Question 1

A COMPANY BUYS EQUIPMENT FOR $8,000, PAYING $3,000 IN CASH AND SIGNING A NOTE FOR THE REST. WHAT IS THE NET EFFECT ON THE ACCOUNTING EQUATION?

Accepted Answer

TOTAL ASSETS RISE BY $5,000 AND LIABILITIES RISE BY $5,000. Equipment (an asset) goes up $8,000 while Cash (an asset) goes down $3,000, a net asset increase of $5,000; the $5,000 note is a new liability, so both sides of the equation move together and stay balanced. Equity is untouched.

Question 2

A BUSINESS RECEIVES $1,200 IN CASH FOR SERVICES IT PERFORMS TODAY. WHICH JOURNAL ENTRY RECORDS THIS CORRECTLY?

Accepted Answer

DEBIT CASH $1,200; CREDIT REVENUE $1,200. Cash is an asset and rises with a debit; revenue is earned now, so it is recognized with a credit. Unearned revenue would apply only if the work had not yet been done, and accounts receivable would apply only if the customer had not yet paid.

Question 3

A STUDENT WRITES FOUR STATEMENTS ABOUT DEBITS AND CREDITS. WHICH ONE IS INCORRECT?

Accepted Answer

REVENUE ACCOUNTS INCREASE WITH A DEBIT. Revenue accounts increase with a credit, not a debit. Assets and expenses increase on the debit side, while liabilities, equity, and revenue increase on the credit side, which is the pattern the DEALER memory aid captures.

Question 4

DURING THE YEAR A FIRM HAD REVENUES OF $80,000 AND EXPENSES OF $53,000, AND THE OWNER WITHDREW $10,000 FOR PERSONAL USE. WHAT IS NET INCOME FOR THE YEAR?

Accepted Answer

$27,000. Net income is revenues minus expenses: $80,000 minus $53,000 equals $27,000. Owner withdrawals are a distribution of equity, not an expense, so they never enter the net income calculation.

Question 5

A CONSULTANT COMPLETES A PROJECT IN DECEMBER BUT DOES NOT RECEIVE PAYMENT UNTIL JANUARY. UNDER ACCRUAL ACCOUNTING, WHEN IS THE REVENUE RECORDED?

Accepted Answer

IN DECEMBER, WHEN THE WORK IS PERFORMED. Accrual accounting recognizes revenue when it is earned, which is when the service is delivered in December, regardless of when the cash arrives. Recording it in January would be the cash-basis treatment, which GAAP does not allow for most firms.

Question 6

WHICH OF THESE TRANSACTIONS INCREASES AN ASSET AND INCREASES OWNERS' EQUITY AT THE SAME TIME?

Accepted Answer

THE OWNER INVESTS $5,000 OF PERSONAL CASH INTO THE BUSINESS. An owner contribution raises Cash (an asset) and raises owners' equity. Borrowing raises an asset but a liability, buying on credit raises an asset and a liability, and paying a payable lowers an asset and a liability.

Question 7

ON OCTOBER 1 A FIRM PAYS $2,400 FOR TWELVE MONTHS OF INSURANCE. WHAT INSURANCE EXPENSE SHOULD IT RECORD IN THE ADJUSTING ENTRY ON DECEMBER 31?

Accepted Answer

$600. The $2,400 covers 12 months, or $200 per month. By December 31, three months (October, November, December) have been used, so $600 becomes expense and the remaining $1,800 stays on the books as a prepaid asset.

Question 8

A COMPANY REPORTS TOTAL ASSETS OF $150,000 AND TOTAL OWNERS' EQUITY OF $90,000. WHAT ARE ITS TOTAL LIABILITIES?

Accepted Answer

$60,000. Rearranging Assets = Liabilities + Equity gives Liabilities = Assets minus Equity, so $150,000 minus $90,000 equals $60,000. The equation always lets you solve for the missing third term.

Question 9

RETAINED EARNINGS BEGAN THE YEAR AT $40,000. THE COMPANY EARNED $15,000 OF NET INCOME AND PAID $5,000 IN DIVIDENDS. WHAT IS ENDING RETAINED EARNINGS?

Accepted Answer

$50,000. Ending retained earnings equals beginning balance plus net income minus dividends: $40,000 plus $15,000 minus $5,000 equals $50,000. Net income adds to the balance while dividends are paid out of it.

Question 10

A SOFTWARE FIRM COLLECTS $6,000 IN JANUARY FOR A ONE-YEAR SUBSCRIPTION IT WILL DELIVER OVER THE NEXT TWELVE MONTHS. HOW SHOULD THE $6,000 BE RECORDED IN JANUARY?

Accepted Answer

AS A LIABILITY, BECAUSE THE SERVICE HAS NOT YET BEEN DELIVERED. Cash received before the work is done creates an obligation to deliver, so it is recorded as unearned revenue, a liability. Revenue is then recognized $500 at a time as each month of service is provided.

Question 11

A RETAILER PAYS ITS SALESPEOPLE A COMMISSION IN APRIL FOR GOODS THEY SOLD IN MARCH. UNDER THE MATCHING PRINCIPLE, IN WHICH MONTH IS THE COMMISSION EXPENSE RECORDED?

Accepted Answer

MARCH, THE SAME PERIOD AS THE SALES IT GENERATED. The matching principle records an expense in the same period as the revenue it helped earn. The commission relates to March sales, so it belongs in March even though the cash leaves in April.

Question 12

A STORE HAS SALES REVENUE OF $120,000 AND COST OF GOODS SOLD OF $72,000. WHAT IS ITS GROSS PROFIT?

Accepted Answer

$48,000. Gross profit is sales revenue minus cost of goods sold: $120,000 minus $72,000 equals $48,000. Gross profit measures the margin on the goods before operating expenses like rent and salaries are subtracted.

Question 13

A DELIVERY TRUCK COSTING $30,000 WITH A $5,000 SALVAGE VALUE AND A FIVE-YEAR LIFE IS EXPENSED AT $5,000 EACH YEAR THROUGH STRAIGHT-LINE ___.

Accepted Answer

DEPRECIATION. Straight-line depreciation spreads the depreciable cost evenly over the useful life: ($30,000 minus $5,000 salvage) divided by 5 years equals $5,000 per year. It converts part of a long-lived asset's cost into expense each period.

Question 14

A GYM COLLECTS A FULL YEAR OF MEMBERSHIP FEES IN ADVANCE; UNTIL THE MONTHS PASS, THAT CASH SITS ON THE BOOKS AS A LIABILITY CALLED ___ REVENUE.

Accepted Answer

UNEARNED. Because the gym owes future service, the advance payment cannot be revenue yet; it is a liability that is drawn down and recognized as revenue month by month as access is provided.

Question 15

IF A COMPANY HAS $250,000 IN ASSETS AND $160,000 IN LIABILITIES, ITS TOTAL OWNERS' ___ MUST EQUAL $90,000.

Accepted Answer

EQUITY. Rearranging the accounting equation, Equity = Assets minus Liabilities, so $250,000 minus $160,000 equals $90,000. Equity is the owners' residual claim on whatever is left after creditors are covered.

Question 16

A STATEMENT THAT GROUPS A PERIOD'S CASH MOVEMENTS INTO OPERATING, INVESTING, AND FINANCING ACTIVITIES IS THE STATEMENT OF CASH ___.

Accepted Answer

FLOWS. The statement of cash flows reconciles the change in cash across three activity categories and explains why profit on the income statement rarely equals the actual cash the business gained or spent.

Question 17

A FIRM PAYS $3,600 ON JULY 1 FOR SIX MONTHS OF RENT; UNTIL EACH MONTH IS USED UP, THE UNUSED PORTION STAYS ON THE BOOKS AS AN ASSET CALLED A ___ EXPENSE.

Accepted Answer

PREPAID. Paying ahead buys future benefit, so the outlay begins as an asset of $3,600, or $600 per month. Each month $600 is moved from the prepaid asset into rent expense as the benefit is consumed.

FINANCIAL ACCOUNTING BASICS

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