Financial Accounting
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Course Introduction
Financial Accounting is an introductory course that explores the fundamental principles and concepts underlying the preparation and analysis of financial statements. Students will learn how organizations record, summarize, and report financial transactions in accordance with generally accepted accounting principles (GAAP). The course covers essential topics such as the accounting cycle, preparation of balance sheets, income statements, and cash flow statements, as well as the interpretation and use of these reports by various stakeholders. Through practical exercises and case studies, students will develop skills in analyzing financial information, ensuring accuracy, and understanding how accounting data supports business decision-making.
Recommended Textbook Principles of Accounting 11th Edition by Belverd E. Needles
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Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) Corporations represent the largest number of businesses in the United States. A)True
B)False
Answer: False
Q2) Carrying out professional responsibilities with competence and diligence is called A) integrity.
B) independence.
C) objectivity.
D) due care.
Answer: D
Q3) Lin Wo Company had a balance of $360,000 in Li Wo, Capital on December 31, 2009. During 2010, the company reported a net income of $24,000, and the owner withdrew $18,000 during the year, while making no additional investments. Prepare the company's statement of owner's equity for the year ended December 31, 2010.
Answer: 11ea8a63_0209_9862_95ae_299d566a5b6f_TB5134_00
Q4) Obtaining funds from a bank is an example of an investing activity.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Analyzing Business Transactions
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Sample Questions
Q1) Recording an account with a debit balance as a credit, or vice versa, will cause the trial balance to be out of balance by an amount that is evenly divisible by two.
A)True
B)False
Answer: True
Q2) Unearned revenues are recorded by companies that
A) receive money in advance of the performance of a service.
B) pay money at the time the performance of a service is complete.
C) receive money at the time the performance of a service is complete.
D) pay money in advance of the performance of a service.
Answer: A
Q3) Which of the following accounts is classified differently from the others listed?
A) Accounts Receivable
B) Owner's Capital
C) Prepaid Rent
D) Cash
Answer: B
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Chapter 3: Measuring Business Income
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Sample Questions
Q1) Retailers often end their fiscal years .
A) during the slack season
B) during the peak of the busy season.
C) at different times each year, depending on the tax consequences.
D) on June 30.
Answer: A
Q2) Equipment might be depreciated over 15 years because
A) it will lose most of its market value in 15 years.
B) it will be paid for in 15 years.
C) it will help to generate revenue for the company over 15 years.
D) income tax provisions require depreciation over 15 years.
Answer: C
Q3) Depreciation Expense-Equipment is an example of a contra account.
A)True
B)False
Answer: False
Q4) In accounting, depreciation refers to the decline in value of a plant asset.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) The adjusting entries involving Rent Receivable and Salaries Payable could be reversed.
A)True
B)False
Q2) A reversing entry will include either a debit to a revenue account or a credit to an expense account.
A)True
B)False
Q3) Which of the following accounts probably would have a smaller balance in the Adjusted Trial Balance columns of a work sheet than in the Trial Balance columns?
A) Accumulated Depreciation-Equipment
B) Wages Payable
C) Wages Expense
D) Prepaid Advertising
Q4) During the closing process, revenues are transferred to the credit side of the Income Summary account.
A)True
B)False
Q5) Briefly distinguish between adjusting and closing entries.
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Chapter 5: Financial Reporting and Analysis
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Sample Questions
Q1) Another term for cost of goods sold is cost of sales.
A)True
B)False
Q2) Which of the following is not considered an operating expense?
A) General office expenses
B) Cost of goods sold
C) Freight-out expense
D) Advertising expense
Q3) The convention of consistency relates most closely to
A) cost-benefit.
B) comparability.
C) materiality.
D) full disclosure.
Q4) Which accounting convention requires a note to the financial statements explaining the company's method of revenue recognition?
A) Comparability and consistency
B) Materiality
C) Conservatism
D) Full disclosure
Q5) State the definition of a current asset.
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Chapter 6: The Operating Cycle and Merchandising Operations
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Q1) The calculation of cost of goods available for sale during the year is not affected by the previous year's ending merchandise inventory.
A)True
B)False
Q2) Terms of "n/10 eom" mean that payment is due 10 days after the end of the month.
A)True
B)False
Q3) The last step in the operating cycle is the
A) sale of merchandise inventory for cash or on credit.
B) payment for purchases made on credit.
C) collection of cash from credit sales.
D) purchase of merchandise inventory for cash or on credit.
Q4) FOB shipping point means that the seller incurs the shipping costs. A)True B)False
Q5) Under the periodic inventory system, cost of goods sold is treated as an account. A)True B)False
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Chapter 7: Internal Control
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Sample Questions
Q1) In the financial statements, the balance of the Petty Cash account and the balance of main cash account are shown separately.
A)True B)False
Q2) Merchandising companies do not need as good a system of internal control as service companies.
A)True B)False
Q3) An effective system of internal control requires that individuals take periodic vacations.
A)True B)False
Q4) 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
Q5) The petty cash voucher should be kept by the person being reimbursed. A)True B)False
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Chapter 8: Inventories
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Sample Questions
Q1) Specific identification is a very popular inventory method because it is very easy to apply.
A)True
B)False
Q2) A retail store has beginning inventory of $30,000, purchases of $220,000, sales of $200,000, and a normal gross margin of 25 percent. What is estimated inventory based on these facts and the gross profit method?
A) $50,000
B) $150,000
C) $100,000
D) $200,000
Q3) Manufacturing overhead would not include which of the following costs?
A) Packing materials
B) Supervisory salaries
C) Factory rent
D) Raw materials
Q4) When the cost of inventory is written down due to a market decline, a loss must be recorded.
A)True
B)False
Page 10
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Chapter 9: Cash and Receivables
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Sample Questions
Q1) For each of the items below, use the following letters to identify the correct treatment in a bank reconciliation.
\( \mathrm{A}= \) Add to balance per bank\(\quad\quad\quad\quad \mathrm{C}= \) Add to balance per books
\( \mathrm{B}= \) Deduct from balance per bank\(\quad\quad \mathrm{D}= \)
Deduct from balance per books ____ 1. Interest income
____ 2. Outstanding checks
____ 3. Check written for $89, but $98 recorded in books
____ 4. Customer's NSF check
____ 5. Note receivable collected by bank
____ 6. Deposit made for $70, but $700 recorded in books
____ 7. Bank check-printing charge
____ 8. Check written for $52, but $25 recorded in books
____ 9. Deposits in transit
____ 10. Bank fee for collection on note receivable
Q2) When the allowance method is used, the write-off of an account receivable results in an expense at the time of write-off.
A)True
B)False
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11
Chapter 10: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) A liability must never be classified as current if it is due in more than one year.
A)True
B)False
Q2) Calculate answers to the following questions using future value and/or present value tables (amounts rounded).
a. What is the present value of receiving $1,000 at the end of each year for six years, assuming 7 percent interest compounded annually?
b. What amount must be deposited at the bank today to grow to $300 in five years, assuming 14 percent interest compounded semi-annually?
Q3) Which of the following is both an estimated liability and a contingent liability?
A) Cosignature on $500 loan
B) Current portion of long-term debt
C) Warranty liability
D) Liability for dividends
Q4) There is no limit to the amount of income subject to the FUTA tax.
A)True
B)False
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Chapter 11: Long Term Assets
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Sample Questions
Q1) A building was purchased for $500,000. It has accumulated depreciation of $80,000 and had a residual value of $100,000. Assuming the use of straight-line depreciation, its estimated useful life must have been
A) 15 years.
B) ten years.
C) five years.
D) impossible to determine from the facts given.
Q2) If a revenue expenditure is incorrectly recorded on a company's books as a capital expenditure, which of the following statements will be true?
A) Stockholders' equity will be overstated at year end.
B) Net income in the following year will be unaffected.
C) Total assets will be understated at year end.
D) Net income will be understated for the year.
Q3) Extraordinary repairs are recorded with a debit to Accumulated Depreciation.
A)True
B)False
Q4) A revenue expenditure results in the recognition of an asset.
A)True
B)False
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Chapter 12: Contributed Capital
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Sample Questions
Q1) Indicate on the blanks below the net effect (I = increase, D = decrease, NE = no effect) of each of the following entries on working capital.
_____ 1. To record the declaration of a cash dividend
_____ 2. To record the payment of a previously declared and recorded cash dividend
_____ 3. To close the Dividends account at the end of the accounting period
Q2) A corporation's residual equity is its A) preferred stock.
B) retained earnings.
C) common stock.
D) cash.
Q3) A corporation has 10,000 shares of 8 percent cumulative preferred stock and 20,000 shares of common stock outstanding. Par value for each is $100. No dividends were paid last year, but this year a $200,000 dividend is paid. How much of this $200,000 goes to the holders of common stock?
A) $40,000
B) $80,000
C) $160,000
D) $180,000
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Chapter 13: Long Term Liabilities
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Q1) A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.
A)True
B)False
Q2) Accounting for capital leases can be thought of as similar to accounting for mortgage payments.
A)True
B)False
Q3) The interest coverage ratio equals income before income taxes plus interest expense divided by
A) income before income taxes.
B) net income.
C) interest expense.
D) total assets.
Q4) Under a defined benefit pension plan,
A) actuarial computations are unnecessary.
B) accounting for annual pension expense is simple.
C) retirement payments are based on the amount accumulated in the pension fund.
D) the employer guarantees the employees certain benefits upon retirement.
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Chapter 14: The Corporate Income Statement and the Statement of Stockholders Equity
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Q1) The results of discontinued operations are excluded from operating income on the income statement.
A)True B)False
Q2) Lemma Corporation has total contributed capital of $600,000 and retained earnings of $305,000. It has 1,000 shares of $100 par value preferred stock with no dividends in arrears and 5,000 shares of $100 par value common stock. The preferred stock is callable at 105. The book value of each share of common stock is A) $161.
B) $86.
C) $160.
D) $181.
Q3) Draw two distinctions between accounting for a stock split and accounting for a stock dividend.
Q4) The discrepancy between methods used for accounting purposes and methods used for tax purposes causes items in the financial statements to be shown "net of tax."
A)True
B)False
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Chapter 15: The Statement of Cash Flows
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Q1) Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements-Increase in Accrued Liabilities-indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following:
A) Add to net income to arrive at net cash flows from operating activities
B) Subtract from net income to arrive at net cash flows from operating activities
C) Not used to adjust net income to calculate net cash flows from operating activities
Q2) During 2009, Heckart Corporation had sales of $250,000, net income of $25,000, average total assets of $350,000, dividend payments of $17,500, net cash flows from operating activities of $36,000, purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash flows to assets equals (Round amounts to one decimal place)
A) 18.0 percent.
B) 14.4 percent.
C) 12.0 percent.
D) 10.3 percent.
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Chapter 16: Financial Performance Measurement
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Sample Questions
Q1) The number of days' sales uncollected is determined by dividing
A) the number of days in a year by the receivable turnover.
B) the number of days in a year by average accounts receivable.
C) net income by average accounts receivable.
D) sales by average accounts receivable.
Q2) The sale of plant assets and the payment of dividends will reduce free cash flow.
A)True
B)False
Q3) Both profit margin and asset turnover affect a company's return on assets.
A)True
B)False
Q4) In a common-size financial statement, which of the following is given a designation of 100 percent?
A) Cost of goods sold
B) Total assets
C) Total liabilities
D) Net income
Q5) Does the existence of conglomerates make financial performance evaluation easier or more difficult? Why?
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Chapter 17: Partnerships
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Q1) There is no income tax imposed on a partnership.
A)True
B)False
Q2) Doris invests $10,000 for a one-third interest in a partnership in which the other partners have capital totaling $26,000 before admitting Doris. After distribution of the bonus, what is Doris's capital?
A) $5,333
B) $8,667
C) $10,000
D) $12,000
Q3) When a newly admitted partner pays a bonus to the existing partners, the new partner's capital account is debited.
A)True
B)False
Q4) If the asset accounts did not reflect their current values, the asset accounts would need to be adjusted before admitting the new partner.
A)True
B)False
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Chapter 18: The Changing Business Environment-A
Managers Pers
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Q1) Identify and explain the important questions a manager must address before preparing a managerial report. (Hint: Think "w's.")
Q2) Performance measures are limited to financial data.
A)True
B)False
Q3) What steps would a company using TQM take to improve product or service quality?
Q4) Which of the following is not a key question to be addressed when preparing a report?
A) Who?
B) What?
C) When?
D) Where?
Q5) Support services, such as legal services, are critical to making an efficient and effective value chain.
A)True
B)False
Q6) The management process and management accounting are identical. A)True B)False
Q7) List three characteristics of a JIT operating environment. Page 20
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Chapter 19: Cost Concepts and Cost Allocation
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Q1) The controller for Drisau Company has gathered the following overhead data on the company's two products: estimated total overhead, $180,000 (consisting of the $70,000 for setups and $110,000 for assembly); estimated direct labor hours (Product A, 6,000; Product B, 3,000); estimated number of setups (Product A, 750; Product B, 1,250); estimated number of machine hours used in assembly (Product A, 3,000; Product B, 5,000); estimated number of units produced (Product A, 500; Product B, 200).
Using the traditional approach:
a. Calculate the predetermined overhead rate using direct labor hours as the cost driver.
b. Compute the amount of overhead costs applied to each product in total and per unit.
Q2) All manufacturing costs incurred and assigned to products that are being produced are classified as
A) variable costs.
B) allocated costs.
C) product costs.
D) overhead costs.
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Chapter 20: Costing Systems: Job Order Costing
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Q1) To prepare financial statements at the end of the accounting period, the actual overhead cost for the period and the estimated overhead that was applied during the period must be reconciled in a job order costing system.
A)True
B)False
Q2) A process costing system is used by companies that manufacture large amounts of similar products or liquid products.
A)True
B)False
Q3) Unique products are produced in a continuous flow production process.
A)True
B)False
Q4) The _________ provide(s) the most direct means of calculating unit costs for a job.
A) job order cost card
B) Finished Goods Inventory account
C) general ledger
D) Overhead and Work in Process Inventory accounts
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Chapter 21: Costing Systems Process Costing
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Q1) The cost of producing each gallon of paint differs.
A)True
B)False
Q2) In process costing, all costs incurred by a department or production process are divided by the equivalent units produced during the period to determine the average cost per unit produced.
A)True
B)False
Q3) Why are equivalent units of production used in process costing?
A) To allocate overhead costs
B) To determine the value of work in process and finished goods inventories
C) To aid in determining costs per unit and costs of inventories in each process
D) To determine the cost per finished unit
Q4) The number of equivalent units of production may be larger than the number of completed units during the period.
A)True
B)False
Q5) In a process costing system, each product is assigned the same amount of costs.
A)True
B)False
24
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Chapter 22: Activity-Based Systems-Abm and Lean
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Q1) Define activity-based costing. Explain why this approach to cost assignments is superior to the traditional method of using a plantwide overhead cost rate. Will activity-based costing always result in lower product costs? Defend your answer.
Q2) A cost hierarchy and a bill of activities are tools for the implementation of activity-based costing.
A)True
B)False
Q3) For a bank, a credit check of a loan applicant is an example of a batch-level activity.
A)True
B)False
Q4) Activity-based costing is the tool used in an ABM environment to assign activity costs to cost objects. Balance sheets can be created for any cost object of an organization.
A)True
B)False
Q5) The JIT operating philosophy requires pull-through production system.
A)True
B)False
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Chapter 23: Cost Behavior Analysis
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Q1) Dapper Hat Makers is in the business of designing and producing specialty hats. The material used for derbies costs $4.50 per unit, and Dapper pays each of its two full-time employees $250 per week. If Employee A makes 15 derbies in one week, what is the variable cost per derby? (Round to two decimal places where necessary.)
A) $4.50
B) $15.00
C) $16.67
D) $21.17
Q2) In breakeven analysis adjusted for a profit factor, increasing the unit sales price will decrease the number of units needed to meet the targeted profit.
A)True
B)False
Q3) The equation that will provide the breakeven point in units (SP = selling price) is
A) BE units = (SP - VC) ÷ FC per unit.
B) VC per unit + FC = SP per unit \(\times\) BE units.
C) BE units = FC ÷ CM per unit.
D) SP per unit - VC per unit = FC ÷ BE units.
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Chapter 24: The Budgeting Process
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Q1) In the development of a cash budget, which of the following elements must be determined first?
A) Ending balance of Accounts Receivable
B) Direct materials purchases
C) Estimated sales in units
D) Cash for payroll
Q2) United Insurance Company specializes in term life insurance contracts. Cash collection experience shows that 30 percent of billed premiums are collected in the month before they are due, 60 percent are collected in the month they are due, and 6 percent are collected in the month following their due date. Four percent of the billed premiums are collected late (in the second month following their due date). Total billing notices in January were $50,000; in February, $60,000; in March, $66,000; in April, $65,000; in May, $60,000; and in June, $70,000. How much cash does the company expect to collect in May?
A) $63,540
B) $66,750
C) $60,000
D) $56,000
Q3) Describe three benefits budgeting provides to an organization's success.
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Chapter 25: Performance Management and Evaluation
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Q1) The way in which the performance of a cost center is evaluated is similar to A) job order costing.
B) standard costing.
C) process costing.
D) none of these choices.
Q2) Why might stock options not be the best way to promote coordination of goals?
A) Stock prices can fluctuate quickly.
B) Many of the variables that affect stock prices are beyond a manager's control.
C) Employees generally do not value stock options very highly.
D) None of these choices
Q3) Performance reports allow comparisons between actual performance and budget expectations.
A)True
B)False
Q4) The equation for economic value added includes pretax operating income as well as current liabilities.
A)True
B)False
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Chapter 26: Standard Costing and Variance Analysis
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Q1) The variable overhead spending variance is also called the variable overhead efficiency variance.
A)True
B)False
Q2) A performance report should contain cost or revenue items that the manager receiving the report can control.
A)True
B)False
Q3) A favorable fixed overhead volume variance for a manufacturing company could indicate
A) the creation of excess inventory.
B) the actual overhead exceeded the budgeted overhead.
C) sales exceeded production.
D) variable overhead costs were less than fixed overhead costs.
Q4) The direct materials price variance is the difference between the actual price and the standard price, multiplied by the standard quantity.
A)True
B)False
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Chapter 27: Short Run Decision Analysis
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Q1) Special orders should only be considered if unused capacity exists.
A)True
B)False
Q2) Sunk costs are omitted from decision analysis
A) always.
B) never.
C) sometimes.
D) only if immaterial.
Q3) Many management decisions are unique and hence incompatible with strict rules, steps, or timetables.
A)True
B)False
Q4) Fixed costs are irrelevant in make-or-buy decisions.
A)True
B)False
Q5) In manufacturing companies, a common decision facing managers is whether to make or buy some or all of the parts used in product assembly.
A)True
B)False
Q6) What are the two steps in the analysis for a sales mix decision?
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Chapter 28: Capital Investment Analysis
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Q1) Qualitative factors will not be considered in the evaluation of capital investment proposals.
A)True
B)False
Q2) The most commonly used methods in the evaluation of capital investment proposals are net present value method, payback period method and the accounting rate-of-return method.
A)True
B)False
Q3) Capital investment analysis involves all of the following except
A) preparing reports for management.
B) analyzing the sales mix.
C) selecting the best alternative.
D) dividing available capital investment funds.
Q4) An advantage of the net present value method is that it considers the time value of money.
A)True
B)False
Q5) Why the residual value of equipment is relevant when considering the replacement of equipment?
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