Accounting Theory
Pre-Test Questions
Course Introduction
Accounting Theory explores the fundamental principles, concepts, and frameworks that underlie the practice of accounting. The course examines the evolution of accounting thought, the development of accounting standards, and the role of various stakeholders in the accounting process. Students will analyze the theoretical underpinnings of financial reporting, measurement, and disclosure, while also considering issues such as ethics, regulation, and the impact of changing economic environments on accounting practice. Through critical evaluation of contemporary debates and case studies, students will gain a deeper understanding of how accounting theory informs both standard setting and practical decision-making in the field.
Recommended Textbook
Financial Accounting 11th Edition by Belverd E. Needles
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15 Chapters
2808 Verified Questions
2808 Flashcards
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Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) The correct order of the three stages of accounting is
A) communication,processing,and measurement.
B) measurement,communication,and processing.
C) processing,measurement,and communication.
D) none of these are correct.
Answer: D
Q2) In which form of business does CVS operate? List two places where this would be revealed in the financial statements.
Answer: CVS operates as a corporate form of business.This would be evidenced in several places in the financial statements: The title of each statement shows the name of the company as CVS Corporation. The shareholders' equity section of the consolidated balance sheets contains accounts for stock and retained earnings transactions. The consolidated statements of earnings contains a line for income taxes.Corporations are subject to income taxes. The consolidated statements of cash flows also shows stock transactions.
Q3) Net assets equals assets plus liabilities.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Analyzing Business Transactions
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Sample Questions
Q1) Which of the following statements is false about a journal entry?
A) It may have more than one debit or credit entry.
B) Credits are always indented.
C) Accounts that are increased are always listed first.
D) A space should be skipped between journal entries.
Answer: C
Q2) All companies use the same standard set of accounts.
A)True
B)False
Answer: False
Q3) All business transactions require the application of two basic accounting concepts: recording a transaction at the right time and placing the right value on it.
A)True
B)False
Answer: False
Q4) Dividends are classified as an expense.
A)True
B)False Answer: False
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Chapter 3: Measuring Business Income
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Sample Questions
Q1) After all closing entries have been posted,which of the following accounts is most likely to have a nonzero balance?
A) Income Summary
B) Utilities Payable
C) Rent Expense
D) Service Revenue
Answer: B
Q2) The principal difference between depreciation expense and most other types of expenses is that depreciation
A) can be avoided if the asset is in as good of condition as when it was purchased.
B) does not require an immediate cash outlay.
C) is not deductible if it will cause a net loss.
D) is subject to more precise measurement.
Answer: B
Q3) Expenses that have been paid for and recorded are called accrued expenses.
A)True
B)False
Answer: False
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Chapter 4: Supplement - Closing Entries and the Work Sheet
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Sample Questions
Q1) The amount for Dividends will appear in the Income Statement columns of a work sheet.
A)True
B)False
Q2) In preparing closing entries,which of the following columns of the work sheet are the most helpful?
A) Adjustments columns
B) Income Statement columns
C) Adjusted Trial Balance columns
D) Balance Sheet columns
Q3) The amount extended to the Retained Earnings line in the Balance Sheet column of the work sheet is not the amount to be reflected for Retained Earnings on the balance sheet.
A)True B)False
Q4) Closing entries may be prepared by referring to the Income Statement columns and the Dividends column of the work sheet.
A)True B)False
6
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Chapter 5: Financial Reporting and Analysis
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Sample Questions
Q1) Freight paid on goods shipped to customers is classified as a general and administrative expense.
A)True
B)False
Q2) Which accounting term does not mean the same as the others?
A) Retained earnings
B) Net worth
C) Capital
D) Owner's equity
Q3) The term owner's equity is a more accurate term than net worth because many assets are recorded at original cost rather than at current value.
A)True
B)False
Q4) The main difference among the balance sheets of the sole proprietorship,the partnership,and the corporation is found in the liabilities section.
A)True
B)False
Q5) List at least five qualitative characteristics of financial accounting.
Q6) State the definition of a current asset.
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Chapter 6: The Operating Cycle and Merchandising Operations
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Sample Questions
Q1) Colton,Inc.,a specialty retailer of customized audio systems for automobiles,installed a perpetual inventory system in the second quarter of 2012.The new system allowed the firm to adjust its merchandise inventories to sales patterns more effectively and to prepare monthly financial statements.Although the system led to an improvement in sales and income,the gross margin on the monthly income statements was falling below both management's expectations and the industry average.At the end of 2013,a physical inventory revealed that actual merchandise inventory was considerably lower than the perpetual inventory records indicated.The merchandise inventories of some stores were off more than others,but all had deficiencies.What probably caused these losses and what steps could be taken to prevent them in the future?
Q2) Before a check authorization is issued,the following documents must be in agreement,except for the A) invoice.
B) remittance advice.
C) purchase order.
D) receiving report.
Q3) Another term for an invoice is a check.
A)True
B)False
Page 8
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Chapter 7: Inventories
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Sample Questions
Q1) Which of the following inventory methods when used for income tax purposes must also be used for reporting purposes?
A) Specific identification
B) LIFO
C) FIFO
D) Average-cost
Q2) A company has cost of goods available for sale of $500,000,sales of $574,000,and a gross profit percentage of 30 percent.Using the gross profit method,what is the ending inventory?
A) $226,000
B) $10,000
C) $98,200
D) $327,800
Q3) During periods of consistently falling prices,the FIFO inventory method will produce the highest possible amount of net income.
A)True
B)False
Q4) How is the matching rule applied when accounting for merchandise inventory?
Q5) What is the chief objective of supply-chain management? How is it accomplished?
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Chapter 8: Cash and Receivables
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Sample Questions
Q1) Credit balances in customer accounts appear on the balance sheet as a current asset.
A)True
B)False
Q2) Which of the following bank reconciliation items would result in a journal entry on the company's books?
A) Bank error
B) Interest income
C) Deposit in transit
D) Outstanding checks
Q3) The higher the receivable turnover,the lower the days' sales uncollected.
A)True
B)False
Q4) What is a contingent liability,and how does it relate to the discounting of a note receivable at the bank?
Q5) On a bank reconciliation,outstanding checks are deducted from the balance per books.
A)True
B)False
Q6) On a balance sheet,what items normally are included in Cash?
Page 10
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Chapter 9: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) The market approach to the measurement of fair value converts future cash flows to a single present value.
A)True
B)False
Q2) Which of the following is an example of a commitment?
A) Lease
B) Incomes taxes payable
C) Sales taxes payable
D) Dividend payable
Q3) The costs associated with coupons and rebates are usually reflected in liability accounts.
A)True
B)False
Q4) A liability for dividends exists only when the board of directors declares them.
A)True
B)False
Q5) Because accounting measures should be verifiable,liabilities should not be estimated.
A)True
B)False
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Chapter 10: Long Term Assets
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Sample Questions
Q1) The cost of land should include accrued property taxes paid by the purchaser.
A)True
B)False
Q2) The exclusive right to sell a computer program is called a copyright.
A)True
B)False
Q3) On January 1,2009,Tipton's Pizza purchased for $48,000 a delivery truck that will be driven an estimated 120,000 miles.The truck has an estimated useful life of eight years and an estimated residual value of $12,000.Calculate the following amounts: (a)depreciation expense for 2013,under the production method (assume that 17,000 miles were driven that year); (b)the accumulated depreciation after the truck has been used for five and one-half years,under the straight-line method; and (c)depreciation expense for 2011,under the double-declining-balance method.
Q4) An intangible asset with a determinable useful life should be amortized over the legal life of the asset.
A)True
B)False
Q5) Present two arguments in favor of the use of accelerated depreciation.
Q6) What is goodwill and when may it be recorded?
Page 12
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Chapter 11: Long-Term Liabilities
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Sample Questions
Q1) Spencer Corporation issued 30-year term bonds at a premium in 2013.Interest is payable semi-annually.Which of the following statements is true,assuming that the effective interest method of amortization is used for the bond premium?
A) Interest expense decreases each six-month interest period.
B) Interest expense as a percentage of the bond's book value changes from period to period.
C) Interest expense increases each six-month interest period.
D) Interest expense remains constant in amount for each interest period.
Q2) Entering into a capital lease is an example of off-balance-sheet financing.
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) Bond
Q5) Technically,what is meant by the amortization of a bond discount,and why is it necessary?
Q6) Premium
Page 13
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Chapter 12: Stockholders Equity
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Sample Questions
Q1) 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: 2010,$15,000; 2011,$0; 2012,$20,000; 2013,$25,000.Calculate the total cash dividends received by owners of preferred and common stock in each year.
Q2) When shares of preferred stock may be redeemed by the corporation at a certain price,the shares are said to be
A) cumulative.
B) nonconvertible.
C) convertible.
D) callable.
Q3) All of the following would appear on the statement of stockholders' equity except A) foreign currency translation adjustment.
B) purchase of treasury stock.
C) net income.
D) declaration of a stock split.
Q4) Draw two distinctions between accounting for a stock split and accounting for a stock dividend.
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Page 14
Chapter 13: The Statement of Cash Flows
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Sample Questions
Q1) Because noncash investing and financing transactions do not affect cash,they should be excluded from the statement of cash flows.
A)True
B)False
Q2) When a statement of cash flows is prepared using the indirect method,
A) net income is the starting point in determining cash flows from operations.
B) dividend expense is not included.
C) the increase in cash is different than when the direct method is used.
D) the amount of cash collected from customers is calculated.
Q3) Assume the indirect method is used to compute net cash flows from operating activities.For this item extracted from the financial statements-Depreciation Expense-indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following:
A) Add to net income to arrive at net cash flows from operating activities
B) Subtract from net income to arrive at net cash flows from operating activities
C) Not used to adjust net income to calculate net cash flows from operating activities
Q4) Provide the components for the calculation of free cash flow.
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Chapter 14: Financial Performance Measurement
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Sample Questions
Q1) Does the existence of conglomerates make financial performance evaluation easier or more difficult? Why?
Q2) Which of the following is the least useful in evaluating a relationship as either favorable or unfavorable?
A) Industry averages
B) Past performance of the company
C) Past and current performances of the company
D) Rule-of-thumb measures
Q3) In a common-size income statement for a retail store,the 100 percent amount is for
A) cost of goods sold.
B) net revenues.
C) gross profit.
D) net income.
Q4) Define quality of earnings and identify the factors that affect quality of earnings.
Q5) Different accounting methods will often have different effects on net income.
A)True
B)False
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Page 16
Chapter 15: Investments
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Sample Questions
Q1) When are eliminating entries made,where are they entered,and why are they needed?
Q2) Wirt Corporation owns 25 percent of the voting stock of Wood Corporation and accounts for the investment using the equity method.Wood reports a net loss of $20,000.Wirt Corporation's entry to record its share of loss is:
A) Cash 5,000
Investment in Wood Corporation 5,000
B) Loss on Investments 20,000
Investment in Wood Corporation 20,000
C) Loss,Wood Corporation Investment 5,000
Investment in Wood Corporation 5,000
D) Cash 5,000
Loss,Wood Corporation Investment 5,000
Q3) When the market value of available-for-sale securities exceeds cost,an unrealized loss appears in stockholders' equity as an addition.
A)True B)False
Q4) Briefly explain,what are the consolidated financial statements,and how is the consolidation accomplished?
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