CPB / BookKeeping Bookkeeping and Accounting 3 — Questions and Answers
Question 1: Which inventory costing method assumes the oldest inventory items are sold first?
- LIFO
- FIFO (Correct answer)
- Weighted Average
- Specific Identification
Correct answer: FIFO
FIFO (First-In, First-Out) assumes the first items purchased are the first items sold.
Question 2: Depreciation is best described as:
- The decline in market value of an asset
- The allocation of an asset's cost over its useful life (Correct answer)
- Cash set aside to replace an asset
- The repair and maintenance cost of an asset
Correct answer: The allocation of an asset's cost over its useful life
Depreciation systematically allocates the cost of a long-term asset over the periods it provides economic benefit.
Question 3: If a company's total assets are $80,000 and total liabilities are $30,000, what is owners' equity?
- $110,000
- $30,000
- $50,000 (Correct answer)
- $80,000
Correct answer: $50,000
Using the accounting equation: Owners' Equity = Assets − Liabilities = $80,000 − $30,000 = $50,000.
Question 4: A petty cash fund is used to:
- Pay employee salaries
- Handle large capital expenditures
- Pay small, miscellaneous business expenses (Correct answer)
- Record end-of-period adjustments
Correct answer: Pay small, miscellaneous business expenses
Petty cash funds provide a convenient way to pay for minor expenses without writing a check.
Question 5: What does the term 'net income' represent?
- Total revenues for the period
- Revenues minus expenses for the period (Correct answer)
- Cash collected from customers
- Total assets minus total liabilities
Correct answer: Revenues minus expenses for the period
Net income is calculated as total revenues minus total expenses for an accounting period.
Question 6: When a business pays rent in advance, the prepayment is initially recorded as:
- Rent Expense
- A liability
- Prepaid Rent (an asset) (Correct answer)
- Owner's Equity
Correct answer: Prepaid Rent (an asset)
Prepaid rent is an asset because the business has paid for a future benefit — the right to use property.
Question 7: Which of the following best describes 'posting' in the accounting cycle?
- Recording transactions in the general journal
- Transferring journal entries to the general ledger accounts (Correct answer)
- Preparing a trial balance
- Closing temporary accounts
Correct answer: Transferring journal entries to the general ledger accounts
Posting is the process of transferring debit and credit amounts from the journal to the individual ledger accounts.
CPB / BookKeeping Bookkeeping and Accounting 3
Which inventory costing method assumes the oldest inventory items are sold first?