CPB / BookKeeping Bookkeeping 3 — Questions and Answers
Question 1: Which financial statement reports a company's revenues and expenses over a specific period?
- Balance Sheet
- Statement of Cash Flows
- Income Statement (Correct answer)
- Statement of Owner's Equity
Correct answer: Income Statement
The Income Statement (also called the Profit and Loss Statement) reports revenues and expenses for a defined accounting period.
Question 2: When a business pays its monthly rent in advance for six months, the initial entry debits:
- Rent Expense
- Prepaid Rent (Correct answer)
- Accounts Payable
- Deferred Revenue
Correct answer: Prepaid Rent
Prepaid Rent (an asset) is debited when rent is paid in advance because the benefit has not yet been consumed.
Question 3: Which bank reconciliation item requires a journal entry by the company?
- Outstanding checks
- Deposits in transit
- Bank service charges (Correct answer)
- Bank errors
Correct answer: Bank service charges
Bank service charges appear on the bank statement but not in the company's books, so a journal entry is needed to record them.
Question 4: What does the term 'double-entry bookkeeping' mean?
- Each transaction is recorded twice for backup
- Every debit has an equal and offsetting credit (Correct answer)
- Transactions are entered in both a journal and ledger
- Two people must approve each entry
Correct answer: Every debit has an equal and offsetting credit
Double-entry bookkeeping means every transaction affects at least two accounts such that total debits always equal total credits.
Question 5: Which of the following best describes 'accounts payable'?
- Money owed to the company by customers
- Money the company owes to suppliers (Correct answer)
- Cash held in reserve for payments
- Loans from shareholders
Correct answer: Money the company owes to suppliers
Accounts Payable represents amounts owed by the company to its vendors or suppliers for goods or services received on credit.
Question 6: If a company's ending inventory is overstated, what is the effect on net income for that period?
- Net income is understated
- Net income is overstated (Correct answer)
- Net income is unaffected
- Cost of goods sold is overstated
Correct answer: Net income is overstated
Overstated ending inventory reduces COGS, which overstates gross profit and therefore overstates net income.
Question 7: Which posting step follows recording a transaction in the general journal?
- Preparing a trial balance
- Transferring amounts to the general ledger (Correct answer)
- Closing temporary accounts
- Preparing financial statements
Correct answer: Transferring amounts to the general ledger
After journalizing, each debit and credit is posted (transferred) to the appropriate general ledger account.
CPB / BookKeeping Bookkeeping 3
Which financial statement reports a company's revenues and expenses over a specific period?