Financial Accounting Exam Review
Course Introduction
Financial Accounting provides students with a comprehensive understanding of the principles and procedures used to record, summarize, and report business transactions. The course covers key topics such as the accounting cycle, preparation of financial statements, and the interpretation of financial information to assist in decision-making. Emphasis is placed on the roles of generally accepted accounting principles (GAAP), ethical considerations in reporting, and the impact of accounting information on external stakeholders including investors, creditors, and regulators. Through practical exercises and case studies, students gain foundational skills essential for analyzing financial performance and communicating financial results.
Recommended Textbook
Horngrens Accounting Global Edition 10th Edition by Tracie L. Nobles
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3881 Flashcards
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Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) The statement of owner's equity informs users about how much of the earnings were kept and reinvested in the company.
A)True
B)False
Answer: True
Q2) Hamilton Lawn Service incurred $800 as repair expense and paid the repair company in cash. This will:
A) decrease the Owner's capital.
B) increase the assets of the business.
C) increase the liabilities of the business.
D) decrease the liabilities of the business.
Answer: A
Q3) Which of the following organizations is responsible for the creation and governance of accounting standards in the United States?
A) Financial Accounting Standards Board
B) Institute of Management Accountants
C) American Institute of Certified Public Accountants
D) Securities and Exchange Commission
Answer: A
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Page 3
Chapter 2: Recording Business Transactions
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Sample Questions
Q1) A business collects cash from a customer on settlement of accounts receivable. Which of the following accounts will be debited?
A) Cash
B) Accounts Receivable
C) Service Revenue
D) Accounts Payable
Answer: A
Q2) For Owner's Capital, the category of account and its normal balance is:
A) equity and a credit balance.
B) assets and a debit balance.
C) equity and a debit balance.
D) assets and a credit balance.
Answer: A
Q3) For the Cash account, the category of account and its normal balance is:
A) assets and a debit balance.
B) liabilities and a credit balance.
C) liabilities and a debit balance.
D) assets and a credit balance.
Answer: A
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Page 4
Chapter 3: The Adjusting Process
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Sample Questions
Q1) Accrued revenue is revenue that:
A) has been collected and earned.
B) the business has collected in cash, but not yet earned.
C) the business has earned, but not yet collected in cash.
D) will be collected and earned in the future.
Answer: C
Q2) On April 1, Balsa Company purchased office supplies for $1,500. At the end of April, they took a count of the remaining supplies and found that there was $500 of supplies left. Please provide the adjusting entry needed at the end of April. Assume the office supplies were initially recorded as an asset. Assume there were no office supplies on hand prior to the purchase on April 1.
Answer: \[\begin{array} { | c | r | r | }
\hline \text { Supplies Expense } & 1,000 & \\
\hline \text { Office Supplies } & & 1,000 \\
\hline
\end{array}\]
Q3) Accrued revenues are the income that has been received but not earned.
A)True
B)False
Answer: False
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Under which of the following categories would bonds held as investment for more than a year appear?
A) Long-term assets
B) Current assets
C) Long-term liabilities
D) Current liabilities
Q2) Reversing entries are:
A) the exact opposite of a prior adjusting entry.
B) dated the last day of the new period.
C) are required to be passed as per the Generally Accepted Accounting Principles (GAAP).
D) expensive to record and time consuming.
Q3) The Owner's Name, Capital account is a temporary account.
A)True
B)False
Q4) Which of the following accounts would appear in the balance sheet debit column?
A) Unearned Service Revenue
B) Accumulated Depreciation
C) Service Revenue
D) Prepaid Insurance
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Chapter 5: Merchandising Operations
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Sample Questions
Q1) The Income Summary account has a credit balance of $25,000 after the revenue and expense accounts have been closed. Which of the following is to be credited to close the Income Summary account?
A) Owner's Name, Withdrawals
B) Sales Revenue
C) Cost of Goods Sold
D) Owner's Name, Capital
Q2) The inventory account balance is $50,000. An actual count of inventory reveals that actual inventory is $43,000. Which of the following would be included in the adjusting entry? (Assume a perpetual inventory system)
A) a $43,000 credit to Merchandise Inventory
B) a $50,000 debit to Cost of Goods Sold
C) a $7,000 credit to Cost of Goods Sold
D) a $7,000 credit to Merchandise Inventory
Q3) Nurix Inc. sold goods on credit terms n/20 to Jelly Harper Inc. This means no discounts are offered, and the amount of the invoice must be paid within 20 days from the date of invoice.
A)True
B)False
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Page 7
Chapter 6: Merchandise Inventory
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Sample Questions
Q1) A company should not change the inventory costing method each period in order to maximize net income. This is an example of the disclosure principle.
A)True
B)False
Q2) When a company uses the last-in, first-out (LIFO) method, the cost of goods sold correlates to the most recently purchased goods, and the ending inventory correlates to the oldest goods in stock.
A)True
B)False
Q3) The ending merchandise inventory for the current year is overstated by $20,000. What effect will this error have on the following year's Net Income?
A) Net income will be overstated by $40,000.
B) Net income will be overstated by $20,000.
C) Net income will be understated by $20,000.
D) Net income will be understated by $40,000.
Q4) For inventories, market value generally means the current replacement cost.
A)True
B)False
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Page 8
Chapter 7: Accounting Information Systems
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Sample Questions
Q1) The purchases journal is a special journal used to record all purchases of merchandise inventory, office supplies, and other assets on account.
A)True
B)False
Q2) Depreciation of fixed assets is recorded in a:
A) cash payments journal.
B) sales journal.
C) cash receipts journal.
D) general journal.
Q3) Which of the following is true of an accounts receivable subsidiary ledger?
A) It does not include a receivable account for each customer, but includes a cumulative account for all customers.
B) It contains information about the amount each customer purchased on credit, but excludes the customer name.
C) The total of the accounts in the accounts receivable subsidiary ledger must equal the accounts receivable balance in the general ledger.
D) Companies keep an accounts payable subsidiary ledger that is entirely different than the accounts receivable subsidiary ledger.
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Chapter 8: Internal Control and Cash
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Sample Questions
Q1) A(n) ________ is a security procedure designed for e-commerce.
A) burglar alarm
B) firewall
C) fireproof vault
D) inventory storage
Q2) In the following situation, which internal control procedure needs strengthening? Santhom Inc. does not have a separate accounting department. Its operating departments are also responsible for recording transactions in the books of accounts of the company apart from their main operations.
A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents
Q3) According to the bank reconciliation above,Journalize the adjusting entry for the first reconciling item: note collected by bank.
Q4) A strong computer firewall is an essential element of good internal controls for e-commerce.
A)True
B)False
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Chapter 9: Receivables
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Sample Questions
Q1) Sales through credit cards and debit cards are journalized in the same way as credit sales are journalized.
A)True
B)False
Q2) The interest period extends from the original date of the note to the maturity date.
A)True
B)False
Q3) Which of the following are two methods of estimating uncollectible receivables?
A) allowance method and amortization method
B) aging-of-accounts-receivable method and percent-of-sales method
C) gross-up method and direct write-off method
D) direct write-off method and percent-of-completion method
Q4) A company reports net accounts receivable of $150,000 on its December 31, 2015 balance sheet. The Allowance for Bad Debts has a credit balance of $15,000. What is the balance in Accounts Receivable?
A) $155,000
B) $150,000
C) $165,000
D) $135,000
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Chapter 10: Plant Assets, Natural Resources, and Intangibles
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Sample Questions
Q1) On January 1, 2015, Zade Manufacturing Company purchased a machine for $40,000,000. The company expects to use the machine for 24,000 hours over the next 6 years. The estimated sale value of the machine at the end of the sixth year is $40,000. The schedule of usage of the machine is as below.
\[\begin{array} { | c | r | }
\hline { \text { Year } } & \text { Usage } \\
\hline 1 & 4,500 \\
\hline 2 & 6,000 \\
\hline 3 & 5,200 \\
\hline 4 & 4,300 \\
\hline 5 & 2,000 \\
\hline 6 & 2,000 \\
\hline
\end{array}\] Prepare the depreciation schedule using the units-of-production method of depreciation.
Q2) The units-of-production method allocates varying amounts of depreciation each year based on the usage of the asset.
A)True
B)False
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Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) The operating expense section of the income statement includes the estimated warranty payable.
A)True
B)False
Q2) ________ is a pay amount stated at an hourly rate.
A) Salary
B) Wage
C) Commission
D) Bonus
Q3) Which of the following is included in the entry to record the employer's payroll taxes?
A) a debit to State Unemployment Tax Payable
B) a credit to Payroll Tax Expense
C) a credit to FICA-OASDI Tax Payable
D) a credit to Salary Payable to employees
Q4) FUTA, Federal unemployment compensation tax, is not withheld from an employees' gross earnings.
A)True
B)False
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Page 13
Chapter 12: Partnerships
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Sample Questions
Q1) In a general partnership business, each partner has limited personal liability for the debts of the business.
A)True
B)False
Q2) Unlike in a corporation, the owners of a partnership firm:
A) have limited claim on the profit made by the business.
B) are restricted from dissolving the business without prior notice to the SEC.
C) have an unlimited personal liability for the debts of the business.
D) are taxed at two levels.
Q3) Which of the following is true of limited partners in a limited partnership?
A) They have limited liability for the debts of the business but their potential for profits is unlimited.
B) They usually have first claim to profits and losses made by the business.
C) They assume the same operational duties as that of the general partner.
D) They have to assume a liability beyond their contribution in the business in the event of a bankruptcy.
Q4) An S corporation pays no corporate income tax.
A)True
B)False
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Chapter 13: Corporations
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Sample Questions
Q1) The declaration of a cash dividend does not create an obligation (liability) for the corporation.
A)True
B)False
Q2) Happy Holiday, Inc. has 100,000 shares of common stock issued and outstanding, with a par value of $0.01 per share. They declared a 15% common stock dividend; market value is $12 per share. Which of the following is the correct journal entry to record the transaction?
A) Debit Retained Earnings $180,000 and credit Paid-In Capital in Excess of Par-Common $180,000.
B) Debit Retained Earnings $180,000, credit Common Stock Dividend Distributable $150 and credit Paid-In Capital in Excess of Par-Common $179,850.
C) Debit Retained Earnings $180,000 and credit Cash $180,000.
D) Debit Common Stock Dividend Distributable $150, debit Paid-In Capital in Excess of Par-Common $179,850 and credit Retained Earnings $180,000.
Q3) A higher price/earnings ratio signifies a higher return on investment.
A)True
B)False
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Chapter 14: Long-Term Liabilities
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Sample Questions
Q1) A note payable can either be classified as a long-term liability or a short-term liability depending on the discretion of the accountant.
A)True
B)False
Q2) If a bond's stated interest rate is the same as the market rate, which of the following is true?
A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount lower than the maturity value.
Q3) Callable bonds are bonds that the issuer may call and pay off at a specified price whenever the issuer wants.
A)True
B)False
Q4) The amortization of bond premium increases interest expense over the life of the bonds.
A)True
B)False
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Page 16
Chapter 15: Investments
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Sample Questions
Q1) U.S. government securities are:
A) real estate investments.
B) equity securities.
C) debt securities.
D) forward contracts.
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) Payment of dividend is not included in the determination of comprehensive income, even though it results in a decrease in total stockholders' equity.
C) Comprehensive income includes company's change 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 for reporting purposes.
Q3) A company that is controlled by another corporation is called a parent company.
A)True
B)False
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Chapter 16: The Statement of Cash Flows
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Sample Questions
Q1) While preparing a statement of cash flows using the indirect method, the Depreciation Expense:
A) is added back as an adjustment to Net Income in the operating activities section.
B) is shown as a negative cash flow in the investing activities section.
C) is added back to Purchases of Plant Assets under investing activities.
D) is shown as a negative cash flow under operating activities.
Q2) Which of the following would appear on a statement of cash flows prepared using the direct method?
A) adjustments to net income
B) cash payments for salaries
C) adjustments for gains and losses on sale of property
D) increase/decrease in current assets
Q3) The cash paid for the purchase of equipment will typically be shown under the investing activities section of the statement of cash flows.
A)True
B)False
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18
Chapter 17: Financial Statement Analysis
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Sample Questions
Q1) Which of the following best describes trend analysis?
A) calculating key ratios to evaluate performance
B) expressing each figure as a percentage of a budgeted figure
C) comparing a company's financial statements with that of other companies
D) expressing each year's figures as a percentage of the base year figures
Q2) Which of the following is the base amount when performing vertical analysis of an income statement?
A) total expenses
B) net sales
C) sales revenue
D) gross profit
Q3) Which of the following best describes horizontal analysis?
A) comparing figures from year to year for the same company
B) expressing each figure as a percentage of a budgeted figure
C) comparing a company's financial statements with other companies
D) calculating key ratios to evaluate performance
Q4) An unqualified opinion in an audit report states that the financial statements are presented fairly, in all material respects.
A)True
B)False
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Chapter 18: Introduction to Managerial Accounting
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Sample Questions
Q1) The Work-in-Process Inventory account includes the:
A) goods that are ready to be sold.
B) goods that are partially completed.
C) goods that have been sold in the market.
D) goods that are damaged during production.
Q2) Financial statements prepared for investors and creditors often include forward-looking information because they make decisions based on a company's future prospects.
A)True
B)False
Q3) For a manufacturing business, which of the following would be included as indirect manufacturing costs?
A) Sales commissions
B) Fuel and maintenance for delivery vehicles
C) Wages of the assembly line workers
D) Wages of the factory manager
Q4) Financial reporting is typically much more detailed than managerial accounting.
A)True
B)False
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Chapter 19: Job Order Costing
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Sample Questions
Q1) Specialty Wood Products Company had the following manufacturing labor costs last month:
\[\begin{array} { l l }
\text { Woodworkers' wages } & \$ 100,000 \\
\text { Indirect laborers' wages } & \$ 20,000 \\
\text { Maintenance personnel wages } & \$ 10,000 \end{array}\] Provide the journal entry to record the labor costs incurred, which will be paid at a later date.
Q2) Pandora Manufacturing purchased $95,000 of raw materials on account and $5,000 raw materials for cash. The materials will be used to produce furniture. Provide the journal entry for the purchase of materials.
Q3) A process costing system is used when a company produces identical units through a series of production steps. A)True B)False
Q4) For a service company, such as an accounting firm, each client is considered a job. A)True B)False
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Chapter 20: Process Costing
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Sample Questions
Q1) A process costing system is most suitable for businesses that manufacture batches of unique products or provide specialized services.
A)True
B)False
Q2) During September, the Filtering Department of Olive Company had beginning transferred in units of 500 units with costs of $125,000. During the month, 800 units were transferred in from the Milling Department with transferred in costs of $200,000. It had 400 units in ending Work-in-Process Inventory. What is the total cost of production for the units transferred to the Finishing Department in September under the first-in, first-out (FIFO) method?
A) $258,336
B) $125,000
C) $75,000
D) $150,000
Q3) A textile manufacturing company is most likely to use job order costing to arrive at the cost per unit of textile manufactured and sold to customers.
A)True
B)False
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Chapter 21: Cost-Volume-Profit Analysis
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Sample Questions
Q1) When the variable cost per unit increases, the total number of units required to breakeven also increases.
A)True
B)False
Q2) Which of the following statements is true of the behavior of total fixed costs, within the relevant range?
A) They will remain the same as production levels change.
B) They will increase as production decreases.
C) They will decrease as production decreases.
D) They will decrease as production increases.
Q3) When the total variable costs are deducted from total mixed costs, we obtain:
A) mixed cost per unit.
B) variable cost per unit.
C) total high-low costs.
D) total fixed costs.
Q4) If the number of units sold is more than number of units produced, the income under both variable and absorption costing would be the same.
A)True
B)False
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Chapter 22: Master Budgets
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Sample Questions
Q1) The production budget determines the number of units to be produced during the period.
A)True
B)False
Q2) Which of the following statements is true of the budgeting process?
A) It includes qualitative targets of the company, not just quantitative.
B) It is a continuous process.
C) It shows the actual performance of the business.
D) Its success is not dependent on human behavior.
Q3) Which of the following best describes the term sensitivity analysis?
A) It is a testing technique to determine how results would differ if key assumptions are changed.
B) It is an analysis of the emotional sensitivity of a company's employees.
C) It is an evaluation of the accuracy of the assumptions.
D) It evaluates a company's financial condition by doing financial statement analysis.
Q4) A budget represents the plans that a company has in place to achieve its goals.
A)True
B)False
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) Zenith Fashions uses standard costs for their manufacturing division. From the following data, calculate the fixed overhead cost variance. \[\begin{array} { | l | r | }
\hline \text { Actual fixed overhead } & \$ 30,000 \\
\hline \text { Budgeted fixed overhead } & \$ 25,000 \\
\hline \text { Standard overhead allocation rate } & \$ 7 \\
\hline \text { Standard direct labor hours per unit } & 2 \mathrm { DLHr } \\
\hline \text { Actual output } & 2,000 \text { units } \\
\hline \end{array}\]
A) $3,000 F
B) $3,000 U
C) $5,000 F
D) $5,000 U
Q2) Which of the following amounts of a flexible budget remain constant when the sales volume changes?
A) total contribution margin
B) total fixed costs
C) total variable expenses
D) total sales revenue
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Chapter 24: Cost Allocation and Responsibility Accounting
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Q1) The practice of comparing a company's achievements against the best practices in the industry is known as goal congruence.
A)True
B)False
Q2) Which of the following would most likely be evaluated using residual income?
A) cost center
B) profit center
C) revenue center
D) investment center
Q3) Managers of investment centers are responsible not only for generating profits, but also for ensuring efficient use of assets of the investment center.
A)True
B)False
Q4) Cost center responsibility reports generally focus on the static budget variance.
A)True
B)False
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Chapter 25: Short-Term Business Decisions
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Q1) In making product mix decisions under constraining factors, a company should maximize sales of the product with the highest contribution margin per unit.
A)True
B)False
Q2) A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month. Assume the fixed costs are unavoidable, but that company could employ the vacated premises to earn rental income of $700 per month. How will it affect monthly operating income, if the company outsources?
A) Operating income will go up by $500.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will go up by $4,800.
Q3) Price-setters emphasize a cost-plus pricing approach.
A)True
B)False
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Chapter 26: Capital Investment Decisions
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Q1) The payback method is the most thorough and comprehensive way to choose the best investment among alternatives, than any other capital budgeting methods.
A)True B)False
Q2) The accounting rate of return method evaluates the lifetime return of an asset, whereas return on investment evaluates an annual return.
A)True B)False
Q3) Discounted cash flow methods consider the time value of money while evaluating an investment proposal.
A)True
B)False
Q4) The term net present value means the difference between:
A) the total net income of the project and the initial investment.
B) the initial investment and the residual value.
C) the future value of the cash flows and the present value of the cash flows.
D) the present value of the net cash inflows and the investment's cost.
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