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. The Income Statement

b. Statement of Cash Flows
c. The Trial Balance
d. The Balance Sheet
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.