Ready to give it a shot? Dive into the 10 question quiz below to get a feel for how prepared you are! Once you’ve written down your answers, hover over (or tap on a phone) the question to see the answers and explanations.
WarningPlease do keep in mind that we can’t guarantee the accuracy of this quiz, so we do recommend you also run through a full-length practice exam. The CollegeBoard offers a good one that we’ll share in the resources section below.
Question 1: SLA Company purchases office supplies on account. Assuming that SLA Company uses the asset method, when is an Office Supplies Expense recorded?
A. When the office supplies are paid
B. When the office supplies are received
C. When the office supplies are used
D. When the office supplies are bought
Using the asset method, when supplies and similar items are bought, they are first recorded as an asset as opposed to an expense. Therefore, an expense is not recorded when the office supplies are paid, neither when they are received or bought. An adjusting entry is to be made by the company (usually at the end of the month, period, or year) when the office supplies are used. Only then would the office supplies that are used be considered as an expense. This would be reflected in the income statement. Meanwhile, the office supplies still unused would remain as an asset.
Question 2: The separate entity concept distinguishes…
A. Investments from different investors and shareholders
B. Ownership of the owner and ownership of the business
C. Assets from liabilities and owner’s/shareholders’ equity
D. Current (short-term) and non-current (long-term)
The accounting entity or separate entity concept is one of the generally accepted accounting principles (GAAP). It states that whatever the owner owns (or owes) is apart and distinct from whatever the company owns (or owes). Therefore, in accounting, personal expenses such as the rent of the owner’s house should not be considered as an operating expense in the books of the company. Whenever the owner would use company funds for personal use, it should be instead be recorded as a withdrawal from the owner’s capital account.
Question 3: On December 31, 2017, CD Corporation’s merchandise inventory account showed a balance of $1,000. On January 31, 2018, it showed a balance of $500. What is the cost of goods sold for the month of January 2018?
D. Cannot be determined
In the given example, the cost of goods sold cannot be determined. One may hastily answer that the cost of goods sold would be $500 ($1,000 – $500). While this is indeed a possible outcome in real life, we cannot be sure because the amount for Purchases was not given in the problem. With a value for the Purchases account, the cost of goods sold could be even higher than $500.
Question 4: TLT Merchandising buys 10 bouquets of flowers at $10 and resells them at $15. During the month, TLT was able to sell 5 bouquets? Based on the information given, what would be the effect to revenues and operating expenses?
A. Increase in revenue of $150, increase in operating expenses of $100
B. Increase in revenue of $75, increase in operating expenses of $100
C. Increase in revenue of $75, increase in operating expenses of $50
D. Increase in revenue of $75, no increase in operating expenses
Since TLT Merchandising was only able to sell 5 bouquets, the revenue would only increase by $75 ($15 selling price x 5 bouquets). Meanwhile, there is no increase in operating expenses because the $10/bouquet cost would be classified under cost of goods sold since it is directly related with the revenues generated. The cost of goods sold should increase by $50 ($10 purchase price x 5 bouquets sold).
Question 5: In which of the following situations is inventory not recognized from a buyer’s perspective?
A. Goods in transit with terms FOB Destination
B. Goods in transit with terms FOB Shipping Point
C. Goods in a showroom
D. Goods in a warehouse
Goods which have the terms FOB Destination are only recognized as inventory from the buyer’s perspective once it is received by the buyer, not when it is still in transit. This is because FOB Destination means that the buyer is free from the responsibility of the goods until it reaches his or her hands. Therefore, it is not yet recognized as inventory in the buyer’s books.
Question 6: An internal audit has revealed that the operations manager overstated the ending inventory of a certain supermarket. What would be the effect on cost of goods sold and gross income?
A. Cost of goods sold would be overstated, gross income would be understated
B. Cost of goods sold would be understated, gross income would be overstated
C. Cost of goods sold would be overstated, gross income would have no effect
D. Cost of goods sold would be understated, gross income would be overstated
An overstatement in the ending inventory would reduce cost of goods sold, causing it to be understated. Meanwhile, since gross income is the difference between sales and cost of goods sold, it would be overstated.
Question 7:On March 1, 2018, Andrea buys a $2,500 shelf for her business with an estimated 5 years of useful life and a salvage value of $100. On March 31, 2018 and December 31, 2018, respectively, how much depreciation expense does she report based on the straight-line depreciation method?
A. $40, $40
B. $40, $400
C. $40, $200
D. $480, $480
To compute for the depreciation through the straight-line depreciation method, we use the general formula (Purchase price – Salvage value) / Useful life. Plugging in the values, we get $280 (($2,500 – $100)/5 years) as the annual depreciation. To get the monthly value, we divide $280 by 12 months ($40). Therefore, the answer is $40. This would be true in both March and December because the depreciation expense does not change per month under straight-line depreciation. Meanwhile, it would be the accumulated depreciation account which would have a balance of $400.
Question 8: The classification and normal balance of the sales discount account would be…
A. Expense and debit
B. Revenue and credit
C. Contra revenue and credit
D. Contra revenue and debit
Since sales discounts are deductions to sales or revenues, it will be considered as a contra revenue account. Moreover, since the normal balance of revenues is credit (revenues are increased by credits), the normal balance of sales discounts would be the opposite – debit.
Question 9: An increase in accounts payable can be considered an…
A. Operating activity
B. Investing activity
C. Financing activity
D. Non-cash transaction
Typically, accounts payable are incurred whenever we make a purchase from a supplier on account. This type of transaction is associated with the daily operations of a company, and is therefore classified as an operating activity. Alternatively, we can analyze this transaction through the shortcut we have explained above. Since accounts payable is a current liability, we can conclude that it is an operating activity.
Question 10: Which of the following expenses are added back to the net income under the indirect cash flow method?
Depreciation is a non-cash expense – you don’t actually spend cash month after month because your equipment and other fixed assets lose their value. This is why depreciation is added back to the net income in order to accurately depict cash flows from operating activities.
More CLEP Study Resources
Looking for a study guide to fill a couple gaps, or just want a full length practice exam? You can find a few of my favorite resources below. Note that some of the links are affiliate – meaning I’ll make a few dollars if you purchase, but I’m only sharing those resources that were genuinely helpful during my own CLEP journey.
Official CLEP Study Guide: It’s quite short on the study side of things, but this is the go-to practice test bank. I don’t think I’ve done a single CLEP test without taking the practice test in this book first.
REA CLEP Financial Accounting: I’m not huge on reading, but this book series is fantastic if you’re into that kind of thing. It also includes some nifty online practice tests, though I always found the official practice tests (above) more reassuring.
InstantCert Academy: The website looks like it was made before the internet, but it’s legitimately the single most useful study guide I’ve found. Basically it’s a series of flashcards that help you learn about Financial Accounting in a fast paced and fun way.
Plenty of other resources exist – just do a quick internet search – but these are the three that I’ve personally found the most helpful back when I did CLEP.