Business Accounting
Exam Answer Key
Course Introduction
Business Accounting introduces students to the fundamental principles and practices of financial accounting within a business context. The course covers essential topics such as the accounting cycle, preparation and interpretation of financial statements, measurement of business transactions, and internal controls. Students learn how to analyze accounting information for decision-making, understand the regulatory environment, and utilize accounting software tools. Emphasis is also placed on ethical considerations and the role of accounting in strategic planning, providing a solid foundation for further study in finance, management, and entrepreneurship.
Recommended Textbook
Financial and Managerial Accounting 9th 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) Which of the following items has no effect on stockholders' equity?
A) Land purchased
B) Revenue
C) Expense
D) Dividend declared and paid
Answer: A
Q2) Which of the following is considered by accountants to be a separate entity from its owner(s)?
A) Partnership only
B) Sole proprietorship only
C) Corporation only
D) Sole proprietorship, partnership, and corporation
Answer: D
Q3) Obtaining funds from a bank is an example of an investing activity.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Analyzing Business Transactions
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Sample Questions
Q1) Which of the following events does not require a journal entry?
A) Purchase of a one-year insurance policy
B) Agreement to perform a service at a future date
C) Performance of a service agreed to at a past date
D) Payment for a service performed previously
Answer: B
Q2) Which of the following accounts is an asset?
A) Retained Earnings
B) Notes Payable
C) Prepaid Rent
D) Supplies Expense
Answer: C
Q3) Which of the following does not affect retained earnings?
A) Declaration and payment of dividends
B) Earning of revenues
C) Investments by stockholders
D) Incurring of expenses
Answer: C
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4
Chapter 3: Measuring Business Income
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Sample Questions
Q1) Depreciation Expense-Equipment is a permanent account.
A)True
B)False
Answer: False
Q2) The recording of an expense could result in a corresponding increase in A) stockholders' equity.
B) revenue.
C) a liability.
D) an asset.
Answer: C
Q3) Revenue is equal to the cash received by a company during an accounting period.
A)True
B)False
Answer: False
Q4) The cash basis of accounting is prohibited for income tax purposes.
A)True
B)False
Answer: False
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Page 5
Chapter 3: Supplement - Closing Entries and the Work Sheet
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Sample Questions
Q1) The work sheet is prepared
A) after the formal closing entries have been entered into the journal.
B) before the preparation of a formal trial balance.
C) after the formal adjusting entries have been entered into the journal.
D) before the preparation of formal financial statements.
Q2) An amount would not appear along the Dividends account line in which of the following work sheet columns?
A) Income Statement
B) Balance Sheet
C) Trial Balance
D) Adjusted Trial Balance
Q3) 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
Q4) The heading of a work sheet might include the line "As of December 31,20xx."
A)True
B)False
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Chapter 4: Financial Reporting and Analysis
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Sample Questions
Q1) Which of the following appears on the balance sheet?
A) Interest income
B) Income taxes
C) Net sales
D) Merchandise inventory
Q2) Advertising expense should be included in the general and administrative expenses section of a multistep income statement.
A)True
B)False
Q3) Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business.
A)True
B)False
Q4) Gross margin equals the difference between net sales and A) net income.
B) cost of goods sold plus operating expenses.
C) operating expenses.
D) cost of goods sold.
Q5) State the definition of a current asset.
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Chapter 5: The Operating Cycle and Merchandising Operations
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Sample Questions
Q1) An advantage of using the periodic inventory system is that it requires less recordkeeping than the perpetual inventory system.
A)True
B)False
Q2) For each description below,state which document is being described.
a. Document issued to permit the treasurer to make a payment
b. Bill sent by the vendor to the purchaser
c. Written request prepared by a department asking the purchasing department to make a purchase
d. Document accompanying money put in the bank
e. Document describing items in a shipment of goods delivered
f. Document sent to a vendor requesting shipment of goods
Q3) Another term for an invoice is a bill.
A)True
B)False
Q4) All of the following are examples of internal control activities except
A) rotation of key personnel.
B) company picnics for all employees.
C) bank reconciliations.
D) insistence that employees take earned vacations.
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Chapter 6: Inventories
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Sample Questions
Q1) Which of the following terms best describes the assumption made in applying the four inventory methods?
A) Cost flow
B) Goods flow
C) Asset flow
D) Physical flow
Q2) Despite its advantages,the just-in-time operating environment produces increased carrying costs for inventory.
A)True
B)False
Q3) When taking a physical inventory under the retail method,it is necessary to know only the quantity of items on hand.
A)True
B)False
Q4) Inventory turnover is a measure expressed in terms of a percentage.
A)True
B)False
Q5) Why are cost flow assumptions made when accounting for merchandise inventory?
Q6) What is the chief objective of supply-chain management? How is it accomplished?
Page 9
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Chapter 7: Cash and Receivables
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Sample Questions
Q1) If the amount of uncollectible accounts expense is understated at year end,
A) net Accounts Receivable will be understated.
B) total liabilities will be overstated.
C) net income will be understated.
D) Allowance for Uncollectible Accounts will be understated.
Q2) Under the allowance method,uncollectible accounts must be estimated if the matching rule is to be followed.
A)True
B)False
Q3) A petty cash fund is an example of an imprest system.
A)True
B)False
Q4) An NSF check should appear in which section of the bank reconciliation?
A) Deduction from the balance per books
B) Deduction from the balance per bank
C) Addition to the balance per books
D) Addition to the balance per bank
Q5) The receivable turnover is expressed in terms of dollars.
A)True
B)False
10
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Chapter 8: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) Accrued liabilities often arise as a result of the passage of time.
A)True
B)False
Q2) The amount recorded for Payroll Taxes and Benefits Expense is borne entirely by the employee.
A)True
B)False
Q3) Under what circumstances is a contingent liability reflected in the accounting records as though an actual liability exists?
Q4) The term wages refers to the compensation of employees who are paid at a monthly or yearly rate.
A)True
B)False
Q5) Explain why the cost of employing someone is more than just the wage or salary paid to the employee.
Q6) There is no limit to the amount of income subject to the Medicare tax.
A)True
B)False
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Chapter 9: Long Term Assets
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Sample Questions
Q1) The cost of a sewage system should be included in the Land Improvements account.
A)True
B)False
Q2) The primary difference between ordinary and extraordinary repairs is that extraordinary repairs
A) are an expense of the current period.
B) are periodic in nature.
C) are necessary to maintain the asset in good operational condition.
D) extend the useful life or increase the residual value of the asset.
Q3) The term used to describe the allocation of the cost of an intangible asset to the periods it benefits is
A) depletion.
B) apportionment.
C) amortization.
D) depreciation.
Q4) Natural resources are classified as intangible assets on the balance sheet.
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 10: Long-Term Liabilities
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Sample Questions
Q1) Under a capital lease,the lessee does not record which of the following?
A) Rent expense
B) Capital lease obligations
C) Depreciation on the leased asset
D) Capital lease assets
Q2) A capital lease is a lease of property,plant,or equipment that is in effect an installment purchase.
A)True
B)False
Q3) As the interest coverage ratio declines,the risk for creditors also declines.
A)True
B)False
Q4) The interest coverage ratio equals income before income taxes plus interest expense divided by
A) income before income taxes.
B) net income.
C) interest expense.
D) total assets.
Q5) When bonds are converted to common stock,what is the basis for recording (valuing)the stock issued?
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Chapter 11: Contributed Capital
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Sample Questions
Q1) Financing a business with common stock is less risky than financing it with bonds.
A)True
B)False
Q2) The board of directors of Berweck Corporation declared a cash dividend on January 18,2010,to be paid on February 18,2010,to shareholders holding the stock on February 2,2010.Given these facts,the date February 2,2010,is referred to as the
A) date of declaration.
B) date of payment.
C) ex-dividend date.
D) date of record.
Q3) How is it possible for a corporation to have more shares issued than it has outstanding?
Q4) 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.
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Chapter 12: Investments
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Sample Questions
Q1) Minority interest is reported as a(n)
A) current liability on the consolidated balance sheet.
B) asset on the consolidated balance sheet.
C) revenue item on the consolidated income statement.
D) separate item between liabilities and stockholders' equity on the consolidated balance sheet.
Q2) When a corporation owns more than 50 percent of the voting stock in another corporation,it usually should report its investment by using (the)
A) equity method.
B) cost adjusted to market method.
C) book value method.
D) consolidated financial statements.
Q3) Available-for-sale debt securities are valued on the balance sheet at A) cost, adjusted for the effects of interest.
B) maturity value.
C) fair value.
D) original cost.
Q4) Another term for short-term investments is marketable securities.
A)True
B)False
Page 15
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Chapter 13: The Corporate Income Statement and the Statement of
Stockholders Equity
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Sample Questions
Q1) Gains and losses caused by the passage of a new law should be classified as extraordinary on the income statement.
A)True
B)False
Q2) Which of the following would have the least likelihood of being treated as an extraordinary item?
A) Uninsured loss from earthquake
B) Gain or loss on sale of equipment
C) Gain or loss arising from enactment of new law
D) Uninsured loss from fire
Q3) Income tax allocation procedures are applied to comply with the matching principle.
A)True
B)False
Q4) Deferred Income Taxes is classified as an asset when it has a debit balance.
A)True B)False
Q5) A stock dividend does not affect the total amount of stockholders' equity.
A)True
B)False
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Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) Management would not use the statement of cash flows to
A) assess the liquidity of the business.
B) determine dividend policy.
C) evaluate the effects of major policy decisions involving investments and financing.
D) determine the financial position of the company.
Q2) Royer Corporation engaged in this transaction: Received dividends on securities held.
Indicate which section,if any,the above transaction would appear in,or relate to,on a statement of cash flows.
A) Schedule of noncash investing and financing transactions
B) Operating activities section
C) Financing activities section
D) Investing activities section
Q3) Management could use the statement of cash flows to determine whether short-term financing is necessary to pay current liabilities.
A)True
B)False
Q4) On the lines below,provide the components for the calculation of free cash flow.
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Chapter 15: The Changing Business Environment - a Managers Perspective
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Sample Questions
Q1) The overall guideline or limit for management accounting information is that the report or analysis must be meaningful and must answer the questions or issues under review.
A)True
B)False
Q2) If a management accountant gives information about a future merger of his or her company to a relative,the accountant has acted unethically.
A)True
B)False
Q3) Management accounting accumulates,maintains,and processes an organization's financial and nonfinancial information.
A)True
B)False
Q4) What would a company using an activity-based management approach attempt to do in regard to activities that add value to the product and those that do not?
Q5) "Hours of inspection" is an example of a nonfinancial performance measure. A)True
B)False
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Chapter 16: Cost Concepts and Cost Allocation
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Sample Questions
Q1) The two primary types of cost behavior are fixed and variable.
A)True
B)False
Q2) The overhead rate is equal to the total estimated overhead costs divided by the actual cost driver level.
A)True
B)False
Q3) As units are completed,their costs are transferred from the Work in Process Inventory account to the Finished Goods Inventory account.
A)True
B)False
Q4) A single predetermined overhead rate is most appropriately used to assign overhead costs when a company produces a diverse set of products.
A)True
B)False
Q5) Nonvalue-adding costs increase the cost of a product.
A)True
B)False
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Chapter 17: Costing Systems- Job Order Costing
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Sample Questions
Q1) In a job order costing system,when overhead costs are applied,they increase the Work in Process Inventory account.
A)True
B)False
Q2) In a job order costing system,indirect labor costs incurred are charged to the Work in Process Inventory account.
A)True
B)False
Q3) In a job order costing system,when supplies are issued from inventory to production,the Overhead account is increased.
A)True
B)False
Q4) A basic part of a job order costing system is the set of procedures and entries used to record the costs incurred for materials,labor,and overhead.
A)True B)False
Q5) Explain the similarities and differences between job order costing and process costing.Focus on the characteristics of each type of system.
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Chapter 18: Costing Systems- Process Costing
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Sample Questions
Q1) Only one Work in Process Inventory account is used with the process costing system.
A)True
B)False
Q2) Average costing method tries to match cost flow with physical flow of production. A)True
B)False
Q3) D.Q.Company uses the FIFO method in its process costing system.Beginning inventory in the mixing department consisted of 6,000 units that were 75 percent complete with respect to conversion costs.Ending work in process inventory consisted of 5,000 units that were 60 percent complete with respect to conversion costs.If 12,000 units were transferred to the next processing department during the period,the equivalent units for conversion costs would be
A) 12,500 units.
B) 10,500 units.
C) 13,500 units.
D) 13,000 units.
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21
Chapter 19: Value-Based Systems- Abm and Lean
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Sample Questions
Q1) A work cell is an autonomous production line that can perform only one required operation efficiently at a time.
A)True
B)False
Q2) In a just-in-time environment,
A) production runs are interrupted each day at setup time to perform routine maintenance.
B) scheduled and preventive maintenance is extremely important.
C) cost savings are realized by performing maintenance whenever it is needed.
D) routine minor maintenance is always performed by the repair department.
Q3) When managing inventory in a just-in-time environment,there is less need to control personnel.
A)True
B)False
Q4) The just-in-time operating environment typically is characterized by the positioning of all similar machines together on the factory floor.
A)True
B)False
Q5) Why is process value analysis not part of the general ledger accounting system?
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Chapter 20: Cost Behavior Analysis
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Sample Questions
Q1) Identify the following as fixed costs,variable costs,or mixed costs:
materials
building rent
expense
expense
on the factory building
of goods sold
labor
Q2) The equation for finding the breakeven point may be written as A) S - VC - FC = 0.
B) VC - FC = S.
C) S + FC = VC.
D) S + VC + FC = 0.
Q3) Practical capacity is theoretical or ideal capacity reduced by normal and anticipated work stoppages,such as machine breakdowns. A)True
B)False
Q4) Is breakeven analysis a tool that can be used for a service-oriented business? Explain your answer.
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Chapter 21: The Budgeting Process
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Q1) Successful budget implementation depends on two factors-clear communication and the support of top management.
A)True
B)False
Q2) Responsibility accounting authorizes managers to take control of and be held accountable for the revenues and expenses in their budgets.
A)True
B)False
Q3) The budgeting function begins with the preparation of the direct materials purchases budget.
A)True
B)False
Q4) Which of the following is not true about the direct materials purchases budget?
A) It is determined by the anticipated change in the direct materials inventory level and the production budget.
B) The direct materials purchases budget does not affect the forecasted balance sheet.
C) The direct materials purchases budget is expressed in units and dollars.
D) It is used in preparing the budgeted income statement.
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Chapter 22: Performance Management and Evaluation
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Sample Questions
Q1) Standard costing would most often require which type of performance evaluation?
A) Flexible budgeting
B) Zero-based budgeting
C) Variable costing
D) Any of these choices
Q2) ROI,residual income,and economic value added all represent performance measures that can be utilized to determine investment center performance.
A)True
B)False
Q3) Cost of capital is the maximum desired rate of return on a particular investment.
A)True
B)False
Q4) A manager can improve EVA by
A) increasing assets and decreasing costs.
B) increasing sales and assets.
C) increasing cost of capital and assets.
D) decreasing assets and lowering cost of capital.
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25
Chapter 23: Standard Costing and Variance Analysis
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Q1) During April 20xx,production is expected to be 30,000 units with the following costs: direct materials,$195,000; direct labor,$300,000; variable overhead,$120,000; and fixed overhead,$150,000.Prepare a flexible budget for 25,000 and 35,000 units.
Q2) The use of realistic predetermined unit costs to facilitate product costing,cost control,cost flow,and inventory valuation is a description of the A) flexible budget concept.
B) budgetary control concept.
C) capacity level concept.
D) standard cost accounting concept.
Q3) Standard costs are useful for all but which of the following?
A) Determining actual costs
B) Preparing budgets and forecasts
C) Evaluating the performance of workers and management
D) Helping to develop appropriate selling prices
Q4) Direct labor time standards express the hourly labor cost per function or job classification that exists during the current accounting period.
A)True
B)False
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Chapter 24: Short Run Decision Analysis
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Q1) The Norran Company needs 15,000 units of a certain part to use in its production cycle.If Norran buys the part from Waterloo Company instead of making it,Norran could not use the released facilities in another activity; thus,all of the fixed overhead applied will continue regardless of what decision is made.Accounting records provide the following data:
Cost to Norran to make the part:
Direct materials,$3
Direct labor,$12
Variable overhead,$13
Fixed overhead applied,$8
Cost to buy the part from the Waterloo Company,$27
In deciding whether to make or buy the part,Norran's total relevant costs to make the part are
A) $360,000.
B) $240,000.
C) $420,000.
D) $405,000.
Q2) Discuss the qualitative factors that should be considered in short-run decision making.
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Chapter 25: Capital Investment Analysis
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Q1) The cost of debt,the cost of preferred stock,the cost of common stock and the cost of retained earnings are the components of cost of capital.
A)True
B)False
Q2) The proposals that will either meet company strategic goals or produce the minimum rate of return will receive serious review in the preliminary screening process.
A)True B)False
Q3) The accounting rate-of-return method does not consider the time value of money. A)True B)False
Q4) Net present value method,payback period method and accounting rate of return method are the three important decision variables used in the evaluation of proposals. A)True
B)False
Q5) What criteria must be met for accepting any capital expenditure proposal with respect to minimum rate of return on investment?
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Chapter 26: Pricing Decisions,incltarget Costing and Transfer Pricing
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Q1) A major advantage of the target costing approach to pricing is that target costing
A) allows a company to analyze the potential profit of a product before spending money to produce the product.
B) is not dependent on customers' quality versus price decisions. C) identifies unproductive assets.
D) anticipates the product's profitability midway through its life cycle.
Q2) Return on assets pricing has the same objective as gross margin pricing for the price determination process.
A)True
B)False
Q3) The cost-plus transfer price is the sum of the costs incurred by the producing division plus an agreed-upon profit percentage.
A)True
B)False
Q4) A transfer price can be based on a market price for products that has been reduced in the process of bargaining by division managers.
A)True
B)False
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Chapter 27: Quality Management and Measurement
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Sample Questions
Q1) Measures of customer complaints and warranty claims are used in tracking A) materials/scrap control performance.
B) inventory performance.
C) quality performance.
D) delivery performance.
Q2) The overall objective of controlling the costs of quality is to eliminate A) appraisal costs.
B) costs of nonconformance.
C) costs of conformance.
D) the costs of quality.
Q3) The first step in ensuring the production of high-quality products is to have a sound product design.
A)True
B)False
Q4) CAD is
A) a cost allocating decision.
B) computer aided downtime.
C) a computer-based engineering system.
D) an organizational environment.
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Chapter 28: Financial Analysis of Performance
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Q1) For 20xx,Black & White Corporation had average total assets of $300,000,net sales of $250,000,net income of $20,000,net cash flows from operating activities of $30,000,dividend payments of $15,000,purchases of plant assets of $70,000,and sales of plant assets of $30,000.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) Liquidity ratios are an indication of a company's
A) ability to effectively employ its resources.
B) overall debt to equity position.
C) overall debt position.
D) ability to pay bills when they are due and to meet unexpected needs for cash.
Q3) A common measure of liquidity is
A) profit margin.
B) receivable turnover.
C) return on assets.
D) asset turnover.
Q4) Accounting methods may be a source of incomparability among companies.
A)True
B)False
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