Financial Accounting I Exam Preparation Guide
Course Introduction
Financial Accounting I introduces students to the fundamentals of accounting principles and financial reporting. The course covers the accounting cycle, including the recording, summarizing, and reporting of business transactions in accordance with generally accepted accounting principles (GAAP). Topics include the preparation and analysis of financial statements, the proper treatment of assets, liabilities, and equity, and the understanding of revenue recognition, expenses, and internal controls. Emphasis is placed on developing the foundational knowledge and skills necessary to interpret financial information for decision-making in business environments.
Recommended Textbook
Financial Accounting An Introduction to Concepts Methods and Uses 14th Edition by Roman L. Weil
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Page 2
Chapter 1: Introduction to Business Activities and Overview
of Financial Statements and the Reporting Process
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Q1) To increase cash flow, a manufacturer might:
A)delay paying its suppliers.
B)borrow from a bank using the inventory as collateral.
C)institute a just-in-time inventory system.
D)all of the above
E)none of the above
Answer: D
Q2) To reduce the lag on collection of accounts receivable, a company might
A)offer a discount if customers pay quickly.
B)charge interest if customers delay payment.
C)use the accounts receivable as a basis for external financing.
D)sell only for cash.
E)all of the above
Answer: E
Q3) A natural business year ends when most activities in an operating cycle have been substantially concluded.
A)True
B)False
Answer: True
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Chapter 2: The Basics of Record Keeping and Financial
Statement Preparation: Balance Sheet
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Q1) Both U.S.GAAP and IFRS require firms to report balance sheet accounts for the prior year in addition to the current year.
A)True
B)False
Answer: True
Q2) Under IFRS, assets and liabilities in the statement of financial position appear in order of
A)decreasing closeness-to-cash.
B)increasing closeness-to-cash.
C)alphabetical order.
D)numerical order.
E)all of the above.
Answer: B
Q3) Explain the order of assets and liabilities in the balance sheet under U.S.GAAP and IFRS.
Answer: Under U.S.GAAP, assets and liabilities appear in order of decreasing closeness-to-cash; many firms that report under IFRS reverse this ordering.
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Page 4
Chapter 3: The Basics of Record Keeping and Financial
Statement Preparation: Income Statement
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Q1) Which of the following is/are true?
A)The seller measures revenue as the amount of cash, or the cash-equivalent value of other assets, that it receives from customers.
B)The seller measures revenue amounts as the exchange price between buyer and seller at the time of sale.
C)If the firm has not performed all of its obligations, it may make adjustments in the form of sales discounts and allowances.
D)If the firm has not performed all of its obligations, it may make adjustments in the form of sales returns.
E)all of the above are true
Answer: E
Q2) Subtraction of total operating expenses from sales yields:
A)net income.
B)gross margin.
C)operating profit.
D)all of the above.
E)none of the above.
Answer: C
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Chapter 4: Balance Sheet: Presenting and Analyzing
Resources and Financing
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Q1) Accounting records all executory promises.
A)True
B)False
Q2) Firms use long-term financing for
A)assets they expect to convert to cash in the short run.
B)assets to be used over long periods.
C)liabilities they expect to convert to cash in the short run.
D)liabilities to be used over long periods.
E)shareholders' equity they expect to convert to cash in the short run.
Q3) _____ means that the information presented is reasonably free from error and bias and faithfully represents what it purports to represent.
A)Conservatism
B)Realization
C)Relevance
D)Reliability
E)Recognition
Q4) Define liability.When is it recognized?
Q5) Describe Current Replacement Cost, Net Realizable Value, Fair Value, and the Present Value of Future Net Cash Flow use in valuing assets.
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Chapter 5: Income Statement: Reporting Results of Operating Activities
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Q1) Revenue recognition is among the most complex issues in financial reporting. The quantity and complexity of the authoritative guidance for recognizing revenues result(s) from
A)misreporting of revenues.
B)reporting revenues before the firm earns them.
C)reporting nonexistent revenues.
D)firms bundling products and services and selling them in multiple-element arrangements.
E)all of the above.
Q2) Which of the following is/are not examples of a period expense?
A) the president's salary
B) accounting and information systems costs
C) accounting and information systems costs.
D)support activity costs such as legal services, employee training, and corporate planning.
E)the factory foreman's salary
Q3) How are period expenses recognized and measured?
Q4) All transactions that increase net assets affect income.
A)True B)False
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Chapter 6: Statement of Cash Flows
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Q1) Delaying payments to suppliers and others during the last several days of an accounting period conserves cash and thereby increases cash flow from operations for that period.
A)True
B)False
Q2) Firms have some choice as to when they disburse cash.Firms that delay making payments to suppliers, employees, and others during the last several days of an accounting period
A)conserve cash and increase cash flow from operations for that period.
B)conserve cash and decrease cash flow from operations for that period.
C)do not conserve cash and increase cash flow from operations for that period.
D)do not conserve cash and decrease cash flow from operations for that period.
E)do not effect the cash balance and has no affect on cash flow from operations for that period.
Q3) The balance sheet reports
A)the shortfall in cash at the beginning of the year.
B)the balance in cash at the end of the year.
C)how cash changed during the period.
D)how a firm obtains and uses cash.
E)both choices a and b.
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Chapter 7: Introduction to Financial Statement Analysis
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Q1) An analyst examines changes in a firm's ratios over the three-year period-a so-called cross-section analysis.
A)True
B)False
Q2) Financial statement analysis often assess the profitability and risk of an organization.Specific ratios target each of these areas to answer questions such as "How profitable is this company?" or "How risky (liquid) is an investment in this company?"
Required:
a. Discuss three ratios that address how profitable a company might be.
b. Discuss three ratios that address how risky (liquid) a company might be.
Q3) The return from investing in the shares of common stock include(s):
A)change in the market price of the common stock.
B)cash dividends.
C)interest income.
D)choices a and b.
E)all of the above.
Q4) Discuss any ethical issues raised by the following actions.
Q5) Discuss any ethical issues raised by the following actions.
Q6) What are the steps in preparing pro forma financial statements?
Page 9
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Chapter 8: Revenue Recognition, Receivables, and
Advances From Customers
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Q1) (CMA adapted, Dec 92 #18) The mining industry frequently recognizes revenue using the completion of production method.This method is acceptable under the revenue recognition principle because \(\begin{array}{ccc}
\text { Sales prices are } & \text { Assets are } & \text { Production cost } \\ \text { reasonably } & \text { readily } & \text { can be readily }\\ \text { assured } & \text {realizable } & \text {determined } \end{array}\)
A)\(\begin{array}{lll}
\text { Yes } & \text { Yes } & \text { No } \end{array}\)
B)\(\begin{array}{lll}
\text { Yes } & \text { No } & \text { Yes } \end{array}\)
C)\(\begin{array}{lll}
\text { No } & \text { Yes } & \text { No } \end{array}\)
D) \(\text { No } \quad \text { No } \quad \text { Yes }\)
E)\(\text { No } \quad \text { Yes } \quad \text { Yes }\)
Q2) Describe the income recognition principles and how they are applied.
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Chapter 9: Working Capital
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Q1) City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the FIFO cost-flow assumption.The cost of goods sold is _____, and the ending inventory is _____.
A)$2,900; $5,500
B)$2,500; $5,900
C)$3,000; $5,400
D)$2,800; $5,600
E)cannot be determined with the information given
Q2) Cash includes:
A)currency.
B)money orders.
C)bank checks.
D)checking accounts and time deposits.
E)all of the above.
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Page 11
Chapter 10: Long-Lived Tangible and Intangible Assets
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Q1) Which of the following is/are not capitalized as an intangible asset?
A)costs of an internally developed patent
B)legal costs to defend a patent successfully
C)goodwill acquired when a company purchases another company
D)costs to purchase a patent
E)none of the above
Q2) Assume the following long-term debt structure for Parton Stores: Construction Loan at 5% on Building Under Construction .........$2,000,000
Other Borrowings at 6% Average Rate .........................7,200,000
Total Long-Term Debt ....................................$9,200,000
The account Building Under Construction has an average balance during the year of $6,000,000.Parton Stores bases the amount of interest capitalized on the new construction-related borrowing, $2,000,000, and enough of the other borrowing to bring the total to $6,000,000.
How much does Parton Stores capitalize interest on the new construction?
A)$240,000
B)$300,000
C)$320,000
D)$340,000
E)$360,000
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Chapter 11: Notes, Bonds, and Leases
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Q1) Which of the following is/are true?
A)Common terminology refers to the financial contract underlying bank loans as a note.
B)Financial contracts underlying bank loans usually appear on the balance sheet under the title Notes Payable.
C)Notes of business firms generally have maturity dates less than approximately ten years.
D)No public market for Notes Payable exists, so the borrower will have difficulty disengaging from the borrowing arrangement prior to maturity. E)all of the above
Q2) (CMA adapted, Jun 86 #5) A bond issue sold at a premium is valued on the statement of financial position at the A)maturity value.
B)maturity value plus the unamortized portion of the premium.
C)maturity value less the unamortized portion of the premium.
D)current market value.
E)par value.
Q3) What are the requirements for the disclosure of the carrying and fair values of debt?
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Chapter 12: Liabilities: Off-Balance Sheet Financing,
Benefits, and Income Taxes
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Q1) Target Corporation and Bark Company (forest products companies) need additional pulp-processing capacity.Each firm could borrow the needed funds and build its own manufacturing plant.Instead, they form a joint venture to build a pulp-processing plant.Each firm agrees to use half of the new plant's capacity each year for 20 years and to pay half of all operating and debt service costs.The joint venture uses the purchase commitments of Target Corporation and Bark Company to obtain a loan to build the facility.The firms structure the arrangement so that neither firm controls the joint venture.The lender requires both firms to guarantee payment of the loan in case the joint venture defaults, Which of the following is/are true?
A)Under both U.S.GAAP and IFRS, the guarantors would recognize the fair value of the guarantee when they signed the loan.
B)If it becomes probable that the joint venture will default, then the guarantor would apply loss contingency accounting (U.S.GAAP) and recognize a liability.
C)If it becomes probable that the joint venture will default, then the guarantor would apply provision accounting (IFRS) and recognize a liability.
D)all of the above
E)none of the above
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Chapter 13: Marketable Securities and Derivatives
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Q1) U.S.GAAP and IFRS require firms to report trading securities at _____.
A)net realizable value on the balance sheet
B)fair value on the balance sheet
C)present value on the balance sheet
D)fair value on the income statement
E)present value on the income statement
Q2) When accounting for a fair value hedge of a recognized asset or liability, at the end of each period, the firm remeasures the hedged asset or liability to fair value and includes the resulting gain or loss in net income, and the derivative instrument (hedging instrument) to fair value and includes the resulting loss or gain in net income.
A)True
B)False
Q3) Gains and losses on speculative securities, fair value hedges, and the ineffective portion of cash flow hedges are included in
A)accumulated other comprehensive income each period.
B)contributed capital each period.
C)net income each period.
D)an adjustment to the beginning balance of retained earnings.
E)an adjustment to the ending balance of retained earnings.
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Page 15
Chapter 14: Intercorporate Investments in Common Stock
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Q1) The consolidated income statement shows
A)all of the parent's and the subsidiary's revenues less all of the parent's and the subsidiary's expenses, plus or minus intercompany sales, expenses, gains, and losses, which equals consolidated income.
B)The consolidated income statement shows the portion of this consolidated income to which the noncontrolling shareholders have a claim, typically an amount equal to the subsidiary's net income multiplied by the noncontrolling shareholders' ownership percentage.
C)The consolidated income statement shows the portion of this consolidated income to which the parent company shareholders have a claim.
D)all of the above
E)none of the above
Q2) U.S.GAAP and IFRS view investments of between 20% and 50% of the voting stock of another company as minority, active investments unless evidence indicates that the investor cannot exert significant influence.
A)True
B)False
Q3) Describe the limitations of consolidated statements.
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Chapter 15: Shareholders Equity: Capital Contributions and Distributions
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Q1) The accounting for employee stock options involves amortizing the fair value of the stock options on the date of the grant over the requisite service period, which is
A)expected period of benefit.
B)one year.
C)two years.
D)three years.
E)five years.
Q2) On September 1, 2013, Marker Corporation declared and issued a 20 percent common stock dividend.Prior to this date, Marker had 20,000 shares of $2 par value common stock that were both issued and outstanding.The market value of Marker's stock was $20 per share at the time the dividend was issued.As a result of this stock dividend, Marker's total stockholders' equity
A)decreased by $40,000.
B)decreased by $400,000.
C)increased by $400,000.
D)increased by $40,000.
E)did not change.
Q3) Describe the accounting for employee stock options (ESOs).
Q4) Compare the features of stock options and stock rights.What are stock warrants?
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Chapter 16: Statement of Cash Flows: Another Look
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Q1) The balance sheet portrays the effects of a firm's investing and financing decisions.In analyzing these decisions, what two principles guide financing decisions?
Q2) Amortization of the premium on bonds payable is subtracted from net income in the reconciliation of net income to cash flows from operations because
A)it is a financing cash outflow.
B)it reduces income without causing a cash outflow.
C)interest expense understates the cash paid for interest by the amount of the premium amortization.
D)it increases income without causing a cash flow.
E)None of these answers is correct.
Q3) Which of the following transactions would not be reported in the one of the three main activity sections of the statement of cash flows prepared under the indirect method?
A)A purchase of treasury stock
B)A purchase of an operational asset by issuing common stock
C)A loan made to another company
D)Patent amortization
E)A gain on the sale of a plant asset
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Chapter 17: Synthesis and Extensions
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Q1) Concerning treasury shares, which of the following is/are true?
A)Firms recognize no gain or loss from purchasing their own shares or reissuing previously purchased shares.
B)Differences between the purchase and reissue price are not earnings transactions but affect contributed capital accounts.
C)Firms account for the purchase of treasury shares using either the cost method or the par value method or the constructive retirement method.
D)The methods firms use to account for the purchase of treasury shares differ in terms of the shareholders' equity accounts affected, but all result in an equal reduction in total shareholders' equity when firms purchase their own shares.
E)all of the above
Q2) Both U.S.GAAP and IFRS often refer to ownership of a majority of the voting stock of another entity as indicating control, unless evidence indicates that the majority owner cannot exercise control.
A)True
B)False
Q3) Discuss recent changes in the financial reporting environment.
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