Accounting practice quiz with answers

What is the accounting equation?

1. Assets = Liabilities − Equity
2. Assets = Liabilities + Equity
3. Assets = Revenue − Expenses
4. Equity = Liabilities − Assets

Answer: B. Everything a business owns (assets) is financed either by creditors (liabilities) or by the owners (equity).

Which account normally has a credit balance?

1. Rent Expense
2. Accounts Payable
3. Equipment
4. Cash

Answer: B. Accounts Payable is a liability, and liabilities increase with credits. Cash and Equipment are assets and Rent Expense is an expense, so they normally have debit balances.

A company performs $2,000 of services on account. What is the journal entry?

1. Debit Service Revenue, credit Accounts Receivable
2. Debit Accounts Receivable, credit Unearned Revenue
3. Debit Cash, credit Service Revenue
4. Debit Accounts Receivable, credit Service Revenue

Answer: D. The customer will pay later, so Accounts Receivable increases (debit). The revenue has been earned, so Service Revenue increases (credit).

A customer paid $6,000 in advance for 6 months of service. After 2 months, what is the adjusting entry?

1. Debit Unearned Revenue $4,000, credit Service Revenue $4,000
2. Debit Unearned Revenue $2,000, credit Service Revenue $2,000
3. Debit Cash $2,000, credit Service Revenue $2,000
4. Debit Service Revenue $4,000, credit Unearned Revenue $4,000

Answer: B. $6,000 ÷ 6 months × 2 months = $2,000 has been earned. The liability (Unearned Revenue) goes down and revenue goes up. No cash moves in an adjusting entry.

Which of these is NOT an adjusting entry?

1. Accruing wages owed at year end
2. Recording expired prepaid insurance
3. Recording a cash sale made today
4. Recording depreciation

Answer: C. A cash sale is an ordinary transaction recorded when it happens. Adjusting entries are made at period end and never involve Cash.

Equipment costs $20,000, has a $2,000 salvage value and a 6-year life. What is the annual straight-line depreciation?

1. $3,000
2. $3,667
3. $2,000
4. $3,333

Answer: A. ($20,000 − $2,000) ÷ 6 = $3,000 per year. Salvage value is subtracted before dividing.

What is the double-declining balance rate for an asset with a 4-year useful life?

1. 50%
2. 200%
3. 25%
4. 40%

Answer: A. The straight-line rate is 1 ÷ 4 = 25%. Double-declining doubles it: 2 ÷ 4 = 50%.

When prices are rising, which inventory method gives the highest cost of goods sold?

1. They are all equal
2. FIFO
3. LIFO
4. Weighted average

Answer: C. LIFO expenses the newest, most expensive units first, so cost of goods sold is highest and ending inventory is lowest.

Price is $40 per unit, variable cost is $25 per unit and fixed costs are $30,000. What is the break-even point in units?

1. 750
2. 1,200
3. 2,000
4. 1,500

Answer: C. Contribution margin = $40 − $25 = $15. Break-even = $30,000 ÷ $15 = 2,000 units.

Price is $50 and variable cost is $30 per unit. What is the contribution margin ratio?

1. 40%
2. 20%
3. 30%
4. 60%

Answer: A. ($50 − $30) ÷ $50 = $20 ÷ $50 = 40%.

Current assets are $90,000 and current liabilities are $60,000. What is the current ratio?

1. 30,000
2. 2.5
3. 0.67
4. 1.5

Answer: D. Current ratio = current assets ÷ current liabilities = $90,000 ÷ $60,000 = 1.5.

Net income is $30,000 and net sales are $200,000. What is the net profit margin?

1. 20%
2. 15%
3. 6.7%
4. 30%

Answer: B. Net profit margin = net income ÷ net sales = $30,000 ÷ $200,000 = 15%.

On a bank reconciliation, how is an outstanding check treated?

1. Added to the bank balance
2. Subtracted from the bank balance
3. Added to the book balance
4. Subtracted from the book balance

Answer: B. The company already recorded the check, but it hasn't cleared the bank yet, so the bank balance is too high. Subtract it from the bank side.

A customer's check is returned NSF (not sufficient funds). How is it treated?

1. Added to the bank balance
2. Subtracted from the bank balance
3. No adjustment is needed
4. Subtracted from the book balance

Answer: D. The bank has already removed the money, but the company's books still count it as cash. Subtract it from the book balance and debit Accounts Receivable.

What is the present value of $1,000 received in 2 years at 10%?

1. $909.09
2. $1,210.00
3. $826.45
4. $800.00

Answer: C. PV = $1,000 ÷ (1.10)² = $1,000 ÷ 1.21 = $826.45.