Accounting Knowledge practice questions

Financial statements & analysis

6 practice questions on financial statements & analysis, each with the answer and why it is right. From Questiva Learning' QuickBooks® Online skills test.

1. To see what the business owns and what it owes as of today, you should:

   1. Run a Profit and Loss report.
   2. Look at the Statement of Cash Flows.
   3. Run a Balance Sheet.
   4. Add up your open invoices and unpaid bills.

   Answer: C) Run a Balance Sheet.. The Balance Sheet lists assets, liabilities and equity as of one date. The Profit and Loss covers a stretch of time and shows income and expenses.

2. A bank loan to the business, deposited into its checking account, is recorded as:

   1. Income.
   2. An owner's investment.
   3. An expense, once you start paying it back.
   4. A liability.

   Answer: D) A liability.. Borrowed money isn't earned, so the deposit adds to cash and to a loan liability. Later, only the interest you pay is an expense.

3. The business made a profit this year, but its bank balance went down. What could be causing it?

   1. A large depreciation entry.
   2. More unpaid vendor bills than last year.
   3. Customers are slower to pay their invoices.
   4. Employees have earned wages you haven't paid yet.

   Answer: C) Customers are slower to pay their invoices.. A sale on an invoice counts as income right away, but the cash comes in only when the customer pays. If unpaid invoices grow by more than the profit, cash goes down.

4. A request for revenue "as of June 30" is missing:

   1. Nothing. The Balance Sheet for that date shows it.
   2. Cash or accrual, since revenue only exists under accrual.
   3. A start date.
   4. The bank account it was deposited into.

   Answer: C) A start date.. Revenue is reported for a period, and balances as of one date. Revenue through June 30 could mean June alone or the year to date.

5. Until they sell, products you buy to resell are recorded in:

   1. Cost of Goods Sold.
   2. An expense account, such as Supplies.
   3. A Fixed Asset account.
   4. Inventory, an asset.

   Answer: D) Inventory, an asset.. Inventory stays an asset until it sells. Then its cost moves to Cost of Goods Sold, so the purchase alone doesn't touch the Profit and Loss.

6. When a building's market value rises, the books should:

   1. Write it up to market value and raise equity.
   2. Wait for a licensed appraiser to change it.
   3. Record the rise as income.
   4. Keep it at cost, less depreciation.

   Answer: D) Keep it at cost, less depreciation.. Assets stay on the books at what you paid, less depreciation. A gain shows up only when the asset is sold.