Accounting Equation

1. During 2017, ABC Company’s assets decreased by CU 50,000, and its liabilities decreased
by CU 90,000. Its stockholders’ equity therefore:

a. Decreased by CU 40,000

b. Increased by CU 40,000

c. Decreased by CU 140,000

d. Increased by CU 140,000

2. The effect on the basic accounting equation of performing services on account is to:

a. Increase assets (cash) and decrease stockholders’ equity (service revenue)

b. Increase assets (accounts receivable) and increase stockholders’ equity (service

c. Increase assets (accounts receivable) and increase stockholders’ equity (sales revenue)

d. Increase assets (cash) and increase stockholders’ equity (sales revenue)

3. What is the system that records the two-sided effect of each transaction in appropriate
accounts?

a. General ledger system

b. Account system

c. Double-entry system

d. Single-entry system

Accounting Books/Accounts

4. Which statement about an account is TRUE?

a. In its simplest form, an account consists of two parts.

b. An account is an individual accounting record of increases and decreases in specific

d. The left side of an account is the credit (decrease) side.

5. Credits:

a. Increase both assets and liabilities

b. Decrease both assets and liabilities

c. Increase assets and decrease liabilities

d. Decrease assets and increase liabilities

6. Below is the general ledger account for Accounts Payable. If you are using MS Excel, what is
the correct formula to calculate the balance of the account on January 5?

a. Balance (Jan 01) + Credit (Jan 01) - Debit (Jan 01)

b. Balance (Jan 01) - Credit (Jan 05) + Debit (Jan 05)

c. Balance (Jan 01) + Credit (Jan 01) - Debit (Jan 01)

d. Balance (Jan 01) + Credit (Jan 05) - Debit (Jan 05)

Accounting Concepts

7. This account represents a distribution of income by a corporation to its stockholders.

b. Retained Earnings

c. Income Summary

d. Net Income

8. Which accounts normally have debit balances?

a. Assets, expenses, and revenues

b. Assets, expenses, and retained earnings

c. Assets, liabilities, and dividends

d. Assets, dividends, and expenses

9. Posting:

a. Normally occurs before journalizing.

b. Transfers ledger transaction data to the journal.

c. Is an optional step in the recording process.

d. Transfers journal entries to ledger accounts.

Financial Statements

10. When preparing financial statements, what is the ideal order of preparation?

a. Balance Sheet, Income Statement, Cash Flows Statement, and Stockholders’ Equity

b. Income Statement, Stockholders’ Equity, Balance Sheet, and Cash Flows Statement

c. Income Statement, Balance Sheet, Stockholders’ Equity, and Cash Flows Statement

d. Balance Sheet, Income Statement, Stockholders’ Equity, and Cash Flows Statement

11. Genesis Company buys a CU900 machine on credit. This transaction will affect the:

a. Income statement only

c. Income statement and retained earnings statement only

d. Income statement, retained earnings statement, and balance sheet

Financial Statement Transfers

12. The net income from the Income Statement is transferred to the (1. which financial
statement?), and the ending balance from this statement is transferred to the (2. which financial
statement?).

a. Balance Sheet → Cash Flow Statement

b. Cash Flow Statement → Retained Earnings Statement

c. Balance Sheet → Retained Earnings Statement

d. Retained Earnings Statement → Balance Sheet

Recognition Principles & Accounting Terms

13. This accounting recognition principle requires companies to recognize revenue in the
accounting period in which the performance obligation is satisfied.

a. Expense Recognition Principle

b. Cash Basis Accounting Recognition Principle

c. Revenue Recognition Principle

d. Accrual Accounting Recognition Principle

14. A dry cleaning company cleans clothes on June 30, but customers do not claim and pay for
their clothes until the first week of July. Under the revenue recognition principle, when should
the company record the revenue?

a. June 30

b. June 1

c. First week of July

d. July 30

15. An accounting period that starts on January 1 and ends on December 31 is called a:
a. Fiscal Year

b. Semi-Annual Year

c. Calendar Year

d. Annual Year

16. A system used for collecting, storing, and processing financial and accounting data is called:

a. Accounting Equation

b. Accounting Information System

c. Financial Statements

d. Accounting Spreadsheet

Cash Basis vs. Accrual Basis Accounting

17. Suppose Fresh Aircon Repair and Maintenance Company performed a service in November
2022. In November 2022, it incurs and pays CU 55,000 in total expenses (salaries and repair
costs). It bills the customer CU 80,000, but does not receive payment until December 2023.

What is the net income or net loss using cash basis accounting in November 2022?

a. Net Income of CU 80,000

b. Net Income of CU 25,000

c. Net Loss of CU 55,000

d. 0

18. Using the same scenario, what is the net income using accrual basis accounting in
November 2022?

a. Net Income of CU 80,000

b. Net Income of CU 25,000

c. Net Loss of CU 55,000

d. 0
19. Assume that the company pays salaries on the 25th of the current month for the 10 working
days (excluding weekends). The payroll period starts on the 14th of the month, and the daily
salary rate is CU 500.

What is the accrued salary payable for the current month?

a. CU 7,500

b. CU 5,000

c. CU 500

d. CU 2,000

20. What is the correct journal entry to record the adjusting entry for accrued salaries at the end
of the month? B
21. Below is the journal entry prior to adjustment:

The company acquired the insurance for 4 months. If no adjusting entry is made, what will be
the effect on the balance sheet and retained earnings?

a. Balance sheet is overstated, retained earnings is understated

b. Balance sheet is understated, retained earnings is overstated

c. Both balance sheet and retained earnings are overstated

d. Both balance sheet and retained earnings are understated

22. What is the basic analysis of the adjusting entry for prepaid insurance?

a. Decrease (credit) to asset and increase (debit) to expense

b. Increase (credit) to asset and decrease (debit) to expense

d. Decrease (credit) to asset and increase (debit) to expense

23. How much is the Insurance Expense for the month?

a. CU 400

b. CU 1,600

c. CU 1,200

d. CU 0

Adjusting Entry for Prepaid Insurance

24. What is the correct adjusting journal entry for prepaid insurance?

a. Debit Insurance Expense 400, Credit Insurance 400

b. Debit Insurance 400, Credit Insurance Expense 400

c. Debit Insurance 1,200, Credit Insurance Expense 1,200

d. Debit Insurance Expense 1,200, Credit Insurance 1,200

Adjusting Entry for Unearned Service Revenue (Liability Method)

25. Below is the journal entry before the adjustment for October:

• Debit Cash 6,200

• Credit Unearned Service Revenue 6,200

The company determines that it should recognize CU 4,000 of revenue in October.

If no adjusting entry is prepared on October 31, what is the basic analysis of the accounts?

a. Liability is overstated while the revenue is understated

b. Liability is understated while the revenue is overstated

c. Liability is understated while the retained earnings is understated

d. Liability is understated while the retained earnings is overstated

a. Decrease (a credit) to liability and increase (a debit) to service revenue

b. Increase (a credit) to liability and decrease (a debit) to service revenue

c. Increase (a credit) to service revenue and decrease (a debit) to liability

d. Decrease (a debit) to liability and increase (a credit) to service revenue

27. What is the adjusting journal entry?

a. Debit Unearned Service Revenue 2,200, Credit Service Revenue 2,200

b. Debit Unearned Service Revenue 4,000, Credit Service Revenue 4,000

c. Debit Service Revenue 2,200, Credit Unearned Service Revenue 1,200

d. Debit Service Revenue 4,000, Credit Unearned Service Revenue 4,000

Depreciation on Equipment

28. Glamore Corporation purchased equipment for CU 60,000 with a useful life of 10 years.
After three (3) months, how much is the balance of the equipment in the general ledger?

a. CU 60,000

b. CU 58,500

c. CU 59,500

d. CU 59,000

Reporting Equipment on the Balance Sheet

29. What is the amount of the equipment that should be reported in the balance sheet?

a. CU 60,000

b. CU 58,500

c. CU 59,500

d. CU 59,000
Closing Entry

An accountant prepares journal entries to:

• Close revenue to income summary for CU 1,500,000

• Close expenses to income summary for CU 1,200,000

• Close the dividend for CU 50,000

30. Calculate the amount of net income.

a. CU 300,000

b. CU 250,000

c. CU 1,500,000

d. CU 1,200,000

31. Calculate the amount of retained earnings.

a. CU 250,000

b. CU 300,000

c. CU 1,200,000

d. CU 1,500,000

32. What is the correct journal entry to close the income summary?

a. Debit Income Summary CU 250,000, Credit Retained Earnings CU 250,000

b. Debit Retained Earnings CU 250,000, Credit Income Summary CU 250,000

c. Debit Income Summary CU 300,000, Credit Retained Earnings CU 300,000

d. Debit Retained Earnings CU 300,000, Credit Income Summary CU 300,000

33. Which accounts are subject to closing entries at the end of the accounting period?

a. Balance sheet accounts

b. Income statement accounts

c. Retained earnings accounts

Income Statement Calculation

GLC Corporation reported the following amounts on December 31, 2017:

• Sales revenue: CU 250,000

• Sales returns and allowances: CU 1,000

• Sales discounts: CU 1,500

• Beginning inventory: CU 17,200

• Purchases: CU 160,400

• Purchase discounts: CU 3,000

• Purchase returns and allowances: CU 1,100

• Freight-in: CU 600

• Freight-out: CU 900

• Ending inventory: CU 20,600

• Operating expenses: CU 85,000

• Tax rate: 15%

34. Calculate the cost of goods sold.

a. CU 154,400

b. CU 153,500

c. CU 152,600

d. CU 99,900

Cost of Goods and Net Income Calculations

35. Calculate the cost of goods purchased.

a. CU 156,000
b. CU 174,100

c. CU 156,900

d. CU 157,800

36. Calculate the net income after tax.

a. CU 79,900

b. CU 94,000

c. CU 79,135

d. CU 93,100

37. Calculate the profit margin rate.

a. 33%

b. 35%

c. 38%

d. 32%

38. Which of the following is the best way to improve the profit margin, assuming that the gross
profit ratio remains the same?

a. Lower the operating expenses

b. Lower the income tax expense

c. Increase net income

d. Increase gross profit

Spreadsheet Adjustments

39. When preparing a spreadsheet, in the balance sheet column, the net income is written on
which side of the money column?

a. Debit side

b. Credit side
40. In the income statement column of the spreadsheet, if there is a net loss, which side of the
money column is higher?

a. Debit

b. Credit

Merchandising Company Transaction

A company makes a credit sale of CU 65,000 on June 13, with terms 2/10, n/30. A return of CU
5,000 is granted on June 16.

41. What amount is received as full payment on June 24?

a. CU 60,000

b. CU 65,000

c. CU 58,800

d. CU 63,700

42. How much is the discount if the customer takes advantage of the discount terms?

a. CU 1,300

b. CU 1,200

c. CU 6,500

d. CU 6,000

43. The company debited the account of Sales Discount to record the receipt of cash. What
inventory system is the company using?

• First In, First Out (FIFO) inventory system

• Perpetual inventory system

• Periodic inventory system

• None of the above

44. The freight cost incurred by the seller is charged as:

• Cost of purchases
 • Operating expenses

• Disregarded

• Other expenses

45. Suppose the goods were not returned, but the seller granted the buyer an allowance by
reducing the purchase price. What is the journal entry to be prepared by the seller?

Debit:

• Sales Returns and Allowances

• Inventory

• Purchase Returns and Allowances

• Sales Returns and Allowances

Credit:

• Accounts Receivable

• Cost of Goods Sold

• Accounts Receivable

• No second journal entry

Financial Statements

46. A statement that presents items not included in the determination of net income, referred to
as other comprehensive income, is called:

• Income Statement

• Balance Sheet

• Comprehensive Income Statement

• Retained Earnings Statement

Perpetual Inventory System

• Only one journal entry is necessary to record cost of goods sold and reduction of
inventory.

• Only one journal entry is necessary to record the receipt of cash and the sales.

• Two journal entries are necessary: one to record the receipt of cash and
sales revenue, and one to record the cost of goods sold and reduction of inventory.

• Two journal entries are necessary: one to record the receipt of cash and
reduction of inventory, and one to record the cost of goods sold and sales revenue.

Income Statement Structure

48. The multiple-step income statement for a merchandising company includes each of these
features except:

• Gross profit

• Cost of goods sold

• A sales section

• An investing activities section

Inventory Systems

49. An inventory system in which a company does not maintain detailed records of goods on
hand throughout the period and determines the cost of goods sold only at the end of an
accounting period is:

a. Periodic Inventory System

b. FIFO Inventory System

c. Perpetual Inventory System

d. LIFO Inventory System

50. An account that is offset against a revenue account on the income statement.

a. Contra-purchases account
b. Contra-asset account

c. Contra-revenue account

d. Contra-liability account