Basic Financial Accounting
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Course Introduction
Basic Financial Accounting introduces students to the fundamental concepts and principles of accounting used to prepare, analyze, and interpret financial statements. The course covers the accounting cycle, the recording and summarizing of transactions, and the preparation of key financial statements such as the balance sheet, income statement, and cash flow statement. Emphasis is placed on understanding the roles of generally accepted accounting principles (GAAP), double-entry bookkeeping, and the ethical considerations in financial reporting. This foundational course provides essential skills for anyone pursuing further studies or a career in business, finance, or accounting.
Recommended Textbook Fundamentals of Financial Accounting 5th Edition by Fred Phillips
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Chapter 1: Business Decisions and Financial Accounting
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Q1) Generally accepted accounting principles (GAAP)were (are)established by:
A) an Italian monk in 1494.
B) the U.S. Congress and the SEC.
C) the PCAOB.
D) the FASB on an ongoing basis.
Answer: D
Q2) Use the information above to answer the following question.What is the amount of the change in stockholders' equity during the year?
A) $3,000 increase
B) $21,000 increase
C) $21,000 decrease
D) $3,000 decrease
Answer: B
Q3) What do independent auditors provide for companies who hire them?
A) Assurance that this year's financial statements are perfect
B) A guarantee that next year's operations will be profitable
C) Assurance that the financial statements follow Generally Accepted Accounting Principles
D) Assurance that the company's stock is a good investment
Answer: C
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Chapter 2: Reporting Investing and Financing Results on the Balance Sheet
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Q1) Which of the following sequences indicates the correct order of steps in the accounting cycle?
A) Post to T-accounts, prepare journal entries, prepare trial balance, and prepare financial statements.
B) Post to T-accounts, prepare journal entries, prepare financial statements, and prepare trial balance.
C) Prepare Journal entries, post to T-accounts, prepare trial balance, and prepare financial statements.
D) Prepare Journal entries, post to T-accounts, prepare financial statements, and prepare trial balance.
Answer: C
Q2) Which account would be decreased with a credit?
A) Cash
B) Accounts Payable
C) Common Stock
D) Retained Earnings
Answer: A
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Chapter 3: Reporting Operating Results on the Income Statement
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Q1) Which of the following statements about revenues and expenses is correct?
A) Both revenues and expenses typically have credit balances.
B) Revenues and expenses are considered assets and liabilities, respectively.
C) Revenue is the same as cash.
D) Expenses decrease the amount of stockholders' equity.
Answer: D
Q2) In accrual accounting,according to the __________ recognition principle,revenues should be recognized when they are earned,not necessarily when cash is received.
A) revenue
B) expense
C) cost
D) accrual
Answer: A
Q3) The primary source of revenues and expenses comes from:
A) financing activities.
B) investing activities.
C) operating activities.
D) other activities.
Answer: C
Page 5
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Chapter 4: Adjustments,financial Statements,and Financial
Results
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Q1) Which of the following appear on an adjusted trial balance?
A) The ending balance of Retained Earnings
B) Dividends
C) Gross profit
D) Net income
Q2) Which of the following statements about the presentation of a trial balance is correct?
A) The adjusted trial balance shows the end-of-year balance for Retained Earnings.
B) An adjusted trial balance presents account balances in the same level of detail as in the presentation of the financial statements.
C) The order of accounts on a trial balance is as follows: assets, liabilities, stockholders' equity, dividends, revenues and expenses.
D) The adjusted trial balance shows all the debit and credit postings to all the ledger accounts.
Q3) A deferral adjustment may involve one asset and one expense account.
A)True
B)False
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Chapter 5: Fraud, Internal Control, and Cash
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Q1) What is the primary goal of internal controls for cash payments?
A) To ensure the lowest prices possible are paid
B) To make payments as quickly as possible
C) To ensure that payments are made only for properly authorized transactions
D) To independently verify cash payments
Q2) DigDug Corporation had outstanding checks totaling $5,400 on its June bank reconciliation.In July,DigDug issued checks totaling $38,900.The July bank statement shows that $26,300 in checks cleared the bank in July.The amount of outstanding checks on DigDug's July bank reconciliation should be:
A) $12,600.
B) $18,000.
C) $5,400.
D) $7,200.
Q3) The account Cash Overage is which type of account?
A) An asset account
B) A liability account
C) A miscellaneous revenue account
D) A miscellaneous expense account
Q4) Identify the purpose of a voucher system and describe a voucher.
Q5) Describe each of the five components of an internal control system.
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Chapter 6: Internal Control and Financial Reporting for Cash and Merchandising Operations
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Q1) Sales Revenue reports the:
A) cost of merchandise available to sell
B) cost of merchandise purchased
C) cost times the quantity of goods sold
D) selling price times the quantity of goods sold
Q2) When inventory is sold,the cost of the inventory is removed from inventory and reported on a multistep the income statement as:
A) inventory expense.
B) cost of goods sold.
C) selling, general, and administrative expenses.
D) operating expenses.
Q3) Which of the following is an activity in the operations of a manufacturer,but not in the operations of a merchandising or service company?
A) Selling the good to consumers
B) Receiving cash
C) Selling the good to other firms
D) Buying raw materials
Q4) Which inventory system (periodic or perpetual)inventory system provides the best inventory control?
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Chapter 7: Reporting and Interpreting Inventories and Cost of Goods Sold
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Q1) For a manufacturer,inventory turnover refers to how many times:
A) during the period the company replaces the raw materials inventory.
B) the company purchases and sells its inventory of finished goods.
C) the company produces its goods and delivers the inventory to customers.
D) the company orders raw materials.
Q2) Which company is most likely to have a higher inventory turnover than its competitors within the same industry?
A) A company with lower-priced goods and lower gross profit
B) A company with higher-priced goods and lower gross profit
C) A company with higher-priced goods and higher gross profit
D) A company that reports lower cost of goods sold and higher inventory values
Q3) Use the information above to answer the following question.The inventory turnover ratio in Year 1 was:
A) 0.18 times
B) 6.37 times
C) 4.84 times
D) 5.50 times
Q4) Ending inventory = Beginning inventory + Purchases + Cost of goods sold
A)True B)False
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Chapter 8: Reporting and Interpreting Receivables,bad
Debt Expense,and Interest Revenue
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Q1) What effect does the collection of a note receivable,excluding interest,have on the accounting equation?
A) Total assets remain the same.
B) Assets are reduced and stockholders' equity is reduced.
C) Assets are increased and stockholders' equity is increased.
D) Assets are reduced and liabilities are reduced.
Q2) A company uses the direct write-off method.The company writes off a $3,000 customer account balance when it becomes clear that the particular customer will never pay.What is the journal entry that would be prepared to record this write-off?
A) Debit Bad Debt Expense and credit Accounts Receivable for $3,000
B) Debit Allowance for Doubtful Accounts and credit Bad Debt Expense for $3,000
C) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $3,000
D) Debit Accounts Receivable and credit Bad Debt Expense for $3,000
Q3) A scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing might suggest:
A) channel stuffing.
B) cookie jar accounting.
C) an investment opportunity.
D) improved receivables monitoring.
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Chapter 9: Reporting and Interpreting Long-Lived Tangible and Intangible Assets
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Q1) Miss Hap,the company bookkeeper,recorded the annual repair costs on the company's machinery as an increase to the Machinery account.As a result,which of the following statements correctly describes this situation?
A) Assets will be overstated.
B) Stockholders' equity will be understated.
C) Expenses will be overstated.
D) Liabilities will be overstated.
Q2) On January 1,Charlie Co.purchased a truck for $50,000 which has an estimated productive life of 100,000 miles.Its residual value is $5,000.During the first full year of its useful life,the company drove the truck 25,000 miles.Its depreciation expense for the year using the units of production method is:
A) $ 9,000.
B) $10,000.
C) $11,250.
D) $12,500.
Q3) The useful life of an asset is always measured in units of time,such as years or months.
A)True
B)False
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Chapter 10: Reporting and Interpreting Liabilities
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Q1) Liabilities are classified as current if they:
A) will be paid within the company's operating cycle or within 1 year, whichever is longer.
B) will be paid using current assets.
C) are less than the current assets.
D) are greater than the current assets.
Q2) The discount on a bonds payable becomes:
A) additional interest expense in only the year the bonds are issued.
B) additional interest expense over the life of the bonds.
C) a reduction in interest expense in only the year the bonds mature.
D) a reduction in interest expense over the life of the bonds.
Q3) The entry to record the initial borrowing of cash by issuing a promissory note will include a debit to ______ and a credit to ______:
A) Cash Notes Payable
B) Notes Payable Cash
C) Interest Expense Cash
D) Cash Interest Expense
Q4) Callable bonds can be converted to stock.
A)True
B)False
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Chapter 11: Reporting and Interpreting Stockholders Equity
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Q1) Preferred stock differs from common stock in that:
A) preferred stock has more voting power and, as such, greater control over the management of the company.
B) preferred stockholders are paid dividends before common stockholders.
C) preferred stock pays tax-free dividends.
D) preferred stock has no preemptive rights or residual claims.
Q2) If a company's earnings per share and return on equity both increase:
A) it could mean that net income is rising or it could mean that the number of outstanding shares is falling. The first is sustainable; the second cannot be continued indefinitely.
B) it means that the company is becoming more profitable and stockholders will see greater returns.
C) it means that the company's tax liability will rise in the future and cause a decline in profitability.
D) it could mean that net income is rising or it could mean that the number of outstanding shares is falling. In either case, stockholders can expect greater future returns indefinitely.
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Chapter 12: Reporting and Interpreting the Statement of Cash Flows
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Q1) ABC Company issued 30,000 shares of common stock in January.In August,the company repurchased 5,000 shares for the treasury.When reporting these transactions in the statement of cash flows,ABC Company ______ combine them into one transaction in the ______ activities section.
A) can financing
B) cannot financing
C) cannot investing
D) can investing
Q2) A machine with a cost of $130,000 and accumulated depreciation of $85,000 is sold for $35,000 cash.
Required:
Part a.Prepare the journal entry to record this transaction.
Part b.Explain how this transaction would be reported on the statement of cash flows prepared using the indirect method.
Q3) Free cash flow may be used for all of the following except:
A) expanding the business.
B) paying off debt.
C) building up the cash balance.
D) paying employees.
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Chapter 13: Measuring and Evaluating Financial Performance
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Q1) Trend data can be measured in dollar amounts or percentages.
A)True
B)False
Q2) Liquidity measures the ability of a company to meet its current financial obligations.
A)True
B)False
Q3) A company has $72,500 of inventory at the beginning of the year and $65,500 at the end of the year.Sales revenue is $986,400,cost of goods sold is $572,700,and net income is $124,200 for the year.The inventory turnover ratio is closest to:
A) 1.8.
B) 8.3.
C) 6.0.
D) 14.3.
Q4) Which of the following would improve a current ratio that is now 1.2?
A) Selling long-term assets for cash
B) Purchasing land for cash
C) Buying equipment in exchange for a two-year note
D) Purchasing inventory on account
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