CREDIT BUSINESS ASSOCIATE (CBA) EXAM
Questions and Answers|Latest Update| Pass Guaranteed
1. Which financial statement reports a company's assets, liabilities, and equity at a
single point in time?
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of retained earnings
Answer: B — Balance sheet
Rationale: The balance sheet is a snapshot as of a specific date, showing what a
company owns (assets), owes (liabilities), and the residual owners' equity. The income
statement and cash flow statement cover a period of time rather than a single date.
2. Under the accrual basis of accounting, revenue is recognized when:
A. Cash is received
B. The invoice is printed
C. It is earned, regardless of when cash is collected
D. The fiscal year ends
Answer: C — It is earned, regardless of when cash is collected
Rationale: Accrual accounting matches revenue to the period in which it is earned
(goods delivered or services performed), not to the timing of cash receipt. This is the
core distinction from cash-basis accounting.
3. In the fundamental accounting equation, Assets = Liabilities + Equity, an increase in
liabilities with no change in assets must result in:
A. An increase in equity
B. A decrease in equity
C. No effect on equity
D. An increase in revenue
Answer: B — A decrease in equity
, Rationale: Because the equation must always balance, if assets stay constant while
liabilities rise, equity must fall by the same amount to keep both sides equal.
4. Which of the following is classified as a current asset?
A. Goodwill
B. Accounts receivable
C. Long-term investments
D. Machinery
Answer: B — Accounts receivable
Rationale: Current assets are those expected to be converted to cash or used within
one year or one operating cycle. Accounts receivable normally meets that test, while
goodwill, long-term investments, and machinery are long-lived or intangible assets.
5. Depreciation expense on the income statement primarily reflects:
A. Cash paid out during the period for equipment
B. The allocation of a tangible asset's cost over its useful life
C. A decline in a company's stock price
D. An increase in the market value of an asset
Answer: B — The allocation of a tangible asset's cost over its useful life
Rationale: Depreciation is a non-cash expense that systematically allocates the
historical cost of a fixed asset over the periods it is used, matching expense to the
revenue the asset helps generate.
6. A company's retained earnings balance increases when:
A. Dividends are paid
B. The company reports net income
C. The company issues new stock
D. Inventory is written down
Answer: B — The company reports net income
Rationale: Retained earnings represent cumulative net income not distributed to
shareholders. Net income increases retained earnings, while dividend payments
decrease it; issuing stock affects paid-in capital, not retained earnings directly.
7. Which statement best describes 'contra-asset' accounts such as Allowance for
Doubtful Accounts?
A. They increase the carrying value of an asset
B. They are reported as liabilities
, C. They reduce the reported value of a related asset
D. They appear only on the income statement
Answer: C — They reduce the reported value of a related asset
Rationale: A contra-asset account carries a credit balance and is netted against its
related asset account (accounts receivable) to present a more realistic, collectible
carrying value.
8. The matching principle in accounting requires that:
A. Assets equal liabilities plus equity
B. Expenses be recorded in the same period as the revenues they help generate
C. All transactions be recorded in cash
D. Revenue be recognized only when cash is collected
Answer: B — Expenses be recorded in the same period as the revenues they help
generate
Rationale: The matching principle pairs expenses with the revenues they helped
produce in the same accounting period, which is central to accrual-basis financial
reporting.
9. On a classified balance sheet, which liability would normally appear in the current
liabilities section?
A. Bonds payable due in 10 years
B. Mortgage payable due in 15 years
C. Accounts payable due in 45 days
D. Deferred tax liability due beyond one year
Answer: C — Accounts payable due in 45 days
Rationale: Current liabilities are obligations due within one year or the operating
cycle. Trade accounts payable due in 45 days clearly meets that definition, unlike the
long-term debts listed.
10. A journal entry that debits Cash and credits Accounts Receivable most likely
records:
A. A sale made on credit
B. Collection of a customer payment on an existing receivable
C. A write-off of a bad debt
D. Recognition of interest income
Answer: B — Collection of a customer payment on an existing receivable
, Rationale: Debiting Cash and crediting Accounts Receivable reduces the receivable
balance while increasing cash, which is exactly what happens when a customer pays
down an open invoice.
11. Which inventory costing method, in a period of rising prices, produces the lowest
reported net income?
A. FIFO (first-in, first-out)
B. LIFO (last-in, first-out)
C. Weighted average
D. Specific identification of the oldest units
Answer: B — LIFO (last-in, first-out)
Rationale: Under LIFO in a rising-price environment, the most recently purchased
(higher-cost) inventory is expensed first, producing higher cost of goods sold and
therefore lower reported net income than FIFO or weighted average.
12. Working capital is best defined as:
A. Total assets minus total liabilities
B. Current assets minus current liabilities
C. Cash minus current liabilities
D. Total equity minus long-term debt
Answer: B — Current assets minus current liabilities
Rationale: Working capital measures short-term liquidity by comparing resources
expected to convert to cash within a year against obligations due in the same period.
13. An adjusting entry to record accrued interest expense at year-end would:
A. Debit Interest Expense and credit Interest Payable
B. Debit Interest Payable and credit Cash
C. Debit Cash and credit Interest Revenue
D. Debit Interest Expense and credit Cash
Answer: A — Debit Interest Expense and credit Interest Payable
Rationale: Accrued but unpaid interest is recognized by debiting the expense (to
reflect the cost incurred in the period) and crediting a payable (to reflect the
obligation not yet paid in cash).
14. A company's cost of goods sold is understated because ending inventory was
overstated. What is the effect on net income for that period?
A. Net income is understated
Questions and Answers|Latest Update| Pass Guaranteed
1. Which financial statement reports a company's assets, liabilities, and equity at a
single point in time?
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of retained earnings
Answer: B — Balance sheet
Rationale: The balance sheet is a snapshot as of a specific date, showing what a
company owns (assets), owes (liabilities), and the residual owners' equity. The income
statement and cash flow statement cover a period of time rather than a single date.
2. Under the accrual basis of accounting, revenue is recognized when:
A. Cash is received
B. The invoice is printed
C. It is earned, regardless of when cash is collected
D. The fiscal year ends
Answer: C — It is earned, regardless of when cash is collected
Rationale: Accrual accounting matches revenue to the period in which it is earned
(goods delivered or services performed), not to the timing of cash receipt. This is the
core distinction from cash-basis accounting.
3. In the fundamental accounting equation, Assets = Liabilities + Equity, an increase in
liabilities with no change in assets must result in:
A. An increase in equity
B. A decrease in equity
C. No effect on equity
D. An increase in revenue
Answer: B — A decrease in equity
, Rationale: Because the equation must always balance, if assets stay constant while
liabilities rise, equity must fall by the same amount to keep both sides equal.
4. Which of the following is classified as a current asset?
A. Goodwill
B. Accounts receivable
C. Long-term investments
D. Machinery
Answer: B — Accounts receivable
Rationale: Current assets are those expected to be converted to cash or used within
one year or one operating cycle. Accounts receivable normally meets that test, while
goodwill, long-term investments, and machinery are long-lived or intangible assets.
5. Depreciation expense on the income statement primarily reflects:
A. Cash paid out during the period for equipment
B. The allocation of a tangible asset's cost over its useful life
C. A decline in a company's stock price
D. An increase in the market value of an asset
Answer: B — The allocation of a tangible asset's cost over its useful life
Rationale: Depreciation is a non-cash expense that systematically allocates the
historical cost of a fixed asset over the periods it is used, matching expense to the
revenue the asset helps generate.
6. A company's retained earnings balance increases when:
A. Dividends are paid
B. The company reports net income
C. The company issues new stock
D. Inventory is written down
Answer: B — The company reports net income
Rationale: Retained earnings represent cumulative net income not distributed to
shareholders. Net income increases retained earnings, while dividend payments
decrease it; issuing stock affects paid-in capital, not retained earnings directly.
7. Which statement best describes 'contra-asset' accounts such as Allowance for
Doubtful Accounts?
A. They increase the carrying value of an asset
B. They are reported as liabilities
, C. They reduce the reported value of a related asset
D. They appear only on the income statement
Answer: C — They reduce the reported value of a related asset
Rationale: A contra-asset account carries a credit balance and is netted against its
related asset account (accounts receivable) to present a more realistic, collectible
carrying value.
8. The matching principle in accounting requires that:
A. Assets equal liabilities plus equity
B. Expenses be recorded in the same period as the revenues they help generate
C. All transactions be recorded in cash
D. Revenue be recognized only when cash is collected
Answer: B — Expenses be recorded in the same period as the revenues they help
generate
Rationale: The matching principle pairs expenses with the revenues they helped
produce in the same accounting period, which is central to accrual-basis financial
reporting.
9. On a classified balance sheet, which liability would normally appear in the current
liabilities section?
A. Bonds payable due in 10 years
B. Mortgage payable due in 15 years
C. Accounts payable due in 45 days
D. Deferred tax liability due beyond one year
Answer: C — Accounts payable due in 45 days
Rationale: Current liabilities are obligations due within one year or the operating
cycle. Trade accounts payable due in 45 days clearly meets that definition, unlike the
long-term debts listed.
10. A journal entry that debits Cash and credits Accounts Receivable most likely
records:
A. A sale made on credit
B. Collection of a customer payment on an existing receivable
C. A write-off of a bad debt
D. Recognition of interest income
Answer: B — Collection of a customer payment on an existing receivable
, Rationale: Debiting Cash and crediting Accounts Receivable reduces the receivable
balance while increasing cash, which is exactly what happens when a customer pays
down an open invoice.
11. Which inventory costing method, in a period of rising prices, produces the lowest
reported net income?
A. FIFO (first-in, first-out)
B. LIFO (last-in, first-out)
C. Weighted average
D. Specific identification of the oldest units
Answer: B — LIFO (last-in, first-out)
Rationale: Under LIFO in a rising-price environment, the most recently purchased
(higher-cost) inventory is expensed first, producing higher cost of goods sold and
therefore lower reported net income than FIFO or weighted average.
12. Working capital is best defined as:
A. Total assets minus total liabilities
B. Current assets minus current liabilities
C. Cash minus current liabilities
D. Total equity minus long-term debt
Answer: B — Current assets minus current liabilities
Rationale: Working capital measures short-term liquidity by comparing resources
expected to convert to cash within a year against obligations due in the same period.
13. An adjusting entry to record accrued interest expense at year-end would:
A. Debit Interest Expense and credit Interest Payable
B. Debit Interest Payable and credit Cash
C. Debit Cash and credit Interest Revenue
D. Debit Interest Expense and credit Cash
Answer: A — Debit Interest Expense and credit Interest Payable
Rationale: Accrued but unpaid interest is recognized by debiting the expense (to
reflect the cost incurred in the period) and crediting a payable (to reflect the
obligation not yet paid in cash).
14. A company's cost of goods sold is understated because ending inventory was
overstated. What is the effect on net income for that period?
A. Net income is understated
