Accounting Fundamentals Exam Preparation Guide
Course Introduction
Accounting Fundamentals introduces students to the basic principles and concepts of accounting, focusing on the systematic recording, presentation, and interpretation of financial information. This course covers essential topics such as the accounting cycle, preparation of financial statements, double-entry bookkeeping, and the use of ledgers and journals. Students will gain practical skills in analyzing transactions, managing accounts, and understanding the regulatory context of financial reporting. Emphasis is placed on developing a solid foundation in accounting practices to support decision-making in business environments.
Recommended Textbook
Financial Managerial Accounting 16th Edition by Jan Williams
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Page 2
Chapter 1: Accounting: Information for Decision Making
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Q1) The general purpose financial statements prepared annually by a corporation would not include the:
A) Balance sheet.
B) Income tax return.
C) Income statement.
D) Statement of cash flows.
Answer: B
Q2) AICPA Code of Professional Conduct
State and discuss the six articles of the AICPA Code of Professional Conduct that guide members in performing their professional responsibilities. Answer: (I.) Responsibilities
(II.) The Public Interest
(III.) Integrity
(IV.) Objectivity and Independence
(V.) Due Care
(VI.) Scope and Nature of Services
Q3) The information is intended to be used for planning and control decisions. Answer: Management
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Chapter 2: Basic Financial Statements
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Q1) At the beginning of October, owners' equity in Waldorf was $480,000. Given the transactions of October, 2011, what will owners' equity be at the end of the month?
A) $480,000.
B) $484,000.
C) $502,500.
D) $580,500.
Answer: B
Q2) Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction?
A) Assets.
B) Liabilities.
C) Owners' equity.
D) Cash.
Answer: C
Q3) If a company purchases equipment by issuing a note payable, its total assets will not change.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Accounting Cycle: Capturing Economic Events
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Q1) A journal entry to recognize an expense could include each of the following, except:
A) A debit to an expense account.
B) A credit to Accounts Payable.
C) A debit to a liability account.
D) A credit to Cash.
Answer: C
Q2) A CEO or CFO associated with fraudulent financial reporting could be fined but not imprisoned under the Sarbanes Oxley Act.
A)True
B)False
Answer: False
Q3) What is the total owners' equity at the end of May?
A) $810,000.
B) $600,000.
C) $790,000.
D) $660,000.
Answer: B
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Page 5
Chapter 4: The Accounting Cycle: Accruals and Deferrals
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Q1) The book value of a depreciable asset can be determined by its market value at a particular time.
A)True
B)False
Q2) Assume Fisher Company usually earns taxable income, but sustains a loss in the current period. The entry to record income taxes expense in the current period will most likely: (indicate all correct answers.)
A) Increase the amount of that loss.
B) Include a credit to the Income Taxes Expense account.
C) Be an adjusting entry, rather than an entry to record a transaction completed during the period.
D) Include a credit to Income Taxes Payable.
Q3) If an asset was purchased on January 1, 2006 for $140,000 with an estimated life of 5 years, what is the accumulated depreciation at December 31, 2009?
A) $28,000.
B) $112,000.
C) $56,000.
D) $84,000.
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Chapter 5: The Accounting Cycle: Reporting Financial Results
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Q1) Materiality
(a) Identify several factors considered by an accountant in deciding whether an item is "material."
(b) Does the concept of materiality complicate or simplify the process of making adjusting entries? Give an illustration to support your answer.
Q2) Which statement is true regarding the Income Statement?
A) Losses do not appear on income statements.
B) Dividends reduce net income.
C) Dividends declared increase net income.
D) Both losses and gains appear on an income statement.
Q3) Income Summary appears on which financial statement:
A) Income statement.
B) Balance sheet.
C) Retained Earnings statement.
D) Income summary does not appear on any financial statement.
Q4) Interim financial statements usually report on a period of time greater than one year.
A)True
B)False
Chapter 6: Merchandising Activities
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Q1) If Bounder Dog Supplies, Inc purchased inventory at $2,200 list price and the terms were 3/10 n/30, what would be the value associated with the inventory if payment was made within 10 days?
A) $2,268.
B) $2,334.
C) $2,200.
D) $2,134.
Q2) If cost of goods sold is $360,000 and the gross profit rate is 40%, what is the gross profit?
A) $240,000.
B) $360,000.
C) $600,000.
D) $900,000.
Q3) Inventories are assets that a company holds for sale in the ordinary course of business.
A)True B)False
Q4) Wholesalers buy from retailers and sell to the general public.
A)True
B)False
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Chapter 7: Financial Assets
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Q1) A note receivable which is not collected promptly at the maturity date should be written off the books by a debit to Accounts Receivable and a credit to Notes Receivable.
A)True
B)False
Q2) The financial statements of Baxter Corporation include an Unrealized Holding Gain on Investments. This item:
A) Is included in the income statement.
B) Is shown as a reduction in total stockholders' equity.
C) Indicates that Baxter's marketable securities have a current market value higher than cost.
D) Indicate that Baxter Corporation sold marketable securities during the period at a gain.
Q3) Under the allowance method, when a receivable that had been previously written off is collected:
A) Net income is increased.
B) Net assets are increased.
C) Net income and net assets are not affected.
D) Net assets and net income are both increased.
Q4) What is the adjusted cash balance in the September 30 bank reconciliation?
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Chapter 8: Inventories and the Cost of Goods Sold
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Q1) Assuming that Ace Systems uses the LIFO flow assump?tion, the 12 units of this product in inventory at January 31 have a total cost of:
A) $499.
B) $331.
C) $509.
D) Some other amount.
Q2) Overstating the ending inventory will result in understating the cost of goods sold and overstating profits.
A)True
B)False
Q3) Assume that Castle TV, Inc. uses the LIFO flow assumption. The cost of the 200 units in the year-end inventory is:
A) $37,000.
B) $46,000.
C) $41,500.
D) $83,000.
Q4) The higher a company's inventory turnover rate, the higher its gross profit.
A)True
B)False
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Chapter 9: Plant and Intangible Assets
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Q1) Yale Company purchased equipment having an invoice price of $21,500. The terms of sale were 2/10, n/30, and Yale paid within the discount period. In addition, Yale paid a $320 delivery charge, $350 installation charge, and $1,183 sales tax. The amount recorded as the cost of this equipment is:
A) $21,070.
B) $21,500.
C) $21,740.
D) $22,923
Q2) If an accelerated depreciation method is used for an asset with a useful life of five years, more depreciation expense would be recorded in the third year than in the fifth year.
A)True
B)False
Q3) Research and development costs should be capitalized to match the period of benefit.
A)True B)False
Q4) Revenue expenditures are a part of selling and administrative expenses.
A)True
B)False
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Chapter 10: Liabilities
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Sample Questions
Q1) What is the amount of interest expense Central Food's recognizes on this note in 2011?
A) $700.
B) $8,400.
C) $7,700.
D) $1,400.
Q2) Junk bonds are attractive to investors because they carry a high rate of interest and are usually convertible into a specified number of shares of capital stock.
A)True
B)False
Q3) Pension expense is:
A) The present value of the estimated future pension benefits earned by employees as a result of their services during the period.
B) The amount funded to the pension in a given year.
C) The future value of rights granted to employees as a result of their services during the period.
D) The amount withdrawn from the pension fund to pay retirees during the period.
Q4) Payroll-related expenses
Shown below is a summary of the annual payroll data of Revere Ironworks:
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12
Chapter 11: Stockholders Equity: Paid-In Capital
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Sample Questions
Q1) A primary disadvantage of the corporate form of organization is:
A) Unlimited personal liability for business debts.
B) Ownership is difficult to transfer.
C) Corporate earnings are subject to double taxation.
D) Management is separated from ownership.
Q2) A corporation must always have more than one class of stock.
A)True
B)False
Q3) The net assets of a corporation are equal to:
A) Total assets-total liabilities.
B) Total assets-retained earnings.
C) Total assets + total liabilities.
D) Total assets + retained earnings.
Q4) Stockholders of a corporation are personally liable for the debts of the corporation if all shares of stock are owned by the officers of the corporation.
A)True
B)False
Q5) The book value per share of common stock (assume current-year preferred dividends have been paid) $_____ per share
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Chapter 12: Income and Changes in Retained Earnings
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Q1) Which of the following would be treated as a prior period adjustment by Gold Corporation in 2010?
A) In 2010, it was discovered that Gold Corporation recorded the purchase of a warehouse in 2007 as a debit to Repairs Expense.
B) In 2010, Gold Corporation switched from the straight-line method of depreciation to another method of computing depreciation.
C) In 2010, Gold Corporation's management decided that the estimated useful life of its computer equipment should be changed from five years to nine years.
D) In 2010, Gold Corporation sold a segment of the business that it has operated since 1996.
Q2) A company had 125,000 shares of common stock outstanding on January 1 and then sold 35,000 additional shares on March 30. Net income for the year was $594,750. What are earnings per share?
A) $4.73.
B) $4.58.
C) $3.93.
D) $6.61.
Q3) How many shares of common stock are outstanding?
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Chapter 13: Statement of Cash Flows
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Q1) When a company uses peak pricing, it is charging the highest or "peak" prices the public will be willing to pay during periods of low demand.
A)True
B)False
Q2) Based solely on the data provided above, Hierarchy's net cash flow from investing activities for the current year is:
A) $264,000 net cash provided by investing activities.
B) $264,000 net cash used by investing activities.
C) $201,600 net cash provided by investing activities.
D) $1,200,000 net cash provided by investing activities.
Q3) Compute the amount of Seldin's cash payments for purchases of merchandise during the current year.
A) $130,000.
B) $125,000.
C) $133,000.
D) $127,000.
Q4) Depreciation is a non-cash expense.
A)True
B)False
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) The measures most often used in evaluating solvency-the current ratio, quick ratio, and amount of working capital-are developed from amounts appearing in the:
A) Balance sheet.
B) Income statement.
C) Statement of retained earnings.
D) Statement of cash flows.
Q2) If a company's current ratio declined in a year during which its quick ratio improved, which of the following is the most likely explanation?
A) Inventory is increasing.
B) Inventory is declining.
C) Receivables are being collected more rapidly than in the past.
D) Receivables are being collected more slowly than in the past.
Q3) The debt ratio is a measure of:
A) Net cash flows relating to financing activities.
B) Long-term credit risk.
C) Short-term solvency.
D) Profitability, independent of the manner in which assets are financed.
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16
Chapter 15: Global Business and Accounting
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Q1) Making accurate estimates of costs is a challenge for global companies.
A)True
B)False
Q2) A contract giving the right to receive a specified quantity of foreign currency at a future date is known as:
A) Hedging.
B) Exchange rates.
C) Maquilladora.
D) Future contracts.
Q3) Future contracts are used by companies to hedge against losses in foreign currencies.
A)True
B)False
Q4) An increase in the exchange rate between a transaction date and the date of payment will cause the debtor to incur a loss.
A)True
B)False
Q5) Accounting as a profession did not exist in England prior to 1988.
A)True
B)False
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Chapter 16: Management Accounting: a Business Partner
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Q1) The accountant for Eric's Plumbing Equipment Company recently made a journal entry consisting of a debit to Work in Process and a credit to Raw Materials Inventory. This entry recorded:
A) The use of raw materials in the production process.
B) Payment for raw materials.
C) The return of unused materials to inventory.
D) The receipt of raw materials from the company's supplier.
Q2) The managerial functions of planning and controlling include all of the following activities except:
A) Setting objectives and goals for future performance.
B) Monitoring the extent to which planned objectives are being achieved.
C) Taking corrective action when actual results differ from the plan.
D) Directing the work of employees.
Q3) Which of the following is not one of the three types of inventories of a manufacturing company?
A) Raw materials inventory.
B) Work in process inventory.
C) Product inventory.
D) Finished goods inventory.
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Page 18
Chapter 17: Job Order Cost Systems and Overhead
Allocations
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Q1) In an activity-based costing system, manufacturing overhead costs are divided into separate:
A) Cost drivers.
B) Activity cost pools.
C) Activity bases.
D) Indirect cost centers.
Q2) The amount of overhead costs applied to Job #007 during March was:
A) $90,000.
B) $26,250.
C) $65,000.
D) $60,000.
Q3) 118.Using ABC to allocate manufacturing overhead can help managers to:
A) Identify what activities drive overhead costs.
B) Set product prices.
C) Locate inefficiencies in the production process.
D) Do all of the above.
Q4) Activity-based costing uses multiple activity bases to assign overhead costs to units of production.
A)True B)False
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Chapter 18: Process Costing
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Q1) The gross profit (sales minus cost of goods sold) on chemicals sold in May was:
A) $64,000.
B) $70,000.
C) $111,000.
D) Some other amount.
Q2) Which company would most likely use a process costing system?
A) Bic Pens.
B) Pepsi Cola.
C) Mars Candy.
D) All three.
Q3) Equivalent full units of production significantly differ from units completed and transferred during the period only when no significant differences exist between beginning and ending work in process.
A)True
B)False
Q4) Process costing would be suitable for:
A) Automobile repair.
B) Production of television sets.
C) Boat building.
D) Kitchen remodeling.
Page 20
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Chapter 19: Costing and the Value Chain
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Q1) JIT inventory systems strive to:
A) Cultivate long-term relationships with a select group of reliable suppliers.
B) Keep inventories at minimal levels.
C) Improve overall product quality.
D) All of the above.
Q2) What are the total external failure costs for the Abrams Corporation?
A) $38,300.
B) $34,500.
C) $19,700.
D) $35,250.
Q3) Which activities might be reduced or eliminated should Efficient implement a JIT system?
Q4) The length of time for a product to pass completely through a specific manufacturing process. ________________________________
Q5) Just-in-time costing considers all potential resources used by the product over its entire life.
A)True B)False
Q6) Resourceful's total cycle time is __________ days.
Q7) Resourceful's value-adding production activities include:
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Chapter 20: Cost-Volume-Profit Analysis
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Q1) Operating income can be calculated by:
A) Dividing fixed costs by the contribution margin ratio.
B) Multiplying fixed costs by the contribution margin ratio.
C) Multiplying the margin of safety by the contribution margin ratio.
D) Dividing the margin of safety by the contribution margin ratio.
Q2) The cost formula for Ratnere's monthly overhead cost can be expressed as:
A) $2.65 average cost per unit.
B) $1.75 average cost per unit.
C) $24,000 fixed cost plus $1.00 per unit.
D) $72,000 fixed cost + $2.00 per unit.
Q3) Perkins Corporation manufactures two products; data are shown below: If Perkins' monthly fixed costs average $425,000, what is its break-even point expressed in sales dollars?
A) $1,320,000.
B) $1,400,000.
C) $1,250,000.
D) $990,000.
Q4) In cost-volume-profit analysis, the volume index is always stated in units.
A)True
B)False
Page 22
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Chapter 21: Incremental Analysis
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Q1) Even though costs, revenues, and other factors do not vary among possible courses of action, they may be relevant to a decision.
A)True
B)False
Q2) Which of the following questions would not be relevant to a make or buy decision?
A) Will the supplier make a product that is equal in quality to our own?
B) Will the supplier meet our specified delivery dates?
C) For how long will the supplier be committed to the quoted price?
D) All of the above questions are relevant.
Q3) What are the total relevant costs of keeping the old equipment?
A) $8,000.
B) $50,000.
C) $10,000.
D) $45,000.
Q4) Should K Corp.(1) sell the units for scrap or (2) repair the units? Underline the most profitable action, and indicate the amount of the net financial benefit of this action to the company. $____________
Q5) Joint costs allocated to product MB total: $_____________
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Chapter 22: Responsibility Accounting and Transfer Pricing
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Q1) Carrier Corporation produces heating and air conditioning equipment at a number of plants throughout the United States including one in Syracuse, New York. Carrier should evaluate its Syracuse plant as:
A) A cost center.
B) An investment center.
C) A profit center (other than an investment center).
D) A committed center.
Q2) A responsibility income statement generally does not show the:
A) Contribution margin of each responsibility center.
B) Traceable fixed costs allocated to each responsibility center.
C) Segment margin of each responsibility center.
D) Net income of each responsibility center.
Q3) A responsibility accounting system measures the performance of each of the following centers except:
A) Profit center.
B) Investment center.
C) Control center.
D) Cost center.
Q4) Contribution margin ratio: _____________%
Q5) Responsibility margin: $_____________
24
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Chapter 23: Operational Budgeting
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Q1) Assume Baskin actually achieves the 60,000 unit sales level, and that net income actually earned at this level was $70,000. A performance report would indicate that net income was:
A) $2,660 over budget.
B) $43,120 under budget.
C) $90,000 under budget.
D) At the budgeted level.
Q2) During the first quarter of its operations, Morris Mfg. Co. expects to sell 50,000 units and create an ending inventory of 20,000 units. Variable manufacturing costs are budgeted at $10 per unit, and fixed manufacturing costs at $100,000 per quarter. The company's treasurer expects that 80 percent of the variable manufacturing costs will require cash payment during the quarter and that 20 percent will be financed through accounts payable and accrued liabilities. Only 50 percent of the fixed manufacturing costs are expected to require cash payments during the quarter. In the cash budget, payments for manufacturing costs during the quarter will total:
A) $800,000.
B) $610,000.
C) $600,000.
D) $450,000.
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Chapter 24: Standard Cost Systems
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Q1) Establishing standard cost amounts
Explain why the determination of standard cost amounts should not be the sole responsibility of a company's cost accountant.
Q2) A good standard cost system should always generate unfavorable variances.
A)True
B)False
Q3) In setting standards, management's level of performance expectation must be something less than ideal.
A)True
B)False
Q4) The journal entry to record the cost of direct materials used in June includes each of the following except:
A) A debit to Work-in-Process Inventory of $77,700.
B) A credit to Materials Price Variance of $3,210.
C) A credit to Direct Materials Inventory of $77,700.
D) A debit to Materials Quantity Variance of $1,480.
Q5) The purchasing manager is often included in evaluating cost variances.
A)True
B)False
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Chapter 25: Rewarding Business Performance
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Q1) A system that considers the earnings per sales dollar and the investment used to generate those sales dollars is called:
A) The economic value added system.
B) The balanced scorecard system.
C) The Dupont system.
D) The residual income system.
Q2) Which of the following is not represented in the balanced scorecard?
A) A learning and growth perspective.
B) The internal business process perspective.
C) The government's perspective.
D) The customers' perspective.
E) The financial perspective.
Q3) Explain the importance of incentive systems for motivating performance.
Q4) Which of the following is not one of the components of the DuPont system for measuring and evaluating business performance?
A) Return on sales.
B) Return on investment.
C) Inventory turnover.
D) Capital turnover.
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Chapter 26: Capital Budgeting
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Q1) Investment center managers may be overly optimistic about the efficiency of the new capital investment and thus, may understate expected results.
A)True
B)False
Q2) The payback period of this investment is:
A) Four years.
B) Five years.
C) Six years.
D) Over six years.
Q3) An investment's annual net cash flow will always be equal to its:
A) Annual revenue less its annual expenses.
B) Annual cash receipts less its annual cash disbursements.
C) Annual revenue less its annual cash disbursements.
D) Annual net income plus its annual depreciation expense.
Q4) Capital budget audits are often undertaken to ensure the accuracy of cash flow estimates.
A)True
B)False
Q5) Payback period: ____________ years
Q6) Annual increase in Port's net income: $_____________
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Chapter 28: Forms of Business Organization
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Q1) Paid-in Capital refers to:
A) The lifetime earnings of the corporation.
B) The amount invested by stockholders.
C) Net income less dividends.
D) The amount in excess of the par value of the stock.
Q2) Retained earnings are a fund of cash the business has earned from profitable operations.
A)True
B)False
Q3) Net income in a partnership may not be distributed to the partners:
A) As a salary allowance.
B) As interest on beginning capital.
C) In a fixed ratio.
D) In the form of dividends.
Q4) The net income of a sole proprietorship should compensate the owner for all of the following except:
A) Personal service.
B) The income taxes paid by the owner.
C) Capital invested by the owner.
D) The risk taken by the owner.
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Chapter 27: The Time Value of Money: Future Amounts and
Present Values Answer Key
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Q1) The present value of a single amount can only be calculated through the application of complex calculations.
A)True
B)False
Q2) (a) How long will it take Barbara to accumulate $30,000 to buy a car if she invests $15,000 at 5%? (b) How long will it take if she invests the same amount at 4% semi-annually?
Q3) An interest rate of 12% a year is the same as 6% for 2 months.
A)True
B)False
Q4) The future value of an investment gradually increases toward the present amount. A)True
B)False
Q5) The future amount of an annuity is calculated by multiplying the periodic payment amount by the discounted factor from the future value of an annuity table.
A)True
B)False
Q6) Explain what is meant by the "time value of money." Provide examples.
Q7) Explain how compound interest applies to the time value of money.
To view all questions and flashcards with answers, click on the resource link above. Page 30