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CLEP Financial Accounting study materials
CLEP Financial Accounting study resources

CLEP Financial Accounting practice questions

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Question 1General Topics

Which financial statement reports a company's assets, liabilities, and owners' equity at a specific point in time?

  1. Statement of cash flows
  2. Statement of retained earnings
  3. Income statement
  4. Balance sheet Correct answer.

Explanation

The balance sheet presents the accounting equation (assets = liabilities + equity) as of a single date, unlike flow statements that cover a period.

Question 2General Topics

Under the double-entry system, every transaction affects at least how many accounts?

  1. Three
  2. Four
  3. One
  4. Two Correct answer.

Explanation

Double-entry accounting requires that each transaction be recorded with equal debits and credits in at least two accounts, keeping the accounting equation in balance.

Question 3General Topics

A company pays $2,400 cash for six months of insurance coverage in advance. What is the effect of this transaction on the accounting equation at the time of payment?

  1. Assets stay the same and equity decreases Correct answer.
  2. Assets and equity both decrease
  3. Assets increase and liabilities increase
  4. Assets decrease and expenses increase

Explanation

The payment converts one asset (cash) into another asset (prepaid insurance), so total assets are unchanged; no expense is recognized until coverage is used.

Question 4General Topics

Which account normally carries a credit balance?

  1. Equipment
  2. Dividends
  3. Accounts receivable
  4. Unearned revenue Correct answer.

Explanation

Unearned revenue is a liability, and liabilities increase with credits, so it carries a normal credit balance.

Question 5General Topics

A firm records $5,000 of services performed on account. Which journal entry correctly records this event?

  1. Debit Accounts Receivable $5,000; credit Cash $5,000
  2. Debit Service Revenue $5,000; credit Accounts Receivable $5,000
  3. Debit Accounts Receivable $5,000; credit Service Revenue $5,000 Correct answer.
  4. Debit Cash $5,000; credit Service Revenue $5,000

Explanation

Earning revenue on account increases an asset (accounts receivable) with a debit and increases revenue with a credit.

Question 6General Topics

The matching principle requires that expenses be recognized in the same period as:

  1. The budget was approved
  2. The cash paid for them
  3. The revenues they helped generate Correct answer.
  4. The related liabilities are settled

Explanation

The matching principle ties expenses to the revenues of the period they helped produce, regardless of when cash changes hands.

Question 7General Topics

A company has beginning inventory of $10,000, purchases of $40,000, and ending inventory of $12,000. What is cost of goods sold?

  1. $42,000
  2. $40,000
  3. $62,000
  4. $38,000 Correct answer.

Explanation

Cost of goods sold equals beginning inventory plus purchases minus ending inventory: $10,000 + $40,000 − $12,000 = $38,000.

Question 8General Topics

Which inventory cost flow method assigns the most recent purchase costs to cost of goods sold?

  1. Specific identification
  2. FIFO
  3. LIFO Correct answer.
  4. Weighted average

Explanation

Under LIFO, the last costs incurred are the first charged to cost of goods sold, leaving older costs in ending inventory.

Question 9General Topics

A company uses straight-line depreciation for a machine costing $50,000 with a $5,000 salvage value and a 5-year life. What is annual depreciation expense?

  1. $10,000
  2. $11,000
  3. $5,000
  4. $9,000 Correct answer.

Explanation

Straight-line depreciation is (cost − salvage value) ÷ useful life = ($50,000 − $5,000) ÷ 5 = $9,000 per year.

Question 10General Topics

Recording depreciation on equipment has what effect on the financial statements?

  1. Decreases liabilities and increases equity
  2. Increases expenses and increases assets
  3. Decreases assets and decreases equity Correct answer.
  4. Increases assets and increases equity

Explanation

Depreciation debits an expense, reducing net income and thus equity, and credits accumulated depreciation, which reduces the carrying amount of assets.

Question 11General Topics

Which of the following is an internal user of a company's accounting information?

  1. The company's controller Correct answer.
  2. A supplier setting credit terms
  3. A bank evaluating a loan application
  4. A government tax agency

Explanation

Internal users such as managers and controllers work within the company and use accounting data for planning and control decisions.

Question 12General Topics

The primary objective of financial accounting is to provide information useful for:

  1. Calculating employee bonuses
  2. Preparing production schedules
  3. Setting product prices for internal managers
  4. Making investment and credit decisions Correct answer.

Explanation

General-purpose financial statements exist chiefly to help present and potential investors and creditors make resource allocation decisions.

Question 13General Topics

Which assumption justifies preparing separate financial reports for a business apart from its owners' personal affairs?

  1. Monetary unit
  2. Going concern
  3. Periodicity
  4. Economic entity Correct answer.

Explanation

The economic entity assumption holds that a business is accounted for separately from its owners and other entities, so personal transactions are excluded.

Question 14General Topics

The accounting equation can be expressed as:

  1. Equity = Assets + Liabilities
  2. Assets = Liabilities − Equity
  3. Liabilities = Assets + Equity
  4. Assets = Liabilities + Equity Correct answer.

Explanation

The fundamental accounting identity states that total assets equal the claims of creditors (liabilities) plus owners (equity).

Question 15General Topics

A trial balance totals debits of $80,000 and credits of $79,700. Which error could explain the $300 difference?

  1. A $300 debit posted twice
  2. A $300 transaction not recorded at all Correct answer.
  3. A $300 debit posted as a credit
  4. A transposition of digits in a $300 entry

Explanation

A completely omitted entry leaves both a debit and a credit out, so the trial balance still may not detect it - but here the imbalance reveals an unequal posting; an entry recorded on only one side would create a difference equal to its amount.

Question 16General Topics

Which sequence correctly lists the steps of the accounting cycle for a period?

  1. Journalize, post, prepare trial balance, adjust, prepare statements Correct answer.
  2. Post, journalize, adjust, prepare trial balance, prepare statements
  3. Journalize, adjust, post, prepare statements, prepare trial balance
  4. Adjust, journalize, post, prepare statements, prepare trial balance

Explanation

Transactions are first recorded in the journal, posted to ledger accounts, summarized in an unadjusted trial balance, adjusted at period end, and then reported in the financial statements.

Question 17General Topics

A company has cash of $15,000, accounts receivable of $25,000, inventory of $30,000, and current liabilities of $35,000. What is the current ratio?

  1. 1.14
  2. 0.50
  3. 0.71
  4. 2.00 Correct answer.

Explanation

Current ratio equals current assets divided by current liabilities: ($15,000 + $25,000 + $30,000) ÷ $35,000 = $70,000 ÷ $35,000 = 2.00.

Question 18General Topics

An accrued expense, such as wages earned but unpaid at year-end, is recorded with which adjusting entry?

  1. Debit expense; credit cash
  2. Debit liability; credit expense
  3. Debit prepaid asset; credit expense
  4. Debit expense; credit liability Correct answer.

Explanation

An accrued expense recognizes the expense in the period incurred with a debit and records the unpaid obligation with a credit to a payable.

Question 19General Topics

After closing entries are posted, which account will have a zero balance?

  1. Accounts payable
  2. Service revenue Correct answer.
  3. Prepaid rent
  4. Retained earnings

Explanation

Closing entries transfer all temporary accounts, including revenues, expenses, and dividends, into retained earnings, leaving them at zero for the new period.

Question 20General Topics

Under the allowance method, writing off a specific uncollectible account has what effect on total assets and net income?

  1. Increases net income and decreases assets
  2. Decreases both assets and net income
  3. Decreases assets but not net income
  4. Has no effect on total assets or net income Correct answer.

Explanation

A write-off debits the allowance and credits accounts receivable, both of which are asset accounts, so total assets and income are unchanged because the expense was recognized when the allowance was estimated.

Question 21General Topics

A company receives $1,200 cash on account from a customer. What is the effect on the balance sheet?

  1. Assets and equity both increase
  2. Assets decrease and equity decreases
  3. One asset increases and another asset decreases Correct answer.
  4. Assets increase and liabilities decrease

Explanation

Collecting a receivable increases cash and decreases accounts receivable by the same amount, so total assets are unchanged.

Question 22General Topics

Which of the following is reported as a current liability?

  1. Land held for future expansion
  2. Bonds payable maturing in 10 years
  3. A mortgage due in 15 years
  4. Accounts payable due in 30 days Correct answer.

Explanation

Current liabilities are obligations expected to be settled within one year or the operating cycle, and accounts payable due in 30 days meets that test.

Question 23General Topics

A company issues common stock for $60,000 cash when the stock has a $10,000 par value. How is the excess over par recorded?

  1. As additional paid-in capital Correct answer.
  2. As a reduction of treasury stock
  3. As a gain on the income statement
  4. As retained earnings

Explanation

Amounts received above par value on stock issuance are credited to additional paid-in capital, an equity account, not to income.

Question 24General Topics

A company reports net income of $40,000, beginning retained earnings of $90,000, and dividends of $15,000. What is ending retained earnings?

  1. $105,000
  2. $115,000 Correct answer.
  3. $130,000
  4. $65,000

Explanation

Ending retained earnings equals beginning retained earnings plus net income minus dividends: $90,000 + $40,000 − $15,000 = $115,000.

Question 25General Topics

The statement of cash flows classifies cash received from the sale of a long-term asset as a:

  1. Financing activity
  2. Investing activity Correct answer.
  3. Operating activity
  4. Noncash activity

Explanation

Cash flows from acquiring or disposing of long-term assets are investing activities under the statement of cash flows classification rules.

Question 26General Topics

Which financial statement reports a firm's revenues and expenses for a period of time rather than its position at a single date?

  1. The statement of retained earnings
  2. The statement of cash flows
  3. The balance sheet
  4. The income statement Correct answer.

Explanation

The income statement measures revenues and expenses over an interval and derives net income. The balance sheet is a point-in-time snapshot, while the retained earnings and cash flow statements report changes in specific balances rather than operating performance.

Question 27General Topics

A company purchases office supplies for $600 cash. What is the effect on the accounting records?

  1. One asset increases and another asset decreases Correct answer.
  2. Assets increase and liabilities increase
  3. Assets decrease and liabilities decrease
  4. Assets increase and equity increases

Explanation

Cash falls by $600 while supplies, also an asset, rise by $600, so total assets are unchanged. Because no revenue or expense is recognized at purchase, equity and liabilities are unaffected.

Question 28General Topics

In a double-entry system, every transaction is recorded so that:

  1. Total debits equal total credits Correct answer.
  2. Assets equal liabilities
  3. Cash inflows equal cash outflows
  4. Revenues equal expenses

Explanation

Double-entry bookkeeping records equal dollar amounts of debits and credits for each transaction, keeping the ledger in balance. The other equalities describe specific circumstances rather than the universal recording rule.

Question 29General Topics

A company performs $2,500 of services for a customer on account. What is recorded?

  1. A debit to Accounts Receivable and a credit to Cash
  2. A debit to Cash and a credit to Service Revenue
  3. A debit to Accounts Receivable and a credit to Service Revenue Correct answer.
  4. A debit to Service Revenue and a credit to Accounts Receivable

Explanation

Revenue is earned when the service is performed, and the right to collect cash creates a receivable. The entry debits Accounts Receivable and credits Service Revenue for $2,500.

Question 30General Topics

Which document is prepared before the adjusting entries are journalized at the end of a period?

  1. The classified balance sheet
  2. The closing entries
  3. The post-closing trial balance
  4. The unadjusted trial balance Correct answer.

Explanation

The unadjusted trial balance is extracted from the ledger to verify that debits equal credits before adjustments are made. Adjusting and closing entries come later in the cycle, and the balance sheet is a final output.

Question 31General Topics

Which qualitative characteristic of useful accounting information means that different knowledgeable observers would reach similar conclusions from the same data?

  1. Materiality
  2. Verifiability Correct answer.
  3. Comparability
  4. Timeliness

Explanation

Verifiability means independent observers using the same information would arrive at essentially the same result. Comparability concerns comparing entities or periods, timeliness concerns availability before decisions, and materiality concerns significance.

Question 32General Topics

A firm records a $900 utility bill that will be paid next month. Which accounts are debited and credited?

  1. Debit Accounts Payable and credit Utilities Expense
  2. Debit Utilities Expense and credit Accounts Payable Correct answer.
  3. Debit Utilities Expense and credit Cash
  4. Debit Cash and credit Utilities Expense

Explanation

The expense is incurred now, so it is debited, and the unpaid obligation is a liability credited to Accounts Payable. Cash is not affected until payment occurs.

Question 33General Topics

A company pays $3,600 in advance for twelve months of rent on the first day of the year. What adjusting entry is needed at the end of the first month?

  1. Debit Rent Expense $300 and credit Prepaid Rent $300 Correct answer.
  2. Debit Prepaid Rent $300 and credit Rent Expense $300
  3. Debit Prepaid Rent $3,300 and credit Rent Expense $3,300
  4. Debit Rent Expense $3,600 and credit Cash $3,600

Explanation

One month of the $3,600 prepayment has expired ($3,600 ÷ 12 = $300), so that amount moves from the asset to expense. The entry debits Rent Expense and credits Prepaid Rent for $300.

Question 34General Topics

A company fails to record an adjusting entry for accrued salaries earned by employees but unpaid at year-end. What is the effect on the financial statements?

  1. Liabilities are overstated and expenses are overstated
  2. Assets are overstated and liabilities are overstated
  3. Liabilities are understated and expenses are understated Correct answer.
  4. Equity is understated and liabilities are understated

Explanation

Omitting the accrual leaves the wage expense and the related payable off the books. As a result, both expenses and liabilities are understated, and net income and equity are overstated.

Question 35General Topics

A company collects $5,000 cash in advance from a customer for work to be performed next month. How is this recorded?

  1. Debit Unearned Revenue and credit Cash
  2. Debit Cash and credit Service Revenue
  3. Debit Cash and credit Unearned Revenue Correct answer.
  4. Debit Accounts Receivable and credit Service Revenue

Explanation

Cash is received before the service is performed, creating a liability for the obligation to perform. The entry debits Cash and credits Unearned Revenue, with revenue recognized later when earned.

Question 36General Topics

A company's ledger shows total debits of $150,000 and total credits of $150,000, yet a $500 purchase of supplies on account was recorded as a debit to Supplies and a debit to Accounts Payable. Which statement is true?

  1. The trial balance will still balance, so the error must be found by other means Correct answer.
  2. The error will be corrected automatically by the closing process
  3. The trial balance will reveal the error because the accounts will not balance
  4. The error affects only the income statement and not the balance sheet

Explanation

Recording two debits of equal amount keeps total debits equal to total credits, so the trial balance still balances. Such errors, including wrong-direction entries of equal size, must be located through account review or reconciliation.

Question 37General Topics

A company uses a perpetual inventory system and sells goods costing $4,000 for $7,000 cash. Which entry records the cost of the goods sold?

  1. Debit Sales Revenue $7,000 and credit Cash $7,000
  2. Debit Cost of Goods Sold $4,000 and credit Inventory $4,000 Correct answer.
  3. Debit Inventory $4,000 and credit Cost of Goods Sold $4,000
  4. Debit Cost of Goods Sold $7,000 and credit Inventory $7,000

Explanation

Under a perpetual system the cost of merchandise sold is recorded at the time of sale by debiting Cost of Goods Sold and crediting Inventory. The separate revenue entry records the $7,000 selling price.

Question 38General Topics

A company has net sales of $200,000, beginning accounts receivable of $30,000, and ending accounts receivable of $20,000. What is its accounts receivable turnover?

  1. 6.7 times
  2. 10.0 times
  3. 4.0 times
  4. 8.0 times Correct answer.

Explanation

Average receivables are ($30,000 + $20,000) ÷ 2 = $25,000, and turnover equals net sales divided by average receivables, or $200,000 ÷ $25,000 = 8.0 times.

Question 39General Topics

A company estimates bad debt expense as 2% of net credit sales of $300,000. What amount of bad debt expense is recorded?

  1. $60,000
  2. $600
  3. $3,000
  4. $6,000 Correct answer.

Explanation

Under the income statement approach, bad debt expense is a percentage of credit sales: 2% × $300,000 = $6,000. The existing allowance balance does not change this expense figure.

Question 40General Topics

A company uses the allowance method and determines that a specific $2,000 customer balance is uncollectible. What is the effect of the write-off on the accounting equation?

  1. Total assets increase and liabilities increase
  2. Total assets are unchanged and equity is unchanged Correct answer.
  3. Total assets decrease and liabilities decrease
  4. Total assets decrease and equity decreases

Explanation

The write-off debits Allowance for Doubtful Accounts and credits Accounts Receivable, reducing a contra-asset and an asset by the same amount. Net receivables and total assets are unchanged, and no expense is recognized at write-off.

Question 41General Topics

A company borrows $50,000 on a one-year note at 12% annual interest on October 1. What adjusting entry is required on December 31?

  1. Debit Interest Expense $6,000 and credit Interest Payable $6,000
  2. Debit Interest Expense $1,500 and credit Interest Payable $1,500 Correct answer.
  3. Debit Interest Payable $1,500 and credit Interest Expense $1,500
  4. Debit Interest Expense $500 and credit Cash $500

Explanation

Three months of interest have accrued: $50,000 × 12% × 3/12 = $1,500. The entry debits Interest Expense and credits Interest Payable because payment occurs later.

Question 42General Topics

A company pays $1,200 cash for a one-year insurance policy and records it as Insurance Expense. What adjusting entry is needed at year-end if six months remain unexpired?

  1. Debit Prepaid Insurance $600 and credit Insurance Expense $600 Correct answer.
  2. Debit Insurance Expense $1,200 and credit Cash $1,200
  3. Debit Insurance Expense $600 and credit Prepaid Insurance $600
  4. No entry is needed because cash was already paid

Explanation

Because the original payment was expensed, the unexpired half must be moved back to an asset. The entry debits Prepaid Insurance and credits Insurance Expense for $600.

Question 43General Topics

A company issues $100,000 face value of bonds for $96,000. How is the difference treated?

  1. As an immediate loss reported in the year of issuance
  2. As a discount that increases total interest expense over the bond's life Correct answer.
  3. As a premium that decreases total interest expense over the bond's life
  4. As a reduction of the face value recorded in the bonds payable account

Explanation

Issuing bonds below face value creates a discount, which is amortized over the life of the bonds and adds to total interest cost. Bonds Payable remains at face value while the discount is a contra-liability.

Question 44General Topics

A company declares and pays a $10,000 cash dividend. What is the effect on the balance sheet?

  1. Assets decrease and liabilities decrease
  2. Liabilities increase and equity decreases
  3. Assets decrease and equity decreases Correct answer.
  4. Assets are unchanged and equity decreases

Explanation

Paying a cash dividend reduces Cash and reduces Retained Earnings, a component of equity. When declared and paid at the same time, no liability remains at the balance sheet date.

Question 45General Topics

A company has current assets of $90,000, inventory of $30,000, and current liabilities of $45,000. What is the quick ratio?

  1. 1.33 Correct answer.
  2. 2.00
  3. 0.67
  4. 1.50

Explanation

Quick assets are current assets minus inventory: $90,000 − $30,000 = $60,000. Dividing by current liabilities of $45,000 gives 1.33.

Question 46General Topics

A company reports net income of $80,000, depreciation expense of $12,000, and an increase in accounts receivable of $5,000. Under the indirect method, what is cash provided by operating activities?

  1. $75,000
  2. $97,000
  3. $87,000 Correct answer.
  4. $63,000

Explanation

Start with net income of $80,000, add back the noncash depreciation of $12,000, and subtract the $5,000 increase in receivables since sales exceeded collections. The result is $87,000.

Question 47General Topics

A company uses the equity method to account for a 30% investment in an investee. The investee reports net income of $100,000 and pays dividends of $40,000. What is the net effect on the investor's investment account?

  1. An increase of $42,000
  2. An increase of $30,000
  3. An increase of $18,000 Correct answer.
  4. A decrease of $12,000

Explanation

The investor records 30% of investee income ($30,000) as an increase and 30% of dividends ($12,000) as a decrease, for a net increase of $18,000. Dividends reduce the investment account rather than being recorded as revenue.

Question 48General Topics

A company changes from an incorrect method of inventory costing to an acceptable method and reports the change by restating prior periods. Which quality is primarily being applied?

  1. Conservatism
  2. Matching
  3. Full disclosure
  4. Consistency Correct answer.

Explanation

Consistency requires that a company apply the same accounting methods across periods so statements are comparable; a change is permitted but must be disclosed and applied retrospectively. Conservatism, matching, and disclosure address different concerns.

Question 49General Topics

A company's gross profit percentage falls from 40% to 32% while sales are unchanged. Which explanation is most consistent with this change?

  1. Selling expenses increased sharply
  2. Cost of goods sold rose as a percentage of sales Correct answer.
  3. The company issued additional common stock
  4. Accounts receivable collections slowed

Explanation

Gross profit percentage equals gross profit divided by sales, so a decline with constant sales indicates cost of goods sold consumed a larger share of each sales dollar. Operating expenses, financing, and collection speed do not affect the gross profit percentage.

Question 50General Topics

A company uses the double-declining-balance method for an asset costing $40,000 with a four-year life and no salvage value. What is depreciation expense for the second year?

  1. $10,000 Correct answer.
  2. $7,500
  3. $5,000
  4. $20,000

Explanation

The straight-line rate is 25%, so the declining-balance rate is 50%. First-year depreciation is $40,000 × 50% = $20,000, leaving $20,000 book value; second-year expense is $20,000 × 50% = $10,000.