Financial Accounting I
Study Guide Questions
Course Introduction
Financial Accounting I introduces students to the fundamental principles and concepts of financial accounting. The course covers the accounting cycle, the preparation and analysis of financial statements, and the recording of business transactions using generally accepted accounting principles (GAAP). Students will learn about the structure and purpose of financial statements, including the balance sheet, income statement, and statement of cash flows. Emphasis is placed on the accurate recording of assets, liabilities, equity, revenues, and expenses to provide reliable information for decision-making by internal and external stakeholders.
Recommended Textbook
Cornerstones of Financial Accounting 1st Canadian Edition by Jay Rich
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12 Chapters
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Page 2
Chapter 1: Accounting and the Financial Statements
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Sample Questions
Q1) Which of the following accounts are normally reported as current liabilities on a classified balance sheet?
A) accounts payable and prepaid insurance
B) interest payable and interest receivable
C) income taxes payable and salaries payable
D) common shares and accounts payable
Answer: C
Q2) What financial statement items are investors and creditors each most interested in and why?
Answer: Investors are most interested in cash receipts from dividends and the cash they can receive upon selling their shares.Creditors are most interested in cash to be received for interest payments and the repayment of the principal.If a company does not have sufficient cash flows,investors and creditors could suffer as a result.The financial position,shown on the company's balance sheet,is also a concern for both investors and creditors because even though the company may have what appears to be sufficient cash flows for the current period,the long-term cash flow could be weak.
Q3) Current assets minus current liabilities is called ____________________.
Answer: working capital
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3
Chapter 2: The Accounting Information System
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Sample Questions
Q1) Retained Earnings
A)debit
B)credit
Answer: B
Q2) Payments are received from customers to whom merchandise was sold on credit.
A)external event to be recorded as a transaction
B)internal event to be recorded as a transaction
C)event that should not be recognized in the accounting system
Answer: A
Q3) An order is placed with a supplier for merchandise.
A)external event to be recorded as a transaction
B)internal event to be recorded as a transaction
C)event that should not be recognized in the accounting system
Answer: C
Q4) Dividends
A)debit
B)credit
Answer: A
Q5) Credits are always on the ____________________ side of a T-account.
Answer: right
4
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Chapter 3: Accrual Accounting
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Sample Questions
Q1) If the income summary account has a credit balance just prior to closing it to retained earnings,the company must have incurred a net income for the year.
A)True
B)False
Answer: True
Q2) rent
A)Recognize revenue over the passage of time.
B)Recognize revenue when the customer takes possession of the product.
C)Recognize revenue when cash is collected.
D)Recognize revenue when service is performed.
Answer: A
Q3) On October 1,a company borrowed $200,000 on a two-year,12% note,with interest and principal to be paid at maturity.How much interest expense will be reported on the income statement for the year ending December 31?
A) $6,000
B) $18,000
C) $12,000
D) $24,000
Answer: A
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Page 5
Chapter 2: Internal Control and Cash
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Sample Questions
Q1) Explain how chequing accounts,bank statements,and a bank reconciliation are used to help a company control its cash.
Q2) While reconciling the chequing account,the accountant notices that an error has been made in recording a cheque received by the company.The bookkeeper has recorded the receipt as $729,but the correct amount of the cheque is $279.Which of the following reconciling adjustments is necessary?
A) adding $450 to the company's records
B) deducting $450 from the company's records
C) adding $450 to the bank statement balance
D) deducting $450 from the bank statement balance
Q3) Refer to the figure Designs on You.What is the company's adjusted cash balance at May 31?
A) $4,865
B) $5,000
C) $5,365
D) $5,500
Q4) A cost-cutting measure used in many business organizations is the use of a(n)____________________ fund,whereby a custodian handles disbursements and documentation for small expenditures.
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Chapter 5: Revenue and Receivables
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Sample Questions
Q1) Refer to Aardvark Resale.Assume that the company estimates bad debts at 2% of net credit sales.
A) What amount will the company record as bad debts expense for Year 1?
B) How much is the net realizable value of accounts receivable reported an the compary's balance sheet at December 31 Year 1 ?
Q2) The amount of interest paid is a function of three variables: the amount borrowed,the interest rate,and the length of the loan period.
A)True
B)False
Q3) Refer to the figure A Better Mousetrap.What amount should the company recognize as interest revenue on the maturity date of the note?
A) $0
B) $3,750
C) $4,500
D) $9,000
Q4) Refer to Accutemp Heating & Air.Identify the maturity date of the note.
Q5) Special forms of factoring are called ____________________.
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Chapter 6: Cost of Goods Sold and Inventory
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Sample Questions
Q1) A departure from the cost basis of accounting may be necessary when the ____________________ of the inventory is less than its cost to the company.
Q2) Refer to the information presented for Serrano Company.On September 12th,Serrano Company sold 10 units of Product B to customers for $180 each.Serrano Company had paid $100 for each unit of Product B when it purchased them from the supplier on September 1st.On September 15th,customers returned 2 units of Product B for a cash refund.
Record the journal entries for this sale and sales return.
Q3) Refer to the information presented for White Appliances.On August 12th,White sold 10 dishwashers to customers for $550 each.White paid $200 each for these dishwashers when it purchased them from the supplier on August 1st.On August 15th,customers returned 2 of these dishwashers for a cash refund.
Record the journal entries for this sale and sales return.
Q4) Prices are rising; cost of goods sold is lower with this method.
A)added to inventory cost
B)subtracted from inventory cost
C)not an inventory cost
Q5) Cost of goods sold is equal to beginning inventory plus the net cost of purchases minus _____.
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Chapter 7: Property plant and Equipment Intangibles and Natural Resources
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Sample Questions
Q1) Flag Financial uses straight-line depreciation for its equipment with an estimated useful life of 10 years and zero residual value.The CEO points out that the equipment will last fewer than 10 years,perhaps only 5 years.If equipment is depreciated over 5 years rather than 10 years,what is the impact on earnings per share and net income of depreciating equipment?
A) Both earnings per share and net income will decrease.
B) Both earnings per share and net income will increase.
C) Earnings per share will decrease; net income will increase.
D) Earnings per share will increase; net income will decrease.
Q2) The more efficiently a company uses its fixed assets the lower the fixed asset turnover ratio will be.
A)True
B)False
Q3) Explain how the costs associated with operating assets are reported on the balance sheet.
Q4) Acquisition cost includes all of the costs that are normal and necessary to acquire and maintain a plant asset over its useful life.
A)True
B)False
Page 9
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Chapter 8: Current Liabilities
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Sample Questions
Q1) When accrued wages payable are paid,what will happen to the operating cash flow ratio?
A) It will decrease.
B) It will increase.
C) It will vanish.
D) It will be unchanged.
Q2) guarantees the repair or replacement of defective goods during a specified period following the sale
A)accrued liabilities
B)contingent liabilities
C)current liabilities
D)interest rate
E)liabilities
F)payroll taxes
G)sales taxes
H)warranty
I)withholdings
Q3) Federal income taxes payable is NOT a current liability.
A)True
B)False
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Chapter 9: Long-Term Liabilities
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Sample Questions
Q1) Which of the following does long-term debt generally include?
A) obligations that will be satisfied within one year
B) accounts payable
C) obligations that extend beyond one year
D) accrued expenses
Q2) Which situation exists when a company issues 10-year,9%,$1,000,000 bonds paying interest on an annual basis,at a premium?
A) The annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year.
B) The annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year.
C) The issue price will be less than $1,000,000.
D) The cash paid to bondholders will be based on the market rate of interest.
Q3) The interest rate used to calculate interest expense in the effective interest method of amortization is equal to the market rate of interest at the time the bonds are issued.
A)True B)False
Q4) Obligations that extend beyond one year are referred to as
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Chapter 11: The Statement of Cash Flows
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Sample Questions
Q1) Refer to the figure Company F.An analysis of records indicated that there were no cash flow effects resulting from the changes in the two accounts presented in the figure.How should the changes in these accounts be reported on a statement of cash flows?
A) The company should report $250,000 for the sale of land as an investing activity and $250,000 for the issuance of shares as a financing activity.
B) The company should report $250,000 as noncash investing and financing activities for the acquisition of land by the issuance of common shares.
C) The company should report the issuance of common shares to acquire land in the financing activity section with a net cash flow effect of zero.
D) The company should report the acquisition of land by the issuance of common shares in the investing activities section with a net cash flow effect of zero.
Q2) Which balance sheet accounts are most affected by investing activities?
A) current assets and current liabilities
B) long-term assets
C) long-term liabilities
D) shareholders' equity
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Page 12
Chapter 12: Investments
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Sample Questions
Q1) On January 1,Year 1,P Company purchased all of the outstanding common shares of S Company.What kind of adjustment is required for the consolidation of the two balance sheets?
A) credit adjustment to eliminate P Company's "Investment in S Company" account
B) debit adjustment to eliminate S Company's "Investment in P Company" account
C) debit adjustment to eliminate P Company's "Investment in S Company" account
D) credit adjustment to eliminate S Company's "Investment in P Company" account
Q2) How can business combinations occur?
A) asset acquisition or stock acquisition
B) asset acquisition or debt acquisition
C) stock acquisition or debt acquisition
D) stock acquisition or equity acquisition
Q3) An advantage of the equity method over the fair value method is that it prevents an investor from manipulating its own income by exerting influence over the amount and timing of investee dividends.
A)True
B)False
Q4) Business combinations can occur through either an asset or ____________________ acquisition.
Q5) ____________________ investments only consist of investments in common shares.
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Chapter 13: Financial Statement Analysis
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Sample Questions
Q1) Which of the following combinations of ratios will best analyze a company's income statement performance?
A) gross profit percentage, return on common equity, and debt-to-equity
B) gross profit percentage, earnings per share, and net profit margin percentage
C) gross profit percentage, current ratio, and return on common equity
D) gross profit percentage, net profit margin percentage, and debt-to-equity
Q2) The three aspects of return on equity (ROE)recognized by DuPont analysis are the net profit margin percentage,the ____________________ ratio,and leverage.
Q3) times interest earned ratio
A)liquidity ratio
B)debt management ratio
C)asset efficiency ratio
D)profitability ratio
E)shareholder ratio
Q4) asset turnover ratio
A)increase
B)decrease
Q5) What are some weaknesses of performing time series analysis alone?
Q6) Why is liquidity important for businesses?
Page 14
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