Financial Accounting Exam Preparation
Guide
Course Introduction
Financial Accounting introduces the fundamental principles and practices involved in recording, summarizing, and reporting financial transactions of a business. Emphasizing the preparation and interpretation of key financial statements including the balance sheet, income statement, and cash flow statement this course enables students to understand how accounting information supports decision-making by internal and external stakeholders. Topics include the accounting cycle, accrual and cash-based accounting, asset and liability measurement, equity transactions, revenue recognition, and financial statement analysis, providing a solid foundation for further study in accounting and finance.
Recommended Textbook
Horngren's Financial and Managerial Accounting 6th Edition by Tracie L. Miller Nobles
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Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) Mars Electronic Company receives cash from a stockholder, John Tilden, and issues common stock to him. The two accounts involved in this transaction are ________.
A) Accounts Payable and Cash
B) Cash and Common Stock
C) Common Stock and Accounts Payable
D) Common Stock and Accounts Receivable
Answer: B
Q2) On the statement of cash flows, investing activities include purchases of land and equipment with the issuance of a note payable.
A)True
B)False
Answer: False
Q3) Members of a limited-liability company (LLC) are not personally liable for the debts of the business.
A)True
B)False
Answer: True
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) The T-account is a summary device that is shaped like a capital T with debits posted on the right side of the vertical line and credits posted on the left side of the vertical line.
A)True
B)False
Answer: False
Q2) A note receivable represents an oral promise that a customer will pay a fixed amount of money and interest by a certain date in the future.
A)True
B)False
Answer: False
Q3) Explain the difference between Prepaid Rent and Unearned Revenue.
Answer: Prepaid Rent is an asset account that represents the payment of rent expense in advance. It is considered an asset because the prepayment provides a benefit in the future.
Unearned Revenue is a liability account that occurs when a company receives cash before providing a service or delivering a good. The company owes a service or good to the customer or a refund, thus making this a liability.
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) Deferred Revenue is a liability created when a business collects cash from customers in advance of completing a service or delivering a product.
A)True
B)False
Answer: True
Q2) Prepaid Rent is an expense account that appears on the income statement.
A)True
B)False
Answer: False
Q3) Which of the following is NOT a type of adjusting entry?
A) deferred expenses
B) accrued revenues
C) unearned expenses
D) deferred revenues
Answer: C
Q4) Adjusting entries either credit a revenue account or debit an expense account.
A)True
B)False
Answer: True
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) An account that is not closed at the end of the period is called a(n) ________.
A) expense account
B) temporary account
C) permanent account
D) revenue account
Q2) The balance sheet section of the worksheet includes the asset and liability accounts and all equity accounts, including all revenues and expenses.
A)True
B)False
Q3) Assets that are expected to be converted to cash, sold, or used up during the next 12 months, or within the business's normal operating cycle if the cycle is longer than a year, are called ________ assets.
A) intangible
B) plant
C) long-term
D) current
Q4) The Accumulated Depreciation account is a permanent account.
A)True
B)False
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Chapter 5: Merchandising Operations
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Sample Questions
Q1) Which of the following is true of freight in?
A) It is an administrative expense.
B) It is a selling expense.
C) It is the transportation cost on purchases.
D) It is the transportation cost on sales.
Q2) The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold.
A)True
B)False
Q3) Gross profit is the extra amount the company receives from the customer for merchandise sold over what the company paid to the vendor.
A)True
B)False
Q4) On the income statement, a service company reports the cost of merchandise inventory that has been sold to customers.
A)True
B)False
Q5) List the three steps, in order of occurrence, of the operating cycle of a merchandising business.
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Chapter 6: Merchandise Inventory
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Sample Questions
Q1) The tracking of inventory shrinkage due to theft, damage, or errors is done with the help of a(n) ________ of inventory.
A) authorization
B) sale
C) physical count
D) delivery
Q2) The ending merchandise inventory for the current accounting period is overstated by $3,500. What will be the effect of this error?
A) The net income for the current accounting period will be overstated by $3,500.
B) The cost of goods sold for the current accounting period will be overstated by $3,500.
C) The ending merchandise inventory for the next accounting period will be overstated by $3,500.
D) The cost of goods sold for the next accounting period will be understated by $3,500.
Q3) When using the periodic inventory system and weighted-average inventory costing method, when is the weighted average cost per unit computed?
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Chapter 7: Internal Control and Cash
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Sample Questions
Q1) Cash in the bank is more liquid than a petty cash fund.
A)True
B)False
Q2) Cash equivalents are included in the calculation of the cash ratio.
A)True
B)False
Q3) The petty cash fund at Brookshire Company has a designated balance of $350. The fund currently holds $126 in cash and $226 in petty cash tickets. Based on this information, which of the following statements is correct?
A) The total of the cash on hand plus petty cash tickets equals the designated fund balance.
B) A shortage of $2 exists.
C) To replenish the petty cash fund, the company must write a check, payable to Petty Cash, for $226.
D) The petty cash fund custodian must locate the $2 discrepancy.
Q4) All items on the book side of the bank reconciliation require journal entries.
A)True
B)False
Q5) List the five components of internal control.
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Chapter 8: Receivables
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Sample Questions
Q1) The Allowance for Bad Debts account has a debit balance of $9,000 before the adjusting entry for bad debts expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging-of-receivables method, the company's management estimates that uncollectible accounts will be $11,000. What amount of bad debts expense will be reported on the income statement?
A) $8,000
B) $20,000
C) $2,000
D) $11,000
Q2) On October 1, 2019, Westfield, Inc. sold machinery to a customer for $25,000. The customer could not pay at the time of sale, but agreed to pay 12 months later, and signed a 12-month note at 9% interest. How much interest revenue was earned during 2019? Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.
A) $593
B) $563
C) $5,067
D) $2,250
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Chapter 9: Plant Assets, Natural Resources, and Intangibles
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Sample Questions
Q1) Which of the following is true of goodwill?
A) Goodwill must be capitalized when acquired and amortized over seven years or less.
B) Both created and acquired goodwill must be recorded in the books.
C) Goodwill must be expensed when acquired.
D) Goodwill is not amortized.
Q2) A truck costs $307,000 and is expected to be driven 113,000 miles during its five-year life. Residual value is expected to be zero. If the truck is driven 31,000 miles during the first year, how much depreciation should the business record under the units-of-production method? (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.)
A) $96,050
B) $28,107
C) $84,320
D) $56,070
Q3) The cost of a plant asset includes all amounts paid to ready the asset for its intended use.
A)True
B)False
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Chapter 10: Investments
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Sample Questions
Q1) Investments accounted for by the equity method are recorded at cost at the time of purchase.
A)True
B)False
Q2) Which of the following is true of comprehensive income?
A) All items included in comprehensive income enter into the determination of net income.
B) Dividend payments are not included in the determination of comprehensive income, even though it results in a decrease in total stockholders' equity.
C) Comprehensive income includes company changes in total stockholders' equity from all sources, including owners' investments.
D) Comprehensive income cannot be combined with a traditional income statement into a combined statement of comprehensive income.
Q3) On October 1, 2018, North Co. invested excess cash of $80,000 by purchasing bonds of South Inc. At year-end, December 31, 2018, the market price of the bonds was $77,000. The investment is categorized as a trading debt investment. Journalize the adjusting entry needed at December 31, 2018. Omit explanation.
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Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) Contingencies that are reasonably possible have a greater chance of occurring but are not likely.
A)True
B)False
Q2) Direct deposits decrease the efficiency of the payroll process because of cyber issues.
A)True
B)False
Q3) Only contingencies that are probable and can be estimated are recorded as a liability and an accrued expense.
A)True
B)False
Q4) Which of the following is included in the entry to record accrual of warranty expense?
A) a debit to Warranty Expense
B) a credit to Merchandise Inventory
C) a credit to Warranty Expense
D) a debit to Estimated Warranty Payable
Q5) If the likelihood of a future event is remote, how should the company report the contingency?
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Chapter 12: Long-Term Liabilities
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Sample Questions
Q1) When bonds are retired at maturity, ________.
A) the bondholders are paid the face value plus the unamortized premium or less the unamortized discount
B) the carrying value equals the face value plus the unamortized premium or less the unamortized discount
C) the carrying value always equals the face value
D) the entry to retire the bonds may include a gain or loss on retirement of bonds
Q2) What does the debt to equity ratio show, and how is it calculated?
Q3) The balance in the Bonds Payable account is a credit of $67,000. The balance in the Discount on Bonds Payable account is a debit of $2,650. The bond's carrying amount is $64,350.
A)True
B)False
Q4) The current portion of notes payable is reported on the balance sheet under current liabilities.
A)True
B)False
Q5) What is the difference between simple interest and compound interest?
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Chapter 13: Stockholders Equity
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Sample Questions
Q1) A corporation is a separate legal entity that is organized independently of its owners.
A)True
B)False
Q2) The declaration of a cash dividend does not create an obligation for the corporation.
A)True
B)False
Q3) A company cannot report a gain or loss when buying or selling its own stock.
A)True
B)False
Q4) If a company retires preferred stock, ________.
A) total stockholders' equity will decrease
B) total stockholders' equity will increase
C) the company can record a gain or loss on retirement of stock
D) the number of outstanding shares will increase
Q5) The statement of stockholders' equity reports the number of shares and any changes during the year in preferred, common, and treasury stock.
A)True
B)False
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Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) The financing section of the statement of cash flows involves transactions relating to the equity accounts and the long-term liability accounts.
A)True
B)False
Q2) Free cash flow is calculated by adding cash payments planned for investments in long-term assets and cash dividends to the amount of net cash provided by operating activities.
A)True
B)False
Q3) One of the purposes of the statement of cash flows is to ________.
A) determine the operating income of a business
B) calculate inventory turnover
C) evaluate the level of debt and leverage of a company
D) predict the ability of a company to pay debts and dividends
Q4) Use the following information to calculate the free cash flow of Jarvis, Inc.
Net cash provided by operating activities, $25,000
Net cash provided by financing activities, $35,000
Net cash used for planned investment in long-term assets, $12,000
Net cash used for investing activities, $20,000
Cash dividends paid, $10,000.
Page 16
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Chapter 15: Financial Statement Analysis
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Sample Questions
Q1) No single ratio tells the whole picture of any company's performance.
A)True B)False
Q2) Data for Martin Corp. and Tante, Inc. follow: \(\begin{array}{lll} &\underline{\text { Martin}}&\underline{\text { Tante}}\\
\text { Net Sales } & \$ 25,000 & \$ 32,500 \\
\text { Cost of Goods Sold } & 18,500 & 22,360 \\
\text { Other Expenses } & 2,150 & 5,000 \\
\text { Net Income } & \$ 4,350 & \$ 5,140
\end{array}\) Prepare a comparative common-size income statement for each company for the year ending December 31, 2019. Round to two decimal places. Use a multi-step format for the income statement.
Q3) List the three ways to analyze financial statements. State what each of these ways provides to investors and creditors.
Q4) What is a common-size statement? Why are these statements useful?
Q5) An annual report provides information about a company's financial condition. A)True B)False
Q6) What is an annual report? Briefly describe the key parts of the annual report.
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Chapter 16: Introduction to Managerial Accounting
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Sample Questions
Q1) How does a manufacturing company calculate unit product cost? Why do managers need to know the unit product cost?
Q2) What is Total Quality Management (TQM)?
A) a philosophy of supplying customers with superior products and services
B) an exchange of information with suppliers and customers to create efficient and effective processes
C) a software system that integrates a company's functions, departments, and data into a single system
D) a system that speeds the transformation of raw materials into finished products
Q3) Which of the following is an example of a period cost for a manufacturing company?
A) advertising expense
B) depreciation on factory equipment
C) indirect materials
D) property taxes for the factory
Q4) Depreciation on the office equipment
A)Period cost
B)Product cost
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Chapter 17: Job Order Costing
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Q1) A major purpose of a cost accounting system is to ________.
A) compute the cost of goods sold for the income statement
B) classify all costs as operating or marketing costs
C) assist creditors in determining whether to grant a loan
D) show investors a company is operating efficiently
Q2) The entry to record the purchase of raw materials on account would include a ________.
A) debit to the Raw Materials Inventory account
B) debit to the Work-in-Process Inventory account
C) credit to the Work-in-Process Inventory account
D) credit to the Raw Materials Inventory account
Q3) A job order costing system is used by companies that manufacture batches of unique products or provide specialized services.
A)True
B)False
Q4) Manufacturing Overhead is a temporary account used to accumulate indirect production costs during the accounting period.
A)True
B)False
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Chapter 18: Process Costing
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Q1) If a business operates in an industry that experiences significant cost changes, should the business prepare its production cost report using the FIFO method or the weighted-average method? Explain your answer.
Q2) Under process costing, the costs incurred by each department are reported in a separate production cost report for each department.
A)True
B)False
Q3) Garcia Manufacturing has two processes-Coloring and Mixing. The company assigned $390,000 to the 6000 gallons of paint transferred from Mixing Department to Finished Goods Inventory. The journal entry to record this assignment of cost is
A) debit Work-in-Process Inventory-Mixing, $390,000; credit Finished Goods Inventory, $390,000
B) debit Finished Goods Inventory, $390,000; credit Cost of Goods Sold, $390,000
C) debit Cost of Goods Sold, $390,000; credit Finished Goods Inventory, $390,000
D) debit Finished Goods Inventory, $390,000; credit Work-in-Process Inventory-Mixing, $390,000
Q4) How is a production cost report prepared using the FIFO method?
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Chapter 19: Cost Management Systems: Activity-Based
Just-In-Time
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Sample Questions
Q1) Setting up machines for production
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
Q2) When preparing the report to analyze a proposed quality improvement program, which of the following are included in the costs to continue without the quality improvement program?
A) prevention and appraisal
B) prevention and internal failure
C) internal and external failure
D) appraisal and external failure
Q3) What is activity-based management? How is it different from activity-based costing?
Q4) Why is using multiple predetermined overhead allocation rates more accurate than using a single plantwide allocation rate?
Q5) Define target cost. How is target cost determined?
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Chapter 20: Cost Volume Profit Analysis
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Q1) \[\begin{array} { | l | r | r | }
\hline & \text { Minutes } & \text { Total Bill } \\
\hline \text { January } & 480 & \$ 4500 \\
\hline \text { February } & 240 & \$ 2690 \\
\hline \text { March } & 160 & \$ 2630 \\
\hline \text { April } & 300 & \$ 2845 \\
\hline
\end{array}\] If the company uses 360 minutes in May, how much will the total bill be? (Round any intermediate calculations to the nearest cent and your final answer to the nearest dollar.)
A) $1697
B) $2102
C) $3799
D) $7305
Q2) How is the contribution margin calculated?
Q3) When the variable cost per unit increases, the total number of units required to break even also increases.
A)True
B)False
Q4) How is the unit contribution margin calculated?
Page 22
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Chapter 21: Variable Costing
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Sample Questions
Q1) Gross profit is calculated by deducting ________ from sales revenue.
A) total fixed costs
B) cost of goods sold
C) total variable costs
D) selling and administrative costs
Q2) When units produced are less than units sold, how does operating income differ between variable costing and absorption costing? Explain your answer.
Q3) A variable costing income statement is used for ________.
A) filing income tax returns
B) external reporting purposes
C) determining the amount of gross profit
D) internal decision-making purposes
Q4) Under absorption costing, all product costs are first recorded as assets in inventory accounts, and later transferred to the Cost of Goods Sold account when sold.
A)True B)False
Q5) Variable costing prepares the income statement using the traditional format. A)True B)False
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Chapter 22: Master Budgets
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Q1) For a merchandising company, the final step in the process of creating the master budget is the preparation of the ________.
A) budgeted balance sheet
B) operating budget
C) budgeted statement of retained earnings
D) cash budget
Q2) The inventory costing method affects the process of preparing the cost of goods sold budget.
A)True
B)False
Q3) To calculate budgeted direct labor costs, multiply the number of units to be produced by the number of projected direct labor hours. Next, multiply that total by the actual direct labor cost per hour.
A)True
B)False
Q4) The production budget determines the number of units to be produced during the period.
A)True
B)False
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) The management of Lawnshark Lawnmowers has calculated the following variances:
\[\begin{array} { | l | r | }
\hline \text { Direct materials cost variance } & \$ 11,000 \mathrm { U } \\
\hline \text { Direct materials efficiency variance } & 37,000 \mathrm {~F} \\
\hline \text { Direct labor cost variance } & 15,000 \mathrm {~F} \\
\hline \text { Direct labor efficiency variance } & 13,000 \mathrm { U } \\
\hline \text { Variable overhead cost variance } & 2000 \mathrm {~F} \\
\hline \text { Variable overhead efficiency variance } & 6000 \mathrm {~F} \\
\hline \text { Fixed overhead cost variance } & 4500 \mathrm {~F} \\
\hline
\end{array}\] What is the total variable overhead variance of the company?
A) $4000 F
B) $12,500 F
C) $8000 F
D) $4500 F
Q2) A favorable variance has a debit balance and is a contra revenue.
A)True
B)False
Q3) What does the fixed overhead cost variance measure?
Q4) What does the fixed overhead volume variance measure?
Page 25
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) Which of the following is a key performance indicator of the customer perspective in a balanced scorecard?
A) defect rate
B) employee satisfaction
C) gross margin growth
D) number of repeat customers
Q2) The transfer price should be an amount between the market price and the variable cost.
A)True
B)False
Q3) Centralized companies split their operations into segments and top management delegates decision making to the segment managers.
A)True
B)False
Q4) If a market-based transfer price is used, the transfer price is based on the cost of goods sold.
A)True
B)False
Q5) List and briefly discuss the two limitations of financial performance measures.
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Chapter 25: Short-Term Business Decisions
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Q1) If a company has limited competition and sells unique products, it is considered a price taker.
A)True B)False
Q2) Companies that are price-takers have considerable flexibility in setting the prices of their products.
A)True B)False
Q3) Launch Company sells 2200 paddleboards per year at a sales price of $470 per unit. Launch sells in a highly competitive market and uses target pricing. The company has $900,000 of assets, and the shareholders wish to make a profit of 17% on assets. Variable cost is $200 per unit and cannot be reduced. Assume all products produced are sold. What are the target fixed costs?
A) $1,034,000
B) $881,000
C) $153,000
D) $441,000
Q4) Explain the difference between price-takers and price-setters.
Q5) Identify the four steps in the decision-making process.
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Chapter 26: Capital Investment Decisions
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Q1) All else being equal, investments with longer payback periods are preferable.
A)True
B)False
Q2) The payback method is used only when the net cash inflows from a capital investment are the same for each period.
A)True
B)False
Q3) An investment today of $8,424 at 6% will yield payments of $2,000 per year for five years, or total payments of $10,000 over five years. The reason for this increase is that the interest is being earned on principal that is left invested each year.
A)True
B)False
Q4) Capital budgeting methods which incorporate the time value of money include the ________.
A) net present value method
B) accounting rate of return
C) average rate of return
D) payback method
Q5) What are the strengths of the net present value capital budgeting method?
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Chapter 27: Understanding Accounting Information Systems
and their Components
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Q1) 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.
Q2) When using a purchases journal, Accounts Payable is always credited.
A)True
B)False
Q3) In the cash receipts journal, the Other Accounts CR column is used when a transaction involves a credit entry that is not listed in the headings (columns) of the cash receipts journal.
A)True
B)False
Q4) Describe the transactions recorded in the purchases journal.
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