Practice Test Questions

Question 1

Falcon, Inc., a manufacturer and supplier of kitchen appliances, provides a two-year warranty on component parts at no cost. Which accounting principle requires Falcon to recognize as an expense the estimated cost of fulfilling a warranty in the year the equipment is sold?

Answer 1

Matching Principle

Question 2

The lower of cost or market (LCM) is an application of?

Answer 2

Conservatism

Question 3

What is the correct sequence of events i the accounting cycle?

Answer 3

1. Transactions are recorded in a journal
2. Transactions are posted to ledgers
3. Trial balance is prepared
4. Adjusting journal entries are made
5. Adjusted trial balance is prepared
6. Financial statements are prepared
7. Closing entries are made

Question 4

The Accumulated Depreciation account should be shown in the financial statements as…

Answer 4

A cotra (deduction) to an asset account

Question 5

Which of the following will be credited when recording an accrued expense?

Answer 5

a liability account

Question 6

In a limited partnership, limited partners are at risk for?

Answer 6

the amount of their investment in the partnership

Question 7

The owner of a small business paid the property taxes on her personal residence from the business checking account. The payment should be charged to which of the following?

Answer 7

withdrawals

Question 8

As it pertains to GAAP Standardization, the governing body that always enforces GAAP in the United States is called:

Answer 8

Financial Accounting Standards Board (FASB)

Question 9

GAAP issues protocol essential to industry regulations which are also attributable to characteristics to accounting principles, and include:

Answer 9

the identification, measurement, and communication of financial information for businesses

Question 10

The purpose of documenting information presented in notes relevant to the financial statements is to always:

Answer 10

provide disclosure required by generally accepted accounting principles

Question 11

The Objectivity Principle allows for business transactions to be recorded using the best objective evidence in order to always:

Answer 11

prevent any accounting department of a business from documenting slanted information, based on bias

Question 12

The Going-Concern Principle demonstrates that financial statements are to assume that businesses will last indefinitely, and exhibit the efforts to always fulfill:

Answer 12

obligations, commitments, and objectives

Question 13

The Conservative Principle attempts to resolve financial statement uncertainty in the least favorable way by anticipating future losses, not gains, where understating net assets and net income always allows companies to:

Answer 13

Play it safe

Question 14

GAAP Principles always enforce transactions to get recorded more than once, and is usually done:

Answer 14

Two Times

Question 15

Ling is an accountant at a publicly traded corporation. She recently discovered in the accounting records a material error that affected last year’s financial statements and will affect this year’s statements. If the error is not corrected, it will reverse itself this year and probably no one else will discover it. Even though last year’s net income was materially overstated and this year’s net income will be materially understated, the overall effect on the two years combined net incomes is that the overstatement and the understatement will completely offset each other. Which of the following is the best action that Ling should take?

Answer 15

Inform her immediate supervisor and help correct last year’s statements

Question 16

Which of the following identifies the income statement items in their proper order as found in a correctly prepared income statement?

Answer 16

Sales, cost of goods sold, gross profit, operating expenses, net income

Question 17

The Income Statement always shows the results of business operations over a specific period of time including:

Answer 17

A Month, a Quarter, or a Year correct

Question 18

To avoid formatting issues, accountants often use a traditional diagram, or chart, called a:

Answer 18

T-Account

Question 19

Which of the following will always increase when net income increases?

Answer 19

Equity

Question 20

The income statement is designed to measure

Answer 20

The results of business operations correct

Question 21

New World, Inc., purchased $30,000 in goods on account that in turn were sold on account for $35,000. If New World uses accrual accounting, how much should they record in expenses and revenue?

Answer 21

$35,000 in revenue and $30,000 in expenses correct

Question 22

Cash is reported

Answer 22

as a current asset correct

Question 23

Before the football season begins, a college football team receives $12,000,000 from season-ticket holders for one year’s home games. The team will play three home games in September, one in October, and two in November. How much revenue is recognized in September?

Answer 23

$6,000,000

Question 24

What is the purpose of closing entries?

Answer 24

To reduce revenues, expenses, and dividends to zero for the next accounting period correct

Question 25

On the Income Statement, the term which describes when you take the number that appears in the Statement of Owner’s Equity, and combined it into the Final number for Income and Expenses, is always called:

Answer 25

Owner’s Equity—End of Period

Question 26

“Owner’s equity—End of period” always appears in which financial statement simultaneously to the Income Statement during a financial period ending?

Answer 26

Balance Sheet

Question 27

Deferred Revenues are liabilities that always result from receiving _____ prior to earning the income

Answer 27

Cash

Question 28

Return on assets helps users of financial statements evaluate which of the following

Answer 28

Profitability

Question 29

A company had net sales of $27,900 in April. Beginning inventory was $5,000. Net inventory purchases were $15,000. Ending inventory was $7,000. Total operating expenses were $6,500. How much net income did the company earn in April?

Answer 29

$8,400

Question 30

If net sales are two million dollars,
and operating expenses are 300,000,
and your gross profit, after all is said and done,
is 360,000 dollars,
how much is the cost of goods sold?

Answer 30

$1,640,000

Question 31

At the end of Dugan Retail Corporation’s first year of operation, it was determined that the company had overstated its ending inventory.

Indicate the effect that the overstatement will have on the first year’s cost of goods sold and net income.

Answer 31

Cost of goods sold will be understated

Net income will be overstated

Question 32

Gross Profit Formula always derives from the equation:

Answer 32

Sales - Costs of Goods Sold = Gross Profit (GP)

Question 33

Cost of goods sold is determined by which of the following?

Answer 33

Beginning inventory plus net purchases minus ending inventory

Question 34

The L Company purchased new machinery and incurred the following costs:

Invoice price $30,000
Freight (F.O.B. shipping point) $2,000
Foundation for machinery $1,000
Installation costs $900
Annual maintenance of machinery $600

The recorded cost of the machinery is?

Answer 34

$33,900

Question 35

Longshore Group bought a piece of equipment for use in its operations under the following terms: 5 annual payments of $64,000 for the equipment, including interest. Although the list price of the equipment was $315,000, Longshore Group could have bought it for $300,000 cash. Salvage value is $20,000. Which amount should Longshore Group use to record the purchase of the machine on its books?

Answer 35

$300,000 correct

Question 36

Which of the following appears separately, net of income tax, on an income statement?

Answer 36

Loss on discontinued operations

Question 37

Extraordinary gains and losses are events that are both considered:

Answer 37

Unusual and Infrequent

Question 38

Profitability analysis always permits an anticipation of sales potential specific to such elements as:

Answer 38

Customer Age, Geography, and Product Types

Question 39

There are _____ types of Profitability Analysis:

Answer 39

3