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Quizzes > Business & Finance > Finance & Economics

Accounting Principles Quiz: Test Your Knowledge Now

Ready to master financial accounting? Try this basic accounting principles quiz now!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art quiz scene with accounting books calculator pencil charts on coral background inviting accounting challenge

This accounting principles quiz helps you practice core financial accounting and find gaps to review. Answer quick questions on the accounting equation, debits and credits, journal entries, and basic statements. Get your score and next steps. For more, try extra practice questions .

What is the basic accounting equation?
Equity = Assets ? Liabilities
Assets = Liabilities ? Equity
Liabilities = Assets + Equity
Assets = Liabilities + Equity
The basic accounting equation states that Assets equal Liabilities plus Equity, reflecting the balance sheet structure. This equation ensures that the company's resources are always financed by creditors or owners. It is fundamental to double-entry accounting and every transaction affects this equality.
In double-entry accounting, every transaction affects at least how many accounts?
One account
Two accounts
Four accounts
Three accounts
Double-entry accounting records each transaction as both a debit and a credit to maintain the balance of the accounting equation. This means at least two accounts are impacted by each transaction. It provides built-in error detection since total debits must equal total credits.
Which account type increases with a debit entry?
Equity
Revenue
Assets
Liabilities
Asset accounts increase with debits and decrease with credits under the double-entry system. This convention helps maintain the accounting equation's balance. Recognizing how debits and credits affect each account type is a core concept in accounting.
The matching principle in accrual accounting requires:
Recording revenues only when cash is received
Recording expenses in the same period as related revenues
Valuing assets at market value
Recognizing liabilities only when paid
The matching principle dictates that expenses should be recorded in the same period as the revenues they help generate. This results in more accurate measurement of profit for a period. It's a cornerstone of accrual accounting and ensures consistency across reporting periods.
Which financial statement shows a company's revenues and expenses over a period of time?
Income Statement
Statement of Cash Flows
Statement of Shareholders' Equity
Balance Sheet
The income statement reports a company's revenues, expenses, and profits over a specified period. It is also known as the profit and loss statement. This statement helps users evaluate the company's operational performance.
What is a liability?
The residual interest of owners
A resource owned by the company
A report of cash inflows and outflows
A present obligation arising from past events expected to result in an outflow of resources
A liability is a present obligation of the entity to transfer economic benefits due to past transactions or events. It represents what the company owes to outside parties. Liabilities are reported on the balance sheet under current or non-current categories.
What does the term 'accrual' refer to in accounting?
Recognizing transactions when they occur rather than when cash exchanges
Estimating future revenues and expenses
Recording only cash transactions
Consolidating multiple periods
Accrual accounting recognizes revenues when earned and expenses when incurred, regardless of cash flow timing. This approach matches revenues and expenses in the period to which they relate. It provides a more accurate picture of financial performance than cash basis.
What is the purpose of adjusting entries?
To reconcile bank statements
To record cash receipts at year-end
To calculate tax liabilities
To update account balances before preparing financial statements
Adjusting entries ensure that revenues and expenses are recorded in the period they occur, aligning with accrual accounting principles. They update asset, liability, revenue, and expense accounts before financial statements are prepared. Without them, financials could be misstated.
On a trial balance, total debits must equal total credits because:
It's required by tax authorities
Only assets and liabilities are recorded
Each transaction uses the double-entry method ensuring equal debits and credits
It reflects a profitable company
A trial balance lists all ledger accounts and their balances; debits and credits must match if all entries are recorded properly under double-entry accounting. This check helps detect posting errors. If totals differ, it signals that errors exist.
Which depreciation method results in higher expense in the early years of an asset's life?
Sum-of-the-years'-digits
Double-declining balance
Units-of-production
Straight-line
The double-declining balance method applies a constant rate to a declining book value, yielding higher expense in early years. It's an accelerated depreciation method. This approach matches higher usage or obsolescence when the asset is new.
What type of account is Accumulated Depreciation?
Contra asset
Current liability
Equity
Expense
Accumulated Depreciation is a contra asset account that offsets the related asset's gross value. It represents the total depreciation expense charged against an asset since acquisition. The net book value equals cost minus accumulated depreciation.
Under the cash basis of accounting, revenue is recognized when:
Expenses are paid
Services are performed
Cash is received
Invoices are issued
Cash basis accounting records revenue only when cash is received and expenses only when cash is paid. It does not match revenues and expenses to the period in which they occur, which can distort financial performance. It is simpler but less accurate for business reporting.
The statement of cash flows classifies cash flows into three categories. Which is NOT one?
Equity activities
Financing activities
Operating activities
Investing activities
Cash flows are classified as operating, investing, or financing activities. Equity activities per se are not a separate classification, though transactions affecting equity may appear in financing sections. This structure helps users assess liquidity and cash management.
Which ratio measures the ability to pay current liabilities with current assets?
Current ratio
Price-to-earnings ratio
Debt ratio
Return on assets
The current ratio is calculated as current assets divided by current liabilities. It indicates whether a company can meet short-term obligations with short-term resources. A ratio above 1 suggests good liquidity.
Under the FIFO inventory method during inflation, which is true?
Ending inventory is valued at oldest costs, reducing net income
Cost of goods sold is higher and ending inventory is lower
Gross margin decreases due to higher expense
Cost of goods sold is lower and ending inventory is valued at more recent costs
FIFO (First-In, First-Out) assumes oldest costs are matched with current revenues, so during inflation older lower costs hit COGS, resulting in lower expense and higher gross profit. Ending inventory reflects newer, higher costs. This increases reported income.
When bonds are issued at a discount, which of these is true?
Coupon rate exceeds market rate
Market interest rate is lower than the coupon rate
Present value of interest payments increases
Market interest rate is higher than the coupon rate
A bond issues at a discount when its stated (coupon) rate is below the prevailing market rate. Investors pay less than face value to achieve the market yield. The discount is amortized to interest expense over the bond's life.
Using the equity method, an investor recognizes its share of the investee's:
Net income
Gross revenues
Total assets
Dividend payments
Under the equity method, an investor records its share of the investee's net income as an increase to the investment account and income recognized. Dividends reduce the carrying amount but are not recognized as income again. This method applies when significant influence is present.
How is the present value of a single future amount calculated?
Future value multiplied by (1 + r)^n
Future value divided by (1 + r)^n
Future value plus interest
Future value times (1 ? r)^n
The present value formula for a single future amount discounts future cash by dividing it by (1 + discount rate) raised to the number of periods. It reflects the time value of money concept. This calculation is fundamental in valuation and finance.
Which standard sets the guidelines for revenue recognition under IFRS?
IFRS 9
IFRS 15
IAS 16
IAS 2
IFRS 15, 'Revenue from Contracts with Customers,' establishes principles for reporting useful information to users about the nature, timing, and uncertainty of revenue and cash flows from contracts with customers. It replaced multiple previous standards.
Deferred tax assets typically arise when taxable income is:
Less than accounting income
Unrelated to accounting income
Equal to accounting income
Greater than accounting income
A deferred tax asset arises when taxes payable (based on taxable income) exceed the tax expense recognized in the income statement, which occurs if taxable income is higher than accounting income. This creates deductible future tax benefits. It reflects timing differences in recognition.
Which of the following is considered an intangible asset?
Inventory
Patent
Accumulated depreciation
Land
Intangible assets lack physical substance and include intellectual property such as patents, trademarks, and copyrights. They are recognized if future economic benefits are probable and cost can be measured reliably. They are amortized over their useful lives.
In consolidated financial statements, noncontrolling interest is measured at:
Historical cost
Fair value
Proportionate share of net assets
Book value
Under U.S. GAAP and IFRS, noncontrolling interest (NCI) in a subsidiary can be measured at fair value at the acquisition date. IFRS also permits measurement at the proportionate share of identifiable net assets. NCI recognition ensures full consolidation.
Under hedge accounting, the effective portion of a cash flow hedge is recognized in:
Additional paid-in capital
Retained earnings
Other comprehensive income
Profit or loss
For a cash flow hedge, the effective portion of gains or losses on the hedging instrument is initially reported in other comprehensive income. It is reclassified into profit or loss in the same period that the hedged item affects earnings. This treatment aligns timing of hedge gains and losses.
Foreign currency transaction gains and losses are recognized in:
Deferred tax
Other comprehensive income
Equity
Profit or loss
Gains and losses on foreign currency transactions are recognized in profit or loss in the period in which they occur. They are not deferred or reported in other comprehensive income. This reflects the volatility of exchange rates in net income.
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Study Outcomes

  1. Understand Core Accounting Terminology -

    Recognize essential terms and concepts featured in the accounting principles quiz, ensuring you can navigate questions with confidence.

  2. Apply Debits and Credits in Transaction Analysis -

    Demonstrate proper journal entries by applying the rules of debits and credits in real-world scenarios from the basic accounting principles quiz.

  3. Analyze Revenue Recognition Standards -

    Evaluate when and how revenue should be recognized according to GAAP principles presented in the accounting principles test.

  4. Differentiate Cash and Accrual Accounting Methods -

    Distinguish between cash basis and accrual basis approaches in the principles of accounting quiz to understand their impact on financial results.

  5. Interpret Financial Statements for Business Insights -

    Use your results from the financial accounting quiz to read and interpret balance sheets and income statements for informed decision-making.

Cheat Sheet

  1. Debits, Credits, and the Accounting Equation -

    Debits and credits form the backbone of double-entry accounting, ensuring the accounting equation (Assets = Liabilities + Equity) always balances. For example, debiting Cash increases assets, while crediting Revenue boosts equity. A handy mnemonic is DEAD CLIC: Debits increase Expenses, Assets, Dividends; Credits increase Liabilities, Income, Capital (source: IFRS Foundation).

  2. Revenue Recognition and IFRS 15's Five-Step Model -

    The revenue recognition principle dictates that companies recognize revenue when control of goods or services transfers to customers. IFRS 15 outlines a five-step model: identify the contract, performance obligations, transaction price, allocate the price, then recognize revenue as obligations are met. Remember "IPEA - R" (Identify, Price, Etc.) to recall each step (source: IASB).

  3. Matching Principle in Action -

    The matching principle requires expenses to be recorded in the same period as the revenues they help generate, creating accurate period profit figures. For instance, depreciation expense on machinery is matched to the revenue it produces over its useful life. Think "Match Expenses to Earnings" to lock in this GAAP cornerstone (source: FASB Accounting Standards Codification 705).

  4. Accrual vs. Cash Basis Accounting -

    Accrual accounting records transactions when they occur, while cash basis waits for cash receipts or payments. Accrual provides a more accurate financial picture by including accounts receivable and payable (source: FASB ASC 105). Mnemonic tip: "Accrual = ASAP, Cash = Cha-Ching When Paid."

  5. Adjusting Entries: Deferrals and Accruals -

    Adjusting entries update revenue and expense accounts for transactions spanning periods, ensuring accrual compliance. Deferrals postpone recognition (e.g., prepaid insurance), while accruals recognize owed items (e.g., wages payable). Recall "DAD: Deferral After, Accrual Due" to classify each adjustment (source: University accounting textbooks).

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