Financial Accounting Exam Questions and Answers

Financial Accounting Exam Questions and Answers 1. After doing a physical inventory of Balloon Party's balloons on December 31, 2012, Lauren discovers that she has $500 of balloons on hand. The balance in her balloon inventory account is $564. What journal entry will correct this? - ANSWER-Debit balloon expense: $64; Credit Balloon Inventory (564-64=500) $64 (To adjust the Balloon Inventory account to equal the physical count $500) .1. Why should debiting cash and liabilities make you happy? - ANSWER-When you debit cash, cash goes up. Every business owner likes that. When you debit liabilities, debts go down. The fewer debts, the more business assets belong to you. .2. Suppose that immediately after buying the car, Lauren sells it to a friend for $2,000. Analyze the debits and credits. - ANSWER-The asset "cash" increases by a debit of $2,000, which is balanced when the asset "car" decreases by a credit of $2,000. The equation stays in balance because assets go up and down by the same amount. The question said nothing about paying back Cousin Lou. .3. In the equation A - B = C, if B gets larger, what happens to C? - ANSWER-C gets smaller. That is the nature of contra accounts. The larger a contra-equity account gets, the smaller equity gets. The larger a contra-asset account gets, the smaller some asset gets. The larger a contra-sales account gets, the smaller net sales gets. .3. Why must the total of every column equal zero? - ANSWER-The debits you add must equal the credits you subtract. .4. If the books are in balance, does that mean all the accounting was correctly done? - ANSWER-No. If the books are in balance, it means that the accountant posted an equal number of debits and credits. However, it is possible that the accountant placed a credit or a debit in the wrong account. A trail balance will not catch this type of mistake. .5. When Lauren bought balloons, she debited balloon inventory for $70 and debited cash for $70. By how much will the trail balance be off, if at all? - ANSWER-It was a mistake to debit cash. The book will be off by $140 because there are $70 too many debits and $70 too few credits. .6. What is the normal type of balance of asset accounts? Liability accounts? Contra-asset accounts, such as accumulated depreciation? - ANSWER-Assets normally have debit balances. Liabilities normally have credit balances. Because contra-asset accounts are like negative assets, they normally have credit balances. .Account - ANSWER-A place on the financial books to keep track of financial information that the owner wants to know. .Accrual basis accounting - ANSWER-The system in which income is recognized when earned and expenses are recognized when incurred. .Accrual basis accounting - ANSWER-The system in which income is recognized when earned and expenses are recognized when incurred. .Accumulated depreciation - ANSWER-The contra-asset account that accumulates all the depreciation of long-lived assets over the years. .Acid test ratio formula - ANSWER-The same as quick ratio formula. .Adjust balloon inventory to make it $500 smaller - ANSWER-Debit Balloon expense $500; credit Balloon inventory $500 .After 10 years of operations, which inventory system would have more layers, FIFO or LIFO? - ANSWER-LIFO will normally have more layers. By using LIFO, a business can add several layers to inventory each year. With FIFO, the old layers always get sold, so only the one or two newest layers end up in inventory. .AICPA - ANSWER-American Institute of Certified Public Accountants. Accounting's professional organization that issues the code of ethics for accountants. .All-Costs-to-Get-Operating Principle - ANSWER-Requires a business to capitalize all costs necessary to get an asset operating. .An inventory contains some merchandise at $5, some at $6 and some at $7. What is the weighted average price of the merchandise? - ANSWER-This is a trick question. It is impossible to answer from the information given. If you answered $6, you fell into a common CLEP trap. The weighted average does not just average the prices. You need to know the quantity at each price! .Asset account - ANSWER-Receivable, prepaid, investment, inventory. Many asset accounts merely list the name of the asset, such as "land" and "equipment" without any special identifying word. Whenever CLEP questions list an account without one of these key words, you should assume that it is an asset account. .Assets - ANSWER-Economic resources that the business plans to use in the future to make money. .Assuming Company B buys it for $8,000, at what value will it appear on Company B's balance sheet? - ANSWER-$8,000, the historical cost .Audit - ANSWER-The check of business accounting records in order to give an opinion on whether the financial statements present the business fairly. .Auditors - ANSWER-CPA who udit accounting records .Average invetory - ANSWER-(Beginning inventory + Ending inventory)/2= Average inventory .Average net accounts receivable (A/R) formula - ANSWER-(Beginning net A/R + Ending net A/R)/2 = Average net A/R .Balance sheet - ANSWER-The financial report that shows business assets, liabilities, and owner's equity as of a particular day. .Balanced books - ANSWER-When "Where did it go?" equals "Where did it come from?" or wen a company's assets equal its liabilities plus owner's equity.