Question 1

Which of the following best describes the primary purpose of the income statement?

Accepted Answer

To summarize the revenues and expenses and calculate net income for a period

Question 2

A company had the following balances at year-end: Assets = $$\120$$,000$$, Liabilities = $$\$$45,000$$, Dividends = $$\5$$,000$$, Revenue = $$\$$80,000$$, Expenses = $$\60$$,000$. What is the ending balance of Equity?

Accepted Answer

$$\120$$,000 - \$$45,000 = \75$$,000$

Question 3

Which of the following is NOT considered a business transaction?

Accepted Answer

Signing a contract to purchase inventory in the future

Question 4

Under the accrual basis of accounting, when is revenue recognized?

Accepted Answer

When the performance obligation is satisfied, regardless of when cash is received

Question 5

A company paid $$\12$$,000$ for a one-year insurance policy on October 1. What is the balance in Prepaid Insurance on December 31 after adjusting entries are made?

Accepted Answer

$$\9$$,000$

Question 6

Which of the following accounts increases with a credit?

Accepted Answer

Accounts Payable

Question 7

If a company earned $$\50$$,000$$ in revenue and incurred $$\$$35,000 in $$expenses, but only received $$\40$$,000$ in cash, what is net income under the accrual basis?

Accepted Answer

$$\15$$,000$

Question 8

Which of the following is a nominal (temporary) account that is closed at the end of the period?

Accepted Answer

Service Revenue

Question 9

A company collected $$\10$$,000$$ in advance for services to be performed next year. At year-end, $$\$$2,500 of $$the services have been performed. What is the balance in Unearned Revenue after adjusting entries?

Accepted Answer

$$\7$$,500$

Question 10

Which of the following best describes the stable-monetary unit assumption?

Accepted Answer

Financial statements ignore the effects of inflation

Question 11

Which of the following journal entries records the accrual of an unpaid expense at year-end?

Accepted Answer

Debit Expense, Credit Payable

Question 12

Which of the following is the correct order of preparation for the financial statements?

Accepted Answer

Income Statement, Retained Earnings Statement, Balance Sheet, Statement of Cash Flows

Question 13

Which of the following is an example of a current asset?

Accepted Answer

Accounts Receivable

Question 14

A company had beginning retained earnings of $$\20$$,000$$. During the year, it reported net income of $$\$$8,000$$ and declared dividends of $$\3$$,000$. What is the ending retained earnings balance?

Accepted Answer

$$\25$$,000$

Question 15

Which of the following best describes the matching principle?

Accepted Answer

Expenses are recognized in the same period as the revenues they help generate

Question 16

Which of the following accounts would be closed with a debit during the closing process?

Accepted Answer

Service Revenue

Question 17

A company performed services worth $$\5$$,000$ on account. What is the correct journal entry?

Accepted Answer

Debit Accounts Receivable $$\5$$,000$$, Credit Service Revenue $$\$$5,000$$

Question 18

Which of the following is NOT a characteristic of useful accounting information?

Accepted Answer

Obsolescence

Question 19

If a company fails to record an adjusting entry for accrued revenue, what is the effect on the financial statements?

Accepted Answer

Assets are understated and net income is understated

Question 20

Which of the following best describes the purpose of closing entries?

Accepted Answer

To transfer the balances of temporary accounts to Retained Earnings

Financial Accounting Exam Review: Chapters 1-3 Study Guide

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