A
Which of the following is not a core financial statement?
A. The Income Statement
B. Statement of Cash Flows
C. The Trial Balance
D. The Balance Sheet
C — Running a trial balance is an intermediary step in the financial close, not a core financial statement. Core financial statements are: the income statement, the balance sheet, statement of cash flows, statement of retained earnings and the notes to the financial statements.
Which of the following account types increase by debits in double-entry accounting?
A. Assets, Expenses, Losses
B. Assets, Revenue, Gains
C. Expenses, Liabilities, Losses
D. Gains, Expenses, Liabilities
A — Assets, expenses and losses increase with debits. Revenue, liabilities and gains increase with credits.
What is the minimum number of accounts that accounting entries can have?
A. One
B. Four
C. Five
D. Two
D — All accounting entries must contain at least two accounts: one that is debited and another that is credited.
The listing of all the financial accounts within a company’s general ledger is called the _____.
A. Chart of accounts
B. Journal entry
C. Balance sheet
D. P&L statement
A — A chart of accounts helps companies break down all financial transactions made during a certain period into subcategories. That enables them to gain deeper insight into the profitability and effectiveness of various products, services or business units.
Which formula is used to calculate operating income?
A. Revenue + Direct Operating Cost = Operating Income
B. Indirect Operating Cost - Revenue = Operating Income
C. Gross Income - Operating Expenses = Operating Income
D. Gross Profit - Indirect Operating Cost = Operating Income
C — Gross Income - Operating Expenses = Operating Income.
A company’s operating income is, in other words, its income from core operations. Operating income is calculated by subtracting operating costs from gross income.
The income statement, which presents the results of operations, can be prepared in many forms including:
A. Single Step Income Statement
B. Condensed Income Statement
C. Common Sized Income Statement
D. All of the above
D — All are correct. A single step income statement has a section for revenue and expenses and only requires one subtraction to arrive at net income/loss. A condensed income statement only includes summary totals. Common sized income statements add a column to show the calculation of each line item as a percentage of revenue.
A company that uses the cash basis of accounting will:
A. Record revenue when it is collected.
B. Record revenue when it is earned.
C. Record revenue at the same time as accounts receivable.
D. Record bad debt expense on the income statement.
A — Cash basis accounting records revenue when paid. Accrual accounting reflects revenue when it is earned. Accounts receivable and its related bad debt are part of accrual accounting only.
Which of the following is true?
A. Accounts receivable are found in the current asset section of a balance sheet.
B. Accounts receivable increase by credits.
C. Accounts receivable are generated when a customer makes payments.
D. Accounts receivable become more valuable over time.
A — Accounts receivable is a short-term asset included in the current asset section of a balance sheet and increases by debits. They come about when customer sales are made on credit, not cash. Accounts receivable become harder to collect, and therefore less valuable, as they age.
Which side of the ledger account are debits recorded on?
A. Left
B. Right
D. Depends on the debit
A — Debits are recorded on the left side of the ledger account because they decrease equity, liability and revenue and increase expense or asset accounts.
Which organizations are involved in development of US Generally Accepted Accounting Principles (GAAP)? (Check all that apply.)
A. Financial Accounting Standards Board (FASB)
B. Government Accounting Standards Board (GASB)
C. Securities and Exchange Commission (SEC)
D. Federal Accounting Standards Advisory Board (FASAB)
A, B, C & D — All of the organizations listed are involved in development of financial accounting standards.
What are the main sections on a balance sheet?
A. Assets, liabilities, income
B. Assets, liabilities, equity
C. Assets, liabilities, expenses
D. Assets, gains, revenue
B — Assets, liabilities and equity are found on the balance sheet. Revenue (or sales), expenses, gains, losses and net income (or earnings) are income statement accounts.
When are liabilities recorded under the accrual basis of accounting?
A. When incurred
B. When paid
C. At the end of the fiscal year
D. When bank accounts are reconciled
A — Under the accrual basis of accounting, liabilities are recorded in the fiscal period that they are incurred or committed, regardless of when paid.
Which of the following scenarios increases accounts payable?
A. A customer fails to pay an invoice.
B. A supplier delivers raw materials on credit.
C. Office supplies are purchased with cash.
D. None of the above
B — When a supplier delivers raw material a liability is incurred. Customer payments relate to accounts receivable, not accounts payable. Expenses paid with cash do not generate accounts payable because the payment is made concurrent with incurring the liability.
Which of the following must a certified public accountant (CPA) have in-depth knowledge of to pass the CPA licensing exam? (Check all that apply.)
A. Accounting software packages
B. Auditing
C. Derivatives
D. International banking laws
B — The four sections of the CPA exam are Auditing and Attestation, Business Environment and Concepts, Financial Accounting and Reporting, and Regulation. While knowledge of accounting software, derivative financial instruments and international banking law are helpful, they are not mandatory for licensure.
Which is not an example of financing cash flow?
A. Paying off a debt of $25,000
B. Investing in equipment worth $90,000
C. Paying $12,000 worth of dividends to shareholders
D. Issuing $42,000 worth of shares
B — Cash flow is defined as the movement of cash in and out of a business, and cash flow from financing activities (CFF) — or cash flow financing — is a section of the cash flow statement that includes transactions involving debt, equity and dividends. The purchase of plant, property and equipment (PP&E) would fall under cash flow from investing.
How are a company’s financial statements used?
A. For internal analysis
B. For external negotiation
C. For compliance
D. All of the above
D — All are correct. Financial statements are used for internal analysis, like trending and calculating key performance indicators. External negotiations, such as applying for loans and credit cards, require financials statements. Compliance agencies, such as the Securities & Exchange Commission (SEC), require financial statements from public companies.
What would the journal entry be for a company that takes out a five-year, $100,000 business loan?
A. Debit $100,000 non-current asset, Credit $100,000 non-current liabilities
B. Debit $100,000 current asset, Credit $100,000 non-current liabilities
C. Debit $100,000 non-current liabilities, Credit $100,000 non-current assets
D. Debit $100,000 current liabilities, Credit $100,000 current assets
B — The transaction increases cash, a current asset, via a debit. It also increases loans payable, which is a non-current liability because it is due in five years, via a credit.
Which inventory valuation method reflects the most current market value for inventory on hand?
A. Last-in-First-Out (LIFO)
B. Average Costs
C. First-in-First-Out (FIFO)
D. Specific Identification
C — The FIFO method assumes that the oldest inventory is sold first, and inventory on hand at the end of a period is the newest. The newest purchases reflect the most current market values.
Which accounts are associated with cost of goods sold?
A. Accrued interest
B. Depreciation
C. Dividends
D. Inventory
D — Cost of goods sold is an interim step on the income statement and is calculated as: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold.
Unearned revenues are recorded on a company’s balance sheet under which kind of account?
A. Current asset
B. Owners’ or stockholders’ equity
C. Non-current asset
D. Liability
D — Unearned revenues are incurred when businesses or individuals receive payment for a product or service that has yet to be delivered or provided. Until the item is delivered, these types of transactions are marked as liabilities.
When a company purchases property, plant, and equipment, how is it reflected on the statement of cash flows?
A. As a source of cash in the "cash from investing activities" section
B. As a source of cash in the "cash from financing activities" section.
C. As a use of cash in the "cash from investing activities" section.
D. As a use of cash in the "cash from operating activities" section.
C — Acquisitions of property, plant and equipment are uses of cash/cash equivalents and categorized as an investing activity. The operating activities section of the statement of cash flows captures the inflow/outflows from business operations, such as sales or labor expenses, rather than investments.
Which of the following statements is not true about intercompany accounting?
A. Intercompany transactions are between two units within the same legal entity.
B. Intercompany transactions are eliminated in consolidated parent financial statements.
C. They can significantly impact taxes.
D. Intercompany transactions are between different legal entities under the same parent control.
C — The FIFO method assumes that the oldest inventory is sold first, and inventory on hand at the end of a period is the newest. The newest purchases reflect the most current market values.
After making a sale of $3,000, where $1,200 is paid in cash and $1,800 is sold on credit, how would a company go about updating its balance sheet?
A. $1,800 debit in accounts receivable; $3,000 credit in retained earnings; $1,200 debit in cash
B. $3,000 debit in retained earnings; $1,200 credit in cash; $1,800 credit in accounts receivable
C. $1,800 debit in accounts payable; $1,200 debit in cash; $3,000 credit in retained earnings
D. $1,200 credit in cash; $1,800 credit in accounts payable; $3,000 debit in retained earnings
A — $1,800 debit in accounts receivable; $3,000 credit in retained earnings; $1,200 debit in cash. Cash is classified as a current asset and therefore expected to be consumed, sold or exhausted within a year, so it’s recorded on the balance sheet as a debit when it's received. When a customer makes a payment, cash is debited. Conversely, when a customer buys something on credit, the sale is documented in accounts receivable, where all funds owed to a company are accounted for. Retained earnings are a portion of the profits earned that are not used as dividends and are often reserved for reinvesting into the business.
Which financial statement is a report of a company’s revenues and expenses during a certain time period?
A. Statement of Changes in Equity
B. Income Statement
C. Statement Of Cash Flows
B — An income statement is a financial report that documents a company’s earnings over a specific time period — yearly, quarterly or monthly — and records the expenses and costs associated with earning that revenue.
What is the result of the following transaction for Company A? Company A’s customer is unable to pay for a previous credit sale in accordance with Company A’s 90-day payment terms. The customer makes a promissory note to Company A that extends payment over a 24-month term including 5% interest.
A. No result because the customer didn’t pay.
B. Accounts receivable increases because of the interest.
C. A note receivable is recorded in non-current assets.
D. Company A records the loan as a liability.
C — Company A records a note receivable from its customer. It is a non-current asset because the term is greater than 12 months. A non-paying customer would cause accounts receivable to be written off. Interest payments are not recorded in accounts receivable. Company A is the payee of the promissory note, not the debtor, and has no liability.