationale: Retained earnings represent the portion of net income that is reinvested in
the business rather than paid out as dividends.
Question 11:
Which of the following is a characteristic of a sole proprietorship?
A) Limited liability
B) Unlimited liability
C) Separate legal entity
D) Complex taxation
Rationale: A sole proprietorship does not offer limited liability protection, meaning the
owner is personally responsible for debts.
Question 12:
What does the "going concern" assumption imply?
, A) The entity will continue its operations for the foreseeable future
B) The company is closing
C) Assets will be liquidated
D) Future profits are guaranteed
Rationale: The going concern assumption is fundamental for financial statements,
indicating that the business will remain operational.
Question 13:
What is included in "operating expenses"?
A) Cost of goods sold
B) Rent, utilities, and salaries
C) Long-term investments
D) Interest income
Rationale: Operating expenses are costs incurred during normal business operations,
excluding the cost of goods sold.
Question 14:
What is the effect of issuing shares on the balance sheet?
A) Decrease in assets
B) Increase in liabilities
C) Increase in equity
D) No effect
Rationale: Issuing shares increases the equity section of the balance sheet,
representing funds raised from shareholders.
Question 15:
Which accounting method recognizes revenue when it is earned?
A) Accrual Basis
B) Cash Basis
C) Modified Cash Basis
D) None of the above
Rationale: The accrual basis of accounting recognizes revenue when it is earned,
regardless of cash receipt.
Question 16:
What does "materiality" refer to in financial reporting?
