ACC 231 ASU Exam 2 (Professor Mindy Wolfe) Practice Test Bank: 200 Questions with Correct Answers &
Detailed Rationales | Arizona State University Financial Accounting Exam Review – Accounting Equation, Journal
Entries, Inventory Methods (FIFO/LIFO), Receivables, Bad Debts, Depreciation, Liabilities, Payroll, Financial
Ratios & Time Value of Money – 2026 Updated Q&A | Instant Download PDF for Studiva
Section 1: The Accounting Equation and Transaction Analysis (Q1–30)
1. Which of the following represents the correct accounting equation?
A) Assets = Liabilities - Stockholders' Equity
B) Assets = Liabilities + Stockholders' Equity
C) Assets + Liabilities = Stockholders' Equity
D) Assets + Stockholders' Equity = Liabilities
✅ Correct Answer: B – Assets = Liabilities + Stockholders' Equity
Rationale: The accounting equation is the foundation of double-entry accounting: Assets = Liabilities
+ Equity.
2. Liabilities are defined as:
A) Future economic benefits of a company
B) Earnings retained in the business
C) Stockholders' claims to assets
D) Amounts owed to lenders or creditors
✅ Correct Answer: D – Amounts owed to lenders or creditors
Rationale: Liabilities represent obligations or debts owed to external parties arising from past
transactions.
3. Assets are defined as:
A) Stockholders' claims to assets
B) Economic resources of a company
C) Amounts owed to others
D) Earnings retained in the business
✅ Correct Answer: B – Economic resources of a company
Rationale: Assets are resources controlled by the entity as a result of past events from which future
economic benefits are expected.
4. Which of the following does NOT describe Stockholders' Equity?
A) Money lent to a business
B) Money invested in a business by its owners
C) The owners' claim on the assets of a company
D) Profits retained in the business
✅ Correct Answer: A – Money lent to a business
Rationale: Money lent is a liability (note payable), not equity. Equity consists of contributed capital
and retained earnings.
5. Which of the following is NOT an asset?
A) Buildings
B) Net income
,C) Cash
D) Inventory
✅ Correct Answer: B – Net income
Rationale: Net income is a measure of profitability reported on the income statement, not an asset.
Assets are resources like cash, inventory, and buildings.
6. Stockholders' Equity represents:
A) An initial investment of cash by the owners only
B) A fair distribution of wealth in the firm
C) Retention of profits by a firm only
D) Both initial investment and retained profits
✅ Correct Answer: D – Both initial investment and retained profits
Rationale: Stockholders' Equity includes contributed capital (owner investments) and retained
earnings (accumulated profits not distributed as dividends).
7. A business with one owner is called a sole proprietorship. True or False?
A) True
B) False
✅ Correct Answer: A – True
Rationale: A sole proprietorship is a business owned by one person. However, it does not
necessarily have to be a service business as stated in some practice problems.
8. Shareholders must pay income tax on the dividends they have received from a corporation. True or
False?
A) True
B) False
✅ Correct Answer: A – True
Rationale: Dividends received by shareholders are taxable as income to the shareholder.
9. A limited liability company (LLC) is a legal entity like a corporation, but the income is taxed like a
sole proprietorship or partnership. True or False?
A) True
B) False
✅ Correct Answer: A – True
Rationale: LLCs provide limited liability protection while allowing pass-through taxation.
10. Which of the following is a disadvantage of the corporate form of business?
A) Limited liability
B) Limited resources
C) Double taxation
D) Ease of raising capital
✅ Correct Answer: C – Double taxation
Rationale: Corporations pay income tax on profits, and shareholders pay tax on dividends, resulting
in double taxation.
,11. Which type of organization has stockholders?
A) Limited liability companies
B) Sole proprietorships
C) Partnerships
D) Corporations
✅ Correct Answer: D – Corporations
Rationale: Only corporations issue stock and have stockholders.
12. Which business form is similar to a corporation in regard to owner liability?
A) Sole proprietorship
B) Partnership
C) Limited liability company (LLC)
D) All businesses have same liability
✅ Correct Answer: C – Limited liability company (LLC)
Rationale: LLCs provide limited liability protection similar to corporations.
13. Which would NOT be an example of a for-profit business?
A) Red Cross
B) Red Robin
C) Petsmart
D) Toys 'R Us
✅ Correct Answer: A – Red Cross
Rationale: The Red Cross is a non-profit organization; the others are for-profit businesses.
14. Ronald opens his business by investing $12,000. How does this affect the accounting equation?
A) Increase in Liabilities; Increase in Stockholders' Equity
B) Decrease in Assets; Increase in Stockholders' Equity
C) Increase in Assets; Increase in Stockholders' Equity
D) Increase in Assets; Increase in Liabilities
✅ Correct Answer: C – Increase in Assets; Increase in Stockholders' Equity
Rationale: Cash (asset) increases by $12,000, and Common Stock (equity) increases by $12,000.
15. If a company purchases equipment on account, how does this affect the accounting equation?
A) Assets increase; Liabilities increase
B) Assets increase; Equity increases
C) Assets decrease; Liabilities decrease
D) No change in total assets
✅ Correct Answer: A – Assets increase; Liabilities increase
Rationale: Equipment (asset) increases; Accounts Payable (liability) increases.
16. If a company pays $5,000 to reduce accounts payable, how does this affect the accounting
equation?
A) Assets increase; Liabilities increase
B) Assets decrease; Liabilities decrease
C) Assets increase; Equity increases
D) Assets decrease; Equity decreases
, ✅ Correct Answer: B – Assets decrease; Liabilities decrease
Rationale: Cash (asset) decreases; Accounts Payable (liability) decreases.
17. A company provides services to a customer on account for $2,000. The effect is:
A) Assets increase; Equity increases
B) Assets increase; Liabilities increase
C) Assets decrease; Equity decreases
D) No change in assets
✅ Correct Answer: A – Assets increase; Equity increases
Rationale: Accounts Receivable (asset) increases; Revenue increases equity.
18. The accounting equation must remain in balance after every transaction. True or False?
A) True
B) False
✅ Correct Answer: A – True
Rationale: Double-entry accounting ensures the equation remains balanced after each transaction.
19. Net income is defined as:
A) Expenses less revenue
B) Revenue plus expenses
C) Revenue less assets
D) Revenue less expenses
✅ Correct Answer: D – Revenue less expenses
Rationale: Net income = Revenues - Expenses, representing profitability over a period.
20. What do we call amounts of money borrowed from lenders?
A) Asset
B) Expense
C) Liability
D) Revenue
✅ Correct Answer: C – Liability
Rationale: Borrowed funds create an obligation to repay, classified as a liability (e.g., notes payable).
21. A company has assets of $100,000 and liabilities of $40,000. What is stockholders' equity?
A) $60,000
B) $140,000
C) $40,000
D) $100,000
✅ Correct Answer: A – $60,000
Rationale: Equity = Assets - Liabilities = $100,000 - $40,000 = $60,000.
22. A company has equity of $75,000 and liabilities of $45,000. What are total assets?
A) $30,000
B) $75,000
C) $120,000
D) $45,000
Detailed Rationales | Arizona State University Financial Accounting Exam Review – Accounting Equation, Journal
Entries, Inventory Methods (FIFO/LIFO), Receivables, Bad Debts, Depreciation, Liabilities, Payroll, Financial
Ratios & Time Value of Money – 2026 Updated Q&A | Instant Download PDF for Studiva
Section 1: The Accounting Equation and Transaction Analysis (Q1–30)
1. Which of the following represents the correct accounting equation?
A) Assets = Liabilities - Stockholders' Equity
B) Assets = Liabilities + Stockholders' Equity
C) Assets + Liabilities = Stockholders' Equity
D) Assets + Stockholders' Equity = Liabilities
✅ Correct Answer: B – Assets = Liabilities + Stockholders' Equity
Rationale: The accounting equation is the foundation of double-entry accounting: Assets = Liabilities
+ Equity.
2. Liabilities are defined as:
A) Future economic benefits of a company
B) Earnings retained in the business
C) Stockholders' claims to assets
D) Amounts owed to lenders or creditors
✅ Correct Answer: D – Amounts owed to lenders or creditors
Rationale: Liabilities represent obligations or debts owed to external parties arising from past
transactions.
3. Assets are defined as:
A) Stockholders' claims to assets
B) Economic resources of a company
C) Amounts owed to others
D) Earnings retained in the business
✅ Correct Answer: B – Economic resources of a company
Rationale: Assets are resources controlled by the entity as a result of past events from which future
economic benefits are expected.
4. Which of the following does NOT describe Stockholders' Equity?
A) Money lent to a business
B) Money invested in a business by its owners
C) The owners' claim on the assets of a company
D) Profits retained in the business
✅ Correct Answer: A – Money lent to a business
Rationale: Money lent is a liability (note payable), not equity. Equity consists of contributed capital
and retained earnings.
5. Which of the following is NOT an asset?
A) Buildings
B) Net income
,C) Cash
D) Inventory
✅ Correct Answer: B – Net income
Rationale: Net income is a measure of profitability reported on the income statement, not an asset.
Assets are resources like cash, inventory, and buildings.
6. Stockholders' Equity represents:
A) An initial investment of cash by the owners only
B) A fair distribution of wealth in the firm
C) Retention of profits by a firm only
D) Both initial investment and retained profits
✅ Correct Answer: D – Both initial investment and retained profits
Rationale: Stockholders' Equity includes contributed capital (owner investments) and retained
earnings (accumulated profits not distributed as dividends).
7. A business with one owner is called a sole proprietorship. True or False?
A) True
B) False
✅ Correct Answer: A – True
Rationale: A sole proprietorship is a business owned by one person. However, it does not
necessarily have to be a service business as stated in some practice problems.
8. Shareholders must pay income tax on the dividends they have received from a corporation. True or
False?
A) True
B) False
✅ Correct Answer: A – True
Rationale: Dividends received by shareholders are taxable as income to the shareholder.
9. A limited liability company (LLC) is a legal entity like a corporation, but the income is taxed like a
sole proprietorship or partnership. True or False?
A) True
B) False
✅ Correct Answer: A – True
Rationale: LLCs provide limited liability protection while allowing pass-through taxation.
10. Which of the following is a disadvantage of the corporate form of business?
A) Limited liability
B) Limited resources
C) Double taxation
D) Ease of raising capital
✅ Correct Answer: C – Double taxation
Rationale: Corporations pay income tax on profits, and shareholders pay tax on dividends, resulting
in double taxation.
,11. Which type of organization has stockholders?
A) Limited liability companies
B) Sole proprietorships
C) Partnerships
D) Corporations
✅ Correct Answer: D – Corporations
Rationale: Only corporations issue stock and have stockholders.
12. Which business form is similar to a corporation in regard to owner liability?
A) Sole proprietorship
B) Partnership
C) Limited liability company (LLC)
D) All businesses have same liability
✅ Correct Answer: C – Limited liability company (LLC)
Rationale: LLCs provide limited liability protection similar to corporations.
13. Which would NOT be an example of a for-profit business?
A) Red Cross
B) Red Robin
C) Petsmart
D) Toys 'R Us
✅ Correct Answer: A – Red Cross
Rationale: The Red Cross is a non-profit organization; the others are for-profit businesses.
14. Ronald opens his business by investing $12,000. How does this affect the accounting equation?
A) Increase in Liabilities; Increase in Stockholders' Equity
B) Decrease in Assets; Increase in Stockholders' Equity
C) Increase in Assets; Increase in Stockholders' Equity
D) Increase in Assets; Increase in Liabilities
✅ Correct Answer: C – Increase in Assets; Increase in Stockholders' Equity
Rationale: Cash (asset) increases by $12,000, and Common Stock (equity) increases by $12,000.
15. If a company purchases equipment on account, how does this affect the accounting equation?
A) Assets increase; Liabilities increase
B) Assets increase; Equity increases
C) Assets decrease; Liabilities decrease
D) No change in total assets
✅ Correct Answer: A – Assets increase; Liabilities increase
Rationale: Equipment (asset) increases; Accounts Payable (liability) increases.
16. If a company pays $5,000 to reduce accounts payable, how does this affect the accounting
equation?
A) Assets increase; Liabilities increase
B) Assets decrease; Liabilities decrease
C) Assets increase; Equity increases
D) Assets decrease; Equity decreases
, ✅ Correct Answer: B – Assets decrease; Liabilities decrease
Rationale: Cash (asset) decreases; Accounts Payable (liability) decreases.
17. A company provides services to a customer on account for $2,000. The effect is:
A) Assets increase; Equity increases
B) Assets increase; Liabilities increase
C) Assets decrease; Equity decreases
D) No change in assets
✅ Correct Answer: A – Assets increase; Equity increases
Rationale: Accounts Receivable (asset) increases; Revenue increases equity.
18. The accounting equation must remain in balance after every transaction. True or False?
A) True
B) False
✅ Correct Answer: A – True
Rationale: Double-entry accounting ensures the equation remains balanced after each transaction.
19. Net income is defined as:
A) Expenses less revenue
B) Revenue plus expenses
C) Revenue less assets
D) Revenue less expenses
✅ Correct Answer: D – Revenue less expenses
Rationale: Net income = Revenues - Expenses, representing profitability over a period.
20. What do we call amounts of money borrowed from lenders?
A) Asset
B) Expense
C) Liability
D) Revenue
✅ Correct Answer: C – Liability
Rationale: Borrowed funds create an obligation to repay, classified as a liability (e.g., notes payable).
21. A company has assets of $100,000 and liabilities of $40,000. What is stockholders' equity?
A) $60,000
B) $140,000
C) $40,000
D) $100,000
✅ Correct Answer: A – $60,000
Rationale: Equity = Assets - Liabilities = $100,000 - $40,000 = $60,000.
22. A company has equity of $75,000 and liabilities of $45,000. What are total assets?
A) $30,000
B) $75,000
C) $120,000
D) $45,000
