ACC 201 – FINANCIAL ACCOUNTING | COMPLETE EXAM 2026/2027 |
QUESTIONS AND 100% VERIFIED ANSWERS | PASS GUARANTEE
Q1. What is the primary purpose of financial accounting? ANSWER The
primary purpose of financial accounting is to provide financial information about a
business to external users (such as investors, creditors, and regulators) to help
them make economic decisions.
Q2. What are the four basic financial statements? ANSWER 1) Income
Statement, 2) Balance Sheet (Statement of Financial Position), 3) Statement of
Retained Earnings (or Statement of Changes in Equity), 4) Statement of Cash
Flows.
Q3. What is the accounting equation? ANSWER Assets = Liabilities +
Stockholders’ Equity (or Assets = Liabilities + Owner’s Equity)
Q4. Define an asset. ANSWER An asset is an economic resource that is
expected to provide future economic benefit to the business. Examples include
cash, accounts receivable, inventory, and equipment.
Q5. Define a liability. ANSWER A liability is an obligation of the business to
transfer economic resources to another party in the future. Examples include
accounts payable, notes payable, and salaries payable.
Q6. Define stockholders’ equity. ANSWER Stockholders’ equity represents
the owners’ claim on the assets of the business after all liabilities have been paid.
It consists of common stock (contributions by owners) and retained earnings
(accumulated profits).
Q7. What is the difference between financial accounting and managerial
accounting? ANSWER Financial accounting provides information to external
users and follows GAAP, while managerial accounting provides information to
internal managers for decision-making and does not need to follow GAAP.
,Q8. What does GAAP stand for? ANSWER Generally Accepted Accounting
Principles.
Q9. What is the Securities and Exchange Commission (SEC)? ANSWER
The SEC is a U.S. government agency that regulates the financial reporting of
publicly traded companies and enforces securities laws.
Q10. What is the role of the Financial Accounting Standards Board (FASB)?
ANSWER The FASB is the private-sector body that establishes and improves
financial accounting and reporting standards (GAAP) in the United States.
Q11. What is a sole proprietorship? ANSWER A business owned by one
person. The owner has unlimited liability, and the business is not a separate legal
entity from the owner.
Q12. What is a partnership? ANSWER A business owned by two or more
people who share profits and losses. Partners generally have unlimited liability.
Q13. What is a corporation? ANSWER A legal entity separate from its owners
(stockholders). Stockholders have limited liability, and ownership is represented
by shares of stock.
Q14. What is the difference between a current asset and a long-term asset?
ANSWER Current assets are expected to be converted to cash or used up within
one year or the operating cycle, whichever is longer. Long-term assets are
expected to provide benefits for more than one year.
Q15. What is the difference between a current liability and a long-term
liability? ANSWER Current liabilities are obligations due within one year or the
operating cycle. Long-term liabilities are obligations due after one year.
Q16. What is retained earnings? ANSWER Retained earnings is the
cumulative net income earned by the company minus any dividends paid to
stockholders since the company’s inception.
Q17. What is the income statement equation? ANSWER Revenues -
Expenses = Net Income (or Net Loss)
Q18. What is the balance sheet equation? ANSWER Assets = Liabilities +
Stockholders’ Equity
, Q19. What is the statement of retained earnings equation? ANSWER
Beginning Retained Earnings + Net Income - Dividends = Ending Retained
Earnings
Q20. What are revenues? ANSWER Revenues are inflows of assets (or
reductions of liabilities) from providing goods or services to customers.
Q21. What are expenses? ANSWER Expenses are outflows of assets (or
increases in liabilities) incurred to generate revenues.
Q22. What is net income? ANSWER Net income occurs when revenues
exceed expenses. It increases stockholders’ equity.
Q23. What is a net loss? ANSWER A net loss occurs when expenses exceed
revenues. It decreases stockholders’ equity.
Q24. What are dividends? ANSWER Dividends are distributions of earnings to
stockholders. They reduce retained earnings but are not expenses.
Q25. What is the operating cycle? ANSWER The operating cycle is the
average time it takes to purchase inventory, sell it, and collect cash from
customers.
SECTION 2: RECORDING TRANSACTIONS (Questions 26-60)
Q26. What is the double-entry accounting system? ANSWER A system
where every transaction affects at least two accounts, with total debits equaling
total credits.
Q27. What is a debit? ANSWER A debit is an entry on the left side of an
account that increases assets and expenses, and decreases liabilities, equity,
and revenues.
Q28. What is a credit? ANSWER A credit is an entry on the right side of an
account that increases liabilities, equity, and revenues, and decreases assets
and expenses.
Q29. What is the normal balance of an asset account? ANSWER Debit
balance.
Q30. What is the normal balance of a liability account? ANSWER Credit
balance.
QUESTIONS AND 100% VERIFIED ANSWERS | PASS GUARANTEE
Q1. What is the primary purpose of financial accounting? ANSWER The
primary purpose of financial accounting is to provide financial information about a
business to external users (such as investors, creditors, and regulators) to help
them make economic decisions.
Q2. What are the four basic financial statements? ANSWER 1) Income
Statement, 2) Balance Sheet (Statement of Financial Position), 3) Statement of
Retained Earnings (or Statement of Changes in Equity), 4) Statement of Cash
Flows.
Q3. What is the accounting equation? ANSWER Assets = Liabilities +
Stockholders’ Equity (or Assets = Liabilities + Owner’s Equity)
Q4. Define an asset. ANSWER An asset is an economic resource that is
expected to provide future economic benefit to the business. Examples include
cash, accounts receivable, inventory, and equipment.
Q5. Define a liability. ANSWER A liability is an obligation of the business to
transfer economic resources to another party in the future. Examples include
accounts payable, notes payable, and salaries payable.
Q6. Define stockholders’ equity. ANSWER Stockholders’ equity represents
the owners’ claim on the assets of the business after all liabilities have been paid.
It consists of common stock (contributions by owners) and retained earnings
(accumulated profits).
Q7. What is the difference between financial accounting and managerial
accounting? ANSWER Financial accounting provides information to external
users and follows GAAP, while managerial accounting provides information to
internal managers for decision-making and does not need to follow GAAP.
,Q8. What does GAAP stand for? ANSWER Generally Accepted Accounting
Principles.
Q9. What is the Securities and Exchange Commission (SEC)? ANSWER
The SEC is a U.S. government agency that regulates the financial reporting of
publicly traded companies and enforces securities laws.
Q10. What is the role of the Financial Accounting Standards Board (FASB)?
ANSWER The FASB is the private-sector body that establishes and improves
financial accounting and reporting standards (GAAP) in the United States.
Q11. What is a sole proprietorship? ANSWER A business owned by one
person. The owner has unlimited liability, and the business is not a separate legal
entity from the owner.
Q12. What is a partnership? ANSWER A business owned by two or more
people who share profits and losses. Partners generally have unlimited liability.
Q13. What is a corporation? ANSWER A legal entity separate from its owners
(stockholders). Stockholders have limited liability, and ownership is represented
by shares of stock.
Q14. What is the difference between a current asset and a long-term asset?
ANSWER Current assets are expected to be converted to cash or used up within
one year or the operating cycle, whichever is longer. Long-term assets are
expected to provide benefits for more than one year.
Q15. What is the difference between a current liability and a long-term
liability? ANSWER Current liabilities are obligations due within one year or the
operating cycle. Long-term liabilities are obligations due after one year.
Q16. What is retained earnings? ANSWER Retained earnings is the
cumulative net income earned by the company minus any dividends paid to
stockholders since the company’s inception.
Q17. What is the income statement equation? ANSWER Revenues -
Expenses = Net Income (or Net Loss)
Q18. What is the balance sheet equation? ANSWER Assets = Liabilities +
Stockholders’ Equity
, Q19. What is the statement of retained earnings equation? ANSWER
Beginning Retained Earnings + Net Income - Dividends = Ending Retained
Earnings
Q20. What are revenues? ANSWER Revenues are inflows of assets (or
reductions of liabilities) from providing goods or services to customers.
Q21. What are expenses? ANSWER Expenses are outflows of assets (or
increases in liabilities) incurred to generate revenues.
Q22. What is net income? ANSWER Net income occurs when revenues
exceed expenses. It increases stockholders’ equity.
Q23. What is a net loss? ANSWER A net loss occurs when expenses exceed
revenues. It decreases stockholders’ equity.
Q24. What are dividends? ANSWER Dividends are distributions of earnings to
stockholders. They reduce retained earnings but are not expenses.
Q25. What is the operating cycle? ANSWER The operating cycle is the
average time it takes to purchase inventory, sell it, and collect cash from
customers.
SECTION 2: RECORDING TRANSACTIONS (Questions 26-60)
Q26. What is the double-entry accounting system? ANSWER A system
where every transaction affects at least two accounts, with total debits equaling
total credits.
Q27. What is a debit? ANSWER A debit is an entry on the left side of an
account that increases assets and expenses, and decreases liabilities, equity,
and revenues.
Q28. What is a credit? ANSWER A credit is an entry on the right side of an
account that increases liabilities, equity, and revenues, and decreases assets
and expenses.
Q29. What is the normal balance of an asset account? ANSWER Debit
balance.
Q30. What is the normal balance of a liability account? ANSWER Credit
balance.
