Accounting Fundamentals – Quiz Questions
1. Which of the following items is NOT an example of an Asset?
a. Goodwill
b. Land
c. Accounts Payable
d. Accounts Receivable
2. Assets are generally reported on the balance sheet at which amount?
a. Cost
b. Current Market Value
c. Expected Selling Price
d. Net Present Value of Future Profits
3. True or False. Management’s policy decisions can affect how financial results are reported.
a. True
b. False
4. If a company wishes to minimize the amount of taxes it pays, it will:
a. Delay the recognition of revenue
b. Speed up the recognition of expenses
c. Both of the above
d. None of the above
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5. What is the MAIN difference between Cost of Goods Sold (COGS) and Operating Expenses
(OpEx) on a company’s Income Statement?
a. They’re both expenses, but OpEx is almost always significantly bigger than COGS.
b. COGS can reflect only cash expenses, whereas OpEx may include both expenses paid out
in cash in the current period, as well as expenses that are owed and which will be paid
out in cash in the future.
c. COGS corresponds to expenses that can be *directly* linked to individual products or
services sold, whereas with OpEx there is not a direct relationship.
d. COGS is almost always projected as a percentage of revenue, but OpEx is rarely
projected that way since it can’t be linked to individual units sold.
6. A company sells one unit of merchandise for $100 in January, and also delivers it to the
customer in January. The customer is on a payment plan, and will pay $50 in February and $50
in March for this merchandise. When does the company recognize revenue from this sale?
a. $50 in February, and $50 in March
b. $50 in January, $25 in February, and $25 in March
c. $100 in January
d. $100 in March
7. If you only had access to one financial statement when analyzing a company, which one would
you pick?
a. Income Statement
b. Balance Sheet
c. Cash Flow Statement
d. Statement of Owners Equity
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8. Which of the following items depreciate?
a. Land
b. Other Intangible Assets
c. Factories
d. Goodwill
e. Equipment
9. You’re analyzing a 3-statement model for a company. Assume that Depreciation DECLINES by
$50 in Year 1, and that the company’s tax rate is 40%. What happens to the company’s Net
Income, Cash, and PP&E in Year 1?
a. Net Income INCREASES by $30; Cash DECREASES by $20; PP&E INCREASES by $50.
b. No changes to Net Income or Cash since Depreciation is a non-cash charge; PP&E
INCREASES by $50.
c. Net Income DECREASES by $30; Cash INCREASES by $20; PP&E DECREASES by $50.
d. Net Income INCREASES by $50; Cash stays the same; PP&E INCREASES by $50.
Use the following information about a company’s beginning Inventory balance, Inventory additions
over the course of the year, and the cost of those additions to answer the next three questions:
The company sells 40 units during the year at a price of $25 per unit, for total revenue of $1,000.
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10. What is the Cost of Goods Sold for those 40 units under LIFO?
a. $663
b. $555
c. $609
d. $396
11. Without performing any calculations, which method (LIFO or FIFO) would produce a lower
Cost of Goods Sold in this scenario?
a. FIFO
b. LIFO
c. Both would produce the same result.
d. It’s impossible to say without running the numbers.
12. What is the dollar value of the ending Inventory balance under LIFO in this same scenario (40
units sold over the course of a year)?
a. $396
b. $555
c. $476
d. $467
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Given the partial balance sheets below, please answer the following questions:
Balance Sheet
Year 1
Year 2
Operating Activities:
Current Assets:
Cash & Cash-Equivalents:
Accounts Receivable:
Inventory:
Total Current Assets:
$755
$1,159
$879
$2,793
$832
$1,234
$765
$2,831
Current Liabilities:
Revolver:
Accounts Payable:
Accrued Expenses:
Total Current Liabilities:
$1,000
$532
$245
$1,777
$1,000
$603
$205
$1,808
13. Based on the information above, what would be the numerical value of the Change in
Operating Assets and Liabilities in the Cash Flow from Operations section of this company’s
Year 2 Cash Flow Statement?
a. $70 – A cash flow INCREASE of $70
b. ($7) – A cash flow DECREASE of $7
c. $7 – A cash flow INCREASE of $7
d. ($70) – A cash flow DECREASE of $70
14. True or False: Given the information above, the company is in a GOOD working capital
situation.
a. True
b. False
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15. A company receives $500 in cash upfront for a service to be delivered over the next year. The
company records an increase of $500 in cash, and an increase of $500 in deferred revenue
because the service has not yet been performed. Six months later, half of the service has been
delivered. Assuming that there are no expenses associated with this revenue and that the
company has a 40% tax rate, how does the company’s cash balance change?
a. Increases by $250
b. Decreases by $100
c. Increases by $150
d. Increases by $100
16. When a company records revenue but has not yet collected cash from the customer, both
Revenue and Accounts Receivable increase. What happens when the company collects cash
from this same customer?
a. Both Accounts Receivable and Revenue will decrease and Cash will increase, because
you need to reverse the initial change.
b. Neither Accounts Receivable nor Revenue changes, but you increase the company’s
Cash balance to reflect that collection.
c. Revenue stays the same, Accounts Receivable decreases, and Cash increases to reflect
the collection.
d. Revenue stays the same, Accounts Receivable decreases, and Cash increases to reflect
the collection, but you also create a Deferred Tax Liability to reflect future taxes owed
on the cash received.
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17. Given the following information, how much does the company spend on Capital Expenditures
(CapEx) in Year 2?
PP&E, net of Accumulated Depreciation
Annual Depreciation Expense
Year 1
$150
$50
Year 2
$200
$75
a. $50
b. $125
c. $25
d. $175
18. Where do you show Interest Expense as an EXPLICIT line item on a company’s Cash Flow
Statement?
a. Cash Flows from Investing – since paying interest on debt counts as an investing activity.
b. Cash Flows from Operations – since interest paid on debt is tax-deductible.
c. Cash Flows from Financing – since paying interest on debt counts as a financing activity.
d. None of the above
19. Which of the following conditions must be true for an expense to appear on the income
statement?
a. It must be paid in cash.
b. It must correspond to the period that the income statement covers.
c. It must be tax-deductible for book tax purposes.
d. It must be tax-deductible for both book and cash tax purposes.
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20. You are analyzing the Net Income and Cash balances of Company A over the last three years
(shown below). You find that Net Income is increasing, but Cash is decreasing. What are
possible explanations for this trend?
Cash
Net Income
Year 1
$250
$50
Year 2
$200
$100
Year 3
$150
$150
a. In Years 2 and 3, the company made large capital expenditures.
b. The company has high working capital requirements (such as purchasing inventory).
c. The company has a large debt balance that requires high annual principal payments.
d. None of the above – this scenario could never happen in real life.
21. On the last day of its fiscal year, a company issues $100 of long-term debt at 6% annual
interest to purchase $100 of inventory. How does this transaction effect the income statement
for THAT fiscal year?
a. Interest expense increases by $6
b. COGS increases by $100
c. Both of the above
d. None of the above
22. You’re reviewing a company’s records, and you see that it has recorded the following THREE
transactions today. Which transaction(s) would result in the company recording an ACCRUED
EXPENSE on its weekly financial statements?
a. A customer pays $100 today for services the company will perform over the next year.
b. A new employee has now worked for 2 weeks, and the company will pay his salary in
cash at the end of the month (2 weeks from now).
c. The company pays rent for the upcoming month, before it is actually due.
d. The company receives a bill for legal services from a law firm, but does not yet remit
cash payment for it.
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23. On a company’s financial statements, you are given the following information: Month 1
Inventory = 290, Month 2 Inventory = 340, and Month 2 COGS = 115. How much Inventory was
purchased in Month 2?
a. 165
b. 50
c. 65
d. Cannot determine with the information given
24. On the first day of the year, a company pays $120 for insurance coverage for the entire year,
which decreases Cash by $120 and increases Prepaid Expenses by $120 at that instant. The
company has a 40% tax rate. Six months into the year, how have the Net Income, Cash, and
Prepaid Expenses items on the financial statements changed? Assume that ONLY the
insurance expense has impacted the statements and that there have been no other changes.
a. Net Income INCREASES by $36; Cash DECREASES by $24; Prepaid Expenses INCREASES
by $60.
b. Net Income does not change; Cash INCREASES by $60; Prepaid Expenses DECREASES by
$60.
c. Net Income DECREASES by $60; Cash INCREASES by $60; Prepaid Expenses DECREASES
by $60.
d. Net Income DECREASES by $36; Cash INCREASES by $24; Prepaid Expenses DECREASES
by $60.
25. A company has pre-tax income of $100 on its income statement, but due to temporary
differences between book and tax values, its cash taxable income is only $75. With a tax rate
of 40%, what is reported on the company’s income statement as net income?
a. $45
b. $40
c. $60
d. $55
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26. Using the information from the previous question, should the company record a deferred tax
asset or a deferred tax liability due to the difference between book taxes and cash taxes? And
how much should be recorded?
a. DTL of $10
b. DTA of $10
c. DTL of $15
d. DTL of $25
27. What is the difference between Accrued Expenses and Accounts Payable?
a. There is no difference – they work the same way on the financial statements and
represent the same concept.
b. They represent the same concept, but you recognize Accrued Expenses more quickly on
the income statement.
c. They work the same way on the financial statements, but represent slightly different
concepts: Accrued Expenses is more for regular, recurring payments such as rent and
wages, whereas Accounts Payable is more for payments that don’t have a set schedule.
d. They represent different concepts and work differently on the financial statements:
Accrued Expenses is for regular payments and Accounts Payable is for payments without
a set schedule, and you recognize Accrued Expenses more quickly on the income
statement.
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28. A company with a tax rate of 40% buys a $100 piece of equipment with a useful life of 10
years and no salvage value (i.e. it is worth $0 at the end of the 10 years). The company
accelerates depreciation for tax purposes but NOT for book purposes. Specifically, for tax
purposes, Year 1 Depreciation is $30, Year 2 is $20, Year 3 is $15, and Years 4-10 are $5. For
book purposes, Depreciation is $10 in Years 1-10. What is the value of the Deferred Tax
Liability created by this scenario at the end of Year 10?
a. $3
b. $5
c. $0
d. $10
29. A company with a tax rate of 40% declares and issues Dividends totaling $500. By how much
do these Dividends impact Net Income?
a. Down by $500
b. Up by $500
c. Down by $300
d. Up by $300
e. No effect
30. A company has 1,000,000 shares outstanding at a market price of $10.00 per share. It also
earns $9 million in net income. The company is able to repurchase 100,000 shares at a
discount, for $5.50 per share. After the share repurchase, what is the company’s earnings per
share (EPS)?
a. $9.39
b. $10.00
c. $9.00
d. $8.89
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31. Continue with the assumptions outlined in the question above. Assuming that the company’s
Equity Value (Market Cap) is reduced by the dollar value of the shares repurchased, what
should be the price of one share of this company after the share repurchase?
a. $10.50
b. $10.00
c. $9.45
d. $10.45
32. A company issues $500 worth of debt with an annual interest rate of 10% and principal
repayment of 20% due each year. As a result, Cash on the Balance Sheet increases by $500 and
Debt increases by $500 initially on the other side to balance it. Exactly *one year* after the
debt has been issued, how have the financial statements changed? Assume that the interest
expense is based on the beginning debt balance and do NOT average the beginning and
ending balances.
a. Debt DECREASES by $100; Net Income DECREASES by $30; Cash DECREASES by $130.
b. Debt DECREASES by $100; Net Income DECREASES by $130; Cash DECREASES by $130.
c. Debt DECREASES by $100; Net Income does not change; Cash DECREASES by $100.
d. Debt DECREASES by $100; Net Income DECREASES by $30; Cash DECREASES by $100.
33. Which of the following statements best describes how writing down OWED debt (a Liability)
affects a company’s financial statements?
a. Net income decreases, and cash increases due to the reduced liability.
b. Net income increases, and cash decreases due to the reduced liability.
c. Net income is unaffected; the liability is reduced and cash is increased by the same
amount.
d. Net income is unaffected; the liability is increased and cash is reduced by the same
amount.
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34. A company purchases an asset with a useful life of 5 years and no salvage value for $100. The
company depreciates this item using the straight-line method, where the annual depreciation
expense equals 20% of the initial purchase price. After three years, the company sells the
asset for $60. The company has a tax rate of 40%. How does the asset sale affect the
company’s financial statements compared to what they looked like immediately before the
company sold it?
a. Net Income INCREASES by $12; Cash INCREASES by $52; PP&E DECREASES by $40.
b. Net Income does not change; Cash INCREASES by $40; PP&E DECREASES by $40.
c. Net Income INCREASES by $36; Cash INCREASES by $36; PP&E DECREASES by $60.
d. Net Income INCREASES by $12; Cash INCREASES by $52; PP&E DECREASES by $60.
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