The CLEP: Financial Accounting examination was developed by the College Board as a way for individuals to demonstrate undergraduate-level knowledge and skills in this subject. Almost three thousand American colleges give credit to students who pass a CLEP exam; for this reason, many college-bound students take a CLEP exam in order to skip over introductory courses.
To succeed on the Financial Accounting exam, students will need to master the following topics and skills: the basic concepts and terminology of accounting; the preparation, use, and analysis of internal and external accounting data and financial reports; the application of accounting techniques to problem-solving situations; and the rationale for generally accepted accounting principles and procedures. The content of the exam is broken down as follows: general topics, including generally accepted accounting principles and the accounting cycle (20-30%); the income statement (20-30%); the balance sheet (30-40%); the statement of cash flow (5-10%); and investments and contingent liabilities (less than 5%). The Financial Accounting exam consists of 75 multiple-choice questions and must be completed within 90 minutes.
After the exam is complete, an unofficial score report will be made available. This score report will include the total score on a scale of 20 to 80; the American Council on Education recommends that students get credit if they score 50 or above. The total score is the raw score (number of correct answers) adjusted according to the difficulty of the exam version. The College Board does not distinguish between unanswered questions and questions answered incorrectly, so test-takers are encouraged to respond to every question. Some of the questions on the exam are pre-test questions, which are used to develop future versions of the exam and do not contribute to the raw score. It is impossible for test-takers to determine which questions are pre-test questions. The CLEP exams are administered in both computer and paper formats at over a thousand locations throughout the world. To register for an exam, visit the College Board website.
CLEP Financial Accounting Practice Questions
1. What is the basic accounting equation?
A: assets = equity + capital
B: assets = capital + profits
C: assets = capital – depreciation
D: assets = liabilities + capital
E: assets = capital + liquidity
2. Which financial statement presents a summary of the assets, liabilities, and owners’ equity of a firm?
A: general ledger
B: work sheet
C: balance sheet
E: cash flow statement
3. Who is in charge of setting the generally accepted accounting principles?
A: Federal Reserve
B: Financial Accounting Standards Board
C: United States Securities and Exchange Commission
D: Governmental Accounting Standards Board
E: Institute of Chartered Accountants
4. Which kind of organization has no more than 35 stockholders and pays no income tax as a firm, though owners must pay income tax on profits?
B: limited partnership
C: C corporations
D: full partnership
E: S corporation
5. Subtracting expenses from revenues yields _____.
A: net income
B: net profits
C: carrying value
D: long-term assets
E: net liabilities
6. Which type of inventory system requires updating the inventory balance at the end of the accounting period?
A: periodic inventory system
B: contingency inventory system
D: perpetual inventory system
7. Which accounting document keeps track of the cash receipts and cash payments of a business during a specific period?
A: balance sheet
B: income statement
C: financial report
D: network statement
E: cash flow statement
8. Total liabilities divided by total shareholders’ equity yields the _____.
A: deferred-tax-liability ratio
B: interest-coverage ratio
C: debt-to-equity ratio
D: debt-to-total-assets ratio
E: long-term-debt-to-total-capital ratio
9. Which is the most popular method of accelerated depreciation?
A: straight-line depreciation
B: double-declining-balance depreciation
C: acquisition cost depreciation
D: declining-balance depreciation
E: unit depreciation
10. What is the name of the process of identifying each posting and journal entry?
A: balance calculation
B: network retrieval
C: inventory manipulation
E: balance sheet organization
CLEP Financial Accounting Answer Key
1. D. Capital is also known as owners’ equity.
2. C. A balance sheet contains three sections: assets, liabilities, and equity.
3. B. The FASB is an independent group consisting of seven recognized experts in accounting.
4. E. Shareholders in an S corporation are required to declare their share of profits on an income tax statement even if they do not receive a distribution.
5. A. Net income is also known as net earnings.
6. A. A periodic inventory system is much less costly to operate than a perpetual inventory system.
7. E. The cash flow statement is simply a detailed account of the changes in one section of the balance sheet account.
8. C. The ratio of borrowing to equity indicates the degree of risk involved in loaning money to a given firm.
9. B. Double-declining-balance depreciation entails doubling the straight-line rate and then multiplying the resulting rate by the beginning book value.
10. D. Accountants cross-reference in order to organize their books.