Financial Accounting
Final Test Solutions
Course Introduction
Financial Accounting provides an introduction to the principles, standards, and processes used to record, summarize, and report economic events in business organizations. This course covers the preparation and analysis of financial statements including the income statement, balance sheet, and cash flow statement with an emphasis on understanding the role of accounting information in decision-making by investors, creditors, and management. Students will develop foundational skills in identifying, measuring, and communicating financial data, and gain insights into accountings regulatory environment, ethical considerations, and its impact on organizational performance.
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) The total assets and the total liabilities of Atlas Financial Services are shown below. The company issued no common stock and paid no dividends during the year.
\[\begin{array} { | l | r | r | }
\hline & \text { Total Assets } & \text { Total Liabilities } \\
\hline \text { Beginning of year } & \$ 405,000 & \$ 295,000 \\
\hline \text { End of year } & 455,000 & 305,000 \\
\hline
\end{array}\] What was the amount of net income for the year?
A) $50,000
B) $10,000
C) $40,000
D) $60,000
Answer: C
Q2) The balance sheet reports on the assets, liabilities, and stockholders' equity of the business as of a specific date.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Recording Business Transactions
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Sample Questions
Q1) Which of the following sequences is the normal sequence of flow of accounting data?
A) Ledger Journal Source document
B) Journal Source document Ledger
C) Source document Journal Ledger
D) Source document Ledger Journal
Answer: C
Q2) Journalizing a transaction involves ________.
A) calculating the balance in an account using journal entries
B) posting the account balances in the chart of accounts
C) preparing a summary of account balances
D) recording the data only in the journal
Answer: D
Q3) Prepaid Rent is a liability account.
A)True
B)False
Answer: False
Q4) What are two ways in which a company can improve its debt ratio?
Answer: Increase assets
Reduce debt
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) In the case of deferred revenue, the adjusting entry at the end of the period includes a credit to Service Revenue. Assume the deferred revenue is initially recorded as a liability.
A)True
B)False
Answer: True
Q2) The time period concept states that ________.
A) financial statements can be prepared for specific periods
B) all expenses should be recorded when they are incurred during the period C) companies should record revenue when it has been earned D) expenses incurred during a period should be matched against the revenues of the period
Answer: A
Q3) Adjusting entries are completed to ensure that all income statement accounts for the accounting period examined have been recorded and to update the balance sheet accounts.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Adjusting journal entries are prepared ________.
A) after preparing the adjusted trial balance
B) after preparing the unadjusted trial balance
C) after posting the closing entries
D) after preparing the financial statements
Q2) Which of the following steps must be completed before preparing the adjusted trial balance?
A) Prepare the post-closing trial balance.
B) Post journal entries to the accounts.
C) Journalize and post the closing entries.
D) Prepare the financial statements.
Q3) The Common Stock account is a permanent account.
A)True
B)False
Q4) Which of the following accounts would appear in the balance sheet credit column of the worksheet?
A) Prepaid Insurance
B) Buildings
C) Unearned Revenue
D) Service Revenue
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Chapter 5: Merchandising Operations
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Sample Questions
Q1) A merchandiser reports sales revenue of $25,000 and sales discounts forfeited of $1,500. The merchandiser uses a perpetual inventory system. The first entry in the closing process would include ________.
A) a credit to Income Summary for $26,500
B) a credit to Income Summary for $25,000
C) a debit to Income Summary for $26,500
D) a debit to Income Summary for $25,000
Q2) ABC Electrical Supply Company purchased $560,000 of inventory. Goods of $35,000 were returned. ABC received an early discount of $55,000 and paid freight in of $15,000 and freight out of $20,000. Compute the net cost of inventory purchased. Label your work and show all computations.
Q3) The gross profit percentage is one of the most carefully watched measures of
A) profitability
B) liquidity
C) solvency
D) marketability
Q4) Describe how the cost of goods sold is calculated when using the periodic inventory system.
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Chapter 6: Merchandise Inventory
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Sample Questions
Q1) Which of the following is the correct formula to calculate days' sales in inventory?
A) Days' sales in inventory = 365 days × Inventory turnover
B) Days' sales in inventory = 365 days + Inventory turnover
C) Days' sales in inventory = 365 days / Inventory turnover
D) Days' sales in inventory = 365 days - Inventory turnover
Q2) Properly recording inventory when sold and removing the units sold from the inventory count will prevent a company from running out of inventory.
A)True
B)False
Q3) In a period of rising costs, the first-in, first-out (FIFO) method results in a lower cost of goods sold and a higher gross profit than the last-in, first-out (LIFO) method.
A)True
B)False
Q4) 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
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Chapter 7: Internal Control and Cash
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Sample Questions
Q1) A way to account for petty cash by maintaining a constant balance in the petty cash account and which at any time requires that cash plus petty cash tickets must total the amount allocated to the petty cash fund, is known as the ________.
A) control system
B) voucher system
C) balanced system
D) imprest system
Q2) It is difficult and costly to plan controls that can prevent collusion.
A)True
B)False
Q3) The petty cash fund has a current balance of $350, which is the established fund balance. Based on activity in the fund, it is determined that the balance needs to be changed to $400. Which journal entry is needed to make this change?
A) Debit the Petty Cash account and credit the Cash account for $400.
B) No journal entry is needed because this change only involves cash.
C) Debit the Petty Cash account and credit the Cash account for $50.
D) Debit the Cash account and credit the Petty Cash account for $50.
Q4) List the five components of internal control.
Q5) List and briefly discuss the five components of internal control.
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Chapter 8: Receivables
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Sample Questions
Q1) On April 1, 2019, Barnes Services received a 9-month note for $12,000 at 12%. Calculate the amount of interest due at maturity. (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.)
A) $972
B) $1,188
C) $1,440
D) $1,080
Q2) Which of the following statements, regarding notes receivable, is incorrect?
A) Notes receivable usually have longer terms than accounts receivable.
B) A notes receivable is a written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future.
C) All notes receivable are considered long-term assets.
D) Notes receivable are sometimes called promissory notes.
Q3) Separation of cash-handling and cash-accounting duties is a critical element of internal control over receivables.
A)True
B)False
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Chapter 9: Plant Assets, Natural Resources, and Intangibles
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Sample Questions
Q1) Which of the following is an intangible asset?
A) plant and machinery
B) goodwill
C) building
D) land
Q2) Intangible assets ______.
A) represent assets for which the market value cannot be determined
B) are not recorded in the books because they have no physical substance
C) convey special rights from patents, copyrights, trademarks, and other creative works
D) All of the statements are correct.
Q3) Estimated residual value can be zero if the company does not expect to receive anything when disposing of the asset.
A)True
B)False
Q4) The lump-sum amount paid for a group of assets is divided among the acquired assets based on their relative market values.
A)True
B)False
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11
Chapter 10: Investments
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Sample Questions
Q1) A ________ is an example of equity securities.
A) preferred stock
B) municipal bond
C) corporate bond
D) Treasury bill
Q2) Hometown Resources, Inc. has a 9% rate of return on total assets and the industry average is 12%. How was the 9% rate of return on total assets computed? Comment on this information.
Q3) Sparklers Services, Inc. pays $1,350,000 to acquire 35% of voting stock of Global Investments, Inc. on March 5, 2018. When this transaction is recorded, the ________.
A) total equity will increase
B) total assets will increase
C) total assets will decrease
D) total cash will decrease
Q4) Debt securities represent a credit relationship with another company or governmental entity.
A)True
B)False
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Page 12
Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) Which of the following is a reason why many companies require a photo ID when employees pick up their paychecks?
A) to make sure an employee's work hours have been accurately reported
B) to avoid writing a paycheck to a fictitious person
C) to improve efficiency of the payroll disbursement process
D) to make sure all employees are legal adults
Q2) FICA tax is paid by the employee only and is deducted from gross earnings. A)True
B)False
Q3) Sean's gross pay for this month is $8750. His gross year-to-date pay, prior to this month, totaled $112,000. Sean's rate for federal income tax is 25%. His voluntary deductions total $950. What is Sean's net pay? (Assume an OASDI rate of 6.2%, applicable on the first $118,500 earnings, and a Medicare rate of 1.45%, applicable on all earnings. Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.)
A) $6032.62
B) $5612.50
C) $6562.50
D) $5082.62
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Page 13
Chapter 12: Long-Term Liabilities
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Sample Questions
Q1) A-Plus Carpets Company buys a building for $115,000, paying $30,000 cash and signing a 30-year mortgage note for $85,000 at 11%. Prepare the journal entry for the purchase. Omit explanation.
Q2) The date on which the principal amount is repaid to the bondholder is known as the ________.
A) issuing date
B) interest date
C) maturity date
D) installment date
Q3) On January 1, 2018, Westside Sales issued $16,000 in bonds for $19,800. These are eight-year bonds with a stated interest rate of 10% that pay semiannual interest. Westside Sales uses the straight-line method to amortize the bond premium. After the first interest payment on June 30, 2018, what is the bond carrying amount? (Round your intermediate answers to the nearest dollar.)
A) $19,800
B) $19,562
C) $16,238
D) $16,000
Q4) 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) Which of the following items are NOT reported as part of income from continuing operations?
A) discontinued operations
B) gross profit
C) other income and (expenses)
D) gain on sale of equipment
Q2) Regarding the statement of stockholders' equity, which of the following statements is incorrect?
A) The statement of stockholders' equity has more information than the statement of retained earnings because it reports the changes in all stockholders' equity accounts.
B) The statement of stockholders' equity does not show the changes to the Retained Earnings account because that information is provided in the statement of retained earnings.
C) The statement of stockholders' equity is an option for reporting the changes in stockholders' equity of a corporation.
D) The statement of stockholders' equity reports the number of shares and any changes during the year in preferred, common, and treasury stock.
Q3) List the four basic rights of stockholders.
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15
Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) Which of the following will be listed in the operating section of the statement of cash flows that is prepared using the indirect method?
A) collections from customers
B) payments to suppliers
C) interest received
D) increases/decreases in current liabilities
Q2) IFRS requires the use of the indirect method for the operating activities section of the statement of cash flows.
A)True
B)False
Q3) Which of the following sections of the statement of cash flows is presented differently between the direct method and indirect method?
A) investing activities
B) financing activities
C) operating activities
D) non-cash investing and financing activities
Q4) The statement of cash flows shows where cash came from and how cash was spent.
A)True
B)False
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Chapter 15: Financial Statement Analysis
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Sample Questions
Q1) Horizontal analysis compares the change in each statement item from one year to the next.
A)True
B)False
Q2) Working capital measures a business's ability to meet its long-term obligations with its current assets.
A)True B)False
Q3) Trend analysis is a form of horizontal analysis.
A)True
B)False
Q4) The current ratio is calculated as total current assets divided by total current liabilities.
A)True
B)False
Q5) No single ratio tells the whole picture of any company's performance.
A)True B)False
Q6) What is a common-size statement? Why are these statements useful?
Q7) 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) Managerial accounting is used in manufacturing and merchandising companies, but not in service companies.
A)True
B)False
Q2) Manufacturing overhead includes all manufacturing costs, such as direct labor and direct materials.
A)True
B)False
Q3) In a manufacturing company, wages and benefits of assembly line workers are period costs.
A)True
B)False
Q4) Strategic planning focuses on short term actions while operational planning involves developing long-term strategies.
A)True
B)False
Q5) Knowing the unit cost per item helps managers set appropriate selling prices.
A)True
B)False
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Chapter 17: Job Order Costing
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Sample Questions
Q1) Specialty Wood Products, Inc. had the following manufacturing labor costs last month:
\[\begin{array} { | l | r | }
\hline \text { Woodworkers' wages } & \$ 100,000 \\
\hline \text { Indirect laborers' wages } & 20,000 \\
\hline \text { Maintenance personnel wages } & 10,000 \\
\hline
\end{array}\] Provide the journal entry to record the labor costs incurred, which will be paid at a later date. Omit explanation.
Q2) The journal entry to issue indirect materials to production should include a debit to the ________.
A) Finished Goods Inventory account
B) Raw Materials Inventory account
C) Manufacturing Overhead account
D) Work-in-Process Inventory account
Q3) Both job order and process costing systems use a four-step method to track product costs. List each of the four steps.
Q4) Why would the manager of a service company need to use job order costing?
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Chapter 18: Process Costing
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Sample Questions
Q1) The production cost report for Department 1 shows that $159,000 was assigned to the 38,000 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 1. Process costing is used.
A)True
B)False
Q2) A production cost report can help managers identify the most profitable products.
A)True
B)False
Q3) Both job order costing and process costing ________.
A) maintain a single Work-in-Process Inventory account
B) treat all period costs as product costs
C) follow last-in, first-out method for inventory valuation
D) have the same type of product costs
Q4) Under process costing, depreciation on plant machinery is debited to the respective department's Work-in-Process Inventory.
A)True
B)False
Q5) 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) Stealth, Inc. produces two types of drones, rotary and fixed wing. Stealth estimated $1,210,000 of manufacturing overhead, and 55,000 machine hours for the year. The allocation base for overhead costs is machine hours. The rotary model actually consumed 26,000 machine hours, and the fixed wing type consumed 29,000 machine hours. How much overhead is allocated to the rotary model?
A) $572,000
B) $638,000
C) $260,000
D) $212,667
Q2) Under the just-in-time management system, ________.
A) a company's storage costs increase
B) a company's inventory insurance costs increase
C) the floor space available for production increases
D) the risk of the inventory becoming obsolete increases
Q3) Direct material costs and direct labor costs cannot be easily traced to products. Therefore, they are allocated to products.
A)True
B)False
Q4) What is the purpose of implementing a just-in-time inventory system?
Page 21
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Chapter 20: Cost Volume Profit Analysis
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Sample Questions
Q1) A 15% increase in production volume will result in a ________.
A) 15% increase in the variable cost per unit
B) 15% increase in total mixed costs
C) 15% increase in total administration costs
D) 15% increase in total variable costs
Q2) Increases in total fixed costs ________ contribution margin per unit and ________ the breakeven point.
Q3) The degree of operating leverage is the ratio that measures the effects that variable costs have on operating income when sales volume changes.
A)True
B)False
Q4) Which of the following is NOT an assumption of cost-volume-profit (CVP) analysis?
A) The only factor that affects total costs is a change in volume, which increases or decreases total variable and mixed costs.
B) The price per unit does not change as volume changes.
C) Total fixed costs do not change.
D) The price per unit changes as volume changes.
Q5) List the cost-volume-profit (CVP) assumptions.
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Chapter 21: Variable Costing
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Q1) Louie's Music produces harmonicas that it sells for $12 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of harmonicas to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Louie's Music's first month in business:
\[\begin{array} { | l | r | }
\hline \text { Jnuary 2019 } & \\
\hline \text { Units produced and sold: } & \\
\hline \text { Sales in units } & 1,200 \\
\hline \text { Production in units } &1,400\\
\hline \text { Variable manufacturing cost per harmonica } & \$ 4 \\
\hline \text { Sales commission cost per harmonica } & \$ 1 \\
\hline \text { Total fixed manufacturing overhead } & \$ 2,800 \\
\hline \text { Total fixed selling and administrative costs } &\$ 2,100\\
\hline
\end{array}\] Requirements
1. Compute the product cost per harmonica produced under absorption costing.
2. Prepare an income statement for January, 2019
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Chapter 22: Master Budgets
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Q1) A budgeting process where individuals who are impacted by a budget are directly involved in its development is called ________.
A) flexible budgeting
B) benefit budgeting
C) participative budgeting
D) cooperative budgeting
Q2) Purchases of direct material for May were $115,000, while expected purchases for June and July are $121,000 and $136,000, respectively. All purchases are paid 25% in the month of purchase and 75% the following month. Calculate the budgeted payments for the month of June.
A) $116,500
B) $119,500
C) $121,000
D) $90,750
Q3) Cost behavior is considered in developing the selling and administrative expense budget as costs are designated as variable or fixed.
A)True
B)False
Q4) What is the cornerstone of the master budget for a merchandising company? Why?
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) When a manufacturing company uses a standard cost system, the direct materials cost variance is recorded at the time direct materials are issued in production.
A)True
B)False
Q2) A variance is the difference between an actual amount and the budgeted amount. A)True
B)False
Q3) The fixed overhead cost variance measures how well the business ________.
A) keeps costs of variable overhead inputs within standard.
B) uses its variable overhead inputs.
C) keeps fixed overhead within standard.
D) explains why fixed overhead is under allocated or overallocated
Q4) The variable overhead cost variance measures how well the business ________.
A) keeps unit costs of variable overhead inputs within standard.
B) uses its variable overhead inputs.
C) keeps fixed overhead within standard.
D) explains why fixed overhead is under allocated or overallocated
Q5) A static budget is prepared for only one level of sales volume. A)True B)False
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) The level of employee satisfaction is a key performance indicator of the ________ perspective of a balanced scorecard.
A) financial
B) learning and growth
C) internal business
D) customer
Q2) A profit center performance report includes both revenues and expenses.
A)True
B)False
Q3) For a centralized company, the major planning and controlling decisions are made by top management.
A)True
B)False
Q4) Management by exception directs management's attention to important differences between the actual and the budgeted amounts.
A)True
B)False
Q5) Discuss the difference between a centralized company and a decentralized company.
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Chapter 25: Short-Term Business Decisions
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Q1) Managerial accountants assist managers in the decision-making process by gathering and analyzing relevant information.
A)True
B)False
Q2) Louis Company is considering replacing its multi-functional copier system with a new system. Which costs would be relevant to its decision and which costs would be irrelevant?
Q3) Value Electronics uses a standard part in the manufacture of different types of radios. The total cost of producing 28,000 parts is $90,000, which includes fixed costs of $30,000 and variable costs of $60,000. The company can buy this part from an external supplier for $5 per unit and avoid 10% of the fixed costs. If Value Electronics decides to outsource the production of the part, how will it impact its operating income?
A) Operating income increases by $77,000.
B) Operating income decreases by $77,000.
C) Operating income increases by $80,000.
D) Operating income decreases by $80,000.
Q4) Define joint cost. Should joint costs be considered in the decision to sell or further process the product? Explain your answer.
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Page 27
Chapter 26: Capital Investment Decisions
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Sample Questions
Q1) Solutions Tool Co. is considering investing in specialized equipment costing $975,000. The equipment has a useful life of five years and a residual value of $75,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below:
\(\begin{array}{rr}
\text { Year 1 } & \$ 275,000 \\
\text { Year 2 } & 220,000 \\
\text { Year 3 } & 200,000 \\
\text { Year 4 } & 200,000 \\
\text { Year 5 } & 180,000 \\ & \$ 1,075,000
\end{array}\) Compute the accounting rate of return on the investment. Show your calculations and round to two decimal places.
Q2) All of the following are considered cash inflows except the
A) future cash revenue generated by the investment
B) future savings in ongoing cash operating costs
C) future residual value of the capital investment
D) future additional operating costs of the investment
Q3) What are the strengths of the net present value capital budgeting method?
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Page 28
Chapter 27: Understanding Accounting Information Systems
and their Components
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Q1) Which of the following is true of the general journal?
A) All transactions recorded in one of the special journals are also recorded in the general journal.
B) Manual accounting information systems do not need the general journal.
C) The adjusting entries and the closing entries are recorded in the general journal.
D) Non-routine transactions are generally not recorded in the general journal.
Q2) In an accounting information system, outputs are the reports used for decision making, which include the financial statements.
A)True
B)False
Q3) List and briefly discuss the three basic components of an accounting information system.
Q4) The accounting is the same regardless of whether a business uses a manual or a computerized accounting information system.
A)True
B)False
Q5) List and describe two features of an effective accounting information system.
Q6) Describe the transactions recorded in the cash payments journal.
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