Financial Accounting II
Final Test Solutions
Course Introduction
Financial Accounting II builds upon the foundational principles introduced in Financial Accounting I, focusing on more advanced concepts and applications in accounting. The course delves into the complexities of financial reporting and analysis for corporations, including accounting for assets, liabilities, and shareholders equity. Students will examine topics such as revenue recognition, long-term investments, leases, pensions, income taxes, and statement of cash flows. Emphasis is placed on the interpretation and use of financial statements, contemporary accounting standards, and the implications for managerial decision-making. By the end of the course, students will be equipped to analyze financial information and understand its role in organizational strategy and external reporting.
Recommended Textbook
Financial Accounting 15th Edition by Jan Williams
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Chapter 1: Accounting: Information for Decision Making
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Sample Questions
Q1) Suppose a number of your friends have organized a company to develop and sell a new software product. They have asked you to loan them $7,000 to help get the company started, and have promised to repay your $7,000 plus 10% interest in one year. Of the following, which amount may be described as the return on your investment?
A) $7,000.
B) $700.
C) $7,700.
D) Some other amount.
Answer: B
Q2) Which of the following is generally not considered one of the general purpose financial statements issued by a corporation?
A) Income statement forecast for the coming year.
B) Balance sheet.
C) Statement of financial position.
D) Statement of cash flows.
Answer: A
Q3) The information is summarized in a set of statements distributed to the public. Answer: Financial
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3
Chapter 2: Basic Financial Statements
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Q1) If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business:
A) Total assets are increased.
B) Total liabilities are decreased.
C) Total assets are decreased.
D) The owners' equity is increased.
Answer: A
Q2) An accounting entity may best be described as:
A) An individual.
B) A particular economic unit.
C) A publicly owned corporation.
D) Any corporation, regardless of size.
Answer: B
Q3) The balance sheet of Dotty Designs includes the following items: This list includes:
A) Four assets and three liabilities.
B) Five assets and three liabilities.
C) Five assets and two liabilities.
D) Six assets and two liabilities.
Answer: C
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Page 4
Chapter 3: The Accounting Cycle: Capturing Economic Events
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Q1) Revenues increase owners' equity and are, therefore, recorded by crediting the revenues account.
A)True
B)False Answer: True
Q2) 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
Q3) In a computerized accounting system, posting may be done automatically but journalizing must be done by someone with an understanding of recording transactions.
A)True
B)False Answer: True
Q4) Dividends are an expense to a corporation and appear on the income statement. A)True
B)False
Answer: False
Page 5
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Chapter 4: The Accounting Cycle: Accruals and Deferrals
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Sample Questions
Q1) Before any month-end adjustments are made, the net income of Russell Company is $38,000. However, the following adjustments are necessary: office supplies used, $3,160; services performed for clients but not yet recorded or collected, $3,040; interest accrued on a note payable to bank, $3,640. After adjusting entries are made for the items listed above, Russell Company's net income would be:
A) $38,000.
B) $34,240.
C) $41,160.
D) $44,200.
Q2) Employees are owed $750 for services since the last payday in March, to be paid the first week in April. The amount to be reported in the March income statement for salaries expense is:
A) $7,800.
B) $750.
C) $7,050.
D) $8,550.
Q3) All assets should be depreciated.
A)True
B)False
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Page 6
Chapter 5: The Accounting Cycle: Reporting Financial
Results
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Sample Questions
Q1) Publicly traded companies must file audited financial statements with the:
A) AICPA.
B) IRS.
C) SEC.
D) AAA.
Q2) Refer to the information above. The total debits in the After Closing-Trial Balance will equal:
A) $23,360.
B) $28,640.
C) $22,400.
D) $6,720.
Q3) Return on equity measures:
A) Solvency.
B) Profitability.
C) Leverage.
D) All three of the above.
Q4) The net income percentage can be measured by dividing net income by total revenue.
A)True B)False
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Chapter 6: Merchandising Activities
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Sample Questions
Q1) Gross profit The table below contains information from a recent annual report of Molloy, Inc. (Dollar amounts are stated in millions.) Fill in the missing amounts.
\[\begin{array} { | l | l | l | }
\hline & 2009 & 2010 \\
\hline \text { Net sales } & \$ 28,800 & \$ 32,200 \\
\hline \begin{array} { l }
\text { Cost of goods } \\
\text { sold }
\end{array} & ? & \$ 16,600 \\
\hline \text { Gross profit } & \$ 12,200 & ? \\
\hline
\end{array}\]
Q2) Today, most large merchandising companies use a perpetual inventory system.
A)True
B)False
Q3) Under the periodic inventory system, no effort is made to keep up-to-date records of either Inventory or Cost of Goods Sold as transactions occur.
A)True
B)False
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Page 8
Chapter 7: Financial Assets
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Q1) The accounting records of Golden Company showed cash of $15,250 at June 30. The balance per the bank statement at June 30 was $15,125. The only reconciling items were deposits in transit of $3,200, outstanding checks totaling $4,100, an NSF check for $1,000 returned by the bank which Golden had not yet charged back to the customer, and a bank service charge of $25. The preparation of a bank reconciliation should indicate cash owned by Golden at June 30 in the amount of:
A) $14,475.
B) $15,375.
C) $14,225.
D) $15,525.
Q2) Assuming a single journal entry is made to adjust Quinn Company's accounting records at January 31, the journal entry includes:
A) A debit to Rent Expense for $90.
B) A credit to Accounts Receivable, G.Denton, for $426.
C) A credit to Cash for $450.
D) A credit to Cash for $1,720.
Q3) The term "financial asset" is synonymous with the term "cash equivalent."
A)True
B)False
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Page 9
Chapter 8: Inventories and the Cost of Goods Sold
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Q1) Short-term creditors are likely to view a higher-than-average inventory turnover rate as indicating that:
A) A company is in financial difficulty.
B) The company is able to sell its inventory quickly.
C) The company probably has an excessive amount of inventory.
D) The company has a longer-than-average operating cycle.
Q2) The principle of consistency prohibits a company from changing an inventory valuation method once one is selected.
A)True
B)False
Q3) The primary purpose of an inventory flow assumption is to:
A) Increase inventory turnover.
B) Increase gross profit.
C) Determine which unit costs are assigned to inventory and which are assigned to the cost of goods sold.
D) Minimize taxable income during periods of rising prices.
Q4) Just-in-time inventory systems cannot be used in conjunction with LIFO.
A)True B)False
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Chapter 9: Plant and Intangible Assets
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Q1) Glouchester Associates sold office equipment for cash of $142,000. The accumulated depreciation at date of sale amounted to $138,000, and a gain of $18,000 was recognized on the sale. The original cost of the asset must have been:
A) $260,000.
B) $262,000.
C) $280,000.
D) $156,000.
Q2) The formula for the double-declining balance method of depreciation is: Remaining book value times the straight line rate is equal to depreciation expense.
A)True
B)False
Q3) If an accelerated depreciation method is used for an asset with a useful life of five years, more depreciation expense would be recorded in the third year than in the fifth year.
A)True
B)False
Q4) Compute the book value of the stallion at May 31, 2009, the date of sale.
$______________
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Chapter 10: Liabilities
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Q1) At December 31, Year 1, Noble Co.'s overall liability for this loan amounts to:
A) $80,000.
B) $81,600.
C) $83,200.
D) $84,800.
Q2) Bonds, with the same face value, issued at a premium, will have a higher maturity value than bonds issued at a discount.
A)True
B)False
Q3) The withholding of taxes from an employee's pay is a liability to the company.
A)True
B)False
Q4) When a corporation has a right to redeem bonds in advance of the maturity date, the bond is considered a:
A) Convertible bond.
B) Callable bond.
C) Junk bond.
D) Debenture bond.
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Page 12
Chapter 11: Stockholders Equity: Paid-In Capital
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Q1) Which of the following most likely explains why a corporation's stock trades at a very high price-earnings ratio?
A) Investors expect the corporation to have higher earnings in the future.
B) The corporation pays a very low dividend on its stock.
C) The corporation has several classes of stock outstanding.
D) The corporation is large with very low risk.
Q2) A primary disadvantage of the corporate form of organization is:
A) Unlimited personal liability for business debts.
B) Ownership is difficult to transfer.
C) Corporate earnings are subject to double taxation.
D) Management is separated from ownership.
Q3) The total amount of paid-in capital: $__________
Q4) By going public a corporation can raise equity capital from many investors. A)True
B)False
Q5) A corporation continues in existence even if a stockholder dies or withdraws from the organization.
A)True
B)False
Q6) The total amount of legal capital: $__________
Page 13
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Chapter 12: Income and Changes in Retained Earnings
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Q1) The statement of retained earnings:
A) Includes prior period adjustments, cash dividends, and stock dividends.
B) Indicates the amount of cash available for the payment of dividends.
C) Need not be prepared if a separate statement of stockholders' equity accompanies the financial statements.
D) Shows revenue, expenses, and dividends for the accounting period.
Q2) Fuller Mfg.'s financial statements for the current year include the following: Income from continuing operations $663,200
Prior period adjustment (increase in prior-year net income, net of taxes) 180,000
Cash dividends paid to preferred stockholders 196,800
Gain from discontinued operations (net of taxes) 433,600
Extraordinary loss (net of tax benefit) 174,400
On the basis of this information, net income for the current year is:
A) $488,800.
B) $922,400.
C) $725,600.
D) $1,102,400.
Q3) Stock dividends
What is the effect of a stock dividend?
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Page 14
Chapter 13: Statement of Cash Flows
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Q1) New World's net cash flow from operating activities for the current year is:
A) $1,191,750.
B) $1,192,800.
C) $1,113,000.
D) $1,160,250.
Q2) If interest receivable was $6,300 at December 31, 2008, and is $10,500 at the end of 2009, interest revenue reported in Global Data's income statement for 2009 must have been:
A) $16,800.
B) $21,000.
C) $35,700.
D) $4,200.
Q3) Any "non-cash" investing and financing transactions should be disclosed in a supplementary schedule accompanying a statement of cash flows.
A)True
B)False
Q4) Depreciation is a non-cash expense.
A)True
B)False
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Chapter 14: Financial Statement Analysis
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Q1) The debt ratio is a measure of:
A) Net cash flows relating to financing activities.
B) Long-term credit risk.
C) Short-term solvency.
D) Profitability, independent of the manner in which assets are financed.
Q2) Vertical analysis compares the results of financial information with a business in the same industry for a number of consecutive periods of time.
A)True
B)False
Q3) From the viewpoint of a stockholder, which of the following relationships do you consider of least significance?
A) The return on assets consistently is higher than the industry average.
B) The return on equity has increased in each of the past five years.
C) Net income is greater than the amount of working capital.
D) The return on assets is greater than the rate of interest being paid to creditors.
Q4) The gross profit rate is gross profit expressed as a percentage of net sales.
A)True
B)False
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Page 16
Chapter 15: Global Business and Accounting
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Q1) The standards issued by the International Accounting Standards Board must be followed by all multinational companies.
A)True
B)False
Q2) Making accurate estimates of costs is a challenge for global companies.
A)True
B)False
Q3) The journal entry to record the sale in Brown's accounting records on December 10, 2011, includes:
A) A debit to Accounts Receivable for 16,000 pesos.
B) A credit to Sales for $2,560.
C) A debit to Loss on Fluctuation of Foreign Currency for $260.
D) No entry is made until year-end on this type of transaction.
Q4) In Japan, financial reporting requirements are based primarily on the need to provide information to:
A) Investors.
B) Government agencies.
C) Banks.
D) U.S. subsidiaries of Japanese companies.
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Chapter 16: The Time Value of Money
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Q1) Belle invests $200 at the end of each year in a savings account which pays 5% annually. How much will Belle have at the end of 5 years?
A) $1,000.
B) $1,105.13.
C) $1,077.50.
D) $1,082.37.
Q2) The future amount of an annuity is calculated by multiplying the periodic payment amount by the discounted factor from the future value of an annuity table.
A)True
B)False
Q3) Financial instruments do not include:
A) Contracts that call for receipts or payment of cash.
B) Equity investment in another business.
C) Cash.
D) Tangible assets.
Q4) Annuities may provide equal amounts to an investor at fixed periods of time over the life of an investment.
A)True
B)False
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