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Question 1. What is the primary purpose of bookkeeping within the accounting process? A) To prepare financial statements B) To record, classify, and summarize financial transactions C) To analyze financial performance D) To audit financial records Answer: B Explanation: Bookkeeping involves systematically recording, classifying, and summarizing financial transactions, serving as the foundation for preparing financial reports. Question 2. Which of the following is a primary user of financial information? A) Competitors B) External creditors C) Management D) All of the above Answer: D Explanation: Financial information is used by external users (creditors, investors), management, and other stakeholders for decision-making purposes. Question 3. Which type of business organization offers limited liability to its owners?
A) Sole proprietorship B) Partnership C) Corporation D) None of the above Answer: C Explanation: Corporations provide limited liability, meaning owners are generally not personally liable for the company's debts. Question 4. The basic accounting equation is Assets = Liabilities + Equity. If a business borrows $5,000 cash, how does this transaction affect the equation? A) Assets increase by $5,000; liabilities increase by $5, B) Assets decrease by $5,000; liabilities decrease by $5, C) Assets increase by $5,000; equity increases by $5, D) No change Answer: A Explanation: Borrowing cash increases assets (cash) and liabilities (loan payable) equally, maintaining the equation's balance. Question 5. Which step is part of the accounting cycle? A) Budgeting B) Recording transactions in the journal C) Conducting a market analysis
Question 8. When a company receives cash before providing services, this transaction creates: A) A liability called unearned revenue B) An asset called prepaid expense C) An expense D) An owner’s equity increase Answer: A Explanation: Receiving cash in advance for services creates a liability called unearned revenue until the service is performed. Question 9. Which rule applies when recording a debit to an asset account? A) It decreases the asset B) It increases the asset C) It has no effect D) It increases liabilities Answer: B Explanation: Debiting an asset account increases its balance; crediting decreases it. Question 10. Which of the following is recorded in the general journal? A) Summary of ledger balances
B) Original entries of transactions C) Adjusted trial balance D) Financial statements Answer: B Explanation: The general journal records original transactions (journal entries) as they occur. Question 11. Posting journal entries from the journal to the ledger is called: A) Journalizing B) Posting C) Reconciling D) Trial balancing Answer: B Explanation: Posting involves transferring journal entries to the respective accounts in the ledger. Question 12. A T-account is used primarily to: A) Record transactions B) Track account balances visually C) Prepare financial statements D) Adjust entries
Question 15. The main purpose of the Income Statement is to: A) Show the financial position at a specific point in time B) Report revenues, expenses, and net income or loss for a period C) Detail cash inflows and outflows D) Show owner's equity changes Answer: B Explanation: The income statement measures profitability by reporting revenues and expenses over a period. Question 16. Which financial statement provides information about an entity’s assets, liabilities, and equity at a specific date? A) Income Statement B) Balance Sheet C) Cash Flow Statement D) Statement of Owner's Equity Answer: B Explanation: The balance sheet displays the entity’s financial position at a specific point in time. Question 17. The Statement of Cash Flows is divided into which three categories? A) Operating, investing, and financing activities B) Assets, liabilities, and equity
C) Revenues, expenses, and net income D) Assets, liabilities, and owner’s equity Answer: A Explanation: Cash flows are categorized into operating, investing, and financing activities to show cash movement during a period. Question 18. Which statement explains the relationship among financial statements? A) The income statement feeds into the statement of owner’s equity B) The balance sheet summarizes revenues and expenses C) The cash flow statement reports net income D) All of the above Answer: A Explanation: Net income from the income statement flows into the statement of owner’s equity, linking the statements. Question 19. Adjusting entries are needed to: A) Correct errors in the books B) Recognize revenues and expenses in the correct period C) Close temporary accounts D) Record transactions for the next period Answer: B
A) Recognizing revenue that was received in advance B) Recording expenses paid in advance C) Writing off uncollectible accounts D) Calculating depreciation Answer: A Explanation: Deferred revenue is recognized when previously received cash is earned, requiring an adjustment to record revenue. Question 23. Which method of depreciation allocates an equal expense each period over the asset’s useful life? A) Straight-line method B) Units-of-production method C) Declining-balance method D) Sum-of-the-years'-digits method Answer: A Explanation: The straight-line method evenly spreads depreciation expense over the asset's useful life. Question 24. Which depreciation method accelerates depreciation, recording higher expenses in the early years? A) Straight-line method B) Units-of-production method
C) Declining-balance method D) Sum-of-the-years'-digits method Answer: C Explanation: The declining-balance method is an accelerated depreciation method, with higher expenses early on. Question 25. When recording depreciation, the journal entry typically involves debiting: A) Accumulated depreciation B) Depreciation expense C) Asset account D) Cash Answer: B Explanation: Depreciation expense is debited to recognize expense, while accumulated depreciation is credited. Question 26. The difference between book depreciation and tax depreciation is primarily due to: A) Variations in depreciation methods and rules B) Accounting errors C) Incorrect asset valuation D) Changes in market value
Question 29. Which inventory costing method results in higher net income during periods of rising prices? A) FIFO B) LIFO C) Specific identification D) Weighted-average Answer: A Explanation: FIFO yields higher net income during inflation because it matches older, lower costs with current revenues. Question 30. The Lower of Cost or Market (LCM) rule requires inventory to be valued at: A) The lower of historical cost or replacement cost B) The higher of cost or market value C) The lower of cost or net realizable value D) The original purchase price only Answer: C Explanation: LCM mandates valuing inventory at the lower of cost or net realizable value to avoid overstating assets. Question 31. Closing entries are made to: A) Transfer temporary account balances to retained earnings
B) Adjust asset accounts C) Record new transactions D) Prepare the trial balance Answer: A Explanation: Closing entries transfer balances of revenues, expenses, and dividends to retained earnings to reset temporary accounts. Question 32. Which account is credited during the closing process? A) Revenue accounts B) Expense accounts C) Dividends account D) Retained earnings Answer: A Explanation: Revenue accounts are credited to close them out, transferring their balances to retained earnings. Question 33. The post-closing trial balance contains only: A) Temporary accounts B) Permanent accounts C) All accounts with balances D) Only cash and accounts receivable
Question 36. A red flag indicating potential fraud is: A) Consistent and accurate records B) Unexplained discrepancies in cash balances C) Regular internal audits D) Proper segregation of duties Answer: B Explanation: Unexplained discrepancies or anomalies in records may signal fraudulent activity. Question 37. Which document is used by an employee to claim withholding allowances? A) W- 2 B) W- 3 C) W- 4 D) I- 9 Answer: C Explanation: Form W-4 is used by employees to indicate withholding allowances for payroll tax purposes. Question 38. The purpose of a bank reconciliation is to: A) Verify cash balances between company records and bank statement B) Prepare financial statements
C) Record all cash transactions D) Calculate payroll taxes Answer: A Explanation: Bank reconciliation compares the company's cash records to bank statements to identify discrepancies. Question 39. Which of the following could cause a bank reconciliation discrepancy? A) Outstanding checks B) Deposits in transit C) Bank errors D) All of the above Answer: D Explanation: All listed factors can cause differences between the bank statement and company records. Question 40. When recording bank service charges, the journal entry generally involves: A) Debit to Bank Service Charges, credit to Cash B) Debit to Cash, credit to Expenses C) Debit to Expenses, credit to Bank D) No entry needed
Question 43. Which method estimates uncollectible accounts based on a percentage of current receivables? A) Direct write-off method B) Allowance method C) Aging method D) Percentage-of-sales method Answer: C Explanation: The aging method estimates uncollectibles by assessing receivables based on their age. Question 44. The direct write-off method records uncollectible accounts: A) When accounts are deemed uncollectible B) At the end of the fiscal year C) Using an allowance account D) As soon as the account is overdue Answer: A Explanation: The direct write-off method recognizes bad debts only when accounts are confirmed uncollectible. Question 45. To write off an uncollectible account using the allowance method, the journal entry includes: A) Debit Allowance for Doubtful Accounts, credit Accounts Receivable
B) Debit Bad Debt Expense, credit Accounts Receivable C) Debit Accounts Receivable, credit Allowance D) No journal entry is required Answer: A Explanation: The allowance method uses an allowance account to write off specific uncollectible accounts. Question 46. When a previously written-off account is collected, the entry involves: A) Reversing the write-off and recording cash collection B) Recording revenue C) No entry needed D) Debit to Bad Debt Expense Answer: A Explanation: The account is reinstated by reversing the write-off, then recording the cash received. Question 47. Recording a purchase of inventory on credit involves: A) Debiting Inventory and crediting Accounts Payable B) Debiting Accounts Payable and crediting Inventory C) Debiting Cash and crediting Inventory D) Debiting Expenses and crediting Accounts Payable
