Financial Accounting
Exam Answer Key
Course Introduction
Financial Accounting is a foundational course that introduces students to the principles and practices of accounting used to measure, process, and communicate financial information about economic entities. The course covers key topics such as the accounting cycle, preparation of financial statements, and the analysis and interpretation of financial data. Students will gain an understanding of generally accepted accounting principles (GAAP), the roles of ethics and professional standards in financial reporting, and the use of accounting information in decision-making by stakeholders including investors, creditors, and management. Through practical exercises and real-world examples, this course equips students with essential skills for interpreting financial information and making informed business decisions.
Recommended Textbook
Horngrens Financial and Managerial Accounting 6th Edition by Tracie L. Nobles
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Page 2
Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) A law firm provides legal services for clients who do not pay immediately.There is no effect on the accounting equation until the clients pay for the services.
A)True
B)False
Answer: False
Q2) The guidelines for accounting information are called Generally Accepted Accounting Principles (GAAP).
A)True
B)False
Answer: True
Q3) Which of the following is shown on the balance sheet as well as the statement of cash flows?
A)Stockholders' equity (ending balance)
B)Net income
C)Total assets (ending balance)
D)Cash (ending balance)
Answer: D
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) For expenses,the category of account and its normal balance is ________.
A)equity and a credit balance
B)assets and a debit balance
C)assets and a credit balance
D)equity and a debit balance
Answer: D
Q2) If the total debits equal the total credits on the trial balance,the individual account balances will be error free.
A)True
B)False
Answer: False
Q3) Accounts Payable is a(n)________ account and has a normal ________ balance.
A)liability;debit
B)asset;debit
C)liability;credit
D)asset;credit
Answer: C
Q4) A business performs services for its customer for $50,000 on account.Record the transaction in the journal.
Answer: 11ea86ed_2d00_7fef_8b27_fb29aeb532b0_TB3056_00
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) Mercury,Inc.sells tickets in advance for its weekly productions and records the proceeds as Unearned Revenue.At the end of each month,the company makes an adjusting entry to account for the tickets used during the month (ticket revenue. )On March 1,the Unearned Revenue account had a credit balance of $2,000.During March,Mercury sold 300 tickets at $20 each,and 250 tickets were used during the month.What is the balance in Unearned Revenue at the end of March?
A)credit balance of $3,000
B)debit balance of $2,000
C)credit balance of $2,000
D)debit balance of $3,000
Answer: A
Q2) Justice,Inc.purchased a machine for $15,000 two years ago.The machine had no residual value and had an estimated useful life of 10 years.If the company uses the straight-line depreciation method,calculate the current book value of the machine.
A)$12,000
B)$3,000
C)$16,500
D)$15,000
Answer: A
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Which of the following accounts will be included in a post-closing trial balance?
A)Dividends
B)Salaries Expense
C)Common Stock
D)Supplies Expense
Q2) All assets that will not be converted to cash or used up within the business's operating cycle or one year,whichever is greater,are called ________.
A)long-term assets
B)fully depreciated assets
C)current assets
D)current liabilities
Q3) Which of the following is a permanent account?
A)Wages Expense
B)Salaries Payable
C)Service Revenue
D)Utilities Expense
Q4) Logan Service Company earned revenues of $100,000 and incurred expenses of $107,000.Prepare the entry to close the Income Summary account.Omit explanation.
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Chapter 5: Merchandising Operations
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Q1) The Merchandise Inventory account is only used in a perpetual inventory system.
A)True
B)False
Q2) Complete Electronics Inc.sells a point-of-sale computer with a two-year service contract.Complete collects $3,000 cash for the selling price of the computer and $576 for the two-year service contract.How is revenue recognized?
A)Complete will record Sales Revenue of $3,576 when the computer is delivered to the customer.
B)Complete will record Sales Revenue of $1,788 per year for two years.
C)Complete will record Sales Revenue of $3,000 when the computer is delivered and Service Revenue of $24 per month for 24 months.
D)Complete will record Sales Revenue of $3,000 when the computer is delivered and will record revenue for the service contract as service calls are made.
Q3) When using the perpetual inventory system,the entry to close Cost of Goods Sold will include a debit to Income Summary.
A)True
B)False
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Chapter 6: Merchandise Inventory
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Q1) Under International Financial Reporting Standards (IFRS),which of the following statements regarding the lower-of-cost-or-market rule is incorrect?
A)It is not necessary to record inventory at the lower-of-cost-or-market.
B)The market value is defined as net realizable value.
C)If the historical cost is higher than the net realizable value,the inventory must be written down.
D)The IFRS approach results in fewer write-downs of inventory than U.S.GAAP.
Q2) Companies can choose between reporting ending Merchandise Inventory using specific identification,FIFO,LIFO,weighted-average,or lower-of-cost-or-market.
A)True
B)False
Q3) First Street Merchandisers has total cost of goods sold of $54,500,total beginning inventory of $18,500,and total ending inventory of $22,100.Cost of goods available for sale is $73,000.
A)True
B)False
Q4) List and briefly discuss three measures that can be taken to maintain good controls over merchandise inventory.
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Page 8
Chapter 7: Internal Control and Cash
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Q1) Which of the following is NOT an appropriate internal control for cash receipts over the counter?
A)A receipt is issued for each transaction to ensure that each sale is recorded.
B)The store clerk deposits the cash in the bank.
C)At the end of the day,the manager proves the cash by comparing the cash in the drawer against the machine's record of cash sales.
D)The cash draw opens after the store clerk enters a transaction.
Q2) As long as the same person deposits customer checks and makes the journal entry to customer accounts,there will be good internal control over cash receipts.
A)True
B)False
Q3) Which of the following describes the risk assessment component of internal control?
A)Internal auditors monitor company controls to safeguard assets,and external auditors monitor the controls to ensure that the accounting records are accurate.
B)Risk assessment is the "tone at the top" of the business.
C)A company must identify its risks and take necessary steps to minimize them.
D)Risk assessment is designed to ensure that the business's goals are achieved.
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Chapter 8: Receivables
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Sample Questions
Q1) When businesses accept payment by credit and debit cards,the costs of processing fees are greater than the benefits of transferring the risk of not being able to collect from the customer and avoiding the costs associated with credit customers.
A)True
B)False
Q2) Interest on a $12,000 note at 6% for 4 months is $240.
A)True
B)False
Q3) Accounts Receivable has a balance of $8,000,and the Allowance for Bad Debts has a credit balance of $450.The allowance method is used.What is the net realizable value of Accounts Receivable after a $160 account receivable is written off?
A)$7,390
B)$7,710
C)$7,550
D)$8,000
Q4) In counting the number of days in a note term,omit the date the note was issued.
A)True
B)False
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Chapter 9: Plant Assets, natural Resources, and Intangibles
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Sample Questions
Q1) On June 30,2018,Clooney Printers purchased a printer for $59,000.It expects the printer to last for four years and have a residual value of $6000.Compute the depreciation expense on the printer for the year ended December 31,2018,using the straight-line method.(Round any intermediate calculations to two decimal places,and your final answer to the nearest dollar. )
A)$13,250
B)$6625
C)$14,750
D)$7729
Q2) U.S.Generally Accepted Accounting Principles permits the presentation of plant assets at their fair market value.
A)True
B)False
Q3) Which of the following costs related to a business car would be capitalized?
A)the cost to install an engine with higher horsepower
B)the cost to change the oil
C)the cost to replace a broken windshield
D)the cost of new tires
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11
Chapter 10: Investments
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Sample Questions
Q1) A preferred stock is an example of a debt security.
A)True
B)False
Q2) Depending on the maturity date,held-to-maturity debt investments are categorized as current assets or long-term assets on the balance sheet.
A)True
B)False
Q3) Available-for-sale (AFS)debt investments that are expected to be held longer than a year are reported as ________.
A)equity
B)current assets
C)long-term assets
D)either current assets or long-term assets
Q4) A(n)________ represents stock ownership in another company and sometimes pays dividends.
A)debt security
B)Treasury bill
C)corporate bond
D)equity security
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Chapter 11: Current Liabilities and Payroll
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Q1) Which of the following is the proper treatment for a contingency that is probable but the exact amount of which is not known? The amount can be estimated.
A)The liability should be doubled following conservatism.
B)The liability should be estimated and recorded.
C)The liability should be ignored.
D)The liability should be reported in the notes to the financial statements.
Q2) It is mandatory for both the employer and employee to pay ________.
A)FICA
B)SUTA
C)employee income tax
D)federal unemployment tax
Q3) Superior Sales,Inc.offers warranties on all its electronic goods.Warranty expense is estimated at 3.5% of sales revenue.In 2018,Superior had sales of $333,000.In the same year,Superior replaced defective goods with merchandise inventory costing $8,750.Prepare the journal entry to record the warranty expense.Omit explanation.
Q4) On June 30,2019,Development,Inc.purchased merchandise inventory for $500,000 by signing a six-month,8% note payable.Prepare the journal entry for the payment of the note on December 30,2019.Omit explanation.
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Chapter 12: Long-Term Liabilities
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Q1) If a company is financing more assets with debt than with equity,the ________.
A)debt to equity ratio will be more than 1
B)debt to equity ratio will be between 0 to 1
C)debt to equity ratio will be equal to 1
D)debt to equity ratio will be negative
Q2) Great Lake Glassware Company issues $1,121,000 of its 12%,10-year bonds at 99 on February 28,2018.The bonds pay interest on February 28 and August 31.Assume that Great Lake uses the straight-line method for amortization.The journal entry to record the first interest payment on August 31,2018 includes a ________.
A)debit to Cash for $67,260
B)debit to Interest Expense for $67,821
C)debit to Interest Expense for $66,699
D)debit to Discount on Bonds Payable for $561
Q3) A bond is issued at premium ________.
A)when a bond's stated interest rate is equal to the market interest rate
B)when a bond's stated interest rate is less than the effective interest rate
C)when a bond's stated interest rate is less than the market interest rate
D)when a bond's stated interest rate is higher than the market interest rate
Q4) List three disadvantages of borrowing.
Q5) When computing the present value of a bond,which interest rate is used? Why?
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Chapter 13: Stockholders Equity
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Sample Questions
Q1) Home Gallery,Inc.had beginning retained earnings of $125,000 on January 1,2019.During the year,Home Gallery declared and paid $40,000 of cash dividends and earned $55,000 of net income.Prepare a statement of retained earnings for Home Gallery,Inc.for the year ending December 31,2019.
Q2) Treasury stock has voting rights and receives cash or stock dividends. A)True
B)False
Q3) Earnings per share is calculated as net income plus preferred dividends divided by the average number of common shares outstanding.
A)True
B)False
Q4) A company may purchase treasury stock to support the company's stock price. A)True B)False
Q5) If treasury shares are sold for less than their cost,the difference is recorded as a loss. A)True
B)False
Q6) List the four basic rights of stockholders.
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Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) Using the direct method,interest expense paid on a note payable is included in the operating activities section of the statement of cash flows.
A)True
B)False
Q2) Selling property,plant,and equipment for $10,000 cash is considered a cash inflow from investing activities on the statement of cash flows.
A)True
B)False
Q3) The contribution of equipment by a stockholder in exchange for common stock is an example of ________.
A)investing activity
B)financing activity
C)operating activity
D)non-cash investing and financing activity
Q4) The statement of cash flows is the link between the accrual-based income statement and the cash reported on the balance sheet.
A)True
B)False
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Page 16
Chapter 15: Financial Statement Analysis
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Q1) Which of the following statements is true for financial leverage?
A)The asset turnover ratio measures financial leverage.
B)Financial leverage always increases profitability.
C)Financial leverage is measured in the proportion of total assets relative to total equity.
D)The higher the debt to equity ratio,the higher the financial leverage.
Q2) The relationship between total liabilities and total assets is the ________.
A)debt ratio
B)debt to equity ratio
C)current ratio
D)earnings per share
Q3) Investors and creditors can evaluate a company by examining only one year of data.
A)True
B)False
Q4) Normally,companies with low gross profit percentages will have low asset turnover.
A)True
B)False
Q5) What is a common-size statement? Why are these statements useful?
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Chapter 16: Introduction to Managerial Accounting
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Q1) Comparing actual results to expected results is part of the
A)controlling function of managerial accounting.
B)planning function of managerial accounting.
C)reporting function of managerial accounting.
D)organizing function of managerial accounting.
Q2) Managerial accounting information for a company is primarily used by ________.
A)its customers to understand the pricing of the product
B)its creditors to understand the credibility of the business
C)its employees to plan,direct and control operations
D)its investors to make their investment decisions
Q3) Which of the following is a part of manufacturing overhead?
A)cost of raw materials
B)wages of assembly line workers
C)factory insurance
D)depreciation on office furniture
Q4) Which of the following would be classified as a prime cost?
A)cost of direct materials used
B)depreciation on factory equipment
C)salary of sales personnel
D)depreciation on office furniture
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Chapter 17: Job Order Costing
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Q1) The information from a cost accounting system allows managers to make decisions about planning and directing,but not about controlling.
A)True
B)False
Q2) Overallocated manufacturing overhead is adjusted by debiting the Cost of Goods Sold account.
A)True B)False
Q3) Midtown,Inc.uses a predetermined overhead allocation rate of $67 per direct labor hour.In January,the company completed Job A23 which utilized 24 direct labor hours.Which of the following correctly describes the journal entry to allocate overhead to the job?
A)debit Finished Goods Inventory $1608 and credit Manufacturing Overhead $1608
B)debit Manufacturing Overhead $67 and credit Work-in-Process Inventory $67
C)debit Work-in-Process Inventory $1608 and credit Manufacturing Overhead $1608
D)debit Cost of Goods Sold $67 and credit Finished Goods Inventory $67
Q4) Ivade,Inc.uses a predetermined overhead allocation rate of $75 per direct labor hour.In January,Ivade completed Job B23,which utilized 20 direct labor hours.Provide the journal entry to allocate overhead to the job.Omit explanation.
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Chapter 18: Process Costing
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Questions
Q1) On September 30,the Sorting Department of Java Works had ending Work-in-Process Inventory of 30,000 units that was 46% complete for materials and 36% complete for conversion costs.The company uses the FIFO method.This means that for the beginning Work-in-Process Inventory,________% of the materials and ________% of conversion costs were added during October.
A)46;36
B)64;54
C)54;64
D)36;46
Q2) The production cost report for Department 1 shows that $154,000 was assigned to the 36,000 units transferred to Department 2.This transfer cost assigned to units transferred to Department 2 is recorded with a debit to Work-in-Process-Department 2.Process costing is used.
A)True
B)False
Q3) Thompson,Inc.purchased raw materials for $6,000 and $25,000 for cash and on account,respectively.Provide the journal entry to record the purchase of raw materials.Process costing is used.
Q4) How is a production cost report prepared using the FIFO method?
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Chapter
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Sample Questions
Q1) Bar None Legal Services,Inc.is a consulting firm that offers optimal legal solutions.It allocates indirect costs using a single predetermined overhead allocation rate with direct labor hours as the allocation base.The estimated indirect costs for this year amount to $170,000.The company is expected to work 17,000 direct labor hours during the year.The direct labor rate is $200 per hour.Clients are billed at 130% of direct labor cost.Last month,Bar None's consultants spent 180 hours on Henderson,Inc.Calculate the total costs assigned and allocated to Henderson.
A)$37,800
B)$36,000
C)$189,000
D)$9000
Q2) Providing janitorial services to the production departments
A)Square footage for each department
B)Number of new employees
C)Number of machine hours
D)Number of batches
E)Number of inspections
F)Number of purchase orders
G)Number of service calls
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Chapter 20: Cost-Volume-Profit Analysis
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Q1) When the sales price per unit decreases,the contribution margin per unit ________.
A)increases proportionately B)increases
C)remains the same D)decreases
Q2) Kim Airedale,a manager of Waggers,Inc. ,was reviewing the water bills of a dog daycare and spa.She determined that its highest and lowest bills of $3600 and $2800 were incurred in the months of May and November,respectively.If 500 dogs were washed in May and 200 dogs were washed in November,what was the variable cost per dog associated with the company's water bill? (Round your answer to the nearest cent. )
A)$4.00
B)$14.00
C)$7.20
D)$2.67
Q3) If all other factors remain constant,an increase in fixed costs will increase the breakeven point.
A)True
B)False
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Chapter 21: Variable Costing
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Q1) Following GAAP,the income statement issued to investors and creditors must ________.
A)be prepared in the traditional format
B)be prepared using variable costing
C)be prepared in the contribution margin format
D)show the value of contribution margin
Q2) Which of the following costing methods charges all the manufacturing costs to the products?
A)variable costing
B)direct costing
C)absorption costing
D)contribution costing
Q3) Variable costing cannot be used in service companies.
A)True
B)False
Q4) For short-term pricing decisions,fixed costs are usually not relevant because they do not change.
A)True
B)False
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Chapter 22: Master Budgets
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Q1) When preparing the selling and administrative expense budget,there is no need for a merchandising company to separate mixed costs into the fixed and variable components.
A)True
B)False
Q2) The budget process is a loop that consists of ________.
A)planning,directing,and controlling
B)developing strategies,planning,directing,and controlling
C)developing strategies,planning,and directing
D)developing strategies,directing,and controlling
Q3) When preparing the operating budgets for a manufacturing company,the manufacturing overhead budget ________.
A)represents the last period cost to be considered
B)only includes variable manufacturing overhead
C)only computes the budgeted overhead cost for the year
D)includes costs that are projected by the cost accountant and the production manager
Q4) For manufacturing companies,the primary source of cash is from its customers.
A)True
B)False
24
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) A company is analyzing its month-end results by comparing it to both static and flexible budgets.During the month,the actual fixed costs were lower than the expected fixed costs as per the static budget.This difference results in a(n)________.
A)unfavorable flexible budget variance for fixed costs
B)favorable sales volume variance for fixed costs
C)favorable flexible budget variance for fixed costs
D)unfavorable sales volume variance for fixed costs
Q2) The production manager of a company,in an effort to gain a promotion,negotiated a new labor contract with the factory employees that required them to bear a greater percentage of benefit costs than before,thus bringing down the cost of direct labor to the company.Shortly afterward,several experienced and highly skilled workers resigned and were replaced by new employees whose work was very slow during their training period.At the end of the quarter,the company's profits fell 10%.This would produce a(n)________.
A)favorable direct materials cost variance
B)unfavorable direct labor cost variance
C)unfavorable direct labor efficiency variance
D)favorable direct materials efficiency variance
Q3) List three ways in which using a standard cost system helps managers.
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) The limitations of financial performance measures ________.
A)lead management to use accelerated depreciation methods
B)make it easy for companies to create goal congruence
C)lead management to use the net book value of assets
D)can be overcome by taking a broader view of performance with a balanced scorecard
Q2) Which of the following best describes the manager of a profit center?
A)The manager is only responsible for controlling costs.
B)The manager is responsible for generating profits and efficiently managing the center's invested capital.
C)The manager is only responsible for generating revenues.
D)The manager is responsible for generating revenues and controlling costs.
Q3) Opportunity cost is the benefit ________.
A)received by selling goods on behalf of another division
B)received by selling goods to one of the other divisions within the company
C)given up by purchasing goods at a price lower than its total manufacturing cost
D)given up by choosing an alternate course of action
Q4) How is the use of a balanced scorecard as a performance evaluation system helpful to companies?
Page 26
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Chapter 25: Short-Term Business Decisions
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Q1) Sanchez Semiconductors produces 200,000 high-tech computer chips per month.Each chip uses a component that Sanchez makes in-house.The variable costs to make the component are $1.40 per unit,and the fixed costs are $1,100,000 per month.The company has been approached by a foreign producer who can supply the component,within acceptable quality standards,for $1.10 each.If the company chooses to outsource,fixed costs can be reduced by 30%.There are no other uses for the facilities currently employed in making the component.What would be the effect on operating income,if the company decides to outsource?
A)There would be no effect on operating income.
B)Operating income would increase by $390,000.
C)Operating income would increase by $220,000.
D)Operating income would decrease by $60,000.
Q2) Define the terms "Relevant Cost" and "Sunk Cost."
Q3) A company is a price-taker when ________.
A)it operates in a highly competitive market
B)its product is unique
C)it has considerable flexibility in setting prices of its products
D)it has very high fixed costs
Q4) List three questions managers should consider when deciding whether to drop a product or a business segment.
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Chapter 26: Capital Investment Decisions
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Q1) When comparing several investments with the same initial cost,the decision should be made on the basis of the ________.
A)highest total cash inflows
B)longest payback period
C)highest NPV
D)highest ARR
Q2) What are the strengths of the net present value capital budgeting method?
Q3) Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.
A)True
B)False
Q4) Most capital budgeting methods focus on accrual-based income. A)True
B)False
Q5) Management uses several different methods in evaluating potential capital investments.Identify and briefly discuss the four methods outlined in the text.
Q6) List the steps of the capital budgeting process and identify actions that relate to each step.
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Chapter 27: Accounting Information Systems
Available Study Resources on Quizplus for this Chatper
164 Verified Questions
164 Flashcards
Source URL: https://quizplus.com/quiz/70989
Sample Questions
Q1) What are the two basic components of a computerized accounting information system?
A)sales journal and purchase journal
B)hardware and software
C)cash payments journal and cash receipts journal
D)network and cloud computing
Q2) Describe the transactions recorded in the purchases journal.
Q3) On April 1,a hardware retailer purchases inventory on account for $1500.Which of the following correctly describes the effect of this transaction? Assume a perpetual inventory system is used.
A)Merchandise Inventory decreases by $1500 and Accounts Receivable decreases by $1500.
B)Merchandise Inventory decreases by $1500 and Accounts Receivable increases by $1500.
C)Merchandise Inventory increases by $1500 and Accounts Payable decreases by $1500.
D)Merchandise Inventory increases by $1500 and Accounts Payable increases by $1500.
Q4) List and describe two features of an effective accounting information system.
Q5) Describe the transactions recorded in the cash payments journal.
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