Free practice final
Financial Accounting practice final (free, with answers)
A typical intro financial accounting final asks you to record transactions with debits and credits, make adjusting entries, cost inventory, and account for receivables, depreciation, bonds and stockholders' equity, then read the financial statements with ratios. These questions follow US GAAP. Work each one on paper before you open the answer, then use the explanation to check the key step.
Topics
- Accounting Equation
- Debits and Credits
- Adjusting Entries
- Inventory
- Receivables
- Depreciation
- Bonds and Liabilities
- Stockholders' Equity
- Financial Statements and Ratios
15 questions
Try each one before you open its answer.
1. At the start of the year, a corporation had total assets of $250,000 and total liabilities of $90,000. During the year, total assets increased by $40,000 and total liabilities decreased by $15,000. The company also issued common stock for $10,000 cash and declared and paid $8,000 of dividends. If there were no other changes in stockholders' equity, what was net income for the year?
- A $55,000
- B $37,000
- C $53,000
- D $63,000
Show answer
Answer: C. $53,000
Equity was $250,000 − $90,000 = $160,000 at the start and $290,000 − $75,000 = $215,000 at the end, an increase of $55,000. That increase equals stock issued plus net income minus dividends, so net income = $55,000 − $10,000 + $8,000 = $53,000.
2. A company performs services for a customer for $5,000. The customer pays $2,000 in cash right away and agrees to pay the remaining $3,000 in 30 days. Under accrual accounting, which journal entry records the transaction?
- A Debit Cash $2,000 and Accounts Receivable $3,000; credit Service Revenue $5,000
- B Debit Cash $2,000; credit Service Revenue $2,000
- C Debit Cash $2,000 and Accounts Receivable $3,000; credit Unearned Service Revenue $5,000
- D Debit Service Revenue $5,000; credit Cash $2,000 and Accounts Receivable $3,000
Show answer
Answer: A. Debit Cash $2,000 and Accounts Receivable $3,000; credit Service Revenue $5,000
Under accrual accounting, revenue is recorded when the service is performed, so the full $5,000 is earned now even though only $2,000 was collected. The cash received is debited to Cash, the amount still owed is debited to Accounts Receivable, and Service Revenue is credited. Unearned revenue is used only when cash arrives before the work is done.
3. On October 1, a company paid $7,200 for a 12-month insurance policy and debited Prepaid Insurance for the full amount. Its fiscal year ends December 31. After the year-end adjusting entry, what is the balance in Prepaid Insurance?
Show answer
Answer: $5,400
Three months of coverage (October through December) have been used: $7,200 × 3/12 = $1,800, which the adjusting entry moves to expense with a debit to Insurance Expense and a credit to Prepaid Insurance. The remaining 9 months, $7,200 − $1,800 = $5,400, stay on the balance sheet as an asset.
4. On November 1, a customer paid a company $12,000 in advance for six months of service starting that day, and the company credited Unearned Service Revenue. Its fiscal year ends December 31. Which adjusting entry should the company make on December 31?
- A Debit Unearned Service Revenue $8,000; credit Service Revenue $8,000
- B Debit Cash $4,000; credit Service Revenue $4,000
- C Debit Service Revenue $4,000; credit Unearned Service Revenue $4,000
- D Debit Unearned Service Revenue $4,000; credit Service Revenue $4,000
Show answer
Answer: D. Debit Unearned Service Revenue $4,000; credit Service Revenue $4,000
By December 31 the company has provided 2 of the 6 months of service, so it has earned $12,000 × 2/6 = $4,000. The entry reduces the liability with a debit to Unearned Service Revenue and records the revenue with a credit to Service Revenue; the other $8,000 stays a liability until it is earned, and no cash changes hands at year-end.
5. A company uses a periodic inventory system. It began the year with 100 units costing $10 each, then bought 150 units at $12 each and later 200 units at $13 each. It sold 320 units during the year. Under FIFO, what is the cost of ending inventory?
- A $1,360
- B $1,690
- C $1,560
- D $3,710
Show answer
Answer: B. $1,690
There are 450 − 320 = 130 units left, and FIFO sends the oldest costs to cost of goods sold, so ending inventory is the 130 most recently bought units: 130 × $13 = $1,690. LIFO, which US GAAP allows but IFRS does not, would leave the oldest costs in inventory (100 × $10 + 30 × $12 = $1,360), and $3,710 is FIFO cost of goods sold.
6. A company uses the weighted-average cost method with a periodic inventory system. Its goods available for sale were beginning inventory of 200 units at $8.00, a purchase of 300 units at $9.00, and a purchase of 500 units at $10.40. It sold 700 units. What is cost of goods sold?
- A $6,380
- B $7,000
- C $6,650
- D $2,850
Show answer
Answer: C. $6,650
Periodic weighted-average cost is the total cost of goods available divided by the units available: ($1,600 + $2,700 + $5,200) ÷ 1,000 = $9.50 per unit. Cost of goods sold is 700 × $9.50 = $6,650, and the other 300 units ($2,850) stay in ending inventory.
7. At year-end, Accounts Receivable is $80,000, and the company estimates that 5% of it will be uncollectible (the percentage-of-receivables method). Before the adjustment, Allowance for Doubtful Accounts has a $600 debit balance. How much bad debt expense should the company record?
- A $4,600
- B $4,000
- C $3,400
- D $600
Show answer
Answer: A. $4,600
The allowance must end the year with a $4,000 credit balance ($80,000 × 5%). Starting from a $600 debit balance, the adjustment has to credit the allowance for $4,000 + $600 = $4,600, and that amount is the bad debt expense.
8. A company that uses the allowance method has Accounts Receivable of $50,000 and a $3,000 credit balance in Allowance for Doubtful Accounts. It then writes off a $1,200 customer account as uncollectible. What is the net realizable value of its receivables immediately after the write-off?
Show answer
Answer: $47,000, the same as before the write-off
The write-off debits Allowance for Doubtful Accounts and credits Accounts Receivable for $1,200, so receivables fall to $48,800 and the allowance to $1,800. Net realizable value is $48,800 − $1,800 = $47,000, unchanged, because the expense was already recognized when the allowance was estimated.
9. On January 1, a company buys equipment for $50,000 with an estimated salvage value of $5,000 and a 5-year useful life. It uses the double-declining-balance method and has a December 31 year-end. What is depreciation expense for the second year?
- A $9,000
- B $10,800
- C $20,000
- D $12,000
Show answer
Answer: D. $12,000
The double-declining rate is 2 × 1/5 = 40%, applied to book value, not to cost minus salvage. Year 1 is $50,000 × 40% = $20,000, leaving a book value of $30,000, so year 2 is $30,000 × 40% = $12,000; salvage value only matters as a floor that book value cannot drop below.
10. A machine cost $36,000, has an estimated salvage value of $4,000 and an 8-year useful life, and is depreciated by the straight-line method. After exactly 3 full years of use, the company sells it for $22,000 cash. What gain or loss does it record on the sale?
Show answer
Answer: A $2,000 loss
Annual depreciation is ($36,000 − $4,000) ÷ 8 = $4,000, so after 3 years accumulated depreciation is $12,000 and book value is $24,000. Selling for $22,000, which is $2,000 below book value, produces a $2,000 loss.
11. A corporation issues 10-year bonds with a 6% stated (coupon) rate when the market rate of interest for similar bonds is 7%. Which statement is true?
- A The bonds sell at a premium, and interest expense each period is less than the cash interest paid
- B The bonds sell at a discount, and interest expense each period is more than the cash interest paid
- C The bonds sell at a discount, and interest expense each period is less than the cash interest paid
- D The bonds sell at face value, because the stated rate sets the interest payments
Show answer
Answer: B. The bonds sell at a discount, and interest expense each period is more than the cash interest paid
Investors can earn 7% elsewhere, so they pay less than face value for a bond that pays only 6%, and the bonds sell at a discount. Interest expense each period equals the cash interest plus that period's discount amortization, so it is larger than the cash paid, and the amortization raises the carrying value to face value by maturity.
12. On January 1, a company issues $200,000 of 10-year bonds with a 6% stated rate, paying interest every June 30 and December 31. The market rate is 8% compounded semiannually, so the bonds sell for $172,819. Using the effective-interest method, how much of the discount is amortized on the first interest date, June 30? Round to the cent.
Show answer
Answer: $912.76
Interest expense is the carrying value times the semiannual market rate: $172,819 × 4% = $6,912.76. The cash paid is $200,000 × 3% = $6,000, so the discount amortized is $6,912.76 − $6,000 = $912.76, which raises the carrying value to $173,731.76.
13. A corporation has 10,000 shares of 5%, $100 par cumulative, nonparticipating preferred stock outstanding, plus common stock. It declared no dividends last year. This year it declares $180,000 of dividends in total. How much of it goes to the common stockholders?
- A $130,000
- B $100,000
- C $80,000
- D $180,000
Show answer
Answer: C. $80,000
The preferred dividend is 10,000 × $100 × 5% = $50,000 a year, and because the stock is cumulative, last year's skipped $50,000 must be paid first along with this year's. Preferred stockholders get $100,000, leaving $180,000 − $100,000 = $80,000 for common.
14. A company's balance sheet shows cash of $20,000, short-term investments of $10,000, net accounts receivable of $30,000, inventory of $40,000, prepaid expenses of $5,000, and current liabilities of $50,000. What is its quick (acid-test) ratio, defined as (cash + short-term investments + net receivables) ÷ current liabilities?
- A 1.20
- B 2.10
- C 2.00
- D 0.60
Show answer
Answer: A. 1.20
Quick assets are $20,000 + $10,000 + $30,000 = $60,000, and $60,000 ÷ $50,000 = 1.20. Inventory and prepaid expenses are left out because they cannot be turned into cash quickly; including them gives the current ratio of 2.10.
15. For the year, a company reports net sales of $400,000, cost of goods sold of $240,000, operating expenses of $90,000, and interest expense of $10,000. Its income tax rate is 25%. What is net income?
Show answer
Answer: $45,000
Gross profit is $400,000 − $240,000 = $160,000, and subtracting operating expenses gives operating income of $70,000. Subtracting interest leaves income before taxes of $60,000, and after 25% tax, net income is $60,000 × 0.75 = $45,000.