Financial and Managerial Accounting for MBAs over 200 questions and
answers
Module 1: Financial Accounting for MBAs
1. What are the four major activities undertaken by organizations?
a. Planning, organizing, staffing, and directing
b. Planning, financing, investing, and operating
c. Financing, investing, operating, and selling
d. Planning, marketing, production, and finance
Answer: b. Planning, financing, investing, and operating
Rationale: Organizations undertake four major activities: planning (ideas, goals, strategies), financing
(paying for resources), investing (buying and selling resources), and operating (carrying out plans).
2. According to the accounting equation, which of the following must always be true?
a. Assets = Liabilities - Stockholders' Equity
b. Assets + Liabilities = Stockholders' Equity
c. Assets = Liabilities + Stockholders' Equity
d. Assets + Stockholders' Equity = Liabilities
Answer: c. Assets = Liabilities + Stockholders' Equity
Rationale: The accounting equation (also called the balance sheet equation) states that an organization's
financing activities (liabilities and equity) pay for investing activities (assets). This equation applies to all
organizations at all times.
3. Which of the following is NOT one of the four main financial statements?
a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Statement of market value
Answer: d. Statement of market value
Rationale: The four main financial statements are: income statement, balance sheet, statement of
stockholders' equity, and statement of cash flows.
,4. What information does the income statement provide?
a. The company's assets, liabilities, and equity as of a point in time
b. The company's revenues, expenses, and profitability over a period of time
c. The sources and uses of cash during a period
d. The changes in stockholders' equity accounts
Answer: b. The company's revenues, expenses, and profitability over a period of time
Rationale: The income statement provides information about the company's revenues, expenses, and
profitability over a period of time.
5. The balance sheet provides information as of:
a. A period of time
b. A point in time
c. The entire fiscal year
d. Multiple reporting periods
Answer: b. A point in time
Rationale: The balance sheet lists the company's assets, liabilities, and stockholders' equity as of a
specific point in time, unlike the income statement which covers a period.
6. Retained earnings on the balance sheet is increased by:
a. Payment of dividends
b. Issuance of common stock
c. Net income earned during the period
d. Purchase of treasury stock
Answer: c. Net income earned during the period
Rationale: Retained earnings is increased each period by any net income earned during the period (as
reported in the income statement) and decreased by dividend payments.
7. Which of the following is an external user of financial accounting information?
a. Production manager
b. Chief Executive Officer
c. Lender
d. Internal auditor
Answer: c. Lender
Rationale: External users include lenders (for measuring risk and return of loans), shareholders, analysts,
auditors, consultants, regulators, and suppliers.
,8. According to Porter's Five Forces, which of the following is NOT one of the forces?
a. Industry competition
b. Buyer power
c. Product substitutes
d. Government regulation
Answer: d. Government regulation
Rationale: Porter's five forces are: industry competition, buyer power, supplier power, product
substitutes, and threat of entry.
9. What does SWOT analysis stand for?
a. Strengths, Weaknesses, Opportunities, Threats
b. Strategy, Weaknesses, Operations, Technology
c. Strengths, Workflow, Objectives, Targets
d. Structure, Workforce, Objectives, Timing
Answer: a. Strengths, Weaknesses, Opportunities, Threats
Rationale: SWOT stands for Strengths and Weaknesses (internal factors) and Opportunities and Threats
(external factors).
10. What is the primary function of an independent auditor?
a. To prepare the financial statements for the company
b. To guarantee the company's continued performance
c. To express an opinion on whether financial statements fairly present the company's condition
d. To manage the company's internal accounting systems
Answer: c. To express an opinion on whether financial statements fairly present the company's condition
Rationale: The auditor's primary function is to express an opinion as to whether the financial statements
fairly present the financial condition of the company and are free from material misstatements. Auditors
do not prepare the statements.
11. Which body primarily sets Generally Accepted Accounting Principles (GAAP)?
a. Securities and Exchange Commission (SEC)
b. Financial Accounting Standards Board (FASB)
c. American Institute of Certified Public Accountants (AICPA)
d. International Accounting Standards Board (IASB)
, Answer: b. Financial Accounting Standards Board (FASB)
Rationale: GAAP is primarily set by the FASB, a private sector entity with representatives from companies
that issue financial statements, accounting firms, and users of financial information.
12. Return on Equity (ROE) is calculated as:
a. Net income divided by total assets
b. Net income divided by average stockholders' equity
c. Net sales divided by average stockholders' equity
d. Operating income divided by total liabilities
Answer: b. Net income divided by average stockholders' equity
Rationale: ROE is a fundamental measure of financial performance that compares net income to the
investment made by stockholders.
13. A company with the same ROE but using less debt would generally be viewed as:
a. Riskier
b. Safer (less risky)
c. More profitable
d. Less profitable
Answer: b. Safer (less risky)
Rationale: When comparing two companies with the same return on equity, the one using less debt
would generally be viewed as safer because borrowed money must be repaid with interest and creditors
have legal remedies including bankruptcy.
14. What is corporate governance?
a. The system of policies and procedures that protect stakeholder interests
b. The process of preparing financial statements
c. The method of calculating corporate taxes
d. The strategy for market competition
Answer: a. The system of policies and procedures that protect stakeholder interests
Rationale: Corporate governance is the system of policies, procedures, and mechanisms that protect the
interests of stakeholders including investors, creditors, regulatory bodies, and employees.
15. Which of the following best describes the matching concept?
a. Recording revenue when cash is received
answers
Module 1: Financial Accounting for MBAs
1. What are the four major activities undertaken by organizations?
a. Planning, organizing, staffing, and directing
b. Planning, financing, investing, and operating
c. Financing, investing, operating, and selling
d. Planning, marketing, production, and finance
Answer: b. Planning, financing, investing, and operating
Rationale: Organizations undertake four major activities: planning (ideas, goals, strategies), financing
(paying for resources), investing (buying and selling resources), and operating (carrying out plans).
2. According to the accounting equation, which of the following must always be true?
a. Assets = Liabilities - Stockholders' Equity
b. Assets + Liabilities = Stockholders' Equity
c. Assets = Liabilities + Stockholders' Equity
d. Assets + Stockholders' Equity = Liabilities
Answer: c. Assets = Liabilities + Stockholders' Equity
Rationale: The accounting equation (also called the balance sheet equation) states that an organization's
financing activities (liabilities and equity) pay for investing activities (assets). This equation applies to all
organizations at all times.
3. Which of the following is NOT one of the four main financial statements?
a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Statement of market value
Answer: d. Statement of market value
Rationale: The four main financial statements are: income statement, balance sheet, statement of
stockholders' equity, and statement of cash flows.
,4. What information does the income statement provide?
a. The company's assets, liabilities, and equity as of a point in time
b. The company's revenues, expenses, and profitability over a period of time
c. The sources and uses of cash during a period
d. The changes in stockholders' equity accounts
Answer: b. The company's revenues, expenses, and profitability over a period of time
Rationale: The income statement provides information about the company's revenues, expenses, and
profitability over a period of time.
5. The balance sheet provides information as of:
a. A period of time
b. A point in time
c. The entire fiscal year
d. Multiple reporting periods
Answer: b. A point in time
Rationale: The balance sheet lists the company's assets, liabilities, and stockholders' equity as of a
specific point in time, unlike the income statement which covers a period.
6. Retained earnings on the balance sheet is increased by:
a. Payment of dividends
b. Issuance of common stock
c. Net income earned during the period
d. Purchase of treasury stock
Answer: c. Net income earned during the period
Rationale: Retained earnings is increased each period by any net income earned during the period (as
reported in the income statement) and decreased by dividend payments.
7. Which of the following is an external user of financial accounting information?
a. Production manager
b. Chief Executive Officer
c. Lender
d. Internal auditor
Answer: c. Lender
Rationale: External users include lenders (for measuring risk and return of loans), shareholders, analysts,
auditors, consultants, regulators, and suppliers.
,8. According to Porter's Five Forces, which of the following is NOT one of the forces?
a. Industry competition
b. Buyer power
c. Product substitutes
d. Government regulation
Answer: d. Government regulation
Rationale: Porter's five forces are: industry competition, buyer power, supplier power, product
substitutes, and threat of entry.
9. What does SWOT analysis stand for?
a. Strengths, Weaknesses, Opportunities, Threats
b. Strategy, Weaknesses, Operations, Technology
c. Strengths, Workflow, Objectives, Targets
d. Structure, Workforce, Objectives, Timing
Answer: a. Strengths, Weaknesses, Opportunities, Threats
Rationale: SWOT stands for Strengths and Weaknesses (internal factors) and Opportunities and Threats
(external factors).
10. What is the primary function of an independent auditor?
a. To prepare the financial statements for the company
b. To guarantee the company's continued performance
c. To express an opinion on whether financial statements fairly present the company's condition
d. To manage the company's internal accounting systems
Answer: c. To express an opinion on whether financial statements fairly present the company's condition
Rationale: The auditor's primary function is to express an opinion as to whether the financial statements
fairly present the financial condition of the company and are free from material misstatements. Auditors
do not prepare the statements.
11. Which body primarily sets Generally Accepted Accounting Principles (GAAP)?
a. Securities and Exchange Commission (SEC)
b. Financial Accounting Standards Board (FASB)
c. American Institute of Certified Public Accountants (AICPA)
d. International Accounting Standards Board (IASB)
, Answer: b. Financial Accounting Standards Board (FASB)
Rationale: GAAP is primarily set by the FASB, a private sector entity with representatives from companies
that issue financial statements, accounting firms, and users of financial information.
12. Return on Equity (ROE) is calculated as:
a. Net income divided by total assets
b. Net income divided by average stockholders' equity
c. Net sales divided by average stockholders' equity
d. Operating income divided by total liabilities
Answer: b. Net income divided by average stockholders' equity
Rationale: ROE is a fundamental measure of financial performance that compares net income to the
investment made by stockholders.
13. A company with the same ROE but using less debt would generally be viewed as:
a. Riskier
b. Safer (less risky)
c. More profitable
d. Less profitable
Answer: b. Safer (less risky)
Rationale: When comparing two companies with the same return on equity, the one using less debt
would generally be viewed as safer because borrowed money must be repaid with interest and creditors
have legal remedies including bankruptcy.
14. What is corporate governance?
a. The system of policies and procedures that protect stakeholder interests
b. The process of preparing financial statements
c. The method of calculating corporate taxes
d. The strategy for market competition
Answer: a. The system of policies and procedures that protect stakeholder interests
Rationale: Corporate governance is the system of policies, procedures, and mechanisms that protect the
interests of stakeholders including investors, creditors, regulatory bodies, and employees.
15. Which of the following best describes the matching concept?
a. Recording revenue when cash is received
