Financial Accounting
Chapter Exam Questions
Course Introduction
Financial Accounting introduces students to the fundamental principles and practices of accounting that are essential for understanding and recording business transactions. The course covers the preparation and interpretation of financial statements, including balance sheets, income statements, and cash flow statements, in accordance with generally accepted accounting principles (GAAP). Emphasis is placed on the accounting cycle, the role of ethics in financial reporting, and the analysis of financial information for decision-making purposes. By the end of the course, students will develop the foundational skills needed to accurately communicate the financial performance and position of organizations to a range of stakeholders.
Recommended Textbook
Financial and Managerial Accounting 12th Edition by Carl S. Warren
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Chapter 1: Introduction to Accounting and Business
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Q1) Simpson Auto Body Repair purchased $20,000 of machinery. The company paid $8,000 in cash at the time of the purchase and signed a promissory note for the remainder to be paid in four monthly installments.
(a) How will the purchase affect the accounting equation?
(b) How will the payment of the first monthly installment affect the accounting equation?
Answer: (a) Increase Total Assets by a net amount of $12,000 (increase Machinery $20,000 and decrease Cash $8,000) and increase Liabilities by $12,000 (Notes Payable $12,000) .
(b) Decrease Assets by $3,000 (decrease Cash) and decrease Liabilities by $3,000. (decrease Notes Payable)
Q2) List the five steps in the process by which accounting provides information to users.
Answer: 1. Identify users.
2. Assess users' information needs.
3. Design the accounting information system to meet users' needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
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Page 3
Chapter 2: Analyzing Transactions
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Sample Questions
Q1) Accounts are classified in the ledger
A) chronologically
B) alphabetically
C) in accordance with their appearance in the financial statements
D) so that accounts used most often are listed first
Answer: C
Q2) All of the following occur with a double-entry accounting system except
A) The accounting equation remains in balance.
B) The sum of all debits is always equal to the sum of all credits in each journal entry.
C) Each business transaction will have only two entries.
D) Every transaction affects at least two accounts.
Answer: C
Q3) Which of the following entries records the cash sale of capital stock to stockholders?
A) debit Capital Stock; credit Cash
B) debit Cash; credit Capital Stock
C) debit Cash; credit Revenue
D) debit Revenue; credit Cash
Answer: B
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as a(n)
A) expense
B) asset
C) contra asset
D) liability
Answer: B
Q2) List the four basic types of accounts that require adjusting entries and give an example of each.
Answer: 1. Prepaid expenses - Example: Prepaid insurance
2. Unearned revenues - Example: An attorney's retainer fee
3. Accrued revenues - Example: Interest earned on a notes receivable yet to be received
4. Accrued expenses - Example: Unpaid wages owed to employees
Q3) Which of the following is considered to be unearned revenue?
A) Concert tickets sold last month for yesterday's performance.
B) Concert tickets sold yesterday on credit for yesterday's performance.
C) Concert tickets that were not sold for the current performance.
D) Concert tickets sold for next month's performance.
Answer: D
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) The unequal totals of the debit and credit columns of the Adjusted Trial Balance columns on a work sheet
A) indicates the amount of net income or loss
B) indicates there is an error on the work sheet
C) is not unusual when preparing the work sheet
D) is the net difference between revenue, expenses, and dividends
Q2) Accrued taxes payable are generally reported on the balance sheet as a current liability.
A)True
B)False
Q3) Cross-referencing is useful in assuring that the debits and credits are in balance.
A)True
B)False
Q4) Balance sheet accounts
A) represent amounts accumulated during a specific period of time
B) are called real accounts
C) have zero balances after the closing entries have been posted
D) are equal to assets and liabilities
Q5) Explain how net income or loss is determined by using the work sheet.
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Chapter 5: Accounting for Merchandising Businesses
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Q1) The ratio of net sales to assets measures how effectively a business is using its assets to generate sales.
A)True
B)False
Q2) During the current year, merchandise is sold for $137,500 cash and $425,600 on account. The cost of the merchandise sold is $322,325. What is the amount of the gross profit?
Q3) There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.
A)True
B)False
Q4) If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are
A) consigned
B) n/30
C) FOB shipping point
D) FOB destination
Q5) Discuss the following statement:
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Chapter 6: Inventories
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Q1) Stevens Company started the year with an inventory cost of $145,000. During the month of January they purchased inventory that cost of $53,000. January sales totaled $140,000. Estimated gross profit is 35%. The estimated ending inventory as of January 31 is
A) $58,000
B) $91,000
C) $107,000
D) $69,300
Q2) On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. \(\begin{array} { | l | l | l | l | }
\hline \text { Item } & \text { Inventory Quantity } & \text { Unit Cost Price } & \text { Unit Market Price } \\
\hline \text { Product C } & 420 & \$ 6 & \$ 5 \\
\hline \text { Product D } & 370 & 12 & 14 \\
\hline
\end{array}\)
Q3) Describe three inventory cost flow assumptions and how they impact the financial statements.
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Page 8
Chapter 7: Sarbanes-Oxley, Internal Control, and Cash
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Sample Questions
Q1) You began your new job as the accountant at Bolivar Industries during the month of December. During your first month, you found several interesting issues.
1) While looking through the invoices, you found Invoices 213-242, 245-271, and 275-290. It appears that invoices 243, 244, 272, 273, and 274 are missing.
2) During the month, Clerk # 3 issued $250 in refunds as compared to Clerks #1, #2, and #4 who issued less than $50 each.
3) The daily cash receipts and bank deposits reconcile, except on Tuesdays during the month.
4) Business is generally brisk during the holiday season, but two weeks before Christmas there was a sudden increase in slow payments.
REQUIRED:
Part A: What kind of warning signs could be associated with these issues?
Part B: What control could you put in place regarding cash refunds mentioned in Part A (2)?
Q2) Money orders are considered cash.
A)True
B)False
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Page 9
Chapter 8: Receivables
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Sample Questions
Q1) Allowance for Doubtful Accounts is classified as a(n) ______ and has a normal ______ balance.
A) owners' equity, credit
B) contra-asset, debit
C) owners' equity, debit
D) contra-asset, credit
Q2) Allowance for Doubtful Accounts has a debit balance of $2,500 at the end of the year (before adjustment), and bad debt expense is estimated at 4% of net credit sales. If net credit sales are $800,000, the amount of the adjusting entry to record the estimate of the uncollectible accounts is
A) $29,500
B) $34,500
C) $32,000
D) cannot be determined
Q3) The direct write-off method of accounting for uncollectible accounts
A) emphasizes balance sheet relationships.
B) is often used by small companies and companies with few receivables.
C) emphasizes cash realizable value.
D) emphasizes the matching of expenses with revenues.
Q4) List at least three things that indicate a receivable may be uncollectible.
Page 10
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Chapter 9: Fixed Assets and Intangible Assets
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Sample Questions
Q1) Falcon Company acquired an adjacent lot to construct a new warehouse, paying $40,000 and giving a short-term note for $410,000. Legal fees paid were $13,275, delinquent taxes assessed were $14,500, and fees paid to remove an old building from the land were $15,800. Materials salvaged from the demolition of the building were sold for $6,800. A contractor was paid $890,000 to construct a new warehouse. Determine the cost of the land to be reported on the balance sheet and show your work.
Q2) All of the following below are needed for the calculation of straight-line depreciation except
A) cost
B) residual value
C) estimated life
D) units produced
Q3) The depreciable cost of a building is the same as its acquisition cost.
A)True
B)False
Q4) The cost of computer equipment does not include the consultant's fee to supervise installation of the equipment.
A)True
B)False
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Chapter 10: Current Liabilities and Payroll
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Sample Questions
Q1) The employee earnings record would contain which column that the payroll register would probably not contain?
A) deductions
B) payment
C) earnings
D) cumulative earnings
Q2) Research Company sells merchandise with a one year warranty. In 2012, sales consisted of 2,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2012 and 70% in 2013. In the 2012 income statement, Research should show warranty expense of
A) $25,000
B) $7,500
C) $17,500
D) $0
Q3) Which of the following is the most desirable quick ratio?
A) 1.20
B) 1.00
C) 0.95
D) 0.50
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Page 12
Chapter 11: Corporations: Organization, Stock Transactions, and Dividends
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Sample Questions
Q1) The balance in Retained Earnings should be interpreted as representing surplus cash left over for dividends.
A)True
B)False
Q2) The ability of a corporation to obtain capital is
A) less than a partnership.
B) about the same as a partnership.
C) restricted because of the limited life of the corporation.
D) enhanced because of limited liability and ease of share transferability.
Q3) Treasury Stock is listed in the stockholders' equity section on the balance sheet.
A)True
B)False
Q4) If common stock is issued for an amount greater than par value, the excess should be credited to
A) Retained Earnings.
B) Cash.
C) Legal Capital.
D) Paid-in Capital in Excess of Par Value.
Page 13
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Chapter 12: Long-Term Liabilities: Bonds and Notes
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Q1) When the market rate of interest was 11%, Valley Corporation issued $100,000, 8%, 10-year bonds that pay interest semiannually. Using the straight-line method, the amount of discount or premium to be amortized each interest period would be
A) $4,000
B) $896
C) $17,926
D) $1,793
Q2) A bond indenture is
A) a contract between the corporation issuing the bonds and the underwriters selling the bonds
B) the amount due at the maturity date of the bonds
C) a contract between the corporation issuing the bonds and the bond trustee, who is acting on behalf of the bondholders.
D) the amount for which the corporation can buy back the bonds prior to the maturity date
Q3) The face value of bonds is quoted as a percentage of the bonds' market value.
A)True
B)False
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Chapter 13: Investments and Fair Value Accounting
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Q1) The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue.
A)True
B)False
Q2) Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include:
A) Interest Receivable debit $2,000
B) Investment in Bonds debit $202,000.
C) Cash debit $200,000
D) Interest Revenue credit $2,000.
Q3) Newville Corporation reported net income of $50,000 in 2015. They have 10,000 shares of $100 par, 6% preferred stock and 50,000 shares of $2 common stock outstanding. During 2012 Newville paid the preferred stockholder's a $6 per share dividend and also paid $30,000 to common shareholders. The market value of Newville's stock is: Preferred - $105 and Common - $10.
(1) Calculate Newville's dividend yield.
(2) Why does the dividend yield vary widely across firms?
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Chapter 14: Statement of Cash Flows
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Q1) There are two alternatives to reporting cash flows from operating activities in the statement of cash flows: (1) the direct method and (2) the indirect method.
A)True
B)False
Q2) Cash paid to purchase long-term investments would be reported in the statement of cash flows in
A) the cash flows from operating activities section
B) the cash flows from financing activities section
C) the cash flows from investing activities section
D) a separate schedule
Q3) In preparing the statement of cash flows, the correct order of reporting cash activities is Financing, Operating, Investing.
A)True
B)False
Q4) Cash inflows and outflows are netted in the investing or financing sections of the statement of cash flows but are separately disclosed to give the reader full information. A)True
B)False
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Chapter 15: Financial Statement Analysis
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Q1) The number of days' sales in inventory is one means of expressing the relationship between the cost of goods sold and inventory.
A)True
B)False
Q2) A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will
A) both decrease.
B) both increase.
C) increase and remain the same, respectively.
D) remain the same and decrease, respectively.
Q3) The numerator used to calculate accounts receivable turnover is
A) total sales
B) net sales
C) accounts receivable at year-end
D) average accounts receivable
Q4) An extraordinary item must be either unusual in nature or infrequent in occurrence.
A)True
B)False
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Chapter 16: Managerial Accounting Concepts and Principles
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Q1) Depreciation on factory plant and equipment is an example of factory overhead cost.
A)True
B)False
Q2) In most business organizations, the chief accountant is called the controller.
A)True
B)False
Q3) A diagram of the operating structure of an organization is called an organization chart.
A)True
B)False
Q4) All of the following employees hold line positions in Anthea Electric EXCEPT:
A) vice president of production
B) vice president of finance
C) manager of the Valhalla Plant
D) vice president of sales
Q5) Conversion costs consist of product costs and period costs.
A)True
B)False
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Chapter 17: Job Order Costing
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Q1) The following are true regarding product costs except
A) product costs are found on the balance sheet until they are sold.
B) product costs consist of direct labor, direct materials, and factory overhead.
C) product costs can be found in three accounts in the balance sheet.
D) product costs include sales and administrative expenses.
Q2) Flagler Company allocates overhead based on machine hours. They estimated overhead costs for the year to be $420,000. Estimated machine hours were 50,000. Actual hours and costs for the year were 46,000 machine hours and $380,000 of overhead.
Required:
a. Calculate the overhead application rate for the year.
b. What is the amount of applied overhead for the year?
c. What is the amount of under or overapplied overhead for the year? Indicate whether it is over- or underapplied.
Q3) A process cost accounting system accumulates costs for each of the departments or processes within the factory.
A)True
B)False
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Chapter 18: Process Cost Systems
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Q1) The two categories of cost comprising conversion costs are:
A) direct labor and indirect labor
B) direct labor and factory overhead
C) factory overhead and direct materials
D) direct labor and direct materials
Q2) Conversion costs are generally added evenly throughout the process.
A)True
B)False
Q3) Department A had 4,000 units in work in process that were 60% completed as to labor and overhead at the beginning of the period, 29,000 units of direct materials were added during the period, 31,000 units were completed during the period, and 2,000 units were 80% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. The first-in, first-out method is used to cost inventories. The number of equivalent units of production for material costs for the period was:
A) 33,000
B) 29,800
C) 29,000
D) 32,000
Q4) Discuss how equivalent units are computed under the average cost method.
Page 20
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Chapter 19: Cost Behavior and Cost-Volume-Profit Analysis
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Q1) Cool-It Company manufactures and sells commercial air conditioners. Because of current trends, it expects to increase sales by 10 percent next year. If this expected level of production and sales occurs and plant expansion is not needed, how should this increase affect next year's total amounts for the following costs. Variable Costs Fixed Costs Mixed Costs
A) increase increase increase
B) increase no change increase
C) no change no change increase
D) decrease increase increase
Q2) Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio.
A)True
B)False
Q3) The dollars available from each unit of sales to cover fixed cost and profit is the unit variable cost.
A)True B)False
Q4) Total variable costs change as the level of activity changes. A)True
B)False
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Chapter 20: Variable Costing for Management Analysis
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Q1) If the ability to sell and the amount of production facilities devoted to each of two products is equal, it is profitable to increase the sales of that product with the highest contribution margin.
A)True
B)False
Q2) If sales totaled $800,000 for the year (80,000 units at $10.00 each) and the planned sales totaled $799,500 (78,000 units at $10.25 each), the effect of the unit price factor on the change in sales is:
A) $19,500 decrease
B) $19,500 increase
C) $20,000 decrease
D) $20,000 increase
Q3) In which of the following types of firms would it be appropriate to prepare contribution margin reporting and analysis?
A) boat manufacturing
B) a chain of beauty salons
C) home building
D) all of the above
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Chapter 21: Budgeting
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Q1) When preparing the cash budget, all the following should be considered except:
A) Cash receipts from customers.
B) Depreciation expense.
C) Cash payments to suppliers.
D) Cash payments for equipment.
Q2) A capital expenditures budget is prepared before the operating budgets.
A)True
B)False
Q3) The operating budgets of a company include:
A) the cash budget
B) the capital expenditures budget
C) the financing budget
D) the production budget
Q4) At the beginning of the period, the Cutting Department budgeted direct labor of $30,000 and supervisor salaries of $20,000 for 3,000 hours of production. The department actually completed 5,000 hours of production. Determine the budget for the department assuming that it uses flexible budgeting?
Q5) Budget preparation is best determined in a top-down managerial approach.
A)True
B)False
23
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Chapter 22: Performance Evaluation Using Variances From Standard
Costs
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Q1) Nonfinancial performance output measures are used to improve the input measures. A)True
B)False
Q2) The St. Augustine Corporation originally budgeted for $360,000 of fixed overhead at 100% production capacity. Production was budgeted to be 12,000 units. The standard hours for production were 5 hours per unit. The variable overhead rate was $3 per hour. Actual fixed overhead was $360,000 and actual variable overhead was $170,000. Actual production was 11,700 units. Compute the factory overhead controllable variance.
A) $9,000F
B) $9,000U
C) $5,500F
D) $5,500U
Q3) The formula to compute direct material quantity variance is to calculate the difference between
A) actual costs - standard costs
B) standard costs - actual costs
C) (actual quantity * standard price) - standard costs
D) actual costs - (standard price * standard costs)
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Chapter 23: Performance Evaluation for Decentralized Operations
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Q1) Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers.
A)True
B)False
Q2) Division X of O'Blarney Company has sales of $300,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000. What is the rate of return on investment for Division X?
A) 9.15%
B) 81.3%
C) 40.7%
D) 200%
Q3) If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3.
A)True
B)False
Q4) The DuPont formula uses financial information to measure the performance of a business.
A)True
B)False
25
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Chapter 24: Differential Analysis and Product Pricing
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Q1) A business is considering a cash outlay of $250,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available which yield an 18% return, the opportunity cost of the purchase of the land is:
A) $35,000
B) $45,000
C) $10,000
D) $6,300
Q2) Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace usable plant assets.
A)True
B)False
Q3) Make or buy options often arise when a manufacturer has excess productive capacity in the form of unused equipment, space, and labor.
A)True
B)False
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Chapter 25: Capital Investment Analysis
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Q1) The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method.
A)True
B)False
Q2) In calculating the net present value of an investment in equipment, the required investment and its terminal residual value should be subtracted from the present value of all future cash inflows.
A)True
B)False
Q3) A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from the investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4), and $6,000 (year 5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years.
A)True
B)False
Q4) What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?
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Chapter 26: Cost Allocation and Activity-Based Costing
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Q1) A plantwide factory overhead rate assumes that all overhead is directly related to one activity representing the entire plant.
A)True
B)False
Q2) Common allocation bases are
A) direct labor dollars, direct labor hours, direct material dollars
B) direct labor dollars, direct labor hours, machine hours
C) direct labor dollars, direct labor hours, machine dollars
D) machine dollars, direct labor dollars, machine hours
Q3) Activity-based costing for selling and administrative expenses can also be beneficial in allocating expenses to various products. Which of the following is the best allocation base for help desk costs?
A) Number of calls
B) Square footage of the help desk office
C) Number of products sold
D) Number of employees
Q4) A single plantwide overhead rate method is very expensive to apply.
A)True
B)False
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Chapter 27: Cost Management for Just-In-Time
Environments
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Q1) Costs of controlling quality include prevention costs and internal failure costs.
A)True
B)False
Q2) Lead time includes both value-added time and non-value-added time.
A)True
B)False
Q3) The just-in-time (JIT) philosophy views inventory as an unnecessary waste of resources.
A)True
B)False
Q4) Long setups and large batch sizes result in smaller inventories.
A)True
B)False
Q5) ____ manufacturing deals with several suppliers in hopes of finding the best price.
A) Traditional
B) Just-In-Time
C) Economic
D) Productivity improvement
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