1. C — Running a trial balance is an intermediary step in the 10.

C — Company A records a note receivable from its

financial close, not a core financial statement. Core financial customer. It is a non-current asset because the term is

statements are: the income statement, the balance sheet, greater than 12 months. A non-paying customer would cause

statement of cash flows, statement of retained earnings and accounts receivable to be written off. Interest payments are

the notes to the financial statements. not recorded in accounts receivable. Company A is the

2. D — All are correct. A single step income statement has a payee of the promissory note, not the debtor, and has no

section for revenue and expenses and only requires one liability.

subtraction to arrive at net income/loss. A condensed income 11. A — Under the accrual basis of accounting, liabilities are

statement only includes summary totals. Common sized recorded in the fiscal period that they are incurred or

income statements add a column to show the calculation of committed, regardless of when paid.

each line item as a percentage of revenue. 12. B — Balance sheets are prepared "as of" a specified date.

3. A — Assets, expenses and losses increase with debits. Current liabilities are due within the next 12 months. Time

Revenue, liabilities and gains increase with credits. value of money, or net present value, is often used by

4. A — Accounts receivable is a short-term asset included in accountants such as for lease accounting. Accounts

the current asset section of a balance sheet and increases by receivable become less likely to be paid as they age.

debits. They come about when customer sales are made on 13. C — Acquisitions of property, plant and equipment are uses

credit, not cash. Accounts receivable become harder to of cash/cash equivalents and categorized as an investing

collect, and therefore less valuable, as they age. activity. The operating activities section of the statement of

5. A — Cash basis accounting records revenue when paid. cash flows captures the inflow/outflows from business

Accrual accounting reflects revenue when it is earned. operations, such as sales or labor expenses, rather than

Accounts receivable and its related bad debt are part of investments.

accrual accounting only. 14. B — The transaction increases cash, a current asset, via a

6. B — Assets, liabilities and equity are found on the balance debit. It also increases loans payable, which is a non-current

sheet. Revenue (or sales), expenses, gains, losses and net liability because it is due in five years, via a credit.

income (or earnings) are income statement accounts. 15. D — Cost of goods sold is an interim step on the income

7. D — All are correct. Financial statements are used for statement and is calculated as: Beginning Inventory +

internal analysis, like trending and calculating key Purchases - Ending Inventory = Cost of Goods Sold.

performance indicators. External negotiations, such as 16. A, B, C & D — All of the organizations listed are involved in
applying for loans and credit cards, require financials development of financial accounting standards.

statements. Compliance agencies, such as the Securities & 17. C — The FIFO method assumes that the oldest inventory is

Exchange Commission (SEC), require financial statements sold first, and inventory on hand at the end of a period is the

from public companies. newest. The newest purchases reflect the most current

8. B — When a supplier delivers raw material a liability is market values.

incurred. Customer payments relate to accounts receivable, 18. C — The FIFO method assumes that the oldest inventory is

not accounts payable. Expenses paid with cash do not sold first, and inventory on hand at the end of a period is the

generate accounts payable because the payment is made newest. The newest purchases reflect the most current

concurrent with incurring the liability. market values.

9. B — The four sections of the CPA exam are Auditing and 19. B — The IRS requires the MACRS method for most fixed

Attestation, Business Environment and Concepts, Financial assets. MACRS is not GAAP-compliant because salvage

Accounting and Reporting, and Regulation. While knowledge values are ignored and because it relies on an IRS-

of accounting software, derivative financial instruments and determined table of useful lives that is inconsistent with

international banking law are helpful, they are not mandatory GAAP principles.

for licensure.
20. A — The straight-line method is the only GAAP-compliant 30. E — Considering that current assets are expected to be

method for amortizing intangible assets. converted to cash within a year, property, which is a long-

21. B — An income statement is a financial report that term asset often held for multiple years, would not be

documents a company’s earnings over a specific time period classified as such.

— yearly, quarterly or monthly — and records the expenses 31. C — Gross Income - Operating Expenses = Operating

and costs associated with earning that revenue. Income.

22. A — $1,800 debit in accounts receivable; $3,000 credit in A company’s operating income is, in other words, its income

retained earnings; $1,200 debit in cash. Cash is classified as from core operations. Operating income is calculated by

a current asset and therefore expected to be consumed, sold subtracting operating costs from gross income.

or exhausted within a year, so it’s recorded on the balance 32. C — If the business has provided the goods or services and

sheet as a debit when it's received. When a customer makes can reasonably expect to receive cash, it can recognize the

a payment, cash is debited. Conversely, when a customer revenue in that period. The accrual concept requires that

buys something on credit, the sale is documented in revenues and costs are recognized when they are earned or

accounts receivable, where all funds owed to a company are incurred, rather than when they are received in cash or paid.

accounted for. Retained earnings are a portion of the profits This method tends to provide companies with better and

earned that are not used as dividends and are often reserved more comprehensive insights into their profitability and

for reinvesting into the business. overall financial health.

23. B — Cash flow is defined as the movement of cash in and 33. B — Accounts payable tracks the money businesses owe to

out of a business, and cash flow from financing activities their creditors, so when businesses begin to pay off their

(CFF) — or cash flow financing — is a section of the cash purchases, which are recorded as debits, the balance in

flow statement that includes transactions involving debt, accounts payable decreases.

equity and dividends. The purchase of plant, property and 34. D — The depreciation expense is larger in the first few years

equipment (PP&E) would fall under cash flow from investing. and gets smaller as time goes on. Double-declining balance

24. A — Debits are recorded on the left side of the ledger depreciation is an accelerated depreciation method that is

account because they decrease equity, liability and revenue used to offset an asset’s increased maintenance costs with

and increase expense or asset accounts. lower depreciation expenses throughout its lifetime. For

25. B — Assets are recorded at their historical cost values, which example, in knowing that assets will have lower repair and

means that they are documented at their original cost and maintenance expenses in their early years, companies
time acquired. allocate higher depreciation expenses to newer assets.

26. B — Increasing an asset involves debiting the account, 35. C — Sales + Taxes + Interest.

because assets and expenses have natural debit balances.

27. D — Unearned revenues are incurred when businesses or 36. Earnings before interest and taxes (EBIT) is a business’s net

individuals receive payment for a product or service that has income before interest and taxes are deducted, and it’s often

yet to be delivered or provided. Until the item is delivered, used as a measure of operating profit. There are multiple

these types of transactions are marked as liabilities. ways to calculate EBIT; no matter which you use, the metric

28. D — All accounting entries must contain at least two provides a look at a company’s profitability regardless of its

accounts: one that is debited and another that is credited. capital structure.

29. A — A chart of accounts helps companies break down all

financial transactions made during a certain period into

subcategories. That enables them to gain deeper insight into

the profitability and effectiveness of various products,

services or business units.