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Accounting Practice Questions1) The fundamental accounting equation states that:a) assets liabilities owner’s equityb) assets liabilities drawingsc) assets liabilities net incomed) assets liabilities net income – owner’s equitye) assets liabilities - owner’s equity2) If Net Income is 25,600, Gross Income is 32,505, and Revenue is 45,500 then:a) Cost of Goods Sold is 19,900 and expenses is 6,905b) Cost of Goods Sold is 12,995 and expenses is 6,905c) Cost of Goods Sold is 12,995 and expenses is 16,448d) Cost of Goods Sold is 19,900 and expenses is 16,448e) Cost of Goods Sold is 6,905 and expenses is 12,995Explanation: COGS Revenue- Gross IncomeExpenses Gross Income – Net Income3) Calculate the amount of simple interest that would be charged if 5,500 is borrowed for 3years at an interest rate of 6%.a) 860b) 900c) 990d) 1,080e) 1,170Explanation: 5,500*0.06 330/year 330*3 9904) When Business X owes money to Business Y for supplies or materials purchased on credit,Business X calls this an:a) accounts receivableb) accounts payablec) assetd) interest accounte) expense5) An asset loses value over time through the process of:a) depreciation.b) deprecation.c) capitalization.d) appreciation.e) depression.
6) Unlimited liability means that:a) as many people as you want may be involved as customers.b) there is no limit to the amount of ownership.c) the owner’s personal belongings may be sold to cover the debts of a business.d) shareholders are responsible for corporation liabilities.e) shareholders may only lose the amount of their investment in a business.7) ABC Company sells product Y for a price of 50 per unit. The fixed cost associated withproduct Y is 85 000 and the variable cost is 12.50 per unit. What is the quantity of productY that ABC Company will need to produce and sell to break-even?a) 1,700b) 2,267c) 3,500d) 6,800e) break-even cannot be calculatedExplanation: Let x be the number of units sold to break even50x 12.50x 8500037.50x 85000x 2,2678) Assume you are reviewing a student budget you have prepared for yourself. You find thatyour ‘net income’ for each month is negative. Your best option to quickly reverse thissituation is.a) Increase your expenses.b) Decrease your expenses and increase your income.c) Decrease your expenses and make strategic use of a credit card to build credit.d) Decrease your expenses.e) Decrease your expenses and work to get a student loan approved.Explanation: Since you are a student, it is normal to have a negative net income for each month.One way to have a positive net income is to cut back on your spending (expenses) and get a parttime job to increase your income.9) About 30% of Charlie's pay goes to income taxes and other government deductions. If heborrows 1 000 at 5% interest, roughly how much will he need to earn to pay it off in oneyear?a) 1,050b) 1300c) 1,500d) 1,005e) None of the above
Explanation: Total amount Charlie need to pay back 1,000*0.05 1,050Charlie Needs to Earn 1,050/(1-0.3) 1,50010) Chris bought a hockey stick that regularly sold for 175. He received a 20 percent discount.How much did the stick cost before tax?a) 140b) 205c) 35d) 125e) 145Explanation: Discounted Price 175*(1-0.2) 14011) An example of a monthly variable expense for a household is:a) Rentb) Utilitiesc) Property taxd) House insurancee) Car paymentExplanation: Utilities is an example of variable expense for a household because sometimes youuse more heating in the winter than in the summer. Therefore Utilities changes from month tomonth depending on the weather. The other options in the question are considered a fixedexpense because these expenses tend to stay constant.12) If Net Income is 83,550, Gross Income is 98,700, and Revenue is 128,000 then:a) Cost of Goods Sold is 34.73% of Revenue and expenses are 11.84% of Revenueb) Cost of Goods Sold is 22.89% of Revenue and expenses are 11.84% of Revenuec) Cost of Goods Sold is 22.89% of Revenue and expenses are 28.81% of Revenued) Cost of Goods Sold is 34.73% of Revenue and expenses are 28.81% of Revenuee) Cost of Goods Sold is 11.84% of Revenue and expenses are22.89% of RevenueExplanation: COGS % (Revenue –Gross Income)/Revenue ( 128,000-98,700)/ 128,000 22.89%Expenses % (Gross Income – Net Income)/Revenue ( 98,700-83,550)/ 128,000 11.84%
13) As the owner of a catering business, you are required to provide a quote for possible events.You have been asked to provide a quote for wedding for 200 people. You know it will cost 32.00 per person in raw materials, and estimate it will take 12 people to work an eighthour shift each. Each staff member is paid 15.00 per hour. The customer will also berenting 20 tables at 10 per table from you. How much should you quote if you want tomake a 20% profit?a) 8,040b) 9,648c) 6,432d) 10,420e) 8,128Explanation:ExpensesCostsRaw Material Costs32*200 6400Staff Cost15*8*12 1440Table Cost20*10 200Total Expenses8040Quote 8040*(1.2) 964814) The financial statement that indicates how well the business has been doing over a period oftime is called thea) balance sheetb) inventory sheetc) ledger statementd) income statemente) journal sheet15) The amount that an asset is worth at the end of the lease is referred to as thea) face valueb) operating valuec) residual valued) lease valuee) gross value
16) The financial statement that best demonstrates that a business has enough funds to meetits current obligations isa) a balance sheetb) an income statementc) a statement of shareholder's equityd) a statement of cash-flowe) these are all equally good17) If assets total 375,000 and owner’s equity equal 125,000, then liabilities would totala) 500,000b) 250,000c) 225,000d) 375,000e) 125,000Explanation: Liabilities Assets-Owner’s Equity18) What effect does a low inventory turnover have on a company?a) None, only the level of sales is important.b) Negative, inventory that moves slowly costs moneyc) Positive, low levels of inventory turnover indicates less holding costsd) Positive, low turnover indicates increased cash flowe) None, low turnover indicates lower assets on the balance sheet onlyExplanation: If a company has a low inventory turnover, this means that the company is notgetting rid of their inventory fast enough. This will cost the company money due to holdingcosts. In addition, it might lead to possible write- offs of inventory due to obsolescence.19) Pick the valid formula.a) Revenue – Fixed Cost Profitb) Fixed Cost Variable Cost Gross Salesc) Revenue – Expenses Profitd) Expenses – Profit Revenuee) Revenue – Variable Cost Fixed Cost Profit20) Business owners use income statements in order to:a) Increase assetsb) Decrease liabilitiesc) Determine the amount of profit or lossd) Calculate the original owner’s equitye) Calculate if they should expand the business
21) The length of a fiscal period may be:a) 3 monthsb) a yearc) 6 monthsd) a monthe) any length of timeExplanation: There are no regulations regarding to the length of a fiscal period. However, mostcompanies’ fiscal period are either quarterly or yearly.22) An item that will be used up or converted to cash during the fiscal year is:a) a current liabilityb) an expensec) a fixed assetd) a plant assete) a current asset23) The shareholders of a corporation elect:a) the executivesb) the Board of Directorsc) the employeesd) the proxye) the CEOExplanation: The shareholders of a company can only elect members of the Board of Directors.The Board of Directors represents the shareholders of the company. The Board of Directors hasthe power to appoint CEO of the company.
Figure 1Statement of Net Incomefor the year ending December 31, 2011Company ASales RevenueCost of Goods SoldGross Margin on Sales 379,600205,000174,600Advertising ExpenseRent ExpenseSalaries ExpenseTelephone ExpenseUtilities ExpenseTotal Operating ExpensesNet IncomeCompany B 159,740104,00055,740 15,20032,000103,0007,35010,550168,100 4,85310,70030,6001,1753,12550,453 6,500 5,28724) By examining the Statement of Net Income (figure 1 above) for Company A and Company B,the reader can conclude that:a) Company A has a higher return on sales than Company Bb) Company B has a higher return on sales than Company Ac) Company A’s advertising is more effective in generating salesd) Company B’s advertising is more effective in generating salese) Company A has a better telephone plan than Company B don’t understand thisquestion.
Explanation: By looking at Company A and B’s financial statements, we can tell that Company Aand B are two different size companies. We cannot compare the numbers in the IncomeStatement due to the different size of the companies. In order to determine which company isdoing better, we need to calculate the Return on SalesCompany A: 6,500/379,600 0.017Company B: 5,287/159,740 0.03325) Net Income can be found by calculating:a) Assets – Liabilitiesb) Liabilities – Assetsc) Revenue – Expensesd) Expenses – Revenuee) Cost - Expense26) About 25% of Zach's pay goes to income taxes and other government deductions. If heborrows 1,000 at 6% interest, roughly how much will he need to earn to pay it off in oneyear?a) 1,060b) 1300c) 1,410d) 1,005e) None of the aboveExplanation: Total amount Zach need to pay back 1000*0.06 1,060Zach Needs to Earn 1,060/(1-0.25) 1,41327) Chris bought a iPad mini that regularly sold for 325. He received a 20 percent discount.How much did the iPad cost after tax (13 % GST)?a) 299.99b) 325.00c) 367.25d) 260.00e) 293.80Explanation: Discounted Price 325*(1-0.2) 260.00iPad cost after tax 260*1.13 293.80
28) Which type of business has the greatest control over its expenses?a) Bakeryb) Consultingc) Manufacturingd) Utilitye) AirlineExplanation: Airline and Manufacturing companies have high expenses due to the depreciationof their equipments. Utility companies cannot control their expenses very well because of thedepletion of their natural resources and depreciation of their equipment. In addition, Bakeriescannot control their expenses very well due to the nature of their business. ThereforeConsulting companies have the greatest control of their expenses out of all the options.29) Account Receivable isa) Money owed by the companyb) Computer accounts you have still to activatec) A company expensed) Money owed to the companye) Nothing important in business
12) If Net Income is 83,550, Gross Income is 98,700, and Revenue is 128,000 then: a) Cost of Goods Sold is 34.73% of Revenue and expenses are 11.84% of Revenue b) Cost of Goods Sold is 22.89% of Revenue and expenses are 11.84% of Revenue c) Cost of Goods Sold is 22.89% of Revenue and expenses are 28.81% of Revenue
