Question 1

Which of the following best describes the relationship between the income statement and the statement of retained earnings?

Accepted Answer

Net income from the income statement is added to the beginning retained earnings on the statement of retained earnings.

Question 2

A company pays $2,000 cash for a one-year insurance policy on January 1. At the end of March, what adjusting entry is required?

Accepted Answer

Debit Insurance Expense $$500; Credit Prepaid Insurance 500$$

Question 3

Which of the following accounts would NOT appear on a balance sheet?

Accepted Answer

Service Revenue

Question 4

A company receives $5,000 cash in advance for services to be performed next month. What is the correct journal entry at the time of receipt?

Accepted Answer

Debit Cash $$5,000; Credit Unearned Revenue 5$$,000

Question 5

Which of the following best describes a contra asset account?

Accepted Answer

It is an account that offsets an asset account and is increased with a credit.

Question 6

If a company has current assets of $$50,000 and current liabilities of 25$$,000, what is its current ratio?

Accepted Answer

$2.00

Question 7

Which of the following transactions would NOT affect the accounting equation?

Accepted Answer

Paying a previously recorded liability

Question 8

A company earned $$10,000 in revenue, incurred 7$$,000 in expenses, and declared $$1,000 in dividends. What is the ending balance in retained earnings if the beginning balance was 5$$,000?

Accepted Answer

$9,000

Question 9

Which of the following is true regarding the rules of debits and credits?

Accepted Answer

Assets are increased with debits and decreased with credits.

Question 10

A company has total assets of $$120,000 and total liabilities of 90$$,000. What is the debt to total assets ratio?

Accepted Answer

$$0.60$$

Question 11

Which of the following best illustrates the matching principle?

Accepted Answer

Recording expenses in the same period as the revenues they help generate

Question 12

Which of the following is an example of an accrual adjustment?

Accepted Answer

Recording interest revenue earned but not yet received

Question 13

If a company issues common stock for $15,000 cash, what is the effect on the accounting equation?

Accepted Answer

Assets increase by $$15,000; Stockholders’ Equity increases by 15$$,000

Question 14

Which of the following accounts normally has a credit balance?

Accepted Answer

Accumulated Depreciation

Question 15

A company performed services worth $8,000 on account. What is the correct journal entry?

Accepted Answer

Debit Accounts Receivable $$8,000; Credit Service Revenue 8$$,000

Question 16

Which of the following best describes the purpose of adjusting journal entries?

Accepted Answer

To record transactions that have not yet been booked and ensure revenues and expenses are recognized in the correct period

Question 17

A company has net income of $$12,000, dividends of 2$$,000, and beginning retained earnings of $10,000. What is the ending retained earnings balance?

Accepted Answer

$20,000

Question 18

Which of the following is a characteristic of a current liability?

Accepted Answer

It is expected to be paid within one year or the operating cycle, whichever is longer.

Question 19

A company purchased equipment for $30,000 cash. How does this transaction affect the company’s working capital?

Accepted Answer

Working capital decreases by $30,000

Question 20

Which of the following best describes the effect of declaring and paying a cash dividend?

Accepted Answer

Decreases assets and decreases stockholders’ equity

Financial Accounting Exam 1 Review: Core Concepts and Applications

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