Course Introduction
Financial Accounting Exam Practice
Tests
Financial Accounting introduces students to the fundamental principles and practices of recording, classifying, and reporting financial transactions of business organizations. This course covers essential concepts such as the accounting cycle, preparation of financial statements, and the interpretation of balance sheets, income statements, and cash flow statements. Emphasis is placed on understanding generally accepted accounting principles (GAAP), ethical considerations, and the role of accounting information in decision-making for internal and external stakeholders. Through practical exercises and case studies, students develop the skills necessary to analyze and communicate financial information effectively.
Recommended Textbook
Intermediate Accounting 9th Edition by
J. David Spiceland
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21 Chapters
4034 Verified Questions
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Sample Questions
Q1) Identify or define the following term: historical cost.
Answer: <u>Historical cost</u>-A measurement attribute under which asset and liability measurements are based on the amount given or received in an exchange transaction.
Q2) Gain
A)The change in equity from nonowner transactions.
B)Contains all information necessary for faithful representation.
C)Along with relevance, a fundamental decision-specific quality.
D)Results if an asset is sold for more than book value.
E)Concerns the decision-making impact of both the amount and nature of an item.
Answer: D
Q3) Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002?
A) Corporate executive accountability.
B) Auditor rotation.
C) Retention of work papers.
D) All of these answer choices are correct.
Answer: D
Q4) Compute the cash balance at the end of the first year for Alpaca Corporation. Answer: 11ee8885_3175_6962_91cb_034eaabfdd31_TB2599_11
Page 3
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) Which of the following accounts has a balance whereby debits normally exceed credits?
A) Accounts payable.
B) Accrued taxes.
C) Accumulated depreciation.
D) Advertising expense.
Answer: D
Q2) Describe the difference between external events and internal events, and provide two examples of each.
Answer: External events involve an <b>exchange</b> between the<b> company </b>and a <b>separate economic entity</b>. Examples include purchasing inventory on account or borrowing money from a bank. Internal events directly affect the financial position of the company but <b>do not involve exchange transactions with another entity</b>. Examples include depreciation of equipment or use of supplies.
Q3) Purchased building and equipment for $10,000,000, paying 20% cash and issuing a 30-year note for the balance.
Answer: 11ea937b_366a_54df_a419_5307f1e09116_TB2599_00
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Page 4
Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) What would Symphony report as total current assets?
A) $823 millions.
B) $838 millions.
C) $843 millions.
D) $1,696 millions.
Answer: A
Q2) Cash equivalents would not include:
A) Cash not available for current operations.
B) Money market funds.
C) U.S. treasury bills.
D) Bank drafts.
Answer: A
Q3) The Management's Discussion and Analysis section of the annual report can best be described as:
A) Frank but objective.
B) Independent but precise.
C) Legalistic and lengthy.
D) Biased but informative.
Answer: D
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Page 5
Chapter 4: The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
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Sample Questions
Q1) Required: Prepare a 2018 single, continuous statement of comprehensive income for Rollins Inc. Use a multiple-step income statement format.
Q2) Earnings quality refers to:
A) the ability of management to budget for expenditures in the following year.
B) the ability of management to sell its inventory for a profit.
C) the ability of management to quickly collect cash from customers.
D) the ability of reported earnings to predict a company's future earnings.
Q3) Popson Inc. incurred a material loss that was unusual in character. This loss should be reported as:
A) a discontinued operation.
B) a line item between income from continuing operations and income from discontinued operations.
C) a line item within income from continuing operations.
D) a line item in the retained earnings statement.
Q4) Its return on assets for 2018. Round your answer to one decimal place, e.g., 0.1234 as 12.3%.
Q5) Briefly explain why the income statement is referred to as a change statement.
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Q6) Its return on stockholders' equity for 2018. Round your answer to one decimal place, e.g., 0.1234 as 12.3%.
Chapter 5: Revenue Recognition
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Sample Questions
Q1) What are CCC's estimated remaining construction costs on the project at the end of 2018?
A) $90 million.
B) $135 million.
C) $225 million.
D) $0.
Q2) Assume that Beavis recognizes revenue on this contract over time according to percentage of completion.
Required:
Compute the amount of gross profit recognized during 2017 and 2018.
Q3) The transaction price should be adjusted to reflect the time value of money for interest payable, but not for interest receivable.
A)True
B)False
Q4) Goods or services are distinct if they are either capable of being distinct or are separately identifiable.
A)True
B)False
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Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment?
A) $1,667.
B) $1,511.
C) $1,834.
D) None of these answer choices are correct.
Q2) Adam Baum Company borrowed $48,000 from B. A. Ware on January 1, 2018, and signed a three-year, 6% installment note to be paid in three equal payments at the end of each year. The present value of an ordinary annuity of $1 for 3 periods at 6% is 2.67301. Required: Calculate the amount of one installment payment.
Q3) Spielberg Inc. signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. What is the value of this debt at its inception?
A) $200,000.
B) $178,000.
C) $118,690.
D) $222,000.
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8
Chapter 7: Cash and Receivables
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Sample Questions
Q1) Which of the following does not reduce the balance in accounts receivable?
A) Returns on credit sales.
B) Collections from customers.
C) Recognizing bad debts expense.
D) Write-offs.
Q2) On June 14, 2018, Rumsfeld Company sold 100 air-conditioning units to Powell Heating and Cooling. The units list for $600 each, but Powell was granted a 25% trade discount. All of Rumfeld's sales are subject to terms 2/10, n/30. Rumsfeld uses the gross method of accounting for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on June 22, 2018.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on July 10, 2018.
Q3) Is there any evidence in Winchester's disclosures above that are consistent with earnings management?
Q4) Define what it is meant by internal control.
Q5) Describe some key elements of an internal control system for cash.
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Chapter 8: Inventories: Measurement
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Sample Questions
Q1) Bascomb Company purchased $420,000 in merchandise on account during the month of April, and merchandise costing $350,000 was sold on account for $425,000.
Required:
1. Prepare journal entries to record the purchases and sales assuming Bascomb uses a perpetual inventory system.
2. Prepare journal entries to record the purchases and sales assuming Bascomb uses a periodic inventory system.
Q2) Inventory does not include:
A) Materials used in the production of goods to be sold.
B) Assets intended to be sold in the normal course of business.
C) The cost of office equipment.
D) Assets currently in production for normal sales.
Q3) What is Nu's net income if it elects FIFO?
A) $480.
B) $288.
C) $1,360.
D) $144.
Q4) Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.
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Chapter 9: Inventories: Additional Issues
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Sample Questions
Q1) Net realizable value is selling price less costs of completion, disposal, and transportation.
A)True
B)False
Q2) In applying the lower of cost or net realizable value rule, the inventory of rehab supplies would be valued at:
A) $165.
B) $152.
C) $162.
D) $155.
Q3) Briefly explain the difference between the LIFO retail method and the dollar-value LIFO retail method.
Q4) The market value for purposes of using the lower of cost or market (LCM) method is defined as replacement cost, subject to a ceiling and a floor.
A)True
B)False
Q5) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to categories of feed products.
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Chapter 10: Property, Plant, and Equipment and Intangible
Assets: Acquisition
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Sample Questions
Q1) Assets acquired by the issuance of equity securities are valued based on:
A) Their fair values.
B) The fair value of the equity securities.
C) The fair value of the assets acquired or the fair value of the equity securities, whichever is more reasonably determinable.
D) The fair value of the assets acquired or the fair value of the equity securities, whichever is smaller.
Q2) Average accumulated expenditures:
A) Is an approximation of the average debt a firm would have outstanding if it financed all construction through debt.
B) Is computed as a simple average if all construction expenditures are made at the end of the period.
C) Are irrelevant if the company's total outstanding debt is less than total costs of construction.
D) All of these answer choices are true statements.
Q3) When is interest capitalized? Briefly describe how the amount to be capitalized is computed.
Q4) How are donated assets recorded?
Page 12
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Chapter 11: Property, Plant, and Equipment and Intangible
Assets: Utilization and Disposition
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Sample Questions
Q1) On March 30, 2018, Calvin Exploration purchased a drilling machine for $840,000. The estimated useful life of the machine is 10 years and no residual value is anticipated. An important component of the machine is the drill housing component that will need to be replaced in five years. The $200,000 cost of the drill housing component is included in the $840,000 cost of the machine. Calvin uses the straight-line depreciation method for all machinery. The company's fiscal year ends on December 31.
Required:
1. Calculate depreciation on the drilling machine for 2018 and 2019 applying the typical U.S. GAAP treatment.
2. Repeat requirement 1 applying IFRS.
Q2) Using the double-declining balance method, the book value at December 31, 2019, would be:
A) $14,400.
B) $24,960.
C) $27,360.
D) $25,920.
Q3) Why is land not depreciated? What are land improvements? Why do we record land and land improvements separately?
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Chapter 12: Investments
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Sample Questions
Q1) Which of the following is not true about derivatives?
A) Large losses on derivative investments have been reported in the press.
B) Derivatives are so named because their value is derived from some underlying measure.
C) Derivatives are useful instruments for managing risk.
D) Accounting for derivatives is fully resolved and no additional rules or interpretations are likely.
Q2) When investments are treated as available-for-sale, other comprehensive income (OCI) also includes the tax effects associated with unrealized holding gains and losses.
As a result:
A) Accumulated other comprehensive income would be increased by the tax benefits typically associated with unrealized holding gains.
B) Other comprehensive income typically would be reduced by the tax expense associated with unrealized holding gains.
C) Accumulated other comprehensive income would not be affected by taxes.
D) None of these answer choices are correct.
Q3) Prepare appropriate entry(s) at December 31, 2019, and indicate how the scenario will affect net income, OCI, and comprehensive income.
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Chapter 13: Current Liabilities and Contingencies
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Sample Questions
Q1) A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer. Razor believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under IFRS, Razor should accrue a liability in the amount of:
A) $0.
B) $1,000,000.
C) $2,000,000.
D) $3,000,000.
Q2) When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:
A) Reported in the income statement and disclosed.
B) Offset against shareholders' equity.
C) Disclosed but not recognized in the income statement.
D) Neither recognized in the income statement nor disclosed.
Q3) Indicate how TinyPart would disclose or account for the lawsuit described in part (a) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2018.
Q4) How are customer advances and refundable deposits similar and yet different?
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Chapter 14: Bonds and Long-Term Notes
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Sample Questions
Q1) For a bond issue that sells for more than the bond face amount, the effective interest rate is:
A) The rate printed on the face of the bond.
B) The Wall Street Journal prime rate.
C) More than the rate stated on the face of the bond.
D) Less than the rate stated on the face of the bond.
Q2) On January 1, 2018, Anne Teak Furniture issued $100,000 of 8% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in 10 years. The annual market rate for bonds of similar risk and maturity is 10%. What was the issue price of the bonds?
A) $85,666.
B) $86,711.
C) $87,538
D) $87,711.
Q3) Zero-coupon bonds:
A) Offer a return in the form of a deep discount off the face value.
B) Result in zero interest expense for the issuer.
C) Result in zero interest revenue for the investor.
D) Are reported as shareholders' equity by the issuer.
Q4) How are bonds and notes the same? How do they differ?
Page 16
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Chapter 15: Leases
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Sample Questions
Q1) At the beginning of a lease agreement, a lessee's debt to equity ratio and rate of return on assets are both affected regardless of whether the lease is classified as a finance lease or as an operating lease.
A)True
B)False
Q2) A lessee will reassess variable lease payments that depend on an index or a rate:
A) Only when the lessee remeasures the right-of-use asset and lease liability for other reasons.
B) Only when the lessor also reassesses the variable lease payments.
C) Whenever there is a change in the cash flows resulting from a change in the reference index or rate.
D) Never.
Q3) If the leaseback portion of a sale-leaseback transaction is classified as an operating lease:
A) Any gain is deferred and recognized as a reduction of rent expense.
B) Any gain is deferred and recognized as a reduction of depreciation.
C) Any gain is recognized at the lease's inception.
D) There can be no gain.
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Chapter 16: Accounting for Income Taxes
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Sample Questions
Q1) Which of the following must Franklin Freightways disclose related to the income tax expense reported in the income statement ($ in millions)?
A) Only the current portion of tax expense of $66.
B) Only the total tax expense of $82.
C) Both the current portion of the tax expense of $66 and the deferred portion of the tax expense of $16.
D) None of these answer choices are correct.
Q2) Which of the following causes a permanent difference between taxable income and pretax accounting income?
A) The installment method used for sales of property.
B) MACRS depreciation method used for equipment.
C) Interest income on municipal bonds.
D) Percentage-of-completion method for long-term construction contracts.
Q3) The tax benefit of a net operating loss carried back two years represents a current receivable for income tax to be refunded.
A)True
B)False
Q4) What is a valuation allowance for deferred tax assets and when is it used?
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Page 18
Chapter 17: Pensions and Other Postretirement Benefits
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Sample Questions
Q1) To help assess the uncertainties that surround a defined benefit pension plan, corporations frequently hire a(n):
A) CPA.
B) Attorney.
C) Investment analyst.
D) Actuary.
Q2) Accounting for postretirement health care benefits is similar, in most respects, to accounting for:
A) Payroll taxes.
B) Health insurance costs for current employees.
C) Pension benefits.
D) Sick pay and vacation pay.
Q3) The PBO is increased by:
A) An increase in the average life expectancy of employees.
B) Amortization of prior service cost.
C) An increase in the actuary's assumed discount rate.
D) A return on plan assets that is lower than expected.
Q4) Discuss income smoothing as the term relates to pension plans.
Q5) What are the five components of postretirement benefit expense?
Q6) How do U.S. GAAP and IFRS differ with regard to reporting prior service costs?
Page 19
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Chapter 18: Shareholders Equity
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Sample Questions
Q1) Share issue costs refer to the costs of obtaining the legal, promotional, and accounting services necessary to effect the sale of shares. The costs reduce the net cash proceeds from selling the shares and thus paid-in capital-excess of par, and are:
A) Not recorded separately.
B) Recorded as an asset.
C) Recorded as a liability.
D) Amortized over time.
Q2) On June 1, 2018, Blue Co. distributed to its common stockholders 200,000 outstanding common shares of its investment in Red Inc, an unrelated party. The book value on Blue's books of Red's $1 par common stock was $2 per share. Immediately after the declaration, the market price of Red's stock was $2.50 per share. In its income statement for the year ended June 30, 2018, what amount should Blue report as gain before income taxes on disposal of the stock?
A) $0.
B) $100,000.
C) $400,000.
D) $500,000.
Q3) When stock is issued for consideration other than cash, what is the measurement objective?
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Page 20
Chapter 19: Share-Based Compensation and Earnings Per Share
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Sample Questions
Q1) On December 31, 2017, Merlin Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). On February 28, 2018, Merlin issued an additional 36,000 shares of common stock. A 10% stock dividend was declared and distributed on July 1, 2018. On September 1, 2018, 9,000 shares were retired. At year-end, there were fully vested incentive stock options outstanding for 30,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock averaged $20 during the year. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2015 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 40%.
Required:
Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 2018.
Q2) Vesting period
A)Expensed as compensation in the period earned
B)Benefit period over which stock option compensation expense is spread.
C)Paid-in capital effectively renamed under the fair value approach
D)Shares given for achieving financial goals
E)A right to buy shares of stock in the future.
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Chapter 20: Accounting Changes and Error Corrections
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Sample Questions
Q1) Prior years' financial statements are restated under the:
A) Current approach.
B) Prospective approach.
C) Retrospective approach.
D) None of these answer choices are correct.
Q2) Cherokee Company's auditor discovered some errors. No errors were corrected during 2017. The errors are described as follows:
(1.) Beginning inventory on January 1, 2017, was understated by $5,000.
(2.) A two-year insurance policy purchased on April 30, 2017, in the amount of $24,000 was debited to Prepaid Insurance. No adjustment was made on December 31, 2017, or on December 31, 2018.
Required:
Prepare appropriate journal entries (assume the 2018 books have not been closed). Ignore income taxes.
Q3) Most changes in accounting principle require a disclosure justifying the change in the first set of financial statements that the change is made.
A)True
B)False
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22
Chapter 21: The Statement of Cash Flows Revisited
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Q1) Generally speaking, cash flows from operating activities include the elements of net income reported on a cash basis.
A)True
B)False
Q2) Cash flows from financing activities do not include:
A) cash received from issuing preferred stock.
B) cash paid for treasury stock.
C) declaration of a cash dividend.
D) repayment of a bank loan.
Q3) Which of the following would be reported as a cash outflow from investing activities?
A) Issuance of bonds.
B) Purchase of land.
C) Payment of dividends.
D) Retirement of common stock.
Q4) Cash equivalents have each of the following characteristics except:
A) Little risk of loss.
B) Highly liquid.
C) Maturity of at least three months.
D) Short-term.
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