Financial accounting is a branch of accounting that focuses on the recording, summarizing, and reporting of a company’s financial transactions and activities. Its primary purpose is to provide relevant and reliable financial information to external stakeholders, such as investors, creditors, regulators, and the general public. The information generated through financial accounting helps users make informed decisions about the company’s financial health and performance.

Key features of financial accounting include:

Financial Statements: The core output of financial accounting is the preparation of financial statements, which include the balance sheet (statement of financial position), income statement (profit and loss statement), and cash flow statement. These statements summarize the financial position, results of operations, and cash flows of the business.

Generally Accepted Accounting Principles (GAAP): Financial accounting follows specific accounting principles and standards known as GAAP, which are established by various accounting standard-setting bodies in each country. GAAP ensures consistency, comparability, and transparency in financial reporting.

Accrual Basis of Accounting: Financial accounting generally follows the accrual basis of accounting, which records revenues and expenses when they are earned or incurred, regardless of when the associated cash is received or paid.

External Users: The information produced by financial accounting is primarily intended for external users, such as investors, creditors, suppliers, customers, and government agencies, to assess the company’s financial performance and make decisions related to their interactions with the business.

Article outline

• Part 1: 30 financial accounting quiz questions & answers
• Part 2: Download financial accounting questions & answers for free
• Part 3: Free online quiz creator – OnlineExamMaker

Part 1: 30 financial accounting quiz questions & answers

1. Which financial statement reports a company’s financial position at a specific point in time?
a) Income Statement
b) Balance Sheet
c) Cash Flow Statement
d) Statement of Retained Earnings
Answer: b) Balance Sheet

2. The process of systematically allocating the cost of tangible assets over their useful lives is called:
a) Depreciation
b) Amortization
c) Impairment
d) Depletion
Answer: a) Depreciation

3. Which accounting principle requires expenses to be recognized in the same period as the revenues they help generate?
a) Materiality
b) Consistency
c) Matching Principle
d) Conservatism
Answer: c) Matching Principle

4. Cash and cash equivalents are typically reported under which section of the balance sheet?
a) Current Assets
b) Long-term Assets
c) Current Liabilities
d) Long-term Liabilities
Answer: a) Current Assets

5. What type of account is “Accounts Receivable”?
a) Asset
b) Liability
c) Equity
d) Revenue
Answer: a) Asset

6. Which financial statement shows a company’s revenues and expenses over a specific period?
a) Balance Sheet
b) Income Statement
c) Cash Flow Statement
d) Statement of Stockholders’ Equity
Answer: b) Income Statement

7. The process of transferring journal entries to the ledger accounts is called:
a) Posting
b) Adjusting
c) Balancing
d) Closing
Answer: a) Posting

8. Which accounting method records revenue when it is earned, and expenses when they are incurred, regardless of cash flow?
a) Accrual Basis
b) Cash Basis
c) Hybrid Basis
d) Inflation Basis
Answer: a) Accrual Basis

9. A company’s debt-to-equity ratio is calculated by dividing:
a) Total Assets by Total Equity
b) Total Liabilities by Total Equity
c) Total Debt by Total Equity
d) Total Revenue by Total Equity
Answer: b) Total Liabilities by Total Equity

10. Which financial statement reports the net increase or decrease in a company’s cash during a specific period?
a) Balance Sheet
b) Income Statement
c) Cash Flow Statement
d) Statement of Retained Earnings
Answer: c) Cash Flow Statement

11. Under which method of inventory accounting are the most recent inventory costs matched with current revenues?
a) LIFO (Last-In, First-Out)
b) FIFO (First-In, First-Out)
c) Average Cost Method
d) Specific Identification Method
Answer: b) FIFO (First-In, First-Out)

12. Which of the following represents the accounting equation?
a) Assets = Liabilities + Equity
b) Assets + Liabilities = Equity
c) Assets – Liabilities = Equity
d) Assets + Equity = Liabilities
Answer: a) Assets = Liabilities + Equity

13. What is the purpose of the “trial balance” in financial accounting?
a) To prepare financial statements
b) To verify the accuracy of debit and credit entries
c) To calculate net income
d) To record adjusting entries
Answer: b) To verify the accuracy of debit and credit entries

14. Which financial statement provides an overview of a company’s changes in equity during a specific period?
a) Income Statement
b) Balance Sheet
c) Cash Flow Statement
d) Statement of Retained Earnings
Answer: d) Statement of Retained Earnings

15. Which of the following is NOT a type of financial statement?
a) Trial Balance
b) Balance Sheet
c) Income Statement
d) Cash Flow Statement
Answer: a) Trial Balance

Part 2: Download financial accounting questions & answers for free

16. The process of allocating the cost of intangible assets over their useful lives is called:
a) Depreciation
b) Amortization
c) Impairment
d) Depletion
Answer: b) Amortization

17. A company’s ability to pay its short-term obligations is assessed using which financial ratio?
a) Debt-to-Equity Ratio
b) Current Ratio
c) Return on Equity (ROE)
d) Gross Profit Margin
Answer: b) Current Ratio

18. Which financial statement reports the changes in a company’s retained earnings during a specific period?
a) Income Statement
b) Balance Sheet
c) Cash Flow Statement
d) Statement of Retained Earnings
Answer: d) Statement of Retained Earnings

19. The process of adjusting journal entries is primarily performed to:
a) Correct errors in the financial statements
b) Update the financial statements with current data
c) Close temporary accounts at the end of the period
d) Reconcile bank statements
Answer: b) Update the financial statements with current data

20. Which accounting principle states that assets should be recorded at their historical cost rather than their current market value?
a) Matching Principle
b) Revenue Recognition Principle
c) Cost Principle
d) Going Concern Assumption
Answer: c) Cost Principle

21. When a company sells goods on credit, which accounts are affected?
a) Accounts Receivable increases, Sales Revenue increases
b) Accounts Payable increases, Sales Revenue increases
c) Accounts Receivable increases, Cost of Goods Sold increases
d) Accounts Payable increases, Cost of Goods Sold increases
Answer: a) Accounts Receivable increases, Sales Revenue increases

22. The accounting equation must always remain in balance because of the principle of:
a) Materiality
b) Conservatism
c) Consistency
d) Dual Aspect Concept
Answer: d) Dual Aspect Concept

23. Which of the following is NOT considered an intangible asset?
a) Patents
b) Buildings
c) Trademarks
d) Goodwill
Answer: b) Buildings

24. When a company receives cash in advance from a customer for services to be provided in the future, which account is credited?
a) Accounts Receivable
b) Cash
c) Unearned Revenue
d) Revenue
Answer: c) Unearned Revenue

25. Which financial statement reports the change in a company’s cash and cash equivalents during a specific period?
a) Income Statement
b) Balance Sheet
c) Statement of Cash Flows
d) Statement of Changes in Equity
Answer: c) Statement of Cash Flows

26. The process of formally recording and recognizing a financial transaction in the accounting records is known as:
a) Reporting
b) Analyzing
c) Posting
d) Auditing
Answer: c) Posting

27. Which financial statement provides information about a company’s revenue and expenses over a specific period?
a) Income Statement
b) Balance Sheet
c) Cash Flow Statement
d) Statement of Changes in Equity
Answer: a) Income Statement

When recording an adjusting entry for accrued expenses, which accounts are affected?
a) Assets increase, Liabilities increase
b) Expenses increase, Liabilities increase
c) Expenses increase, Equity increases
d) Liabilities decrease, Equity increases
Answer: b) Expenses increase, Liabilities increase

The primary purpose of the statement of cash flows is to:
a) Show the changes in a company’s equity during a period
b) Provide information about the company’s cash receipts and payments
c) Report the company’s revenues and expenses for a specific period
d) Detail the company’s assets, liabilities, and equity at a specific point in time
Answer: b) Provide information about the company’s cash receipts and payments

Which financial ratio measures a company’s profitability by comparing net income to its average total assets?
a) Return on Equity (ROE)
b) Gross Profit Margin
c) Return on Assets (ROA)
d) Debt-to-Equity Ratio
Answer: c) Return on Assets (ROA)

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