Accounting Fundamentals Exam Practice Tests
Course Introduction
Accounting Fundamentals introduces students to the basic principles and practices of financial accounting. The course covers the accounting cycle, including the recording, classifying, and summarizing of financial transactions, preparation of financial statements, and understanding the role of accounting in business decision-making. Students will learn key concepts such as assets, liabilities, equity, revenues, and expenses, and will gain practical skills in journalizing entries, posting to ledgers, and preparing trial balances. This foundational course provides a crucial understanding for anyone pursuing business, finance, or further studies in accounting.
Recommended Textbook
Horngren's Accounting 12th Edition by Tracie L. Miller Nobles
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Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) Which of the following users would rely on managerial accounting information for decision-making purposes?
A) potential investors
B) creditors
C) customers
D) company managers
Answer: D
Q2) Which of the following transactions will affect the balance of Owner,Capital?
A) paid accounts payable
B) paid rent expense for the month
C) purchased land for cash
D) collection on account
Answer: B
Q3) If a transaction does not involve cash,such as the purchase of supplies on account,it will not be reported on the statement of cash flows.
A)True
B)False
Answer: True
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3
Chapter 2: Recording Business Transactions
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Sample Questions
Q1) Which of the following is assessed using the debt ratio?
A) profitability
B) revenues
C) risk of default
D) net income
Answer: C
Q2) Which of the following accounts increases with a debit?
A) Prepaid Rent
B) Interest Payable
C) Accounts Payable
D) Owner, Capital
Answer: A
Q3) The higher the debt ratio,the lower the risk of default.
A)True
B)False
Answer: False
Q4) A payment of an expense in advance is called a prepaid expense.
A)True
B)False
Answer: True
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) Which of the following accounting elements does the matching principle help to match?
A) revenues and liabilities
B) expenses and assets
C) expenses and revenues
D) expenses and liabilities
Answer: C
Q2) Revenue that has been earned but not yet collected in cash is called a(n)________.
A) accrued revenue
B) deferred expense
C) deferred revenue
D) accrued expense
Answer: A
Q3) The worksheet is a useful step in preparing adjusting entries and the unadjusted trial balance.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Only temporary accounts appear on the post-closing trial balance.
A)True
B)False
Q2) Where does net income appear on a worksheet?
A) Net income appears only in the income statement debit column.
B) Net income appears in the balance sheet credit column and in the income statement debit column.
C) Net income appears in the income statement credit column and in the balance sheet debit column.
D) Net income appears only in the balance sheet credit column.
Q3) Which of the following accounts would appear in the balance sheet debit column of the worksheet?
A) Unearned Revenue
B) Accumulated Depreciation
C) Service Revenue
D) Prepaid Insurance
Q4) Reversing entries are dated on the first day of the new accounting period.
A)True
B)False
Q5) Why are temporary accounts not included in the post-closing trial balance?
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Chapter 5: Merchandising Operations
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Sample Questions
Q1) When a company that uses the perpetual inventory system sells goods for cash,the journal entry to record cost of goods sold is:
A) \(\begin{array}{|l|c|c|}
\hline \text { Cost of Goods Sold } & \text { XX} &\\
\hline \text { Sales } & & \text { XX }\\
\hline
\end{array}\)
B) No journal entry is required.
C) \(\begin{array}{|l|c|c|}
\hline \text { Cost of Goods Sold } & \text { XX } \\
\hline \text { Merchandise Inventory } && \text { XX }\\
\hline
\end{array}\)
D) \(\begin{array}{|l|l|l|}
\hline\text { Sales } & \mathrm{XX} & \\
\hline \text { Merchandise Inventory } & & \mathrm{XX} \\
\hline
\end{array}\)
Q2) What does the gross profit percentage measure? How is it computed?
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Page 7
Chapter 6: Merchandise Inventory
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Sample Questions
Q1) The lower-of-cost-or-market value (LCM)rule ________.
A) replaces the use of specific identification, FIFO, LIFO, or weighted-average inventory costing methods.
B) violates the conservatism principle
C) requires that merchandise inventory be reported in the financial statements at the lower of the historical cost or the selling price of the inventory
D) is an accounting issue separate from applying an inventory costing method
Q2) Two ratios that help businesses monitor their inventory levels are days' sales in inventory and the inventory level ratio.
A)True
B)False
Q3) A high rate of inventory turnover indicates difficulty in selling inventory.
A)True
B)False
Q4) In a period of rising costs,the last-in,first-out (LIFO)method results in a lower cost of goods sold and a higher net income than the first-in,first-out (FIFO)method.
A)True
B)False
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Page 8
Chapter 7: Accounting Information Systems
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Sample Questions
Q1) Depreciation expense is recorded in a ________.
A) cash payments journal
B) sales journal
C) cash receipts journal
D) general journal
Q2) After posting from the cash payments journal,the posting reference is printed in the general journal.
A)True
B)False
Q3) Southeastern Company sold merchandise for $4,450 to Northern Company on account.The cost of goods sold was $1,185.Southeastern Company uses a perpetual inventory system and special journals.The $4,450 is recorded as ________.
A) an entry in the general journal
B) Accounts Receivable DR, Sales Revenue CR column of the sales journal
C) Merchandise Inventory DR column of the purchases journal
D) Accounts Receivable CR column of cash receipts journal
Q4) Most small businesses have computerized all of their accounting.
A)True
B)False
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Chapter 8: Internal Control and Cash
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Sample Questions
Q1) A very low cash ratio does not send a strong message to investors and creditors that the company has the ability to repay its short-term debt.
A)True
B)False
Q2) For each petty cash payment,the custodian prepares a petty cash ticket.
A)True
B)False
Q3) For the following situation,state whether it represents a strength or weakness in internal control and give the reason for your answer. The mailroom employee opens all incoming mail.Customers' checks are sent to the treasurer,and remittance advices are sent to the accounting department.The controller compares the daily bank deposit amount from the treasurer and the daily debit to cash from the accounting department.
Q4) Having a cash ratio above 1.0 implies that a company has enough cash and cash equivalents to pay current liabilities.
A)True
B)False
Q5) List the four steps,the proper order,of the purchasing and payment process.
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Page 10
Chapter 9: Receivables
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Sample Questions
Q1) On April 1,2019,Barnes Services received a 6-month note for $15,000 at 9%.Calculate the amount of interest due at maturity.(Round any intermediate calculations to two decimal places,and your final answer to the nearest dollar.)
A) $608
B) $743
C) $1350
D) $675
Q2) Define net realizable value.How is net realizable value affected when a receivable is written off under the allowance method?
Q3) Which of the following statements regarding receivables is correct?
A) Each receivable transaction involves three parties.
B) Receivables occur when a business loans money to another party.
C) A receivable occurs when a business makes a cash sale of goods or services to another party.
D) A receivable is the right to pay cash in the future from a current receivable transaction.
Q4) The two major types of receivables are interest receivable and taxes receivable.
A)True
B)False
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Chapter 10: Plant Assets,natural Resources,and Intangibles
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Sample Questions
Q1) A company's accountant capitalized a payment that should have been recorded as a revenue expenditure.How will this error affect the company's financial statements?
A) Net income will be understated.
B) Expenses will be overstated.
C) Assets will be overstated.
D) Liabilities will be overstated.
Q2) During 2018,Landers Company had net sales of $17,700,000.The beginning total assets were $10,000,000.The asset turnover ratio was 1.5 times.Calculate the ending total assets of Landers.(Round any intermediate calculations to two decimal places,and your final answer to the nearest dollar.)
A) $13,600,000
B) $10,000,000
C) $15,900,000
D) $5,900,000
Q3) Which of the following is NOT recorded as the cost of a building?
A) building permits
B) fencing
C) architectural fees
D) contractor charges
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Page 12
Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) Income taxes are withheld from the employee's paycheck.
A)True
B)False
Q2) Which of the following is a reason why many companies require a photo ID when employees pick up their paychecks?
A) to make sure an employee's work hours have been accurately reported
B) to avoid writing a paycheck to a fictitious person
C) to improve efficiency of the payroll disbursement process
D) to make sure all employees are legal adults
Q3) Vacation,health,and pension benefits must be estimated and recorded as a liability.
A)True
B)False
Q4) Metro Sales Company offers warranties on all its electronic goods.Warranty expense is estimated at 3.5% of sales revenue.In 2019,Metro had sales of $333,000.In the same year,Metro replaced defective goods with merchandise inventory costing $8,750.Prepare the journal entry to record the replacement of defective goods.Omit explanation.
Q5) What is a contingent liability? Provide two examples of contingencies.
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Page 13
Chapter 12: Partnerships
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Sample Questions
Q1) Which of the following businesses is most likely to be organized as an LLP?
A) a bookstore run by two partners
B) an international retail chain
C) an accounting firm run by two partners
D) a stationery store owned by an individual
Q2) Which of the following is TRUE of a partnership?
A) All partnership firms are public firms.
B) Partnership firms have a limited life.
C) The owners of the partnership have limited liabilities for the partnership's debts.
D) The maximum loss an owner of a partnership can incur is the invested amount.
Q3) In a partnership,the income is taxed at the partnership level as well as at the personal level of the owners.
A)True
B)False
Q4) How is the accounting equation affected when a partner withdraws cash?
A) Both equity and assets decrease; liabilities are not affected.
B) Assets increase and equity decreases; liabilities are not affected.
C) Both assets and liabilities decrease; equity is not affected.
D) Liabilities decrease and assets increase; equity is not affected.
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Chapter 13: Corporations
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Sample Questions
Q1) A profitable corporation may make distributions to stockholders in the form of bonuses.
A)True
B)False
Q2) Which of the following items are NOT reported as part of income from continuing operations?
A) discontinued operations
B) gross profit
C) other income and (expenses)
D) gain on sale of equipment
Q3) A corporation declares a dividend of $0.50 per share on 18,000 shares of common stock.Which of the following is included in the entry to record the declaration?
A) Cash Dividends is debited for $9000.
B) Paid-In Capital in Excess of Par-Common is credited for $9000.
C) Cash Dividends is credited for $9000.
D) Dividends Payable-Common is debited for $9000.
Q4) A higher price/earnings ratio signifies a higher return on investment.
A)True
B)False
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Chapter 14: Long-Term Liabilities
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Sample Questions
Q1) The United Way Payable account would normally be shown on the balance sheet under current liabilities.
A)True
B)False
Q2) If a company is financing more assets with debt than with equity,the ________.
A) debt to equity ratio will be more than 1
B) debt to equity ratio will be between 0 to 1
C) debt to equity ratio will be equal to 1
D) debt to equity ratio will be negative
Q3) Which of the following statements is TRUE of the debt to equity ratio?
A) The higher the debt to equity ratio, the lower the company's financial risk.
B) The higher the debt to equity ratio, the greater the company's financial risk.
C) If the debt to equity ratio is greater than 1, the company is financing more assets with equity than with debt.
D) If the debt to equity ratio is less than 1, the company is financing more assets with debt than with equity.
Q4) What is the difference between simple interest and compound interest?
Q5) List three disadvantages of borrowing.
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Chapter 15: Investments
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Sample Questions
Q1) Under the equity method,dividend revenue is treated as ________.
A) a debit to revenue from investments
B) dividend revenue
C) a return of capital
D) a credit to current assets
Q2) A security is a ________.
A) regulation dealing with the transactions of investments
B) system aimed at protecting the interests of the market participants
C) share or interest representing financial value
D) process related to the valuation of a financial instrument
Q3) Littlefield Industries purchased a bond on September 1 of the current year for $200,000 and classified the investment as trading debt.The market value of the trading debt investment at year-end is $196,000.The adjustment is ________.
A) reported as a separate component of stockholders' equity
B) added to the Trading Debt Investments account
C) not reported on the income statement because the bond has not been disposed of D) reported as a $4,000 unrealized holding loss in the Other Income and (Expenses) section of the income statement
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Chapter 16: The Statement of Cash Flows
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Sample Questions
Q1) On the statement of cash flows,the investing activities section is shown after the financing activities section.
A)True
B)False
Q2) Which of the following sections from the statement of cash flows includes the cash paid for the purchase of Treasury Stock?
A) the financing activities section
B) the operating activities section
C) the investing activities section
D) the non-cash investing and financing section
Q3) The indirect and direct methods use different computations but produce the same amount of net cash provided by operating activities.
A)True
B)False
Q4) Which of the following is TRUE of the statement of cash flows?
A) It indicates when long-term debt will mature.
B) It reports on the qualitative behavior of the company's performance.
C) It covers a span of time and is dated the same as the income statement.
D) It shows how the profits or losses of the company were generated.
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Chapter 17: Financial Statement Analysis
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Sample Questions
Q1) Horizontal analysis provides a year-to-year comparison of a company's performance in different periods.
A)True
B)False
Q2) Data for Martin Corp.and Tante,Inc.follow: \(\begin{array}{lll}
&\text {Martin}&\text {Tante}\\
\text { Net Sales } & \$ 25,000 & \$ 32,500 \\
\text { Cost of Goods Sold } & 18,500 & 22,360 \\
\text { Other Expenses } & 2,150 & 5,000 \\
\text { Net Income } & \$ 4,350 & \$ 5,140 \end{array}\)
Prepare a comparative common-size income statement for each company for the year ending December 31,2019.Round to two decimal places.Use a multi-step format for the income statement.
Q3) In a vertical analysis of the balance sheet,the base amount is total liabilities.
A)True B)False
Q4) What is an annual report? Briefly describe the key parts of the annual report.
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Chapter 18: Introduction to Managerial Accounting
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Sample Questions
Q1) Define period cost.Give three examples of period costs of a merchandising company.
Q2) Anything for which managers want a separate measurement of cost is called a ________.
A) responsibility center
B) cost object
C) profit object
D) conversion cost
Q3) The managerial role that involves the day-to-day running of the business is the ________.
A) directing function
B) planning function
C) controlling function
D) strategic planning function
Q4) Managerial accounting can be used to calculate costs for service and merchandising companies.
A)True
B)False
Q5) Describe the flow of product costs for a manufacturer.
Q6) Define direct cost.
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Chapter 19: Job Order Costing
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Sample Questions
Q1) Costs identified as indirect labor should be charged to ________.
A) manufacturing overhead
B) direct labor on the job cost record
C) ignored since they are not relevant
D) salaries payable
Q2) On June 30,Coral,Inc.finished Job 750 with total job costs of $4700,and transferred the costs to Finished Goods Inventory.On July 6,Coral sold goods to a customer for $5000 cash.Which of the following is the correct journal entry to record the cost of goods sold? Assume the perpetual inventory system is used.
A) debit Finished Goods Inventory $4700 and credit Cost of Goods Sold $4700
B) debit Cost of Goods Sold $4700 and credit Work-in-Process Inventory $4700
C) debit Work-in-Process Inventory $4700 and credit Cost of Goods Sold $4700
D) debit Cost of Goods Sold $4700 and credit Finished Goods Inventory $4700
Q3) At the end of the year,Delta,Inc.has an unadjusted debit balance in the Manufacturing Overhead account of $3,950.Provide the year-end adjusting entry needed to adjust the account.Omit explanation.
Q4) Define a process costing system and list two types of businesses that would use a process costing system.
Q5) Why would the manager of a service company need to use job order costing?
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Chapter 20: Process Costing
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Sample Questions
Q1) The Polishing Department of Metalware Fixtures,Inc.had 20,000 units in process on June 1 and received 23,000 units from the Machining Department.During the month,it completed 31,000 units and transferred them to the Packaging Department and had 12,000 units in ending Work-in-Process Inventory.The company uses FIFO.Calculate the number of units accounted for by the Polishing Department for June.
A) 11,000 units
B) 20,000 units
C) 12,000 units
D) 43,000 units
Q2) A production cost report shows only the calculations for the physical flow of products.
A)True
B)False
Q3) A production cost report aids in preparing an income statement by providing data for ________.
A) period costs incurred during the period
B) various inventory accounts
C) cost of goods sold during the period
D) revenues generated during the period
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Chapter 21: Cost-Volume-Profit Analysis
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Sample Questions
Q1) Which of the following is TRUE of the traditional format of the income statement?
A) It is prepared under the variable costing method.
B) It shows contribution margin as a line item.
C) It is not allowed under GAAP.
D) It is prepared under the absorption costing method.
Q2) Which of the following is the correct formula for calculating total mixed cost?
A) Total mixed cost = (Variable cost per unit / Number of units) + Total fixed cost
B) Total mixed cost = (Variable cost per unit × Number of units) - Total fixed cost
C) Total mixed cost = (Variable cost per unit × Number of units) + Total fixed cost
D) Total mixed cost = (Variable cost per unit / Number of units) - Total fixed cost
Q3) CVP is also sometimes referred to as cost-volume-loss analysis because changes in sales prices also affect profits (or losses).
A)True B)False
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Chapter 22: Master Budgets
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Q1) The sales budget is considered the cornerstone of the master budget because
A) the level of sales affects almost all of the other elements of the master budget
B) it is prepared last and summarizes all of the other elements of the budget
C) it plays a minor role in the preparation of the operating budget
D) it determines the amount of materials to purchase for production
Q2) Bulldog,Inc.has budgeted sales for the first quarter of the next year to be 45,000 units.The inventory on hand at the beginning of quarter is 5000 units.The desired ending inventory is 3000 units.Calculate the budgeted production for the first quarter.
A) 3000 units
B) 43,000 units
C) 40,000 units
D) 48,000 units
Q3) Cost behavior is considered in developing the selling and administrative expense budget as costs are designated as variable or fixed.
A)True
B)False
Q4) List the four budgeting objectives.Why is this process a loop?
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) The flexible budget variance is the difference between expected results in the flexible budget for the actual units sold and the static budget.
A)True
B)False
Q2) The fixed overhead cost variance measures the difference between actual fixed overhead and budgeted fixed overhead to determine the controllable portion of total fixed overhead variance.
A)True
B)False
Q3) Midnight Sun Outfitters projected sales of 76,000 units for the year at a unit sales price of $12.00.Actual sales for the year were 72,000 units at $15.00 per unit.Variable costs were budgeted at $4.50 per unit,and the actual variable cost was $4.75 per unit.Budgeted fixed costs totaled $378,000,while actual fixed costs amounted to $410,000.What is the sales volume variance for operating income?
A) $136,000 unfavorable
B) $30,000 unfavorable
C) $30,000 favorable
D) $166,000 unfavorable
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Chapter 24: Cost Allocation and Responsibility Accounting
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Q1) The balanced scorecard focuses only on lead indicators,because lag indicators are not important for performance evaluation.
A)True
B)False
Q2) Which of the following is the most appropriate cost driver for allocating the cost of warranty services?
A) number of employees
B) number of materials purchased
C) number of machine hours
D) number of service calls
Q3) Investment center managers are responsible for generating profits and making the best use of the investment center's assets.
A)True
B)False
Q4) To adequately evaluate an investment center's financial performance,summary performance measures should include both the division's operating income and its assets.
A)True B)False
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Chapter 25: Short-Term Business Decisions
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Q1) Pinewood Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $750 per table,and takes 7.50 labor hours to manufacture.The large table sells for $1,700,has variable costs of $900,and takes 10 direct labor hours to manufacture.If the company has no sales limitations on either product,it should make and sell as many of the large tables as possible to maximize operating income.
A)True
B)False
Q2) Murong Enterprises is a price-setter that uses the cost-plus pricing approach.The products are specialty components used in industrial equipment.The CEO is certain that the company can produce and sell 500,000 units per year,due to the high demand for the product.Variable costs are $3.25 per unit.Total fixed costs are $860,000 per year.The target operating income for the year is $150,000.What sales price would allow the CEO to achieve the target profit if the cost-plus pricing method is used? (Round your answer to nearest cent.)Show all computations.
Q3) Differential analysis is a method that looks at how operating income would differ under each budget scenario.
A)True
B)False
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Chapter 26: Capital Investment Decisions
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Q1) Gateway Graphics is considering an investment in new printing equipment costing $502,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $122,000 the first year,$158,000 the second year,and $160,000 every year thereafter until the fifth year.What is the payback period for this investment? The residual value is zero.(Round your answer to two decimal places.)
A) 4.30 years
B) 3.39 years
C) 2.80 years
D) 3.11 years
Q2) Which of the following is correct about the payback method?
A) It considers only the cash flows that occur during the payback period.
B) It considers an asset's profitability.
C) It is normally the only method used when deciding whether to invest in an asset.
D) It is difficult to calculate.
Q3) All else being equal,investments with longer payback periods are preferable.
A)True
B)False
Q4) What are the strengths of the net present value capital budgeting method?
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