Financial Accounting
Test Preparation
Course Introduction
Financial Accounting is an introductory course that examines the fundamental principles and processes involved in the preparation and interpretation of financial statements. Students will learn how to record, classify, and summarize business transactions in accordance with generally accepted accounting principles (GAAP). The course emphasizes the analysis of balance sheets, income statements, and cash flow statements, providing insight into the financial health and performance of organizations. By exploring concepts such as revenue recognition, asset valuation, and liability measurement, students will gain the skills necessary to communicate financial information effectively to stakeholders and make informed business decisions.
Recommended Textbook Principles of Accounting 11th Edition by
Belverd E. Needles
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28 Chapters
4320 Verified Questions
4320 Flashcards
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Page 2
Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) Which of the following is a regulatory agency?
A) IASB
B) SEC
C) FASB
D) GASB
Answer: B
Q2) The Internal Revenue Service is responsible for issuing accounting standards for state and local governments.
A)True
B)False
Answer: False
Q3) Kalis Company's owner's equity equals one-third of the company's total assets. The company's liabilities are $120,000. What is the amount of the company's owner's equity?
Answer: Assets = Liabilities + Equity
A = 2/3 A + 1/3 A
A = $120,000 \(\times\) 3/2 = $180,000
Equity = $180,000 - $120,000 = $60,000
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Page 3
Chapter 2: Analyzing Business Transactions
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Sample Questions
Q1) Which of the following accounts will eventually be followed with an outflow of cash?
A) Design Revenue
B) Notes Receivable
C) Accounts Payable
D) Prepaid Rent
Answer: C
Q2) Which of the following accounts probably would be listed before the others in a chart of accounts?
A) Insurance Expense
B) Grace Peterson, Withdrawals
C) Notes Payable
D) Accumulated Depreciation, Buildings
Answer: D
Q3) Which of the following accounts has a normal debit balance?
A) Art Fees Earned
B) Notes Payable
C) Prepaid Insurance
D) Unearned Art Fees
Answer: C
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Page 4
Chapter 3: Measuring Business Income
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Sample Questions
Q1) Which of the following is a condition required by the SEC for the recognition of revenue?
A) Completion of goods manufactured
B) Execution of a promissory note
C) Price in excess of $100
D) Reasonable assurance of collection
Answer: D
Q2) A company's five-day weekly payroll of $890 is paid on Fridays. Assume that the last day of the month falls on Wednesday. Which of the following is the required adjusting entry for the month end?
A) Debit Salaries Payable $534 and credit Salaries Expense $534.
B) Debit Salaries Expense $534 and credit Salaries Payable $534.
C) Debit Unpaid Salaries $534 and credit Salaries Payable $534.
D) Debit Salaries Expense $356 and credit Salaries Payable $356.
Answer: B
Q3) Revenue is equal to the cash received by a company during an accounting period.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Which of the following steps is the first step in accounting cycle?
A) The financial statements are prepared.
B) Source documents are analyzed.
C) Adjusting entries are recorded and posted.
D) Closing entries are recorded and posted.
Q2) Which of the following is not a temporary account?
A) Depreciation Expense-Vehicles
B) Service Revenue
C) Accumulated Depreciation-Vehicles
D) Interest Income
Q3) The post-closing trial balance contains
A) neither real accounts nor nominal accounts.
B) nominal accounts only.
C) real accounts only.
D) both real accounts and nominal accounts.
Q4) Closing entries result in the transfer of net income or net loss into the owner's Capital account.
A)True
B)False
Q5) Briefly distinguish between adjusting and closing entries.
Page 6
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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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Sample Questions
Q1) For a company that takes an average of 50 days to sell inventory, takes an average of 110 days to collect for its sales, and has payment terms of 45 days on its purchases, what is the financing period? Show calculations.
Q2) The fee paid by a retailer to a credit card company is considered a contra-revenue account by the retailer.
A)True
B)False
Q3) Under the periodic inventory system, cost of goods sold is treated as an account. A)True
B)False
Q4) 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
Q5) Financing period represents the time during which merchandizing company has to finance its customers.
A)True
B)False
8
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Chapter 7: Internal Control
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Sample Questions
Q1) Which of the following attributes of internal control would be violated if the chief accounting clerk wrote checks to pay accounts payable?
A) Adequate design of documents
B) Sound personnel procedures
C) Periodic independent verification
D) Separation of duties
Q2) A remittance advice would be attached to a check authorization.
A)True
B)False
Q3) A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.
A)True
B)False
Q4) It is best that the receiving department not be given a copy of the purchase order or the invoice.
A)True
B)False
Q5) Why is the separation of duties an important control activity in a good system of internal control?
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Chapter 8: Inventories
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Sample Questions
Q1) An assumption about cost flow is necessary
A) because it is required by income tax regulations.
B) only when the flow of goods cannot be determined.
C) because prices usually change, and tracking which units have been sold is difficult. D) even when there is no change in the purchase price of inventory.
Q2) Why will an understated beginning inventory produce an overstated income before income taxes for the same period? Will the understatement have a favorable or unfavorable effect on current year income taxes?
Q3) Why are cost flow assumptions made when accounting for merchandise inventory?
Q4) Average inventory equals $100,000, and cost of goods sold equals $221,000. Days' inventory on hand equals
A) 165.2 days.
B) 165.2 days.
C) 154.3 days.
D) 188.7 days.
Q5) Days' inventory on hand equals the inventory turnover divided by 365.
A)True B)False
Q6) How is the matching rule applied when accounting for merchandise inventory?
Page 10
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Chapter 9: Cash and Receivables
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Sample Questions
Q1) At year end, Erwin Graphics has a $350 debit balance in Allowance for Uncollectible Accounts. It estimates that 5 percent of the $20,000 in sales are uncollectible. Give the amount that should be used in the adjusting entry to record uncollectible accounts using the percentage of net sales method. (Show your calculations.)
Q2) An example of a cash equivalent is
A) a 120-day time deposit.
B) notes receivable.
C) accounts receivable.
D) a 60-day certificate of deposit.
Q3) The interest on a three-month, 12 percent, $8,100 note receivable is
A) $243.
B) $81.
C) $162.
D) $972.
Q4) If a promissory note is dishonored, the payee should record interest income.
A)True
B)False
Q5) What is a compensating balance? By whom is it required?
Q6) Why do businesses need to keep some currency on hand?
Page 11
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Chapter 10: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) A company sells merchandise on a deferred payment plan, ultimately receiving $5,000 on the account receivable. On the payment date, the company would
A) credit Accounts Receivable for less than $5,000.
B) debit Interest Income for the imputed amount.
C) credit Sales for less than $5,000.
D) debit the asset account for $5,000.
Q2) A company wishes to make deposits at the end of the next four years to accumulate a fund of $60,000. The annual contributions equal $60,000 multiplied by the appropriate present value of an ordinary annuity factor.
A)True
B)False
Q3) A contingent liability is best described as a(n)
A) current liability.
B) probable liability.
C) potential liability.
D) estimated liability.
Q4) Commercial paper normally is issued by companies with poor credit ratings.
A)True
B)False
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Chapter 11: Long Term Assets
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Sample Questions
Q1) Which of the following costs normally is expensed in the year incurred, regardless of the extent of future benefit?
A) Technology
B) Customer lists
C) Research and development
D) Leasehold improvements
Q2) On January 1, a machine with a useful life of five years and a residual value of $3,000 is purchased for $15,000. What is the depreciation expense in year 3 under straight-line depreciation?
A) $3,000
B) $2,400
C) $7,200
D) $9,000
Q3) The exclusive right to sell a computer program is covered by which intangible?
A) software.
B) franchise.
C) patent.
D) trademark.
Q4) Present two arguments in favor of the use of accelerated depreciation.
Q5) What is goodwill and when may it be recorded?
Page 13
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Chapter 12: Contributed Capital
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Sample Questions
Q1) The declaration of a cash dividend causes an increase in a corporation's liabilities at the date of record.
A)True
B)False
Q2) No entry is required on the date of record for a cash dividend.
A)True
B)False
Q3) An advantage of the corporate form is the ability of the board to hire professional managers to attend to the corporation's affairs.
A)True
B)False
Q4) Treasury stock may be either common or preferred stock.
A)True
B)False
Q5) If there is no change in the number of shares authorized and issued from one year to the next, but there is a change in the number of shares outstanding on those same dates, how would you explain that change?
Q6) How is it possible for a corporation to have more shares issued than it has outstanding?
Page 14
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Chapter 13: Long Term Liabilities
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Sample Questions
Q1) On January 1, 2009, Woodvale Corporation issued five-year term bonds with a face value of $700,000. Interest is payable annually on December 31. The bonds were issued for $727,300. The effective interest method of amortization is used. Ryan reported Bond Interest Expense of $65,457 on its income statement for the year ended December 31, 2009. Calculate the effective interest rate for these bonds.
Q2) When a bond issue is converted into common stock, total contributed capital is increased by the carrying value of the bonds converted.
A)True
B)False
Q3) The present value of a bond is always less than the face value of the bond. A)True
B)False
Q4) A corporation issues bonds that pay interest each February 1 and August 1. The corporation's December 31 adjusting entry might include a
A) debit to Unamortized Bond Premium.
B) debit to Cash.
C) debit to Bond Interest Payable.
D) credit to Bond Interest Income.
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Page 15
Chapter 14: The Corporate Income Statement and the Statement of Stockholders Equity
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Sample Questions
Q1) Retained earnings represent cash readily available for dividends.
A)True
B)False
Q2) The federal income tax is progressive in nature.
A)True
B)False
Q3) 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.
Q4) A stock dividend is a pro rata distribution of cash to a corporation's stockholders.
A)True
B)False
Q5) Distinguish between cash and retained earnings.
Q6) Why must certain income statement items be presented "net of taxes"?
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Chapter 15: The Statement of Cash Flows
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Sample Questions
Q1) Royer Corporation engaged in this transaction: Declared and issued a stock dividend.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows.
A) Financing activities section
B) Operating activities section
C) Does not represent a cash flow
D) Investing activities section
Q2) If the indirect method is used to prepare a statement of cash flows, which of the following would be added to net income to arrive at net cash flows from operating activities?
A) Decrease in accounts payable
B) Increase in inventory
C) Decrease in prepaid expenses
D) Increase in accounts receivable
Q3) The primary purpose of the statement of cash flows is to provide information about a company's investing and financing activities during an accounting period.
A)True
B)False
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Page 17
Chapter 16: Financial Performance Measurement
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Sample Questions
Q1) Per the Sarbanes-Oxley Act of 2002, a compensation committee, comprised of a public corporation's top executives, must be established to determine the salaries and wages of its employees.
A)True
B)False
Q2) A quick ratio that is much smaller than the current ratio indicates that
A) inventories represent a large portion of current assets.
B) the company has a low inventory turnover.
C) inventories represent a small portion of current assets.
D) the company has a high inventory turnover.
Q3) Why is the quick ratio probably better than the current ratio as a measure of short-term liquidity?
Q4) In general, the greater the investment risk taken, the lower the return required as compensation.
A)True B)False
Q5) What is horizontal analysis, and why is it useful in performing financial performance measurement?
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Chapter 17: Partnerships
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Sample Questions
Q1) After selling all the assets and paying the liabilities in a liquidation of a partnership, the partners share any remaining cash according to the stated ratios.
A)True
B)False
Q2) 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
Q3) 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
Q4) When a new partner is admitted, a new partnership agreement should be in place. A)True
B)False
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Chapter 18: The Changing Business Environment-A
Managers Pers
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Sample Questions
Q1) In order to obtain information about benchmarks, a manager might join a trade association for the company's particular industry.
A)True
B)False
Q2) Management accountants who alter reports to meet targeted levels of performance are not acting unethically, because their job is to provide information that will aid in communicating the goals of the business.
A)True
B)False
Q3) Which of the following types of information is not essential for a manager to run a business effectively?
A) Product or service costing information
B) Data for planning and controlling of operations
C) Special reports and analyses to support decisions
D) Quote of the current price of the company's stock
Q4) Management accounting accumulates, maintains, and processes an organization's financial and nonfinancial information.
A)True
B)False
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Chapter 19: Cost Concepts and Cost Allocation
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Sample Questions
Q1) 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
Q2) Both direct labor and indirect labor are recorded in the Work in Process Inventory account as the product is being manufactured.
A)True
B)False
Q3) In accounting for an immaterial amount of overapplied overhead, which of the following is part of the adjusting entry?
A) A debit to the Work in Process Inventory account
B) A debit to the Overhead account
C) A debit to the Cost of Goods Sold account
D) A credit to the Overhead account
Q4) Property taxes and equipment depreciation are examples of indirect manufacturing costs.
A)True B)False
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Chapter 20: Costing Systems: Job Order Costing
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Sample Questions
Q1) Under a job order costing system, the dollar amount of the entry involved in the transfer of goods from work in process to finished goods is the total of the costs charged to all jobs
A) started during the period.
B) completed and sold during the period.
C) completed during the period.
D) started and completed during the period.
Q2) The production process determines the product costing system needed. A)True
B)False
Q3) In a process costing system, product costs are traced to individual products. A)True
B)False
Q4) The typical product costing system in a factory incorporates parts of both job order costing and process costing to create a hybrid system. A)True
B)False
Q5) Explain the similarities and differences between job order costing and process costing. Focus on the characteristics of each type of system.
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Chapter 21: Costing Systems Process Costing
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Q1) Fantastic Fabricating uses the FIFO method in its process costing system. Beginning inventory in the mixing processing center consisted of 4,000 units, 75 percent complete with respect to conversion costs. Ending work in process inventory consisted of 3,000 units, 60 percent complete with respect to conversion costs. If 11,200 units were transferred to the next processing center during the period, the equivalent units for conversion costs would be
A) 12,400 units.
B) 10,000 units.
C) 11,200 units.
D) 12,200 units.
Q2) In a process costing system, the cost of ending work in process inventory for a period can be verified by reference to supporting analysis in A) materials requisitions and labor time tickets.
B) cost recap included in the statement of production.
C) cost recap included in the process cost report.
D) none of the above.
Q3) The cost of producing each gallon of paint differs.
A)True
B)False
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Page 23
Chapter 22: Activity-Based Systems-Abm and Lean
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Sample Questions
Q1) Activity-based management focuses on identifying product costs as either value-adding or nonvalue-adding activities.
A)True
B)False
Q2) A manufacturer of audio equipment employing an activity-based cost hierarchy uses the unit, batch, product, and facility levels to classify its activities. A batch-level activity is
A) testing products.
B) inspection.
C) implementation of engineering changes.
D) maintenance of the building.
Q3) Maintaining consistent high product quality
A) is both required for and a by-product of the just-in-time environment.
B) is difficult to obtain in a just-in-time environment because of the severe time constraints imposed by the just-in-time environment.
C) requires quality control inspectors at each step of the production process.
D) is too expensive to obtain in a just-in-time environment.
Q4) When using a just-in-time system, what qualities should be used to evaluate a supplier?
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Chapter 23: Cost Behavior Analysis
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Sample Questions
Q1) Field Legal Services is trying to determine the variable and fixed elements of its service overhead. The following data have been collected from recent activity: \(\begin{array}{lrr} & \begin{array}{r}
\text { Total Service } \\ \text { Overhead }
\end{array} & \text { Cases Worked } \\
\text { March } & \$ 22,900 & 112 \\
\text { April } & 20,800 & 98 \\
\text { May } & 26,400 & 138 \\ \hline
\end{array}\) The formula for total service overhead costs is
A) $5,600 + $140 per case.
B) $5,600 + $40 per case.
C) $7,823 + $134.62 per case.
D) $7,080 + $140 per case.
Q2) Telephone costs are an example of a mixed cost. A)True B)False
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Chapter 24: The Budgeting Process
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Sample Questions
Q1) 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
Q2) The short-term plan or budget involves every part of the enterprise and is much more detailed than the long-term plan.
A)True
B)False
Q3) Operating budgets are plans used in daily operations.
A)True
B)False
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Page 26
Chapter 25: Performance Management and Evaluation
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Q1) How effective a performance management and evaluation system is depends on how well the goals of the entire company are coordinated rather than on how well the goals of individual responsibility centers and managers are coordinated.
A)True
B)False
Q2) When developing performance measures, management must consider a number of different issues besides what to measure and how to measure.
A)True
B)False
Q3) An organization's four basic stakeholder groups include investors, employees, external business processes, and customers.
A)True
B)False
Q4) ROI is a performance measure mainly connected with a company's income statement.
A)True
B)False
Q5) Identify and describe the five different responsibility centers, and provide one example of each.
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Chapter 26: Standard Costing and Variance Analysis
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Q1) If actual capacity used exceeds expected capacity, the fixed overhead volume variance is favorable.
A)True
B)False
Q2) The total variable overhead variance is comprised of the
A) variable overhead efficiency and fixed variances.
B) fixed overhead budget and volume variances.
C) variable overhead spending and efficiency variances.
D) labor efficiency and rate variances.
Q3) Variance analysis involves computing the difference between standard and actual costs.
A)True
B)False
Q4) In a standard costing system, standard costs eventually flow into the
A) Cost of Goods Sold account.
B) Standard Cost account.
C) Selling and Administrative Expenses account.
D) Sales account.
Q5) Discuss the keys to preparing a performance report based on standard costs and related variances.
28
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Chapter 27: Short Run Decision Analysis
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Q1) Opportunity costs arise when the choice of one course of action eliminates the possibility of another course of action.
A)True
B)False
Q2) Which of the following statements about incremental analysis is false?
A) It is based on both historical and future information relevant to the decision at hand.
B) It focuses on the differences between alternatives.
C) It reduces the time taken to select the best course of action.
D) It makes the evaluation process easier for the decision maker.
Q3) 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?
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29
Chapter 28: Capital Investment Analysis
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Q1) Managers must be careful while making capital budgeting decisions so that the selected alternative will contribute the most to future profits.
A)True
B)False
Q2) Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of A) capital investment decisions.
B) incremental analysis. C) sales mix analysis.
D) direct costing decisions.
Q3) Simple interest is the interest earned on a principal sum that is increased at the end of each period by the interest for that period.
A)True
B)False
Q4) Discuss the qualitative factors that should be considered in the evaluation of proposals in addition to the quantitative factors.
Q5) Why is the book value of equipment irrelevant when considering the replacement of equipment?
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