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CLEP Financial Accounting Practice Test

10 free sample questions with answers and explanations. See how you'd score on the real CLEP exam.

Question 1Unit 1: The Accounting Cycle

What is the purpose of disclosing contingent liabilities in the financial statements?

A
A) To recognize a liability
B
B) To recognize a gain
C
C) To provide information to investors and creditors
D
D) To ignore the contingency
E
E) To recognize a loss

Explanation

To provide information to investors and creditors is correct because the purpose of disclosing contingent liabilities is to provide information to investors and creditors about the potential risks and liabilities of the company.

Question 2Unit 1: The Accounting Cycle

A company has a contingent liability of $1 million. What is the accounting treatment if the loss is reasonably possible but not probable?

A
A) Recognize a liability
B
B) Disclose the contingency in the notes
C
C) Ignore the contingency
D
D) Recognize a gain
E
E) Recognize a loss

Explanation

Disclose the contingency in the notes is correct because contingent liabilities that are reasonably possible but not probable should be disclosed in the notes to the financial statements.

Question 3Unit 1: The Accounting Cycle

A company has a contingent liability of $200,000. What is disclosed in the financial statements if the amount is probable but not reasonably estimable?

A
A) Recognize the liability
B
B) Disclose the contingency in the notes
C
C) Ignore the contingency
D
D) Recognize a gain
E
E) Recognize a loss

Explanation

Disclose the contingency in the notes is correct because contingent liabilities that are probable but not reasonably estimable should be disclosed in the notes to the financial statements.

Question 4Unit 1: The Accounting Cycle

What is the accounting treatment for a contingent liability that is probable and the amount can be reasonably estimated?

A
A) Recognize a gain
B
B) Recognize a loss
C
C) Recognize a liability
D
D) Ignore the contingency
E
E) Disclose the contingency in the notes

Explanation

Recognize a liability is correct because contingent liabilities that are probable and can be reasonably estimated should be recognized as a liability in the financial statements.

Question 5Unit 1: The Accounting Cycle

A company has a contingent liability of $500,000. What is disclosed in the financial statements if the amount is reasonably possible but not probable?

A
A) Recognize the liability
B
B) Disclose the contingency in the notes
C
C) Ignore the contingency
D
D) Recognize a gain
E
E) Recognize a loss

Explanation

Disclose the contingency in the notes is correct because contingent liabilities that are reasonably possible but not probable should be disclosed in the notes to the financial statements.

Question 6Unit 1: The Accounting Cycle

A company is sued for $100,000. What is reported if the loss is probable and reasonably estimable?

A
A) $0
B
B) $50,000
C
C) $100,000
D
D) $200,000
E
E) $500,000

Explanation

$100,000 is correct because the loss is probable and reasonably estimable, so it should be recorded as a liability.

Question 7Unit 1: The Accounting Cycle

What is the accounting treatment for a decline in the value of an available-for-sale security that is deemed to be other-than-temporary?

A
A) Recognized in net income
B
B) Recognized in other comprehensive income
C
C) Not recognized until sold
D
D) Recognized as a liability
E
E) Recognized as an asset

Explanation

Recognized in net income is correct because a decline in the value of an available-for-sale security that is deemed to be other-than-temporary is recognized in net income, applying the principle that permanent declines in value are reflected in earnings.

Question 8Unit 1: The Accounting Cycle

What type of investment is accounted for at amortized cost?

A
A) Trading security
B
B) Available-for-sale security
C
C) Held-to-maturity security
D
D) Equity investment
E
E) Derivative

Explanation

Held-to-maturity security is correct because held-to-maturity securities are accounted for at amortized cost, since the company intends to hold the security until maturity and the fair value is not relevant.

Question 9Unit 1: The Accounting Cycle

What is the purpose of the fair value hierarchy in accounting for investments?

A
A) To determine the cost of an investment
B
B) To classify investments as trading or available-for-sale
C
C) To prioritize the use of fair value measurements
D
D) To recognize unrealized gains and losses
E
E) To determine the risk of an investment

Explanation

To prioritize the use of fair value measurements is correct because the fair value hierarchy provides a framework for prioritizing the use of fair value measurements, with Level 1 being the most reliable and Level 3 being the least reliable.

Question 10Unit 1: The Accounting Cycle

A company invests $50,000 in a 10-year bond with a 5% annual interest rate. What is the annual interest income?

A
A) $2,000
B
B) $2,500
C
C) $3,000
D
D) $4,000
E
E) $5,000

Explanation

$2,500 is correct because the annual interest income is calculated as the principal amount multiplied by the annual interest rate, which is $50,000 * 5% = $2,500.

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