10 free sample questions with answers and explanations. See how you'd score on the real CLEP exam.
Which of the following journal entries is in accordance with GAAP for a company that has performed services worth $10,000 but has not yet received payment?
Explanation
The correct journal entry is: Debit Accounts Receivable $10,000, Credit Revenue $10,000. This is because the company has earned the revenue, but has not yet received payment, so it must record an account receivable. The debit to Accounts Receivable increases the asset account, while the credit to Revenue increases the revenue account. This is in accordance with GAAP, which requires that revenue be recognized when it is earned, regardless of when payment is received. Distractor A is incorrect because it assumes the company has received payment, which is not the case. Distractor B is incorrect because it does not recognize the revenue earned. Distractor D is incorrect because it reverses the debit and credit.
Where would a company classify the cash received from the sale of a building in its statement of cash flows?
Explanation
The correct answer is B) Investing Activities. According to GAAP, the sale of a long-term asset such as a building is classified as an investing activity. The cash inflow from the sale of the building would be reported in the investing activities section of the statement of cash flows. The journal entry to record the sale would be: Debit: Accumulated Depreciation $20,000, Debit: Cash $100,000, Credit: Building $80,000, Credit: Gain on Sale of Building $20,000. Distractor A is incorrect because operating activities relate to the company's core business operations, not the sale of long-term assets. Distractor C is incorrect because financing activities relate to the company's financing obligations, such as debt or equity issuance. Distractor D is incorrect because non-cash investing and financing activities are reported in a separate section of the statement of cash flows, and the sale of a building is a cash transaction.
Which of the following best describes a key aspect of vertical analysis?
Explanation
Vertical analysis is a method of analyzing financial statements where each line item is expressed as a percentage of sales or total revenue. This allows for a more detailed understanding of the composition of the financial statements and helps to identify trends and anomalies. In the given example, the cost of goods sold is 60% of sales, and the gross profit is 40% of sales. According to GAAP, financial statements should be presented in a manner that is consistent and comparable across periods. Distractor A is incorrect because it describes horizontal analysis, which involves comparing financial statements over multiple years. Distractor B is incorrect because while vertical analysis does involve using percentages, it is not limited to only using percentages. Distractor C is incorrect because it describes a different type of analysis, where a company's financial performance is compared to industry averages.
How should a company account for a $10,000 payment received in advance for services to be performed over the next year?
Explanation
According to GAAP, revenue should be recognized when it is earned, regardless of when the payment is received. In this case, the company has received payment in advance for services to be performed over the next year. Therefore, the correct journal entry is: Debit Cash $10,000, Credit Unearned Revenue $10,000. This entry recognizes the receipt of cash and increases the Unearned Revenue account, which is a liability account. As the services are performed, the company will debit Unearned Revenue and credit Revenue. Distractor A incorrectly recognizes revenue immediately, violating the revenue recognition principle. Distractor C incorrectly uses Accounts Receivable, which is an asset account used to record amounts due from customers for services already performed. Distractor D incorrectly uses Accounts Payable, which is a liability account used to record amounts due to suppliers or vendors.
How should a company classify the cash received from the sale of a building?
Explanation
According to GAAP, the sale of a building is considered an investing activity. The cash received from the sale of the building should be classified as a cash inflow from investing activities on the statement of cash flows. The journal entry to record the sale would be: Debit Cash $100,000, Debit Accumulated Depreciation $20,000, Credit Building $80,000, Credit Gain on Sale of Building $40,000. Distractor A is incorrect because the sale of a building is not an operating activity. Distractor C is incorrect because the sale of a building is not a financing activity. Distractor D is incorrect because the sale of a building is a cash transaction, not a non-cash transaction.
On December 31, a company provides consulting services to a client for $10,000, but the client has not yet paid. How should the company recognize this revenue?
Explanation
According to GAAP, revenue should be recognized when it is earned, regardless of when the payment is received. In this case, the company has provided the consulting services and the client has accepted them, so the revenue is earned on December 31. The correct journal entry would be: Debit Accounts Receivable $10,000, Credit Service Revenue $10,000. This recognizes the revenue and increases accounts receivable, which is an asset account. Options A, C, and D are incorrect because they do not follow GAAP revenue recognition principles. Option A is incorrect because it recognizes revenue when the client pays, which is the cash basis of accounting. Option C is incorrect because it recognizes revenue over a period of time, which is not applicable in this scenario. Option D is incorrect because it recognizes revenue when the company receives the cash, which is also the cash basis of accounting.
What is the earnings per share for the year?
Explanation
To calculate earnings per share, we need to subtract the preferred dividends from the net income and then divide by the weighted average of common shares outstanding. However, since there are cumulative preferred dividends in arrears, we should subtract the total preferred dividends (including the arrears) from the net income. The correct calculation is: (Net Income - Total Preferred Dividends) / Weighted Average Common Shares = ($100,000 - ($10,000 + $20,000)) / 50,000 = $70,000 / 50,000 = $1.40, but since the $20,000 is not for the current year, only $10,000 should be subtracted: ($100,000 - $10,000) / 50,000 = $90,000 / 50,000 = $1.80. The correct answer is B) $1.80.
How should the company classify the $100,000 of sales discounts in the multi-step income statement?
Explanation
According to GAAP, sales discounts should be reported as a deduction from sales revenue to arrive at net sales. This is because sales discounts represent a reduction in the selling price of the goods and are therefore a contra-revenue account. The correct classification is: Sales Revenue ($1,000,000) - Sales Discounts ($100,000) = Net Sales ($900,000). The journal entry to record sales discounts would be: Debit Sales Discounts ($100,000), Credit Sales Revenue ($100,000). Distractor A is incorrect because sales discounts are not a component of gross profit. Distractor C is incorrect because sales discounts are not an operating expense, but rather a reduction of sales revenue. Distractor D is incorrect because sales discounts are not a non-operating item, but rather a component of net sales.
On December 31, a company provides consulting services to a client for $10,000. The client will pay the company on January 15 of the next year. What journal entry should the company make on December 31?
Explanation
The correct answer is B) Debit Accounts Receivable $10,000, Credit Consulting Revenue $10,000. According to GAAP, revenue should be recognized when it is earned, regardless of when the cash is received. Since the company has provided the consulting services, it has earned the revenue and should record it on December 31. The journal entry would be: Debit Accounts Receivable $10,000, Credit Consulting Revenue $10,000. This entry increases Accounts Receivable, an asset account, and increases Consulting Revenue, a revenue account. Distractor A is incorrect because the company has not received cash, so Cash should not be debited. Distractor C is incorrect because it reverses the debit and credit. Distractor D is incorrect because it incorrectly debits Cash and credits Accounts Receivable, which is not the correct way to record earned revenue.
What is the cost of goods sold under the FIFO method?
Explanation
Under the FIFO method, the cost of goods sold is calculated by assuming that the oldest units are sold first. The cost of goods sold is calculated as follows: 100 units at $10 each = $1,000, 200 units at $12 each = $2,400. The total cost of goods sold is $1,000 + $2,400 = $3,400 - $1,000 (150 units at $10 and 50 units at $12 in ending inventory, but only the $10 ones are used) = $2,400. The correct answer is B) $2,400. Distractor A targets the misconception of using the average cost of inventory, distractor C targets the misconception of using the LIFO method, and distractor D targets the misconception of incorrectly calculating the cost of goods sold.