1,001 Accounting Practice Problems For Dummies®
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Library of Congress Control Number: 2014954678
ISBN 978-1-118-85328-3 (pbk)
This book is intended for anyone who needs to brush up on basic accounting concepts. You may use this book as a supplement to material you’re learning in an undergraduate accounting course. If you’re working as an accountant, this book may help you with concepts that you need to review. The book provides a basic level of accounting knowledge. After you understand these concepts, you can move on to more complex accounting issues.
The 1,001 accounting questions are grouped into 14 chapters that cover everything from absorption costing to warranty expense. The last chapter of the book contains the answers, with detailed answer explanations. If you miss a question, take a close look at the answer explanation. Understanding where you went wrong will help you learn the concepts.
This product comes with a free online Cheat Sheet that helps you increase your accounting knowledge. Check it out at www.dummies.com/cheatsheet/1001accounting.
This book covers a great deal of accounting material. Because there are so many topics, you may struggle in some areas. If you get stuck, consider getting some additional help.
In addition to getting help from your friends, teachers, or coworkers, you can find a variety of great materials online. If you have Internet access, a simple search often turns up a treasure trove of information. You can also head to www.dummies.com to see the many articles and books that can help you in your studies.
1,001 Accounting Practice Problems For Dummies gives you just that — 1,001 practice questions and answers that increase your understanding and give you an opportunity to apply accounting concepts. If you need more in-depth study and direction for your accounting courses, you may want to try out the following For Dummies products (or their companion workbooks), all published by Wiley. There are For Dummies books that cover each of the major areas of study in accounting:
Part I
Visit www.dummies.com for free access to great For Dummies content online.
In this part . . .
The only way to become proficient in accounting is through a lot of practice. Fortunately, you now have 1,001 practice opportunities right in front of you. These questions cover a variety of accounting concepts and range in difficulty from easy to hard. Master these problems and you’ll be well on your way to a solid foundation in accounting concepts.
Here are the types of problems that you can expect to see:
Chapter 1
Accounting is a subject that requires you to learn concepts in a specific order. That’s because concept B builds upon what you learned about concept A. In fact, an accounting student can get very frustrated trying to learn a concept by jumping ahead and not understanding earlier concepts. This chapter provides some of the critical elements of accounting. You need these concepts before moving on to any other accounting topics.
In this chapter, you see a variety of algebra problems:
Don’t let common mistakes trip you up. Some of the following suggestions may be helpful:
Types of Business Entities
1–5
1. Business entities can legally be organized in a variety of ways. What is a common characteristic among all business entity types?
2. What business type is a single-owner business?
3. Entering into a business with another person is an example of what type of business entity?
4. Why is a sole partnership not one of the ways of legally organizing a business?
5. Which business type is most difficult to create initially but, once created, makes it easier to raise funds and provides liability protection for the owners?
The Accounting Equation and Why It Balances
6–30
6. What is the proper format of the basic accounting equation?
7. What are assets?
8. What makes a vehicle purchased with a loan an example of an asset?
9. What are liabilities?
10. Why is money owed to a bank on a loan considered a liability?
11. What does it mean when a company purchases something on account?
12. Why is a loan from a bank not an asset?
13. Why is office equipment an example of an asset?
14. What is the name for resources owned by a company?
15. A business has assets of $135,000 and liabilities of $45,000. Calculate the amount of owners’ equity.
16. A business has liabilities of $345,700 and owners’ equity of $154,300. Calculate the amount of assets the company has.
17. At the end of an accounting period, a company’s total assets equaled $1,450,000, and owners’ equity was $654,000. How much were the company’s liabilities?
18. At the end of an accounting period, a company’s total assets equaled $576,000, and liabilities equaled $245,000. How much was the company’s owners’ equity?
19. At the end of an accounting period, a company’s owners’ equity equaled $2,376,000, and its liabilities equaled $142,000. How much were the company’s assets?
20. What does it mean when a business has negative retained earnings?
21. What is the effect on the accounting equation if a company buys a truck with a cash down payment of $5,000 and borrows the remaining $25,000?
22. What is the effect on the accounting equation when a company pays cash for purchases of inventory?
23. What is the effect on the accounting equation when a company obtains a loan to purchase a delivery truck?
24. A company owes a supplier $37,000 for inventory purchased a week ago. What is the effect on the accounting equation if the company makes a $20,000 payment?
25. What is the effect on the accounting equation when owners contribute a delivery truck to a company?
26. What is the effect on the accounting equation when a company earns revenue by selling a product and collects the amount of the sale in cash?
27. What is the impact on the accounting equation when a company uses its cash to pay for office expenses such as rent and utilities?
28. What does it mean when a business is highly leveraged?
29. The owners of a start-up invest $1,000,000 into the business. After one year of operations, the business has assets of $850,000 and losses of $300,000. What are the total liabilities at the end of the first year?
30. The owners of a start-up invest $50,000 into the business. After one year of operations, the business has assets of $350,000 and liabilities of $200,000. How much profit or loss did the business generate during the first year?
Cash-basis Accounting versus Accrual-basis Accounting
31–52
31. What is the main characteristic of cash-basis accounting?
32. What is the main characteristic of accrual-basis accounting?
33. What is the primary difference between cash-basis and accrual-basis accounting?
34. Cash-basis accounting is most frequently used by which group?
35. Accrual-basis accounting is most frequently used by which group?
36. Why is cash-basis accounting not used by large businesses?
37. When are transactions recorded under accrual-basis accounting?
38. Al LaMode Ice Cream Company produces high-quality ice cream that is distributed to shops in resort areas. On July 1, the company purchased the raw materials to make the ice cream. On July 15, the process was complete, and the product was stored in the freezer ready to ship to customers. On July 31, Ken and Mary’s Ice Cream Shop ordered 200 pounds of ice cream. On August 1, Al LaMode delivered the ice cream to Ken and Mary’s Ice Cream Shop. Ken and Mary paid Al LaMode on August 10. Ken and Mary sold all the ice cream between August 5 and August 12. If it uses accrual-basis accounting, when will Al LaMode record the revenue from the sale to Ken and Mary?
39. Al LaMode Ice Cream Company produces high quality ice cream that is distributed to shops in resort areas. On July 1, the company purchased the raw materials to make the ice cream. On July 15, the process was complete, and the product was stored in the freezer ready to ship to customers. On July 31, Ken and Mary’s Ice Cream Shop ordered 200 pounds of ice cream. On August 1, Al LaMode delivered the ice cream to Ken and Mary’s Ice Cream Shop. Ken and Mary paid Al LaMode on August 10. Ken and Mary sold all the ice cream between August 5 and August 12. If it uses cash-basis accounting, when will Al LaMode record the revenue from the sale to Ken and Mary?
40. Little Falls Bandages sells medical supplies to college football teams. The teams pay a flat fee of $10,000 on August 1 for as many bandages as they need during the football season, September through November. If they use cash-basis accounting, how much revenue does Little Falls record in September?
41. Furd Buggy Company uses electricity in its retail shop during the month of May. On June 15, the company receives the bill for the May electricity usage for $759. Furd pays the bill on July 1. If Furd Buggy Company uses accrual-basis accounting, on which month’s income statement will the expense appear, and how much will it be?
42. Credit Cab Corporation buys fuel from a fuel bank, paying $1,000,000 on January 1 for 250,000 gallons of fuel. The company uses the last of the 250,000 gallons on July 1. The January income statement shows a fuel expense of $1,000,000. What basis of accounting does Credit Cab use?
43. Calculate the amount of cash-basis revenues for Ace, Inc. for 2015.
44. Calculate the amount of cash-basis expenses for Ace, Inc. for 2015.
45. Calculate the amount of cash-basis profit or loss for Ace, Inc. for 2015.
46. Calculate the amount of accrual-basis revenues for Ace, Inc. for 2015.
47. Calculate the accrual-basis cost of goods sold for Ace, Inc. for 2015.
48. Calculate, using the accrual basis, other expenses for Ace, Inc. for 2015.
49. Calculate the accrual-basis profit or loss for Ace, Inc. for 2015.
50. Calculate the amount of cash-basis revenues for XYZ, Inc. for 2015.
51. Calculate the amount of cash-basis expenses for XYZ, Inc. for 2015.
52. Calculate the amount of difference between accrual-basis revenues and cash-basis revenues for XYZ, Inc. for 2015.
Profit Activities and the Income Statement
53–72
53. What is the name of the financial statement that summarizes a company’s revenues, other income, expenses, and losses?
54. What is another name for an income statement?
55. What is the financial statement that shows the business profit or loss during a period?
56. The financial statement you are looking at lists revenues and gains, along with some other items. What financial statement are you viewing?
57. Other than revenues and expenses, what other items may be found on an income statement?
58. A banker asks a borrower for information on the company’s revenue growth over the last few years. What financial statement will the borrower provide the banker?
59. What information is presented on an income statement?
60. Which of the following items appear on an income statement?
61. Identify the expenses that must be listed separately on the income statement to comply with accounting rules.
62. Calculate the gross profit for Hummus Records.
63. Calculate the operating income for Hummus Records.
64. Calculate the income before taxes for Hummus Records.
65. What is the amount of gross profit on Koala Kuddles’ 2015 income statement?
66. What is the amount of operating earnings on Koala Kuddles’ 2015 income statement?
67. What is the amount of earnings or loss before income taxes on Koala Kuddles’ 2015 income statement?
68. What is the amount of net income or loss on Koala Kuddles’ 2015 income statement?
69. What is the amount of income tax expense on Petal Bikes’ 2015 income statement?
70. What is the amount of the cost of goods sold on Petal Bikes’ 2015 income statement?
71. What is the amount of selling, general, and administrative expenses on Petal Bikes’ income statement?
72. What is the amount of interest expense on Petal Bikes’ 2015 income statement?
Financial Condition and the Balance Sheet
73–78
73. What are the three primary financial statements?
74. What is the balance sheet sometimes called?
75. GameTime Caterers has presented its banker with a financial statement that displays the cash balance on hand, the amount owed to its suppliers, common stock, and retained earnings as of December 31, 2015. What statement did the company give to the banker?
76. What are the total assets on Car Bop’s balance sheet?
77. What are the total liabilities on Car Bop’s balance sheet?
78. What is the total equity on Car Bop’s balance sheet?
Cash Flows and the Statement of Cash Flows
79–90
79. A banker is considering a loan to finance a vehicle for a small company but wants to make sure that the company will have enough cash to make the payments over the next three years. What statement should she look at?
80. The statement of cash flows includes a section called which of the following?
81. During the year, Organic Bricks Co. paid cash for a new delivery truck. Where on the statement of cash flows would that event appear?
82. During the year, Organic Bricks made the last payment on the mortgage on its building. How should the company classify this on the statement of cash flows?
83. Organic Bricks sold an old truck that originally cost $76,000. The book value of the truck was $26,000, and the company received $30,000 in cash from the buyer as full payment. How should the company reflect this transaction in the cash flows from investing activities?
84. Determine the amount of change in cash during the year based on the following:
85. Determine the cash flow from investing activities during the year based on the following:
86. Determine the cash flow from financing activities during the year based on the following:
87. Determine the cash flow from operating activities during the year based on the following:
88. Calculate the cash flow from investing activities for Lawn Paint Yard Service.
89. Calculate the cash flow from financing activities for Lawn Paint Yard Service.
90. If Lawn Paint Yard Service started the year with a cash balance of $6,300, what was the balance of cash on hand at the end of the year?
Chapter 2
This chapter explains the three basic financial statements. You’ll go over the information found in each type of statement. The chapter also points out the financial impact of many accounting transactions. As an accountant, you need to understand how accounting activity affects each financial statement.
In this chapter, you see questions on these topics:
Don’t let common mistakes trip you up. Some of the following suggestions may be helpful:
Classifying Business Transactions
91–99
91. What are the primary financial statements?
92. What is the name of the financial statement that summarizes a business’s assets, liabilities, and owners’ equity at the end of an accounting period?
93. What is the name of the financial statement that summarizes the profit-making transactions during a period of time?
94. What is the name of the financial statement that summarizes a business’s cash transactions during a period of time?
95. The primary activity of a business is focused on which of the following?
96. Which of the following transactions relates to generating cost of goods sold?
97. Which of the following is an example of a profit-making transaction?
98. Which of the following is an example of an investing activity?
99. Which of the following is an example of a financing activity?
Looking at Both Sides of Business Transactions
100–109
100. Which of the following is a responsibility of an accountant?
101. The most important assets that are found on the balance sheets of most businesses that sell products are which of the following?
102. What types of liabilities do not usually require the payment of interest?
103. Green Power, Inc. received $50,000 cash as a capital contribution from one of its owners. What impact did this transaction have on the balance sheet?
104. Green Power, Inc. took out a bank loan for $100,000 on January 1. The terms of the loan require Green Power to repay the loan in full in three years, plus make annual interest payments of $8,000 on December 31. What impact did this transaction have on the balance sheet on the day the company took out the loan?
105. Green Power, Inc. received a $25,000 payment from a customer as payment on the customer’s account. What impact did this transaction have on the balance sheet?
106. Green Power, Inc. made a principal payment of $80,000 on its bank loan. What impact did this transaction have on the balance sheet?
107. Green Power, Inc. made a $10,000 distribution of profit to its owners. What impact did this transaction have on the balance sheet?
108. Green Power, Inc. purchased equipment that cost $20,000 by making a down payment of $5,000 and financing the remainder with a new loan. What impact did this transaction have on the balance sheet?
109. Green Power, Inc. returned $15,000 of inventory previously purchased on account. The balance has not been paid yet. What impact did this transaction have on the balance sheet?
Concentrating on Sales
110–119
110. How does a company increase profits?
111. Subtracting expenses from revenues gives what?
112. Which of the following types of sales increase assets and revenue at the time cash is received?
113. What type of sale transaction creates a liability and no increase in profit for the company?
114. What type of sale transaction increases cash and profit?
115. What type of sale transaction does not increase cash but does increase profit?
116. What type of sale transaction increases cash but does not increase profit?
117. Cash purchase of an airline ticket for a flight next month is an example of what kind of transaction to the airline?
118. Bebebanana Co. sells its product either as a cash sale or as a customer deposit. During the year the company received $17,100,000 in cash from customers. The company fulfilled 90% of the orders. What is the effect of these exchanges on the business’s financial condition?
119. A company receives $120 on January 1 as payment for a 12-month magazine subscription. Starting in January, the company will deliver the magazines at the end of each month for the next 12 months. How much is the unearned revenue balance on the company’s balance sheet as of June 30?
Concentrating on Expenses
120–129
120. Which financial statement includes expenses?
121. Gold Leaves Corporation purchased $47,000 worth of its product during the year. The company had $3,000 of product on hand at the beginning of the year and sold products that it paid $43,000 for during the year. How much expense related to the products sold will Gold Leaves record for the year?
122. A company buys a building for $2,000,000 — $1,000,000 cash immediately and another $1,000,000 in two weeks. When does the company record the expense of that building?
123. Kelly’s Cleaning Crew recorded expenses of $287,000 for the year. The expenses included increases to operating liabilities of $2,000 and depreciation on the van and cleaning equipment of $7,500. How did the expenses change the financial condition of the business?
124. A company pays $24,000 cash for a one-year insurance policy on October 1. As of December 31, the company has benefited from three months of insurance coverage. Calculate the amount of insurance expenses recorded as of December 31.
125. At the end of the year, the accountant for Bonnie Cameron Cosmetics notices a balance in the prepaid insurance account of $3,600 that was recorded when the three-year premium was paid on July 1. No other entries have been posted to the prepaid insurance account. How much expense should the accountant record at the end of the year?
126. Dragon Zombie Costumes had $95,000 in expenses on the income statement for the year. Of that amount, depreciation expense was $5,000. The company had no change in inventory or operating liabilities. How much cash was paid for expenses?
127. Dragon Zombie Costumes had $141,000 in expenses for the year. These expenses included depreciation expense of $8,500 and an increase in accounts payable of $2,400. How much cash did the company pay for expenses?
128. Kelly’s Clean Crew recorded expenses of $500,000 for the year. The expenses included an increase to wages payable of $3,500 and depreciation on the van and cleaning equipment of $7,500. How much cash did the company pay for expenses?
129. Gray House had $139,000 in expenses for the year. Inventory increased by $2,000, prepaid rent increased by $900, depreciation expense was $9,000, wages payable increased by $12,000, and sales tax payable increased by $4,600. What was the amount of cash used to pay expenses?
Before and after Transactions of Sales and Expenses
130. How much did cash increase as a result of those transactions?
131. What is the total impact on receivables as a result of those transactions?
132. What is the total impact on operating liabilities as a result of those transactions?
133. Calculate the total impact on retained earnings as a result of those transactions.
134. Calculate the total impact on total assets as a result of those transactions.
135. How did those expenses change the net balance of property, plant, and equipment?
136. How did those transactions change the balance of retained earnings?
137. Using the balance sheet equation, how did those transactions change the balance of total assets?
138. How did those transactions change the balance of total liabilities and owners’ equity?
139. How did those expenses change the balance of cash?
Determining the Financial Effects of Profit or Loss
140–148
140. How do you calculate profit?
141. Which balance sheet accounts are not affected by sales and expense transactions?
142. Badabing only makes cash sales to its customers and pays all expenses in cash as incurred. During the year, sales were $53,000, and expenses were $42,000. What is the total impact on the financial position for the company as a result of operations during the past year?
143. Profit accumulated by a business since its inception is called what?
144. Badabing only makes credit sales to its customers and pays all expenses in cash as incurred. During the year, sales were $35,000, and expenses were $23,000. Collections from customers were $33,000. What is the total impact on the financial position for the company as a result of operations during the past year?
145. What is the composite change in the year-end operating liabilities balance of the business caused by its profit-making activities during the year?
146. What is the composite change in total assets caused by the business’s profit-making activities during the year?
147. What is the net income or loss for the year?
148. What is the composite change in the year-end cash balance of the business caused by its profit-making activities during the year?
Chapter 3
Bookkeeping is the nuts and bolts of accounting. It includes the most basic accounting activities. This chapter covers the chart of accounts and how accounts are created. You’ll see questions on debits and credits and review nominal versus permanent accounts. The chapter provides questions on posting journal entries for a variety of transactions.
In this chapter, you see problems on these accounting topics:
Don’t let common mistakes trip you up. Some of the following suggestions may be helpful:
Constructing Accounts
149–158
149. What is the purpose of accounts used in accounting?
150. What is the purpose of contra accounts?
151. A provided list of accounts includes depreciation expense, accounts receivable, accumulated depreciation, accounts payable, and sales revenue. Which of these accounts is an example of a commonly used contra asset?
152. What is the primary consideration when first setting up a chart of accounts?
153. What is a chart of accounts?
154. What type of account usually begins a chart of accounts?
155. What are the components of a chart of accounts?
156. What account does a business need in its chart of accounts to record expenses for renting its warehouse space?
157. What accounts does a business need in its chart of accounts to record sales to customers on account?
158. What accounts does a business need in its chart of accounts to record the receipt of cash for products to be delivered in the future?
Identifying Nominal versus Real Accounts
159–168
159. Which of the following accounts are real accounts (also known as permanent accounts)?
160. Which of the following accounts are nominal accounts (also known as temporary accounts)?
161. Which of the following accounts are real accounts?
162. Which of the following describes nominal accounts?
163. Why are certain accounts closed at the end of the year?
164. Which of the following accounts is a nominal account?
165. Which of the following is an example of a nominal account?
166. Which of the following is an example of a real account?
167. Which of the following is an example of a real account?
168. Which of the following is an example of a real account?
Knowing Your Debits from Your Credits
169–183
169. The left side of an account is
170. The right side of an account is
171. A T account is
172. What type of accounts increase on the debit side?
173. What type of accounts increase on the credit side?
174. How are decreases to liabilities recorded in journal entries?
175. How are increases to revenues recorded in journal entries?
176. What is the normal balance of an account?
177. What three types of accounts normally have debit balances?
178. What three types of accounts normally have credit balances?
179. What is the journal entry to record a collection of $2,000 of outstanding accounts receivables?
180. What main type of accounts has a normal debit balance?
181. Credit to an account means
182. A company recorded a debit to an asset account for $1,000 and a credit to a liability account for $200. What else should be recorded to complete the journal entry?
183. An account will have a debit balance if
Making Original Journal Entries
184–198
184. Posting refers to
185. What are the components of a journal entry?
186. Which of the following isn’t an example of a specialized journal?
187. The general journal is most commonly used to record
188. A company records the following journal entry: cash: $5,000; sales revenue: $5,000. Provide a narrative description for the transaction.
189. A company records the following journal entry: cost of goods sold: $5,000; inventory: $5,000. Provide a narrative description for the transaction.
190. What is the proper journal entry to record a payment received from a customer on an outstanding balance?
191. What is the proper journal entry to record a $12,000 purchase of inventory on account?
192. What is the proper journal entry to record a payment on an outstanding balance owed to a supplier?
193. What is the proper entry to record a new three-year, 5% annual interest, $100,000 bank loan?
194. What is the proper entry to record a $25,000 investment in a business made by the owner?
195. What is the proper entry to record $8,000 of salaries paid to employees?
196. What is the proper entry to record a payment on a loan (principal portion only)?
197. What is the proper entry to record $1,500 of rent paid on June 30 to a landlord for the next six months’ rent?
198. What is the proper entry to record a purchase of a truck for $20,000 with a 50% cash down payment and the balance financed with a loan?