Accounting and Finance
Mock Exam
Course Introduction
This course provides a comprehensive introduction to the fundamental principles of accounting and finance, exploring how financial information is generated, interpreted, and utilized within organizations. Students will examine topics such as financial statement preparation and analysis, management of assets and liabilities, budgeting, investment decision-making, and the regulatory environment. The course aims to develop students' ability to critically evaluate financial information, understand key accounting concepts, and apply financial techniques to real-world business scenarios, preparing them for further study and practical application in the fields of accounting and finance.
Recommended Textbook
Financial Accounting An Introduction to Concepts Methods and Uses 14th Edition by Roman L. Weil
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Page 2
Chapter 1: Introduction to Business Activities and Overview
of Financial Statements and the Reporting Process
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Sample Questions
Q1) _____ are economic resources with the potential to provide future economic benefits to a firm.
A)Revenues
B)Expenses
C)Liabilities
D)Assets
E)Shareholder Equity
Answer: D
Q2) The mix of liabilities plus shareholders' equity reflects a firm's investing decisions, each measured at the balance sheet date.
A)True
B)False
Answer: False
Q3) _____ are the end results toward which the firm directs its energies.
A)Goals
B)Strategies
C)Objectives
D)Activities
E)Milestones
Answer: A
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Chapter 2: The Basics of Record Keeping and Financial
Statement Preparation: Balance Sheet
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Sample Questions
Q1) Before preparing the balance sheet and income statement, an accountant would use what accounting record to first record the firm's transactions?
A)the trial balance
B)the adjusting entry
C)the general ledger
D)the subsidiary ledger
E)the journal
Answer: E
Q2) A balance sheet account with a credit balance requires a closing entry that debits that account, because a debit closing entry will result in a zero ending balance in the account.
A)True
B)False
Answer: False
Q3) The balance sheet equation provides the analytical framework to understand the effects of transactions and events on the financial statements.
A)True
B)False
Answer: True
Page 4
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Chapter 3: The Basics of Record Keeping and Financial
Statement Preparation: Income Statement
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129 Flashcards
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Sample Questions
Q1) Describe the relationship between the balance sheet and the income statement.
Answer: RELATIONSHIP BETWEEN THE BALANCE SHEET AND THE INCOME STATEMENT
The income statement links the beginning and ending balance sheets. The beginning balance of the shareholders equity account Retained Earnings plus net income from the income statement less dividends equals the ending balance of Retained Earnings. The equation that describes the relationship between the balance sheet and the income statement through the Retained Earnings account is as follows:
Retained Earnings (beginning) + Net Income - Dividends = Retained Earnings (ending)
Common terminology often says that the income statement articulates with the balance sheet. Retained earnings measures the cumulative excess of net income over dividends for the life of a firm. Cumulative means that retained earnings aggregates all undistributed earnings.
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5
Chapter 4: Balance Sheet: Presenting and Analyzing
Resources and Financing
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Sample Questions
Q1) All of the following statements are true except:
A)U.S.GAAP and IFRS define fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
B)The fair value of an asset is an opportunity cost in the sense that fair value reflects an amount that the firm could receive if it sold the asset today.
C)Current replacement cost is often used in U.S.GAAP to measure inventories whose usefulness has declined below acquisition cost.
D)Net realizable value is similar, but not identical, to fair value.
E)Net realizable value is not allowed by IFRS.
Q2) Accounting does not normally recognize mutually unexecuted contracts as assets or liabilities.
A)True
B)False
Q3) Describe the following concepts: (1) going concern, (2) recognition and realization, and (3) relevance and reliability,
Q4) What is conservatism?
Q5) Define liability.When is it recognized?
Page 6
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Chapter 5: Income Statement: Reporting Results of Operating Activities
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Sample Questions
Q1) Which of the following is/are not a period expense?
A)salaries and commissions of the sales staff
B)costs to produce catalogs
C)marketing costs, such as advertising
D)costs to produce sales literature
E)direct labor
Q2) U.S.GAAP and IFRS require firms to disclose unrealized gains and losses that historically have bypassed the income statement in a category called _____.
A)net income
B)gross income
C)other comprehensive income
D)accumulated other comprehensive income
E)cash flows from operations
Q3) Recognition of revenue usually occurs when
A)the firm pays for the related expenses.
B)the revenue is earned, such as at the time of the sale or delivery of the goods.
C)a signed, legally binding contract is received.
D)an advance payment for the goods is received.
E)none of the above.
Page 7
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Chapter 6: Statement of Cash Flows
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Sample Questions
Q1) On the statement of cash flows, the issuance of capital stock for cash to be used for future expansion of a production facility is treated as a/an
A)investing activity.
B)financing activity.
C)operating activity.
D)exchange transaction.
E)funds flow activity.
Q2) The disposal of equipment for an amount of cash greater than the carrying value of the equipment results in a cash receipt equal to the carrying value of the equipment plus the gain on the disposal, which appears in net income.
A)True
B)False
Q3) Some analysts focus attention on cash flow from operations, thinking it as important as, or more important than, net income as a performance measure.Interpreting cash from operations as a measure of operating performance requires considering cash flows along two dimensions: (1) their timing and (2) their classification and disclosure in the statement and related notes.Explain.
Q4) Describe the various sections of the statement of cash flows.
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Page 8
Chapter 7: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Inventory turnover equals cost of goods sold divided by the average inventory during the period.
A)True
B)False
Q2) Discusses the four measures for assessing short-term liquidity risk.
Q3) The numerator of the rate of return on common shareholders' equity
A)is the amount of earnings assignable to common shareholders' equity after subtracting all amounts required to compensate other providers of financing for the use of their funds.
B)subtracts from net income any earnings allocable to preferred stock equity, usually the dividends on preferred stock declared during the period.
C)does not subtract the dividends on common stock because such dividends represent distributions to common shareholders of a portion of the returns generated for them during the period.
D)all of the above
E)none of the above
Q4) Describe the fixed asset turnover ratio.
Q5) Explain how common-size balance sheets are used by analysts.
Q6) Describe the inventory turnover ratio.
Page 9
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Chapter 8: Revenue Recognition, Receivables, and
Advances From Customers
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Sample Questions
Q1) Sales returns affect net cash collections when a customer has the right to return a product for a refund, and the firm can reasonably estimate the amount of returns at the time of sale, U.S.GAAP and IFRS
A)require that the firm use the allowance method to estimate and recognize the effects of returns.
B)the selling firm debits a revenue contra account for expected returns to reduce current period revenues to the estimated amount that will not be returned.
C)require that the firm measures revenues based on the amount of cash it expects to collect from current period sales.
D)preclude revenue recognition when customers have the right to return goods unless the firm can reasonably estimate the amount of returns.
E)all of the above
Q2) The U.S.Internal Revenue Service requires that firms recognize bad debt expense only when they conclude an account is not collectible.
A)True
B)False
Q3) How do sellers measure revenue?
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Page 10
Chapter 9: Working Capital
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Sample Questions
Q1) On August 1, Covington Motors pays £18,000 for insurance coverage for the next 12 months.On August 1, the firm records the following journal entry:
A) Prepaid
B)
C)
D)
E)
Q2) The market value for inventory valuation purposes generally means
A)replacement cost.
B)sellers bid price.
C)buyers offer price.
D)the mean between the sellers bid price and the buyers offer price.
E)present value of future cash flows.
Q3) What are the cost-flow assumptions used in inventory measurement?
Q4) What costs are included in inventory of manufacturing and merchandising firms?
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Chapter 10: Long-Lived Tangible and Intangible Assets
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Sample Questions
Q1) Firms recognize expenditures to acquire intangibles externally from third parties as _____ if the intangibles are either separable or arise from contractual or other legal rights.
A)assets
B)liabilities
C)retained earnings
D)revenue
E)expenses
Q2) U.S.GAAP requires firms to recognize an impairment loss on a nonamortized intangible other than goodwill whenever the carrying value of the asset exceeds its fair value.
A)True
B)False
Q3) U.S.GAAP and IFRS require firms to treat expenditures for maintenance and repairs as expenses of the period as incurred but treat expenditures for improvements as assets (which firms subsequently depreciate or amortize).
A)True
B)False
Q4) How are periodic depreciation and amortization accounted for?
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Chapter 11: Notes, Bonds, and Leases
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Sample Questions
Q1) The fair value of long-term debt
A)is the amount the firm would have to pay to repurchase the debt on the market in an orderly transaction on the measurement date.
B)is the market price of the bonds on that date, if the bonds trade in an active market.
C)is the present value of the contractual cash payments discounted at the interest rate a lender would require on the measurement date, if the fair value of bonds are not actively traded.
D)all of the above
E)none of the above
Q2) Firms must disclose in notes to the financial statements the cash flows associated with capital leases and with operating leases for each of the succeeding five years and for all years after five years in the aggregate.
A)True
B)False
Q3) Describe what bond provisions exist.
Q4) What are the requirements for the disclosure of the carrying and fair values of debt?
Q5) Discuss the fair value option in accounting for certain assets and liabilities.
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Page 13
Chapter 12: Liabilities: Off-Balance Sheet Financing, Retirement
Benefits, and Income Taxes
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Q1) The notes to the financial statements provide information on the components of book income before taxes, the current and deferred portions of income tax expense, a reconciliation between income taxes at the statutory rate and the effective rate, and the components of deferred tax assets and deferred tax liabilities.
A)True
B)False
Q2) Acquired in-process research and development (IPR&D) is _____ for tax purposes and results in a(n) _____ effective tax rate.
A)never deductible; increased
B)never deductible; decreased
C)always deductible; increased
D)always deductible; decreased
E)deductible over a 15 year period; decreased
Q3) In a defined benefit plan, the employer is ultimately responsible for either contributing cash or obtaining a return on pension investments sufficient to pay promised amounts to retired employees.
A)True
B)False
Q4) Discuss the interpretation of retirement benefit disclosures.
Page 14
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Chapter 13: Marketable Securities and Derivatives
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Sample Questions
Q1) Marco Insurance Marco Insurance acquired shares of Penny Systems' common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Marco Insurance sold these shares on January 3, 2014, for $405,000. (Refer to Marco Insurance.) The total income from the purchase and sale of these securities is
A)$5,000
B)$4,000
C)$3,000
D)$2,000
E)$1,000
Q2) Measurement of trading securities at fair value reflects income when it occurs in the form of a change in fair value, not when the investor realizes a gain or loss at the time of sale.
A)True
B)False
Q3) Describe the accounting for derivatives.
Q4) What is the accounting treatment for securities available for sale?
Q5) How does U.S.GAAP and IFRS require firms to classify marketable securities?
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Chapter 14: Intercorporate Investments in Common Stock
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Q1) The equity method of accounting for an investment in the common stock of another company should be used when the investment
A)is composed of common stock and it is the investor's intent to vote the common stock.
B)ensures a source of supply such as raw materials.
C)enables the investor to exercise significant influence over the investee.
D)gives the investor voting control over the investee.
E)None of these answer choices is correct.
Q2) Parent Computer Corporation acquired significant influence over Child Computer Company on January 2 by purchasing 20 percent of its outstanding stock for $100 million.Parent attributes the entire excess of cost over book value acquired to a patent, which it amortizes over 10 years.Child Computer had earnings of $100 million and declared dividends of $30 million during the year.The accounts receivable of Parent Computer Corporation at December 31 included $600,000 due from Child Computer.Parent Computer Corporation accounts for its investment in Child Computer using the equity method.Parent Computer Corporation considers reducing its ownership from 20 percent to 19.5 percent so that it no longer has to use the equity method.Comment on the ethical implications of this possibility.
Q3) Discuss the accounting for majority, active investments.
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Chapter 15: Shareholders Equity: Capital Contributions and Distributions
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Sample Questions
Q1) Stock dividends
A)have little economic substance for shareholders.
B)result in a proportionate increase in the number of shares held by each shareholder, but does not change that shareholder's ownership interest or proportionate voting power.
C)result in decreases to book value per common share, but each shareholder has a proportionately larger number of shares, so the total book value of each shareholder's interest remains unchanged.
D)result in the decline of market value per share should be commensurate with the proportional increase in shares, but all else equal, the total market value of an individual's shares should not change.
E)all of the above
Q2) Only the corporate form of business organization provides the owner with limited liability.
A)True
B)False
Q3) All corporations must issue preferred stock.
A)True
B)False
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Chapter 16: Statement of Cash Flows: Another Look
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Sample Questions
Q1) Most, but not all, firms report cash flows from operations using the indirect method. A)True B)False
Q2) In U.S.GAAP, which of the following accurately describes the effects of transactions involving investments on the statement of cash flows using the fair value method for trading securities and fair value hedges?
A)Realized gains and losses appear in net income.Unrealized gains and losses appear in Other Comprehensive Income.
B)Realized gains and losses appear in Other Comprehensive Income.Unrealized gains and losses appear in net income.
C)Realized gains and losses appear in Retained Earnings.Unrealized gains and losses appear in Other Comprehensive Income.
D)Realized gains and losses appear in Retained Earnings.Unrealized gains and losses appear in net income.
E)Both realized and unrealized gains and losses appear in net income.
Q3) Discuss the effects of transactions involving derivatives and the fair value option on the statements of cash flows.
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18
Chapter 17: Synthesis and Extensions
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Sample Questions
Q1) Firms recognize revenue
A)when they have completed an earnings process or performed most or all of their obligations to customers, usually the delivery of a product or service.
B)when they have received cash or a receivable capable of sufficiently reliable measurement.
C)using the percentage-of-completion method when the firms sell products under long-term contracts, such as construction companies.
D)using the completed contract method [U.S.GAAP, only] when firms cannot reasonably estimate revenues and costs.
E)all of the above
Q2) U.S.GAAP and IFRS require firms to treat some or all expenditures made to internally develop brand names, customer lists, new technologies, and other intangibles as expenses in the period of the expenditure.
A)True
B)False
Q3) Describe accrual and cash accounting.
Q4) How do firms account for property, plant, and equipment?
Q5) Discuss the definition, recognition, and measurement of gains and losses.
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