Accounting Principles Practice Quiz Questions and Answers

Accounting Principles Practice Quiz Questions and Answers

A strong understanding of accounting principles is the foundation of every successful financial career. Whether you’re a student aiming for exam success or a professional seeking to reinforce the basics, these Accounting Principles Practice Quiz Questions and Answers are designed to help you master core concepts that are essential in both academic and real-world accounting environments.

This comprehensive quiz covers a wide range of accounting principles, offering targeted practice that strengthens your knowledge and helps identify key areas for improvement. The questions are structured to reflect the types of challenges you’ll face in classroom tests, certification exams, or day-to-day work in accounting and finance.

What You’ll Learn and Review

This practice quiz thoroughly tests your understanding of foundational accounting concepts, allowing you to gain confidence in areas such as:

• The Basic Accounting Equation (Assets = Liabilities + Equity)
• Revenue Recognition and Matching Principles
• Accrual vs. Cash Accounting Methods
• Consistency, Materiality, and Conservatism
• GAAP Fundamentals and International Accounting Standards
• Double-entry bookkeeping and the chart of accounts
• Journal Entries, Ledgers, and Trial Balances
• Financial Statement Preparation and Interpretation

Each question is thoughtfully designed to encourage critical thinking—not just memorization. You’ll engage with real-life business scenarios that require application of accounting rules, logical reasoning, and analytical skills.

 Why These Practice Quiz Questions and Answers Work

What makes this quiz stand out is its educational depth and exam-oriented approach. Instead of superficial questions, you’ll get practice that reflects real standards used in financial reporting and decision-making.

These practice questions are ideal for testing your grasp on complex principles like revenue recognition timing, adjusting entries, and the ethical implications of financial reporting. With each attempt, you’ll not only reinforce your theoretical knowledge but also improve your practical problem-solving skills.

This format helps learners internalize the logic behind accounting principles, which is essential for success in any accounting course or professional certification.

Who Should Use This Quiz

The Accounting Principles Practice Quiz Questions and Answers are perfect for:

• Accounting students preparing for class assessments or university finals
• CPA, ACCA, CMA, or bookkeeping certification candidates
• Finance professionals revisiting key accounting foundations
• Teachers and tutors seeking reliable and effective practice material
• Business owners or entrepreneurs looking to understand accounting basics for better financial control

If you’re serious about improving your command of accounting principles, this quiz offers a focused and structured path toward proficiency.

FAQ

What topics are covered in the Accounting Principles Practice Quiz Questions and Answers?

The quiz includes questions on foundational principles such as the accounting equation, revenue recognition, accrual vs. cash basis, GAAP, and journal entries.

Is this quiz suitable for professional exam preparation?

Yes, it’s great for CPA, CMA, ACCA, and bookkeeping certification candidates, offering content aligned with standardized exam formats.

Can beginners with no accounting background benefit from this quiz?

Absolutely. The quiz is structured to build understanding from the ground up, making it ideal for newcomers to accounting.

How does this quiz help in real-world accounting roles?

It strengthens your understanding of how accounting principles are applied in financial reporting, which is crucial for accurate record-keeping and ethical decision-making.

Are the answers explained in detail?

Yes, each answer is paired with a clear explanation to help you understand the logic and improve retention.

Questions

Which of the following is an example of an asset?

A) Accounts Payable

B) Revenue

C) Cash

D) Common Stock

What is the main purpose of the matching principle in accounting?

A) To ensure that all expenses are recorded in the period they are incurred

B) To ensure revenues are recognized when they are earned and realizable

C) To match the company’s liabilities with its assets

D) To ensure all transactions are recorded in the same period

The fundamental accounting equation is:

A) Assets = Liabilities + Owner’s Equity

B) Assets = Liabilities + Revenue

C) Assets = Liabilities – Expenses

D) Liabilities = Assets + Owner’s Equity

Which principle requires that financial information be complete and free from bias?

A) Consistency Principle

B) Relevance Principle

C) Faithful Representation Principle

D) Materiality Principle

Under the accrual basis of accounting, when are revenues recognized?

A) When cash is received

B) When the earning process is complete, and realization has occurred

C) At the end of the fiscal year

D) When a product is sold, but payment has not been received

Which of the following accounts is considered a liability?

A) Prepaid Rent

B) Notes Payable

C) Service Revenue

D) Common Stock

If a company reports revenue of $10,000 and expenses of $7,000, what is the net income?

A) $3,000

B) $7,000

C) $10,000

D) $17,000

What type of account is “Accumulated Depreciation”?

A) Asset

B) Contra-asset

C) Liability

D) Revenue

Which financial statement shows the company’s financial position at a specific point in time?

A) Income Statement

B) Cash Flow Statement

C) Balance Sheet

D) Statement of Retained Earnings

Which of the following best describes the cost principle in accounting?

A) Assets should be recorded at their current market value

B) Assets should be recorded at their original purchase price

C) Liabilities should be recorded at the amount expected to be paid

D) Expenses should be recognized when they are incurred

Which accounting principle requires that expenses be recognized in the same period as the revenues they help generate?

A) Revenue Recognition Principle

B) Matching Principle

C) Cost Principle

D) Economic Entity Assumption

What does the going concern assumption imply?

A) The business will close in the near future.

B) The business will continue to operate indefinitely.

C) The business must only report short-term transactions.

D) The business will be sold soon.

Which of the following statements about the consistency principle is true?

A) It allows companies to change their accounting methods whenever they choose.

B) It ensures that the same accounting principles are applied in each period.

C) It requires companies to adjust financial statements for seasonal changes.

D) It mandates that companies must report financial information in real-time.

Which of the following best describes the conservatism principle?

A) Revenue should be recorded as soon as it is earned.

B) Expenses should be recorded as soon as they are foreseeable.

C) Losses should be recognized when they are probable, but gains should only be recognized when they are certain.

D) The financial statements should present the most optimistic view of the company’s position.

Which account would be classified as a current asset?

A) Buildings

B) Land

C) Accounts Receivable

D) Equipment

If a company receives $5,000 in advance for services to be performed next month, how should this be recorded?

A) Debit Cash, Credit Revenue

B) Debit Cash, Credit Unearned Revenue

C) Debit Unearned Revenue, Credit Cash

D) Debit Unearned Revenue, Credit Revenue

What is the purpose of an adjusting entry in accounting?

A) To record transactions that were missed in the previous period

B) To ensure that revenues and expenses are recognized in the period they occur

C) To make financial statements more complex

D) To report non-cash transactions

Which of the following statements is true about the historical cost principle?

A) Assets should be recorded at their current fair market value.

B) Assets should be recorded at the value they would sell for in an open market.

C) Assets should be recorded at their original purchase price.

D) Assets should be adjusted to reflect inflation each period.

What type of account is “Prepaid Insurance”?

A) Liability

B) Expense

C) Asset

D) Equity

What is the primary purpose of the revenue recognition principle?

A) To ensure that revenue is recognized when cash is received.

B) To ensure that revenue is recognized when earned, regardless of when cash is received.

C) To recognize revenue only at the end of the fiscal year.

D) To match revenue with associated expenses.

Which of the following is true regarding the economic entity assumption?

A) It allows a business to be mixed with the personal financial activities of its owners.

B) It requires the business to keep its financial records separate from those of its owners.

C) It states that all transactions must be recorded based on the business’s personal income.

D) It assumes that the business’s financial statements are prepared for personal use only.

What is the primary focus of the full disclosure principle?

A) To limit the amount of information included in financial statements.

B) To provide all relevant information that could affect a user’s understanding of the financial statements.

C) To only disclose information when it is legally required.

D) To only include financial information that is not proprietary.

Which of the following would not be considered a characteristic of reliable financial information?

A) Verifiability

B) Relevance

C) Neutrality

D) Timeliness

If a company uses the FIFO (First-In, First-Out) method for inventory, how does it affect the cost of goods sold during inflation?

A) It results in a higher cost of goods sold.

B) It results in a lower cost of goods sold.

C) It has no effect on the cost of goods sold.

D) It results in the same cost of goods sold as LIFO.

Which of the following describes a deferred revenue?

A) Revenue earned but not yet received in cash.

B) Revenue earned and already received in cash.

C) Cash received in advance for services that have not yet been performed.

D) Cash received for goods sold on credit.

What is the primary purpose of a trial balance?

A) To confirm the total assets equal total liabilities.

B) To ensure that total debits equal total credits.

C) To calculate net income for the period.

D) To record all journal entries for the month.

Under which principle is a company required to use the same accounting methods from year to year?

A) Matching Principle

B) Consistency Principle

C) Revenue Recognition Principle

D) Cost Principle

What does the term “liquidity” refer to in accounting?

A) The level of profitability of a business.

B) The ease with which an asset can be converted into cash.

C) The company’s total debt to equity ratio.

D) The rate at which inventory is sold.

Which of the following is considered an owner’s equity account?

A) Accounts Payable

B) Retained Earnings

C) Accounts Receivable

D) Supplies

What is the effect of an adjusting entry that increases accrued revenues?

A) It increases both assets and liabilities.

B) It increases assets and revenue.

C) It decreases assets and increases liabilities.

D) It decreases liabilities and revenue.

Which of the following is an example of an internal control procedure?

A) Using cash for personal transactions.

B) Allowing a single employee to handle both cash receipts and recording of sales.

C) Requiring management to approve all large transactions.

D) Recording all transactions in a ledger without checking for errors.

When a company incurs an expense that has not yet been paid by the end of the accounting period, how should it be recorded?

A) As a prepaid expense

B) As an accrued expense

C) As a deferred revenue

D) As an unearned income

Which principle states that expenses should be recorded in the same period as the revenues they help generate?

A) Revenue Recognition Principle

B) Cost Principle

C) Matching Principle

D) Economic Entity Assumption

If a company has a net income of $50,000 and pays out $10,000 in dividends, what is the effect on retained earnings?

A) It increases by $50,000.

B) It decreases by $10,000.

C) It increases by $40,000.

D) It remains unchanged.

What is the primary function of a journal in accounting?

A) To summarize financial data in a report format.

B) To record financial transactions in chronological order.

C) To provide a list of all accounts and their balances.

D) To prepare financial statements.

Which of the following best describes a “contra account”?

A) An account that offsets a related account to show a net balance.

B) An account that records transactions not related to operations.

C) An account that tracks cash inflows and outflows.

D) An account used to record errors found in financial statements.

What is the definition of “capital expenditure”?

A) An expense that is charged to the income statement immediately.

B) An expenditure for purchasing assets that will provide future benefits.

C) A cost incurred for maintaining assets.

D) An expense that decreases retained earnings directly.

Which of the following would be classified as an operating activity on the statement of cash flows?

A) Purchase of a new building

B) Issuance of company stock

C) Sale of goods and services

D) Borrowing from a bank

Under which of the following scenarios would a company recognize a liability?

A) When it receives cash in advance for a service that will be provided in the future.

B) When it pays cash to settle an account payable.

C) When it issues stock to investors.

D) When it buys equipment on credit.

What is the purpose of the matching principle in relation to revenue and expense recognition?

A) To ensure that revenues and expenses are reported in the same financial year.

B) To match assets with the period in which they are acquired.

C) To match revenues and related expenses in the period in which they are earned and incurred.

D) To match cash flow with the time of sale.

What type of account is “Accumulated Depreciation”?

A) Asset

B) Contra-asset

C) Liability

D) Revenue

Which of the following best describes the matching principle?

A) Revenue should be recorded when cash is received.

B) Expenses should be recorded when they are paid.

C) Expenses should be matched with the revenues they help generate within the same period.

D) Assets should be recorded at their fair value at the end of each reporting period.

What is the result of recording a transaction involving the purchase of inventory on credit?

A) Increase in liabilities and decrease in assets

B) Increase in assets and increase in liabilities

C) Decrease in assets and increase in owner’s equity

D) Decrease in assets and decrease in liabilities

What is a primary characteristic of a liability account?

A) It represents an obligation that the company must settle in the future.

B) It shows the company’s ownership interest.

C) It reflects revenue earned during a specific period.

D) It tracks income from stockholder investments.

Which of the following is true about the accrual basis of accounting?

A) Revenue and expenses are recorded only when cash is exchanged.

B) Revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash changes hands.

C) It recognizes revenue only when it is received in cash.

D) It does not match revenues with the expenses incurred to generate them.

Which type of account is “Sales Revenue”?

A) Asset

B) Liability

C) Revenue

D) Expense

What does the principle of consistency require?

A) That financial statements must be consistent across different companies.

B) That companies use the same accounting methods from year to year unless a change is justified.

C) That a company must always report the highest possible revenue.

D) That the income statement should always match the balance sheet.

Which of the following is considered an investing activity on the statement of cash flows?

A) Payment of interest on a loan

B) Sale of company stock

C) Purchase of equipment

D) Collection of accounts receivable

What does the term “current asset” refer to?

A) Assets that are expected to be used or converted to cash within one year or one operating cycle.

B) Assets that have a lifespan of more than 10 years.

C) Assets that are held for long-term investment.

D) Assets that are not expected to generate future cash flows.

Under the historical cost principle, how should an asset be recorded?

A) At its current fair market value.

B) At its replacement cost.

C) At the original cost paid for the asset, regardless of its current market value.

D) At the expected future cash inflow value.

What is the purpose of the “going concern” assumption in accounting?

A) To assume that the company will liquidate and close its operations within a short period.

B) To assume that the company will continue its operations for the foreseeable future.

C) To assume that the company will sell all its assets in the current period.

D) To assume that the company’s financial statements are only for internal use.

Which of the following is true about the revenue recognition principle?

A) Revenue should be recognized when cash is received.

B) Revenue should be recognized when it is earned, regardless of when cash is received.

C) Revenue should only be recognized after all expenses have been paid.

D) Revenue should be recognized only if a customer has paid in full.

What type of account is “Unearned Revenue”?

A) Asset

B) Contra-asset

C) Liability

D) Revenue

When an expense is paid in advance, what type of account is used?

A) Liability

B) Prepaid expense (Asset)

C) Revenue

D) Accrued expense

Which of the following statements is true about the accrual basis of accounting compared to cash basis accounting?

A) Accrual basis records revenue and expenses only when cash is exchanged, while cash basis records them when earned or incurred.

B) Accrual basis provides a more accurate picture of a company’s financial position over time than cash basis.

C) Cash basis records revenue and expenses when earned or incurred, while accrual basis records them when cash is exchanged.

D) Accrual basis is not allowed under GAAP.

Which of the following is an example of an intangible asset?

A) Inventory

B) Goodwill

C) Land

D) Equipment

When a company sells an asset for more than its book value, what type of gain is recognized?

A) Revenue gain

B) Operating income

C) Capital gain

D) Extraordinary gain

Which principle requires that accounting information should be free from bias and present an objective view?

A) Matching principle

B) Consistency principle

C) Objectivity principle

D) Historical cost principle

How should a company account for a contingent liability that is probable and can be reasonably estimated?

A) Disclose it in the financial statements only.

B) Record it as an expense and a liability in the financial statements.

C) Ignore it until it becomes a certainty.

D) Only disclose it if it is material.

Which of the following best describes a “contra-revenue” account?

A) An account that offsets a related revenue account to show a net revenue figure.

B) An account that tracks expenses related to the generation of revenue.

C) An account that is used for internal management purposes only.

D) An account that records revenue not earned in the current period.

Which of the following statements best describes the “cost principle” in accounting?

A) Assets are recorded at their current market value.

B) Assets are recorded at the cost paid for them at the time of purchase.

C) Assets are recorded at the highest price they could be sold for.

D) Assets are recorded at the value that is agreed upon by both parties.

What is the main purpose of the trial balance?

A) To prepare the financial statements for a company.

B) To ensure that total debits equal total credits in the ledger.

C) To record transactions as they occur.

D) To report the company’s net income or loss.

Which of the following best describes the “economic entity assumption”?

A) A company should maintain separate financial records from its owners and other businesses.

B) A company’s financial statements should include only external transactions.

C) A company’s financial transactions must be recorded based on historical cost.

D) The company and its shareholders should be treated as a single entity.

What does the “matching principle” require in accounting?

A) Revenue should be recognized when earned, regardless of when cash is received.

B) Expenses should be recorded in the period in which they are paid.

C) Expenses should be recorded in the same period as the revenues they help generate.

D) Assets should be recorded at fair market value.

Which type of financial statement shows a company’s financial position at a specific point in time?

A) Income statement

B) Statement of cash flows

C) Balance sheet

D) Statement of retained earnings

What is the effect on the financial statements if a company fails to record an accrued expense?

A) Assets are overstated, and liabilities are understated.

B) Liabilities are overstated, and expenses are understated.

C) Net income is understated, and liabilities are understated.

D) Net income is overstated, and liabilities are understated.

What does the term “materiality” mean in accounting?

A) A company should only report financial information that is important to its stakeholders.

B) All financial transactions must be recorded, regardless of their size.

C) A company should follow strict rules without any exceptions.

D) Only transactions that are verified by an audit should be recorded.

Which of the following is a feature of a perpetual inventory system?

A) Inventory levels are updated only at the end of the period.

B) Inventory is recorded as purchases are made and sales are completed.

C) It does not require the use of barcodes or scanning equipment.

D) It only tracks the cost of goods sold and not inventory on hand.

In which financial statement would you find “retained earnings”?

A) Income statement

B) Statement of cash flows

C) Balance sheet

D) Statement of changes in equity

Which of the following transactions would result in an increase to both assets and liabilities?

A) A company pays off a portion of its debt.

B) A company borrows money from a bank.

C) A company earns revenue from a sale.

D) A company issues shares to investors

Which of the following accounts is typically considered a current liability?

A) Bonds payable

B) Long-term debt

C) Accounts payable

D) Equipment

What is the effect of recording a prepaid expense?

A) Increase in assets and increase in liabilities

B) Increase in assets and decrease in expenses

C) Increase in assets and decrease in equity

D) Increase in assets and increase in equity

Under the lower of cost or market rule, inventory is valued at:

A) The lower value between its original cost and its current market value.

B) The cost of inventory at the time of purchase.

C) The market value only.

D) The highest value between its original cost and market value.

Which principle requires that all relevant financial information must be included in the financial statements?

A) Economic entity assumption

B) Full disclosure principle

C) Revenue recognition principle

D) Cost principle

What is the primary purpose of a bank reconciliation?

A) To prepare the company’s income statement.

B) To confirm that the company’s records and the bank’s records match.

C) To calculate the company’s net income.

D) To ensure that all expenses are paid on time.

When a company writes off an uncollectible account, what is the immediate effect on the financial statements?

A) Increase in assets and increase in net income

B) Decrease in assets and decrease in net income

C) Decrease in assets and no effect on net income

D) No change in assets and increase in net income

If a company has a higher current ratio, this generally indicates:

A) A better ability to pay its short-term obligations.

B) A higher debt level compared to assets.

C) A higher number of long-term liabilities.

D) A higher rate of return on equity.

What is a deferred revenue?

A) Revenue that has been earned but not yet collected.

B) Revenue that has not yet been earned but has been collected.

C) Revenue that has been recorded in the income statement.

D) Revenue that is recorded when a payment is made.

Which of the following best describes the revenue recognition principle?

A) Revenue should only be recorded when cash is received.

B) Revenue should be recorded when it is earned and realizable, regardless of when cash is received.

C) Revenue should be recorded at the end of the fiscal year.

D) Revenue should be recorded when payment is due.

Which of the following would be considered an external user of accounting information?

A) A company’s accountant

B) A company’s management team

C) A potential investor

D) A company’s internal audito

Which of the following is NOT an example of an operating activity on the statement of cash flows?

A) Payment to suppliers for goods and services

B) Sale of long-term investments

C) Receipt of interest on a loan

D) Payment of employee salaries

What type of account is “Accumulated Depreciation”?

A) Liability

B) Contra-asset

C) Revenue

D) Equity

In a period of rising prices, which inventory valuation method will report the highest net income?

A) FIFO (First-In, First-Out)

B) LIFO (Last-In, First-Out)

C) Weighted average cost

D) Specific identification

Which of the following statements is true about a cash basis of accounting?

A) Revenue is recorded when it is earned, regardless of when cash is received.

B) Expenses are recorded when they are incurred, regardless of when cash is paid.

C) Revenue is recorded only when cash is received, and expenses are recorded only when cash is paid.

D) Both revenue and expenses are recorded when earned or incurred, not when cash is involved.

Which of the following is true about a company’s income statement?

A) It shows a company’s financial position at a specific point in time.

B) It summarizes the company’s revenue, expenses, and net income over a period of time.

C) It includes only the cash transactions of the company.

D) It is prepared before the balance sheet.

What is the main purpose of the “matching principle”?

A) To match revenue with the period it is received.

B) To match expenses with the period in which the revenue they helped generate is recognized.

C) To match cash inflows with cash outflows.

D) To match assets with liabilities on the balance sheet.

Which of the following would be classified as a financing activity in the statement of cash flows?

A) Purchasing equipment

B) Paying wages to employees

C) Issuing new shares of stock

D) Receiving payment from customers

What does the “conservatism principle” in accounting emphasize?

A) Revenues should be recognized as soon as they are probable.

B) Liabilities should be recognized only when they are certain.

C) Expenses and liabilities should be recognized as soon as they are probable, but revenues should only be recognized when they are certain.

D) Assets should be recorded at their fair value at the time of purchase.

What is a primary characteristic of a perpetual inventory system?

A) Inventory is updated only once per year.

B) Inventory is updated continuously after each purchase or sale.

C) Inventory is updated once a month.

D) Inventory counts are only made at the end of the fiscal year.

Under which condition would the revenue recognition principle require recognition of revenue?

A) When cash is received, regardless of when the service was performed.

B) When the service has been provided and there is reasonable assurance of payment.

C) When a sale is made, but only if the customer pays in cash.

D) When a company anticipates that a customer will make a purchase.

Which financial statement shows a company’s financial position as of a specific date?

A) Income statement

B) Cash flow statement

C) Balance sheet

D) Statement of retained earnings

What is the key difference between the accrual basis of accounting and the cash basis of accounting?

A) Accrual accounting records transactions only when cash is exchanged, while cash accounting records transactions when earned or incurred.

B) Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash is exchanged, while cash accounting records transactions only when cash changes hands.

C) Accrual accounting uses only cash transactions, while cash accounting records all financial activities.

D) There is no difference; both methods record revenue and expenses at the same time.

What does the principle of “going concern” assume about a business?

A) The business will liquidate its assets in the near future.

B) The business will continue to operate indefinitely unless proven otherwise.

C) The business’s assets are always valued at their market price.

D) The business will pay all debts immediately.

Which of the following statements about “depreciation” is true?

A) Depreciation is used to allocate the cost of an asset over its useful life.

B) Depreciation represents the loss in market value of an asset.

C) Depreciation only applies to intangible assets.

D) Depreciation affects cash flow directly.

What is the main purpose of an adjusting entry at the end of an accounting period?

A) To correct errors in previous entries.

B) To record transactions that were not previously recorded during the period.

C) To ensure that revenues and expenses are recorded in the period they are earned or incurred.

D) To close out the books for the fiscal period.

If a company borrows money from a bank, what is the immediate impact on the company’s balance sheet?

A) Increase in liabilities and decrease in assets.

B) Increase in assets and increase in liabilities.

C) Increase in assets and increase in equity.

D) Increase in revenue and increase in cash flow.

What is the primary purpose of the statement of cash flows?

A) To summarize the company’s revenue and expenses over a period of time.

B) To show the company’s total assets, liabilities, and equity at a specific date.

C) To report cash inflows and outflows from operating, investing, and financing activities.

D) To provide a summary of retained earnings over a period of time.

When a company receives payment for services to be performed in the future, it records:

A) Revenue and accounts payable.

B) Deferred revenue and accounts receivable.

C) Deferred revenue and cash.

D) Revenue and cash.

Which of the following statements best describes the “cost principle” in accounting?

A) Assets should be recorded at their market value at the time of purchase.

B) Assets should be recorded at their original purchase cost, regardless of current market value.

C) Assets should be recorded at the price at which they were sold.

D) Assets should be recorded at their highest possible value.

Which of the following is true about the “matching principle”? –

A) It matches expenses with the time period they are paid. –

B) It matches revenues with expenses incurred to earn them in the same period. –

C) It ensures that revenue is recorded when cash is received. –

D) It matches cash receipts with cash disbursements.

What is the effect of recording a prepaid expense on the balance sheet?

A) Decreases assets and increases liabilities. –

B) Increases assets and decreases equity. –

C) Increases assets and increases liabilities. –

D) Decreases liabilities and increases equity. –

Which of the following would be considered a non-cash activity?

A) Paying cash for inventory. –

B) Converting bonds into stock. –

C) Issuing a check for rent. –

D) Purchasing equipment with cash

What is the main purpose of the revenue recognition principle? –

A) To recognize revenue when cash is received. –

B) To record revenue at the point of sale or when earned, regardless of when payment is received. –

C) To record revenue only when payment is made. –

D) To ensure that revenue is recognized only when expenses are paid.

When a company issues a credit memo to a customer, what is the immediate effect on the company’s accounts? –

A) Increases accounts receivable and decreases sales. –

B) Decreases accounts payable and decreases inventory. –

C) Decreases accounts receivable and decreases sales. –

D) Increases accounts payable and increases cash.

What type of account is “Unearned Revenue”? –

A) Asset –

B) Liability –

C) Revenue –

D) Equity –

Which of the following transactions would increase a company’s liabilities? –

A) Paying cash for rent. –

B) Issuing stock to investors. –

C) Taking out a loan from a bank. –

D) Collecting cash from a customer for services performed.

In which of the following situations is the matching principle applied? –

A) Recording an expense when it is paid. –

B) Recognizing revenue when it is collected. –

C) Recording the expense of utilities in the same period as the utility service was provided. –

D) Recognizing a gain when cash is received.

What is the main advantage of using the FIFO (First-In, First-Out) inventory valuation method? –

A) It provides a better match between revenue and expenses during periods of rising prices. –

B) It results in lower taxes due to higher cost of goods sold. –

C) It reflects current market prices more accurately on the balance sheet. –

D) It allows companies to pay less for their inventory.

Which of the following would be considered an investing activity on the statement of cash flows? –

A) Receiving payment from a customer. –

B) Purchasing new equipment. –

C) Paying wages to employees. –

D) Issuing bonds to investors.

What is the effect on the accounting equation when a company purchases inventory on account? –

A) Increase in assets and decrease in liabilities. –

B) Increase in assets and increase in equity. –

C) Increase in assets and increase in liabilities. –

D) Decrease in assets and decrease in liabilities.