Financial Accounting
Exam Answer Key
Course Introduction
Financial Accounting provides students with a foundational understanding of the principles and practices used to prepare and interpret financial statements. The course covers key concepts such as the accounting cycle, recognition of revenue and expenses, asset and liability management, and the framework for preparing balance sheets, income statements, and cash flow statements. Emphasis is placed on the use of Generally Accepted Accounting Principles (GAAP), ethical considerations, and the role of financial accounting information in business decision-making. Through practical exercises and real-world examples, students develop the skills to analyze and communicate financial data effectively to various stakeholders.
Recommended Textbook
Fundamental Accounting Principles 21st Edition by John J. Wild
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Chapter 1: Accounting in Business
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Sample Questions
Q1) If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000,is assessed for tax purposes at $95,000,is recognized by its purchasers as easily being worth $140,000,and is sold for $137,000.At the time of the sale,assume that the seller still owed $30,000 to TrustOne Bank on the land that was purchased for $85,000.Immediately after the sale,the seller paid off the loan to TrustOne Bank.What is the effect of the sale and the payoff of the loan on the accounting equation?
A)Assets increase $52,000; owner's equity increases $22,000; liabilities decrease $30,000
B)Assets increase $52,000; owner's equity increases $30,000; liabilities decrease $30,000
C)Assets increase $22,000; owner's equity increases $52,000; liabilities decrease $30,000
D)Assets decrease $30,000; owner's equity decreases $30,000; liabilities decrease $30,000
E)Assets decrease $55,000; owner's equity decreases $55,000; liabilities decrease $30,000
Answer: C
Q2) Using the accounting equation,equity is equal to ________________________.
Answer: assets minus liabilities
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3
Chapter 2: Analyzing and Recording Transactions
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Q1) An account used to record the owner's investments in the business is called a(n):
A)Withdrawals account.
B)Capital account.
C)Revenue account.
D)Expense account.
E)Liability account.
Answer: B
Q2) Posting is the transfer of journal entry information to the ledger.
A)True
B)False
Answer: True
Q3) A company that finances a relatively large portion of its assets with liabilities is said to have a high degree of financial leverage.
A)True
B)False
Answer: True
Q4) _______________ is the process of transferring journal entry information to the ledger. Answer: Posting
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Chapter 3: Adjusting Accounts and Preparing Financial Statements
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Sample Questions
Q1) Identify the differences between accrual accounting and cash basis accounting.
Answer: Accrual accounting records revenues in the period earned,and expenses in the period incurred.The cash basis,on the other hand records revenues when cash is received,and expenses when cash is paid.
Q2) Profit margin reflects the percent of profit in each dollar of revenue.
A)True
B)False
Answer: True
Q3) Financial statements can be prepared directly from the information in the adjusted trial balance.
A)True
B)False
Answer: True
Q4) The entry to record a cash receipt from a customer when the service to be provided has not yet been performed involves a debit to an unearned revenue account.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Completing the Accounting Cycle
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Q1) The recurring steps performed each reporting period,starting with analyzing and recording transactions in the journal and continuing through the post-closing trial balance,is referred to as the:
A)Accounting period.
B)Operating cycle.
C)Accounting cycle.
D)Closing cycle.
E)Natural business year.
Q2) Harry's Bikes current ratio is 1.3.The industry average for the current ratio is 1.2.This indicates that Harry's Bikes can cover its short term liabilities with its short term assets.
A)True
B)False
Q3) List and explain the steps in preparing a 10-column worksheet.
Q4) The ______________ refers to the steps in preparing financial statements for users.
Q5) Balance sheet accounts are called ____________________ accounts because they carry their balances to the next accounting period,and are not closed as long as the company continues to own the asset,owe the liability and have equity.
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Chapter 5: Accounting for Merchandising Operations
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Questions
Q1) ABC Corporation's total quick assets were $5,888,000,its current assets were $11,700,000 and its current liabilities were $8,000,000.Its acid-test ratio equals:
A)0.50.
B)0.68.
C)0.74.
D)1.50.
E)2.20.
Q2) Under a periodic inventory system,purchases,purchases returns and allowances,purchase discounts,and transportation in transactions are recorded in separate temporary accounts.
A)True
B)False
Q3) A service company earns net income by buying and selling merchandise. A)True B)False
Q4) A perpetual inventory system requires updating of the inventory account only at the beginning of an accounting period.
A)True B)False
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Chapter 7: Accounting Information Systems
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Sample Questions
Q1) The five fundamental principles of accounting information systems are:
A)Control, accountability, relevance, compatibility, and flexibility.
B)Historical cost, relevance, compatibility, flexibility, and cost-benefit.
C)Control, relevance, compatibility, flexibility, and safety.
D)Control, relevance, compatibility, timeliness, and cost-benefit.
E)Control, relevance, compatibility, flexibility, and cost-benefit.
Q2) A special journal is used to record and post transactions of a similar type.
A)True
B)False
Q3) Output devices include all of the following except:
A)Printers.
B)Monitors.
C)LCD projectors.
D)Web communications.
E)Bar code readers.
Q4) A subsidiary ledger is a listing of individual accounts with a common characteristic.
A)True
B)False
Q5) Describe the posting process for special journals.
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Chapter 8: Cash and Internal Controls
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Q1) List the principles of internal control.
Q2) At the end of the day,the cash register's record shows $1,250,but the count of cash in the cash register is $1,245.The correct entry to record the cash sales is
A)Debit Cash $1,245; Credit Sales $1,245.
B)Debit Cash $1,245; debit Cash Over and Short $5; credit Sales $1,250.
C)Debit Cash $1,250; credit Sales $1,250.
D)Debit Cash $1,250; credit Sales $1,245, credit Cash Over and Short $5.
E)Debit Cash Over and Short $5, credit Sales $5.
Q3) Liquidity refers to a company's ability to pay its near-term obligations.
A)True
B)False
Q4) The impact of technology on internal controls includes:
A)Reduced processing errors.
B)Elimination of the need for regular audits.
C)Elimination of the need to bond employees.
D)Elimination of separation of duties.
E)Elimination of fraud.
Q5) What is the purpose of the days' sales uncollected ratio?
Q6) What is the purpose of the petty cash account?
Page 9
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Chapter 9: Accounting for Receivables
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Q1) The aging method of determining bad debts expense is based on the knowledge that the longer a receivable is past due,the lower the likelihood of collection.
A)True B)False
Q2) Companies use two methods to account for uncollectible accounts,the direct write-off method and the allowance method.
A)True B)False
Q3) Explain how to record the receipt of a note receivable.
Q4) A ____________________ is a signed promise to pay a specified amount of money either on demand or at a definite future date.
Q5) A company factored $35,000 of its accounts receivable and was charged a 2% factoring fee.The journal entry to record this transaction would include a debit to Cash of $35,000,a debit to Factoring Fee Expense of $700,and credit to Accounts Receivable of $35,700.
A)True
B)False
Q6) What is the maturity date of a 6-month note receivable dated February 5?
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Chapter 10: Plant Assets, natural Resources, and Intangibles
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Q1) A company purchased a mineral deposit for $800,000.It expects this property to produce 1,200,000 tons of ore and to have a salvage value of $50,000.In the current year,the company mined and sold 90,000 tons of ore.Its depletion expense for the current period equals:
A)$ 15,000.
B)$ 60,000.
C)$150,000.
D)$ 56,250.
E)$139,500.
Q2) A company had a building destroyed by fire.The building originally cost $650,000,and its accumulated depreciation as of the date of the fire was $300,000.The company received $400,000 cash from an insurance policy that covered the building and will use that money to help rebuild.Prepare the single journal entry to record the destruction of the building and the receipt of cash from the insurance company.
Q3) Asset turnover is computed by dividing average total assets by cost of sales.
A)True
B)False
Q4) Describe the accounting for intangible assets,including their acquisition,cost allocation,and accounts involved.
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Chapter 11: Current Liabilities and Payroll Accounting
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Q1) A table that shows the amount of federal income tax to be withheld from an employee's pay is the:
A)Form 941.
B)Tax table.
C)Wage bracket withholding table.
D)W-2.
E)W-4.
Q2) Employee vacation benefits:
A)Are estimated liabilities.
B)Are contingent liabilities.
C)Are recorded as an expense when the employee takes a vacation.
D)Are recorded as an expense when the employee retires.
E)Increase net income.
Q3) Describe employer responsibilities for reporting payroll taxes.(To the extent possible,reference the form to be filed for each tax.)
Q4) Describe how to account for and report on contingent liabilities.
Q5) Agro Depot's income before interest expense and income taxes was $5,909 million,and interest expense was $37 million.Calculate Agro Depot's times interest earned.
Q6) Identify and explain the types of employer payroll taxes.
Page 12
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Chapter 12: Accounting for Partnerships
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Sample Questions
Q1) Smith,West,and Krug form a partnership.Smith contributes $180,000,West contributes $150,000,and Krug contributes $270,000.Their partnership agreement calls for the income or loss division to be based on the ratio of capital invested.If the partnership reports income of $175,000 for its first year,what amount of income is credited to Krug's capital account?
A)$43,750.
B)$78,750.
C)$52,500.
D)$58,333.
E)$60,000.
Q2) A partnership designed to protect innocent partners from malpractice or negligence claims resulting from acts of another partner is a:
A)Partnership.
B)Limited partnership.
C)Limited liability partnership.
D)General partnership.
E)Limited liability company.
Q3) __________________ means that partners can commit or bind the partnership to any contract within the scope of the partnership business.
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Chapter 13: Accounting for Corporations
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Q1) When preferred stock is cumulative and the directors either do not declare a dividend to preferred stockholders or declare one that does not cover the total amount of cumulative dividends,the unpaid amount is called
Q2) The number of shares that a corporation's charter allows it to sell is referred to as:
A)Issued stock.
B)Outstanding stock.
C)Common stock.
D)Preferred stock.
E)Authorized stock.
Q3) Stock that is retired is the same as authorized and unissued stock.
A)True
B)False
Q4) A company has 500,000 common shares authorized,400,000 common shares issued,and 15,000 common shares in treasury stock at the current year-end.It paid $0.24 per share in cash dividends during the year.The year-end market price of the stock is $15.Calculate (1)the total dividends paid and (2)the dividend yield.
Q5) What are the rights generally granted to common stockholders?
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Chapter 14: Long-Term Liabilities
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Q1) A company has bonds outstanding with a par value of $100,000.The unamortized discount on these bonds is $4,500.The company retired these bonds by buying them on the open market at 97.What is the gain or loss on this retirement?
A)$0 gain or loss.
B)$1,500 gain.
C)$1,500 loss.
D)$3,000 gain.
E)$3,000 loss.
Q2) _____________________ bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.
Q3) Bonds issued in the names and addresses of their holders are ________________ bonds.
Q4) A company enters into an agreement to make 5 annual year-end payments of $3,000 each,starting one year from now.The annual interest rate is 6%.The present value of an annuity factor for 5 periods,6% is 4.2124.What is the present value of these five payments?
Q5) ______________ bonds are bonds that are scheduled for maturity on one specified date.
Q6) Bonds payable to whoever holds them are called _________________ bonds. To view all questions and flashcards with answers, click on the resource link above.
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Chapter 15: Investments and International Operations
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Q1) A company reported net income for Year 1 of $98,000 and $106,000 for Year 2.It also reported net sales of $735,000 in Year 1 and $798,000 in Year 2.The company's average total assets in Year 1 were $1,850,000 and $1,720,000 in Year 2.Calculate the company's profit margin,total asset turnover and return on total assets for Year 1and Year 2.Comment on the results.
Q2) When using the equity method for investments in equity securities,the investor records the receipt of cash dividends as revenue.
A)True
B)False
Q3) Profit margin is net sales divided by net income.
A)True
B)False
Q4) Doherty Corporation had net income of $30,000,net sales of $1,000,000,and average total assets of $500,000.Its return on total assets is:
A)3%
B)200%
C)6%
D)17%
E)1.5%
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Chapter 16: Reporting the Statement of Cash Flows
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Q1) The reporting of investing and financing activities is _________________ under the direct and indirect methods of preparing the statement of cash flows.
Q2) The indirect method separately lists each major item of operating cash receipts and cash payments.
A)True
B)False
Q3) The appropriate section in the statement of cash flows for reporting the cash payment of wages is:
A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Schedule of noncash investing or financing activity.
E)None of these.This is not reported on the statement of cash flows.
Q4) What are the five usual steps involved in the preparation of the statement of cash flows?
Q5) Mansell reported net income of $233.4 million,net cash provided by operating activities of $131.4 million,total cash flows of $187.7 million,and average total assets of $2,040.8 million at the end of the year.Calculate the cash flow on total assets ratio for Mansell.
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Chapter 17: Analysis of Financial Statements
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Q1) Comparative financial statements in which each individual financial statement amount is expressed as a percentage of a base amount are called:
A)Asset comparative statements.
B)Percentage comparative statements.
C)Common-size comparative statements.
D)Sales comparative statements.
E)General-purpose financial statements.
Q2) Ratios may be expressed as (1)________________,(2)__________________,or (3)__________________.
Q3) Working capital is computed as current liabilities minus current assets.
A)True
B)False
Q4) Vertical analysis is the comparison of a company's financial condition and performance across time.
A)True B)False
Q5) The return on total assets ratio is a profitability measure. A)True B)False
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Chapter 18: Managerial Accounting Concepts and Principles
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Q1) Both financial and managerial accounting report monetary information; managerial accounting also reports considerable nonmonetary information.
A)True
B)False
Q2) Which of the following statements is true regarding product and period costs?
A)Office salaries expense is a product cost and factory maintenance is a period cost.
B)Office rent is a product cost and supervisors' salaries expense is a period cost.
C)Factory rent is a product cost and advertising expense is a period cost.
D)Delivery expense is a product cost and indirect materials is a period cost.
E)Sales commissions is a product cost and indirect labor is a period cost.
Q3) The Malcolm Baldrige Award was established by
A)The United Nations.
B)The U.S.Chamber of Commerce.
C)The Malcolm Baldrige Foundation.
D)The U.S.Congress.
E)The SEC.
Q4) ___________________ is the process of setting goals and making plans to achieve them.
Page 19
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Chapter 19: Job Order Costing
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Q1) The production of one unit of Product BBB used $17.50 of direct materials and $21.00 of direct labor.The unit sold for $56.00 and was assigned overhead at a rate of 30% of labor costs.What is the gross profit per unit on its sale?
Q2) Key Manufacturing Co.applies factory overhead to production on the basis of direct labor costs.Assume that at the beginning of the current year the company estimated that direct material costs would be $178,800,direct labor costs would be $154,000,and factory overhead costs would be $231,000.
(1)If the $28,000 cost of Key's goods in process inventory included $5,200 of direct labor cost,what amount of direct materials cost was included?
(2)If $8,100 of the company's $34,300 finished goods inventory was direct materials cost,determine the direct labor cost and factory overhead cost of the finished goods inventory.
Q3) Any material amount of under- or overapplied factory overhead must always be closed to Cost of Goods Sold at the end of an accounting period.
A)True
B)False
Q4) A ______________________ is a separate record maintained for each job.
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Chapter 20: Process Costing
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Q1) In a process cost accounting system,a department's production should be measured in terms of equivalent units when its beginning or ending inventory includes goods in process.
A)True
B)False
Q2) The Machining Department started the current month with a beginning goods in process inventory of $10,000.During the month,it was assigned the following costs: direct materials,$76,000; direct labor,$24,000; and factory overhead,50% of direct labor cost.Also,inventory with a cost of $109,000 was transferred out of the department to the next phase in the process.The ending balance of the Goods in Process Inventory account for the Machining Department is:
A)$ 13,000.
B)$ 56,000.
C)$ 59,000.
D)$110,000.
E)$165,000.
Q3) If a process has _______________ or _______________ inventory of partially completed production,equivalent units must be calculated so that total costs incurred during the period are assigned to all units worked on.
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) Dunkin Company manufactures and sells a single product that sells for $480 per unit; variable costs are $300.Annual fixed costs are $990,000.Current sales volume is $4,200,000.Compute the break-even point in units.
A)3,750.
B)10,000.
C)5,500.
D)3,300.
E)6,000.
Q2) A CVP graph presents data on:
A)Profit and loss on a per unit basis.
B)Profit, loss, and break-even on a total dollar basis.
C)Profit, loss, and break-even on a per unit basis.
D)Only profit and loss on a total basis.
E)Profit and loss on a budget and actual basis.
Q3) A visual line fit to points in a scatter diagram may be used to identify the approximate relation between past cost and volume.
A)True
B)False
Q4) Briefly describe a CVP chart,including its major components.
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Chapter 22: Master Budgets and Planning
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Q1) Grafton budgets production of 300 units in June and 310 units in July.Each unit requires 1.5 hours of direct labor.The direct labor rate if $14 per hour.The indirect labor rate is $21.00 per hour.Compute the budgeted direct labor cost for July.
A)$6,300.
B)$6,510.
C)$9,450.
D)$9,765.
E)$16,275.
Q2) Which of the following is not a result of following a well-designed budgeting process?
A)Improved decision-making processes.
B)Improved performance evaluations.
C)Improved coordination of business activities.
D)Assurance of future profits.
E)All of these are benefits of effective budgeting.
Q3) The task of preparing a budget should be the sole task of the most important department in an organization.
A)True
B)False
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Chapter 23: Flexible Budgets and Standard Costs
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Q1) Cabot Company collected the following data regarding production of one of its products.Compute the direct materials price variance. \[\begin{array} { l l }
\text { Direct materials stardard (6lbs. @ } \$ 2 / lb ) & \$ 12 \mathrm { per } \text { firished urit } \\
\text { Actual direct materials used } & 243,000 \mathrm { lbs } \\
\text { Actual firished urits produced } & 40,000 \mathrm { units } \\
\text { Actual cost of direct materials used } & \$ 483,570 \end{array}\]
A)$2,430 unfavorable.
B)$3,570 unfavorable.
C)$2,430 favorable.
D)$6,000 unfavorable.
E)$3,570 favorable.
Q2) Another name for a static budget is a variable budget. A)True B)False
Q3) Standard costs can serve as a basis for evaluating actual performance. A)True B)False
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Chapter 24: Performance Measurement and Responsibility Accounting
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Q1) The China Department of the Coulsen Department Store had sales of $282,000,cost of goods sold of $198,750,indirect expenses of $19,875,and direct expenses of $41,250 for the current period.What is the China Department's contribution to overhead as a percent of sales?
Q2) The most useful evaluation of a manager's cost performance is based on:
A)Controllable costs.
B)Contribution percentages.
C)Departmental contributions to overhead.
D)Uncontrollable expenses.
E)Direct costs.
Q3) With respect to cycle time,companies strive to reduce non-value added time in order to improve ________________________.
Q4) Direct costs require allocation across departments.
A)True
B)False
Q5) ___________________ are costs incurred to produce or purchase two or more products at the same time.
25
Q6) A ______________________ incurs costs without directly generating revenues.
Q7) Define an investment center.How are investment centers evaluated?
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Chapter 25: Capital Budgeting and Managerial Decisions
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Q1) What is capital budgeting?
Why are capital budgeting decisions often difficult and risky?
Q2) Fields Company currently manufactures one of its parts at a cost of $3.25 per unit.This cost is based on a normal production rate of 50,000 units.Variable costs are $2.10 per unit,fixed costs related to making this part are $40,000 per year,and allocated fixed costs are $45,000 per year.Allocated fixed costs are unavoidable whether the company makes or buys the part.Fields is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period.Should the company continue to manufacture the part,or should it buy the part from the outside supplier?
Support your answer with analyses.
Q3) Good management accounting indicates that projects be evaluated using relevant data.In choosing among alternatives,what factors (considerations)are relevant?
Q4) The break-even time (BET)method is a variation of the:
A)Payback method.
B)Internal rate of return method.
C)Accounting rate of return method.
D)Net present value method.
E)Present value method.
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Chapter 26: Time Value of Money B
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Q1) To calculate present value of an amount,two factors are required: __________________ and ___________________.
Q2) At an annual interest rate of 8% compounded annually,$5,300 will accumulate to a total of $7,210.65 in 5 years.
A)True
B)False
Q3) Interest is:
A)Time.
B)A borrower's payment to the owner of an asset for its use.
C)The same as a savings account.
D)Always a liability.
E)Always an asset.
Q4) A company needs to have $200,000 in 4 years,and will create a fund to insure that the $200,000 will be available.If they can earn a 7% return,how much must the company invest in the fund today to equal the $200,000 at the end of 4 years?
Q5) Explain the concept of the present value of a single amount.
Page 27
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Chapter 27: Activity-Based Costing C
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Q1) A _________________ is a factor that causes the cost of an activity to go up and down.
Q2) Briefly describe the process of activity-based costing.
Q3) Activity cost pools are an important part of the allocation of overhead costs using activity-based costing.
A)True
B)False
Q4) A system of assigning costs to departments and products on the basis of a variety of activities instead of only one allocation base is called:
A)A responsibility accounting system.
B)A cost center accounting system.
C)Controllable costing.
D)Activity-based costing.
E)Performance costing.
Q5) Unit costs can be significantly different when using activity-based costing compared to traditional cost allocation methods.
A)True
B)False
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