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Question 1. Which of the following is an example of an accrual adjusting entry at year-end? A) Recording depreciation expense B) Recording prepaid insurance C) Recording accrued salaries payable D) Recording supplies purchased Answer: C Explanation: Accrued salaries payable records expenses incurred but not yet paid, which is an accrual adjusting entry. Question 2. What is the primary purpose of adjusting entries? A) To correct errors in the trial balance B) To update account balances to reflect revenues earned and expenses incurred C) To close temporary accounts D) To balance the bank statement Answer: B Explanation: Adjusting entries ensure that revenues and expenses are recorded in the period in which they occur, matching the accrual basis of accounting. Question 3. A company paid $4,800 cash for a 12-month insurance policy on November 1. What adjusting entry is needed at December 31? A) Debit Prepaid Insurance $800; Credit Insurance Expense $ B) Debit Insurance Expense $800; Credit Prepaid Insurance $8 00 C) Debit Insurance Expense $4,800; Credit Prepaid Insurance $4, D) Debit Prepaid Insurance $4,000; Credit Insurance Expense $4, Answer: B Explanation: Two months’ insurance ($4,800/12*2 = $800) has expired by December 31, so Insurance Expense is debited and Prepaid Insurance is credited. Question 4. Which account is credited when recording accrued interest revenue at year-end? A) Interest Revenue B) Interest Receivable C) Cash D) Unearned Revenue Answer: A Explanation: Accrued interest revenue increases Interest Receivable (asset) and recognizes Interest Revenue (revenue). Question 5. Which of the following errors will not cause the trial balance to be out of balance? A) A transposition error in posting B) Failure to record a transaction C) Entering an amount in the wrong account D) Recording a debit as a credit Answer: B Explanation: Failing to record a transaction affects equal debits and credits, so the trial balance still balances, but the accounts are incomplete. Question 6. Which entry corrects an error if $500 in utilities expense was debited to Rent Expense? A) Debit Utilities Expense $500; Credit Rent Expense $ B) Debit Rent Expense $500; Credit Utilities Expense $ C) Debit Utilities Expense $500; Credit Utilities Payable $
D) Debit Rent Expense $250; Credit Utilities Expense $ Answer: A Explanation: Remove the $500 from Rent Expense and correctly add it to Utilities Expense. Question 7. Which of the following items would be added to the book balance during bank reconciliation? A) Outstanding checks B) Deposits in transit C) Bank service charges D) Interest earned on the account Answer: D Explanation: Interest earned is not yet recorded in the books; it must be added. Question 8. What is the first step in performing a bank reconciliation? A) Adjust the book balance for errors B) Compare the bank statement to the company’s cash ledger C) Add outstanding checks to the bank balance D) Subtract service charges from the book balance Answer: B Explanation: The first step is to compare the bank statement and company records to identify differences. Question 9. Which situation requires a journal entry after completion of the bank reconciliation? A) An outstanding check B) Deposit in transit C) Bank service charge recorded by the bank D) Checks not yet received by the payee Answer: C Explanation: Bank service charges are not yet recorded in the company’s books, so a journal entry is needed. Question 10. A check written for $360 was recorded as $630 in the company books. What is the adjustment? A) Add $270 to the book balance B) Subtract $270 from the book balance C) Add $360 to the bank balance D) Subtract $630 from the bank balance Answer: A Explanation: The book balance is $270 less than it should be; adding $270 corrects the error. Question 11. What would be the effect of failing to record an accrued expense? A) Overstated assets and understated liabilities B) Overstated expenses and understated liabilities C) Understated expenses and understated liabilities D) Overstated revenues and overstated liabilities Answer: C Explanation: Both expenses and liabilities are understated if an accrued expense is not recorded. Question 12. Which of the following would be considered a deferral? A) Accrued interest income
Question 18. Which of the following is a permanent account? A) Insurance Expense B) Service Revenue C) Accumulated Depreciation D) Dividends Answer: C Explanation: Accumulated Depreciation is a balance sheet account and is not closed at the end of the period. Question 19. If a check is returned by the bank marked NSF, what journal entry is required? A) Debit Cash; Credit Accounts Receivable B) Debit Accounts Receivable; Credit Cash C) Debit Cash; Credit Sales D) Debit Bad Debt Expense; Credit Cash Answer: B Explanation: NSF (non-sufficient funds) checks must be reversed from Cash and recorded back to Accounts Receivable. Question 20. Which of the following is NOT a correct step in the accounting cycle? A) Journalize transactions B) Post to ledger accounts C) Prepare a bank reconciliation D) Prepare the adjusted trial balance Answer: C Explanation: Bank reconciliations are important, but not a formal step in the accounting cycle. Question 21. What is the effect of recording revenue before it is earned? A) Liabilities understated B) Assets overstated C) Revenues overstated D) Expenses understated Answer: C Explanation: Recording revenue too early overstates total revenues. Question 22. Which of the following should be subtracted from the bank statement balance during reconciliation? A) Bank service charges B) Outstanding checks C) Deposits in transit D) Interest earned Answer: B Explanation: Outstanding checks have been recorded in the books but not yet cleared by the bank. Question 23. Which of the following is NOT considered an adjusting entry? A) Accruing salaries expense B) Recording depreciation C) Paying a utility bill D) Deferring unearned revenue Answer: C Explanation: Paying a utility bill is a regular transaction, not an adjustment.
Question 24. A company received a $2,000 advance on December 15 for services to be performed in January. What is the adjusting entry at December 31 if no services have been performed? A) Debit Cash $2,000; Credit Service Revenue $2, B) Debit Unearned Revenue $2,000; Credit Service Revenue $2, C) No adjusting entry needed D) Debit Service Revenue $2,000; Credit Unearned Revenue $2, Answer: C Explanation: Since no service was performed, unearned revenue remains a liability; no adjustment is necessary. Question 25. What is the purpose of closing entries? A) To correct errors B) To update asset accounts C) To transfer temporary account balances to retained earnings D) To prepare the adjusted trial balance Answer: C Explanation: Closing entries move revenue, expense, and dividend accounts to retained earnings. Question 26. If an error caused an expense to be recorded twice, what is the effect on net income? A) Net income is understated B) Net income is overstated C) Net income is not affected D) Retained earnings are overstated Answer: A Explanation: Double recording an expense reduces net income more than it should. Question 27. Which entry corrects a $1,200 cash payment incorrectly posted as $120? A) Debit Cash $1,080; Credit Expense $1, B) Debit Expense $1,080; Credit Cash $1, C) Debit Cash $120; Credit Expense $ D) Debit Expense $120; Credit Cash $ Answer: B Explanation: Increase the expense and cash outflow by the missing $1,080. Question 28. Which of the following is a typical reconciling item on a bank reconciliation? A) Outstanding checks B) Notes payable C) Depreciation expense D) Prepaid insurance Answer: A Explanation: Outstanding checks are a common reconciling item as they have not yet cleared the bank. Question 29. What is the correct entry for recording accrued interest expense? A) Debit Interest Expense; Credit Interest Payable B) Debit Interest Payable; Credit Interest Expense C) Debit Interest Receivable; Credit Interest Revenue D) Debit Interest Expense; Credit Cash Answer: A Explanation: Accrued interest expense increases Interest Expense and sets up Interest Payable.
Question 36. A salaried employee earns $48,000 annually, paid biweekly. What is the gross pay per pay period? A) $1,846. B) $2,000. C) $1,600. D) $923. Answer: A Explanation: $48,000/26 pay periods = $1,846.15 per period. Question 37. An hourly employee works 45 hours in one week at $20/hour. Overtime is paid at 1.5x regular rate. What is the gross pay? A) $ B) $ C) $1, D) $1, Answer: B Explanation: 40 hours x $20 = $800; 5 hours x $30 = $150; Total = $950. Question 38. Which form is used to report annual federal unemployment tax? A) Form 940 B) Form 941 C) Form W- 2 D) Form 1099 Answer: A Explanation: Form 940 is used for annual FUTA reporting. Question 39. Which payroll form must be given to employees by January 31 for the previous year? A) W- 3 B) W- 2 C) 941 D) 940 Answer: B Explanation: The W-2 is distributed to employees by January 31. Question 40. Which of the following is NOT included in an employee’s gross pay? A) Commission earned B) Overtime pay C) Employer Social Security tax D) Regular wages Answer: C Explanation: Employer Social Security tax is not part of gross pay; it’s an employer expense. Question 41. What is the employer's responsibility for FICA taxes? A) Pay the employee’s entire FICA tax B) Withhold only the employee’s share C) Withhold and match the employee’s share D) Do nothing; employees pay all FICA taxes Answer: C Explanation: Employers withhold the employee’s share and pay a matching amount.
Question 42. Which of the following is not subject to payroll tax withholding? A) Regular salary B) Commission C) Reimbursement of business expenses D) Overtime pay Answer: C Explanation: Genuine business expense reimbursements are not subject to payroll tax. Question 43. Which method is NOT acceptable for calculating depreciation? A) Straight-line B) Declining balance C) Sum-of-the-years’-digits D) Direct write-off Answer: D Explanation: Direct write-off is not a depreciation method. Question 44. What is the formula for straight-line depreciation? A) (Cost – Salvage Value) / Useful Life B) (Cost + Salvage Value) x Useful Life C) Cost / Useful Life D) (Cost – Accumulated Depreciation) / Useful Life Answer: A Explanation: Depreciation is spread evenly: (Cost – Salvage Value) divided by useful life. Question 45. Which depreciation method results in higher expense in the early years? A) Straight-line B) Units-of-production C) Double declining balance D) None; all methods are equal Answer: C Explanation: Double declining balance is an accelerated method, resulting in higher expense early. Question 46. Which asset should NOT be depreciated? A) Office equipment B) Land C) Building D) Vehicles Answer: B Explanation: Land is not depreciated since it does not wear out. Question 47. If a company changes from straight-line to double declining balance depreciation, what is required? A) No disclosure is necessary B) Disclose the change in financial statements C) Report the change only to the IRS D) Apply the change retroactively Answer: B Explanation: Changing depreciation methods requires disclosure in the financial statements.
Question 54. Which IRS form is used to report depreciation of business assets? A) Form 4562 B) Form 940 C) Form 941 D) Form 1099 Answer: A Explanation: Form 4562 is used to report depreciation and amortization. Question 55. For a vehicle used 90% for business and 10% personal, what portion is depreciable? A) 100% B) 90% C) 10% D) 50% Answer: B Explanation: Only the business use portion is depreciated. Question 56. Which of the following describes the FIFO inventory method? A) Last units in are the first sold B) First units in are the first sold C) Average cost of all units is used D) Inventory is valued at market price Answer: B Explanation: FIFO stands for “first-in, first-out.” Question 57. Under the LIFO method, which units are assumed to be sold first? A) First units in B) Last units in C) Units with the highest cost D) Units with the lowest cost Answer: B Explanation: LIFO = “last-in, first-out.” Question 58. The weighted average inventory method is most appropriate when: A) Inventory units are identical and interchangeable B) Inventory costs are highly variable C) Inventory items are unique D) Inventory turnover is low Answer: A Explanation: Weighted average works best for similar, interchangeable items. Question 59. Which inventory system records each purchase and sale continuously? A) Periodic B) Perpetual C) Weighted average D) FIFO Answer: B Explanation: The perpetual system updates inventory records with each transaction. Question 60. Under the periodic inventory system, what account is NOT used? A) Purchases
B) Inventory C) Cost of Goods Sold D) Purchases Returns and Allowances Answer: C Explanation: Cost of Goods Sold is calculated at period end, not recorded directly. Question 61. Which of the following is NOT included in inventory cost? A) Freight-in B) Purchase discounts taken C) Storage D) Sales commissions Answer: D Explanation: Sales commissions are selling expenses, not inventory costs. Question 62. What is the effect on ending inventory when prices are rising and the FIFO method is used? A) Ending inventory is overstated B) Ending inventory is understated C) Ending inventory reflects current costs D) Ending inventory reflects older costs Answer: C Explanation: FIFO leaves the most recent (higher) costs in ending inventory. Question 63. When prices are falling, which inventory method results in the highest cost of goods sold? A) FIFO B) LIFO C) Weighted average D) Perpetual Answer: A Explanation: With falling prices, FIFO assigns higher (older) costs to cost of goods sold. Question 64. Which inventory costing method assigns the most recent cost to cost of goods sold? A) FIFO B) LIFO C) Weighted average D) Specific identification Answer: B Explanation: LIFO assigns the latest costs to cost of goods sold. Question 65. If inventory is understated at year-end, what is the effect on net income? A) Net income is overstated B) Net income is understated C) Net income is unaffected D) Assets are overstated Answer: B Explanation: Understated inventory raises cost of goods sold, lowering net income. Question 66. The lower of cost or net realizable value (LCNRV) rule applies to: A) Inventory valuation
C) Inventory value per unit D) Gross profit margin Answer: A Explanation: The inventory turnover ratio shows how quickly inventory is sold. Question 73. Which of the following is true under the periodic inventory system? A) Inventory is updated after each sale B) Purchases are debited to Inventory C) Inventory is counted at period end to calculate cost of goods sold D) Cost of Goods Sold is updated continuously Answer: C Explanation: Inventory is physically counted at period end to determine cost of goods sold. Question 74. Which type of business is most likely to use the specific identification inventory method? A) Grocery store B) Auto dealership C) Clothing retailer D) Bookstore Answer: B Explanation: Auto dealerships track each vehicle individually, making specific identification suitable. Question 75. Which of the following is NOT included in the calculation of cost of goods sold under a periodic system? A) Beginning inventory B) Purchases C) Ending inventory D) Purchase discounts forfeited Answer: D Explanation: Only discounts taken are subtracted; forfeited discounts are not included. Question 76. In a perpetual inventory system, a sale of goods is recorded with: A) One journal entry B) Two journal entries C) No journal entries until period end D) An adjusting entry only Answer: B Explanation: One entry records the sale, and another records the cost of goods sold. Question 77. Which of the following is required for a bank reconciliation? A) Matching the check register to the general ledger B) Comparing the cash book balance to the bank statement balance C) Confirming all transactions with the bank teller D) Reconciling non-cash assets Answer: B Explanation: Bank reconciliations compare the company’s records to the bank statement. Question 78. If a company issues a check but forgets to record it, what is the effect on the book balance? A) Overstated
B) Understated C) No effect D) Understated liabilities Answer: A Explanation: Cash is overstated in the books until the check is recorded. Question 79. If a deposit in transit is not recorded by the bank, what is the effect on the bank balance? A) Overstated B) Understated C) No effect D) Understated liabilities Answer: B Explanation: The bank balance is understated until the deposit is processed. Question 80. What is the result if a company fails to adjust for accrued revenue? A) Understated assets and understated revenues B) Overstated assets and understated revenues C) Overstated revenues and understated assets D) Understated revenues and overstated liabilities Answer: A Explanation: Accrued revenue increases both assets (receivable) and revenue. Question 81. What is the effect if a company overstates ending inventory? A) Overstated cost of goods sold B) Understated net income C) Overstated net income D) No effect on net income Answer: C Explanation: Overstating ending inventory reduces cost of goods sold, raising net income. Question 82. Which of the following is an example of a contra-asset account? A) Inventory B) Accumulated Depreciation C) Prepaid Insurance D) Payroll Expense Answer: B Explanation: Accumulated Depreciation reduces the value of the related asset. Question 83. When is the entry to record depreciation expense typically made? A) When the asset is purchased B) At the end of each accounting period C) At the time of disposal D) When the asset is fully depreciated Answer: B Explanation: Depreciation expense is recorded at each period end. Question 84. Which payroll form summarizes total wages and withholdings for all employees? A) W- 2 B) 941
D) Sum-of-the-years’-digits Answer: B Explanation: Straight-line spreads the expense evenly over the asset's useful life. Question 91. If a business fails to record accrued interest revenue, what is the effect? A) Overstated assets and understated revenues B) Understated assets and understated revenues C) Understated assets and overstated revenues D) Overstated liabilities and understated revenues Answer: B Explanation: Accrued interest increases both assets and revenues. Question 92. Which of the following is subtracted from the book balance during bank reconciliation? A) Deposits in transit B) Outstanding checks C) Bank service charges D) Interest earned Answer: C Explanation: Bank service charges reduce the book balance. Question 93. Which account is credited when recording accrued payroll at period end? A) Payroll Expense B) Payroll Payable C) Cash D) Salaries Expense Answer: B Explanation: Payroll Payable is credited to record the liability. Question 94. When is the cost of goods sold determined under a periodic system? A) After each sale B) At the end of the accounting period C) When purchases are made D) When inventory is ordered Answer: B Explanation: Cost of goods sold is calculated at period end. Question 95. Which of the following is NOT a component of payroll tax expense? A) Employer’s share of Social Security and Medicare B) Federal unemployment tax C) State unemployment tax D) Federal income tax withheld from employees Answer: D Explanation: Federal income tax withheld is not an employer expense. Question 96. What is the effect of an error that understates accrued liabilities? A) Overstated net income B) Understated net income C) Overstated assets D) Understated assets
Answer: A Explanation: Not recording liabilities means expenses are understated, raising net income. Question 97. When should unearned revenue be recognized as revenue? A) When cash is received B) When the goods/services are provided C) At the end of the period D) At the time the invoice is created Answer: B Explanation: Revenue is recognized when earned, not when cash is received. Question 98. What is included in an employee’s gross pay calculation? A) Regular wages and bonuses B) Only regular wages C) Only overtime pay D) Only base salary Answer: A Explanation: Gross pay includes all compensation: wages, overtime, bonuses, and commissions. Question 99. Which of the following is NOT an adjusting entry? A) Accrued expenses B) Prepaid expenses C) Depreciation D) Paying for office supplies Answer: D Explanation: Paying for office supplies is a regular transaction. Question 100. Why is it important to separate business and personal use of assets for depreciation? A) To maximize tax deductions B) To avoid double taxation C) To comply with IRS rules D) To increase net income Answer: C Explanation: Only business use of an asset is depreciable for tax purposes. Question 101. Which inventory method results in the lowest net income during inflation? A) FIFO B) LIFO C) Weighted average D) Specific identification Answer: B Explanation: LIFO assigns higher (recent) costs to cost of goods sold, reducing net income. Question 102. If a company discovers it overstated prior-year depreciation, what is the correction? A) Reverse the depreciation in the current year B) Adjust retained earnings and accumulated depreciation C) Ignore the error D) Record additional depreciation in the current year Answer: B
Answer: A Explanation: Payroll tax expense is accrued along with payroll. Question 109. Which account is debited for the employer’s share of FICA taxes? A) Payroll Expense B) FICA Taxes Payable C) Salaries Payable D) Cash Answer: A Explanation: Payroll Expense is debited for the employer’s payroll taxes. Question 110. If an asset is used 75% for business and 25% for personal use, what percentage can be depreciated for tax? A) 75% B) 100% C) 25% D) 0% Answer: A Explanation: Only the business-use portion is depreciable for tax purposes. Question 111. Which journal entry corrects an error where $400 was posted as $4,000 to Supplies Expense? A) Debit Supplies Expense $3,600; Credit Cash $3, B) Debit Cash $3,600; Credit Supplies Expense $3, C) Debit Supplies $3,600; Credit Supplies Expense $3, D) Debit Supplies Expense $400; Credit Cash $ Answer: B Explanation: The overstatement of $3,600 must be reversed from Supplies Expense and returned to Cash. Question 112. What is the journal entry for a returned customer check marked NSF? A) Debit Cash; Credit Accounts Receivable B) Debit Accounts Receivable; Credit Cash C) Debit Bad Debt Expense; Credit Cash D) Debit Cash; Credit Bad Debt Expense Answer: B Explanation: The original cash receipt is reversed, and the amount is restored to Accounts Receivable. Question 113. Which of the following is NOT a payroll form? A) W- 2 B) 941 C) 4562 D) 940 Answer: C Explanation: Form 4562 is for depreciation, not payroll. Question 114. What is the effect if a purchase is recorded in the wrong period? A) Overstated expenses in one period, understated in another B) Overstated assets
C) No effect on financial statements D) Understated liabilities Answer: A Explanation: Expenses are incorrectly allocated between periods. Question 115. Which payroll record tracks each employee’s cumulative earnings and withholdings? A) Payroll register B) Employee earnings record C) Time card D) W-2 form Answer: B Explanation: The employee earnings record shows cumulative payroll data for each employee. Question 116. What is the journal entry to record the employer’s portion of payroll taxes? A) Debit Payroll Expense; Credit Payroll Taxes Payable B) Debit Payroll Taxes Payable; Credit Payroll Expense C) Debit Payroll Expense; Credit Cash D) Debit Payroll Taxes Payable; Credit Cash Answer: A Explanation: Payroll Expense is debited for the employer’s share of payroll taxes. Question 117. Which of the following is a reconciling item only on the book side of a bank reconciliation? A) Outstanding checks B) Deposits in transit C) Bank service charges D) Bank errors Answer: C Explanation: Bank service charges are recorded only in the bank statement, requiring a book entry. Question 118. What is the effect if a company fails to record accrued interest expense? A) Overstated net income and understated liabilities B) Understated assets and net income C) Overstated expenses and understated assets D) No effect on financial statements Answer: A Explanation: Not recording the expense overstates net income and understates liabilities. Question 119. Which of the following is NOT a typical payroll deduction? A) Social Security tax B) Health insurance premiums C) State unemployment tax D) Federal income tax Answer: C Explanation: State unemployment tax is paid by the employer, not withheld from employees. Question 120. Which of the following is NOT an element of internal control over payroll? A) Separation of duties B) Pre-numbered checks C) Direct deposit of wages
