Accounting I Review Questions
Course Introduction
Accounting I is an introductory course designed to familiarize students with the fundamental principles and procedures of financial accounting. The course covers the accounting cycle, including the identification, recording, and reporting of business transactions, preparation of financial statements, and the analysis and interpretation of accounting information. Students learn about key concepts such as assets, liabilities, equity, revenues, and expenses, and gain practical experience in using accounting systems and tools. By the end of the course, students will have a solid understanding of basic accounting concepts and their application in real-world business scenarios.
Recommended Textbook
Financial Accounting An Introduction to Concepts Methods and Uses 14th Edition by Roman L. Weil
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Chapter 1: Introduction to Business Activities and Overview
of Financial Statements and the Reporting Process
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Sample Questions
Q1) FASB board members make standard-setting decisions guided by a conceptual framework that addresses the qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting information holds that the information should represent what it is supposed to represent, in the sense that the information should correspond to the phenomenon being reported, and it should be verifiable and free from bias?
A)Relevance
B)Reliability
C)Comparability.
D)Subjective
E)all of the above
Answer: B
Q2) U.S.GAAP and IFRS contain broad guidance on what the financial statements must contain, but neither completely specifies the level of detail or the names of accounts.
A)True
B)False
Answer: True
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Chapter 2: The Basics of Record Keeping and Financial
Statement Preparation: Balance Sheet
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Q1) Income statement accounts are temporary accounts and, as such, will have beginning and ending balances of zero.
A)True
B)False
Answer: True
Q2) The equation that describes the relationship between the balance sheet and the income statement through the Retained Earnings account is as follows:
A)Retained Earnings (beginning) - Net Income = Retained Earnings (ending)
B)Retained Earnings (beginning) + Net Income + Dividends = Retained Earnings (ending)
C)Retained Earnings (beginning) - Net Income - Dividends = Retained Earnings (ending)
D)Retained Earnings (beginning) - Net Income + Dividends = Retained Earnings (ending)
E)Retained Earnings (beginning) + Net Income - Dividends = Retained Earnings (ending)
Answer: E
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4
Chapter 3: The Basics of Record Keeping and Financial
Statement Preparation: Income Statement
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Sample Questions
Q1) Common terminology, but not definitions in U.S.GAAP and IFRS, often refers to the difference between sales and cost of sales as gross margin, gross profit, or gross income.
A)True
B)False
Answer: True
Q2) When assets and income from operations that a firm has decided to discontinue (and dispose of or abandon), separating the two income components allows users to form better predictions of
A)past earnings.
B)current earnings.
C)future earnings.
D)all of the above
E)none of the above
Answer: C
Q3) The income statement typically provides information about the operating results of business segments.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Balance Sheet: Presenting and Analyzing
Resources and Financing
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Sample Questions
Q1) Investors would view measurements that reflect current conditions as the most relevant for making investment decisions.
A)True
B)False
Q2) Historically, _____ has described a preference for financial reporting such "that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets."
A)conservatism
B)reliability
C)realization
D)recognition
E)relevance
Q3) Applying asset and liability definitions and recognition criteria under U.S.GAAP and IFRS results in the balance sheet including all economic benefits (resources) and obligations.
A)True
B)False
Q4) Describe Asset recognition, definition, and measurement.
Q5) What is conservatism?
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Chapter 5: Income Statement: Reporting Results of Operating Activities
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Sample Questions
Q1) While no general principle describes the nature of items excluded from net income and included in Other Comprehensive Income, they tend to arise from remeasurements of assets and liabilities (often, remeasurements at fair value) and not from transactions.For example, IFRS permits but does not require firms to revalue certain noncurrent assets upward to reflect increases in fair value in excess of acquisition cost.Under IFRS, such a revaluation remeasurement increases assets (because the firm now records an existing asset on the balance sheet at a larger number) and increases Other Comprehensive Income.These increases are accumulated in a(n) _____ account, Revaluation Surplus.
A)liability
B)shareholders' equity
C)revenue
D)asset
E)expense
Q2) Subtraction of total operating expenses from sales yields:
A)net income.
B)gross margin.
C)operating profit.
D)all of the above
E)none of the above
Page 7
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Chapter 6: Statement of Cash Flows
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Sample Questions
Q1) Net income for a particular period does not equal cash flow from operations because
A)most firms use the accrual basis of accounting to measure operating performance.
B)most firms typically recognize revenue at the time of sale, independent of when they receive the cash from the sale.
C)some firms receive cash before providing services and recognizing revenues.
D)some firms receive cash after they have provided goods and recognized revenues.
E)all of the above
Q2) Which of the following statements is/are not true?
A)The statement of cash flows reports flows, or changes in cash over time.
B)The balance sheet reports changes in the amounts of cash over time.
C)The last few lines of each statement of cash flows report the amount of cash on each firm's balance sheet at the beginning and the end of each period.
D)Both U.S.GAAP and IFRS require that the statement of cash flows explain changes in cash and cash equivalents.
E)All of the above are not true.
Q3) Why is a Statement of Cash Flows needed?
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Chapter 7: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Why are ratios useful?
Q2) Indicate the effects (increase, decrease, no effect) of the following independent transactions on (1) the profit margin ratio, (2) the plant asset turnover, and (3) the inventory turnover.
\(\begin{array}{lll}
&&\text { Profit Margin } & \text { Plant Asset } & \text { Inventory } \\
&&\text { Ratio } & \text { Turnover } & \text { Turnover }\\
a.& \text {Payment of various repair expenses }&\_\_\_\_&\_\_\_\_&\_\_\_\_\\
b.& \text {Purchase of inventory on account }&\_\_\_\_&\_\_\_\_&\_\_\_\_\\
c.& \text { Purchase of equipment}&\_\_\_\_&\_\_\_\_&\_\_\_\_\\
d.& \text {Payment of bonds payable }&\_\_\_\_&\_\_\_\_&\_\_\_\_\\ \end{array}\)
Q3) The fixed asset turnover ratio
A)measures the relation between sales and the investment in fixed assets such as property, plant, and equipment.
B)measures the amount of sales generated from a particular level of investments in fixed assets.
C)is calculated by dividing sales by the average fixed assets for the period.
D)all of the above.
E)none of the above.
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Chapter 8: Revenue Recognition, Receivables, and
Advances From Customers
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Sample Questions
Q1) The allowance method for uncollectibles is used by a firm
A)when it knows that at the time of sale, it will experience some reduction in future cash flows.
B)when the firm can estimate with reasonable precision the amount of reduction in future cash flows at the time of sale.
C)to reduce reported earnings in the period of sale to the amount of the expected net cash collections.
D)all of the above.
E)none of the above.
Q2) The financial statements contain information for analyzing the collectibility of accounts receivable and the adequacy of the expense for uncollectible accounts.Typical ratios used for this analysis include the
A)accounts receivable turnover ratio, only.
B)days receivables outstanding, only.
C)write-off percentage, only.
D)accounts receivable turnover ratio, days receivables outstanding, and write-off percentage.
E)accounts receivable turnover ratio and days receivables outstanding, only.
Q3) Describe income recognition after the sale when substantial performance remains.
Page 10
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Chapter 9: Working Capital
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Q1) Which of the following is not true regarding the Work-in-Process Inventory account?
A)The Work-in-Process Inventory account accumulates the cost of raw materials transferred to the factory floor.
B)The Work-in-Process Inventory account accumulates the cost of direct labor used in production.
C)The Work-in-Process Inventory account accumulates the manufacturing overhead costs.
D)The Work-in-Process Inventory account accumulates the administrative costs.
E)The Work-in-Process Inventory account is credited for the manufacturing costs assigned to the finished units transferred to the finished goods storeroom.
Q2) As time passes, firms gain information about both actual warranty usage and actual warranty expenditures.
A)True B)False
Q3) What costs are included in inventory of manufacturing and merchandising firms?
Q4) Describe the similarities and differences between the allowance method for uncollectibles and the allowance method for warranties.
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Chapter 10: Long-Lived Tangible and Intangible Assets
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Sample Questions
Q1) The Perma Company spent $300,000 on research and development during Year 8 to generate new product lines.One of the three projects looks like it will ultimately be technologically feasible while the other two projects resulted in unsuccessful efforts.For the project which may become technologically feasible, a total of $125,000 was incurred during Year 8.Under U.S.GAAP, how much of the $300,000 should be recognized as an expense in Year 8?
A)$300,000
B)$225,000
C)$175,000
D)$50,000
E)$0
Q2) The economic value of a tangible asset may decline below its book value but an impairment loss would not be recognized when the
A)undiscounted future cash flows exceed its book value.
B)undiscounted future cash flows exceed its market value.
C)discounted future cash flows exceed its book value.
D)discounted future cash flows exceed its market value.
E)discounted future cash flows exceed its liquidation value.
Q3) How are long-lived assets analyzed?
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Page 12
Chapter 11: Notes, Bonds, and Leases
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Sample Questions
Q1) A firm classifies mortgages, notes, bonds, and leases which were used to acquire its long-term assets that fall due after the operating cycle, (usually greater than one year) as
A)a current liabilities.
B)a long-term asset.
C)a long-term liabilities.
D)part of shareholders' equity.
E)contingent liabilities.
Q2) The conversion option of convertible bonds has value because the holder can benefit from some of the later increases in the market value of the firm's _____ after issuance of the bonds.
A)preferred stock
B)paid-in-capital
C)treasury stock
D)common stock
E)debentures
Q3) Describe the sources of long-term debt financing.
Q4) Discuss the fair value option in accounting for certain assets and liabilities.
Q5) What factors enter into choosing the accounting method for leases under U.S.GAAP and IFRS?
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Chapter 12: Liabilities: Off-Balance Sheet Financing,
Benefits, and Income Taxes
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Sample Questions
Q1) Permanent differences between pretax book income and taxable income arises from
A)tax-exempt interest revenue, only.
B)certain fines, only.
C)depreciation on long-lived assets, only.
D)bad debt expense, only.
E)tax-exempt interest revenue and certain fines.
Q2) A complicated financing arrangement, whereby firms sell batches of receivables to a legally separate entity whose sole purpose is to hold the receivables and issue claims on their cash flows.The process is referred to as _____ of the receivables.
A)consolidation
B)transformation
C)hypothecation
D)securitization
E)credit enhancement
Q3) Describe the accounting for income taxes for financial reporting purposes.
Q4) U.S.GAAP and IFRS require firms to recognize the cost of pension plans as an expense during the years as the employees receive the retirement benefits.
A)True
B)False
Page 14
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Chapter 13: Marketable Securities and Derivatives
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Sample Questions
Q1) A firm records debt securities purchased at the acquisition cost.The acquisition cost will differ from the _______ of the debt if the __________on the bonds differs from the required ________ on the bonds at the time the firm acquired them.
A)market value; coupon rate; market yield
B)market value; discount rate; coupon yield
C)maturity value; coupon rate; market yield
D)maturity value; discount rate; market yield
E)maturity value; discount rate; coupon yield
Q2) According to U.S.GAAP, firms holding debt securities with a positive intent and ability to hold to maturity display such securities in the Investments section of the balance sheet at
A)amortized acquisition cost .
B)market value.
C)maturity value.
D)future value of future cash flows.
E)present value of future cash flows.
Q3) How does U.S.GAAP and IFRS require firms to classify marketable securities?
Q4) What disclosures about marketable securities are required by U.S.GAAP?
Q5) What is the accounting treatment for trading securities?
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Chapter 14: Intercorporate Investments in Common Stock
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Sample Questions
Q1) What is a noncontrolling interest in a consolidated subsidiary?
Q2) In the acquisition method for a business combination, the excess of the fair value of the consideration over the fair value of the acquired firm's identifiable assets net of identifiable liabilities is goodwill.
A)True
B)False
Q3) Often, the parent does not own 100% of the voting stock of a consolidated subsidiary.The parent refers to the owners of the remaining shares of voting stock as a A)noncontrolling interest.
B)nonconsolidated group.
C)consolidated subsidiary.
D)noninfluential interest.
E)nonvoting interest.
Q4) An intercompany transaction is a transaction between
A)two subsidiary corporations only.
B)the subsidiaries and the parent company only.
C)any two members of a consolidated entity.
D)any two members of a consolidated entity, conducted at arm's-length.
E)any three members of a consolidated entity.
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Chapter 15: Shareholders Equity: Capital Contributions and Distributions
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Q1) What are convertible bonds and convertible preferred stock and how does U.S.GAAP and IFRS account for their issuance? Describe the accounting for conversion of convertible bonds and convertible preferred.
Q2) Holders of a bond or preferred stock with common stock warrants attached cannot detach and redeem the warrants separately from the bond or preferred stock.
A)True
B)False
Q3) Common and preferred stock usually do not have a par or stated value.
A)True
B)False
Q4) A stock dividend indicates
A)a permanent commitment of assets generated by reinvested earnings.
B)an increase to total owners' equity.
C)an attempt to shift the control of the company by diluting ownership.
D)a transfer of corporate assets to shareholders without using cash.
E)a temporary commitment of assets generated by reinvested earnings.
Q5) Discuss the accounting for treasury shares.
Page 17
Q6) Discuss callable preferred shares from the issuer's point-of-view.
Q7) Discuss why firms repurchase their own stock?
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Chapter 16: Statement of Cash Flows: Another Look
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Q1) On a statement of cash flows prepared using the direct method, cash paid for income taxes would be income tax expense minus
A)an increase in income taxes payable.
B)a decrease in income taxes payable.
C)beginning income taxes payable.
D)ending income taxes payable.
E)None of these answers is correct.
Q2) When using the indirect method to calculate cash flow from operations, add back the subtraction for minority interest in earnings of consolidated, but less than 100%-owned subsidiaries to derive cash flow from operations.
A)True
B)False
Q3) Most, but not all, firms report cash flows from operations using the indirect method. A)True
B)False
Q4) Discuss the effects of transactions involving derivatives and the fair value option on the statements of cash flows.
Q5) Discuss the indirect and direct methods in deriving cash flow from operations.
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Chapter 17: Synthesis and Extensions
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Sample Questions
Q1) Discuss GAAP reporting of income transactions.
Q2) Which of the following is not true?
A)Acquisition cost for a merchandising firm includes the costs incurred to purchase and transport the inventory prior to sale.
B)Acquisition cost for a manufacturing firm includes the direct material, direct labor, and manufacturing overhead cost to produce the inventory.
C)If the market values of inventory items decline below acquisition cost prior to sale, firms must reduce their balance sheet carrying values using the lower of cost or market method.
D)U.S.GAAP uses a combination of replacement cost and net realizable values to measure market value.
E)U.S.GAAP and IFRS permits firms to remeasure inventories upward when market value exceeds acquisition cost.
Q3) Both U.S.GAAP and IFRS require firms to report certain information about each of their operating segments. What segment information and disclosures are required?
Q4) When do firms recognize revenue?
Q5) Explain the accounting for leases.
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