Aspiring accountants and finance professionals understand the importance of having a strong foundation in accounting principles and concepts. Whether you’re starting your FMVA certification program or looking to assess your knowledge in basic accounting, taking an accounting test can provide valuable insights into your understanding of core financial statements, cash flows, assets, liabilities, and more.
In this comprehensive article, we will explore various accounting test questions and delve into the essential concepts covered in Accounting 101 classes. By the end of this article, you’ll have a better understanding of how to evaluate your accounting knowledge and identify areas for improvement. So, let’s dive in and test your accounting prowess!
The Core Financial Statements
The first section of the accounting test focuses on the core financial statements: the income statement, balance sheet, statement of cash flows, and trial balance. These statements provide a snapshot of a company’s financial performance, position, and cash flows. Let’s explore each statement in detail:
The Income Statement
Also known as the statement of profit and loss, the income statement presents the results of a company’s operations during a specific period. It showcases the revenues earned and expenses incurred, ultimately leading to the calculation of net income or net loss. The income statement is a vital tool for assessing a company’s profitability.
The Balance Sheet
The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It presents the company’s assets, liabilities, and shareholders’ equity. Assets represent what a company owns, liabilities indicate what it owes, and shareholders’ equity reflects the owners’ claim on the company’s assets.
The Statement of Cash Flows
The statement of cash flows tracks the inflow and outflow of cash and cash equivalents during a specific period. It categorizes cash flows into three main activities: operating activities, investing activities, and financing activities. This statement provides insights into a company’s liquidity and cash management.
The Trial Balance
The trial balance is an intermediary step in the financial close process. It lists all the accounts from the general ledger and their respective debit or credit balances. The trial balance ensures that the total debits equal the total credits, highlighting any potential errors in the accounting records.
Assessing Your Knowledge: Accounting Test Questions
Now that we’ve covered the core financial statements, let’s move on to the accounting test questions that will assess your understanding of essential accounting principles and concepts. These questions cover various topics, including cash flows, assets, liabilities, revenue recognition, and more. Let’s test your knowledge:
Question 1: The Core Financial Statements
Which of the following is not a core financial statement?
- The Income Statement
- Statement of Cash Flows
- The Trial Balance
- The Balance Sheet
Question 2: The Income Statement
The income statement, which presents the results of operations, can be prepared in many forms, including:
- Single Step Income Statement
- Condensed Income Statement
- Common Sized Income Statement
- All of the above
Question 3: Double-Entry Accounting
Which of the following account types increase by debits in double-entry accounting?
- Assets, Expenses, Losses
- Assets, Revenue, Gains
- Expenses, Liabilities, Losses
- Gains, Expenses, Liabilities
Question 4: Assets on the Balance Sheet
True or False: Accounts receivable are found in the current asset section of a balance sheet.
- True
- False
Question 5: Cash Basis vs. Accrual Basis Accounting
A company that uses the cash basis of accounting will:
- Record revenue when it is collected
- Record revenue when it is earned
- Record revenue at the same time as accounts receivable
- Record bad debt expense on the income statement
Question 6: The Main Sections on a Balance Sheet
What are the main sections on a balance sheet?
- Assets, liabilities, income
- Assets, liabilities, equity
- Assets, liabilities, expenses
- Assets, gains, revenue
Question 7: Financial Statements Usage
How are a company’s financial statements used?
- For internal analysis
- For external negotiation
- For compliance
- All of the above
Question 8: Accounts Payable
Which of the following scenarios increases accounts payable?
- A customer fails to pay an invoice
- A supplier delivers raw materials on credit
- Office supplies are purchased with cash
- None of the above
Question 9: CPA Knowledge Requirements
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.)
- Accounting software packages
- Auditing
- Derivatives
- International banking laws
Question 10: Recording Transactions
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.
- No result because the customer didn’t pay
- Accounts receivable increases because of the interest
- A note receivable is recorded in non-current assets
- Company A records the loan as a liability
Question 11: Liabilities under the Accrual Basis
When are liabilities recorded under the accrual basis of accounting?
- When incurred
- When paid
- At the end of the fiscal year
- When bank accounts are reconciled
Question 12: Time in Accounting
Which is true about time in accounting?
- Current liabilities are debts payable within 2 years
- Balance sheets reflect a company’s financial position at a certain point in time
- The time value of money is a finance concept, not relevant in accounting
- Accounts receivable are more easily collected as time passes
Question 13: Property, Plant, and Equipment on the Statement of Cash Flows
When a company purchases property, plant, and equipment, how is it reflected on the statement of cash flows?
- As a source of cash in the “cash from investing activities” section
- As a source of cash in the “cash from financing activities” section
- As a use of cash in the “cash from investing activities” section
- As a use of cash in the “cash from operating activities” section
Question 14: Journal Entry for a Business Loan
What would the journal entry be for a company that takes out a five-year, $100,000 business loan?
- Debit $100,000 non-current asset, Credit $100,000 non-current liabilities
- Debit $100,000 current asset, Credit $100,000 non-current liabilities
- Debit $100,000 non-current liabilities, Credit $100,000 non-current assets
- Debit $100,000 current liabilities, Credit $100,000 current assets
Question 15: Cost of Goods Sold
Which accounts are associated with cost of goods sold?
- Accrued interest
- Depreciation
- Dividends
- Inventory
Question 16: US Generally Accepted Accounting Principles (GAAP)
Which organizations are involved in the development of US Generally Accepted Accounting Principles (GAAP)? (Check all that apply.)
- Financial Accounting Standards Board (FASB)
- Government Accounting Standards Board (GASB)
- Securities and Exchange Commission (SEC)
- Federal Accounting Standards Advisory Board (FASAB)
Question 17: Inventory Valuation Methods
Which inventory valuation method reflects the most current market value for inventory on hand?
- Last-in-First-Out (LIFO)
- Average Costs
- First-in-First-Out (FIFO)
- Specific Identification
Question 18: Intercompany Accounting
Which of the following statements is not true about intercompany accounting?
- Intercompany transactions are between two units within the same legal entity
- Intercompany transactions are eliminated in consolidated parent financial statements
- They can significantly impact taxes
- Intercompany transactions are between different legal entities under the same parent control
Question 19: Tax-Return Depreciation Method
Which is the method of depreciation used for US tax returns that is not GAAP-compliant?
- Straight-line method
- Modified accelerated cost recovery systems
- Double-declining balance method
- Units of production method
Question 20: Amortization of Intangible Assets
What is the most-used method to amortize intangible assets on a company’s financial statements?
- Straight-line method
- Sum of the years’ digits method
- Double-declining balance method
- Units of production method
Question 21: The Income Statement
Which financial statement is a report of a company’s revenues and expenses during a certain time period?
- Statement of Changes in Equity
- Income Statement
- Statement Of Cash Flows
Question 22: Updating the Balance Sheet
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?
- $1,800 debit in accounts receivable; $3,000 credit in retained earnings; $1,200 debit in cash
- $3,000 debit in retained earnings; $1,200 credit in cash; $1,800 credit in accounts receivable
- $1,800 debit in accounts payable; $1,200 debit in cash; $3,000 credit in retained earnings
- $1,200 credit in cash; $1,800 credit in accounts payable; $3,000 debit in retained earnings
Question 23: Financing Cash Flow
Which is not an example of financing cash flow?
- Paying off a debt of $25,000
- Investing in equipment worth $90,000
- Paying $12,000 worth of dividends to shareholders
- Issuing $42,000 worth of shares
Question 24: Debits on the Ledger Account
Which side of the ledger account are debits recorded on?
- Left
- Right
- Depends on the debit
- Are assets on the balance sheet recorded at their estimated fair market value?
Question 25: Are Assets Recorded at Fair Market Value?
True or False: Assets on the balance sheet are recorded at their estimated fair market value.
- True
- False
Question 26: Crediting Assets
True or False: Increasing an asset involves crediting the account.
- True
- False
Question 27: Unearned Revenues
Unearned revenues are recorded on a company’s balance sheet under which kind of account?
- Current asset
- Owners’ or stockholders’ equity
- Non-current asset
- Liability
Question 28: Minimum Number of Accounts in an Accounting Entry
What is the minimum number of accounts that accounting entries can have?
- One
- Four
- Five
- Two
Question 29: The Listing of Financial Accounts
The listing of all the financial accounts within a company’s general ledger is called the _____.
- Chart of accounts
- Journal entry
- Balance sheet
- P&L statement
Question 30: Current Asset Classification
Which is not classified as a current asset?
- Cash
- Product inventory
- Liquid assets
- Prepaid liabilities
Question 31: Operating Income Calculation
Which formula is used to calculate operating income?
- Revenue + Direct Operating Cost = Operating Income
- Indirect Operating Cost – Revenue = Operating Income
- Gross Income – Operating Expenses = Operating Income
- Gross Profit – Indirect Operating Cost = Operating Income
Question 32: Accrual Accounting
Which of these statements about accrual accounting is true?
- Revenue is recorded only when payments are received, while expenses are recognized when they’re incurred.
- All revenue from prepayments should be recognized when the payment is received, while expenses accrue over the life of the obligation.
- If the business has provided the goods or services and can reasonably expect to receive cash, it can recognize the revenue in that period.
- The matching principle dictates that expenses should be recognized when they are incurred, regardless of when revenue is recognized.
Question 33: Debits in Journal Entries
In a journal entry, a debit decreases which of the following accounts?
- Cash
- Accounts Payable
- Supplies Expense
- Both a and c
Question 34: The Double-Declining Balance Depreciation Method
Which describes the double-declining balance depreciation method?
- Estimated salvage value is greater at the end of the assets’ useful life than with straight-line depreciation.
- It yields reports of higher income in the early years and lower income later on.
- This method decreases the useful life of the asset and disposal costs by half.
- The depreciation expense is larger in the first few years and gets smaller as time goes on.
Question 35: Earnings Before Interest and Taxes (EBIT)
Which one of these WILL NOT yield earnings before interest and taxes (EBIT)?
- Revenue – Cost of goods sold – Operating expenses
- Net income + Tax expense + Interest expense
- Sales + Taxes + Interest
- Gross profit – Operating expenses
Congratulations! You’ve completed the accounting test questions. Now, let’s dive into the explanations and understand the correct answers.
Explanation of Accounting Test Questions
Question 1: The Core Financial Statements
The correct answer is: The Trial Balance. The trial balance is an intermediary step in the financial close process, and it is not considered a core financial statement.
Question 2: The Income Statement
The correct answer is: All of the above. The income statement can be prepared in different forms, including the single-step income statement, condensed income statement, and common-sized income statement.
Question 3: Double-Entry Accounting
The correct answer is: Assets, Expenses, Losses. In double-entry accounting, assets, expenses, and losses increase with debits.
Question 4: Assets on the Balance Sheet
The correct answer is: True. Accounts receivable are found in the current asset section of a balance sheet.
Question 5: Cash Basis vs. Accrual Basis Accounting
The correct answer is: Record revenue when it is collected. Companies that use the cash basis of accounting record revenue when it is collected, rather than when it is earned.
Question 6: The Main Sections on a Balance Sheet
The correct answer is: Assets, liabilities, equity. The main sections on a balance sheet are assets, liabilities, and equity.
Question 7: Financial Statements Usage
The correct answer is: All of the above. Financial statements are used for internal analysis, external negotiation, and compliance purposes.
Question 8: Accounts Payable
The correct answer is: A supplier delivers raw materials on credit. Accounts payable increase when a supplier delivers raw materials on credit.
Question 9: CPA Knowledge Requirements
The correct answers are: Auditing and International banking laws. Certified public accountants (CPAs) must have in-depth knowledge of auditing and international banking laws to pass the CPA licensing exam.
Question 10: Recording Transactions
The correct answer is: A note receivable is recorded in non-current assets. When a customer is unable to pay for a previous credit sale, and a promissory note is made, the note receivable is recorded as a non-current asset.
Question 11: Liabilities under the Accrual Basis
The correct answer is: When incurred. Liabilities are recorded under the accrual basis of accounting when they are incurred, regardless of when they are paid.
Question 12: Time in Accounting
The correct answer is: Balance sheets reflect a company’s financial position at a certain point in time. Balance sheets provide a snapshot of a company’s financial position at a specific point in time.
Question 13: Property, Plant, and Equipment on the Statement of Cash Flows
The correct answer is: As a use of cash in the “cash from investing activities” section. The purchase of property, plant, and equipment is reflected as a use of cash in the “cash from investing activities” section of the statement of cash flows.
Question 14: Journal Entry for a Business Loan
The correct answer is: Debit $100,000 non-current liabilities, Credit $100,000 non-current assets. Taking out a business loan involves debiting the non-current liabilities account and crediting the non-current assets account.
Question 15: Cost of Goods Sold
The correct answer is: Inventory. Cost of goods sold is associated with the inventory account.
Question 16: US Generally Accepted Accounting Principles (GAAP)
The correct answers are: Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC). These organizations are involved in the development of US Generally Accepted Accounting Principles (GAAP).
Question 17: Inventory Valuation Methods
The correct answer is: First-in-First-Out (FIFO). FIFO assumes that the oldest inventory is sold first, reflecting the most current market value for inventory on hand.
Question 18: Intercompany Accounting
The correct answer is: Intercompany transactions are between different legal entities under the same parent control. Intercompany transactions involve different legal entities under the same parent control.
Question 19: Tax-Return Depreciation Method
The correct answer is: Modified accelerated cost recovery systems. The modified accelerated cost recovery systems (MACRS) method is used for US tax returns and is not GAAP-compliant.
Question 20: Amortization of Intangible Assets
The correct answer is: Straight-line method. The straight-line method is the most commonly used method to amortize intangible assets on a company’s financial statements.
Question 21: The Income Statement
The correct answer is: Income Statement. The income statement is a report of a company’s revenues and expenses during a certain time period.
Question 22: Updating the Balance Sheet
The correct answer is: $1,800 debit in accounts receivable; $3,000 credit in retained earnings; $1,200 debit in cash. The sale of $3,000, with $1,200 paid in cash and $1,800 sold on credit, would increase accounts receivable and retained earnings while decreasing cash.
Question 23: Financing Cash Flow
The correct answer is: Investing in equipment worth $90,000. Investing in equipment is not an example of financing cash flow.
Question 24: Debits on the Ledger Account
The correct answer is: Left. Debits are recorded on the left side of the ledger account.
Question 25: Are Assets Recorded at Fair Market Value?
The correct answer is: False. Assets on the balance sheet are recorded at their historical cost, not estimated fair market value.
Question 26: Crediting Assets
The correct answer is: False. Increasing an asset involves debiting the account, not crediting it.
Question 27: Unearned Revenues
The correct answer is: Liability. Unearned revenues are recorded as a liability on a company’s balance sheet.
Question 28: Minimum Number of Accounts in an Accounting Entry
The correct answer is: Two. An accounting entry must have at least two accounts: one that is debited and another that is credited.
Question 29: The Listing of Financial Accounts
The correct answer is: Chart of accounts. The listing of all the financial accounts within a company’s general ledger is called the chart of accounts.
Question 30: Current Asset Classification
The correct answer is: Prepaid liabilities. Prepaid liabilities are not classified as current assets.
Question 31: Operating Income Calculation
The correct answer is: Gross Income – Operating Expenses = Operating Income. Operating income is calculated by subtracting operating expenses from gross income.
Question 32: Accrual Accounting
The correct answer is: If the business has provided the goods or services and can reasonably expect to receive cash, it can recognize the revenue in that period. Accrual accounting recognizes revenue when it is earned, even if the payment is received at a later date.
Question 33: Debits in Journal Entries
The correct answer is: Both a and c. Debits can decrease the cash account or the supplies expense account, depending on the nature of the transaction.
Question 34: The Double-Declining Balance Depreciation Method
The correct answer is: The depreciation expense is larger in the first few years and gets smaller as time goes on. The double-declining balance depreciation method front-loads the depreciation expense, resulting in larger expenses in the early years and smaller expenses later on.
Question 35: Earnings Before Interest and Taxes (EBIT)
The correct answer is: Gross profit – Operating expenses. Earnings before interest and taxes (EBIT) is calculated by subtracting operating expenses from gross profit.
Congratulations on completing the accounting test questions! Assessing your knowledge of accounting principles and concepts is essential for anyone pursuing a career in finance. By understanding the core financial statements, double-entry accounting, cash basis vs. accrual basis, and other fundamental concepts, you can build a strong foundation for your accounting journey.
Remember, continuous learning and practice are key to mastering accounting. Use this assessment as a starting point to identify areas for improvement and focus on further enhancing your knowledge and skills. Good luck on your accounting journey!
