Financial Accounting Quiz: Transaction Analysis
20 questions · exam conditions
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Transaction AnalysisQuestion 1 of 20

Sterling Company uses the allowance method for uncollectible accounts. The company determines that a specific customer account of $3,000 is uncollectible and writes it off. What is the effect of this write-off on Sterling's total assets and net income?

Total assets decrease and net income decreases.
Total assets decrease and net income is not affected.
Total assets are not affected and net income is not affected.
Total assets are not affected and net income decreases.
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Financial Accounting Quiz

Financial Accounting Quiz: Transaction Analysis

Practice Transaction Analysis in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Transaction Analysis, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Sterling Company uses the allowance method for uncollectible accounts. The company determines that a specific customer account of $3,000 is uncollectible and writes it off. What is the effect of this write-off on Sterling's total assets and net income?

  1. Total assets decrease and net income decreases.
  2. Total assets decrease and net income is not affected.
  3. Total assets are not affected and net income is not affected. (correct answer)
  4. Total assets are not affected and net income decreases.
Explanation: Under the allowance method, the write-off entry is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. The decrease in the asset (Accounts Receivable) is exactly offset by the decrease in the contra-asset (Allowance for Doubtful Accounts), so there is no change in the net book value of receivables or total assets. The expense (Bad Debt Expense) was recognized in a prior period when the allowance was created, so the write-off itself does not affect net income.

Question 2

A company acquired a new warehouse. In exchange, the company issued a 10-year, $500,000 note payable directly to the seller. There was no cash down payment. How did this transaction affect the company's assets, liabilities, and equity?

  1. Assets increased, liabilities increased, and equity was unchanged. (correct answer)
  2. Assets increased, liabilities were unchanged, and equity increased.
  3. Assets increased, liabilities decreased, and equity increased.
  4. There was no change in total assets, liabilities, or equity.
Explanation: This is a non-cash transaction. The company receives an asset (warehouse), which increases total assets by $500,000. It simultaneously incurs a long-term debt (note payable), which increases total liabilities by $500,000. Equity is not affected by this exchange of an asset for a liability.

Question 3

In the last week of December, Veridian Solutions completed a $12,000 consulting project for a client. Veridian issued an invoice on December 28, with payment due in 30 days. As of December 31, no payment has been received. What is the effect of the work completed and invoiced on Veridian's financial statements for the year ended December 31?

  1. Assets increase by $12,000 and liabilities increase by $12,000.
  2. Assets increase by $12,000 and equity increases by $12,000. (correct answer)
  3. There is no effect on the financial statements until the cash is collected in January.
  4. Equity increases by $12,000 and liabilities decrease by $12,000.
Explanation: Under accrual accounting, revenue is recognized when it is earned, regardless of when cash is received. The company earned the $12,000, so it recognizes Service Revenue (increasing equity). Since cash was not received, it recognizes Accounts Receivable (increasing assets).

Question 4

A company sold a machine for $55,000 cash. The machine was originally purchased for $120,000 and had accumulated depreciation of $70,000 at the time of sale. Which of the following statements accurately describes the effects of this sale transaction?

  1. Assets increase by $5,000 and equity increases by $5,000. (correct answer)
  2. Assets increase by $55,000 and equity increases by $55,000.
  3. Assets decrease by $5,000 and equity decreases by $5,000.
  4. Assets increase by $5,000 and liabilities decrease by $5,000.
Explanation: First, calculate the machine's book value: Cost (120,000)−AccumulatedDepreciation(120,000) - Accumulated Depreciation (70,000) = 50,000.Next,calculatethegainorloss:Cashproceeds(50,000. Next, calculate the gain or loss: Cash proceeds (55,000) - Book Value ($50,000) = $5,000 Gain. A gain increases equity. For assets, cash increases by 55,000,whilethenetbookvalueofthemachine(55,000, while the net book value of the machine (50,000) is removed from assets. The net increase in total assets is $55,000 - $50,000 = $5,000.

Question 5

Apex Industries purchased a new delivery truck for $60,000. The company paid $15,000 in cash and signed a three-year note payable for the remaining balance. Which of the following correctly describes the effect of this transaction on Apex's accounting equation?

  1. Total assets increase by $45,000 and total liabilities increase by $45,000. (correct answer)
  2. Total assets increase by $60,000 and total liabilities increase by $60,000.
  3. Total assets increase by $45,000 and total equity increases by $45,000.
  4. Total assets remain unchanged, and total liabilities increase by $45,000.
Explanation: The transaction increases the Equipment asset by $60,000 and decreases the Cash asset by $15,000, resulting in a net increase in total assets of $45,000. A Note Payable is created, which increases total liabilities by 45,000.Equityisunaffected.Thus,theaccountingequationremainsinbalance(Assets+45,000. Equity is unaffected. Thus, the accounting equation remains in balance (Assets +45,000 = Liabilities +$45,000).

Question 6

On November 1, a magazine publisher receives $240 in cash from a customer for a two-year subscription. The publisher credits Unearned Subscription Revenue. What is the effect of the adjusting entry that must be made on December 31 of that same year?

  1. A decrease in liabilities and an increase in equity. (correct answer)
  2. An increase in assets and an increase in equity.
  3. A decrease in assets and a decrease in equity.
  4. An increase in liabilities and a decrease in equity.
Explanation: By December 31, two months of the 24-month subscription have been earned. The monthly revenue is $240 / 24 = $10. The revenue earned for two months is $20. The required adjusting entry is to debit Unearned Subscription Revenue (a liability) for $20 and credit Subscription Revenue (an equity account) for $20. This results in a decrease in total liabilities and an increase in total equity.

Question 7

On October 15, the board of directors of Quantum Inc. declared a cash dividend of $0.50 per share on its 100,000 outstanding shares of common stock. The dividend is payable on November 15 to shareholders of record on November 1. What is the impact on Quantum's accounting equation on October 15?

  1. Assets decrease and equity decreases.
  2. Assets decrease and liabilities decrease.
  3. There is no change in the accounting equation.
  4. Liabilities increase and equity decreases. (correct answer)
Explanation: On the date of declaration (October 15), the company incurs a legal obligation to pay the dividend. This creates a liability, Dividends Payable, for $50,000 (100,000 shares * $0.50). This declaration reduces Retained Earnings (an equity account) by the same amount. Therefore, liabilities increase and equity decreases. The payment of the dividend on November 15 will decrease assets and liabilities.

Question 8

Nova Enterprises repurchased 5,000 shares of its own common stock on the open market for $20 per share. The company uses the cost method to account for treasury stock. How does this transaction affect Nova's financial position?

  1. Assets decrease by $100,000 and liabilities decrease by $100,000.
  2. Equity decreases by $100,000 and liabilities increase by $100,000.
  3. Investments increase by $100,000 and cash decreases by $100,000.
  4. Assets decrease by $100,000 and equity decreases by $100,000. (correct answer)
Explanation: The purchase of treasury stock reduces the company's assets and equity. Cash (an asset) decreases by $100,000 (5,000 shares * $20/share). Treasury Stock, a contra-equity account, is debited for $100,000. An increase (debit) in a contra-equity account results in a decrease in total stockholders' equity.

Question 9

On October 1, a company paid $18,000 for a one-year insurance policy, debiting Prepaid Insurance. No other entries were made regarding this policy during the year. What is the effect of the required adjusting entry on December 31?

  1. It increases expenses by $4,500 and decreases assets by $4,500. (correct answer)
  2. It increases expenses by $18,000 and decreases assets by $18,000.
  3. It decreases assets by $4,500 and decreases liabilities by $4,500.
  4. It increases assets by $13,500 and increases equity by $13,500.
Explanation: The $18,000 policy covers 12 months. From October 1 to December 31 is three months. The amount of insurance that has expired is (3/12) * $18,000 = $4,500. The adjusting entry to recognize this is a debit to Insurance Expense for $4,500 and a credit to Prepaid Insurance for $4,500. This increases expenses (which decreases equity) and decreases assets.

Question 10

The owner of a small business, operating as a sole proprietorship, contributed a personal computer to the business. The computer originally cost the owner $2,000 and had a current fair market value of $800. How should this transaction be recorded in the business's accounting records?

  1. Increase Equipment by $2,000 and increase Owner's Capital by $2,000.
  2. Increase Equipment by $800 and increase Owner's Capital by $800. (correct answer)
  3. Increase Equipment by $800 and increase Revenue by $800.
  4. No entry is made because it was a personal asset.
Explanation: When a non-cash asset is contributed to a business by its owner, it must be recorded at its fair market value on the date of contribution. The owner's original cost is irrelevant to the business's financial records. The transaction increases an asset (Equipment) and increases the owner's equity (Owner's Capital).

Question 11

On May 5, a company purchased $10,000 of inventory on credit with terms 2/10, n/30. The company uses a perpetual inventory system and the gross method to record purchases. Which accounts are affected, and by what amount, at the time of purchase on May 5?

  1. Inventory increases by $9,800 and Accounts Payable increases by $9,800.
  2. Inventory increases by $10,000 and Cash decreases by $10,000.
  3. Inventory increases by $10,000, Accounts Payable increases by $9,800, and equity is credited for $200.
  4. Inventory increases by $10,000 and Accounts Payable increases by $10,000. (correct answer)
Explanation: Under the gross method, the purchase is recorded at the full invoice amount ($10,000), without anticipating the discount. The discount is only accounted for if the payment is made within the discount period. Therefore, the entry on May 5 is to debit Inventory for $10,000 (asset increase) and credit Accounts Payable for $10,000 (liability increase).

Question 12

A custom furniture maker received a $4,000 cash deposit from a customer for a large table that will be built and delivered in the next quarter. How does the receipt of this deposit affect the furniture maker's accounts?

  1. Increases cash and increases sales revenue.
  2. Increases cash and increases accounts receivable.
  3. Increases cash and increases a liability. (correct answer)
  4. Increases cash and decreases inventory.
Explanation: The cash received has not yet been earned, so it cannot be recognized as revenue. It represents an obligation to provide a product in the future or to return the money. Therefore, the entry is a debit to Cash (asset increase) and a credit to a liability account such as Customer Deposits or Unearned Revenue.

Question 13

A company factors $100,000 of its accounts receivable with a finance company on a without-recourse basis. The finance company charges a 3% fee and remits the remaining cash to the company immediately. Which of the following describes the effect of this transaction?

  1. Assets increase by $97,000 and equity is unchanged.
  2. Assets decrease by $3,000 and equity decreases by $3,000. (correct answer)
  3. Assets decrease by $100,000 and liabilities decrease by $100,000.
  4. Assets are unchanged and equity decreases by $3,000.
Explanation: A 'without-recourse' factoring is treated as a sale. The company receives cash of 97,000(97,000 (100,000 - 3% fee) and removes Accounts Receivable of $100,000. The $3,000 difference is a Factoring Fee Expense, which decreases equity. The net effect on total assets is an increase in Cash of $97,000 and a decrease in A/R of $100,000, for a net decrease of $3,000. Equity decreases by $3,000 due to the expense.

Question 14

On June 10, a company paid $1,200 for June's rent. The bookkeeper mistakenly debited Office Supplies and credited Cash for $1,200. The error was discovered on June 30, before financial statements were prepared. What is the effect of the correcting entry?

  1. It increases Rent Expense and decreases Cash.
  2. It increases Office Supplies and decreases Rent Expense.
  3. It increases Rent Expense and decreases Office Supplies. (correct answer)
  4. It has no effect on total assets or total equity.
Explanation: The incorrect entry was Dr. Office Supplies, Cr. Cash. The correct entry should have been Dr. Rent Expense, Cr. Cash. To fix the error, the incorrect debit to Office Supplies must be removed and the correct debit to Rent Expense must be made. The correcting entry is: Dr. Rent Expense $1,200, Cr. Office Supplies $1,200. This entry increases an expense account and decreases an asset account. Cash is not part of the correcting entry itself.

Question 15

A corporation had $1,000,000 of convertible bonds outstanding with a carrying value equal to face value. Bondholders exercised their option to convert all the bonds into 50,000 shares of the company's $10 par value common stock. What is the overall effect of this conversion on the corporation's accounting equation?

  1. Liabilities decrease and assets decrease.
  2. Equity increases and assets increase.
  3. Liabilities decrease and equity increases. (correct answer)
  4. There is no change to total liabilities and equity combined.
Explanation: The conversion of bonds to stock extinguishes a debt and creates equity. The Bonds Payable liability account is decreased by $1,000,000. Stockholders' Equity is increased by $1,000,000, allocated between Common Stock (50,000 shares × $10 par = 500,000)andAdditionalPaid−inCapital(500,000) and Additional Paid-in Capital (500,000). The net effect is a decrease in total liabilities and an increase in total equity by the same amount. Total assets are unaffected.

Question 16

Zenith Corp. issued 1,000 shares of its $5 par value common stock in exchange for a piece of land. On the date of issuance, Zenith's stock was actively trading at $22 per share. The land was recently appraised at $23,000. Which of the following correctly describes the effect of this transaction?

  1. Assets increase by $23,000, and equity increases by $23,000.
  2. Assets increase by $22,000, and equity increases by $22,000. (correct answer)
  3. Assets increase by $22,000, liabilities increase by $17,000, and equity increases by $5,000.
  4. Assets increase by $5,000, and equity increases by $5,000.
Explanation: When issuing stock for a non-cash asset, the transaction is recorded at the fair value of the stock issued or the fair value of the asset received, whichever is more clearly determinable. The market price of an actively traded stock ($22 per share) is a more objective measure than an appraisal. Therefore, the transaction is valued at 1,000 shares * $22/share = $22,000. Assets (Land) increase by $22,000, and Equity (Common Stock at par + Additional Paid-in Capital) increases by a total of $22,000.

Question 17

A company uses a perpetual inventory system and the gross method. On July 1, it purchased merchandise for $5,000 with terms 2/10, n/30. On July 9, the company paid the full amount due. What is the effect of the payment transaction on July 9?

  1. Liabilities decrease by $5,000 and assets decrease by $5,000.
  2. Liabilities decrease by $5,000, assets decrease by $4,900, and equity increases by $100.
  3. Liabilities decrease by $5,000, while cash decreases by $4,900 and inventory decreases by $100. (correct answer)
  4. Liabilities decrease by $4,900 and assets decrease by $4,900.
Explanation: Payment on July 9 is within the 10-day discount period, earning a 2% discount ($5,000 * 0.02 = $100). The cash paid is 4,900(4,900 (5,000 - $100). The payment settles the entire $5,000 liability. Under the perpetual system, purchase discounts reduce the cost of inventory. The entry is: Debit Accounts Payable $5,000, Credit Cash $4,900, and Credit Inventory $100. Thus, liabilities decrease by $5,000, and total assets decrease by 5,000(5,000 (4,900 cash + $100 inventory).

Question 18

At the end of 20X1, Cygnet Corp. made an adjusting entry to accrue $25,000 in salary expense. On January 7, 20X2, Cygnet paid these wages in cash. What is the effect of the January 7, 20X2, cash payment transaction?

  1. Decreases assets and decreases equity.
  2. Decreases assets and decreases liabilities. (correct answer)
  3. Decreases liabilities and increases equity.
  4. Has no effect on total liabilities or equity.
Explanation: The adjusting entry in 20X1 created a liability (Salaries Payable) and recognized an expense (decreasing equity). The cash payment on January 7, 20X2, settles this previously recorded liability. The accounting entry is a debit to Salaries Payable (decreasing liabilities) and a credit to Cash (decreasing assets).

Question 19

On November 1, 20X1, a company borrowed $60,000 by signing a 4-month, 8% note payable. The entire principal and interest are due on March 1, 20X2. The company's fiscal year ends on December 31. What is the effect of the necessary adjusting entry on December 31, 20X1?

  1. No entry is needed until the note is paid.
  2. Liabilities increase by $800 and equity decreases by $800. (correct answer)
  3. Liabilities increase by $1,600 and equity decreases by $1,600.
  4. Assets decrease by $800 and equity decreases by $800.
Explanation: Interest expense must be accrued for the period it has been incurred. By December 31, interest for two months (November and December) has been incurred. The interest is calculated as: Principal × Rate × Time = $60,000 × 8% × (2/12) = $800. The adjusting entry is to debit Interest Expense for $800 (decreasing equity) and credit Interest Payable for $800 (increasing liabilities).

Question 20

On March 15, Stellar Corp. issued a $50,000, 6% promissory note to First Bank as collateral for a loan. The note matures in 180 days. Simultaneously, Stellar received $48,500 cash from the bank (the difference representing a discount). What is the correct transaction analysis for Stellar's books on March 15?

  1. Increase Cash $48,500; Increase Notes Payable $48,500
  2. Increase Cash $48,500; Increase Discount on Notes Payable $1,500; Increase Notes Payable $50,000 (correct answer)
  3. Increase Cash $48,500; Increase Interest Expense $1,500; Increase Notes Payable $50,000
  4. Increase Cash $50,000; Increase Discount on Notes Payable $1,500; Increase Notes Payable $48,500
Explanation: When a note is issued at a discount, the full face value is recorded as Notes Payable, the actual cash received increases Cash, and the difference is recorded as Discount on Notes Payable (a contra-liability account that will be amortized over the note's term). Choice A ignores the discount entirely. Choice C incorrectly records the discount as immediate interest expense rather than a contra-liability to be amortized. Choice D incorrectly shows cash received as the face value and misallocates the discount.