35 Basic Accounting Test Questions

1. 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
2. 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
3. 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
4. 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.
5. 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.
6. 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
7. How are a company’s financial statements used?

a. For internal analysis

b. For external negotiation
c. For compliance
d. All of the above
8. 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
9. 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
10. 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.
11. 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
12. Which is true about time in accounting?

a. Current liabilities are debts payable within 2 years.

b. Balance sheets reflect a company’s financial position at a certain
point in time.
c. The time value of money is a finance concept, not relevant in
accounting.
d. Accounts receivable are more easily collected as time passes.
13. 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.
14. 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
15. Which accounts are associated with cost of goods sold?

a. Accrued interest
b. Depreciation
c. Dividends
d. Inventory
16. 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)
17. 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
18. 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.
19. Which is the method of depreciation used for US tax returns that
is not GAAP-compliant?

a. Straight-line method
b. Modified accelerated cost recovery systems
c. Double-declining balance method
 d. Units of production method
20. What is the most-used method to amortize intangible assets on a
company’s financial statements?

a. Straight-line method
b. Sum of the years’ digits method
c. Double-declining balance method
d. Units of production method
21. 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
22. 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
23. 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
24. Which side of the ledger account are debits recorded on?

a. Left
b. Right
 c. Depends on the debit
25. Are assets on the balance sheet recorded at their estimated fair
market value?

a. Yes
b. No
c. Sometimes; it’s situational
26. Increasing an asset involves crediting the account.

a. True
b. False
27. 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
28. What is the minimum number of accounts that accounting entries
can have?

a. One
b. Four
c. Five
d. Two
29. 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
30. Which is not classified as a current asset?

a. Cash
 b. Product inventory
c. Liquid assets
d. Prepaid liabilities
e. Property
31. 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
32. Which of these statements about accrual accounting is true?

a. Revenue is recorded only when payments are received, while

expenses are recognized when they're incurred.
b. All revenue from prepayments should be recognized when the
payment is received, while expenses accrue over the life of the
obligation.
c. If the business has provided the goods or services and can
reasonably expect to receive cash, it can recognize the revenue in
that period.
d. The matching principle dictates that expenses should be
recognized when they are incurred, regardless of when revenue is
recognized.
33. In a journal entry, a debit decreases which of the following
accounts?

a. Cash
b. Accounts Payable
c. Supplies Expense
d. Both a and c
34. Which describes the double-declining balance depreciation
method?

a. Estimated salvage value is greater at the end of the assets’ useful

life than with straight-line depreciation.
 b. It yields reports of higher income in the early years and lower
income later on.
c. This method decreases the useful life of the asset and disposal
costs by half.
d. The depreciation expense is larger in the first few years and gets
smaller as time goes on.
35. Which one of these WILL NOT yield earnings before interest and
taxes (EBIT)?

a. Revenue - Cost of goods sold - Operating expenses

b. Net income + Tax expense + Interest expense
c. Sales + Taxes + Interest
d. Gross profit - Operating expenses

Answer Key With Explanations

1. 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.

2. 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.

3. A — Assets, expenses and losses increase with debits. Revenue,

liabilities and gains increase with credits.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.
11. A — Under the accrual basis of accounting, liabilities are recorded
in the fiscal period that they are incurred or committed, regardless of
when paid.

12. B — Balance sheets are prepared "as of" a specified date.

Current liabilities are due within the next 12 months. Time value of
money, or net present value, is often used by accountants such as for
lease accounting. Accounts receivable become less likely to be paid as
they age.

13. 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.

14. 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.

15. 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.

16. A, B, C & D — All of the organizations listed are involved in

development of financial accounting standards.

17. 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.

18. 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.

19. B — The IRS requires the MACRS method for most fixed assets.
MACRS is not GAAP-compliant because salvage values are ignored
 and because it relies on an IRS-determined table of useful lives that is
inconsistent with GAAP principles.

20. A — The straight-line method is the only GAAP-compliant method

for amortizing intangible assets.

21. 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.

22. 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.

23. 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.

24. 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.

25. B — Assets are recorded at their historical cost values, which

means that they are documented at their original cost and time
acquired.
26. B — Increasing an asset involves debiting the account, because
assets and expenses have natural debit balances.

27. 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.

28. D — All accounting entries must contain at least two accounts:

one that is debited and another that is credited.

29. 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.

30. E — Considering that current assets are expected to be converted

to cash within a year, property, which is a long-term asset often held for
multiple years, would not be classified as such.

31. 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.

32. C — 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 accrual concept requires that revenues and costs are
recognized when they are earned or incurred, rather than when they are
received in cash or paid. This method tends to provide companies with
better and more comprehensive insights into their profitability and
overall financial health.

33. B — Accounts payable tracks the money businesses owe to their

creditors, so when businesses begin to pay off their purchases, which
are recorded as debits, the balance in accounts payable decreases.
 34. D — The depreciation expense is larger in the first few years and
gets smaller as time goes on. Double-declining balance depreciation
is an accelerated depreciation method that is used to offset an asset’s
increased maintenance costs with lower depreciation expenses
throughout its lifetime. For example, in knowing that assets will have
lower repair and maintenance expenses in their early years, companies
allocate higher depreciation expenses to newer assets.

35. C — Sales + Taxes + Interest.

Earnings before interest and taxes (EBIT) is a business’s net income
before interest and taxes are deducted, and it’s often used as a
measure of operating profit. There are multiple ways to calculate EBIT;
no matter which you use, the metric provides a look at a company’s
profitability regardless of its capital structure.

Accounting Basics FAQ

What are the five basic accounting principles?
There are many principles of accounting that guide the way accountants
record transactions. Four accounting principles are considered basic:
historical cost, revenue recognition, matching and full disclosure. When
referring to "5 basic accounting principles," the fifth is objectivity.

What are basic accounting questions?

Basic accounting questions focus on topics concerning the financial
statements and how transactions are recorded.

What are the basics of accounting?

Accounting basics include how to value business transactions, how to record
activity in a company’s books and how to report business results using
financial statements.

What is an accounting assessment test?

An accounting assessment test gauges an individual’s knowledge of basic
accounting information, often used to screen potential candidates for
bookkeeping and lower-level accounting jobs.