Financial Accounting
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Course Introduction
Financial Accounting introduces students to the fundamental principles and practices used to prepare, analyze, and interpret financial statements for external users such as investors, creditors, and regulatory agencies. The course covers essential topics including the accounting cycle, accrual accounting concepts, measurement of assets and liabilities, and the preparation of income statements, balance sheets, and cash flow statements in accordance with generally accepted accounting principles (GAAP). Students will also explore how financial information is used for decision-making and develop skills necessary to evaluate the financial health and performance of organizations.
Recommended Textbook Principles of Accounting 11th Edition by Belverd
E. Needles
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Page 2
Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) The day-by-day accumulation of interest is considered a transaction involving an exchange of value.
A)True
B)False
Answer: False
Q2) The net income figure appears in all the following financial statements except the A) statement of cash flows.
B) income statement.
C) statement of owner's equity.
D) balance sheet.
Answer: D
Q3) Both public accountants and management accountants are required to adhere to a code of professional conduct.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Analyzing Business Transactions
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Sample Questions
Q1) Generally, before Accounts Receivable is debited, it is credited.
A)True
B)False Answer: False
Q2) The Owner's Withdrawals account has a normal credit balance.
A)True
B)False Answer: False
Q3) In a journal entry, assets are always recorded before liabilities.
A)True
B)False Answer: False
Q4) Why is the Owner's Withdrawals account increased by a debit? Explain in terms of its relationship to owner's equity.
Answer: Owner's withdrawals represent a decrease in owner's equity. According to the rules of debit and credit, a decrease in owner's equity is recorded as a debit.
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Chapter 3: Measuring Business Income
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Sample Questions
Q1) If an adjusting entry were not made at the end of an accounting period to remove the earned revenue from the Unearned Revenue account,
A) assets would be understated.
B) owner's equity would be overstated.
C) liabilities would be understated.
D) liabilities would be overstated.
Answer: D
Q2) The cost of doing business is also known as A) a liability.
B) an expense.
C) revenue.
D) an asset.
Answer: B
Q3) The going concern assumption helps solve the A) matching issue.
B) accounting period issue.
C) revenue recognition issue.
D) continuity issue.
Answer: D
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Closing entries ultimately will affect
A) total liabilities.
B) the Cash account.
C) the owner's Capital account.
D) total assets.
Q2) Which account that does not appear on the balance sheet has an amount in the Balance Sheet columns of a work sheet?
A) Depreciation Expense-Trucks
B) Withdrawals
C) Accumulated Depreciation-Trucks
D) Owner's Capital
Q3) An amount would not appear opposite the Withdrawals account in which of the following work sheet columns?
A) Trial Balance
B) Income Statement
C) Balance Sheet
D) Adjusted Trial Balance
Q4) The only accounts that are closed are income statement accounts.
A)True
B)False
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Chapter 5: Financial Reporting and Analysis
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Sample Questions
Q1) Match the following financial statement ratios with their definition.
1. Working capital _____
2. Current ratio _______
3. Profit margin ______
4. Return on assets______
5. Debt to equity ratio________
6. Return on equity_______
7. Asset turnover_________
a. A measure of profitability that shows the proportion of a company's assets that is financed by creditors and the proportion financed by owners
b. A measure of liquidity that shows the net current assets on hand to continue business operations
c. A measure of profitability that relates the amount earned by a business to the owner's investment in the business
d. A measure of profitability that shows the percentage of each sales dollar that results in net income
e. A measure of liquidity; current assets divided by current liabilities
Q2) State the definition of a current asset.
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Chapter 6: The Operating Cycle and Merchandising Operations
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Q1) When customers pay with bank credit cards, sales are considered to have taken place on credit.
A)True
B)False
Q2) When the buyer bears the transportation charge, it is called freight-out.
A)True
B)False
Q3) Under the perpetual inventory system, the return of goods from a customer is recorded with a debit to Sales Returns and Allowances.
A)True
B)False
Q4) When freight-in is a relatively small amount, most companies include the cost in A) operating expenses.
B) cost of goods sold.
C) administrative expenses.
D) merchandise inventory.
Q5) Cost of goods sold is considered an expense of a merchandising business.
A)True B)False
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Chapter 7: Internal Control
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Q1) At the end of each day, the cashier should be the one responsible for comparing the amount on the cash register tape with the day's cash additions to the cash register.
A)True
B)False
Q2) Invoices are documents prepared by a vendor and sent to the accounting department of its customers.
A)True
B)False
Q3) Which of the following is not a primary concern of internal control?
A) Fairness of financial statements
B) Accuracy of accounting records
C) Safeguarding assets
D) Efficiency of company operations
Q4) A traditional definition of internal control specifically includes all of the following features, except
A) reliability of accounting data.
B) detection of employee theft.
C) promotion of operational efficiency.
D) adherence to prescribed managerial policies.
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Chapter 8: Inventories
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Sample Questions
Q1) The higher the inventory turnover, the higher the days' inventory on hand.
A)True
B)False
Q2) Under rising prices, why will the FIFO method produce a higher ending inventory than LIFO?
Q3) The computer has made the perpetual inventory system more popular and easier to apply.
A)True
B)False
Q4) Emil Hinkel owns and operates a large antique shop. He uses the specific identification method to account for transactions that affect inventory. Hinkel recently completed a physical inventory of the merchandise in his shop as part of his year-end work. Today, his accountant called to inform him that it would be necessary to adjust the inventory figure shown on the balance sheet, which will increase Hinkel's tax liability. Hinkel argued that the inventory had to be correct, because he counted it twice and matched every item to an invoice. Cite reasons why the accountant would find it necessary to adjust the inventory even if Hinkel's count is accurate.
Q5) Why are cost flow assumptions made when accounting for merchandise inventory?
Q6) What is the chief objective of supply-chain management? How is it accomplished?
Page 10
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Chapter 9: Cash and Receivables
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Q1) Under the allowance method, Uncollectible Accounts Expense is recorded when an individual customer defaults.
A)True
B)False
Q2) Which of the following is not classified as a short-term financial asset?
A) Accounts Receivable
B) Notes Receivable
C) Inventory
D) Cash
Q3) The balance of Accounts Receivable, net of the allowance account, is $35,000 before the write-off of a $2,800 account. What is the Accounts Receivable balance, net of the allowance account, after the write-off?
A) $35,000
B) $32,200
C) $2,800
D) $37,800
Q4) A promissory note may be issued for an amount to be determined at a future date.
A)True
B)False
Q5) What is a compensating balance? By whom is it required?
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Chapter 10: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) A business accepts a 9 percent, $25,000 note due in 120 days. Assuming simple interest, how much (amount rounded) will the business receive when the note falls due?
A) $25,000
B) $25,075
C) $25,740
D) $27,260
Q2) You win the grand prize and can choose between receiving $100,000 today or $20,000 per year for seven years. Ignoring income taxes, how would you go about making your decision?
Q3) All of the following can be employee payroll withholdings except
A) state income taxes.
B) medical insurance premium payments.
C) charitable contributions.
D) federal unemployment tax.
Q4) When compound interest is used, interest accumulates less quickly than when simple interest is used.
A)True
B)False
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Chapter 11: Long Term Assets
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Sample Questions
Q1) Equipment is purchased for $80,000. It has an eight-year useful life and a $42,750 residual value. Under the double-declining-balance method, what is the depreciation expense for year 3?
A) $11,250
B) $1,750
C) $2,250
D) $2,750
Q2) In calculating the depletion of a natural resource, its useful life in years is irrelevant.
A)True
B)False
Q3) Which of the following is not considered an intangible asset?
A) A leasehold
B) An oil well
C) A franchise
D) Goodwill
Q4) Depreciation should not be recorded for a depreciable asset that is increasing in value.
A)True B)False
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Chapter 12: Contributed Capital
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Q1) An advantage of the corporate form of business is
A) possible lack of control by owners.
B) tax treatment.
C) lack of mutual agency.
D) government regulation.
Q2) The sale of treasury stock at an amount greater than cost results in a gain to be reported on the income statement.
A)True
B)False
Q3) Treasury stock usually is recorded at par value when purchased.
A)True
B)False
Q4) The excess of the issuance price over the stated value of a no-par common stock should be credited to the
A) Common Stock account.
B) Retained Earnings account.
C) Additional Paid-in Capital.
D) Treasury Stock.
Q5) How is it possible for a corporation to have more shares issued than it has outstanding?
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Chapter 13: Long Term Liabilities
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Sample Questions
Q1) When a bond sells at a discount, what is probably true about the market interest versus the face interest rate? Discuss.
Q2) When determining the value of a bond using present value, what are the two components used in the calculation?
Q3) Penmark Corporation issued 15-year term bonds at a discount in 2009. Interest is payable semiannually. Which of the following statements is true, assuming that the effective interest method of amortization is used for the bond discount?
A) Interest expense decreases each six-month interest period.
B) Interest expense as a percentage of the bond's book value changes from period to period.
C) Interest expense increases each six-month interest period.
D) Interest expense remains constant in amount for each interest period.
Q4) The present value of a bond is determined by adding the discounted value of the payment at maturity to the discounted value of a series of fixed interest payments.
A)True B)False
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Page 15
Chapter 14: The Corporate Income Statement and the Statement of Stockholders Equity
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Q1) How is it possible for a company to show a net income for a given year yet be in a deficit position at year end?
Q2) Comprehensive income could contain all of the following except A) revenues.
B) investments by stockholders.
C) expenses.
D) unrealized investment gains and losses.
Q3) Earnings per share information need not be shown for extraordinary gains and losses.
A)True
B)False
Q4) Shank Corporation uses a different depreciation method for its income tax return than it does for its income statement. Consequently, the corporation has a credit balance in its Deferred Income Taxes account. This balance should be classified as a A) current asset.
B) long-term liability.
C) current liability.
D) long-term asset.
Q5) Distinguish between cash and retained earnings.
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Chapter 15: The Statement of Cash Flows
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Sample Questions
Q1) Cash inflows and outflows are easier to manipulate than earnings.
A)True
B)False
Q2) Royer Corporation engaged in this transaction: Issued common stock for cash. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows.
A) Operating activities section
B) Does not represent a cash flow
C) Investing activities section
D) Financing activities section
Q3) The income statement indicates a business's success or failure in earning an income from its operating activities, but it does not reflect the inflow and outflow of cash from operating activities.
A)True
B)False
Q4) Purchases and sales of long-term investments for the period should be netted for disclosure in the investing activities section of the statement of cash flows.
A)True
B)False
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Chapter 16: Financial Performance Measurement
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Sample Questions
Q1) Interim financial statements are subjected to a full audit by an independent auditor.
A)True
B)False
Q2) Ratio analysis is useful only if the ratio states a meaningful relationship between two numbers.
A)True
B)False
Q3) Days' payable measures the relative size of accounts payable.
A)True
B)False
Q4) Within a few days of certain major events, a report must be issued by publicly held corporations to A) stockholders.
B) the SEC.
C) Dun & Bradstreet.
D) creditors.
Q5) Vertical analysis will result in common-size statements.
A)True
B)False
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Chapter 17: Partnerships
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Sample Questions
Q1) A partner will not bind the partnership to an outside purchase contract when the A) the item purchased is considered immaterial in amount
B) item purchased is not within the normal scope of the business
C) partner was not authorized by the other partners to make the purchase
D) partner who made the purchase withdraws from the partnership
Q2) In a liquidation, one partner may have to make up the deficit in another partner's account.
A)True
B)False
Q3) When M purchases N's $10,000 capital interest for $10,000, the ensuing entry on the books of the partnership would contain a debit to Cash for $10,000.
A)True
B)False
Q4) When a partner withdraws assets greater than his or her capital balance, the excess is treated as a bonus to the remaining partners.
A)True
B)False
Q5) Describe how a dissolution of a partnership is different from a liquidation of a partnership.
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Chapter 18: The Changing Business Environment-A
Managers Pers
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Q1) Management accountants working in purchasing must decline gifts from company vendors, because acceptance of a gift might influence or be perceived as influencing their performance or decision analyses.
A)True
B)False
Q2) The management accountant who is responsible only for nonfinancial reports to management does not have to remain objective, using the doctrine of fairness, when preparing all reports and analyses.
A)True
B)False
Q3) An advantage of value chain analysis is that it allows a company to A) evaluate ethical conduct.
B) focus on its core competencies.
C) use the four "w's."
D) increase sales to customers.
Q4) Financial accounting is concerned primarily with planning and control of internal operations.
A)True
B)False
Page 20
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Chapter 19: Cost Concepts and Cost Allocation
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Sample Questions
Q1) Period cost and product cost are synonymous terms.
A)True
B)False
Q2) When the amount of underapplied or overapplied overhead is small, it usually is written off to
A) Work in Process Inventory.
B) Cost of Goods Sold.
C) Finished Goods Inventory.
D) selling expenses.
Q3) The income statement for a manufacturing company usually contains a detailed computation of the
A) total manufacturing cost.
B) cost of goods sold.
C) total cost of materials used.
D) cost of goods manufactured.
Q4) Which of the following costs is considered overhead?
A) Indirect labor only
B) Indirect materials only
C) Indirect materials and indirect labor
D) None of these
21
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Chapter 20: Costing Systems: Job Order Costing
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Q1) In a job order costing system, at the end of the accounting period, the balance in the subsidiary ledger for unfinished jobs should equal the ending balance in the Work in Process Inventory account.
A)True
B)False
Q2) The balance in the Work in Process account equals the A) balance in the Finished Goods Inventory account.
B) balance in the Cost of Goods Sold account.
C) balances on the job cost sheets of uncompleted jobs.
D) balance in the Overhead account.
Q3) Dyana Julian, president of Julian Juices, Inc., has approached you with the following questions: Why must we use the process costing method to compute product unit costs for three lines of fruit juices? Why can't we consider using a job order costing approach? Prepare a written response to Ms. Julian.
Q4) A zero balance in Finished Goods Inventory at the start of the period means all previously completed products have been shipped.
A)True
B)False
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Page 22
Chapter 21: Costing Systems Process Costing
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Q1) Montell Inc. produces a variety of outdoor equipment products and utilizes a process costing system. The following information was provided by the accounting department as of March 31, 20xx:
a. Units started during the month of March totaled 314,000.
b. Units partially complete as of March 31 equaled 76,000.
c. Ending work in process inventory as of March 31, 20xx, was 80 percent complete.
d. Direct materials are added at the beginning of the process, and conversion costs are incurred uniformly throughout the process.
e. No units were in process on March 1, 20xx.
Using the information provided, compute the equivalent units of production for direct materials and conversion costs for the month ended March 31, 20xx, assuming a FIFO costing flow.
Q2) In a process costing system, some of the increases to Department B's Work in Process Inventory account would come from Department A's
A) Finished Goods Inventory account.
B) Materials Inventory account.
C) Cost of Goods Sold account.
D) Work in Process Inventory account.
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Chapter 22: Activity-Based Systems-Abm and Lean
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Q1) Under new methods of management, attempts to continuously improve the work environment come from
A) top management..
B) each department manager.
C) the board of directors
D) everyone in the company.
Q2) The initial step in achieving the efficiency of a just-in-time system is to
A) redesign the plant layout.
B) replace laborers with machines.
C) stop ordering materials for inventory.
D) identify products that are not profitable.
Q3) Just-in-time operations attempt to significantly reduce
A) inspection time and moving time.
B) only storage time.
C) moving time and processing time.
D) inspection time and processing time.
Q4) Lean's primary goal is to eliminate waste in business processes.
A)True
B)False
Q5) Why is process value analysis not part of the general ledger accounting system?
Page 24
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Chapter 23: Cost Behavior Analysis
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Q1) The high-low method
A) calculates variable costs per unit by dividing the difference in the high and low activity levels by the high and low costs.
B) assumes that the fixed portion of the mixed cost is the lowest monthly cost incurred during the period under consideration.
C) allows differentiation between fixed and variable costs when dealing with mixed costs.
D) combines the fixed and variable portions of a cost to determine the total cost.
Q2) Campground, Inc., is considering the production and sale of propane lamps. Annual fixed costs associated with the project are expected to total $60,000. In addition, each lamp would sell for $12 and would require $7 in variable costs. Calculate (a) the breakeven point in units, (b) the breakeven point in dollars, (c) the number of lamps that must be sold to earn a profit of $120,000, and (d) the operating income or loss at a sales volume of 16,000 lamps.
Q3) Contribution margin is selling price minus unit fixed costs.
A)True
B)False
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Chapter 24: The Budgeting Process
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Q1) Given that the cost of goods manufactured is $485,000 and the dollar values of the beginning and ending finished goods inventory are $130,000 and $90,000, respectively, what is the cost of goods sold?
A) $525,000
B) $615,000
C) $395,000
D) $445,000
Q2) Operating budgets for the DiP Company reveal the following information: net sales, $400,000; beginning materials inventory, $23,000; materials purchased, $185,000; beginning work in process inventory, $64,700; beginning finished goods inventory, $21,600; direct labor costs, $34,000; overhead applied, $67,000; ending work in process inventory, $61,200; ending materials inventory, $18,700; and ending finished goods inventory, $16,300. Compute DiP Company's budgeted gross margin.
A) $299,800
B) $293,800
C) $150,900
D) $100,900
Q3) Describe three benefits budgeting provides to an organization's success.
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26
Chapter 25: Performance Management and Evaluation
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Q1) If a performance report contains items that are out of a manager's control, the entire responsibility accounting system can be called into question.
A)True
B)False
Q2) Which of the following is a type of incentive compensation?
A) Health insurance
B) Profit-sharing plans
C) Pension plans
D) Flexible spending programs
Q3) Responsibility accounting is more concerned with performance evaluation than performance management.
A)True
B)False
Q4) Many organizations utilize responsibility accounting
A) to assist in building performance measures for the organization.
B) to assist in performance management and evaluation.
C) solely to evaluate how well employees are handling their responsibilities.
D) as an alternative to generally accepted accounting principles.
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Chapter 26: Standard Costing and Variance Analysis
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Q1) Multiplying the standard price of direct materials by the standard quantity for direct materials yields
A) the direct materials price variance.
B) the direct materials quantity variance.
C) the standard direct materials cost.
D) nothing; the two components should be added together.
Q2) The purchasing agent is responsible for developing the direct materials quantity standard.
A)True
B)False
Q3) The direct labor rate variance is the difference between actual hours worked and standard hours allowed for good units produced, multiplied by the standard labor rate.
A)True
B)False
Q4) If standard costing is not economically feasible for a company, predetermined overhead rates should not be used.
A)True
B)False
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Chapter 27: Short Run Decision Analysis
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Q1) The term incremental cost refers to
A) the difference in total costs between alternatives.
B) a cost that does not entail any dollar outlay but that is relevant to the decision-making process.
C) the profit forgone by selecting one choice instead of another.
D) a cost that constitutes expenses to be incurred even though there is no activity.
Q2) Courtney Sinclaire is trying to rent a new bicycle. She has narrowed her choices to two lease arrangements, each with unique characteristics. Bike Superior would rent for $220 per year, and Bike Deluxe's annual rent would be $250. Bike Superior would need a new seat costing $35 and new racing tires costing $95. The old seat and tires could be sold for $30. Bike Deluxe is fully equipped but would need to be painted at a cost of $110. Maintenance and upkeep on both bikes would average $60 per year.
a. Identify the relevant data in this problem.
b. Prepare an incremental analysis for Courtney to aid her in this decision.
c. What decision should Courtney make?
Q3) Managers rely strictly on financial information when faced with decisions.
A)True
B)False
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Chapter 28: Capital Investment Analysis
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Q1) When deciding whether to keep or replace a fixed asset, the asset's carrying value could be relevant to the decision.
A)True B)False
Q2) An advantage of the net present value method is that it considers the time value of money.
A)True B)False
Q3) Present value is the amount that must be invested today at a given rate of compound interest to produce a given future value.
A)True
B)False
Q4) The accounting rate of return is calculated by dividing the project's investment by its net income.
A)True B)False
Q5) Why the residual value of equipment is relevant when considering the replacement of equipment?
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