Donald Balla - Clep Financial Accounting

PRACTICE TEST 1

(Answer sheets appear in the back of this book.)

DIRECTIONS : Each of the questions or incomplete statements below is followed by five possible answers or completions. Select the best choice in each case and fill in the corresponding oval on the answer sheet.

1. What does double entry accounting mean?

1. Record all transactions in the asset section and in the equity section.
2. Record transactions upon paying and receiving cash.
3. Record where the money came from and where it went.
4. Record transactions in the general ledger and the general journal.
5. Record debts we owe and debts others owe us.

2. Which of the following is NOT an asset?

1. A car
2. Loans we owe
3. Cash
4. Inventory
5. Real estate

3. Which of the following are parts of a heading for a balance sheet?

• I. A date
• II. The name of the business
• III. The name of the owner
• IV. A period of time
  1. I, II, and III only
  2. I, II, and IV only
  3. II and III only
  4. I and II only
  5. I, II, III, and IV

4. If Company A has $10,000 of assets and $6,000 of liabilities, what is the equity ratio?

5. Which statement below about expenses is FALSE?

1. Expenses always make owners equity go down.
2. Expenses always involve cash leaving the business.
3. Expenses always lower net income.
4. Borrowing money is not an expense.
5. Expenses usually happen as a result of normal business operations.

6. Depreciation expense

1. represents the cash spent this period for asset upkeep
2. measures the amount of asset appreciation during a year
3. for an asset happens the year that asset is purchased
4. for an asset happens the year that asset is sold
5. estimates the amount of the asset used up during the year

7. If the cost of goods sold = $6,000, total expenses = $4,000, and gross profit = $3,000, what amount is sales?

8. At the end of the year, Bobs Bargains financial statements show these amounts: net income = $10,000, owners equity at the beginning of the year = $2,000, depreciation expense = $4,000, and withdrawals = $1,000. What is the balance of the owners equity account at the end of the year?

9. Which is the best reason for creating a cash flow statement?

1. It is the easiest financial statement to create.
2. Net income reflects cash received from operations.
3. Bankers want to see how quickly business assets depreciate.
4. Owners need to know how much money they can safely take out of the business.
5. The balance sheet does not contain information useful in determining what has happened to cash.

10. Where does one find the information to create a cash flow statement?

1. On a special worksheet showing the changes in balance sheet accounts
2. On a special worksheet showing the increase in the income statement accounts for the year
3. The amounts in the balance sheet accounts
4. The balances in the income and expense accounts
5. The amounts in the cash flow statement accounts

11. Which of the following is NOT part of the cash flow statement?

1. Cash from operations
2. Cash from investing activities
3. Cash from financing activities
4. Cash from marketing activities
5. Calculation of cashend of period

12. During 20x1, a business borrowed $10,000, paid back $2,000 of the loan with an additional $100 of interest, bought an $8,000 machine, and paid the owner a $500 withdrawal. Assuming this is all the relevant information, what is the cash flow from financing activities?

13. Who is/are LEAST likely to see your sole proprietorship financial statements?

1. Your business banker
2. Your business partners
3. The Internal Revenue Service
4. Your employees
5. Potential investors

14. If there is uncertainty about the amount of a liability, which accounting principle would require you to present your financial statements showing the larger estimate of the liability?