AU Bual 2650 Final Exam | Practice Questions And
Answers 2026/2027 | Complete Questions And Answers
(Verified Answers) | Exam Prep | Comprehensive Exam
Guide 2026&2027
1. Which financial statement is primarily designed to report an entity’s financial position at
a specific point in time?
A. Statement of cash flows
B. Income statement
C. Balance sheet
D. Statement of retained earnings
Answer: C
The balance sheet reports assets, liabilities, and equity as of a specific date, providing a
snapshot of financial position.
2. A business purchases equipment for $24,000, paying $6,000 in cash and financing the
remainder with a note payable. What is the immediate effect on the accounting equation?
A. Assets increase by $18,000 and liabilities increase by $18,000
B. Assets increase by $24,000 and liabilities increase by $18,000
C. Assets decrease by $6,000 and liabilities increase by $18,000
D. Assets increase by $30,000 and equity decreases by $6,000
Answer: B
Equipment increases assets by $24,000, while the cash payment reduces assets by $6,000. The
resulting net asset increase is $18,000, matched by the $18,000 note payable.
3. Which accounting principle requires revenue to be recognized when it is earned rather
than necessarily when cash is received?
A. Matching principle
B. Revenue recognition principle
C. Cost principle
D. Full disclosure principle
Answer: B
The revenue recognition principle focuses on recognizing revenue when the earnings process
has been substantially completed, subject to applicable accounting standards.
4. A company receives $9,000 from a customer for services that will be performed over the
next three months. How should the receipt initially be classified?
,A. Unearned revenue
B. Service revenue
C. Accounts receivable
D. Retained earnings
Answer: A
Because the company has received cash before providing the services, it has an obligation to
perform in the future. The amount is therefore initially recorded as a liability.
5. Which account normally carries a debit balance?
A. Accounts payable
B. Common stock
C. Service revenue
D. Supplies expense
Answer: D
Expenses normally have debit balances because they reduce equity. Accounts payable,
common stock, and revenue normally carry credit balances.
6. A company performs $4,500 of services on account. Which journal entry correctly
records the transaction?
A. Debit Cash $4,500; credit Service Revenue $4,500
B. Debit Accounts Receivable $4,500; credit Service Revenue $4,500
C. Debit Service Revenue $4,500; credit Accounts Receivable $4,500
D. Debit Accounts Payable $4,500; credit Service Revenue $4,500
Answer: B
The customer owes the company for services already provided, increasing accounts
receivable. Revenue is recognized because the service has been performed.
7. Why is the trial balance prepared before financial statements?
A. To prove that every transaction is economically correct
B. To determine whether the company has sufficient cash
C. To verify that total debits equal total credits
D. To calculate taxable income automatically
Answer: C
A trial balance provides a mathematical check that the ledger’s debit balances equal its credit
balances. It does not, however, detect every possible accounting error.
8. An accountant discovers that a $2,000 equipment purchase was mistakenly recorded as
an expense. What is the most appropriate correction?
,A. Increase equipment and decrease expense by $2,000
B. Increase expense and decrease equipment by $2,000
C. Increase revenue by $2,000
D. Make no correction until year-end
Answer: A
The purchase should have been capitalized as equipment rather than expensed. The
correcting entry increases the equipment asset and removes the incorrectly recorded expense.
9. Which transaction increases both assets and liabilities?
A. Paying an accounts payable balance
B. Purchasing supplies for cash
C. Borrowing money from a bank
D. Paying employee wages
Answer: C
Borrowing creates cash or another asset while simultaneously creating a liability to repay the
lender.
10. A company pays $3,600 for a one-year insurance policy beginning immediately. Under
accrual accounting, how should the payment initially be recorded?
A. Insurance expense
B. Prepaid insurance
C. Unearned revenue
D. Accounts payable
Answer: B
The policy provides future economic benefits, so the initial payment is recorded as a prepaid
asset and expensed systematically over the coverage period.
11. Which adjustment is necessary when employees have earned wages that will not be paid
until the following accounting period?
A. Debit Wages Expense and credit Wages Payable
B. Debit Wages Payable and credit Wages Expense
C. Debit Cash and credit Wages Expense
D. Debit Wages Expense and credit Cash
Answer: A
The expense belongs to the current period because employees have already provided services.
The unpaid amount is recognized as a liability.
, 12. What is the primary purpose of adjusting entries?
A. To eliminate all liabilities
B. To ensure revenues and expenses are reported in the proper period
C. To correct every mathematical error in the ledger
D. To close all temporary accounts
Answer: B
Adjusting entries apply accrual accounting by recognizing revenues earned and expenses
incurred in the appropriate reporting period.
13. A company has $8,000 of supplies on hand at the beginning of the month and purchases
another $5,000. At month-end, $3,000 remains. What supplies expense should be
recognized?
A. $3,000
B. $5,000
C. $8,000
D. $10,000
Answer: D
Beginning supplies of $8,000 plus purchases of $5,000 gives $13,000 available. Subtracting
the $3,000 ending balance results in $10,000 of supplies expense.
14. Depreciation expense is best described as:
A. A reduction in the market value of an asset
B. The allocation of an asset’s depreciable cost over its useful life
C. A cash payment for replacing equipment
D. An estimate of the asset’s resale price
Answer: B
Depreciation allocates the depreciable cost of a long-lived asset over the periods benefiting
from its use.
15. Which account is a contra-asset account?
A. Accumulated Depreciation
B. Accounts Payable
C. Service Revenue
D. Retained Earnings
Answer: A
Accumulated depreciation offsets the related long-term asset and normally carries a credit
balance.
Answers 2026/2027 | Complete Questions And Answers
(Verified Answers) | Exam Prep | Comprehensive Exam
Guide 2026&2027
1. Which financial statement is primarily designed to report an entity’s financial position at
a specific point in time?
A. Statement of cash flows
B. Income statement
C. Balance sheet
D. Statement of retained earnings
Answer: C
The balance sheet reports assets, liabilities, and equity as of a specific date, providing a
snapshot of financial position.
2. A business purchases equipment for $24,000, paying $6,000 in cash and financing the
remainder with a note payable. What is the immediate effect on the accounting equation?
A. Assets increase by $18,000 and liabilities increase by $18,000
B. Assets increase by $24,000 and liabilities increase by $18,000
C. Assets decrease by $6,000 and liabilities increase by $18,000
D. Assets increase by $30,000 and equity decreases by $6,000
Answer: B
Equipment increases assets by $24,000, while the cash payment reduces assets by $6,000. The
resulting net asset increase is $18,000, matched by the $18,000 note payable.
3. Which accounting principle requires revenue to be recognized when it is earned rather
than necessarily when cash is received?
A. Matching principle
B. Revenue recognition principle
C. Cost principle
D. Full disclosure principle
Answer: B
The revenue recognition principle focuses on recognizing revenue when the earnings process
has been substantially completed, subject to applicable accounting standards.
4. A company receives $9,000 from a customer for services that will be performed over the
next three months. How should the receipt initially be classified?
,A. Unearned revenue
B. Service revenue
C. Accounts receivable
D. Retained earnings
Answer: A
Because the company has received cash before providing the services, it has an obligation to
perform in the future. The amount is therefore initially recorded as a liability.
5. Which account normally carries a debit balance?
A. Accounts payable
B. Common stock
C. Service revenue
D. Supplies expense
Answer: D
Expenses normally have debit balances because they reduce equity. Accounts payable,
common stock, and revenue normally carry credit balances.
6. A company performs $4,500 of services on account. Which journal entry correctly
records the transaction?
A. Debit Cash $4,500; credit Service Revenue $4,500
B. Debit Accounts Receivable $4,500; credit Service Revenue $4,500
C. Debit Service Revenue $4,500; credit Accounts Receivable $4,500
D. Debit Accounts Payable $4,500; credit Service Revenue $4,500
Answer: B
The customer owes the company for services already provided, increasing accounts
receivable. Revenue is recognized because the service has been performed.
7. Why is the trial balance prepared before financial statements?
A. To prove that every transaction is economically correct
B. To determine whether the company has sufficient cash
C. To verify that total debits equal total credits
D. To calculate taxable income automatically
Answer: C
A trial balance provides a mathematical check that the ledger’s debit balances equal its credit
balances. It does not, however, detect every possible accounting error.
8. An accountant discovers that a $2,000 equipment purchase was mistakenly recorded as
an expense. What is the most appropriate correction?
,A. Increase equipment and decrease expense by $2,000
B. Increase expense and decrease equipment by $2,000
C. Increase revenue by $2,000
D. Make no correction until year-end
Answer: A
The purchase should have been capitalized as equipment rather than expensed. The
correcting entry increases the equipment asset and removes the incorrectly recorded expense.
9. Which transaction increases both assets and liabilities?
A. Paying an accounts payable balance
B. Purchasing supplies for cash
C. Borrowing money from a bank
D. Paying employee wages
Answer: C
Borrowing creates cash or another asset while simultaneously creating a liability to repay the
lender.
10. A company pays $3,600 for a one-year insurance policy beginning immediately. Under
accrual accounting, how should the payment initially be recorded?
A. Insurance expense
B. Prepaid insurance
C. Unearned revenue
D. Accounts payable
Answer: B
The policy provides future economic benefits, so the initial payment is recorded as a prepaid
asset and expensed systematically over the coverage period.
11. Which adjustment is necessary when employees have earned wages that will not be paid
until the following accounting period?
A. Debit Wages Expense and credit Wages Payable
B. Debit Wages Payable and credit Wages Expense
C. Debit Cash and credit Wages Expense
D. Debit Wages Expense and credit Cash
Answer: A
The expense belongs to the current period because employees have already provided services.
The unpaid amount is recognized as a liability.
, 12. What is the primary purpose of adjusting entries?
A. To eliminate all liabilities
B. To ensure revenues and expenses are reported in the proper period
C. To correct every mathematical error in the ledger
D. To close all temporary accounts
Answer: B
Adjusting entries apply accrual accounting by recognizing revenues earned and expenses
incurred in the appropriate reporting period.
13. A company has $8,000 of supplies on hand at the beginning of the month and purchases
another $5,000. At month-end, $3,000 remains. What supplies expense should be
recognized?
A. $3,000
B. $5,000
C. $8,000
D. $10,000
Answer: D
Beginning supplies of $8,000 plus purchases of $5,000 gives $13,000 available. Subtracting
the $3,000 ending balance results in $10,000 of supplies expense.
14. Depreciation expense is best described as:
A. A reduction in the market value of an asset
B. The allocation of an asset’s depreciable cost over its useful life
C. A cash payment for replacing equipment
D. An estimate of the asset’s resale price
Answer: B
Depreciation allocates the depreciable cost of a long-lived asset over the periods benefiting
from its use.
15. Which account is a contra-asset account?
A. Accumulated Depreciation
B. Accounts Payable
C. Service Revenue
D. Retained Earnings
Answer: A
Accumulated depreciation offsets the related long-term asset and normally carries a credit
balance.
