Principles of Accounting

Mid-term mock test

Compiled by PA Team

True/False questions:
1. The going concern principle is only applicable to profit organizations. (F)
2. The historical cost principle requires that assets be recorded on the balance sheet at
their current market value. (F)
3. Liquidity refers to a company's ability to generate profits. (F)
4. The alternative name for “statement of earnings” is “statement of financial position”.
(F)
5. If a company borrows money from a bank, it increases both assets and liabilities. (T)
6. Revenue earned but not yet received in cash increases both assets and equity in the
accounting equation. (T)
7. Investing in new equipment with cash decreases assets but has no impact on
liabilities in the accounting equation. (F)
8. Accrual accounting requires adjusting entries at the end of each accounting period.
(T)
9. The normal balance for accumulated depreciation account is a debit balance. (F)
10. The closing entry for the Income Summary account involves debiting or crediting it to
bring its balance to zero. (T)
11. The steps for closing the Income Summary account and transfering it into Owner’s
Capital when there is net income are identical to the steps for closing the Income
Summary account and transfering it into Owner’s Capital when there is a net loss. (F)
12. The procedure for closing temporary accounts remains the same, irrespective of
whether there is a net income or a net loss. (T)
13. A business can enter into a transaction in which only the left side of the basic
accounting equation is affected. (T)
14. Depreciation is a non-cash expense that is recorded on financial statements to
account for the gradual reduction in the value of an asset due to factors like wear and
tear, obsolescence, and the passage of time. (T)
15. Public accounting firms provide auditing, tax, and consulting services to a wide range
of clients, including businesses, governments, and nonprofit organizations. (T)
16. Forensic accounting primarily involves financial statement preparation for businesses
and organizations. (F)
17. Internal financial statements are audited by CPA (F)
18. IFRS allows for the revaluation of property, plant, and equipment to fair value, while
GAAP generally does not permit such revaluation. (T)
19. Convergence efforts between IFRS and GAAP have been ongoing to reduce the
differences between the two sets of standards. (T)
20. A company pays $12,000 in advance for a one-year insurance policy that starts on
June 1. On September 15, it should report $3,000 as an expense on its income
statement. (F, $3,500)

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MCQs

1. A company purchases a piece of equipment for $60,000, paying $10,000 in cash and
taking out a loan for the remainder. How does this transaction affect the accounting
equation?
a. Assets increase by $60,000, liabilities increase by $60,000
b. Assets increase by $60,000, owner's equity increases by $10,000
c. Assets increase by $50,000, liabilities increase by $50,000
d. Assets increase by $40,000, owner's equity increases by $60,000

Equipment (+$60,000) Cash (-$10,000) -> Assets increase by $50,000

Account Payable (+50,000) -> liabilities increase by $50,000

2. A company purchases a piece of equipment for $40,000, and pays the full amount.
How does this transaction affect the accounting equation?
a. Assets increase by $40,000
b. Cash increases by $40,000
c. Liabilities decrease by $40,000
d. No impact on accounting equation

Cash (-$40,000) and Equipment (+$40,000) -> No effect on accounting equation.

3. Which accounting standard governs the reporting of financial information for entities in the
United States?
a. IFRS (International Financial Reporting Standards)
b. FASB (Financial Accounting Standards Board)
c. GAAP (Generally Accepted Accounting Principles)
d. IAS (International Accounting Standards)

4. A company has $100,000 in assets, $40,000 in liabilities. There is no investment and

withdrawals during the period. What is its total revenue if the expeneses are $40,000?
a. $60,000
b. $100,000
c. $140,000
d. $160,000
OE = $100,000 - $40,000 = $60,000
OE = Investment - Withdrawals + Revenue - Expenses
$60,000 = 0 - 0 + Revenue - $40,000
Revenue = $100,000

5. Which financial statement shows the financial position of a company at a specific point in
time?
a. P&L statement
b. Statement of cash flows
c. Balance sheet
d. Statement of owner’s equity

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6. According to the revenue recognition principle, when should revenue be recognized?
a. When it is earned and realized or realizable
b. When cash is received
c. When the customer places an order
d. At the end of the fiscal year

7. What does the materiality principle in accounting suggest?

a. All financial information, regardless of its size or significance, should be disclosed in
financial statements.
b. Only information that is considered immaterial should be disclosed in financial statements.
c. Information should be disclosed in financial statements if its omission or
misstatement could influence the economic decisions of users.
d. Materiality is not a consideration in financial reporting.

8. Which of the following is a key advantage of a sole proprietorship?

a. Limited liability protection
b. Ease of raising capital
c. It is complex to operate
d. Direct control and decision-making by the owner

9.What is one significant disadvantage of a corporation in terms of taxation?

a. Shareholders enjoy lower personal tax rates on corporate profits.
b. Corporate profits are not taxed at all.
c. Corporate profits are subject to double taxation.
d. Corporate profits are taxed at a flat rate, regardless of income.

10. Which financial statement is often the main focus of private accountants?
a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Statement of retained earnings

11. When a company pays rent for the month, which type of journal entry is typically used?
a. Simple entry
b. Compound entry
c. Complex entry
d. None of the above

12. What is a compound journal entry in accounting?

a. An entry that involves only one account being debited and one account being
credited.
b. An entry that involves multiple accounts being debited and credited.
c. An entry that is made at the end of the fiscal year.
d. An entry that is used for cash transactions only.

13. What is the fundamental concept behind the double-entry system?

a. Every transaction involves only one account.
b. Every transaction is recorded in the income statement.

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 c. Every transaction requires approval by two managers.
d. Every transaction affects at least two accounts.

14. A customer pays $500 for services in advance. What journal entry should the company
make?
a. Debit Service Revenue, Credit Accounts Receivable
b. Debit Accounts Payable, Credit Cash
c. Debit Cash, Credit Unearned Revenue
d. Debit Unearned Revenue, Credit Service Revenue

15. Tiffany Co. received an electricity bill of $400 for the current month, but the payment is
due at the end of the next month. What journal entry should Russell Co. make to record this
bill receipt?
a. Debit Accounts Payable $400, Credit Cash $400.
b. Debit Utilities Expense $400, Credit Accounts Receivable $400.
c. Debit Utilities Expense $400, Credit Accounts Payable $400.
d. Debit Cash $400, Credit Accounts Payable $400.

16. During the month of May, Helena Cleaning Services made purchases on account totaling
$20,000. Also during the month of March, Harley was paid $43,000 by a customer for
services to be provided in the future and paid $11,428 of cash on its accounts payable
balance. If the balance in the accounts payable account at the beginning of May was
$215,852, what is the balance in accounts payable at the end of March?
a. $224,442
b. $242,424
c. $224,424
d. $244,224
Balance in accounts payable at the end of March : $20,000 - $11,428 + $215,852 =
$224,424

17. What does the balance of an account, considering the beginning balance, indicate?
a. The total debits for the account.
b. The total credits for the account.
c. The difference between the total debits and total credits.
d. The account's closing balance at the end of the accounting period.

18. A company's revenue for the year is $150,000. They have operating expenses of
$80,000 and interest expenses of $5,000. What is the company's net income for the year?
a. $65,000
b. $70,000
c. $75,000
d. $85,000

Net Income = Revenue - Operating Expenses - Interest Expenses

Net Income = $150,000 - $80,000 - $5,000 = $65,000

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19. 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 on account.
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 $790 in Interest Expense in cash.

a. $2,190.
b. $6,990.
c. $7,530.
d. $13,490.

20. If total liabilities increased by $15,000, then

a. assets must have decreased by $15,000.
b. owner's equity must have increased by $15,000.
c. assets must have increased by $15,000, or owner's equity must have
decreased by $15,000.
d. assets and owner's equity each increased by $15,000.

21. If total assets equal $247,618 and total owner’s equity equal $149,771, then total
liabilities must equal
a. $45,293
b. $97,847
c. $128,516
d. There is not enough information given to determine this.

A = L + OE
$247,618 = L + $149,771
L = $97,847

22. Which reports that can be prepared from the adjusted trial balance?
a. General Purpose Financial Statements
b. Expense Reports
c. Inventory Reports
d. Payroll Spending Reports

23. The common characteristic possessed by all assets is

a. long life.
b. great monetary value.
c. tangible nature.
d. future economic benefit

24. Which of the following financial statements should be prepared first?

a. Balance Sheet
b. Income Statement
c. Statement of owner’s equity
d. Statement of Cash Flows

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25. In the first month of operations, the total of debit entries to the Cash account amounted
to $3,000 and the total of the credit entries to the Cash account amounted to $1,200. The
Cash account has a
a. $1,200 debit balance
b. $1,800 debit balance
c. $3,000 credit balance
d. $1,800 credit balance

26. At November 1, 2022, Henry Inc. had an Account Receivable balance of $550,000.
During the month, the company made sales on account of $150,000. Besides, Henry Inc.
collected $80,000 from customers that owed them money. At November 30, 2022, the
Account Receivable balance is
a. $580,000 credit balance
b. $820,000 credit balance
c. $730,000 debit balance
d. $620,000 debit balance

27. A company buys equipment for $10,000 in cash. Which accounts are affected by this
transaction?
a. Cash and Equipment
b. Cash and Accounts Payable
c. Equipment and Accounts Receivable
d. Equipment and Liabilities

28. At the end of the accounting period, a company owes $3,000 in utilities expenses for the
month, which have not yet been paid. Calculate the adjusting entry needed to recognize this
accrued expense.
a. Debit Utilities Expense $3,000, Credit Cash $3,000
b. Debit Cash $3,000, Credit Utilities Expense $3,000
c. Debit Utilities Expense $3,000, Credit Accounts Payable $3,000
d. Debit Accounts Payable $3,000, Credit Utilities Expense $3,000

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29. A company forgets to record $500 in depreciation expense on its equipment. How does
this omission affect the financial statements?
a. Understates expenses and overstates owner’s equity.
b. Overstates liabilities and understates expenses.
c. Overstates expenses and understates owner’s equity.
d. Overstates expenses and understates liabilities.

Forget to record depreciation expense -> expense account understated -> OE = Investment -
Withdrawals + Revenue - Expense -> OE overstated

30. Josh signed a four-month note payable in the amount of $30,000 on September 15,
2022. The note requires interest at an annual rate of 8%.
What is the amount of interest to be accrued at the end of December, 2022?
a. $700
b. $600
c. $800
d. $900

Calculate the interest at the end of December, 2022: $30,000 x 8% x 3,5/12 = $700

31. The name given to entering transaction data in the journal is

a. posting
b. listing
c. journalizing
d. chronicling

32. Kylie Company sells tickets in advance for its weekly productions and records the
proceeds as Unearned Revenue. At the end of each month, the company makes an
adjusting entry to account for the tickets used during the month (ticket revenue). On
June 1, the Unearned Revenue account had a credit balance of $13,000. During
March, Kylie sold 830 tickets at $55 each, and 385 tickets were used during the
month. What is the balance in Unearned Revenue at the end of June?
a. debit balance of $37,475
b. credit balance of $37,475
c. debit balance of $38,574
d. credit balance of $38,574
Use T-account

33. What is the total amount of service revenues for the month using the accrual basis
method for Hera Company, considering the following transactions?
a) Paid $4,500 for insurance for the next 12 months.
b) On the first of the month, received $180,000 for services to be performed equally over the
next 12 months.
c) Paid $7,500 for the current month's rent.
d) Paid $2,150 cash for office supplies.
e) Paid $8,500 in Salaries Expense.
f) Received $28,500 in cash for service revenue earned this month.

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 a. $145,300
b. $208,500
c. $43,500
d. $72,600

180,000/12 + 28,500 = 43,500

34.A company purchased medical equipment for $170,000 on January 1, 2022. The
company determined that the yearly depreciation expense is $17,000. What will be the
ending balance in the Accumulated depreciation-Medical Equipment at December 31, 2024?

a. $17,000
b. $51,000
c. $102,000
d. $170,000

Accumulated Depreciation = $17,000 x 3 years = $51,000

35. On October 1 of the current year, a company received $8,400 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 understated by $8,400.
b. net income would be understated by $4,200.
c. net income would be overstated by $2,100.
d. net income would be overstated by $4,200.

36. Which of the following accounts is typically not closed at the end of an accounting
period?
a. Revenue accounts
b. Expense accounts
c. Withdrawals accounts
d. Asset accounts

37. A company's owner's equity at the beginning of the year was $80,000. If the company
had net income of $15,000 and owner withdrawals of $5,000 during the year, what is the
owner's equity at the end of the year before closing entries?
a. $80,000
b. $90,000
c. $85,000
d. $75,000

Owner's Equity at the End of the Year Before Closing Entries = Owner's Equity at the
Beginning of the Year + Net Income - Owner Withdrawals
Owner's Equity at the End of the Year Before Closing Entries = $80,000 + $15,000 - $5,000
= $90,000

38. What is the primary purpose of closing entries in the accounting cycle?

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 a. To record daily transactions
b. To identify errors in financial data
c. To prepare financial statements
d. To reset temporary accounts for the next accounting period

39. The accounting principle that ensures all expenses are recorded during the period when
they are incurred and offsets those expenses against the revenues of the period is called the
________ principle.
a. accrual
b. matching
c. comparison
d. revenue recognition

40. The ledger of Hillstone Company contains the following balances: Owner's Capital
$45,000; Owner's Drawings $6,000; Service Revenue $32,000; Salaries and Wages
Expense $10,000; and Supplies Expense $2,000. What is the ending balance of Owner’s
Capital?

a. $49,000
b. $79,000
c. $59,000
d. $89,000

Account Dr. Cr.

Service revenue 32,000
Income summary 32,000

Income summary 12,000

Salaries and wages expense 10,000
Supplies expense 2,000

Income summary 20,000

Owner’s Capital 20,000

Owner’s Capital 6,000

Owner’s Drawings 6,000

Balance of Owner’s Capital after closing entries: $45,000 + $20,000 - $6,000 =

$59,000
More detail: use T-account

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