Chap 1

1. Identifying is the process of keeping a chronological diary of events measured in

dollars and cents.
a. True
b. False
Explain: IT IS RECORDING

2. The field of accounting that focuses on providing information for top managers is
________.
a. Financial accounting
b. Managerial accounting
c. Non-monetary accounting
d. Cost accounting

3. George and Ringo met at law school and decided to start a small law practice after
graduation. They agree to split revenues and expenses evenly. The most common
form of business organization for a business such as this would be a
a. Joint venture.
b. Partnership.
c. Corporation
d. Proprietorship
Explain: Joint venture: 1 owner, unlimited liability
Partnership: at least 2 owners, unlimited liability
Corporation: can be 1 or many owners, limited liability

4. Choose the INCORRECT statement:

a. Asset - Liability = Equity
b. Expense - Revenue = Net loss
c. Drawings = Capital - Equity + Net loss
d. Capital = Equity + Drawings + Net loss
Explain: Asset = Liability + Owner's Equity
= Liability + Capital - Drawings + Revenues - Expenses
Revenues - Expenses = Net income (Revenue > Expense)
Expenses - Revenues = Net loss (Revenue < Expense)

Flights of Wisdom 8 - Principles of Accounting

 5. Golden company had the following accounts and balances at the end of the first
year of operations. What are total liabilities at the end of the year?

Cash $84,000

Account Payable $23,000

Common Stock $13,000

Dividends $43,000

Operating expense $29,000

Account Receivable $62,000

Unearned Revenue $40,000

Revenue $210,000

Salaries Payable $29,000

a. $84,000
b. $92,000
c. $52,000
d. $237,000
6. A business can enter into a transaction in which only the left side of the basic
accounting is affected.
a. True
b. False
Explain: A company can purchase office supplies in cash, two accounts affected are cash
and supplies, which are assets (only the left side of the basic accounting equation is
affected: Assets = Liabilities + Equity).
7. Which statement reports a 'snapshot' of an entity?
a. Balance sheet
b. Statement of cash flows
c. Statement of retained earnings
d. Income statement
Explain: The balance sheet describes an entity’s financial position at a specific point in
time, not over a period of time.

Flights of Wisdom 8 - Principles of Accounting

 8. Which financial statement answers the following question: How well did the
company perform during the year?
a. Statement of retained earnings
b. Income statement
c. Balance sheet
d. Statement of cash flows
Explain: The income statement shows how much revenue a company generated during a
period of time, how much it spent on expenses, and how much profit or loss it made.
9. The net loss appears indirectly on the income statement and the owner’s equity
statement, and directly on the balance sheet.
a. True
b. False
Explain:
- Directly:
• On the income statement: Revenue – Expense
• On the owner’s equity statement: an addition to the beginning-of period capital.
- Indirectly in the balance sheet: It is included in the capital account which appears in the
owner’s equity section of the balance sheet
10. According to the ________, acquired assets should be recorded at the amount
actually paid rather than at the estimated market value
a. going concern assumption
b. economic entity concept
c. historical cost principle
d. monetary unit assumption
Explain:
- Historical cost & fair value are the same on the date of acquisition.
- Selection of which principle to follow relates to trade-offs between relevance and
faithful representation
11. The accounting assumption that states that the business, rather than its owners, is
the reporting unit is the
a. economic entity assumption.
b. going concern assumption.
c. stable-monetary-unit assumption.
d. historical cost assumption.
Explain:
- Monetary unit assumption enables accounting to quantify economic event
- Economic entity assumption separate the activity of business with the owner
12. Montgomery Equipment Rental Company paid $1,000 of cash to a supplier for the
amount that was owed to the business from the previous month. What is the effect
of this transaction on the accounting equation?

Flights of Wisdom 8 - Principles of Accounting

 a. Cash decreases, Supplies increases
b. Cash decreases, Account Payable decreases
c. Supplies increases, Account Payable increases
d. Cash decreases, Operating Expense increases
13. Ten years ago, a company purchased a building for $190,000. At that time, the
company felt that the building was worth $215,000. The current market value of
the building is $450,000. The building has been assessed at $425,000 for property
tax purposes. At which amount should the company record the building in its
accounting records?
a. $425,000
b. $215,000
c. $190,000
d. $450,000

Chap 2
1. The terms debit and credit mean increase and decrease, respectively.
a. True
b. False
Explain: The term debit and credit mean left and right respectively
2. Which accounts are increased by credits?
a. Equipment and Drawings
b. Cash and Utilities Expense
c. Interest Payable and Account Receivable
d. Salaries Payable and Unearned Revenue
Explain:
- Account increased by Debit: Drawings, Expenses, Assets
- Account increased by Credit: Liabilities, Owner’s Capital, Revenues
3. The proper order for the accounting process is
a. Posting, transaction occurs, journalizing.
b. Transaction occurs, posting, journalizing.
c. Transaction occurs, transaction analyzed, journalizing, and posting.
d. Transaction occurs, posting, transaction analyzed, journalizing.
Explain:
- The basic steps in the recording process are:
• Analyze each transaction for its effects on the accounts.
• Enter the transaction information in a journal.
• Transfer the journal information to the appropriate accounts in the ledger.

Flights of Wisdom 8 - Principles of Accounting

 4. Which of the following statements regarding a trial balance is TRUE?
a. A trial balance may be prepared at any time during the accounting
period
b. A trial balance is a list of only a company's asset and liability accounts used
in a business with their balances.
c. A trial balance is a required financial statement.
d. It proves that the company has recorded all transactions
Explain:
- Prepare a trial balance
• It is a list of accounts and their balances at a given time.
• Its primary purpose is to prove the equality of debits and credits after posting.
• It uncovers errors in journalizing and posting and is useful in preparing financial
statements.
- Indicate limitations of trial balance
• Incorrect accounts are used in journalizing and posting.
• Offsetting errors are made in recording the amount of a transaction.
→ Does not prove that the company has recorded all transactions, or the ledger is correct
5. A trial balance does not always recognize errors in journalizing and posting.
a. True
b. False
6. Which of the following transactions includes a credit to cash?
a. the purchase of supplies on account
b. the payment of an accounts payable
c. the collection of cash from an accounts receivable
d. receipt of cash from a customer when service is provided
7. The double-entry system means each transaction must be recorded twice.
a. True
b. False
Explain: Double-entry system means each transaction has the effects on 2 accounts.
8. The journal list transactions should be recorded in a _____ order.
a. Alphabetical
b. Increasing
c. Decreasing
d. Chronological
Explain: The advantages of using a journal:
• Discloses in one place the complete effects of a transaction.
• Provides a chronological record of transactions.
• Prevents or locates errors because the debit and credit amounts can be easily
compared.

Flights of Wisdom 8 - Principles of Accounting

 9. A transaction that includes a debit to an expense and a credit to a liability indicates
that
a. Revenues increased
b. Expenses decreased
c. Liabilities increased
d. Liabilities decreased
10. A business performed services of $16,000 on account. The business would
a. Debit Service Revenue for $16,000 and Credit Account Receivable for
$16,000
b. Debit Cash for $16,000 and Credit Service Revenue for $16,000
c. Debit Expenses for $16,000 and Credit Account Payable for $16,000
d. Debit Account Receivable for $16,000 and Credit Service Revenue for
$16,000

11. The ledger:

a. is a grouping of all of the balance sheet accounts only.
b. is a grouping of all the income statement accounts only.
c. contains all the accounts used by a business.
d. contains only the permanent accounts used by a business.

12. Yellow company had a balance of $34,000 in Accounts Payable at the beginning
of June, and purchased $100,000 of merchandise on account during the month. At
the end of June, Yellow's Accounts Payable balance was $31,000. What amount
did Yellow pay on account during June?
a. $35,000
b. $40,000
c. $110,000
d. $103,000
13. The Account Payable account of brownstone company has the following postings

Account Payable

1,000 5,600

3,000 500
Calculate the ending balance of the account:
a. $1,600 Credit
b. $2,300 Debit
c. $2,100 Credit
d. $3,000 Debit

Flights of Wisdom 8 - Principles of Accounting

 Chap 3
1. All fiscal years are calendar years.
a. True
b. False
Explain: Fiscal years are not always calendar years.
- Time period assumption: divide the economic life of a business into artificial time
period (month, quarter, semi-annual, annual)
2. Which of the following time periods would not be referred to as an interim period?
a. Monthly
b. Quarterly
c. Semi-annually
d. Annually
Explain: Interim period < 1 year, fiscal year = 1 year
3. The revenue recognition principle dictates that revenue should be recognized in
the accounting records
a. When the performance obligation is satisfied
b. When cash is received
c. At the end of the accounting period
d. In the period that taxes are paid
Explain: Revenue recognition principle, Expense recognition principle
4. Which of the following entries would be made because of the matching principle?
a. Salaries Expense 1,000
Service Revenue 1,000
b. Cash 1,000
Salaries Expense 1,000
c. Salaries Expense 1,000
Salaries Payable 1,000
d. Cash 1,000
Unearned Revenue 1,000
5. Every adjusting entry will include one income statement account and one balance
sheet account.
a. True
b. False
6. Adjusting entries are required by the historical cost principle of accounting
a. True

Flights of Wisdom 8 - Principles of Accounting

 b. False
Explain: Adjusting entries ensure that the revenue recognition and expense recognition
principles are followed, not the historical cost principle
7. In cash basis accounting, revenue is recorded when cash is received, and expenses
are recorded when cash is paid.
a. True
b. False
8. The key differences between the cash basis and accrual basis of accounting are the
timing and recognition of assets and liabilities
a. True
b. False
Explain: The key differences are the timing and recognition of revenues and expenses.
9. ABC Company had the following transactions during the month. What would be
the total amount of expenses for the month if ABC Company uses the cash basis
method?
a) Paid $4,800 for insurance for the next 12 months.
b) Received $6,500 for services to be performed equally over the next 12
months.
c) Paid $1,400 for the current month's rent in cash.
d) Paid $100 cash for buying equipment.
e) Paid $790 in Interest Expense in cash.
f) Received $2,400 in cash for service revenue earned this month.
a. $7,200
b. $3,550
c. $6,150
d. $6,990
10. On January 1, the Accounts Receivable of Martha Company had a debit balance of
$200,000. During January, the company provided services for $400,000 on
account. The company collected $230,000 from its customers on account in
January. What was the ending balance in the Accounts Receivable account at the
end of January?
a. $170,000
b. $600,000
c. $370,000
d. $400,000
11. On October 1 of the current year, a company received $6,600 for services to be
performed evenly over the next six months. If no adjusting entry was made on
December 31 of the current year
a. net income would be overstated by $6,600
b. net income would be understated by $1,050.

Flights of Wisdom 8 - Principles of Accounting

 c. net income would be understated by $3,300
d. net income would be overstated by $3,300
12. On October 1, 2022, Golde Company paid $12,600 for one year of insurance for
the period from October 1, 2022 to September 30, 2023. Which of the following
will be part of the adjusting entry on December 31, 2022?
a. Debit Prepaid Insurance for $1,050
b. Debit Prepaid Insurance for $3,150
c. Debit Insurance Expense for $3,150
d. Debit Insurance Expense for $1,050
13. On August 1 of the current year, Trevor Beck received $7,200 for legal services to
be performed evenly throughout the next six months. The adjusting entry on
December 31 of the current year would include a:
a. Credit to Unearned Service Revenue of $6,000.
b. Debit to Service Revenue of $1,200.
c. Credit to Service Revenue of $6,000.
d. Debit to Unearned Service Revenue of $1,200
Explain:
- Deferrals: prepaid expense, unearned revenue
- Accruals: accrued expense, accrued revenue

14. Dress designers Company has entered into a contract to design 10 new dresses for
a customer. It will collect a total of $48,000 after the design services are complete.
Dress designers started design work on June 1. As of June 30, it finished 2 of the
10 designs. The company will make an adjusting entry at the end of June to accrue
$12,000 of service revenue.
a. True
b. False
15. Hatfield Company purchased a building for $146,000 on October 1 in exchange
for a six-month loan at 12% with interest and a note to be paid six months later.
Assuming the company uses the accrual basis method, what would be the
adjusting entry on December 31?
a. Interest Payable 4,380
Interest Expense 4,380
b. Interest Payable 1,460
Interest Expense 1,460
c. Interest Expense 4,380
Interest Payable 4,380
d. Interest Expense 1,460

Flights of Wisdom 8 - Principles of Accounting

 Interest Payable 1,460
Explain: Interest expense for 1 year = $146,000 * 12% = $17,520
Interest expense for 1 month = $17,520/12 = $1,460
Interest expense from Oct 1 - Dec 31= $1,460*3= $4,380

16. Depreciation is a valuation process that results in the reporting of the fair value of
the asset.
a. True
b. False
Explain:
- Depreciation is the process of allocating the cost of an asset to expense over its
useful life
- Accumulated Depreciation is called a contra asset account.

17. Cash-basis accounting does NOT record:

a. purchase of supplies with cash.
b. sale of common stock.
c. depreciation expense.
d. payment of note payable.

18. Jones Company purchased a piece of equipment for $10,000. It has accumulated
depreciation at the end of three years of $9,000. What is the book value of the
equipment at the end of year 3?
a. $2,000
b. $1,000
c. $7,000
d. $9,000
Explain: Book value = Cost - Accumulated Depreciation

Chap 4
1. Worksheet is a formal financial statements
a. True
b. False
Explain: Preparing worksheet is optional.

Flights of Wisdom 8 - Principles of Accounting

 2. The income statement and balance sheet columns of William Blue worksheet
reflect the following totals

Income statement Balance sheet

Dr. Cr. Dr. Cr.

Totals $5,600 $22,920 $69,360 $52,040

The net income (loss) for the period is
a. $17,320 net income
b. $17,320 net loss
c. Not determined
d. $17,860 net income

3. After the closing entries have been recorded and posted, the balance of the Income
Summary account will equal the net income (loss) of the business.
a. True
b. False
Explain: After closing entries, the ending balance of all temporary account is 0

4. The closing process helps in measuring each period's net income separately from
all other periods
a. True
b. False

5. After closing entries have been posted ________.

a. Only temporary accounts carry balances.
b. All permanent accounts will have a zero balance.
c. All temporary accounts will have a zero balance.
d. None of the statements are correct

6. Which of the following entries is necessary to close the appropriate depreciation

account at the end of the year?
a. Debit Accumulated Depreciation and credit Income Summary
b. Debit Income Summary and credit Depreciation Expense
c. Debit Income Summary and credit Accumulated Depreciation
d. Debit Depreciation Expense and credit Income Summary

Flights of Wisdom 8 - Principles of Accounting

 7. William Blue earned revenues of $32,000 and incurred expenses of $9,000. The
company's owner withdrew $3,200. What is the balance in the Income Summary
account before closing net income or loss to the Owner’s Capital account?
a. Debit balance of $23,000
b. Credit balance of $19,800
c. Credit balance of $23,000
d. Balance of $0

8. The proper order of preparing financial statements:

a. Balance Sheet -> Statement of Owner's Equity -> Income Statement
b. Income Statement -> Statement of Owner's Equity -> Balance Sheet
c. Statement of Owner's Equity -> Balance Sheet -> Income Statement
d. There is no specific order, based on the company
Explain:
Income statement: compute Net income (loss)
Statement of Owner's Equity: Net income (loss) -> compute Owner's Capital
Balance sheet: Owner's Capital -> compute Owner's Equity

9. The financial statements will be prepared after preparing post-closing trial balance
a. True
b. False
Explain: 9 steps in accounting cycles

10. Which of the following steps must be completed before preparing an adjusted trial
balance?
a. Journalize and post the closing entries
b. Post journal entries to ledger accounts
c. Journalize and post adjusting entries
d. Prepare the financial statements

11. Woods Company earned revenues of $90,000 and incurred expenses of $110,000.
No withdrawals were taken and the owner did not make any new capital
contribution during the year. Which of the following statements is correct?
a. The entries to close revenues and expenses will differ if there is a net loss.
b. The entry to close Income Summary is the same regardless of a net income
or a net loss
c. Wood’s Capital will be debited $20,000 and Income Summary will be
credited for $20,000

Flights of Wisdom 8 - Principles of Accounting

 d. The entry to close Income Summary requires a debit to the Income
Summary account

12. On July 4th, Harper Co. journalized and posted a $150 cash collection on account
from a customer as a debit to Cash $150 and a credit to Service Revenue $150.
The company discovered the error on July 31, when the customer paid the
remaining balance in full. What is the correcting entry?
a. Cash 150
Accounts Payable 150
b. Service Revenue 150
Cash 150
c. Cash 150
Accounts Receivable 150
d. Service Revenue 150
Accounts Receivable 150
Explain:
Incorrect entry: Cash 150
Service Revenue 150
Correct entry (should be): Cash 150
Accounts Receivable 150
Correcting entry: Service Revenue 150
Accounts Receivable 150

13. The current portion of a long-term note payable is classified on the balance sheet
as a
a. Current asset
b. Current liability
c. Long-term asset
d. Long-term liability
Explain: If long-term note payable is divided to pay in installments according to the due
period, each payment (the current portion) will be classified as current liability

14. Prepaid Rent is always classified as a long-term asset.

a. True
b. False
Explain: Based on the period, more/less than 12 months

Flights of Wisdom 8 - Principles of Accounting

 15. Current assets are assets expected to be converted to cash, sold, or consumed
during the next
a. 12 months or within the business's operating cycle if longer than a year
b. 12 months or within the business's operating cycle if less than a year.
c. 6 months
d. 24 months
16. In the balance sheet, assets are listed in the order of
a. Amount
b. Chronology
c. Liquidity
d. No specific order

Total: 20 True/False, 40 MCQs

Flights of Wisdom 8 - Principles of Accounting