Intro to Financial Statements
Easy Practice Test
Introduction to Accounting
Introduction to Financial Statements
Easy Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Revenue reported on the income statement would be the same as
a. the amount of cash collected during the period
b. the value of services provided during the period
c. the amount of cash collected less what the customer returns
d. the amount of cash collected less what is owed
Check Your Answer
b. Revenues are recognized when earned, which means the goods or services are provided; not when cash is collected. The amount recorded is the price to the customer or the value of services provided. When cash is collected is not considered when recording revenue.
2. What categories are reported on the cash flow statement?
a. operating, borrowing, repayments
b. investing, financing, selling
c. operating, investing, financing
d. operating, buying, selling
Check Your Answer
c. The cash flow statement is categorized by operating, investing, and financing activities. Operating activities are related to day to day business. Investing activities are related to long term assets. Financing activities are related to long term liabilities and owner’s equity.
3. Rent expense reported on the income statement represents
a. the service that was provided to the company
b. the service that was provided to the customer
c. the amount that was paid for rent
d. the amount that was collected for rent
Check Your Answer
a. An expense is an asset used or a service that has been provided to the company that the company must pay for. Expenses are recorded when the asset is used or when the company is provided the service; when cash is paid does not matter.
4. The notes to the financial statements provide
a. a detail list of all assets the company owns
b. a detail list of all the debts the company owns
c. the financial accounting principles followed by the company
d. all of the above
Check Your Answer
c. The notes to the financial statements begin with the financial accounting principles followed by the company. The notes do not provide detail lists of all assets and liabilities. The notes will provide additional information related to significant assets and liabilities.
5. A company reports $200,000 total assets, $60,000 total equity and $180,000 total revenues. What are total liabilities?
a. $180,000
b. $140,000
c. $260,000
d. $20,000
Check Your Answer
b. Assets = Liabilities + Owner’s Equity. Revenues are already included in owner’s equity. $200,000 = ?? + $60,000 so liabilities have to be $140,000
6. A business records revenues when
a. it collects cash from customers
b. it provides goods and services to customers
c. it pays expenses related to collecting cash
d. its revenues are greater than expenses
Check Your Answer
b. Revenues are recorded when earned which means the goods or services have been provided to the customer. When the cash is collected from the customer does not matter. Revenues are not always greater than expenses.
7. The most common way that a business communicates the results of operations is
a. new releases
b. financial statements
c. board of director meetings
d. letters to potential investors and lenders
Check Your Answer
b. Financial statements are provided to external users to communicate the results of operations and the company’s financial position. Only public companies typically use news releases.
8. The financial statement that reports the financial position of a business on a certain date is the
a. balance sheet
b. income statement
c. statement of cash flows
d. statement of stockholder’s equity
Check Your Answer
a. The balance sheet is the only statement that provides information as of a set date. Financial position normally refers to assets and liabilities.
9. Which of the following items is a revenue?
a. interest earned
b. interest paid
c. collections from customers
d. paying for an expense before it is provided
Check Your Answer
a. Revenues occur when the company provides a good or service. It does not occur when cash is received. Interest is earned when a company provides the service of the use of their money. Paying an expense before it is provided is a prepaid expense, an asset. Paying interest is related to incurring an expense. “Earned” always refers to a revenue.
10. The reason a company has an audit is
a. to prove that financial information is 100% accurate
b. to lend credibility to the financial information
c. to state that the company is a good investment
d. to tell the shareholder about future performance
Check Your Answer
b. An audit does not prove that financial statements are 100% accurate. The audit opinion states the financial statements are not materially misstated in accordance with GAAP. It is not a statement regarding how good or bad the company will perform in the future. It lends credibility to the statements when an independent third party reviews the statements.
11. The Financial Accounting Standards Board (FASB)
a. enforces the application of GAAP
b. provides general guidance on accounting
c. develops laws that all companies must follow
d. is a government entity
Check Your Answer
b. FASB’s only function is to provide accounting guidance. GAAP is not legally enforceable unless the SEC adopts it for public companies only. FASB is an independent organization and is not a government entity.
12. An expense is
a. all things the company has to pay for
b. the cost of providing goods and services
c. paying for an asset
d. only an expense if it will be paid for in the future
Check Your Answer
b. The technical definition of an expense is the cost of providing goods and services or the using up of an asset to provide goods and services. When something is paid for is not relevant to recording an expense. The company also pays for assets that give future benefit. An expense does not give future benefit, it is used up or incurred in this period.
13. Financial accounting
a. records all transactions and reports a summary of transactions
b. records and reports only large transactions
c. provides reports to only managers in the company
d. provides financial statements that project income in the future
Check Your Answer
a. Financial accounting accounts for all transactions of the company. All transactions are summarized and reported on the financial statements. The purpose of financial accounting is reporting to external investors and creditors. Financial statements report past transactions and do not report projections.
14. Who is responsible for the financial statements provided by the company?
a. management
b. loan officers
c. auditors
d. shareholders
Check Your Answer
a. Management is responsible for the financial statements. The auditors are responsible for providing an opinion on whether the financial statements are materially presented in accordance with GAAP.
15. Which of the following is not considered an expense?
a. cost of goods sold
b. prepaid expenses
c. rent incurred
d. utilities used during the period
Check Your Answer
b. Prepaid expenses is an asset that is paid for ahead of time and will be used in the future to provide goods or services. The asset does not become an expense until it is used up. Cost of goods sold is inventory used up when provided to the customer, an expense. Incurred always means provided during this period and it is always an expense this period. Utilities used this period are a service that was provided to the company this period, an expense.
16. Determine the financial statement the following accounts are reported on:
a. inventory
b. prepaid expenses
c. sales
d. cost of goods sold
e. cash
f. accounts payable
g. accrued expenses
h. cash from operations
i. accounts receivable
j. interest revenue
k. notes payable
l. dividends paid
m. rent expense
n. taxes payable
o. accumulated depreciation
Check Your Answer
a. Balance Sheet – asset
b. Balance Sheet – asset
c. Income Statement – revenue
d. Income Statement – expense
e. Balance Sheet – asset
f. Balance Sheet – liability
g. Balance Sheet – liability
h. Cash Flow Statement
i. Balance Sheet – asset
j. Income Statement – revenue
k. Balance Sheet – liability
l. Cash Flow Statement – financing & Stmt OEq.
m. Income Statement – expense
n. Balance Sheet – liability
o. Balance Sheet – with Property/Plant/Eq
17. Using the following information – prepare an income statement
| a. goods provided for cash this period | $12,000 |
| b. goods provided on credit this period | $64,000 |
| c. cash collected for goods provided this period | $53,000 |
| d. paid to employees for work done this period | $22,000 |
| e. paid to employees for work done last period | $ 4,000 |
| f. total amount employees earned for work this period | $28,000 |
| g. utility bill received for this period | $ 200 |
| h. total paid to the utility company this period | $ 800 |
| i. amount paid for rent this month | $ 1,200 |
| j. the amount it cost to rent the building for this month only | $ 600 |
| k. the cost of inventory provided to customers | $43,000 |
| l. the company’s income tax rate is | 30% |
Check Your Answer
Sales $76,000
– Cost of goods sold ( 43,000)
=Gross Profit 33,000
– Salary Expense (28,000)
– Utility Expense ( 200)
– Rent Expense ( 600)
=Income before tax 4,200
– Income tax expense ( 1,260)
= Net Income $2,940
Items stating cash collected or paid are ignored. Revenues and expenses are not recorded when collected or paid. Goods provided is revenue earned and recorded in the period it occurs. Expenses are recorded for the amount of service that was provided to the company this period only. When something is paid or collected does not matter. Things that are earned or incurred this period only are on this period’s statement.
18. Use the following information given on December 31st for ABC, Company to prepare a balance sheet.
| Accounts Receivable | 22,000 | Goodwill | 16,000 | |
| Building | 142,000 | Accrued Expenses | 4,000 | |
| Cash | 38,000 | Short-term Notes Payable | 25,000 | |
| Salary Expense | 22,000 | Cost of Goods Sold | 52,000 | |
| Accounts Payable | 37,000 | Long-term Investments | 35,000 | |
| Equipment | 86,000 | Common Stock | 1,000 | |
| Retained Earnings | ?? | Interest Income | 2,000 | |
| Prepaid Expenses | 2,000 | Inventory | 62,000 | |
| Sales | 123,000 | Dividends Paid | 25,000 | |
| Accumulated Deprec. | 32,000 | Rent Income | 1,200 |
Check Your Answer
Balance Sheet
ABC Company
As of December 31st, XXX
| Assets | Liabilities | |||
| Cash | 38,000 | Accounts Payable | 37,000 | |
| Accounts Receivable | 22,000 | Accrued Expenses | 4,000 | |
| Inventory | 62,000 | Short Term Notes Pay | 25,000 | |
| Prepaid Expenses | 2,000 | Total Liabilities | 66,000 | |
| Long Term Investments | 35,000 | Owner’s Equity: | ||
| Property, Plant, Equipment: | Common Stock | 1,000 | ||
| Building | 142,000 | Retained Earnings | 304,000 | |
| Equipment | 86,000 | Total Owner’s Equity | 305,000 | |
| -Accumulated Deprec | (32,000) | |||
| Net P/P/E | 196,000 | |||
| Goodwill | 16,000 | |||
| Total Assets | 371,000 | Total Liabilities & O..E. | 371,000 | |
Revenues and expenses are reported on the income statement and are not reported on the balance sheet. Dividends paid are not reported separately, they are included in retained earnings.
To determine retained earnings you must first make total liabilities and owner’s equity equal to total assets. Then take total liabilities and owner’s equity less total liabilities to determine what total owners equity has to be. Then take the total owner’s equity you computed less common stock to get the retained earnings amount.
19. State two items that would be reported on each of the 3 sections on the cash flow statement
a. Operating activities
b. Investing activities
c. Financing activities
Check Your Answer
a. cash from customers, cash paid to suppliers, cash paid for any other
expenses, cash received from investments, a change to a current asset or liability
b. cash used to purchase or cash received from selling all long term assets such as property, plant, equipment, intangible assets, L/T notes receivable or L/T investments
c. cash received from borrowing a long term liability or cash used to repay all long term liabilities. Cash received from or paid to shareholders.
20. Prepare a statement of retained earnings from the following information:
a. the company earned $325,000 from all prior years operations
b. the company paid $32,000 to shareholders in all prior years
c. the company incurred a net loss for this period of $12,000
d. the company paid out $5,000 in dividends to shareholders this year
e. the company provided $124,000 of goods to customers this year
f. the company received $23,000 in dividends from investments this year
Check Your Answer
The statement of retained earnings shows the changes in retained earnings; always includes profit or loss and dividends paid.
Beginning retained earnings is the cumulative amount of all prior year profits
or losses and the cumulative amount of all dividends paid in prior years.
Providing goods to customers is a revenue which is already included in the profit or loss for this period. Receiving dividends is a revenue which is already included in the profit or loss for this period.
| Beginning Retained Earnings | $293,000 | (325,000 – 32,000) |
| – Less Net Loss | ($12,000) | this period only |
| – Dividends Paid | ($5,000) | this period only |
| = Ending Retained Earnings | $276,000 |