Accounting Fundamentals
Review Questions
Course Introduction
Accounting Fundamentals introduces students to the basic principles and practices of financial accounting. The course covers essential topics such as the accounting cycle, preparation of financial statements, double-entry bookkeeping, and the recognition and measurement of assets, liabilities, and equity. Emphasis is placed on understanding how financial information is recorded, summarized, and interpreted for decision-making by individuals and organizations. Students will develop proficiency in analyzing transactions, applying generally accepted accounting principles (GAAP), and using accounting information for practical business applications.
Recommended Textbook Principles of Accounting 11th Edition by Belverd E. Needles
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Page 2
Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) Financial position may be assessed by referring to a balance sheet.
A)True
B)False Answer: True
Q2) Which of the following is not one of the broad principles underlying the accountant's code of professional ethics?
A) Objectivity
B) Integrity
C) Loyalty
D) Independence
Answer: C
Q3) The heading for a balance sheet might include the line "As of December 31, 20xx."
A)True
B)False Answer: True
Q4) Management accounting focuses on external decision making.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Analyzing Business Transactions
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Sample Questions
Q1) If a debit to Supplies were posted as a credit, and a credit of the same amount to Cash were posted as a debit, what would be the effect, if any, on the two accounts and on the trial balance column totals?
Answer: The Cash account would be overstated, Supplies would be understated, and the trial balance would balance.
Q2) Which of the following statements is true about a journal entry?
A) The Post. Ref. column is filled in prior to posting.
B) All debits are listed before any credits.
C) The name of the month should be repeated for each entry.
D) An explanation must follow each debit and each credit.
Answer: B
Q3) The Office Supplies account is classified as a(n) A) expense.
B) owner's equity account.
C) asset.
D) liability, if the supplies have not yet been paid for.
Answer: C
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Chapter 3: Measuring Business Income
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Sample Questions
Q1) Which of the following accounts probably would be greater in amount on an adjusted trial balance than on a trial balance?
A) Wages Payable
B) Unearned Revenue
C) Prepaid Advertising
D) Painting Supplies
Answer: A
Q2) Which of the following actions can distort company records and result in fraudulent financial reporting?
A) Prepaying an expense and recording it as an asset
B) Collecting revenue in advance of earning it
C) Recording revenue that has not yet been earned
D) Recording an expense that has been incurred but has not yet been paid
Answer: C
Q3) Net income results in a(n)
A) increase in owner's equity.
B) increase in revenues.
C) decrease in expenses.
D) decrease in liabilities.
Answer: A
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Which of the following types of entries is made primarily to help conform to the matching principle?
A) Reversing entries
B) Closing entries
C) Adjusting entries
D) Correcting entries
Q2) Adjusting entries are all dated as of the first day of the new accounting period.
A)True
B)False
Q3) The Income Summary account appears in the income statement.
A)True
B)False
Q4) Doug Riley is the only accountant employed at Carmen Enterprises. When asked by the company president if the financial statements had been prepared yet, Doug answered that he had completed all of his work except the preparation of the statements. He added that the net income that would appear on the current income statement would be $392,180. Identify the two instances where Doug would have determined the net income before he actually prepared the financial statements.
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Chapter 5: Financial Reporting and Analysis
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Sample Questions
Q1) Operating expenses include cost of goods sold.
A)True
B)False
Q2) A company with a low debt to equity ratio is in a more vulnerable position during poor economic times than a company with a high debt to equity ratio.
A)True
B)False
Q3) Dividend income and interest income are examples of nonoperating revenues.
A)True
B)False
Q4) Financial statements are audited by outside accountants
A) because it is a requirement stated in the Internal Revenue Code.
B) only when fraudulent financial reporting is suspected.
C) who then report on whether or not the company is a good investment.
D) to increase the users' confidence in the statements' reliability.
Q5) On a corporate balance sheet, earned capital is also known as
A) common stock.
B) paid-in capital.
C) retained earnings.
D) contributed capital.
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Chapter 6: The Operating Cycle and Merchandising Operations
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Sample Questions
Q1) The fee paid by a retailer to a credit card company is considered a contra-revenue account by the retailer.
A)True
B)False
Q2) A purchase on account with an invoice price of $750 has been made. The entry to record the payment after the 2 percent discount period would include a(n)
A) decrease to Accounts Payable for $750.
B) decrease to Purchases Discounts for $15.
C) increase to Accounts Payable for $735.
D) decrease to Cash for $735.
Q3) The collection of a $1,000 account beyond the 2 percent discount period would result in a(n)
A) increase to Cash for $980.
B) decrease to Accounts Receivable for $1,000.
C) decrease to Cash for $1,000.
D) increase to Sales Discounts for $20.
Q4) The net cost of purchases is found by deducting freight-in from net purchases.
A)True
B)False
Page 8
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Chapter 7: Internal Control
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Sample Questions
Q1) Which of the following documents would not originate with the purchasing company?
A) Purchase order
B) Receiving report
C) Check
D) Invoice
Q2) Cash received through the mail need be handled by only one employee to achieve effective internal control.
A)True
B)False
Q3) Internal control involves, in part, the protection of a company's assets.
A)True
B)False
Q4) Why is the separation of duties an important control activity in a good system of internal control?
Q5) When a petty cash fund is not replenished at the end of the accounting period, the adjusting entry would contain a credit to Petty Cash.
A)True
B)False
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Chapter 8: Inventories
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Sample Questions
Q1) In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.
A)True
B)False
Q2) How is the matching rule applied when accounting for merchandise inventory?
Q3) Why are the amounts determined for ending inventory and cost of goods sold the same under both the periodic and perpetual inventory systems when FIFO is used but not when LIFO is used?
Q4) During periods of consistently falling prices, the FIFO inventory method will produce the highest possible amount of net income.
A)True
B)False
Q5) The gross profit method requires that records be kept at both cost and retail.
A)True
B)False
Q6) Under rising prices, why will the FIFO method produce a higher ending inventory than LIFO?
Q7) What is the chief objective of supply-chain management? How is it accomplished?
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Q8) Why are cost flow assumptions made when accounting for merchandise inventory?
Chapter 9: Cash and Receivables
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Sample Questions
Q1) The general ledger account for Accounts Receivable shows a debit balance of $37,500. The Allowance for Uncollectible Accounts has a debit balance of $1,000. Net sales for the year were $375,000. In the past, 2 percent of net sales have proved uncollectible. An aging of accounts receivable accounts results in an estimate of $6,250 of uncollectible accounts receivable. Calculate (1) Uncollectible Accounts Expense and (2) the ending balance of the Allowance for Uncollectible Accounts using (a) the percentage of net sales method and (b) the accounts receivable aging method.
Q2) The general ledger account for Accounts Receivable shows a debit balance of $25,000. Allowance for Uncollectible Accounts has a credit balance of $1,500. Net sales for the year were $250,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $10,000 of uncollectible accounts receivable. Using the accounts receivable aging method, the Allowance for Uncollectible Accounts balance (after adjustment) would be
A) $11,500.
B) $10,000.
C) $8,500.
D) $10,750.
Q3) What is a compensating balance? By whom is it required?
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11
Chapter 10: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) Which of the following most likely would be classified as a current liability?
A) Mortgage payable
B) Dividends payable
C) Five-year notes payable
D) Bonds payable
Q2) A customer is injured using a company's product. The potential liability that may result is called a(n)
A) contingent liability.
B) estimated liability.
C) definitely determinable liability.
D) estimated warranty liability.
Q3) When compound interest is used, interest accumulates less quickly than when simple interest is used.
A)True
B)False
Q4) All factors in a present value of a single sum table are less than 1.000.
A)True
B)False
Q5) Explain why the cost of employing someone is more than just the wage or salary paid to the employee.
Page 12
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Chapter 11: Long Term Assets
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Sample Questions
Q1) Which of the following would be considered a capital expenditure?
A) A truck tune-up
B) Machine maintenance
C) Installation of a solar heating system
D) Painting a room
Q2) Intangible assets are also called wasting assets.
A)True
B)False
Q3) Starsky Manufacturing Company purchased three machines during the year: \(\begin{array}{rlr}
\text { Feb. 10 } & \text { Machine 1 } & \$ 1,800 \\
\text { July 26 } & \text { Machine 2 } & 12,000 \\
\text { Oct. 11 } & \text { Machine 3 } & 21,600 \end{array}\)
Each machine is expected to last six years and have no residual value. The company's fiscal year corresponds to the calendar year. Using the straight-line method, compute the depreciation charge (amounts rounded) for each machine for the year.
Q4) In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment?
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Chapter 12: Contributed Capital
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Sample Questions
Q1) The entry required to record start-up and organization costs will cause a decrease in net income for the period.
A)True
B)False
Q2) Duncan Corporation has 2,000 shares of $100 par value, 6 percent cumulative preferred stock and 20,000 shares of $10 par value common stock outstanding. In its first four years of operation, Duncan Corporation paid cash dividends as follows: 2007, $15,000; 2008, $0; 2009, $20,000; 2010, $25,000. Calculate the total cash dividends received by owners of preferred and common stock in each year.
Q3) Which of the following is a correct statement relating to the concept of mutual agency and the corporate form of business?
A) There is no mutual agency with the corporate form of business.
B) Mutual agency may or may not exist in a corporation, depending on the individual state law.
C) Mutual agency always exists in the corporate form of business.
D) Mutual agency may or may not exist in a corporation, depending on a vote by the shareholders.
Q4) Define outstanding stock.
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Chapter 13: Long Term Liabilities
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Sample Questions
Q1) Entering into a lease is an example of off-balance-sheet financing.
A)True
B)False
Q2) Under the effective interest method of amortizing a bond discount, the bond interest expense recorded for each period increases over the life of the bond.
A)True
B)False
Q3) A capital lease is a lease of property, plant, or equipment that is in effect an installment purchase.
A)True
B)False
Q4) The amount of cash received on issuance of a 9 percent, $10,000 bond dated February 1 and issued June 1 at 102 1/2 is
A) $10,300.
B) $11,100.
C) $10,200.
D) $10,550.
Q5) When fixed mortgage payments are made, in what way does the interest portion change each month, and why?
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Chapter 14: The Corporate Income Statement and the Statement of Stockholders Equity
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Q1) Retained earnings represent cash readily available for dividends.
A)True
B)False
Q2) A corporation should account for the declaration of a 10 percent stock dividend by
A) transferring from retained earnings to contributed capital an amount equal to the legal capital represented by the dividend shares.
B) transferring from retained earnings to contributed capital an amount equal to the market value of the dividend shares.
C) transferring from retained earnings to contributed capital whatever amount the board of directors deems appropriate.
D) making only a memorandum entry in the general journal.
Q3) Income tax allocation is necessary because tax rates differ at different levels of income.
A)True B)False
Q4) A write-down is another term for a restructuring.
A)True
B)False
Page 16
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Chapter 15: The Statement of Cash Flows
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Sample Questions
Q1) For 2010, SCJ Corporation had average total assets of $520,000, sales of $450,000, net income of $50,000, net cash flows from operating activities of $75,000, dividend payments of $25,000, purchases of plant assets of $60,000, and sales of plant assets of $55,000. Using this information, compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free cash flow. Round amounts to one decimal place.
Q2) The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations.
A)True
B)False
Q3) Royer Corporation engaged in this transaction: Issued common stock for cash. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows.
A) Operating activities section
B) Does not represent a cash flow
C) Investing activities section
D) Financing activities section
Q4) On the lines below, provide the components for the calculation of free cash flow.
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Chapter 16: Financial Performance Measurement
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Sample Questions
Q1) Days' payable is a measure of A) liquidity.
B) volatility.
C) long-term solvency.
D) profitability.
Q2) A common measure of profitability is the A) asset turnover.
B) debt to equity ratio.
C) current ratio.
D) receivable turnover.
Q3) Both diversified companies and conglomerates operate in a single, well-defined industry.
A)True B)False
Q4) Most companies issue interim financial statements to the public on a monthly basis. A)True B)False
Q5) Does the existence of conglomerates make financial performance evaluation easier or more difficult? Why?
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Chapter 17: Partnerships
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Q1) A partner's inability to meet his or her obligations at the time of liquidation relieves that individual of his or her liabilities to the other partners.
A)True
B)False
Q2) The entities forming joint ventures usually involve companies, but can sometimes involve governments.
A)True
B)False
Q3) Accounting for a partnership comes closer to accounting for a sole proprietorship than to accounting for a corporation.
A)True
B)False
Q4) A partnership agreement should include the procedure for ending the business. A)True
B)False
Q5) Warren and Spencer are partners in a drilling operation. Warren purchased a drilling rig to be used in the partnership's operations. Is this purchase binding on Spencer even though he was not involved in it? Explain your answer.
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Chapter 18: The Changing Business Environment-A
Managers Pers
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Q1) Primary processes
A) apply only to a just-in-time environment.
B) include information systems and human resources.
C) add value to a product or service.
D) limit bottlenecks during production.
Q2) TQM can be used in
A) merchandising firms.
B) service firms.
C) manufacturing firms.
D) all of these.
Q3) A business plan is a comprehensive statement of how a company will achieve its objectives, but does not include budgets or performance goals.
A)True
B)False
Q4) Financial accounting's main emphasis is on full and accurate accounting for and disclosure of a company's operating results.
A)True
B)False
Page 20
Q5) Give two examples of each stage in the management process.
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Chapter 19: Cost Concepts and Cost Allocation
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Sample Questions
Q1) The product is the cost object when assigning indirect product costs.
A)True
B)False
Q2) Total manufacturing costs are equal to
A) Direct Materials + Direct Labor + Selling Costs.
B) Direct Materials + Direct Labor + Overhead.
C) Direct Labor + Overhead + Selling Costs + Administrative Costs.
D) Product Costs + Period Costs.
Q3) Overhead costs are not
A) allocated to the Work in Process Inventory account.
B) charged directly to the Finished Goods Inventory account.
C) assigned to specific products.
D) considered product costs.
Q4) Period costs flow through three types of inventory accounts before becoming part of the cost of goods sold amount.
A)True
B)False
Q5) Cost of Goods Sold is decreased for underapplied overhead.
A)True
B)False
21
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Chapter 20: Costing Systems: Job Order Costing
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Sample Questions
Q1) Which of the following products probably would be manufactured using a job order costing system?
A) Paper
B) Baseball
C) Computer monitors
D) Company business cards
Q2) The balance in the Work in Process Inventory account on April 1 was $25,000, and the balance on April 30 was $22,600. Costs incurred during the month were as follows: direct materials, $41,250; direct labor, $21,300; and overhead, $32,600. What amount was transferred to the Finished Goods Inventory account for April?
A) $97,550
B) $2,400
C) $88,550
D) $120,150
Q3) Dyana Julian, president of Julian Juices, Inc., has approached you with the following questions: Why must we use the process costing method to compute product unit costs for three lines of fruit juices? Why can't we consider using a job order costing approach? Prepare a written response to Ms. Julian.
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Chapter 21: Costing Systems Process Costing
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Q1) Use the following information to perform the calculations requested below, assuming that the average costing approach to a process costing system is being used.
Beginning work in process inventory: 16,000 units, 100 percent complete as to direct materials, 85 percent complete as to conversion costs
Ending work in process inventory: 36,000 units, 100 percent complete as to direct materials, 70 percent complete as to conversion costs
Units started during the month: 59,000
a. Calculate units to be accounted for during the month.
b. Calculate units completed and transferred out during the month.
c. Calculate equivalent units for direct materials.
d. Calculate equivalent units for conversion costs.
Q2) Direct materials costs and conversion costs for the current period on a process cost report are divided by their respective units of equivalent production to arrive at the A) ending inventory unit cost.
B) transferred-in cost per unit.
C) beginning inventory cost per unit.
D) cost per equivalent unit.
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Chapter 22: Activity-Based Systems-Abm and Lean
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Sample Questions
Q1) For a manufacturer, materials storage is a value-adding activity.
A)True
B)False
Q2) Engineering design is an activity vital to the success of any motor vehicle manufacturer. Identify the level at which engineering design would be classified in the cost hierarchy used with ABC for a maker of unique luxury automobiles.
A) Unit-level activity
B) Batch-level activity
C) Product-level activity
D) Facility-level activity
Q3) In the JIT environment, direct materials and conversion costs should be nearly uniform for each product in a work cell.
A)True
B)False
Q4) Unit level, batch level, and service level are examples of cost drivers.
A)True
B)False
Q5) How can activity-based systems help managers in a global marketplace?
Q6) Why is process value analysis not part of the general ledger accounting system?
24
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Chapter 23: Cost Behavior Analysis
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Q1) Using the contribution margin approach, find the contribution margin ratio for Consumer Products if the selling price per unit is $12, the variable cost per unit is $3, and the fixed costs are $8,040.
A) 25%
B) 50%
C) 75%
D) 100%
Q2) An insurance company pays its employees a commission of 6 percent on each sale. What is the proper classification of the cost of sales commissions?
A) Constant cost
B) Variable cost
C) Mixed cost
D) Fixed cost
Q3) Any cost can be classified as either a variable cost or a fixed cost.
A)True
B)False
Q4) Explain what cost-volume-profit analysis is and how managers use it. Give examples of some purposes for which it might be used.
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Chapter 24: The Budgeting Process
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Q1) Participative budgeting seeks to motivate employees.
A)True
B)False
Q2) Preparation of a production budget requires knowledge of the sales target in sales dollars.
A)True
B)False
Q3) Information on cash receipts and payments would not come from which of the following sources?
A) Sales budgets
B) Collection records
C) Direct materials purchases budget
D) Budgeted income statement
Q4) If the cash budget showed a cash shortage, the company most likely would A) arrange to take out a short-term loan.
B) cut salaries of employees.
C) sign up for fewer orders so that it could control costs.
D) lay off employees for that period.
Q5) Describe three benefits budgeting provides to an organization's success.
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Chapter 25: Performance Management and Evaluation
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Q1) An organization chart assists in management control.
A)True
B)False
Q2) One of the overall goals of the Pancake House Restaurant is customer satisfaction. In the light of that goal, match the internal business processes perspective with the appropriate objective.
A) Customer satisfaction means that the chefs engage in culinary continuing education. B) Customer satisfaction means that customers receive their food within 10 minutes of placing an order.
C) Customer satisfaction means that the customer appreciation program is successful. D) Customer satisfaction means that the restaurant is profitable.
Q3) What are some of the limitations of utilizing ROI, residual income, and EVA to measure the performance of investment centers?
Q4) The causal links between an organization's goals, objectives, measures, performance targets need not be apparent.
A)True
B)False
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Chapter 26: Standard Costing and Variance Analysis
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Q1) Underfoot Products uses standard costing. The following information about overhead was generated during May: \(\begin{array}{ll}
\text { Standard variable overhead rate } & \$ 2 \text { per machine hour } \\
\text { Standard fixed overhead rate } & \$ 1 \text { per machine hour } \\
\text { Actual variable overhead costs } & \$ 390,000 \\
\text { Actual fixed overhead costs } & \$ 175,000 \\
\text { Budgeted fixed overhead costs } & \$ 190,000 \\
\text { Standard machine hours per unit produced } & 10 \\
\text { Good units produced } & 18,000 \\
\text { Actual machine hours } & 198000
\end{array}\) Compute the variable overhead efficiency variance.
A) $56000 (F)
B) $56000 (U)
C) $46000 (F)
D) $36000 (U)
Q2) Even if a variance is insignificant, corrective action should be taken.
A)True
B)False
Q3) Discuss the keys to preparing a performance report based on standard costs and related variances.
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Chapter 27: Short Run Decision Analysis
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Q1) There is no limit on the availability of resources such as machine time, labor hours.
A)True
B)False
Q2) Irrelevant costs are costs that are
A) different among alternatives.
B) avoidable costs.
C) opportunity costs.
D) sunk costs.
Q3) Avoidable costs are important for
A) sales mix decisions.
B) pricing decisions for special orders.
C) sell or process-further decisions.
D) decisions to eliminate unprofitable segments.
Q4) Opportunity costs are irrelevant costs.
A)True
B)False
Q5) Special orders should only be considered if unused capacity exists.
A)True
B)False
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Chapter 28: Capital Investment Analysis
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Q1) Any proposal that fails to produce minimum rate but produces the hurdle rate will be accepted.
A)True
B)False
Q2) Simple interest is the interest earned on a principal sum that is increased at the end of each period by the interest for that period.
A)True
B)False
Q3) The components of cost of capital include all of the following except
A) the cost of debt
B) the cost of preferred stock
C) the cost of common stock and retained earnings
D) the minimum rate of return
Q4) Cost of capital of a company will be determined in four steps.
A)True
B)False
Q5) The payback period is based on a project's net income.
A)True
B)False
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