Financial Accounting Practice Questions & Answers
Twelve financial accounting practice questions with answers and explanations from the course deck, from the accounting equation to bonds and cash flows.
This set has 12 questions from Encodr's free financial accounting course, taken from 12 of its 16 units, from the accounting equation to adjusting entries, inventory, depreciation, bonds and the statement of cash flows. Each is a real card from the deck, quoted as it appears there, with the card's own explanation.
How to use it: answer before you read on. Journal entries in particular are better practiced by writing the entry yourself and then comparing, since recognizing a correct entry among four options is much easier than producing one. That gap is the testing effect at work.
Question 8 turns on book value, which is cost minus accumulated depreciation, and the depreciation calculator builds full schedules for the three methods. For the ratio side of the course, see the financial ratio calculator.
The questions
1. Unit 2, Introduction to Financial Statements
Dana Reyes invests $5,000 of personal cash in Maple Street Consulting. What happens to the accounting equation?
- A. Assets increase and equity increases
- B. Assets increase and liabilities increase
- C. Assets decrease and equity decreases
- D. Liabilities increase and equity decreases
Answer: A. Assets increase and equity increases
Why: An investment by the owner brings in an asset and raises equity by the same amount.
2. Unit 3, Analyzing and Recording Transactions
A customer pays $4,000 in advance for services not yet performed. What is the effect on the accounting equation?
- A. Cash and revenue both increase
- B. Cash increases and receivables decrease
- C. Cash and a liability both increase
- D. Cash and equity both increase
Answer: C. Cash and a liability both increase
Why: Cash (an asset) increases and Unearned Revenue (a liability) increases. Revenue is recorded later, when the service is done.
3. Unit 4, The Adjustment Process
On January 3 Maple Street Consulting pays total wages of 6,000, of which 3,575 was already accrued for December. Which entry is correct?
- A. Dr. Salaries Expense 6,000 / Cr. Cash 6,000
- B. Dr. Salaries Payable 3,575 / Dr. Salaries Expense 2,425 / Cr. Cash 6,000
- C. Dr. Salaries Payable 6,000 / Cr. Cash 6,000
- D. Dr. Salaries Payable 2,425 / Dr. Salaries Expense 3,575 / Cr. Cash 6,000
Answer: B. Dr. Salaries Payable 3,575 / Dr. Salaries Expense 2,425 / Cr. Cash 6,000
Why: The accrued 3,575 clears the liability and the other 6,000 - 3,575 = 2,425 is January expense.
4. Unit 5, Completing the Accounting Cycle
Dana Reyes at Maple Street Consulting has just prepared the year-end financial statements. Which cycle step comes next?
Answer: Recording closing entries
Why: Closing entries come after the statements because the statements need the revenue and expense balances that closing resets to zero.
5. Unit 8, Fraud, Internal Controls and Cash
Which reconciling item requires a journal entry on the company's books?
- A. An NSF customer check
- B. A deposit in transit
- C. An outstanding check
- D. A bank error that deducted too much
Answer: A. An NSF customer check
Why: Items the bank knows about and the company has not yet recorded (NSF, service charges, collections, interest) need entries.
6. Unit 9, Accounting for Receivables
Why does the direct write-off method violate the matching principle?
- A. The expense can fall in a later period than its sale
- B. It records the expense before the sale is made
- C. It never records the expense at all
- D. It records the expense in the same period as the collection
Answer: A. The expense can fall in a later period than its sale
Why: Matching wants the expense in the period of the related revenue, but write-off can come months later.
7. Unit 10, Inventory
Unit costs rise all year. Which method produces the highest net income?
- A. LIFO
- B. Weighted average
- C. FIFO
- D. Specific identification
Answer: C. FIFO
Why: FIFO charges the older, cheaper costs to COGS, leaving the highest profit when prices rise.
8. Unit 11, Long-Term Assets
Northgate Corp. has equipment costing $90,000 with accumulated depreciation of $60,000 at the date of sale. It sells the equipment for $34,000. What is the gain?
- A. $34,000
- B. $30,000
- C. $4,000
- D. $56,000
Answer: C. $4,000
Why: Book value = 90,000 - 60,000 = 30,000; gain = 34,000 - 30,000 = 4,000.
9. Unit 12, Current Liabilities
What do credit terms of 2/10, n/30 mean?
- A. 2% off if paid after 10 days; full amount due within 30 days
- B. 2% off if paid within 30 days; full amount due within 10 days
- C. 2% off if paid within 10 days; full amount due within 30 days
- D. 2% interest charged after 10 days; amount due within 30 days
Answer: C. 2% off if paid within 10 days; full amount due within 30 days
Why: The first number is the discount percent, the second is the days it stays available, and n/30 is when the net amount is due.
10. Unit 13, Long-Term Liabilities
A bond pays a 5% stated rate when the market rate is 7%. Does it sell at par, at a premium, or at a discount?
Answer: At a discount
Why: Investors can earn more elsewhere, so they pay less than face for a bond with a lower stated rate.
11. Unit 14, Corporation Accounting
A cash dividend becomes a liability of the corporation on the date of _____.
Answer: declaration
Why: Once the board votes, the dividend is a legal obligation, so the entry is made that day.
12. Unit 16, The Statement of Cash Flows
When accounts receivable increases during the year, is the increase added or subtracted in the indirect method?
Answer: Subtracted
Why: Revenue was recorded but not yet collected in cash, so net income overstates cash received.
Reading your result
Do not just count your total. Note which units your misses came from, and whether each was a wrong fact, a wrong formula or a misread setup. A cluster in one unit means that unit needs a proper pass through its note cards. Scattered misses on setup usually mean you are answering too fast. Redo the missed ones after a gap of a few days, not straight away, and see how many you can now explain rather than merely recognize.
Where to go next
Twelve questions cannot cover 16 units. The full deck opens each chapter with a note card that teaches the rule before the questions begin. What's in Financial Accounting maps every unit, how to study for financial accounting suggests an order, and debits and credits explained is the base for every entry in this set. To turn it into a plan, use the free study schedule generator.
Encodr turns this into a habit: study anything in a feed, and it schedules the rest.
Get started free