ACCT 211-Liberty University ACTUAL exam: QUESTION
AND ANSWERS UPDATED 2025 - 162 Questions
This exam covers the fundamental principles of financial accounting, including the accounting equation,
double-entry bookkeeping, accrual accounting, revenue recognition, and preparation of financial statements. It
emphasizes conceptual understanding and application to complex business scenarios. It contains 162
multiple-choice questions, each with four distractors and a fully worked rationale that explains why the keyed
answer is correct. Content is organized into 12 focused sections: Introduction to Financial Accounting, The
Accounting Cycle, Merchandising Operations, Internal Control and Cash, Receivables, Inventory, Long-Term
Assets, Current Liabilities and Payroll, Long-Term Liabilities, Stockholders' Equity, Statement of Cash Flows,
Financial Statement Analysis. Targeted learning outcomes include: Apply the accounting equation to analyze
transactions.; Prepare and interpret journal entries and adjusting entries.; Explain the revenue recognition
principle and its application.; Analyze the impact of accruals and deferrals on financial statements.. Every item
has been reviewed for clinical accuracy, current guidelines, and clarity so that students can study with confidence
and self-correct as they work through the bank. Use it as a high-yield review immediately before the exam, or as a
structured practice tool during the unit - the rationales double as concise teaching notes. The recommended
writing time is 2 hours, with a passing score of 70%. Aligned with Meets AACSB accreditation standards for
accounting programs. standards and reflects the question style commonly seen on accredited program
Section 1: Introduction to Financial Accounting (Questions 1-10)
1 A company receives $12,000 cash in advance for services to be performed over
the next 12 months. If the company initially records the cash as unearned revenue,
what is the adjusting entry after 3 months?
A) Debit Unearned Revenue $3,000; Credit Service Revenue $3,000
B) Debit Service Revenue $3,000; Credit Unearned Revenue $3,000
C) Debit Cash $3,000; Credit Service Revenue $3,000
D) Debit Unearned Revenue $12,000; Credit Service Revenue $12,000
Answer: A
Rationale: The correct entry recognizes revenue earned over time. After 3 months,
3/12 of the services have been performed, so $3,000 is earned. Unearned Revenue is
debited to reduce the liability, and Service Revenue is credited.
2 Which of the following transactions would increase total assets but not affect total
liabilities or equity?
A) Purchase of equipment for cash
B) Collection of accounts receivable
C) Issuance of common stock for cash
D) Payment of dividends
Answer: B
Rationale: Collecting accounts receivable increases cash (an asset) and decreases
accounts receivable (an asset) by the same amount, so total assets remain
,unchanged. The other options either change the composition of assets (A) or affect
equity (C, D).
3 A company has the following accounts: Cash $10,000, Accounts Receivable
$5,000, Inventory $8,000, Prepaid Insurance $2,000, Accounts Payable $4,000,
Notes Payable $6,000, and Common Stock $10,000. What is the amount of
Retained Earnings?
A) $5,000
B) $7,000
C) $15,000
D) $25,000
Answer: A
Rationale: Using the accounting equation: Assets = Liabilities + Equity. Assets =
$10,000 + $5,000 + $8,000 + $2,000 = $25,000. Liabilities = $4,000 + $6,000 =
$10,000. Equity = Common Stock $10,000 + Retained Earnings. So $25,000 =
$10,000 + $10,000 + Retained Earnings, thus Retained Earnings = $5,000.
4 Under accrual accounting, when should a company recognize revenue from the
sale of goods?
A) When cash is received from the customer
B) When the goods are shipped to the customer
C) When the performance obligation is satisfied
D) When the customer places the order
Answer: C
Rationale: According to GAAP, revenue is recognized when the performance
obligation is satisfied, which typically occurs when control of the goods transfers to
the customer. This may or may not coincide with cash receipt or shipment.
5 A company prepays $24,000 for a two-year insurance policy on January 1. If the
company uses the asset method to record the prepayment, what is the adjusting
entry on December 31 of the first year?
A) Debit Insurance Expense $12,000; Credit Prepaid Insurance $12,000
B) Debit Prepaid Insurance $12,000; Credit Insurance Expense $12,000
C) Debit Insurance Expense $24,000; Credit Prepaid Insurance $24,000
D) Debit Prepaid Insurance $24,000; Credit Cash $24,000
Answer: A
Rationale: Using the asset method, the initial entry debits Prepaid Insurance. At
year-end, one year's worth of insurance has expired ($24, = $12,000). The
,adjusting entry debits Insurance Expense and credits Prepaid Insurance for $12,000.
6 Which of the following is an example of a deferral?
A) Recording wages earned but unpaid at year-end
B) Recording interest revenue earned but not yet received
C) Recording the use of prepaid rent
D) Recording taxes payable
Answer: C
Rationale: A deferral involves cash received or paid before revenue or expense
recognition. Prepaid rent is a deferral because cash is paid before the expense is
incurred. Options A, B, and D are accruals (cash comes after recognition).
7 If a company understates its ending inventory, what is the effect on net income for
the current period?
A) Overstated
B) Understated
C) No effect
D) Cannot be determined
Answer: B
Rationale: Ending inventory is used to calculate cost of goods sold (COGS =
Beginning inventory + Purchases - Ending inventory). Understated ending inventory
leads to overstated COGS, which reduces gross profit and therefore understates net
income.
8 A company purchases equipment for $50,000 with an estimated useful life of 10
years and no salvage value. Using the double-declining balance method, what is
the depreciation expense in year 2?
A) $8,000
B) $10,000
C) $5,000
D) $4,000
Answer: A
Rationale: Double-declining rate = 2/10 = 20%. Year 1 depreciation = $50,000 * 20%
= $10,000. Book value at start of year 2 = $50,000 - $10,000 = $40,000. Year 2
depreciation = $40,000 * 20% = $8,000.
9 Which of the following statements about the classified balance sheet is correct?
A) Current liabilities are listed in order of liquidity
, B) Intangible assets are classified as current assets
C) Long-term investments are listed after property, plant, and equipment
D) Retained earnings is a current liability
Answer: A
Rationale: Current liabilities are typically listed in order of liquidity (how soon they
must be paid). Intangible assets are noncurrent (B). Long-term investments are listed
before property, plant, and equipment (C). Retained earnings is part of stockholders'
equity, not a liability (D).
10 A company has net income of $100,000, depreciation expense of $20,000, an
increase in accounts receivable of $5,000, and a decrease in accounts payable of
$3,000. What is the net cash provided by operating activities using the indirect
method?
A) $112,000
B) $118,000
C) $122,000
D) $128,000
Answer: A
Rationale: Start with net income $100,000. Add depreciation (non-cash expense)
$20,000 = $120,000. Subtract increase in accounts receivable ($5,000) = $115,000.
Subtract decrease in accounts payable ($3,000) = $112,000. So net cash from
operations is $112,000.
Section 2: The Accounting Cycle (Questions 11-27)
11 A company records a credit sale of $10,000 with terms 2/10, n/30. The customer
pays within the discount period. Under the net method, what is the correct
journal entry for the initial sale?
A) Debit Accounts Receivable $9,800, Credit Sales Revenue $9,800
B) Debit Accounts Receivable $10,000, Credit Sales Revenue $10,000
C) Debit Accounts Receivable $9,800, Debit Discount Forfeited $200, Credit Sales
Revenue $10,000
D) Debit Accounts Receivable $10,000, Credit Sales Revenue $9,800, Credit
Discount Allowed $200
Answer: A
Rationale: Under the net method, sales are recorded at the net amount (i.e., the
amount expected to be received). The discount is considered a reduction in revenue,
not an expense. Option A correctly records the receivable and revenue at $9,800
AND ANSWERS UPDATED 2025 - 162 Questions
This exam covers the fundamental principles of financial accounting, including the accounting equation,
double-entry bookkeeping, accrual accounting, revenue recognition, and preparation of financial statements. It
emphasizes conceptual understanding and application to complex business scenarios. It contains 162
multiple-choice questions, each with four distractors and a fully worked rationale that explains why the keyed
answer is correct. Content is organized into 12 focused sections: Introduction to Financial Accounting, The
Accounting Cycle, Merchandising Operations, Internal Control and Cash, Receivables, Inventory, Long-Term
Assets, Current Liabilities and Payroll, Long-Term Liabilities, Stockholders' Equity, Statement of Cash Flows,
Financial Statement Analysis. Targeted learning outcomes include: Apply the accounting equation to analyze
transactions.; Prepare and interpret journal entries and adjusting entries.; Explain the revenue recognition
principle and its application.; Analyze the impact of accruals and deferrals on financial statements.. Every item
has been reviewed for clinical accuracy, current guidelines, and clarity so that students can study with confidence
and self-correct as they work through the bank. Use it as a high-yield review immediately before the exam, or as a
structured practice tool during the unit - the rationales double as concise teaching notes. The recommended
writing time is 2 hours, with a passing score of 70%. Aligned with Meets AACSB accreditation standards for
accounting programs. standards and reflects the question style commonly seen on accredited program
Section 1: Introduction to Financial Accounting (Questions 1-10)
1 A company receives $12,000 cash in advance for services to be performed over
the next 12 months. If the company initially records the cash as unearned revenue,
what is the adjusting entry after 3 months?
A) Debit Unearned Revenue $3,000; Credit Service Revenue $3,000
B) Debit Service Revenue $3,000; Credit Unearned Revenue $3,000
C) Debit Cash $3,000; Credit Service Revenue $3,000
D) Debit Unearned Revenue $12,000; Credit Service Revenue $12,000
Answer: A
Rationale: The correct entry recognizes revenue earned over time. After 3 months,
3/12 of the services have been performed, so $3,000 is earned. Unearned Revenue is
debited to reduce the liability, and Service Revenue is credited.
2 Which of the following transactions would increase total assets but not affect total
liabilities or equity?
A) Purchase of equipment for cash
B) Collection of accounts receivable
C) Issuance of common stock for cash
D) Payment of dividends
Answer: B
Rationale: Collecting accounts receivable increases cash (an asset) and decreases
accounts receivable (an asset) by the same amount, so total assets remain
,unchanged. The other options either change the composition of assets (A) or affect
equity (C, D).
3 A company has the following accounts: Cash $10,000, Accounts Receivable
$5,000, Inventory $8,000, Prepaid Insurance $2,000, Accounts Payable $4,000,
Notes Payable $6,000, and Common Stock $10,000. What is the amount of
Retained Earnings?
A) $5,000
B) $7,000
C) $15,000
D) $25,000
Answer: A
Rationale: Using the accounting equation: Assets = Liabilities + Equity. Assets =
$10,000 + $5,000 + $8,000 + $2,000 = $25,000. Liabilities = $4,000 + $6,000 =
$10,000. Equity = Common Stock $10,000 + Retained Earnings. So $25,000 =
$10,000 + $10,000 + Retained Earnings, thus Retained Earnings = $5,000.
4 Under accrual accounting, when should a company recognize revenue from the
sale of goods?
A) When cash is received from the customer
B) When the goods are shipped to the customer
C) When the performance obligation is satisfied
D) When the customer places the order
Answer: C
Rationale: According to GAAP, revenue is recognized when the performance
obligation is satisfied, which typically occurs when control of the goods transfers to
the customer. This may or may not coincide with cash receipt or shipment.
5 A company prepays $24,000 for a two-year insurance policy on January 1. If the
company uses the asset method to record the prepayment, what is the adjusting
entry on December 31 of the first year?
A) Debit Insurance Expense $12,000; Credit Prepaid Insurance $12,000
B) Debit Prepaid Insurance $12,000; Credit Insurance Expense $12,000
C) Debit Insurance Expense $24,000; Credit Prepaid Insurance $24,000
D) Debit Prepaid Insurance $24,000; Credit Cash $24,000
Answer: A
Rationale: Using the asset method, the initial entry debits Prepaid Insurance. At
year-end, one year's worth of insurance has expired ($24, = $12,000). The
,adjusting entry debits Insurance Expense and credits Prepaid Insurance for $12,000.
6 Which of the following is an example of a deferral?
A) Recording wages earned but unpaid at year-end
B) Recording interest revenue earned but not yet received
C) Recording the use of prepaid rent
D) Recording taxes payable
Answer: C
Rationale: A deferral involves cash received or paid before revenue or expense
recognition. Prepaid rent is a deferral because cash is paid before the expense is
incurred. Options A, B, and D are accruals (cash comes after recognition).
7 If a company understates its ending inventory, what is the effect on net income for
the current period?
A) Overstated
B) Understated
C) No effect
D) Cannot be determined
Answer: B
Rationale: Ending inventory is used to calculate cost of goods sold (COGS =
Beginning inventory + Purchases - Ending inventory). Understated ending inventory
leads to overstated COGS, which reduces gross profit and therefore understates net
income.
8 A company purchases equipment for $50,000 with an estimated useful life of 10
years and no salvage value. Using the double-declining balance method, what is
the depreciation expense in year 2?
A) $8,000
B) $10,000
C) $5,000
D) $4,000
Answer: A
Rationale: Double-declining rate = 2/10 = 20%. Year 1 depreciation = $50,000 * 20%
= $10,000. Book value at start of year 2 = $50,000 - $10,000 = $40,000. Year 2
depreciation = $40,000 * 20% = $8,000.
9 Which of the following statements about the classified balance sheet is correct?
A) Current liabilities are listed in order of liquidity
, B) Intangible assets are classified as current assets
C) Long-term investments are listed after property, plant, and equipment
D) Retained earnings is a current liability
Answer: A
Rationale: Current liabilities are typically listed in order of liquidity (how soon they
must be paid). Intangible assets are noncurrent (B). Long-term investments are listed
before property, plant, and equipment (C). Retained earnings is part of stockholders'
equity, not a liability (D).
10 A company has net income of $100,000, depreciation expense of $20,000, an
increase in accounts receivable of $5,000, and a decrease in accounts payable of
$3,000. What is the net cash provided by operating activities using the indirect
method?
A) $112,000
B) $118,000
C) $122,000
D) $128,000
Answer: A
Rationale: Start with net income $100,000. Add depreciation (non-cash expense)
$20,000 = $120,000. Subtract increase in accounts receivable ($5,000) = $115,000.
Subtract decrease in accounts payable ($3,000) = $112,000. So net cash from
operations is $112,000.
Section 2: The Accounting Cycle (Questions 11-27)
11 A company records a credit sale of $10,000 with terms 2/10, n/30. The customer
pays within the discount period. Under the net method, what is the correct
journal entry for the initial sale?
A) Debit Accounts Receivable $9,800, Credit Sales Revenue $9,800
B) Debit Accounts Receivable $10,000, Credit Sales Revenue $10,000
C) Debit Accounts Receivable $9,800, Debit Discount Forfeited $200, Credit Sales
Revenue $10,000
D) Debit Accounts Receivable $10,000, Credit Sales Revenue $9,800, Credit
Discount Allowed $200
Answer: A
Rationale: Under the net method, sales are recorded at the net amount (i.e., the
amount expected to be received). The discount is considered a reduction in revenue,
not an expense. Option A correctly records the receivable and revenue at $9,800
