Free CLEP Financial Accounting Practice Test (2026)

Question 1

Which is a main disadvantage of a regular (C) corporation compared with a sole proprietorship?

Accepted Answer

Its profits can be taxed twice, once as corporate income and again when paid to owners as dividends

Answer

It cannot raise money by selling shares of stock

Answer

Its owners must manage the business themselves

Answer

Its owners have unlimited personal liability for its debts

Answer

It ends automatically when an owner dies

Question 2

A company buys land for $300,000 to build a store. It pays $20,000 to tear down an old building on the site, $15,000 in legal and title fees, and $40,000 to pave a parking lot. What cost should it record in the Land account?

Accepted Answer

$335,000

Answer

$300,000

Answer

$315,000

Answer

$355,000

Answer

$375,000

Question 3

A company overstates its ending inventory by $8,000 this year. Ignoring income taxes, what is the effect on this year's cost of goods sold and net income?

Accepted Answer

Cost of goods sold is understated by $8,000, and net income is overstated by $8,000

Answer

Cost of goods sold is understated by $8,000, but net income is correct

Answer

Neither is affected, because the error reverses itself next year

Answer

Cost of goods sold is overstated by $8,000, and net income is understated by $8,000

Answer

Cost of goods sold and net income are both overstated by $8,000

Question 4

Which of these accounts normally has a credit balance?

Accepted Answer

Unearned Revenue

Answer

Dividends

Answer

Depreciation Expense

Answer

Prepaid Rent

Answer

Accounts Receivable

Question 5

A delivery van costs $36,000, has a salvage value of $6,000, and is expected to be driven 150,000 miles. Using the units-of-activity method, what is depreciation expense in a year when the van is driven 25,000 miles?

Accepted Answer

$5,000

Answer

$6,000

Answer

$7,200

Answer

$12,000

Answer

$30,000

Question 6

A fast-growing company reports net income of $500,000, yet its net cash from operating activities is negative. Which is the most likely explanation?

Accepted Answer

Large increases in accounts receivable and inventory

Answer

A large new issue of common stock

Answer

A large increase in accounts payable

Answer

Large dividend payments to stockholders

Answer

A large depreciation expense

Question 7

Which accounts are closed at the end of an accounting period?

Accepted Answer

Revenues, expenses, and dividends

Answer

Every account that has a debit balance

Answer

Assets, liabilities, and common stock

Answer

Revenues, expenses, and retained earnings

Answer

Cash, accounts receivable, and accounts payable

Question 8

A company estimates bad debts using the percentage-of-sales method at 2% of credit sales. Credit sales for the year were $300,000, and the allowance for doubtful accounts has a $1,000 credit balance before adjustment. What is bad debt expense for the year?

Accepted Answer

$6,000

Answer

$5,000

Answer

$7,000

Answer

$8,000

Answer

$60,000

Question 9

A retailer's net sales were $500,000, and its gross profit rate was 40 percent. What was its cost of goods sold?

Accepted Answer

$300,000

Answer

$200,000

Answer

$357,143

Answer

$500,000

Answer

$700,000

Question 10

A store's cash register shows total receipts of $10,600 for the day, including a 6 percent sales tax that the register did not record separately. Along with the $10,600 debit to Cash, what should the store credit?

Accepted Answer

Sales Revenue $10,000 and Sales Taxes Payable $600

Answer

Sales Revenue $10,600

Answer

Sales Revenue $9,964 and Sales Taxes Payable $636

Answer

Sales Revenue $10,000 and Sales Tax Revenue $600

Answer

Sales Revenue $10,000 and Unearned Revenue $600

Question 11

A company has net income of $45,000, net sales of $600,000, and average total assets of $500,000. What is its profit margin?

Accepted Answer

7.5%

Answer

1.2%

Answer

9%

Answer

13.3%

Answer

83.3%

Question 12

Company P buys Company S for $900,000 in cash. The fair value of S's identifiable assets is $1,000,000, and the fair value of its liabilities is $300,000. How much goodwill does P record?

Accepted Answer

$200,000

Answer

$100,000

Answer

$300,000

Answer

$700,000

Answer

$900,000

Question 13

Using the indirect method, a company starts with net income of $70,000. During the year, amortization expense was $5,000, inventory decreased by $12,000, and wages payable decreased by $4,000. What is net cash provided by operating activities?

Accepted Answer

$83,000

Answer

$59,000

Answer

$67,000

Answer

$78,000

Answer

$91,000

Question 14

On a multi-step income statement, which item is reported under other expenses and losses, below operating income?

Accepted Answer

Interest expense on a bank loan

Answer

Freight-out on goods delivered to customers

Answer

Depreciation on store equipment

Answer

Advertising expense

Answer

Sales salaries

Question 15

At the start of the year, a company had total assets of $500,000 and total liabilities of $200,000. During the year, its liabilities rose by $40,000 and its stockholders' equity rose by $60,000. What were total assets at year-end?

Accepted Answer

$600,000

Answer

$400,000

Answer

$500,000

Answer

$540,000

Answer

$560,000

Question 16

At year-end, a company forgets to record $5,000 of depreciation on its equipment. What is the effect on that year's financial statements?

Accepted Answer

Expenses are understated, net income is overstated, and total assets are overstated, each by $5,000

Answer

Expenses are overstated, net income is understated, and total assets are understated, each by $5,000

Answer

Net income is overstated by $5,000, but total assets are correct

Answer

Total assets are overstated by $5,000, but net income is correct

Answer

Liabilities are understated by $5,000, and net income is correct

Question 17

A company's retained earnings grew from $80,000 to $95,000 during the year, and it declared $25,000 in dividends. What was its net income for the year?

Accepted Answer

$40,000

Answer

$10,000

Answer

$15,000

Answer

$95,000

Answer

$120,000

Question 18

On December 29, a seller ships goods to a buyer under terms FOB shipping point. The goods are still in transit on December 31, when both companies end their fiscal years. Whose inventory should include the goods on December 31?

Accepted Answer

The buyer's, because ownership passed when the goods left the seller

Answer

The seller's, because the buyer has not yet paid for them

Answer

The seller's, because the buyer has not yet received them

Answer

The trucking company's, because it has the goods

Answer

Neither company's, until the goods arrive

Question 19

The owner of a sole proprietorship pays for her family's groceries from the business checking account and records the payments as supplies expense of the business. Which accounting assumption does this violate?

Accepted Answer

The economic entity assumption

Answer

The monetary unit assumption

Answer

The time period assumption

Answer

The full disclosure principle

Answer

The going concern assumption

Question 20

A corporation has 10,000 shares of 5%, $100 par, cumulative, nonparticipating preferred stock. It paid all preferred dividends through two years ago but paid none last year. This year it declares $120,000 in total dividends. How much goes to the common stockholders?

Accepted Answer

$20,000

Answer

$0

Answer

$50,000

Answer

$70,000

Answer

$120,000

Question 21

A company is suing a competitor for patent infringement, and its lawyers believe it is probable that the company will win $300,000. How should it report this at year-end under US GAAP?

Accepted Answer

Record no gain, though it may describe the possible gain in the notes, taking care not to mislead

Answer

Record the $300,000 as unearned revenue

Answer

Record a $150,000 gain, half the expected amount

Answer

Record a $300,000 gain and a receivable now

Answer

Record a $300,000 gain only if the case is likely to settle within a year

Question 22

A corporation with 100,000 shares of $10 par common stock outstanding declares a 2-for-1 stock split. Right after the split, it has

Accepted Answer

200,000 shares with a $5 par value, and total stockholders' equity is unchanged

Answer

100,000 shares with a $20 par value, and total stockholders' equity is unchanged

Answer

200,000 shares with a $10 par value, and total stockholders' equity doubles

Answer

200,000 shares with a $5 par value, and retained earnings falls by $1,000,000

Answer

50,000 shares with a $20 par value, and total stockholders' equity is unchanged

Question 23

How does a single-step income statement differ from a multi-step income statement?

Accepted Answer

It groups all revenues and gains together and all expenses and losses together, with no gross profit subtotal

Answer

It reports only operating items and leaves out gains and losses

Answer

It reports a different net income than the multi-step format

Answer

It can be used only by service companies, which have no cost of goods sold

Answer

It lists expenses in the order they were paid

Question 24

A company's $300 petty cash fund holds $20 in cash and receipts for $275 of payments. How much cash is needed to bring the fund back to $300?

Accepted Answer

$280

Answer

$5

Answer

$20

Answer

$275

Answer

$300

Question 25

Near year-end, a sales manager asks the company accountant to record a sale for goods that will not ship to the customer until next month, so that this year's bonus target is met. What should the accountant do?

Accepted Answer

Refuse, because the revenue cannot be recognized until the goods are transferred to the customer

Answer

Record half of the sale now and half when the goods ship

Answer

Record the sale if it is below the company's materiality limit

Answer

Record the sale, because the customer has already agreed to buy

Answer

Record the sale now and reverse it next month

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