Test Your Knowledge On Accounting

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| By Mcquistan.2015
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Mcquistan.2015
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  • 1/23 Questions

    A current liability is a liability that can reasonably be expected to be paid:

    • Within one year
    • Between six months and 18 months
    • Out of currently recognized revenues
    • Out of cash currently on hand
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About This Quiz

Explore your understanding of Accounting with this engaging quiz. It covers key concepts like income statements, accrual accounting, inventory systems, and liabilities. Perfect for students or professionals looking to assess or refresh their knowledge in financial accounting.

Test Your Knowledge On Accounting - Quiz

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  • 2. 

    Which of the following is included in the computation of gross profit?

    • Income tax expense

    • Other income-other expense

    • Cost of Goods Sold

    • Operating Expenses

    Correct Answer
    A. Cost of Goods Sold
    Explanation
    The computation of gross profit includes the cost of goods sold. Gross profit is calculated by subtracting the cost of goods sold from the total revenue generated from the sale of goods or services. It represents the profit made before deducting other operating expenses and taxes. Therefore, the cost of goods sold is an essential component in determining the gross profit of a business.

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  • 3. 

    At October 1, 2014, Metz Industries had an Accounts Payable balance of $30,000. During the month, the company made purchases on account of $25,000 and made payments on account of $40,000. At October 31, 2014, the Accounts Payable balance is

    • $30,000 debit

    • $10,000 credit

    • $15,000 credit

    • $40,000 credit

    Correct Answer
    A. $15,000 credit
    Explanation
    During the month, Metz Industries made purchases on account of $25,000 and made payments on account of $40,000. Since the company made more payments than purchases, the accounts payable balance would decrease. The initial balance of $30,000 would be reduced by $40,000, resulting in a credit balance of $10,000. However, since the question asks for the balance at the end of the month, we need to consider the purchases made as well. Therefore, the accounts payable balance at October 31, 2014, would be a credit balance of $15,000.

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  • 4. 

    Accounts receivable are valued and reported on the balance sheet

    • In the investment section

    • At gross amounts less sales returns and allowances

    • At cash realizable value

    • Only if they are not past due

    Correct Answer
    A. At cash realizable value
    Explanation
    Accounts receivable are valued and reported on the balance sheet at cash realizable value. This means that they are recorded at the amount that the company expects to collect from its customers. This value is determined by subtracting any estimated sales returns and allowances from the gross amount of accounts receivable. It is important to report accounts receivable at cash realizable value because it provides a more accurate representation of the amount of cash that the company is likely to collect in the future.

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  • 5. 

    The most useful financial statement for analyzing a company’s profitability is the:

    • Balance Sheet

    • Statement of Retained Earnings

    • Statement of Cash Flows

    • Income Statement

    Correct Answer
    A. Income Statement
    Explanation
    The income statement is the most useful financial statement for analyzing a company's profitability because it provides a summary of the company's revenues, expenses, and net income over a specific period of time. It shows how much money the company has earned from its primary operations and how much it has spent on operating expenses. By comparing the revenues and expenses, investors and analysts can assess the company's profitability and determine if it is generating a profit or a loss. The income statement also includes important metrics such as gross profit margin, operating profit margin, and net profit margin, which further help in evaluating the company's profitability.

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  • 6. 

    With accrual accounting, revenues should be recorded when:

    • Cash is collected from customers

    • It is probable that a sale will be made

    • The company decides it wants to

    • Earned

    Correct Answer
    A. Earned
    Explanation
    Accrual accounting requires revenues to be recorded when they are earned, regardless of when the cash is collected. This means that revenue should be recognized when the company has performed the necessary activities to earn the revenue, such as delivering goods or providing services, regardless of whether or not the customer has paid yet. This ensures that revenues are matched with the expenses incurred to generate them, providing a more accurate representation of the company's financial performance.

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  • 7. 

    With accrual accounting, expenses should be recorded when:

    • Costs are incurred

    • An invoice is received

    • The company decides it wants to

    • Cash payments are made

    Correct Answer
    A. Costs are incurred
    Explanation
    In accrual accounting, expenses should be recorded when costs are incurred. This means that expenses should be recognized and recorded in the financial statements when the goods or services are received or consumed, regardless of when the cash payments are made or when invoices are received. This method ensures that expenses are matched with the revenue they help generate, providing a more accurate representation of the company's financial performance.

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  • 8. 

    The financial statement that reports what a company owns, what it owes, and what the owners of the company currently have invested in the company is called:

    • A balance sheet

    • An income statement

    • A Statement of Stockholders' Equity

    • A Statement of Cash Flows

    Correct Answer
    A. A balance sheet
    Explanation
    A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It reports the company's assets, liabilities, and shareholders' equity. Assets represent what the company owns, liabilities represent what it owes, and shareholders' equity represents the owners' investment in the company. Therefore, a balance sheet is the correct answer as it accurately describes the financial statement that reports what a company owns, what it owes, and what the owners of the company currently have invested in the company.

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  • 9. 

    With accrual accounting, costs (expenses) need to be matched either to “specific accounting periods” or

    • To operating cycles

    • When paid for

    • To reporting entities

    • To the period when revenues are earned

    Correct Answer
    A. To the period when revenues are earned
    Explanation
    In accrual accounting, costs or expenses are matched to the period when revenues are earned. This means that expenses are recognized and recorded in the same period as the related revenues. This principle ensures that financial statements accurately reflect the financial performance of a business during a specific period, even if the expenses are paid for at a different time. By matching expenses to the period when revenues are earned, accrual accounting provides a more accurate representation of the financial position and performance of a company.

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  • 10. 

    On Oct. 1, 2014, the Landlord Corp. received $32,000 in advance for eight months of rent from Oct. 1 of 2014 through May 31 of 2015. Landlord closes its books once a year on Dec. 31. How much does Landlord want to report in “rent Income” on its 2014 Income Statement?

    • $4,000

    • $12,000

    • $20,000

    • $32,000

    Correct Answer
    A. $12,000
    Explanation
    The Landlord Corp. received $32,000 in advance for eight months of rent from Oct. 1, 2014, through May 31, 2015. Since the Landlord closes its books once a year on Dec. 31, only the portion of the advance rent that applies to the current year should be reported as rent income on the 2014 Income Statement. Therefore, the Landlord wants to report $12,000 in "rent income" on its 2014 Income Statement.

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  • 11. 

    The two primary external users of financial accounting reports are

    • The federal government and management

    • The federal government and investors

    • Management and creditors

    • Investors and creditors

    Correct Answer
    A. Investors and creditors
    Explanation
    Investors and creditors are the two primary external users of financial accounting reports. Investors use these reports to make informed decisions about buying, selling, or holding shares of a company's stock. They analyze the financial statements to assess the company's profitability, liquidity, and overall financial health. On the other hand, creditors use financial accounting reports to evaluate a company's creditworthiness and determine whether to extend credit or lend money to the company. They review the financial statements to assess the company's ability to repay its debts and meet its financial obligations.

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  • 12. 

    A measurement of an entity’s ability to pay its obligations due within the next year or operating cycle is called

    • Profitability

    • Long-term risk

    • Leverage

    • Liquidity

    Correct Answer
    A. Liquidity
    Explanation
    Liquidity refers to an entity's ability to meet its short-term financial obligations. It measures the availability of cash or assets that can be easily converted into cash to pay off debts within the next year or operating cycle. It is an important indicator of financial health and stability, as a lack of liquidity can lead to difficulties in meeting financial obligations and may indicate potential financial distress.

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  • 13. 

    What kind of adjusting entry would use a “Rent Payable” account?

    • Accrual

    • Depreciation

    • Transaction

    • Deferral

    Correct Answer
    A. Accrual
    Explanation
    The correct answer is Accrual. An adjusting entry that uses a "Rent Payable" account would typically be an accrual entry. This means that the company has incurred an expense for rent but has not yet paid it. By recording this entry, the company recognizes the expense in the appropriate accounting period, even though the payment has not been made. This ensures that the financial statements accurately reflect the company's financial position and performance.

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  • 14. 

    In performing a complete liquidation of a corporation, which of the following is the proper order of cash distributions?

    • Common shareholders, preferred shareholders, and creditors

    • Common shareholders, creditors, and preferred shareholders

    • Creditors, preferred shareholders, and common shareholders

    • Creditors, common shareholders, and preferred shareholders

    Correct Answer
    A. Creditors, preferred shareholders, and common shareholders
    Explanation
    In a complete liquidation of a corporation, the proper order of cash distributions is to first pay the creditors, followed by the preferred shareholders, and finally the common shareholders. This order ensures that the corporation fulfills its obligations to its creditors before distributing any remaining funds to the shareholders. Preferred shareholders have a higher priority than common shareholders as they have a predetermined right to receive a certain amount of dividends or assets in the event of liquidation. Common shareholders receive any remaining funds after the creditors and preferred shareholders have been paid.

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  • 15. 

    If total liabilities decreased by $4,000, then:

    • Stockholders' equity must have decreased by $4,000

    • Assets must have decreased by $4,000, or stockholders' equity must have increased by $4,000

    • Assets and stockholders' equity each increased by $2,000

    • Assets must have increased by $4,000

    Correct Answer
    A. Assets must have decreased by $4,000, or stockholders' equity must have increased by $4,000
    Explanation
    If total liabilities decreased by $4,000, it means that the company's debts or obligations have decreased. In order to balance the equation, either the company's assets must have decreased by $4,000 or the stockholders' equity must have increased by $4,000. This is because assets minus liabilities equals stockholders' equity. Therefore, if liabilities decrease, either assets must decrease to maintain the equation or stockholders' equity must increase to compensate for the decrease in liabilities.

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  • 16. 

    Which of the following is an inventory system?

    • LIFO

    • Perpetual

    • Weighted Average

    • Gross Profit

    Correct Answer
    A. Perpetual
    Explanation
    A perpetual inventory system is a method of tracking inventory in real-time, where every transaction involving the inventory is recorded immediately. This system provides up-to-date information on the quantity and value of inventory on hand, allowing for accurate inventory management and control. LIFO, Weighted Average, and Gross Profit are not inventory systems, but rather different methods of valuing inventory or calculating profitability.

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  • 17. 

    Most companies record revenue:

    • During the production process

    • When production is completed

    • At the point of sale

    • When cash is received for the sale

    Correct Answer
    A. At the point of sale
    Explanation
    Revenue is recorded at the point of sale because it represents the moment when a company transfers ownership of goods or services to a customer in exchange for payment. This is in accordance with the revenue recognition principle, which states that revenue should be recognized when it is earned and realized or realizable. Recording revenue at the point of sale accurately reflects the company's financial performance and allows for consistent and transparent reporting.

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  • 18. 

    Which one of the following represents the expanded basic accounting equation?

    • Assets = Liabilities + Common Stock + Dividends - Revenue - Expenses

    • Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues

    • Assets - Liabilities - Dividends = Common Stock + Revenue - Expenses

    • Assets = Revenues + Expenses - Liabilities

    Correct Answer
    A. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues
    Explanation
    The correct answer represents the expanded basic accounting equation because it correctly shows that assets, dividends, and expenses are on the left side of the equation, while liabilities, common stock, and revenues are on the right side. This equation follows the fundamental principle of accounting that states that the total value of assets must be equal to the total value of liabilities and owner's equity.

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  • 19. 

    On January 15, Nifty Company sells merchandise on account to Martinez Associates for $2,000 with terms 3/10, n/30. On January 20, Martinez returns merchandise worth $400 to Nifty. On January 24, payment is received from Martinez for the balance due. What is the amount of cash received?

    • $1,600

    • $1,552

    • $1,540

    • $1,120

    Correct Answer
    A. $1,552
    Explanation
    The amount of cash received is $1,552. This can be calculated by subtracting the return of merchandise ($400) from the original amount due ($2,000), resulting in a balance of $1,600. Since the terms are 3/10, n/30, Martinez is eligible for a discount of 3% if payment is made within 10 days. Therefore, the cash received will be 97% of the balance due, which is $1,552.

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  • 20. 

    All of the following requirements about internal controls were enacted under the Sarbanes Oxley Act of 2002 except:

    • Independent outside auditors must attest to the level of internal control

    • Companies must develop sound internal controls over financial reporting

    • Companies must continually assess the functionality of internal controls

    • Independent outside auditors must eliminate redundant internal control

    Correct Answer
    A. Independent outside auditors must eliminate redundant internal control
    Explanation
    The Sarbanes Oxley Act of 2002 requires companies to have independent outside auditors attest to the level of internal control, develop sound internal controls over financial reporting, and continually assess the functionality of internal controls. However, it does not mandate that independent outside auditors must eliminate redundant internal control. This means that while auditors are responsible for evaluating and reporting on the effectiveness of internal controls, they are not required to eliminate redundancy in the controls.

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  • 21. 

    “Merchandise Inventory” is reported at lower-of-cost-market because of the accounting concept of:

    • Matching

    • Consistency

    • Conservatism

    • Materiality

    Correct Answer
    A. Conservatism
    Explanation
    The correct answer is "Conservatism." The concept of conservatism in accounting states that when there are multiple acceptable alternatives for reporting an item, the one that is least likely to overstate assets and income should be chosen. Reporting merchandise inventory at lower-of-cost-market is an application of conservatism, as it ensures that inventory is not overstated on the balance sheet. By valuing inventory at the lower of its cost or market value, potential losses are recognized immediately, which is in line with the conservative approach of recognizing losses as soon as they are probable.

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  • 22. 

    In theory, the reason that depreciation is record on fixed assets is because of:

    • Revenue recognition

    • Consistency

    • Conservatism

    • Matching

    Correct Answer
    A. Matching
    Explanation
    Depreciation is recorded on fixed assets for the purpose of matching. Matching principle in accounting states that expenses should be recognized in the same period as the revenue they help generate. Since fixed assets generate revenue over multiple periods, their cost is allocated over the useful life of the asset through depreciation. This ensures that the expense of using the asset is matched with the revenue it helps generate, resulting in more accurate financial statements.

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  • 23. 

    Under the allowance method, writing off an uncollectible account

    • Affects only the balance sheet accounts

    • Affects both balance sheet and income statement accounts

    • Affects only income statement accounts

    • Is not an acceptable practice

    Correct Answer
    A. Affects only the balance sheet accounts
    Explanation
    Under the allowance method, writing off an uncollectible account affects only the balance sheet accounts. This is because when an account is deemed uncollectible, the company reduces the accounts receivable on the balance sheet by the amount of the uncollectible account, thus decreasing the company's assets. At the same time, the company also reduces the allowance for doubtful accounts, which is a contra-asset account on the balance sheet. This adjustment does not affect the income statement accounts, such as revenues or expenses, as it does not impact the company's profitability or expenses for the period.

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  • Current Version
  • Mar 20, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • May 02, 2016
    Quiz Created by
    Mcquistan.2015
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