SOLUTION MANUAL FOR FINANCIAL ACCOUNTING
FUNDAMENTALS – CHAPTERS 1–13 SUMMARY
*(BASED ON JOHN WILD, 8TH EDITION / STANDARD
ACCOUNTING CURRICULUM)
,Chapter 1: Accounting in Business
Practice Questions & Explanatory Answers
1. Which of the following best describes accounting?
a) Recording financial transactions only
b) The process of identifying, measuring, and communicating economic
information to permit informed decisions c) Preparing tax returns for
businesses
d) Managing a company’s daily operations
Answer: b) Accounting is an information system that identifies, measures,
records, and communicates relevant, reliable, and comparable information
about economic events.
2. The primary objective of financial accounting is:
a) To help managers plan and control operations
b) To provide information to external users for decision making
c) To compute a company’s tax liability
d) To track employee performance
Answer: b) Financial accounting focuses on providing useful financial
information to external parties like investors, creditors, and regulators.
3. Which is an external user of accounting information?
a) Production manager
b) Company CEO
c) Creditor
d) Human resources manager
Answer: c) Creditors (lenders) are external users; others listed are internal
users.
4. Generally Accepted Accounting Principles (GAAP) are established by: a)
The IRS
b) The SEC
c) The FASB
,d) Individual companies
Answer: c) The Financial Accounting Standards Board (FASB) sets U.S. GAAP.
5. The accounting equation is:
a) Assets = Liabilities + Equity
b) Assets + Liabilities = Equity
c) Assets = Liabilities – Equity
d) Revenue – Expenses = Net Income
Answer: a) The fundamental accounting equation: Assets = Liabilities + Equity.
6. An example of an asset is:
a) Accounts Payable
b) Common Stock
c) Equipment
d) Revenue
Answer: c) Equipment is a tangible long-term asset.
7. Owner’s equity increases when:
a) Expenses increase
b) The owner withdraws cash
c) Revenue is earned
d) Liabilities increase
Answer: c) Revenues increase equity; expenses and withdrawals decrease it.
8. Which statement reports financial position at a point in time?
a) Income Statement
b) Statement of Owner’s Equity
c) Balance Sheet
d) Statement of Cash Flows
Answer: c) The Balance Sheet shows Assets, Liabilities, and Equity on a specific
date.
9. Net income appears on which two statements?
a) Balance Sheet and Income Statement
b) Income Statement and Statement of Owner’s Equity
, c) Balance Sheet and Statement of Cash Flows
d) Statement of Cash Flows and Income Statement
Answer: b) Net income is on the Income Statement and flows into the
Statement of Owner’s Equity.
10. If liabilities increase by $5,000 and equity decreases by $3,000, assets
must:
a) Increase by $8,000
b) Increase by $2,000
c) Decrease by $2,000
d) Decrease by $8,000
Answer: b) Assets = Liabilities + Equity. Change: +$5,000 + (–$3,000) = +$2,000.
11. Which principle states that expenses should be recorded in the
same period as the revenues they helped generate? a) Cost Principle
b) Matching Principle
c) Revenue Recognition Principle
d) Full Disclosure Principle
Answer: b) Matching principle: match expenses with related revenues.
12. The historical cost principle means:
a) Assets are recorded at cost and not adjusted for market value changes
b) Assets are recorded at their resale value
c) Liabilities are recorded at present value
d) Expenses are recorded when paid
Answer: a) Under cost principle, assets are kept at original cost in the
accounts.
13. Going concern assumption assumes:
a) A business will continue operating indefinitely
b) A business will liquidate next year
c) Inflation must be considered
d) The business is a sole proprietorship
Answer: a) Going concern assumes the company will remain in operation for
the foreseeable future.
FUNDAMENTALS – CHAPTERS 1–13 SUMMARY
*(BASED ON JOHN WILD, 8TH EDITION / STANDARD
ACCOUNTING CURRICULUM)
,Chapter 1: Accounting in Business
Practice Questions & Explanatory Answers
1. Which of the following best describes accounting?
a) Recording financial transactions only
b) The process of identifying, measuring, and communicating economic
information to permit informed decisions c) Preparing tax returns for
businesses
d) Managing a company’s daily operations
Answer: b) Accounting is an information system that identifies, measures,
records, and communicates relevant, reliable, and comparable information
about economic events.
2. The primary objective of financial accounting is:
a) To help managers plan and control operations
b) To provide information to external users for decision making
c) To compute a company’s tax liability
d) To track employee performance
Answer: b) Financial accounting focuses on providing useful financial
information to external parties like investors, creditors, and regulators.
3. Which is an external user of accounting information?
a) Production manager
b) Company CEO
c) Creditor
d) Human resources manager
Answer: c) Creditors (lenders) are external users; others listed are internal
users.
4. Generally Accepted Accounting Principles (GAAP) are established by: a)
The IRS
b) The SEC
c) The FASB
,d) Individual companies
Answer: c) The Financial Accounting Standards Board (FASB) sets U.S. GAAP.
5. The accounting equation is:
a) Assets = Liabilities + Equity
b) Assets + Liabilities = Equity
c) Assets = Liabilities – Equity
d) Revenue – Expenses = Net Income
Answer: a) The fundamental accounting equation: Assets = Liabilities + Equity.
6. An example of an asset is:
a) Accounts Payable
b) Common Stock
c) Equipment
d) Revenue
Answer: c) Equipment is a tangible long-term asset.
7. Owner’s equity increases when:
a) Expenses increase
b) The owner withdraws cash
c) Revenue is earned
d) Liabilities increase
Answer: c) Revenues increase equity; expenses and withdrawals decrease it.
8. Which statement reports financial position at a point in time?
a) Income Statement
b) Statement of Owner’s Equity
c) Balance Sheet
d) Statement of Cash Flows
Answer: c) The Balance Sheet shows Assets, Liabilities, and Equity on a specific
date.
9. Net income appears on which two statements?
a) Balance Sheet and Income Statement
b) Income Statement and Statement of Owner’s Equity
, c) Balance Sheet and Statement of Cash Flows
d) Statement of Cash Flows and Income Statement
Answer: b) Net income is on the Income Statement and flows into the
Statement of Owner’s Equity.
10. If liabilities increase by $5,000 and equity decreases by $3,000, assets
must:
a) Increase by $8,000
b) Increase by $2,000
c) Decrease by $2,000
d) Decrease by $8,000
Answer: b) Assets = Liabilities + Equity. Change: +$5,000 + (–$3,000) = +$2,000.
11. Which principle states that expenses should be recorded in the
same period as the revenues they helped generate? a) Cost Principle
b) Matching Principle
c) Revenue Recognition Principle
d) Full Disclosure Principle
Answer: b) Matching principle: match expenses with related revenues.
12. The historical cost principle means:
a) Assets are recorded at cost and not adjusted for market value changes
b) Assets are recorded at their resale value
c) Liabilities are recorded at present value
d) Expenses are recorded when paid
Answer: a) Under cost principle, assets are kept at original cost in the
accounts.
13. Going concern assumption assumes:
a) A business will continue operating indefinitely
b) A business will liquidate next year
c) Inflation must be considered
d) The business is a sole proprietorship
Answer: a) Going concern assumes the company will remain in operation for
the foreseeable future.
