Accounting Test 2 Practice
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Which of the following businesses is most likely to use a periodic inventory system?
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A beer bar
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An aircraft manufacturer
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A supermarket that is part of a national chain
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An independently owned art gallery with a manual account system
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This practice quiz for 'Accounting Test 2' focuses on inventory systems, including periodic and perpetual systems, and their impacts on financial statements. It assesses understanding of inventory management, cost of goods sold, and preparation of financial statements, crucial for accounting professionals.
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- 2.
A periodic inventory system eliminates the need for:
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Taking an annual physical inventory
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Recording the revenue from sales transactions
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Recording the cost of merchandise sold as sales occur
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None of the above
Correct Answer
A. Recording the cost of merchandise sold as sales occurExplanation
A periodic inventory system eliminates the need for recording the cost of merchandise sold as sales occur. In a periodic inventory system, the cost of merchandise sold is calculated at the end of a specific period, usually at the end of the accounting period, through a physical count of inventory. This means that the cost of merchandise sold is not recorded at the time of each sale. Instead, it is recorded periodically, simplifying the recording process and reducing the frequency of entries.Rate this question:
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- 3.
If management wants to know the cost and quantity of merchandise on hand at all times, the business will probably:
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Use a periodic inventory system
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Maintain an inventory subsidiary ledger
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Take a complete physical inventory each day
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Debit all purchases of merchandise directly to the Cost of Goods sold account
Correct Answer
A. Maintain an inventory subsidiary ledgerExplanation
Maintaining an inventory subsidiary ledger allows management to keep track of the cost and quantity of merchandise on hand at all times. This ledger provides detailed information about each item in the inventory, including its cost, quantity, and any changes that occur, such as purchases or sales. By using an inventory subsidiary ledger, management can easily monitor and control their inventory levels, make informed decisions about reordering, and accurately calculate the cost of goods sold.Rate this question:
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- 4.
In a perpetual inventory system, the entry to record the cost of goods sold always includes an entry of equal amount to the:
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Inventory account
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Sales Account
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Purchases account
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None of the above
Correct Answer
A. Inventory accountExplanation
In a perpetual inventory system, the entry to record the cost of goods sold always includes an entry of equal amount to the Inventory account. This is because the perpetual inventory system continuously updates the inventory balance after each transaction, allowing for real-time tracking of inventory levels and cost of goods sold. By debiting the Inventory account, the system reduces the quantity and value of inventory, reflecting the cost of goods sold. Therefore, the correct answer is Inventory account.Rate this question:
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- 5.
Prior to taking a physical inventory at year-end, the perpetual inventory records of Athena Designs showed an inventory of $26,000, sales of $358,000, and the cost of goods sold of $215,000. The year-end physical inventory indicated merchandise on hand costing $24,000. The company's gross profit for the year was:
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$334,000
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$145,000
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$141,000
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Some other amount
Correct Answer
A. $141,000Explanation
The gross profit can be calculated by subtracting the cost of goods sold from the sales. In this case, the cost of goods sold is given as $215,000 and the sales are given as $358,000. Therefore, the gross profit is $358,000 - $215,000 = $143,000. However, since the year-end physical inventory indicated merchandise on hand costing $24,000, this needs to be subtracted from the gross profit. Therefore, the final gross profit for the year is $143,000 - $24,000 = $141,000.Rate this question:
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- 6.
The normal order in which the financial statements are prepared is:
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Balance Sheet, income statement, statement of retained earnings
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Income statement, statement of retained earnings, balance sheet
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Income tax return, income statement, balance sheet
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Income statement, statement of cash flows, balance sheet
Correct Answer
A. Income statement, statement of retained earnings, balance sheetExplanation
The correct answer is income statement, statement of retained earnings, balance sheet. This is the normal order in which financial statements are prepared. The income statement shows the company's revenues and expenses over a specific period of time, resulting in net income or loss. The statement of retained earnings shows the changes in the company's retained earnings account, including net income or loss, dividends, and adjustments. Finally, the balance sheet provides a snapshot of the company's assets, liabilities, and shareholders' equity at a specific point in time.Rate this question:
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- 7.
If Income Summary has a net credit balance, it signifies:
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A net loss
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Net income
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A reduction of net worth
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Dividends have been declared
Correct Answer
A. Net incomeExplanation
If Income Summary has a net credit balance, it signifies net income. This means that the total revenue earned during a specific period exceeds the total expenses incurred. A net credit balance in the Income Summary account indicates that the company has made a profit, resulting in an increase in its overall net worth.Rate this question:
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- 8.
If a business closes its accounts only at year-end:
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Financial statements are prepared only at year-end
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Adjusting entries are made only at year-end
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Revenue and expense accounts reflect year-to-date amounts throughout the year
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Monthly and quarterly financial statements cannot be prepared
Correct Answer
A. Revenue and expense accounts reflect year-to-date amounts throughout the yearExplanation
If a business closes its accounts only at year-end, it means that the financial statements are prepared only once at the end of the year. This also implies that adjusting entries, which are necessary to accurately reflect the financial position and performance of the business, are made only at year-end. As a result, revenue and expense accounts reflect year-to-date amounts throughout the year, meaning that they accumulate the revenues and expenses incurred from the beginning of the year until the end. Since financial statements are prepared only at year-end, monthly and quarterly financial statements cannot be prepared.Rate this question:
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- 9.
Assets are considered current assets if they are cash or will usually be inverted into cash:
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Within a month or less
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Within 3 months
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Within a year or less
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Within 6 months or less
Correct Answer
A. Within a year or lessExplanation
Assets are considered current assets if they can be converted into cash within a year or less. This means that these assets have a short-term nature and can be easily liquidated. The time frame of one year or less is used to determine whether an asset can be quickly turned into cash to meet short-term obligations. Assets such as cash, accounts receivable, and inventory are examples of current assets.Rate this question:
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- 10.
Which account listed below is classified as contra-revenue account?
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Cost of Goods Sold
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Gross Profit
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Sales Discounts
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Purchases
Correct Answer
A. Sales DiscountsExplanation
Sales Discounts is classified as a contra-revenue account because it represents the discounts given to customers for early payment or other reasons. Contra-revenue accounts are deducted from gross revenue to calculate net revenue. Sales Discounts has a debit balance and is subtracted from gross sales to arrive at net sales.Rate this question:
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- 11.
Gross Profit is the difference between:
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Net sales and the cost of goods sold
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The cost of merchandise purchased and the cost of merchandise sold
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Net sales and net income
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Net sales and all expenses
Correct Answer
A. Net sales and the cost of goods soldExplanation
Gross profit is calculated by subtracting the cost of goods sold from net sales. This represents the amount of revenue generated from the sale of goods before deducting any expenses. By subtracting the cost of goods sold, which includes the direct costs associated with producing or purchasing the goods sold, from the net sales, the gross profit can be determined. This measure helps assess the profitability of a company's core operations and is an important indicator of its financial performance.Rate this question:
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- 12.
The credit term2.10, n.30 means:
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That after 10 days 2% interest is charged
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That there is a 10% discount if payment is received within 30 days
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That there is a 2% discount if payment is received within 10 days, otherwise, full payment is due within 30 days
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There is a 10% discount if paid immediately and 2% if paid within 30 days
Correct Answer
A. That there is a 2% discount if payment is received within 10 days, otherwise, full payment is due within 30 daysExplanation
The credit term 2.10, n.30 means that there is a 2% discount if payment is received within 10 days. If payment is not received within 10 days, the full payment is due within 30 days. This credit term allows the buyer to take advantage of a small discount if they pay earlier, but if they do not, they are required to make the full payment within 30 days.Rate this question:
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- 13.
The basic purpose of a subsidiary ledger is to:
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Provide a chronological record of all business transactions
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Provide details about the individual items comprising the balance of a general ledger account
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Enable accountants to prepare financial statements
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Provide persons outside of the organization with detailed information about the company's operations
Correct Answer
A. Provide details about the individual items comprising the balance of a general ledger accountExplanation
A subsidiary ledger is a detailed record that provides information about the individual items that make up the balance of a general ledger account. It helps in maintaining a more detailed and organized record of transactions, allowing for easier analysis and reconciliation. By keeping track of specific details related to each transaction, such as dates, amounts, and descriptions, a subsidiary ledger enables accountants to have a clearer understanding of the transactions that contribute to the balance of a particular account. This information is crucial for accurate financial reporting and decision-making.Rate this question:
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- 14.
In a perpetual inventory system, two entries usually are made to record each sales transition. The purposes of these entries are best described as follows:
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On entry recognizes the sales revenue, and the other recognizes the cost of goods sold
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One entry records the purchase of the merchandise, and the other records the sale
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One entry records the cost of goods sold, and the other reduces the balance in the Inventory account
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One entry updates the general ledger, and the other updates the subsidiary ledgers
Correct Answer
A. On entry recognizes the sales revenue, and the other recognizes the cost of goods soldExplanation
In a perpetual inventory system, two entries are made to record each sales transaction. One entry recognizes the sales revenue, which represents the amount of money earned from the sale of goods. The other entry recognizes the cost of goods sold, which represents the cost incurred to produce or acquire the goods that were sold. These two entries are necessary to accurately track the financial impact of sales on the company's revenue and expenses.Rate this question:
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- 15.
Regal Artwork Co. records purchases net of all available purchase discounts. If the company makes payment after the discount has expired, the entry to record the payment should include a:
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Debit to Purchase Discount Lost
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Credit to Purchase Discount Lost
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Debit to Sales Discount
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Credit to Sales Discount
Correct Answer
A. Debit to Purchase Discount LostExplanation
When Regal Artwork Co. makes a payment after the discount has expired, it means that they were not able to take advantage of the purchase discount. This results in a loss for the company, as they have to pay the full amount without any discount. Therefore, the entry to record the payment should include a debit to Purchase Discount Lost, indicating the loss incurred by not being able to avail the discount.Rate this question:
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- 16.
The allowance for Doubtful Accounts will appear on the:
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Income Statement
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Balance Sheet
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Cash flow statement
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Owner's equity statement
Correct Answer
A. Balance SheetExplanation
The allowance for Doubtful Accounts is a contra-asset account that is used to estimate and record the amount of accounts receivable that is expected to be uncollectible. It is reported on the balance sheet as a deduction from accounts receivable. This allows for a more accurate presentation of the accounts receivable balance by reflecting the anticipated losses due to non-payment. The income statement, cash flow statement, and owner's equity statement do not directly involve the allowance for Doubtful Accounts.Rate this question:
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- 17.
The bookkeeper prepare a check for $68 but accidentally recorded it as $86. When preparing the bank reconciliation, this should be corrected by:
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Adding $18 to the bank statement
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Subtracting $18 from the bank balance
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Adding $18 to the book balance
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Subtracting $18 from the book balance
Correct Answer
A. Adding $18 to the book balanceExplanation
When the bookkeeper accidentally recorded the check as $86 instead of $68, there was an overstatement of $18 in the book balance. To correct this error in the bank reconciliation, $18 should be added to the book balance. This adjustment will ensure that the book balance reflects the correct amount and matches the bank statement.Rate this question:
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- 18.
Financial assets:
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Consist of cash and cash equivalents
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Are reported at cost in the balance sheet
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Included short-term investments i marketable securities and receivables, as well as cash
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Are not very productive assets and should be kept to a minimum in a well-managed company
Correct Answer
A. Included short-term investments i marketable securities and receivables, as well as cashExplanation
The correct answer is "Included short-term investments i marketable securities and receivables, as well as cash." This answer is supported by the statement in the given information that financial assets consist of cash and cash equivalents, which includes short-term investments in marketable securities and receivables. Therefore, these assets are included in the category of financial assets.Rate this question:
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- 19.
When preparing a bank reconciliation, checks outstanding will:
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Increase the balance per depositor's records
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Decrease the balance per depositor's
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Increase the balance per the bank statement
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Decrease the balance per the bank statement
Correct Answer
A. Decrease the balance per the bank statementExplanation
When preparing a bank reconciliation, checks outstanding refers to checks that have been issued by the depositor but have not yet been presented to the bank for payment. These checks are deducted from the balance per the bank statement because they have not yet been cleared by the bank. Therefore, they decrease the balance per the bank statement.Rate this question:
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- 20.
When the account Allowance for Doubtful Accounts is used, writing-off of an uncollectible accounts receivable will:
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Reduce income
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Reduce an expense
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Not change income or total assets
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Increase total assets
Correct Answer
A. Not change income or total assetsExplanation
When the account Allowance for Doubtful Accounts is used to write-off an uncollectible accounts receivable, it means that the company has already anticipated and set aside funds for such potential losses. Therefore, the write-off does not affect income since the expense has already been recognized in the form of the allowance. Additionally, the write-off does not impact total assets because the uncollectible accounts receivable were already accounted for in the allowance, which is a contra asset account.Rate this question:
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- 21.
What is the equation for net income?
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Expenses + Taxes = Net Income
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Revenue - Expenses = Net Income
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Revenue - Expenses + Retained Earnings = Net Income
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Revenue - Dividends = Net Income
Correct Answer
A. Revenue - Expenses = Net IncomeExplanation
The equation for net income is Revenue - Expenses. Net income is calculated by subtracting expenses from revenue. This equation represents the basic formula for determining the profitability of a company after deducting all expenses from its total revenue.Rate this question:
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- 22.
What is the equation for Retained Earning at the end of a period?
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Inventory + Gross Profit = Retained Earnings
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Beginning Retained Earnings - Gross Profit - Inventory = Ending Retained Earnings
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Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
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Beginning Retained Earnings + Dividends - Gross Profit = Ending Retained Earnings
Correct Answer
A. Beginning Retained Earnings + Net Income - Dividends = Ending Retained EarningsExplanation
The equation for Retained Earnings at the end of a period is calculated by adding the Beginning Retained Earnings to the Net Income and then subtracting the Dividends. This equation represents the change in retained earnings over a period, taking into account the starting balance, the profit earned during the period, and any dividends paid out to shareholders.Rate this question:
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- 23.
What do you increase on the statement of retained earnings?
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Dividends
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Business Earnings
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Income
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Business Losses (Depreciation)
Correct Answer
A. Business EarningsExplanation
The statement of retained earnings is increased by business earnings. This is because the statement of retained earnings shows the amount of net income that is retained in the business after dividends are paid out to shareholders. Business earnings represent the profit made by the company, and when these earnings are retained, they contribute to the overall retained earnings of the company.Rate this question:
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- 24.
What do you decrease on the statement of retained earnings?
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Dividends
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Business Earnings
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Business Losses (Depreciation)
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Profit
Correct Answer(s)
A. Dividends
A. Business Losses (Depreciation)Explanation
The statement of retained earnings shows the changes in the retained earnings balance over a period of time. Retained earnings are the portion of a company's profits that are reinvested back into the business rather than distributed to shareholders as dividends. Therefore, when dividends are paid out to shareholders, the retained earnings decrease. Additionally, if the business incurs losses due to depreciation, it also decreases the retained earnings balance. Business earnings and profit, on the other hand, would increase the retained earnings balance.Rate this question:
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- 25.
What goes under "Balance per Bank" when reconciling a bank statement?
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+ Deposits in Transit
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- Deposits in Transit
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+ Deposits by Bank
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- Deposits by Bank
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+/- Bank Adjustments
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+/- Book Adjustments
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+ Outstanding Checks
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- Outstanding Checks
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- Service Charge
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+ Service Charge
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+ NSF Checks
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- NSF Checks
Correct Answer(s)
A. + Deposits in Transit
A. +/- Bank Adjustments
A. - Outstanding ChecksExplanation
"Balance per Bank" when reconciling a bank statement includes the following items: + Deposits in Transit (deposits made by the company that have not yet been recorded by the bank), +/- Bank Adjustments (any adjustments made by the bank that affect the company's account balance), and - Outstanding Checks (checks that have been issued by the company but have not yet been cleared by the bank). These items are added or subtracted from the bank statement balance to arrive at the correct "Balance per Bank".Rate this question:
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- 26.
What goes under "Balance per Depositor" when reconciling a bank statement?
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+ Deposits in Transit
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- Deposits in Transit
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+ Deposits by Bank
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- Deposits by Bank
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+/- Bank Adjustments
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+/- Book Adjustments
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+ Outstanding Checks
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- Outstanding Checks
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- Service Charge
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+ Service Charge
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+ NSF Checks
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- NSF Checks
Correct Answer(s)
A. + Deposits by Bank
A. +/- Book Adjustments
A. - Service Charge
A. - NSF ChecksExplanation
The "Balance per Depositor" when reconciling a bank statement includes the deposits made by the bank, any book adjustments that need to be made, any service charges deducted from the account, and any NSF (non-sufficient funds) checks that were returned.Rate this question:
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- 27.
The 8 steps of the accounting cycle are: __________, ______________, _______________, ________________, ______________, _________________, _________________, ____________________
Correct Answer(s)
General Journal
General Ledger
Unadjusted Trial Balance
Make Adjustments
Adjusted Trial Balance
Financial Statements
Close Temporary Accounts
After-closing Trial BalanceExplanation
The 8 steps of the accounting cycle are as follows: General Journal, General Ledger, Unadjusted Trial Balance, Make Adjustments, Adjusted Trial Balance, Financial Statements, Close Temporary Accounts, and After-closing Trial Balance. These steps outline the chronological order in which financial transactions are recorded, summarized, adjusted, and ultimately presented in the form of financial statements. The General Journal is where all transactions are initially recorded, while the General Ledger serves as a central repository for all accounts. The Unadjusted Trial Balance verifies the equality of debits and credits before any adjustments are made. Adjustments are then made to ensure accurate financial reporting, leading to the creation of the Adjusted Trial Balance. Financial Statements are prepared using the adjusted balances, and temporary accounts are closed to prepare for the next accounting period. Finally, the After-closing Trial Balance confirms that all temporary accounts have been closed properly.Rate this question:
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Mar 21, 2023Quiz Edited by
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Oct 08, 2014Quiz Created by
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