,Chapter 1: Accounting in Business
Theme: Introduction to the role of accounting in decision-making, users of
accounting information, the accounting equation, financial statements, ethics, and
business type
Question 1
Which of the following best illustrates how accounting serves as an “information
system” within a business context?
A. By managing employee payrolls
B. By summarizing, analyzing, and reporting financial data for decision-making
C. By preparing internal memos and operational schedules
D. By collecting inventory for physical audits
✅ Correct Answer: B
Rationale: Accounting acts as an information system by identifying, recording,
and communicating relevant economic data to stakeholders. It goes beyond
bookkeeping to deliver insights for decision-making, fulfilling an essential function
for users both inside and outside the organization.
Question 2
A company that reports to external users such as investors and regulatory bodies is
engaged in:
A. Forensic accounting
B. Auditing services
C. Managerial accounting
D. Financial accounting
✅ Correct Answer: D
Rationale: Financial accounting is geared toward providing standardized financial
information to external users, including investors, creditors, and regulatory
agencies. Managerial accounting, by contrast, serves internal decision-makers.
,Question 3
The most fundamental component of the accounting equation is:
A. Income = Revenues – Expenses
B. Assets = Liabilities – Equity
C. Assets = Liabilities + Equity
D. Equity = Assets + Liabilities
✅ Correct Answer: C
Rationale: The core of financial accounting is the accounting equation: Assets =
Liabilities + Equity. It captures the balance between resources owned and claims
against them, forming the foundation of all financial statements.
Question 4
If a company’s liabilities increase by $30,000 and assets increase by $50,000, then
equity must:
A. Increase by $20,000
B. Decrease by $20,000
C. Increase by $80,000
D. Remain unchanged
✅ Correct Answer: A
Rationale: The accounting equation (A = L + E) requires that if assets increase by
$50,000 and liabilities increase by $30,000, the difference must be accounted for by
an increase in equity of $20,000.
Question 5
Which statement is not considered one of the four primary financial statements?
A. Statement of retained earnings
B. Statement of operations
, C. Balance sheet
D. Statement of cash flows
✅ Correct Answer: B
Rationale: The "statement of operations" is not a standard financial statement term.
The four major financial statements are the balance sheet, income statement,
statement of retained earnings, and statement of cash flows.
Question 6
Ethical behavior in accounting is essential primarily because:
A. It is enforced by federal law
B. It promotes transparency and stakeholder trust
C. It reduces payroll taxes
D. It speeds up financial reporting
✅ Correct Answer: B
Rationale: Ethical behavior ensures credibility, transparency, and trust in the
financial information provided to users. Unethical practices undermine stakeholder
confidence and can lead to legal and reputational damage.
Question 7
Which of the following best differentiates a sole proprietorship from a
corporation?
A. Only corporations pay taxes
B. Sole proprietorships are legally distinct entities
C. Owners of corporations have limited liability
D. Sole proprietorships are required to issue stock
✅ Correct Answer: C
Rationale: A key distinction is that corporations offer limited liability to their
owners, meaning shareholders are not personally liable for business debts, unlike
sole proprietorships.
Theme: Introduction to the role of accounting in decision-making, users of
accounting information, the accounting equation, financial statements, ethics, and
business type
Question 1
Which of the following best illustrates how accounting serves as an “information
system” within a business context?
A. By managing employee payrolls
B. By summarizing, analyzing, and reporting financial data for decision-making
C. By preparing internal memos and operational schedules
D. By collecting inventory for physical audits
✅ Correct Answer: B
Rationale: Accounting acts as an information system by identifying, recording,
and communicating relevant economic data to stakeholders. It goes beyond
bookkeeping to deliver insights for decision-making, fulfilling an essential function
for users both inside and outside the organization.
Question 2
A company that reports to external users such as investors and regulatory bodies is
engaged in:
A. Forensic accounting
B. Auditing services
C. Managerial accounting
D. Financial accounting
✅ Correct Answer: D
Rationale: Financial accounting is geared toward providing standardized financial
information to external users, including investors, creditors, and regulatory
agencies. Managerial accounting, by contrast, serves internal decision-makers.
,Question 3
The most fundamental component of the accounting equation is:
A. Income = Revenues – Expenses
B. Assets = Liabilities – Equity
C. Assets = Liabilities + Equity
D. Equity = Assets + Liabilities
✅ Correct Answer: C
Rationale: The core of financial accounting is the accounting equation: Assets =
Liabilities + Equity. It captures the balance between resources owned and claims
against them, forming the foundation of all financial statements.
Question 4
If a company’s liabilities increase by $30,000 and assets increase by $50,000, then
equity must:
A. Increase by $20,000
B. Decrease by $20,000
C. Increase by $80,000
D. Remain unchanged
✅ Correct Answer: A
Rationale: The accounting equation (A = L + E) requires that if assets increase by
$50,000 and liabilities increase by $30,000, the difference must be accounted for by
an increase in equity of $20,000.
Question 5
Which statement is not considered one of the four primary financial statements?
A. Statement of retained earnings
B. Statement of operations
, C. Balance sheet
D. Statement of cash flows
✅ Correct Answer: B
Rationale: The "statement of operations" is not a standard financial statement term.
The four major financial statements are the balance sheet, income statement,
statement of retained earnings, and statement of cash flows.
Question 6
Ethical behavior in accounting is essential primarily because:
A. It is enforced by federal law
B. It promotes transparency and stakeholder trust
C. It reduces payroll taxes
D. It speeds up financial reporting
✅ Correct Answer: B
Rationale: Ethical behavior ensures credibility, transparency, and trust in the
financial information provided to users. Unethical practices undermine stakeholder
confidence and can lead to legal and reputational damage.
Question 7
Which of the following best differentiates a sole proprietorship from a
corporation?
A. Only corporations pay taxes
B. Sole proprietorships are legally distinct entities
C. Owners of corporations have limited liability
D. Sole proprietorships are required to issue stock
✅ Correct Answer: C
Rationale: A key distinction is that corporations offer limited liability to their
owners, meaning shareholders are not personally liable for business debts, unlike
sole proprietorships.
