,Fundamental Accounting Principles Vol. 1 (16th Ed.)
2026/2027 Final Exam Study Guide – Test Bank & Solutions
Instructions: Each question has one correct answer, marked with a ✓. Use this guide to test
your knowledge and prepare for the exam.
Chapter 1: Accounting in Business
1. What is the primary purpose of accounting?
A) To record financial transactions only.
B) To provide information useful for decision-making. ✓
C) To ensure a company is profitable.
D) To calculate taxes owed to the government.
2. Which of the following is NOT a core activity of accounting?
A) Identification.
B) Recording.
C) Communication.
D) Speculation. ✓
3. The group that sets International Financial Reporting Standards (IFRS) is the:
A) SEC.
B) FASB.
C) IASB. ✓
D) GAAP.
4. The principle that assumes a business will continue operating long enough to carry out its
objectives is the:
A) Monetary unit assumption.
B) Going-concern assumption. ✓
C) Time period assumption.
D) Business entity assumption.
5. Assets = Liabilities + Equity is known as the:
A) Income Statement equation.
B) Accounting equation. ✓
C) Cash flow rule.
D) Dual aspect concept.
,Chapter 2: Analyzing and Recording Transactions
6. An account is a detailed record of increases and decreases in a specific:
A) Asset, liability, or equity item. ✓
B) Business transaction only.
C) Revenue or expense.
D) Owner's investment.
7. A debit signifi es:
A) An increase in Assets and a decrease in Liabilities.
B) An increase in Assets and Expenses. ✓
C) A decrease in Equity and Revenue.
D) An increase in Liabilities and Revenue.
8. Which of the following sequences is the normal order of steps in the recording process?
A) Journal, Ledger, Trial Balance. ✓
B) Ledger, Journal, Trial Balance.
C) Trial Balance, Journal, Ledger.
D) Journal, Trial Balance, Ledger.
9. Purchasing offi ce supplies on credit will:
A) Increase an asset and increase a liability. ✓
B) Increase an asset and increase equity.
C) Increase one asset and decrease another asset.
D) Increase an expense and decrease an asset.
10. The right side of a T-account is always the:
A) Debit side.
B) Credit side. ✓
C) Increase side.
D) Decrease side.
Chapter 3: Adjusting Accounts for Financial Statements
11. Adjusting entries are made to ensure that:
A) Expenses are recognized in the period they are paid.
B) Revenues are recorded in the period they are received.
, C) The revenue recognition and expense recognition principles are followed. ✓
D) The trial balance is in balance.
12. An accrued expense is an expense that has:
A) Been incurred but not yet paid. ✓
B) Been paid but not yet incurred.
C) Been recorded and paid.
D) Not yet been recorded or paid.
13. A company pays $2,400 for a 12-month insurance policy on November 1. The adjusting
entry on December 31 would include a:
A) Debit to Insurance Expense for $400. ✓
B) Credit to Prepaid Insurance for $400.
C) Debit to Prepaid Insurance for $2,000.
D) Credit to Insurance Expense for $2,400.
14. Depreciation is the process of:
A) Valuing an asset at its market value.
B) Allocating the cost of a plant asset to expense over its useful life. ✓
C) Setting aside cash for asset replacement.
D) Recording the physical deterioration of an asset.
15. After all adjusting entries are posted, which financial statement is prepared first?
A) Statement of Cash Flows.
B) Balance Sheet.
C) Income Statement. ✓
D) Statement of Retained Earnings.
Chapter 4: Completing the Accounting Cycle
16. The purpose of closing entries is to:
A) Zero out temporary accounts and update Retained Earnings. ✓
B) Correct errors in the accounting records.
C) Adjust asset and liability accounts to their correct balances.
D) Prepare for the next tax year.
17. Which of the following accounts is a permanent (real) account?
A) Service Revenue.
B) Salaries Expense.
2026/2027 Final Exam Study Guide – Test Bank & Solutions
Instructions: Each question has one correct answer, marked with a ✓. Use this guide to test
your knowledge and prepare for the exam.
Chapter 1: Accounting in Business
1. What is the primary purpose of accounting?
A) To record financial transactions only.
B) To provide information useful for decision-making. ✓
C) To ensure a company is profitable.
D) To calculate taxes owed to the government.
2. Which of the following is NOT a core activity of accounting?
A) Identification.
B) Recording.
C) Communication.
D) Speculation. ✓
3. The group that sets International Financial Reporting Standards (IFRS) is the:
A) SEC.
B) FASB.
C) IASB. ✓
D) GAAP.
4. The principle that assumes a business will continue operating long enough to carry out its
objectives is the:
A) Monetary unit assumption.
B) Going-concern assumption. ✓
C) Time period assumption.
D) Business entity assumption.
5. Assets = Liabilities + Equity is known as the:
A) Income Statement equation.
B) Accounting equation. ✓
C) Cash flow rule.
D) Dual aspect concept.
,Chapter 2: Analyzing and Recording Transactions
6. An account is a detailed record of increases and decreases in a specific:
A) Asset, liability, or equity item. ✓
B) Business transaction only.
C) Revenue or expense.
D) Owner's investment.
7. A debit signifi es:
A) An increase in Assets and a decrease in Liabilities.
B) An increase in Assets and Expenses. ✓
C) A decrease in Equity and Revenue.
D) An increase in Liabilities and Revenue.
8. Which of the following sequences is the normal order of steps in the recording process?
A) Journal, Ledger, Trial Balance. ✓
B) Ledger, Journal, Trial Balance.
C) Trial Balance, Journal, Ledger.
D) Journal, Trial Balance, Ledger.
9. Purchasing offi ce supplies on credit will:
A) Increase an asset and increase a liability. ✓
B) Increase an asset and increase equity.
C) Increase one asset and decrease another asset.
D) Increase an expense and decrease an asset.
10. The right side of a T-account is always the:
A) Debit side.
B) Credit side. ✓
C) Increase side.
D) Decrease side.
Chapter 3: Adjusting Accounts for Financial Statements
11. Adjusting entries are made to ensure that:
A) Expenses are recognized in the period they are paid.
B) Revenues are recorded in the period they are received.
, C) The revenue recognition and expense recognition principles are followed. ✓
D) The trial balance is in balance.
12. An accrued expense is an expense that has:
A) Been incurred but not yet paid. ✓
B) Been paid but not yet incurred.
C) Been recorded and paid.
D) Not yet been recorded or paid.
13. A company pays $2,400 for a 12-month insurance policy on November 1. The adjusting
entry on December 31 would include a:
A) Debit to Insurance Expense for $400. ✓
B) Credit to Prepaid Insurance for $400.
C) Debit to Prepaid Insurance for $2,000.
D) Credit to Insurance Expense for $2,400.
14. Depreciation is the process of:
A) Valuing an asset at its market value.
B) Allocating the cost of a plant asset to expense over its useful life. ✓
C) Setting aside cash for asset replacement.
D) Recording the physical deterioration of an asset.
15. After all adjusting entries are posted, which financial statement is prepared first?
A) Statement of Cash Flows.
B) Balance Sheet.
C) Income Statement. ✓
D) Statement of Retained Earnings.
Chapter 4: Completing the Accounting Cycle
16. The purpose of closing entries is to:
A) Zero out temporary accounts and update Retained Earnings. ✓
B) Correct errors in the accounting records.
C) Adjust asset and liability accounts to their correct balances.
D) Prepare for the next tax year.
17. Which of the following accounts is a permanent (real) account?
A) Service Revenue.
B) Salaries Expense.
