Financial Accounting Practice Exam
Course Introduction
Financial Accounting is designed to introduce students to the fundamental principles and practices of accounting within the context of business organizations. The course covers the preparation, analysis, and interpretation of financial statements, focusing on how businesses record, classify, and summarize economic transactions in accordance with generally accepted accounting principles (GAAP). Students will gain practical skills in measuring business performance, understanding the accounting cycle, and utilizing information to support effective decision-making by stakeholders such as management, investors, and regulators. Through case studies and real-world examples, the course lays a crucial foundation for advanced study in accounting and finance.
Recommended Textbook
Horngrens Financial and Managerial Accounting 6th Edition by Tracie L. Nobles
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Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) Dividends are the expenses of a business.
A)True
B)False
Answer: False
Q2) Adams Service Company had a net income of $14,500 for the year ending December 31,2018.The total assets on January 1,2018 were $28,000.The total assets on December 31,2018 were $16,000.
Calculate Adam's return on assets (ROA).Show your computations and label your work.Round your answer to two decimal places.
Answer: Return on Assets = Net Income / Average total assets
Average total assets = (Beginning total assets + Ending total assets)/ 2 11ea86ed_2d16_044d_8b27_61e3c803ed7b_TB3056_00
Q3) Country Homes Corporation just recorded a transaction in its books.If this transaction increased the total liabilities by $10,000,then ________.
A)assets must increase,or equity must decrease by $10,000
B)either assets or equity must decrease by $10,000
C)both assets and equity must each decrease by $5,000
D)assets must decrease by $10,000
Answer: A
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) Regarding the double-entry system,which of the following statements is incorrect?
A)A transaction would be incomplete if only one side were recorded.
B)Because of technology,the use of the double-entry system of accounting is optional.
C)The double-entry system is a system of accounting in which every transaction affects at least two accounts.
D)If office supplies are purchased on account,the account Office Supplies increases and the account Accounts Payable increases.
Answer: B
Q2) The process of transferring data from the ledger to the journal is called posting.
A)True
B)False
Answer: False
Q3) An accounts receivable is often described as a sale "on account."
A)True
B)False
Answer: True
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) Advance cash payments of future expenses are called ________.
A)accrued revenues
B)deferred expenses
C)deferred revenues
D)accrued expenses
Answer: B
Q2) The revenue recognition principle requires companies to record revenue when (or as)the entity satisfies each performance obligation.
A)True
B)False Answer: True
Q3) A performance obligation is a contractual promise with a customer to transfer a distinct good or service.
A)True
B)False Answer: True
Q4) Deferred expenses are advanced payments of future expenses.
A)True
B)False Answer: True
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) The Accounts Receivable account is a permanent account.
A)True
B)False
Q2) Which of the following is an example of an intangible asset?
A)Equipment
B)Plant
C)Property
D)Copyright
Q3) The current ratio is calculated using the values from the income statement.
A)True
B)False
Q4) Which accounts are closed at the end of the accounting period? Why is it necessary to close these accounts?
Q5) The balance sheet is the first financial statement that is prepared at the end of the period.
A)True
B)False
Q6) The current ratio shows the profitability of a firm.
A)True
B)False
Page 6
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Chapter 5: Merchandising Operations
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Q1) A wholesaler is a merchandiser who buys goods from a manufacturer and then sells the goods to retailers.
A)True B)False
Q2) Under the perpetual inventory system,when a purchaser makes payment within the discount period,the amount of discount will be credited to the Merchandise Inventory account.
A)True B)False
Q3) An invoice is a request for payment from the purchaser.
A)True
B)False
Q4) With the terms FOB shipping point,the freight cost becomes part of the cost of merchandise inventory for the purchaser.(Assume a perpetual inventory system. )
A)True B)False
Q5) List,and briefly discuss,two differences between the income statement of a service company and the income statement of a merchandise company.
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Chapter 6: Merchandise Inventory
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Sample Questions
Q1) In the weighted-average inventory costing method,when using the periodic inventory system,a single weighted average cost per unit is computed for the entire period.
A)True
B)False
Q2) The Bridal Gift Shop,Inc.has 14 units in ending merchandise inventory on December 31.The units were purchased in November for $165 each.The price lists from suppliers indicate the current replacement cost of the item to be $171 each.What would be the amount reported as Merchandise Inventory on the balance sheet?
A)$2,310
B)$4,704
C)$336
D)$2,394
Q3) Given the same purchase and sales data,and assuming the cost of inventory is rising,the costing methods for inventory will result in different amounts for net income.
A)True
B)False
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Chapter 7: Internal Control and Cash
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Sample Questions
Q1) Journal entries are required if the bank reconciliation includes outstanding checks.
A)True
B)False
Q2) A receiving report should be matched with the supplier invoice before a payment to the supplier is approved.
A)True
B)False
Q3) A company received a bank statement showing a balance of $79,000.Reconciling items included outstanding checks of $2,300 and a deposit in transit of $9,400.What is the company's adjusted bank balance?
A)$67,300
B)$71,900
C)$86,100
D)$69,600
Q4) Baker Auto Supply purchases merchandise inventory from A & B Company.The accountant places the order,verifies receipt of the merchandise,and records the transaction in the general journal.
Q5) List and briefly discuss the five components of internal control.
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Chapter 8: Receivables
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Sample Questions
Q1) Which of the following is a weak internal control over cash collections from receivables?
A)The credit department should have no access to cash.
B)A credit department should evaluate customers' credit applications to determine whether they meet the company's approval standards.
C)A company should have written approval standards for processing customers' credit applications.
D)In order to avoid losing sales,all customers' credit applications should be approved.
Q2) On October 1,2019,Island Jewelry Company accepted a 4-month,10% note for $2,400 in settlement of an overdue account receivable.Interest revenue was accrued through December 31,2019.Island receives the maturity value of the note at maturity.Prepare the journal entry to record the collection.Omit explanation.
Q3) Define net realizable value.How is net realizable value affected when a receivable is written off under the allowance method?
Q4) Days' sales in receivables is also called the collection period.
A)True
B)False
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Chapter 9: Plant Assets, natural Resources, and Intangibles
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Q1) Depreciation is the allocation of a plant asset's cost to expense over its useful life.
A)True
B)False
Q2) The asset turnover ratio is calculated by dividing cost of goods sold by average total assets.
A)True
B)False
Q3) On July 14,Jones Sporting Goods sold equipment that originally cost $50,000.After updating depreciation,the Accumulated Depreciation - Equipment had a normal balance of $44,000.The selling price of the equipment was $42,000.Jones will report a loss of $8,000.
A)True
B)False
Q4) Depreciation means that the business sets aside cash to replace an asset when it is used up.
A)True
B)False
Q5) Prepare the journal entry to record the acquisition of fences and signs for $5,000 cash.Omit explanation.
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Chapter 10: Investments
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Q1) Which of the following is the least desirable business reason for a company to invest in debt or equity securities?
A)to generate investment income
B)to invest short-term,excess cash
C)to pursue certain business strategies
D)to weaken the relationship between the investing company and a key vendor.
Q2) When a trading debt investment is disposed of,________.
A)an unrealized holding loss is reported on the income statement
B)the Trading Debt Investments account is debited
C)the amount of gain or loss is calculated as the difference between the cash received and the cost of the debt investment disposed of
D)the fair value adjustment is used in determining the calculation of the gain or loss
Q3) All available-for-sale (AFS)debt investments are reported on the balance sheet at ________.
A)historical cost
B)replacement cost
C)current market value
D)net realizable value
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Chapter 11: Current Liabilities and Payroll
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Q1) The income tax column in a payroll register includes the corporate tax owed by the corporation.
A)True
B)False
Q2) Which of the following accounting principles requires that warranty expense must be estimated and recognized in the same period when the related sales revenue is recognized?
A)the matching principle
B)the disclosure principle
C)the revenue principle
D)the consistency principle
Q3) The employees of Vintage Clothes achieved all of the sales goals for 2017.Vintage decides to reward the employees with a bonus of 20% on annual net income,after deducting the bonus.The net income before the calculation of the bonus is $312,000.What is the amount of the bonus? (Round your final answer to the nearest dollar. )
A)$62,400
B)$52,000
C)$55,059
D)$12,480
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Chapter 12: Long-Term Liabilities
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Q1) The balance in the Bonds Payable account is a credit of $67,000.The balance in the Discount on Bonds Payable account is a debit of $3350.What is the bond's carrying amount?
A)$3350
B)$70,350
C)$67,000
D)$63,650
Q2) A bond is issued at premium ________.
A)when a bond's stated interest rate is equal to the market interest rate
B)when a bond's stated interest rate is less than the effective interest rate
C)when a bond's stated interest rate is less than the market interest rate
D)when a bond's stated interest rate is higher than the market interest rate
Q3) State Street Beverage Company issues $805,000 of 9%,10-year bonds on March 31,2017.The bonds pay interest on March 31 and September 30.Which of the following statements is true?
A)If the market rate of interest is 10%,the bonds will issue at a premium.
B)If the market rate of interest is 10%,the bonds will issue at a discount.
C)If the market rate of interest is 10%,the bonds will issue at par.
D)If the market rate of interest is 10%,the bonds will issue above par.
Q4) When computing a bond's cash flow for interest,which interest rate is used? Why?
Page 14
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Chapter 13: Stockholders Equity
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Sample Questions
Q1) Which of the following corporate characteristics is a disadvantage of a corporation?
A)Stockholders have limited liability.
B)A corporation has a continuous life.
C)There is no mutual agency between the stockholders and the corporation.
D)Earnings of a corporation may be subject to double taxation.
Q2) Which of the following actions will decrease Retained Earnings?
A)repayment of bond principal
B)stock split
C)stock dividend declared
D)purchase of treasury stock
Q3) Charter Schools,Inc.is authorized to issue 500,000 shares of $2 par common stock.The company issued 106,000 shares at $6 per share.When the market price of common stock was $10 per share,Charter declared and distributed a 10% stock dividend.Later,Charter declared and paid a $0.10 per share cash dividend. Prepare the journal entries to record these transactions.Explanations are not required.
Q4) Define treasury stock and provide two reasons why a corporation would purchase treasury stock.
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Chapter 14: The Statement of Cash Flows
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Q1) Which of the following sections of the statement of cash flows include purchases and sales of long-term assets?
A)the financing activities section
B)the operating activities section
C)the investing activities section
D)the non-cash investing and financing section
Q2) The financing section of the statement of cash flows involves transactions relating to the equity accounts and the long-term liability accounts.
A)True
B)False
Q3) The financing activities section of the statement of cash flows includes paying dividends and making payments on long-term liabilities.
A)True
B)False
Q4) Which of the following is true of the statement of cash flows?
A)It indicates when long-term debt will mature.
B)It reports on the qualitative behavior of the company's performance.
C)It covers a span of time and is dated the same as the income statement.
D)It shows how the profits or losses of the company were generated.
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Chapter 15: Financial Statement Analysis
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Q1) What is an annual report? Briefly describe the key parts of the annual report.
Q2) In an audit report in the annual report,a qualified opinion states that the financial statements are presented fairly in all material respects.
A)True
B)False
Q3) A common-size statement reports the same percentages that appear in a vertical analysis.
A)True
B)False
Q4) The horizontal analysis of the balance sheet is based on the comparative balance sheet.
A)True
B)False
Q5) The cash ratio helps to determine a company's ability to meet its short-term obligations using cash and cash equivalents.
A)True
B)False
Q6) List the three ways to analyze financial statements.State what each of these ways provides to investors and creditors.
Page 17
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Chapter 16: Introduction to Managerial Accounting
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Q1) Which of the following is the primary focus of financial accounting?
A)providing information that managers need to make operational decisions
B)providing summarized information on operational results to investors and creditors
C)providing information to managers to assist in planning,directing and controlling operations
D)providing highly detailed information on product lines,regions,and divisions
Q2) Which of the following is a product cost for a manufacturing company?
A)salary of administrative staff
B)wages paid to factory janitor
C)commissions paid to sales staff
D)depreciation on corporate building
Q3) Comparing actual results to expected results is part of the
A)controlling function of managerial accounting.
B)planning function of managerial accounting.
C)reporting function of managerial accounting.
D)organizing function of managerial accounting.
Q4) Wages for the assembly line workers
A)Period cost
B)Product cost
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Chapter 17: Job Order Costing
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Q1) Manufacturing Overhead is a temporary account used to accumulate indirect production costs during the accounting period.
A)True
B)False
Q2) Pluto Travel Services provided the following information:
Direct labor rate: $50 per hour
Predetermined allocation rate for indirect costs: $22 per direct labor hour Pluto is negotiating a job with a new client.The job will require 11 hours of direct labor.If Pluto wishes to have at least a 15% gross profit on the revenues,it needs to record $716 of revenues.
A)True
B)False
Q3) Haverhill Products completed Job 440 and several other jobs during the year.In addition to direct labor and direct materials cost,Haverhill allocated $450 of manufacturing overhead to the job.Provide the journal entry for the allocation of manufacturing overhead.Omit explanation.
Q4) What is cost of goods manufactured? Describe the flow of this cost through the job order costing system.Your answer should include the accounts involved and whether the flow involves a debit or credit.
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Chapter 18: Process Costing
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Questions
Q1) Black Hills Manufacturing has two processing departments,Department I and Department II.During the year,direct materials worth $38,000 purchased on account were assigned to Department I.At the end of the year,when the production cost report for Department I was prepared,Black Hills assigned $40,000 to the units transferred from Department I to Department II.The journal entry to record the transfer of units to Department II will ________.
A)debit Work-in-Process Inventory-Department II for $38,000 and credit Work-in-Process Inventory-Department I for $38,000
B)debit Work-in-Process Inventory-Department I for $40,000 and credit Work-in-Process Inventory-Department II for $40,000
C)debit Work-in-Process Inventory-Department I for $38,000 and credit Work-in-Process Inventory-Department II for $38,000
D)debit Work-in-Process Inventory-Department II for $40,000 and credit Work-in-Process Inventory-Department I for $40,000
Q2) A process costing system is generally used by companies that produce homogeneous products.
A)True B)False
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Chapter
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Q1) Providing janitorial services to the production departments
A)Square footage for each department
B)Number of new employees
C)Number of machine hours
D)Number of batches
E)Number of inspections
F)Number of purchase orders
G)Number of service calls
Q2) Distinguish the following costs as prevention,appraisal,internal failure,or external failure:
a)Rework substandard products
b)Technical support provided to suppliers
c)Warranty repairs and replacements
d)Inspection of test equipment
e)Liability arising from defective products
f)Field testing and appraisal at customer site
g)Disposal of defective products during production
Q3) Activity-based costing uses a common allocation base for all activities.
A)True
B)False
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Chapter 20: Cost-Volume-Profit Analysis
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Q1) Which of the following will lower the breakeven point?
A)a decrease in the sales price per unit
B)an increase in total fixed costs
C)an increase in the variable cost per unit
D)an increase in the sales price per unit
Q2) Sales mix,or product mix,is the combination of products that make up total sales.
A)True
B)False
Q3) Awanita Enterprises sells computer flash drives for $3.16 per unit.Unit variable cost is $0.06.The breakeven point in units is 3600,and expected sales in units are 4300.What is the margin of safety in dollars?
A)$2170
B)$2212
C)$42
D)$11,376
Q4) Fixed costs per unit is inversely proportional to the volume of units produced. A)True
B)False
Q5) List the cost-volume-profit (CVP)assumptions.
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Chapter 21: Variable Costing
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Q1) When there are no units in the beginning Finished Goods Inventory and the units produced are more than the units sold,the operating income will be higher under absorption costing than variable costing.
A)True
B)False
Q2) For which of the following decisions is absorption costing most appropriate?
A)decisions related to using the sales mix to maximize profitability
B)decisions related to controlling short-term costs
C)decisions related to setting sales prices in the long run
D)decisions related to increasing contribution margin
Q3) Which of the following is NOT a product cost under variable costing?
A)Direct materials
B)Direct labor
C)Variable manufacturing overhead
D)Fixed manufacturing overhead
Q4) In variable costing,the balance of ending Finished Goods Inventory includes fixed manufacturing overhead.
A)True
B)False
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Chapter 22: Master Budgets
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Q1) A manufacturing company has prepared the operating budget and the cash budget and is now preparing the budgeted balance sheet.The balance of Accounts Payable can be taken from the ________.
A)production budget and cost of goods sold budget
B)financial budget
C)cash budget
D)selling and administrative expenses budget
Q2) Developing a budget reduces coordination and communication at different levels in an organization.
A)True
B)False
Q3) A manufacturing company has prepared the operating budget and the cash budget and is now preparing the budgeted balance sheet.The balance of Accounts Receivable can be obtained from the ________.
A)inventory,purchases and cost of goods sold budget
B)schedule of cash receipts from customers
C)capital expenditures budget
D)selling and administrative expenses budget
Q4) List the four budgeting objectives.Why is this process a loop?
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) An efficiency variance measures how well the business uses its materials or human resources.
A)True
B)False
Q2) The purchasing manager was able to bring down the cost of direct materials by purchasing direct materials of a slightly lower grade quality than the company had used previously.The lower grade of direct materials,however,meant a higher defect rate on the assembly line and a higher waste of direct materials during production,which in turn lowered operating income.This situation would lead to a(n)________.
A)favorable direct materials cost variance
B)unfavorable direct labor cost variance
C)favorable direct labor efficiency variance
D)favorable direct materials efficiency variance
Q3) Which of the following is a reason companies use standard costs?
A)to enhance customer loyalty
B)to set sales prices of products and services
C)to share best practices with other companies
D)to ensure the accuracy of the financial records
Q4) List the direct labor variances and briefly describe each.
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) When using financial performance measures,which of the following statements is incorrect?
A)Most companies use a weighted-average to determine the amount of average assets for ROI calculations.
B)Average total assets are used for both ROI and RI computations.
C)The limitations of financial performance measures reinforce the importance of the balanced scorecard.
D)In general,calculating ROI based on the net book value of assets gives managers an incentive to continue using old,outdated equipment because its low net book value results in a higher ROI.
Q2) In addition to considering both the division's operating income and its average total assets,residual income incorporates top management's target rate of return.
A)True
B)False
Q3) The return on investment of a company can be improved by either increasing average total assets or decreasing operating income.
A)True
B)False
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Chapter 25: Short-Term Business Decisions
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Q1) Differential analysis is a common approach to making short-term business decisions.
A)True
B)False
Q2) A company produces 1000 packages of cat food per month.The sales price is $4.00 per pack.Variable cost is $1.60 per unit,and fixed costs are $1800 per month.Management is considering adding a vitamin supplement to improve the value of the product.The variable cost will increase from $1.60 to $1.80 per unit,and fixed costs will increase by 10%.The company will price the new product at $8 per pack.How will this affect operating income?
A)Operating income will decrease by $3620 per month.
B)Operating income will remain unchanged.
C)Operating income will decrease by $2020 per month.
D)Operating income will increase by $3620 per month.
Q3) Which of following statements is true of short-term decision making?
A)Fixed costs and variable costs must be analyzed separately.
B)All costs behave in the same way.
C)Unit manufacturing costs are variable costs.
D)All costs involved in a decision are considered relevant.
Q4) Identify the four steps in the decision-making process.
Page 27
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Chapter 26: Capital Investment Decisions
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Q1) The net present value method of evaluating capital investments suggests that an investment with discounted net cash inflows which exceed the initial cost of the investment is desirable.
A)True
B)False
Q2) Which of the following is a capital budgeting method that ignores the time value of money?
A)payback
B)internal rate of return
C)return on assets
D)net present value
Q3) Under conditions of limited resources,when a company is comparing several investments with different amounts of initial cost,the decision should be made on the basis of the ________.
A)highest total cash inflows
B)shortest payback period
C)highest profitability index
D)highest NPV
Q4) List the steps of the capital budgeting process and identify actions that relate to each step.
28
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Chapter 27: Accounting Information Systems
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Q1) The accounting is the same regardless of whether a business uses a manual or a computerized accounting information system.
A)True
B)False
Q2) Which of the following is true of outputs in an accounting information system?
A)In a manual system,reports and financial statements can be created using Word documents,Excel spreadsheets,or PowerPoint.
B)In a computerized system,the software can generate reports instantaneously that cannot be formatted.
C)Examples of outputs in an accounting information system include purchase invoices,bank checks,and sales invoices.
D)Since the output in an accounting information system is audited and error-free,it provides the evidence and data for accounting transactions.
Q3) Entries from the purchases journal are posted monthly to the accounts payable subsidiary ledger and daily to the general ledger.
A)True B)False
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