Accounting Fundamentals
Exam Answer Key
Course Introduction
Accounting Fundamentals introduces students to the essential principles and practices of financial accounting. This course covers the basic concepts of accounting, including the accounting cycle, double-entry bookkeeping, preparation and analysis of financial statements, and the role of accounting in business decision-making. Students will develop practical skills in recording transactions, adjusting accounts, and understanding the relationships between assets, liabilities, equity, revenues, and expenses. By the end of the course, students will be equipped with a foundational understanding of accounting concepts necessary for further study and for making informed financial decisions in professional environments.
Recommended Textbook
Horngren's Accounting 8th Australia Edition by Tracie Nobles
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Chapter 1: The Role of Accounting in Decision Making
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Q1) The financial examination of a company's financial records is called a(n):
A) appraisal.
B) criminal investigation.
C) audit.
D) financial analysis.
Answer: C
Q2) The International Accounting Standards Board is made up of members from the private sector and has no public sector involvement.
A)True
B)False
Answer: True
Q3) Star Homes Ltd just recorded a transaction in its books of accounts.If this transaction increased the total liabilities by $12,000:
A) assets or equity must decrease by $12,000
B) assets must increase or equity must decrease by $12,000
C) assets must decrease by $12,000
D) both assets and equity must each decrease by $6000
Answer: B
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Chapter 2: Recording Business Transactions
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Q1) Which of the following statements is TRUE?
A) A trial balance presents data in debit and credit format, but a balance sheet does not.
B) A trial balance is in the same format as a balance sheet.
C) A trial balance is created after the balance sheet is prepared.
D) A trial balance shows total amounts for assets, liabilities and equity.
Answer: A
Q2) Which of the following is the detailed record of the changes in a particular asset,liability or owners' equity?
A) Ledger
B) Journal
C) Trial balance
D) Account
Answer: D
Q3) A trial balance is a list of all of the accounts with their balances.
A)True
B)False
Answer: True
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Chapter 3: The Adjusting Process
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Q1) Patricia Event Planning Service collects fees from their customers in advance.On 1 January 2016,the balance of her Unearned revenue account had a balance of $5000 (Cr.).During January and February,she collected $3000 and $700 as advance fees.During the two-month period,she rendered services of $7500 .What is the balance in Unearned revenue at the end of February?
A) Debit balance of $1200
B) Credit balance of $1200
C) Debit balance of $5000
D) Credit balance of $5000
Answer: B
Q2) On 1 January,Smith had $2 500 of supplies on hand.During January,Smith purchased $6 000 worth of new supplies.At the end of the month,a count revealed $800 worth of supplies remaining on the shelves.The adjustment entry needed will include a debit to Supplies expense of $7 700.The supplies were initially recorded as an asset.
A)True
B)False
Answer: True
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Chapter 4: Completing the Accounting Cycle
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Q1) Which of the following entries will be necessary to close the appropriate depreciation account at the end of the year?
A) Debit Depreciation expense and credit Income summary
B) Debit Accumulated depreciation and credit Income summary
C) Debit Income summary and credit Depreciation expense
D) Debit Income summary and credit Accumulated depreciation
Q2) Which of the following does the current ratio measure?
A) The company's overall ability to pay liabilities
B) The company's rate of cash flow
C) The proportion of the company's assets that are financed with debt
D) The company's ability to pay current liabilities with current assets
Q3) Net profit (loss)is the difference between the total debits and the total credits in the Income statement columns.
A)True
B)False
Q4) As part of the closing process,revenues and expenses are closed to a temporary account called Profit (loss).
A)True
B)False
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Chapter 5: Retailing Operations
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Q1) Which of the following correctly describes the gross profit percentage?
A) The gross profit percentage is one of the most carefully watched measures of profitability.
B) Retailing companies strive to increase the gross profit percentage.
C) For most companies, the gross profit percentage changes little from year to year.
D) All of the above are true.
Q2) Gross profit is equal to Sales revenue less Sales returns and allowances and Sales discounts.
A)True
B)False
Q3) The terms on an invoice are 3/10,n/25.This means that a:
A) discount of 3% is allowed if the invoice is paid in 10 days.
B) discount of 10% is allowed if the invoice is paid in three days.
C) discount of 25% is allowed if the invoice is paid in 10 days.
D) discount of 3% is allowed if the invoice is paid after 25 days.
Q4) The entry to close Sales discounts and Sales returns and allowances results in a debit to Income summary.
A)True
B)False
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Chapter 6: Retail Inventory
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Q1) Which of the following inventory costing methods yields the highest Ending inventory when costs are rising during the accounting period?
A) First-in, first-out
B) Average cost
C) Specific unit cost
D) Last-in, first-out
Q2) A company purchased 400 units for $30 each on 31 January.It purchased 150 units for $35 each on 28 February.It sold a total of 150 units for $80 each from 1 March to 31 December.If the company uses the weighted-average inventory costing method,calculate the amount of ending inventory on 31 December.(Assume that the company uses a perpetual inventory system.)
A) $12,544
B) $17,250
C) $12,000
D) $13,000
Q3) The lower-of-cost-and-net-realisable-value rule demonstrates accounting conservatism in action.
A)True
B)False
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Chapter 7: Accounting Information Systems
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Q1) Keeping accurate records of accounts receivable is an example of which feature of a good accounting information system?
A) favourable cost-benefit relationship
B) flexibility
C) control
D) compatibility
Q2) A column for Cost of sales appears in which of the following journals?
A) Cash payments and purchases
B) Sales and purchases
C) Cash receipts and sales
D) Cash payments and cash receipts
Q3) Some transactions can be recorded in both the general journal and the special journals.
A)True
B)False
Q4) Special journals are a means of classifying transactions according to type to attain greater efficiency in processing.
A)True
B)False
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Chapter 8: Internal Control and Cash
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Q1) A company has a petty cash fund amount of $300.When replenished,it has petty cash slips of $30 for petrol expense,$30 for postage expense,$13 for supplies expense and $10 for miscellaneous expenses.Assume the cash balance is not over or short.In the journal entry,Cash would be credited with:
A) $73
B) $70
C) $60
D) $83
Q2) A receiving report should be matched with the supplier invoice before a payment to the supplier is approved.
A)True
B)False
Q3) The voucher system helps the business to streamline its internal controls over cash receipts.
A)True
B)False
Q4) Daily cash shorts and cash overs should cancel each other out over time.
A)True B)False
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Chapter 9: Receivables
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Q1) The accounts receivable turnover ratio measures:
A) how many days it takes, on average, to sell the inventory.
B) how well a company can pay its current liabilities with its current assets.
C) how many days it takes, on average, to collect receivables.
D) the number of times per year a company sells goods and collects receivables.
Q2) Assets are listed on the balance sheet in order of liquidity.Which of the following items reflects the normal order of liquidity?
A) Cash, Accounts receivable, Inventory, Bills receivable
B) Non-current assets, Inventory, Bills receivable, Cash
C) Cash, Inventory, Bills receivable, Accounts receivable
D) Bills Receivable, Inventory, Accounts receivable, Cash
Q3) Which of the following is a benefit of selling on credit?
A) Some customers do not pay, creating an expense.
B) Expenses are reduced by making sales to a wide range of customers.
C) Revenues are increased by making sales to a wider range of customers.
D) Cash is received sooner.
Q4) The allowance method is a method of recording collection losses by estimating uncollectable amounts.
A)True
B)False
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Chapter 10: Non-Current Assets: Property, plant and Equipment, and Intangibles
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Q1) Which of the following would be capitalised and depreciated,rather than expensed?
A) Replacement of tyres
B) Paint job
C) Modification for new use
D) Normal repair of engine
Q2) Which of the following intangible assets bars other manufacturers from using the same name for a product?
A) Patent
B) Trademark
C) Copyright
D) Franchise
Q3) Which of the following items is included in the journal entry if a company sells equipment at a price equal to its carrying amount?
A) A debit to Loss on sale of equipment
B) A credit to Accumulated depreciation
C) A debit to Equipment for its carrying amount
D) A credit to Equipment for its original cost
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Chapter 11: Current Liabilities and Payroll
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Q1) In which of the following periods should the estimated warranty liability be debited?
A) The period when cash is paid to repair or replace the product
B) The period when the product is sold
C) The period when the product is shipped to the customer
D) The period when cash is collected for the sale of the product
Q2) Which of the following is the proper treatment for a liability that exists,but the exact amount of which is not known?
A) The liability should be ignored.
B) The liability should be treated as a contingent liability.
C) The amount of the liability should be estimated and recorded.
D) The liability should be reported in the notes to the financial statements.
Q3) Firewood Company signed a three-year note payable for $58,000 at 9% annual interest.What is the interest expense for 2016 if the note was signed on 1 August 2016?
A) $2610
B) $15,660
C) $2175
D) $5220
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Chapter 12: Non-Current Liabilities,debentures Payable and
Classification of Liabilities on the Balance Sheet
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Q1) The reason people buy debentures is to: A) reduce their income taxes. B) receive dividend payments. C) earn interest.
D) save money.
Q2) The balance in the Debentures payable account is a credit of $50 000.The balance in the Discount on debentures payable is a debit of $1 500.The balance sheet will report the debenture balance as $48 500.
A)True
B)False
Q3) The market rate is the rate used to calculate the actual cash payments made to debenture holders.
A)True B)False
Q4) Accounts payable is always shown on the balance sheet in current liabilities. A)True B)False
Q5) If a debenture is issued at a discount,it will sell for more than face value. A)True B)False
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Chapter 13: Partnerships
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Q1) When one person purchases the partnership interest of a partner,a new partnership agreement will have to be created.
A)True
B)False
Q2) When one person purchases the partnership interest of a partner,the cash is paid directly to the existing partner,not to the partnership.
A)True
B)False
Q3) Andre,Beau and Caroline share profits and losses of their partnership as 2:3:6.If the net profit is $1,200,000,calculate the profit share of Caroline.
A) $327,273
B) $218,182
C) $109,091
D) $654,545
Q4) Whenever there is a change in the mix of partners,the old partnership is dissolved and a new one begins.
A)True
B)False
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Chapter 14: Companies: Formation and Shareholders
Equity
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Q1) Revival Company's annual report is follows.
\[\begin{array} { | l | l | l | }
\hline & 31 \text { March 2016 } & 31 \text { March 2017 } \\
\hline \text { Net profit } & \$ 352,000 & \$ 432,500 \\
\hline \text { Preference dividends } &0 & 0 \\
\hline \text { Total shareholders' equity } & \$ 4,360,000 & \$ 5,222,000 \\
\hline \begin{array} { l }
\text { Shareholders' equity attributable to } \\
\text { preference shares }
\end{array} &0 &0 \\
\hline \text { Number of ordinary shares outstanding } & 288,000 & 201,000\\
\hline
\end{array}\]
Based on the information provided,find the rate of return on ordinary shareholders' equity on 31 March 2017.
A) 9.03%
B) 8.07%
C) 9.07%
D) 8.28%
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Chapter 15: Companies: Capital Management and the Income Statement
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Q1) RT Company shows a loss from flooding of $235 000 for the year.This loss will be included in profit for the period.
A)True
B)False
Q2) The account to be debited when a share dividend is declared and distributed on the same date would be:
A) Dividends.
B) Cash.
C) Retained earnings.
D) Ordinary share capital.
Q3) Which of the following best describes discontinued operations on the income statement?
A) The gains and losses from transactions that are not part of the normal operations of the business
B) The profit or loss generated from the normal operations of the business
C) The profit or loss from segments of the business that have been sold or terminated
D) The profit or loss generated from unusual or infrequent events
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Chapter 16: The Cash Flow Statement
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Q1) The direct method of preparing the cash flow statement provides a clearer way of analysing cash flow information than the indirect method.
A)True
B)False
Q2) Which of the following is NOT a cash outflow from an operating activity?
A) Payment of interest on a loan
B) Payment for purchasing inventory
C) Payments to the government for taxes
D) Payment of dividends
Q3) Qtopia Company uses the direct method to prepare its cash flow statement.It has reported operating expenses of $21 000 on its income statement for the year 2016.If the balance in accrued liabilities has gone up by $1 000 during the year,then $1 000 will have to be added to $21 000 as part of the process to calculate payments to suppliers for operating expenses.
A)True
B)False
Q4) Issuing preference shares to shareholders would be a financing activity.
A)True
B)False
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Chapter 17: The Framework of Accounting
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Q1) Which of these items must be disclosed in general purpose financial reports under AASB 101?
A) interest on borrowings
B) different categories of receivables
C) comparative figures
D) all of the above
Q2) AASB stands for Australian Accounting Standards Board.
A)True
B)False
Q3) The total contract price to build an office building is $4 200 000,with estimated costs of $2 800 000.The construction firm's costs for Year 1 were $800 000.Under the percentage of completion method,gross profit reported in Year 1 is:
A) $2 200 000.
B) $1 200 000.
C) $400 000.
D) none of the above
Q4) In most businesses,profit is recognised at the point of sale.
A)True
B)False
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Chapter 18: Financial Statement Analysis
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Q1) Benchmarking is the comparison of a company's current year results with an earlier year's performance.
A)True
B)False
Q2) The trend analysis report of Doppler Ltd is given below: \[\begin{array} { |
}
\hline \text { (in millions) } & 2020 & 2019 & 2018 & 2017 & 2016 \\
\hline \text { Profit } & \$ 680 & \$ 604 & \$ 458 & \$ 407 & \$ 399 \\
\hline \text { Trend percentages } & 170 & 151 & 115 & 102 & 100 \\ \hline \end{array}\]
Which of the following is a correct conclusion from the above analysis?
A) Profit for the year 2019 decreased by 151% from 2018.
B) Profit for the year 2020 is 170% of that for the year 2016.
C) Profit for the year 2019 is 151% of the previous year.
D) Profit for the year 2020 increased by 170% from 2019.
Q3) Horizontal analysis compares each item in the income statement to the net sales amount.
A)True B)False
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Chapter 19: Introduction to Managerial Accounting and the Master Budget
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Q1) Management is accountable to its suppliers and vendors in which of the following ways?
A) Repaying loans in a timely manner
B) Providing a return on the stakeholders' investment
C) Making timely payments and complying with contract terms
D) Providing products to customers that are safe and free of defects
Q2) Which of the following is NOT an objective of management accounting?
A) To provide information to business managers to assist them in planning for their business
B) To provide information to business managers to assist them in controlling their business
C) To assist business managers with respect to providing a return to the owners of the business
D) To provide information to shareholders to assist them with their investment decisions
Q3) Transportation costs to ship products to customers are inventoriable product costs.
A)True
B)False
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Chapter 20: Job Costing
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Q1) An activity-based costing system can be a significant competitive advantage for a business which does bidding for manufacturing work.
A)True
B)False
Q2) Aminta Accounting expects its accountants to work a total of 42,000 direct labour hours per year.Aminta's estimated total indirect costs are $336,000.The direct labour rate is $110 per hour.Direct labour hours is the allocation base for indirect costs.If Aminta does a job requiring 60 hours of direct labour and bills the client using a standard markup of 40%,calculate the amount of the client's bill.
A) $9912
B) $6490
C) $5250
D) $134,400
Q3) Two main benefits of activity-based costing are more accurate product cost information and more detailed information on costs of activities and the drivers of these costs.
A)True
B)False
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) Anthony Company has fixed costs of $32,000 per month.Highest production volume during the year was in January when 140,000 units were produced,85,000 units were sold and total costs of $640,000 were incurred.In June,the company produced only 55,000 units.What was the total cost incurred in June?
A) $640,000
B) $414,118
C) $400,900
D) $270,700
Q2) Margaret sells hand-knit scarves at a flea market.Each scarf sells for $35.Margaret pays $60 to rent a vending space for one day.The variable costs are $20 per scarf.How many scarves should she sell each day in order to break even?
A) 4 scarves
B) 35 scarves
C) 7 scarves
D) 3 scarves
Q3) If variable costs go down,and all other factors remain the same,the margin of safety will become larger.
A)True
B)False
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Chapter 22: Short-Term Business Decisions
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Q1) Hilltop Golf Course is planning for the coming season.Investors would like to earn a 15% return on the company's $60,000,000 of assets.The company primarily incurs fixed costs to groom the greens and fairways.Fixed costs are projected to be $30,000,000 for the golfing season.About 500,000 rounds of golf are expected to be played each year.Variable costs are about $17 per round of golf.Hilltop Golf Course has a favourable reputation in the area and therefore,has some control over the price of a round of golf.Using a cost-plus pricing approach,what price should Hilltop charge for a round of golf to achieve the desired profit?
A) $77
B) $43
C) $60
D) $95
Q2) In making product mix decisions under constraining factors,a company should maximise sales of the product with the highest contribution margin per unit.
A)True
B)False
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Chapter 23: Capital Investment Decisions and the Time Value of Money
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Q1) The residual value is discounted as a single lump sum because it will be received only once at the end of life of the asset.
A)True
B)False
Q2) At the internal rate of return (IRR),the present value of cash inflows will be equal to:
A) initial investment.
B) average operating profit.
C) residual value.
D) profit from the project.
Q3) Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash flows whenever they are received.
A)True
B)False
Q4) Discounted cash flow methods consider the time value of money while evaluating an investment proposal.
A)True
B)False
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