Quiz · Hard
Record common transactions with debits and credits, make adjusting entries, and calculate liquidity, leverage and profitability ratios with worked solutions. For Accounting 101 and intro financial accounting.
A company has total assets of $500,000 and total liabilities of $200,000. What is its total equity?
$700,000
$300,000
$200,000
$250,000
Assets = Liabilities + Equity, so Equity = $500,000 - $200,000 = $300,000.
A business buys equipment for $5,000 in cash. What is the journal entry?
Debit Cash $5,000; Credit Equipment $5,000
Debit Equipment Expense $5,000; Credit Cash $5,000
Debit Equipment $5,000; Credit Cash $5,000
Debit Equipment $5,000; Credit Accounts Payable $5,000
One asset (Equipment) increases with a debit and another asset (Cash) decreases with a credit. Equipment is capitalized, not expensed, because it benefits future periods. Accounts Payable would be used only if bought on credit.
A company buys $800 of office supplies on account. What is the journal entry?
Debit Supplies $800; Credit Accounts Payable $800
Debit Supplies $800; Credit Cash $800
Debit Accounts Payable $800; Credit Supplies $800
Debit Accounts Receivable $800; Credit Supplies $800
'On account' means on credit, so a liability (Accounts Payable) increases with a credit. No cash has moved yet.
A consultant finishes a project and bills the client $3,000, due in 30 days. What is the journal entry?
Debit Cash $3,000; Credit Service Revenue $3,000
Debit Accounts Receivable $3,000; Credit Unearned Revenue $3,000
Debit Service Revenue $3,000; Credit Accounts Receivable $3,000
Debit Accounts Receivable $3,000; Credit Service Revenue $3,000
Under accrual accounting, revenue is recorded when earned, even before cash arrives. The client's promise to pay is an asset, Accounts Receivable.
A gym receives $1,200 in cash for a 12-month membership that starts next month. What is the journal entry when the cash is received?
Debit Cash $1,200; Credit Membership Revenue $1,200
Debit Cash $1,200; Credit Unearned Revenue $1,200
Debit Unearned Revenue $1,200; Credit Cash $1,200
Debit Accounts Receivable $1,200; Credit Membership Revenue $1,200
The gym has not earned the money yet; it owes a year of service. Unearned Revenue is a liability. Each month, $100 moves from Unearned Revenue to Revenue.
At year-end, employees have earned $4,000 in wages that will not be paid until next week. What adjusting entry is needed?
No entry until the wages are paid
Debit Wages Payable $4,000; Credit Cash $4,000
Debit Prepaid Wages $4,000; Credit Wages Expense $4,000
Debit Wages Expense $4,000; Credit Wages Payable $4,000
Accrued expenses are recorded in the period the cost is incurred (the matching principle). Skipping the entry would understate expenses and liabilities.
On October 1, a company pays $12,000 for a 12-month insurance policy and records it as Prepaid Insurance. What adjusting entry is needed on December 31?
Debit Insurance Expense $3,000; Credit Prepaid Insurance $3,000
Debit Insurance Expense $12,000; Credit Prepaid Insurance $12,000
Debit Prepaid Insurance $3,000; Credit Insurance Expense $3,000
Debit Insurance Expense $9,000; Credit Prepaid Insurance $9,000
Three months (Oct-Dec) have been used: $12,000 × 3/12 = $3,000 of expense. The remaining $9,000 stays on the balance sheet as Prepaid Insurance.
A machine costs $50,000, has a salvage value of $5,000 and a useful life of 9 years. What is the annual straight-line depreciation?
$5,556
$6,111
$4,500
$5,000
. The entry is Debit Depreciation Expense, Credit Accumulated Depreciation. $5,556 forgets to subtract salvage value.
Which account normally has a CREDIT balance?
Accounts Receivable
Accounts Payable
Dividends
Rent Expense
Liabilities, equity and revenue normally have credit balances. Assets, expenses and dividends (or owner's drawings) normally have debit balances. Mnemonic: DEALER (Dividends, Expenses, Assets = debit; Liabilities, Equity, Revenue = credit).
Using the allowance method, a company writes off a $500 customer account as uncollectible. What is the effect on net accounts receivable?
It decreases by $500
It increases by $500
It does not change
It decreases by $1,000
The entry is Debit Allowance for Doubtful Accounts, Credit Accounts Receivable. Both sides of net AR (AR minus allowance) drop by $500, so net AR is unchanged. The expense was already recorded when the allowance was estimated.
During a period of rising prices, which inventory method reports HIGHER net income?
FIFO
LIFO
Both report the same net income
Specific identification always
FIFO sends the older, cheaper units to Cost of Goods Sold, so COGS is lower and net income higher. LIFO gives higher COGS, lower income and lower taxes when prices rise.
A company buys a new delivery truck for cash. On the statement of cash flows, this is classified as:
An operating activity
An investing activity
A financing activity
A non-cash activity
Buying or selling long-term assets is investing. Borrowing, repaying debt, issuing stock and paying dividends are financing (under US GAAP).
A company has current assets of $300,000 and current liabilities of $150,000. What is its current ratio?
0.5
1.5
2.0
4.5
. The company has $2 of short-term assets for every $1 of short-term debt.
A company has cash of $50,000, marketable securities of $30,000, accounts receivable of $70,000, inventory of $80,000 and current liabilities of $100,000. What is the quick (acid-test) ratio?
1.5
2.3
0.8
1.2
. Inventory (and prepaid expenses) are excluded because they cannot be turned into cash quickly. Including inventory gives 2.3, the current ratio.
A company has total liabilities of $400,000 and shareholders' equity of $800,000. What is its debt-to-equity ratio?
2.0
0.33
1.5
0.5
. Creditors provide 50 cents for every dollar of owner financing. 0.33 is the debt ratio (liabilities / total assets of $1.2M).
Revenue is $500,000 and cost of goods sold is $300,000. What is the gross profit margin?
60%
40%
67%
20%
Gross profit = $500,000 - $300,000 = $200,000. Margin = 200,000 / 500,000 = 40%. 60% is COGS as a percentage of sales.
Net income is $60,000 and average shareholders' equity is $400,000. What is the return on equity (ROE)?
6.7%
24%
15%
40%
.
Cost of goods sold is $600,000 and average inventory is $100,000. About how many days does it take to sell inventory?
6 days
17 days
61 days
100 days
Inventory turnover = 600,000 / 100,000 = 6 times per year. Days in inventory = 365 / 6 ≈ 61 days. '6' is the turnover, not the number of days.
