Generally Accepted Accounting Principles (GAAP) MCQs
Generally Accepted Accounting Principles (GAAP) MCQs
These Generally Accepted Accounting Principles (GAAP) multiple-choice questions and their answers will help you strengthen your grip on the subject of Generally Accepted Accounting Principles (GAAP). You can prepare for an upcoming exam or job interview with these 100+ Generally Accepted Accounting Principles (GAAP) MCQs.
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1: Net Income is $150,000, dividends paid to preferred stock holder is $50,000 and weighted-avg number of common shares are 10,000. What is the basic EPS as per US GAAP?
A. $10
B. $30
C. $20
D. $5
2: Which of the following securities are reported on the balance sheet at amortized cost?
A. Trading Securities
B. Hold-till-maturity
C. Held-to-maturity
D. Available for Sale Securities
3: Your accounts payable increases from the prior year, what happens on the cash flow statement and in which section?
A. Cash increases - Operating section
B. Cash increases - Financing section
C. Cash decreases - Operating section
D. No change
4: Which of the following securities are purchased with the intent of NEITHER holding them till maturity NOR to get profit over near term?
A. Hold-till-maturity
B. Available for Sale Securities
C. Held-to-maturity
D. Trading Securities
5: Which of the following securities are reported on balance sheets at fair value?
A. Available for Sale Securities
B. Available for Sale and Trading Securities
C. Held-to-maturity
D. Trading Securities
6: When should costs be recognized?
A. (None of these)
B. When the cost has been paid
C. When they are probable
D. Only when an invoice is sent
7: Cost of good sold (COGS) reflects the cost of the most recent purchase in which of the following inventory valuation methods?
A. FILO
B. Average Cost
C. LIFO
D. FIFO
8: Which of the following consists of cash inflows and outflows from transactions related to a firm's capital structure ?
A. Cash flow from investing activities (CFI)
B. Cash flow from financing activities (CFF)
C. Cash flow from investing activities (CFI)
D. Cash flow from operating activities (CFO)
9: ABC company purchases a plot of land for $10,000. In the following year the value of the land increases by 10%. What value should this asset be recorded as?
A. $10,010
B. $11,000
C. $10,000
D. $10,100
10: Which of the following is prohibited in US GAAP?
A. Reversal of impairment loss
B. Recognition of impairment loss
C. Measurement of impairment loss
D. Allocation of goodwill
11: Which of the following is the correct formula for calculating basic EPS as per US GAAP?
A. weighted-average number of common shares outstanding / income available for common stockholders
B. Annualized Earnings / # of outstanding stock
C. Quartely Earnings / # of outstanding stock
D. income available for common stockholders / weighted-average number of common shares outstanding
12: In which of the following inventory valuation methods is the oldest cost of goods sold (COGS) entry processed first?
A. Average Cost
B. FILO
C. FIFO
D. LIFO
13: Your accounts receivable increases from the prior year, what happens on the cash flow statement and in which section?
A. Cash increases - Financing section
B. No change
C. Cash decreases - Operating section
D. Cash increases - Operating section
14: In which of the following accounting methods is profit not recognized until cash payments are greater than the cost of property?
A. Cost recovery method
B. Installment method
C. Deposit method
D. Full accrual method
15: Which of the following securities are purchased with the intent to profit over near term?
A. Trading Securities
B. Hold-till-maturity
C. Available for Sale Securities
D. Held-to-maturity
16: Which of the following securities are purchased with the intent of holding them until maturity?
A. Trading Securities
B. Hold-till-maturity
C. Available for Sale Securities
D. Held-to-maturity
17: In which of the following are profits recognized in full when real estate is sold?
A. Full accrual method
B. Installment method
C. Cost recovery method
D. Deposit method
18: A financial record that uses a highly volatile currency would violate which of the following principles?
A. The USD principle
B. The historical cost principle
C. The accounting entity principle
D. The monetary unit principle
19: Which of the following is an Investing Activity as per US GAAP classification?
A. Taxes Paid
B. Sales proceed from fixed assets
C. Interest Paid
D. Cash paid to employees
20: Which of the following is an Operating Activity as per US GAAP classification?
A. Sales proceed from fixed assets
B. Cash paid to employees
C. Dividends paid to shareholders
D. Principal paid on debt
21: True or false? GAAP is internationally based, whereas IFRS is US-centric.
A. True
B. False
22: Your accounts payable drops from the prior year, what happens on the cash flow statement and in which section?
A. Cash decreases - Financing section
B. No change
C. Cash increases - Financing section
D. Cash decreases - Operating section
23: Which of the following is NOT a valid cost flow assumption for determining the inventory cost?
A. FIFO
B. LIFO
C. FILO
D. Average Method
24: Your accounts receivable drops from the prior year. What happens on the cash flow statement and in which section?
A. No change
B. Cash increases - Financing section
C. Cash increases - Operating section
D. Cash decreases - Investing section
25: Which of the following is the formula for return on equity (ROE)?
A. Sales / Net Income
B. Net Income / Equity
C. Net Income / Sales
D. Equity / Net Income
26: Which of the following correctly formulates current ratio?
A. Current Asset - Current Liabilities
B. Current Asset x Current Liabilities
C. Current Liabilities / Current Asset
D. Current Asset / Current Liabilities
27: Under GAAP principles, expenses have to be matched with revenues (as long as it's reasonable to do so). This is an example of which principle?
A. The Revenue Principle
B. The Matching Principle
C. The Cost Principle
D. The Historical Cost Principle
28: Which of the following best describes Going Concern?
A. The decrease in goodwill that follows a decrease in revenue
B. The assumption that a company will operate indefinitely
C. The law of diminishing returns
D. The interest on accounts payable
29: The multiple-step income statement for a merchandiser shows each of the following features EXCEPT:
A. cost of goods sold
B. investing activities
C. sales revenue
D. gross profit
30: Which of the following is a US GAAP depreciation method for financial and tax reporting?
A. Modified Accelerated Cost Recovery Method
B. Straight line depreciation
C. Accelerated depreciation
D. (All of these)
31: Which of the following consists of cash inflows and outflows from transactions that affect a firm's net income?
A. Cash flow from investing activities (CFI)
B. Cash flow from operating activities (CFO)
C. Cash flow from investing activities (CFI)
D. Cash flow from financing activities (CFF)
32: You pay a dividend, what happens on the cash flow statement and in which section?
A. Cash increases - Investing section
B. Cash decreases - Financing section
C. Cash increases - Operating section
D. Cash increases - Financing section
33: Which of the following methods of presenting cash flow is permitted under US GAAP?
A. Indirect
B. Average Cost
C. Both Direct & Indirect
D. Direct
34: Account receivables are classified as which of the following?
A. Assets
B. Liabilities
C. Expenses
D. Revenue
35: When applying the full accrual method in retail land sales, which of the following conditions are required by GAAP?
A. (All of these)
B. Receivable are collectible
C. Receivables should not be subjected to subordination
D. Expiry of the refund period
36: Which of the following is NOT a non-current asset?
A. Intangible assets
B. Property, plant and equipment
C. Unearned income
D. Amortization of intangible assets
37: Which of the following is a Financing Activity as per US GAAP classification?
A. Proceeds from issuing stocks
B. Sales proceed from fixed assets
C. Available for Sale Securities
D. Interest Paid
38: Under US GAAP, minority (non controlling) interest in a subsidary can be reported in which of the following sections of a balance sheet?
A. Mezzanine Section
B. (All of these)
C. Liability Section
D. Equity Section
39: If Earnings before Interest and Taxes (EBIT) is $10,000, interest expense is $500 and number of outstanding common stocks are 20,000, which of the following is the value of interest coverage ratio?
A. 200
B. 1000
C. 20
D. 100
40: In which of the following securities are unrealized gains and losses reported in Other Comprehensive Income (as a part of stockholder's equity)?
A. Held-to-maturity
B. Available for Sale Securities
C. Hold-till-maturity
D. Trading Securities
41: You receive a dividend, what happens on the cash flow statement and in which section?
A. Non of the above
B. Cash increases - Financing section
C. Cash increases - investing section
D. Cash decreases - Financing section
42: Unrealized gain and losses of ________ securities are reported in the Income Statement.
A. Trading Securities
B. Available for Sale Securities
C. Hold-till-maturity
D. Held-to-maturity
43: You have depreciation for the past year, what happens on the cash flow statement and in which section?
A. Cash increases - Operating section
B. No change
C. Cash increases - Financing section
D. Cash decreases - Financing section
44: Under US GAAP, when must the fair value of an acquired firm's "in process research and development" be estimated?
A. Before Computing Goodwill
B. After Computing Expenses
C. After Computing Goodwill
D. Before Computing Expenses
45: In the United States, which of the following organizations mandate that financial reports adhere to GAAP standards?
A. FASB
B. SEC
C. IFRS
D. CFA
46: You declare a dividend. What happens on the cash flow statement and in which section?
A. Cash increases - Operating section
B. Cash increases - Financing section
C. Cash decreases - Investing section
D. No change
47: Which of the following is a valid method to calculate impairment loss in case of a long lived asset?
A. By taking off asset's fair value from it's current market value
B. By taking off asset's carrying amount from it's fair value
C. By taking off asset's current market value from it's fair value
D. By taking off asset's fair value from it's carrying amount
48: Which of the following is TRUE about Impairment of assets?
A. Carrying amount < Recoverable amount
B. Present Market Value > Present Value of all future cash flows
C. Carrying amount > Recoverable amount
D. Present Market Value < Present Value of all future cash flows
49: If the Exercise Price of a purchased put option is greater than Market Price, which of the following is TRUE?
A. The effect of the purchased option is antidilutive
B. The effect of the purchased option is dilutive
C. The buyer will not be able to excercise the option
D. The effect of the purchased option is neither antidilutive nor dilutive
50: If the Exercise Price of a purchased call option is less than Market Price, then which of the following is TRUE?
A. The effect of the purchased option is dilutive
B. The buyer will not be able to excercise the option
C. The effect of the purchased option is antidilutive
D. The effect of the purchased option is neither antidilutive nor dilutive
51: Which of the following is the correct formula for calculating impairment losses on a loan?
A. Observable market price of a loan - Carrying amount of a loan
B. Observable market price of a loan - future value of expected future cash flows from a loan
C. Carrying amount of a loan - future value of expected future cash flows from a loan
D. Carrying amount of a loan - Observable market price of a loan
52: Which of the following is a most conservative measure of liquidity?
A. current ratio
B. quick ratio
C. liquidiy ratio
D. cash ratio
53: Which of the following is TRUE about impairment loss of a non-revalued asset?
A. It is recognized in profit or loss
B. impairment loss of a non-revalued asset cannot be recognized
C. It can be recognized in profit or loss or other comprehensive income
D. It is recognized in other comprehensive income
54: True or false? Private disclosure standards are governed by the SEC.
A. False
B. True
55: At what stage in the manufacturing cycle is Raw Materials?
A. End of the manufacturing cycle, after processing is complete
B. When materials have been ordered from the vendors
C. When inventory has been received and is available to be issued to the manufacturing process
D. When the materials have been issued to the shop floor
56: What did APB 14-1 issued in 2008 do to the accounting rules related to convertible debt?
A. Restricted companies' abilities to issue convertible debt
B. Made rules regarding the accounting of convertible debt less restrictive
C. Laid down the requirement that companies account for the debt and equity components of convertible debt separately
D. Forced companies to convert all debt
57: What did APB14-1 stipulate for retroactive reporting of convertible debt?
A. No retroactive reporting is required.
B. All convertible debt, both retired and active, is required to be retroactively restated.
C. Companies can restate past financial reports if it is to their benefit.
D. Any current outstanding convertible debt must be restated retroactively, any retired convertible debt does not have to be restated.
58: What is "Work in Progress"?
A. Goods ready for sale
B. Raw material which has just been received
C. Inventory which is in the process of being completed at the end of the reporting period
D. Raw material which has been unpacked and is ready to be utilized in the manufacturing process
59: What is "earnings per share"?
A. The total earnings of the company
B. The ratio of a company's earnings to the number of shares outstanding
C. Earnings of the company less any dividends
D. Earnings of the company divided by the number of preferred shares outstanding
60: What is "impairment"?
A. Expensing of the cost of goods sold
B. A revaluation of the assets on the books
C. An asset becoming unusable
D. Natural resources getting used up
61: How often are consolidated financial statements prepared?
A. Whenever a company wishes
B. At least yearly, can be monthly
C. There is no requirement
D. Once in a decade
62: Which FASB statement addresses the capitalization of interest?
A. FASB 101
B. FASB 144
C. FASB 201
D. FASB 34
63: What value should a contingency be booked at?
A. Not be booked until it occurs, and then booked using the actual value
B. At the actual amount, and retroactively
C. Using the best estimate and then adding 10%
D. Using the most likely estimated amount, factoring in conservatism
64: What is the purpose of a derivative instrument?
A. Additional investment activity for companies to use their cash
B. Allowing the firm to offer its staff a way to participate in the growth of the company
C. Creating a guarantee of profit
D. Mitigating risk on the changing value of the asset on which it is based
65: What is a deferred tax asset?
A. A tangible asset which is tax deductible in the current year
B. A tangible asset which can be deducted in future years
C. Temporary differences which will be deductible in future years for tax purposes, creating a positive tax benefit
D. Permanent differences which can later be deducted
66: What is the date of abandonment?
A. The day the asset is purchased
B. The day the asset is fully depreciated
C. The day the asset is sold
D. The day the asset ceases to be utilized
67: When is the stock value of stock dividend determined?
A. On the date of issuance
B. On the date of declaration
C. On the date of record
D. On December 31st of the current year
68: What are "eliminating entries"?
A. Accounting entries which hide negative items
B. Accounting entries made on purpose to reduce tax expense
C. Accounting entries made to reflect accruals
D. Accounting entries made to cancel out the duplication of accounting impact on the books of two consolidating companies
69: Which FASB Statement addresses accounting for stock dividends?
A. FASB 144
B. FASB 201
C. FASB 99
D. FASB 123
70: What number of shares is used in calculating basic EPS?
A. Weighted average number of shares outstanding for the period
B. The closing number of shares outstanding
C. The opening number of shares outstanding
D. The total number of shares authorized
71: Why do firms distinguish income from continuing operations and income from discontinued operations?
A. Because it makes the firm look smart for discontinuing an operation
B. Because it increases the company's per share price
C. Because it reduces the tax effect if it is reported separately
D. Because it gives investors and stockholders insight into the impact that the sale of the discontinued operation will have on the company
72: Which FASB deals with the impairment of long lived assets?
A. FASB 201
B. FASB 144
C. FASB 101
D. FASB 99
73: What account is credited in accounting when impairment is booked?
A. Telephone Expense
B. Accumulated Depreciation
C. Loss on Impairment
D. The Asset itself
74: Which of the following words describes a situation when a contingent liability should be recorded?
A. Remote
B. Probable
C. Possible
D. Never
75: Which of the following would be considered a discontinued operation?
A. A dog food manufacturer decides to stop offering low fat dog food because it doesn't make money.
B. A library decides to stop carrying kids' novels.
C. A stock brokerage goes out of business.
D. A jacket manufacturer decides to sell its rain coat division which has its own plant.
76: Which of the following would qualify for capitalization of interest?
A. An inventory item which takes 1 week to process
B. A ship which is built over 2 years
C. A loan taken by a company to fund general operations
D. A mechanic's lien placed on the company
A. It depends on the value of the stock and the number of shares which are split.
B. It creates a Credit to Common Stock.
C. None; it changes the number of shares outstanding but not the value of the stock.
D. It creates a Debit to Common Stock.
78: What is the alternative to the capitalization of interest costs?
A. Do not account for them at all
B. Expense interest costs
C. Create an current asset
D. Record them as equity
79: What is the general rule regarding the reporting of comprehensive income?
A. That it should not be shown as it is misleading
B. That comprehensive income should be calculated and prominently displayed on financial reports
C. That it should be mailed in a letter to all shareholders
D. That it should only be calculated yearly
80: Which of the following is not a part of inventory?
A. Finished Goods
B. Work in Progress
C. Raw Materials
D. Cost of Goods Sold
81: How is the interest cost to be capitalized calculated?
A. By taking into account the interest cost on the borrowings made to complete the asset
B. By using the average market rate
C. By following the Federal reserve rate
D. By following the interest rate on the company's savings account
82: What is the proper financial reporting treatment for a discontinued operation?
A. Just include a statement that the firm is going to discontinue an operation, but leave the accounting combined.
B. Create an entirely separate entity for the discontinued operation if it is not already there, and put it into bankruptcy.
C. Report it separately on the balance sheet and income statement.
D. Expense all of the assets of the discontinued operation in the current period.
83: Under which of the following situations would prior financial reports not have to be restated?
A. The change is due to a policy change and in writing.
B. The change materially affects what EPS would have been last year.
C. The change has no impact on previous accounting or financial reports.
D. The change is due to an error in the interpretation of accounting GAAP law.
84: Which of the following would not be included in comprehensive income?
A. Loss due to a bad management decision
B. Revenue from a subsidiary company
C. Management salaries
D. Loss due to a hurricane for a company located in an area where hurricanes are not typical
85: What does the term derivative mean for accounting purposes?
A. A financial instrument the value of which is derived from another financial instrument
B. A financial instrument such as a stock or bond
C. A liability of which the obligation is derived based on interest rates
D. An asset the value of which is derived by the current trade in value
86: Why are direct costs added to the value of the inventory?
A. They are costs directly related to the creating of an inventory item and without them, there would be no inventory.
B. It is required by the IRS tax laws.
C. It helps reduce expenses on the income statement.
D. It inflates inventory values on the balance sheet which looks good to the investors.
87: Which of the FASB statements discusses the methodology to be applied when consolidating financial statements?
A. FASB 160
B. FASB 12
C. FASB 144
D. FASB 123
88: Which of the following is a method of testing for impairment?
A. Net Income potential method
B. Discounted cash flow value compared to carrying value
C. Asking management what a fair value is
D. Looking at the historical cost
89: Why would a company issue stock dividend?
A. Because shareholders prefer stock to cash
B. Because they can issue the stock of any corporation to the shareholders
C. Because it involves lower tax impact to both the shareholders and the corporation
D. Because no cash outlay is required while the shareholders are still rewarded
90: Which of the following would be a contingency needing to be booked?
A. Sale of an asset
B. Sale of inventory
C. Management salaries for the following period
D. Product warranty obligations
91: How are income taxes calculated in general for the current period?
A. Using the highest tax bracket in the name of conservatism
B. Using the taxable net income multiplied by the estimated tax rate for the company
C. As an average for the year
D. Based on previous year's tax amount for the same period
92: What are the 3 important dates pertaining to the issuance of stock dividend?
A. Date of record, Date of payment, Date of distribution
B. Date of issuance, Date of delivery, Date of record
C. Date of payment, Date of record, Date of company formation
D. Date of declaration, Date of record, Date of distribution
93: What is a special purpose entity?
A. The same as a different product line
B. A subsidiary entity created for a specific reason
C. A subsidiary company in another country
D. An entity created solely to avoid taxes
94: What is the accounting treatment of stock dividend when it is issued (not declared)?
A. Dr: Cash, Cr: Stock Expense
B. Dr: Stock Expense, Cr: Cash
C. Dr: Equity, Cr: Dividend Payable
D. Dr: Dividend Payable Cr: Common Stock
95: Why would a company want to discontinue the operations of a division?
A. Because it generates too much income
B. Because it is not profitable and won't be in the future
C. Because it is located outside of the company's location
D. Because the tax rate is too high
96: What are direct costs?
A. Costs of management salaries
B. Rent and utilities
C. Costs which are directly attributable to the production of an inventory item
D. General office costs which are then allocated to the inventory as burden
97: What is a "permanent difference"
A. A difference in the management's perspective on all the earnings of the company
B. A difference in tax law and GAAP which will never be resolved
C. A difference in the tax rate between two different countries a firm operates in
D. A difference in the GAAP principles used on the books
98: What interest rate would be used to calculate interest capitalization if there is no specific loan associated with the asset except just the overall company debt?
A. The lowest rate of interest the company has on loans
B. The highest rate of interest the company has on loans
C. The Federal reserve rate
D. A weighted rate based on the amounts of loans and rates carried by the company
99: Which of the FASB statements discusses the accounting treatment of discontinued operations?
A. FASB 123
B. FASB 144
C. FASB 12
D. FASB 201
100: What is a contingency in general?
A. Typically an asset purchase which depends on the expenses for the period
B. A pending lawsuit already filed
C. Potential liabilities with a strong probability that it will happen
D. Changes in equity
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Generally Accepted Accounting Principles (GAAP) MCQs
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