Financial Accounting I Practice Exam
Course Introduction
Financial Accounting I introduces students to the fundamental principles and concepts of accounting, focusing on the preparation and interpretation of financial statements. This course covers the accounting cycle, including journal entries, ledger posting, trial balance, and the adjustment and closing process. Students will learn how to apply generally accepted accounting principles (GAAP) to record business transactions, understand the structure and components of the balance sheet, income statement, and cash flow statement, and analyze financial information for decision-making. Emphasis is placed on ethical practices in accounting and the importance of transparent financial reporting in business.
Recommended Textbook
Financial Accounting 15th Edition by Jan Williams
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Page 2
Chapter 1: Accounting: Information for Decision Making
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Sample Questions
Q1) The best definition of an accounting system is:
A) Journals, ledgers, and worksheets.
B) Manual or computer-based records used in developing information about an entity for use by managers and also persons outside the organization.
C) The personnel, procedures, devices, and records used by an entity to develop accounting information and communicate this information to decision makers.
D) The concepts, principles, and standards specifying the information which should be included in financial statements, and how that information should be presented.
Answer: C
Q2) Which of the following has the least impact upon the reliability of financial statements issued by publicly owned corporations?
A) Federal securities laws.
B) Professional judgment of the accountants who prepare the financial statements.
C) Audits of the financial statements by the Internal Revenue Service.
D) Competence and integrity of the CPAs who perform audits.
Answer: C
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Chapter 2: Basic Financial Statements
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Q1) Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.
A)True
B)False
Answer: False
Q2) From an accounting viewpoint, when is a business considered an entity separate from its owner(s)?
A) Only when organized as a sole proprietorship.
B) Only when organized as a partnership.
C) Only when organized as a corporation.
D) In each of the above situations, the business is an accounting entity separate from the activities of the owner(s).
Answer: D
Q3) A balance sheet is designed to show the financial position of an entity:
A) At a single point in time.
B) Over a period of time such as a year or quarter.
C) At December 31 of the current year.
D) At January 1 of the coming year.
Answer: A
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Page 4
Chapter 3: The Accounting Cycle: Capturing Economic Events
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Q1) A credit to a ledger account refers to the entry of an amount on the right side of an account.
A)True
B)False
Answer: True
Q2) A trial balance proves that equal amounts of debits and credits were posted to the ledger.
A)True
B)False
Answer: True
Q3) Net income is:
A) The excess of debits over credits.
B) The increase in owners' equity resulting from the profitable operations of the business.
C) The excess of credits over debits.
D) The increase in assets of a company during a year.
Answer: B
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Page 5
Chapter 4: The Accounting Cycle: Accruals and Deferrals
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Sample Questions
Q1) On June 1, 2008, the park purchased a 12-month insurance policy. Give the adjusting entry to record insurance coverage expiring in January. (Hint: The company adjusts its books on a monthly basis.)
Q2) The adjusting entry to record income taxes at the end of an unprofitable accounting period consists of a:
A) Debit to Income Tax Expense and a credit to Income Tax Payable.
B) Credit to Income Tax Expense and a debit to Income Tax Payable.
C) Credit to Income Tax Receivable and a debit to Income Tax Expense.
D) No adjusting entry is required for income taxes if there are no profits.
Q3) The accrual of interest on a note payable will:
A) Reduce total liabilities.
B) Increase total liabilities.
C) Have no effect upon total liabilities.
D) Will have no effect upon the income statement but will affect the balance sheet.
Q4) All assets should be depreciated.
A)True
B)False
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6
Chapter 5: The Accounting Cycle: Reporting Financial
Results
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Sample Questions
Q1) Which of the following accounts is not closed to the Income Summary at the end of the accounting period? (More than one answer may be correct).
A) Rent expense.
B) Accumulated Depreciation.
C) Unearned Revenue.
D) Supplies Expense.
Q2) Closing entries do not affect the cash account.
A)True
B)False
Q3) The following information is available: What is the return on equity? (round to the nearest number)
A) 5%.
B) 20%.
C) 25%.
D) 15%.
Q4) The account, Accumulated Depreciation, is considered a permanent account. A)True
B)False
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Chapter 6: Merchandising Activities
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Sample Questions
Q1) At the beginning of 2010, England Dresses has an inventory of $140,000. However, management wants to reduce the amount of inventory on hand to $80,000 at December 31. If net sales for 2010 are forecast at $400,000 and the gross profit rate is expected to be 40%, compute the cost of the merchandise which management should expect to purchase during 2010. (Hint: First compute the expected cost of goods sold.)
A) $240,000.
B) $180,000.
C) $320,000.
D) $220,000.
Q2) Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross sales.
A)True
B)False
Q3) Which of the following companies would be more likely to use a perpetual inventory system?
A) Corner deli.
B) Home Depot.
C) James Dean, CPA.
D) A manufacturer of custom sailboats.
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Page 8
Chapter 7: Financial Assets
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Q1) Uncollectible accounts
(a.) What is an uncollectible account? Explain how a business suffers losses from uncollectible accounts.
(b.) "A competent credit manager should set credit policies so as to avoid any and all losses from uncollectible accounts." Is this statement accurate? Explain your answer.
Q2) Which of the following best describes the application of generally accepted accounting principles to the valuation of accounts receivable?
A) Realization principle-Accounts receivable are shown at their net realizable value in the balance sheet.
B) Matching principle-The loss due to an uncollectible account is recognized in the period in which the sale is made, not in the period in which the account receivable is determined to be worthless.
C) Cost principle-Accounts receivable are shown at the initial cost of the merchandise to customers, less the cost the seller must pay to cover uncollectible accounts.
D) Principle of conservatism-Accountants favor using the lowest reason?able estimate for the amount of uncollectible accounts shown in the balance sheet.
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Chapter 8: Inventories and the Cost of Goods Sold
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Sample Questions
Q1) In a periodic inventory system, the cost of goods sold is determined by:
A) Multiplying net sales for the period by a cost ratio.
B) Journal entries made at the time of each sales transaction.
C) Physically counting the quantities of merchandise sold each day, and determining the cost of these items at year-end.
D) Subtracting the cost assigned to the ending inventory from the cost of goods available for sale during the period.
Q2) Harris Corporation's inventory of a particular product includes 200 units purchased at a per-unit cost of $50, and another 100 units purchased at a unit cost of $60. If Harris sells 10 units of this product, the cost of goods sold will be:
A) $500.
B) $550.
C) $660.
D) The answer will depend upon the inventory flow assumption in use.
Q3) What was the gross profit for the month?
A) $129,000.
B) $171,000.
C) $235,000.
D) $304,750.
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Page 10
Chapter 9: Plant and Intangible Assets
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Q1) The book value of an asset in the plant and equipment category is:
A) The undepreciated cost of the asset.
B) The current replacement cost of the asset.
C) The original cost of the asset.
D) The accumulated depreciation on the asset to date.
Q2) Once the estimated life is determined for a depreciable asset it can never be changed.
A)True
B)False
Q3) When a depreciable asset is sold at a price equal to its book value, a journal entry would include:
A) A credit to the asset account for its book value.
B) A debit to accumulated depreciation.
C) A credit to accumulated depreciation.
D) A credit to cash.
Q4) Most companies benefit by using accelerated depreciation methods for income tax purposes.
A)True
B)False
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Chapter 10: Liabilities
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Sample Questions
Q1) What will be the effect on Apex's debt ratio if Apex's owner invests an additional $2 million to finance its expansion?
A) The debt ratio will decrease from .1 (2/20) to .0909 (2/22) after the additional investment.
B) The debt ratio will decrease from 2/9 before to 2/11 after the additional investment.
C) The debt ratio will increase from 20 before to 22 after the additional investment.
D) Additional investment by owner will have no effect on the debt ratio.
Q2) Webster's entry at June 30, 2012, to record the first semiannual payment of interest and amortization of discount on the bonds includes a:
A) Debit to Bond Interest Expense of $30,000.
B) Credit to Cash of $33,000.
C) Debit to Discount on Bonds Payable of $3,000.
D) Debit to Bond Interest Expense of $33,000.
Q3) When bonds are issued at a discount, the borrower must pay more at maturity than the amount originally received.
A)True
B)False
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Page 12
Chapter 11: Stockholders Equity: Paid-In Capital
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Sample Questions
Q1) A deficit appears in a corporation's financial statements:
A) Among the operating expenses.
B) Among the liabilities.
C) As a deduction from assets.
D) As a deduction from total paid-in capital.
Q2) The sale of treasury stock at a price in excess of its cost results in a realized gain which should be presented as a non-operating item in the income statement.
A)True
B)False
Q3) The number of shares a corporation may issue is specified in the articles of incorporation and approved by the Securities and Exchange Commission.
A)True
B)False
Q4) A stock split will decrease the total par value of the stock.
A)True
B)False
Q5) The average issue price per share of preferred stock: $_____ per share
Q6) The total amount of legal capital: $__________
Q7) The total amount of paid-in capital: $__________
Page 13
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Chapter 12: Income and Changes in Retained Earnings
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Sample Questions
Q1) Stock dividends
What is the effect of a stock dividend?
Q2) Earnings per share-basic and diluted
Greenwich Corporation had net income of $1,712,500 in 2009. The company had 300,000 shares of $4 par value common stock and 25,000 shares of 8%, $100 par, convertible preferred stock outstanding throughout the year. Each share of preferred stock is convertible into four shares of common stock. Compute the following for 2009:
(a) Basic earnings per share:
(b) The number of shares to be used in computing diluted earnings per share.
Q3) All things being equal, if investors expect earnings to increase substantially from current levels, the price/earnings ratio will:
A) Be quite low.
B) Be quite high.
C) Not change.
D) Not be affected by income expectations.
Q4) Large stock dividends tend to keep stock prices down.
A)True
B)False
Q5) How many shares of common stock are outstanding?
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Chapter 13: Statement of Cash Flows
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Sample Questions
Q1) Haven Corporation issued $700,000 of 10-year bonds payable at par in 2005. During 2009 Haven paid $50,000 interest and an additional $233,333 to retire one-third of the bonds at par. These activities would be reported in Haven's statement of cash flows for 2009 as:
A) $283,333 net cash provided by financing activities.
B) $283,333 net cash used in financing activities.
C) $233,333 net cash used in financing activities, and $50,000 cash disbursed for operating activities.
D) $466,667 net cash provided by financing activities, and $50,000 cash disbursed for operating activities.
Q2) Cash flows and accounting records
In a business with an accrual-based accounting system, is a statement of cash flows based upon account balances shown in the adjusted trial balance? Explain.
Q3) Compute the cash payments for purchases of merchandise during the current year.
A) $260,000.
B) $250,000.
C) $266,000.
D) $254,000.
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Page 15
Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) The gross profit rate represents:
A) Total sales revenue.
B) The percentage change in net sales from the prior period.
C) The percentage of sales revenue remaining after providing for the cost of the merchandise sold.
D) Net income stated as a percentage of total sales revenue.
Q2) Eleva Corporation's operating cycle (in days) for 2011 is:
A) 158.8 days.
B) 122.0 days.
C) 213.4 days.
D) 188.0 days.
Q3) The ratio which measures total liabilities as a percentage of total assets is called:
A) Current ratio.
B) Working capital.
C) Debt ratio.
D) Quick ratio.
Q4) ROI: What and why?
In general terms, what do all "ROI" ratios measure? Why are such computations useful?
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Chapter 15: Global Business and Accounting
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Sample Questions
Q1) Which of the following is not true regarding the above sales transaction to Music of Mexico?
A) Brown recognizes a loss on fluctuation of foreign currency in the amount of $4.65 in 2011.
B) Brown recognizes a gain on fluctuation of foreign currency in the amount of $4.80 in 2012.
C) Brown has incurred an overall loss of $1.60 on fluctuation of foreign currency in the period from December 10, 2011 to February 8, 2012.
D) Brown could have avoided any loss due to fluctuations in foreign currency by setting the sales price of the cassettes in terms of U.S. dollars instead of pesos.
Q2) Explain the major provisions of the Foreign Corrupt Practices Act as amended in 1986.
Q3) Although cultural differences are significant in business dealings, they pose no difficulties to the design and implementation of an accounting system.
A)True
B)False
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Chapter 16: The Time Value of Money
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Sample Questions
Q1) A note that does not include an interest rate should be recorded at:
A) Its face amount if the difference between face and present value is material.
B) Its present value if the difference between face and present value is material.
C) Its face amount at all times.
D) Its present value at all times.
Q2) Future value is the amount that must be invested today at a specific interest rate to receive a particular amount at some future date.
A)True
B)False
Q3) The present value of a cash amount:
A) Is always less than the future value.
B) Is always more than the future value.
C) Is the same as the future value.
D) Is the same as the actual cash value.
Q4) The future value of an annuity is:
A) Always more than the present value.
B) Always less than the present value.
C) Equal to the present value.
D) Double the present value.
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