Financial Accounting II
Practice Questions
Course Introduction
Financial Accounting II builds upon the foundational concepts introduced in the first course to deepen students understanding of complex financial reporting and accounting standards. Topics include the analysis and preparation of financial statements for partnerships and corporations, accounting for income taxes, pensions, leases, and earnings per share, as well as issues related to intercompany investments and foreign currency transactions. The course emphasizes the application of accounting principles to real-world business scenarios, interpretation of financial data for decision-making, and adherence to ethical and regulatory standards, preparing students for advanced accounting roles and professional certifications.
Recommended Textbook
Financial Accounting 2nd Edition by
J. David Spiceland
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Page 2
Chapter 1: Accounting Information and Decision Making
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Q1) The 1934 act gives the Securities and Exchange Commission (SEC)the power to require companies with publicly traded securities to prepare periodic financial statements for distribution to investors and creditors.
A)True
B)False
Answer: True
Q2) A corporation is an entity that is legally separate from its owners.
A)True
B)False
Answer: True
Q3) Which of the following items is reported in the statement of stockholders' equity?
A)Total assets.
B)Total expenses.
C)Net income.
D)Operating cash flows.
Answer: C
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Chapter 2: The Accounting Information System
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Sample Questions
Q1) When cash payments are made to stockholders,what is the effect on the company's accounts?
A)Cash decreases and dividends increase.
B)Cash increases and dividends decrease.
C)Cash decreases and common stock decreases.
D)Cash increases and common stock increases.
Answer: A
Q2) A company purchases office supplies on account for $7,500.Record the transaction.
Answer: Office Supplies\(\quad\)7,500
Accounts Payable\(\quad\)7,500
Q3) Jerome purchased a building for his business by signing a note to pay the amount due over the next ten years.Which of the following correctly describes how to record this transaction?
A)Debit assets,credit liabilities.
B)Debit assets,credit stockholders' equity.
C)Debit liabilities,credit assets.
D)Debit expenses,credit liabilities.
Answer: A
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4
Chapter 3: The Financial Reporting Process
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Sample Questions
Q1) A company pays $1,700 cash to employees for work performed during the month.Record the payment using (a)accrual-basis accounting and (b)cash-basis accounting.
Answer: (a) Salaries Expense \(\quad 1,700\)
Cash \(\quad 1,700\)
(b) Salaries Expense \(\quad 1,700\)
Cash \(\quad 1,700\)
Q2) The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $3.2 million from the beginning of the year.The company declared a dividend of $1.3 million during the year.What was the net income earned during the year?
A)$1.9 million
B)$3.2 million
C)$4.5 million
D)$1.3 million
Answer: C
Q3) Once the adjusted trial balance is complete,financial statements are prepared. A)True
B)False
Answer: True
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Page 5
Chapter 4: Cash and Internal Controls
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Sample Questions
Q1) A company had the following transactions during the year:
1.Paid rent for the next two years,$8,000.
2.Purchased office supplies on account,$2,400.
3.Purchased equipment,paying $12,000 cash and issuing a note payable for $4,000.
4.Borrowed from the bank,$6,000.
5.Paid employee salaries,$7,200.
6.Paid $2,000 on account related to transaction 2 above.
7.Paid dividends to stockholders,$2,800.
8.Sold land for $10,000 that was purchased in a prior year for $7,500.
9.Collected cash from customers for services provided,$25,700.
Calculate cash flows from operating activities,investing activities,and financing activities.
Q2) A company's cash is reported in two financial statements - income statement and statement of cash flows.
A)True
B)False
Q3) A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.
A)True
B)False
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Chapter 5: Receivables and Sales
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Sample Questions
Q1) On December 31,2012,Mark Inc.estimates future bad debts to be $6,500.The Allowance for Uncollectible Accounts has a credit balance of $2,500 before any year-end adjustment.What adjustment should Mark Inc.record for the estimated bad debts on December 31,2012?
A)Debit Bad Debt Expense,$6,500; credit Allowance for Uncollectible Accounts,$6,500.
B)Debit Bad Debt Expense,$4,000; credit Allowance for Uncollectible Accounts $4,000.
C)Debit Allowance for Uncollectible Accounts,$9,000; credit Bad Debt Expense,$6,500.
D)Debit Bad Debt Expense,$9,000; credit Allowance for Uncollectible Accounts,$9,000.
Q2) Gershwin Wallcovering Inc.shipped the wrong shade of paint to a customer.The customer agreed to keep the paint upon being offered a 15% price reduction.The price reduction is an example of a:
A)Sales revenue.
B)Sales discount.
C)Sales return.
D)Sales allowance.
Q3) Explain how companies account for uncollectible accounts receivable (bad debts).
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Chapter 6: Inventory and Cost of Goods Sold
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Q1) Good,Inc.sold inventory for $1,200 that was purchased for $700.Good records which of the following when it sells inventory using a perpetual inventory system?
A)No entry is required for cost of goods sold and inventory.
B)Debit Cost of Goods Sold $700; credit Inventory $700.
C)Debit Cost of Goods Sold $1,200; credit Inventory $1,200.
D)Debit Inventory $700; credit Cost of Goods Sold $700.
Q2) During periods of rising costs,LIFO generally results in a higher ending inventory balance.
A)True
B)False
Q3) One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax savings.
A)True
B)False
Q4) What is a multiple-step income statement? What information does it provide beyond "bottom-line" net income?
Q5) When inventory costs are declining,__________ generally results in a higher amount of reported net income.
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Chapter 7: Long-Term Assets
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Q1) Intangible assets with an indefinite useful life (goodwill and most trademarks)are not amortized.
A)True
B)False
Q2) Abbott Company purchased a computer that cost $10,000.It had an estimated useful life of 5 years and no residual value.The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash.Abbott should record:
A)a gain of $1,000.
B)a loss of $1,000.
C)neither a gain nor a loss - the computer was sold at its book value.
D)neither a gain nor a loss - the gain that occurred in this case would not be recognizeD.$10,000/5 = depreciation of $2,000 per year.After four years,the book value would be $10,000 - ($2,000 x 4 years)= $2,000.The asset was sold for $3,000 or a $1,000 gain over book value.
Q3) The amount of impairment loss is the excess of book value over:
A)Carrying value.
B)Future cash flows.
C)Fair value.
D)Future revenues.
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Chapter 8: Current Liabilities
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Q1) Retailers like McDonalds,American Eagle,and Apple Computer sell a large number of gift cards.Explain how these companies account for the sale of gift cards.
Q2) Commonly,current liabilities are payable within one year,and long-term liabilities are payable more than one year from now.
A)True
B)False
Q3) Given a choice,most companies would prefer to report a liability as long-term rather than current because:
A)It may cause the firm to appear less risky to investors and creditors.
B)It may reduce interest rates on borrowing.
C)It may cause the company to appear more stable commanding a higher stock price for new stock listings.
D)All of the other answers are true.
Q4) Net income in the income statement is the same amount as taxable income reported to the Internal Revenue Service (IRS).
A)True B)False
Q5) Why is it important to distinguish between current and long-term liabilities?
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Chapter 9: Long-Term Liabilities
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Q1) On January 1,2012,Ripstick Park issues $800,000 of 8% bonds,due in ten years,with interest payable semiannually on June 30 and December 31 each year.Assuming the market interest rate on the issue date is 7%,the bonds will issue at $856,850.
1.Complete the first three rows of an amortization table.
2.Record the bond issue on January 1,2012,and the first two semi-annual interest payments on June 30,2012,and December 31,2012.
Q2) Return on equity is calculated as net income divided by average stockholders' equity.
A)True
B)False
Q3) Ordinarily,the proceeds from the sale of a bond issue will be equal to:
A)The face amount of the bond.
B)The total of the face amount plus all interest payments.
C)The present value of the face amount plus the present value of the stream of interest payments.
D)The face amount of the bond plus the present value of the stream of interest payments.
Q4) Why do some companies issue bonds rather than borrow money directly from a bank?
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Chapter 10: Stockholders Equity
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Sample Questions
Q1) Tropical Rainwear issues 1,000 shares of its $20 par value preferred stock for cash at $22 per share.Record the issuance of the preferred shares.
Q2) The Surf's Up issues 1,000 shares of 6%,$100 par value preferred stock at the beginning of 2011.All remaining shares are common stock.The company was not able to pay dividends in 2011,but plans to pay dividends of $18,000 in 2012.Assuming the preferred stock is cumulative,how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?
A)$6,000 to preferred stockholders and $12,000 to common stockholders.
B)$18,000 to preferred stockholders and $0 to common stockholders.
C)$12,000 to preferred stockholders and $6,000 to common stockholders.
D)$9,000 to preferred stockholders and $9,000 to common stockholders.
Q3) We record treasury stock at the cost of the shares reacquired.
A)True B)False
Q4) Total assets,total liabilities,and total stockholders' equity do not change as a result of a stock dividend.
A)True
B)False
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Chapter 11: Statement of Cash Flows
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Q1) Depreciation expense is not reported on the statement of cash flows under the direct method.
A)True
B)False
Q2) Freedom Wireless reports operating expenses of $255,000.Operating expenses include both rent expense and salaries expense.Prepaid rent decreases during the year by $10,000 and salaries payable increases by $25,000.What is the cash paid for operating expenses during the year?
Q3) Mobile Video Systems sold land,investments,and issued their own common stock for $10 million,$15 million,and $20 million,respectively.Mobile Video also purchased treasury stock,equipment,and a patent for $2 million,$4 million,and $6 million,respectively.What amount should the company report as net cash flows from investing activities? What amount should the company report as net cash flows from financing activities?
Q4) We report the actual amount of cash proceeds received from the sale of land as a cash inflow from investing activities.
A)True
B)False
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Chapter 12: Financial Statement Analysis
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Q1) The price-earnings (PE)ratio compares a company's share price with its earnings per share.
A)True
B)False
Q2) Which of the following ratios is most useful in evaluating solvency?
A)Debt to equity ratio.
B)Current ratio.
C)Receivables turnover ratio.
D)Inventory turnover ratio.
Q3) Which of the following is a negative sign that a company is not selling its inventory quickly?
A)A low inventory turnover ratio.
B)A high inventory turnover ratio.
C)A low average days in inventory.
D)Both a high inventory turnover ratio and a low average days in inventory.
Q4) Using horizontal analysis,if the base year is negative and the following year is positive,the percentage change is just as useful as if the base year and the following year were both positive.
A)True
B)False
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Chapter 13: Time Value of Money
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Sample Questions
Q1) How much will $25,000 grow to in seven years,assuming an interest rate of 12% compounded annually?
A)$55,267.
B)$46,000.
C)$61,899.
D)$52,344.
Q2) Touche Manufacturing is considering a rearrangement of its manufacturing operations.A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year,$10,000 for the next two years,and $12,000 for the next two years.Assuming a 12% discount rate,calculate the total present value of the cash flows.
Q3) Briefly describe the difference between simple interest and compound interest.
Q4) Today,Thomas deposited $100,000 in a three-year,12% CD that compounds quarterly.What is the maturity value of the CD?
A)$109,270.
B)$119,410.
C)$142,576.
D)$309,090.
Q5) Explain the difference between present value and future value.
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Chapter 14: Investments
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Q1) When significant influence exists,the investment should be accounted for by the equity method.
A)True
B)False
Q2) One of the primary reasons for investing in debt securities includes:
A)Receiving dividend payments.
B)Acquiring significant influence.
C)Earning interest revenue.
D)Deducting interest payments for tax purposes.
Q3) Because the carrying value of bonds purchased at a premium increases over time,interest revenue will also increase each semi-annual interest period.
A)True
B)False
Q4) Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as part of current net income.
A)True
B)False
Q5) How can an investor benefit from an equity investment that does not pay dividends?
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Chapter 15: International Financial Reporting Standards
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Q1) Countries that have similar rules for financial accounting and tax accounting,rely more on debt financing,and have historical political and economic ties with Germany are referred to as what types of countries?
A)Code law countries.
B)European Union countries.
C)Common law countries.
D)Conformist countries.
Q2) How is preferred stock reported differently under U.S.GAAP and IFRS? Do you think preferred stock is a liability or an equity item? Why?
Q3) When preparing a statement of cash flows,IFRS allows companies to report cash inflows from interest and dividends as either operating or investing cash flows,while U.S.GAAP requires these inflows to be reported as only operating activities.
A)True
B)False
Q4) Under U.S.GAAP,development expenditures are capitalized,while under IFRS,these expenditures must be expensed immediately.
A)True
B)False
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