Course Introduction
Financial Accounting
Test Questions
Financial Accounting introduces students to the fundamental principles and practices of accounting as applied to business organizations. The course explores the processes of recording, summarizing, and reporting financial transactions, emphasizing the preparation and interpretation of key financial statements such as the balance sheet, income statement, and cash flow statement. Topics include the accounting cycle, the use of generally accepted accounting principles (GAAP), and the analysis of financial information for decision-making purposes. This course provides a foundational understanding essential for careers in business, finance, and accounting.
Recommended Textbook
Intermediate Accounting Reporting and Analysis 1st Edition by James M. Wahlen
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Page 2
Chapter 1: The Demand for and Supply of Financial
Accounting Information
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Sample Questions
Q1) The convergence project between the IASB and GAAP was initiated in 2002 when the two boards entered into the "Northward Agreement".
A)True
B)False
Answer: False
Q2) Information asymmetry problems arise because management's behavior
A) may be to enhance the owners' financial interests at the expense of their self-interests
B) will always follow classic agency law
C) may not always be in the best interests of the owners (stockholders)
D) as agents will always be in the best interests of the owners (stockholders)
Answer: C
Q3) The codification was established to assist in reducing the time necessary to research an accounting issue and improve the ability to utilize accounting information to conform to GAAP.
A)True
B)False
Answer: True
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Chapter 2: Financial Reporting: Its Conceptual Framework
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Q1) What is the goal of FASB and IASB in the creation of the conceptual framework?
A) To develop standards that are internally consistent.
B) To develop standards that are internationally converged.
C) To develop standards that lead to financial reporting that provides clear consistent information to capital providers.
D) All of these choices
Answer: D
Q2) What is the ultimate objective of accounting information?
A) faithful representation
B) decision usefulness
C) relevance
D) predictive value
Answer: B
Q3) Which fundamental characteristic is an ingredient of faithful representation?
A) predictive value
B) confirmatory value
C) timeliness
D) neutrality
Answer: D
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Page 4
Chapter 3: Review of a Companys Accounting System
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Sample Questions
Q1) The basic purpose of a trial balance is to
A) list all of the accounts in the general ledger
B) list all of the accounts in the general ledger that have a balance
C) be sure that all journal entries have been recorded
D) verify that the total credits equal the total debits
Answer: D
Q2) If the trial balance does not balance and the difference between debits and credits is evenly divisible by 9, there is a good chance that
A) a transaction has not been recorded
B) a transaction has been journalized to the wrong account
C) a transposition or slide has occurred
D) only one side of the transaction has been recorded
Answer: C
Q3) What is the purpose of the worksheet?
Answer: The worksheet is an internal document used to prevent errors and assist in preparing the financial statements. It often helps simplify the journalizing of adjusting entries.
Q4) ........
Answer: ........
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Chapter 4: The Balance Sheet and the Statement of
Shareholders Equity
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Sample Questions
Q1) In order for an external user of a company's financial statements to fully understand the in workings of the company, their accounting policies, practices, and methods must be disclosed. The disclosure of revenue recognition and asset allocations is important. When is it particularly important for this information to be disclosed?
Q2) Intercompany comparison is used to evaluate a company's performance against key competitors within related industries or fields.
A)True
B)False
Q3) Derivative financial instruments must be reported as either assets or liabilities on the balance sheet and be measured at their net realizable value.
A)True
B)False
Q4) Which is classified as a long-term investment?
A) bond premium
B) cash surrender value of life insurance
C) operating lease
D) three-year prepaid rental
Q5) What are the three categories of intangible assets?
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Chapter 5: The Income Statement and the Statement of Cash Flows
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Sample Questions
Q1) Which of the following is not used as a caption if there is nothing to report?
A) income from continuing operations
B) extraordinary items
C) interest expense
D) income taxes
Q2) Companies with lower coverage ratios have a greater risk and a lower financial flexibility.
A)True
B)False
Q3) What criteria must be met in order for a company to classify a component as held for sale?
Q4) Comprehensive income is an important concept in accounting because it represents
A) all changes in equity
B) changes in equity from nonowner sources
C) changes in liabilities minus assets
D) the impact on equity of all transactions
Q5) Gains or losses associated with derivative financial instruments would be included in income from continuing operations.
A)True B)False Page 7
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Page 8
Chapter 6: Cash and Receivables
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Sample Questions
Q1) Compensating balance agreements that do not legally restrict the amount of funds shown on the balance sheet should be reported in the
A) current asset section
B) long-term investment section
C) other asset section
D) notes of the financial statements
Q2) Prior to the adjusting entry for bad debt expense, Blueberry, Inc.'s balances for Accounts Receivable and Allowances for Doubtful Accounts were $750,000 (debit) and $5,500 (credit), respectively. After the bad debt expense entry was posted, the net realizable value of accounts receivable was $675,000. Bad debt expense for the year A) cannot be determined from the information given
B) was $69,500
C) was $75,000
D) was $80,500
Q3) Which is not a key element of internal control over cash receipts?
A) daily recording of all cash receipts in the accounting records
B) daily entry in a voucher register
C) immediate counting by the person opening the mail or using the cash register
D) daily bank deposits
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Page 9
Chapter 7: Inventories: Cost Measurement and Flow
Assumptions
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Sample Questions
Q1) Because the specific identification method seems simple and matches actual costs against revenues, it may appear to be the ideal cost flow assumption to be used in any situation.
Required:
Indicate whether a periodic or perpetual inventory system is more appropriate for this cost flow assumption, indicate when its use is practical, and discuss the practical and theoretical objections to its use.
Q2) Refer to Exhibit 7-5. The ending inventory at December 31, 2015, using the dollar-value LIFO method would be
A) $422,000
B) $402,000
C) $426,000
D) $420,400
Q3) Which one of the following types of costs should be included in the cost of a manufactured inventory?
A) abnormal spoilage
B) production supervisory salaries
C) interest costs
D) selling costs
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Chapter 8: Inventories: Special Valuation Issues
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Sample Questions
Q1) Refer to Exhibit 8-1. The floor constraint of this unit must be
A) $41.90
B) $38.00
C) $41.70
D) $38.10
Q2) Given the following information for Bonnie Bunny Company: \(\begin{array}{ll}
\$ 650 & \text { Freight-in } \\
12,550 & \text { Purchases } \\
300 & \text { Sales returns } \\
1,950 & \text { Beginning inventory } \\
23,450 & \text { Sales } \\
45 \% & \text { Gross profit on sales } \end{array}\)
Calculate ending inventory of Bonnie Bunny using the gross profit method.
A) $1,360
B) $1,075
C) $4,597
D) $2,253
Q3) What is dollar value LIFO retail method?
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Chapter 9: Current Liabilities and Contingencies
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Q1) Which of the following statements is false?
A) A dividend payable in shares of the issuing company's stock is not reported as a current liability.
B) Interest and dividends accrue as a liability as time passes.
C) The declaration of a dividend may not result in a current liability.
D) Undeclared dividends in arrears on cumulative preferred stock are not recognized as a liability.
Q2) The ability to refinance on a long term basis can be demonstrated if the company has already refinanced the obligations after the date of the balance sheet but before it is issued.
A)True
B)False
Q3) Management of current liabilities arises, in part, because of a concern over A) profitability
B) liquidity
C) timeliness
D) materiality
Q4) Explain the deficiencies in accounting for warranty costs under the modified cash basis.
Q5) List and describe the three characteristics of a liability.
Page 12
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Chapter 10: Property, Plant, and Equipment: Acquisition and
Subsequent Investments
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Sample Questions
Q1) Camp, Inc. exchanged a truck that cost $30,000 (now 50% depreciated) for equipment with an appraised value of $25,000. Camp paid boot of $6,000. Camp should record the equipment at
A) $25,000
B) $30,000
C) $21,000
D) $31,000
Q2) During 2014, Red Company acquired a new piece of equipment for its manufacturing process. In order to purchase the equipment, Red made a down payment of $50,000 and issued a $200,000 five-year, 7% note. The annual payment of principal and interest was to be $48,778. The market rate of interest for obligations of this kind is 12%. The present value factor for an ordinary annuity of 5 years at 12% is 3.604776.
Required:
a.Prepare the journal entry to record the acquisition.
b.Assume that the equipment had an established cash price of $220,000. Prepare the journal entry to record the transaction under this additional assumption.
Q3) Why is it important to allocate a lump-sum purchase amount among the individual assets acquired?
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
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Q1) Companies can apply composite depreciation to a grouping of dissimilar assets. What procedures must be followed?
Q2) Which one of the following statements is not true regarding depreciation?
A) It is a systematic, rational method of allocating the cost of an asset over its useful life.
B) It attempts to match the costs of acquiring an asset to the benefits to be derived from the asset.
C) It does not attempt to measure the value of the asset.
D) It provides funds for the replacement of the asset through tax savings over the asset's life.
Q3) Which of the following is not a factor in computing depreciation for a period?
A) method of cost allocation
B) service life
C) present value
D) residual value
Q4) ....
Q5) List the time based allocation methods of cost allocation, provide a brief explanation of each.
Q6) ......
Page 14
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Chapter 12: Intangibles
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Q1) Which of the following groups would be classified as intangible assets for financial accounting and reporting purposes?
A) long-term notes receivable, copyrights, goodwill, and trademarks
B) patents, computer software costs, franchises, copyrights, goodwill and trademarks
C) computer software costs, research and development costs for internally developed patents, patents, and goodwill
D) organization costs, goodwill, costs of employee training programs, and trademarks
Q2) Which of the following statements regarding goodwill is false?
A) Goodwill is never amortized for financial reporting purposes.
B) A company must review its goodwill for impairment annually.
C) A company must review its goodwill for impairment whenever events or changes in circumstances occur that would more likely than not reduce the fair value below its carrying value.
D) A company records goodwill at the time that it acquires another company or at the time it determines that material intellectual capital exists in its employees.
Q3) List 3 activities that can be included in R&D.
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Chapter 13: Investments and Long-Term Receivables
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Q1) When bonds are purchased between interest dates, the accrued interest should be
A) debited to Interest Receivable
B) debited to Interest Income
C) debited to Investment in Bonds
D) either a or b
Q2) The entry to record a sale of trading securities for $65,000 on January 3, 2018, that were purchased for $52,000 on November 21, 2017, and had a fair value on December 31, 2017, of $57,000 would include a
A) credit to Unrealized Holding Gain/Loss-Trading Securities of $8,000
B) debit to Unrealized Holding Gain/Loss-Trading Securities of $5,000
C) debit to Investment in Trading Securities of $5,000
D) credit to Gain on Sale of Trading Securities of $8,000
Q3) An investment of 20% or more in the outstanding common stock of the investee leads to the presumption of significant influence and the use of the consolidation method.
A)True
B)False
Q4) What three steps are necessary to evaluate whether or not an investment is impaired?
Q5) List 3 investments in debt securities and 3 investments in equity securities.
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Chapter 14: Financing Liabilities: Bonds and Notes Payable
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Sample Questions
Q1) Cat's Eye, Inc. owes Brusters, Inc. $45,000 on a note payable, plus $3,250 interest. Bruster's agrees to accept 1,000 shares of Cat's Eye common stock in full settlement of the debt. The stock has a par value of $5 per share and a current market value of $45 a share.
Required:
Record this debt restructuring on the books of Cat's Eye.
Q2) On January 1, 2013, the Keller Co. issued $140,000 of 20-year 8% bonds for $172,000. Interest was payable annually. The effective yield was 6%. The effective interest method was used to amortize the premium. What amount of premium would be amortized for the year ended December 31, 2013?
A) $ 827.20
B) $1,804.80
C) $ 880.00
D) $ 453.20
Q3) Which of the following is always equal to the face rate of interest?
A) effective rate
B) yield rate
C) market rate
D) nominal rate
Q4) .......
Page 17
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Chapter 15: Contributed Capital
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Sample
Questions
Q1) What variables must be considered when a corporation uses the option pricing model?
Q2) Under the par value method of accounting for treasury stock, the treasury stock is reported on the balance sheet as a deduction from
A) the sum of contributed capital, other comprehensive income, and retained earnings
B) retained earnings
C) capital stock
D) contributed capital
Q3) Companies can reacquire their own stock to reduce the likelihood of a hostile takeover.
A)True
B)False
Q4) Dividends in arrears pertain to
A) non cumulative preferred stock
B) non-participating preferred stock
C) cumulative preferred stock
D) convertible preferred stock
Q5) What is a stock subscription?
Q6) What rights is a shareholder of capital stock entitled?
Page 18
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Chapter 16: Retained Earnings and Earnings Per Share
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Q1) Other Comprehensive Income or loss might include what four items?
Q2) Common shares outstanding are increased as a result of a stock dividend or stock split. For purposes of calculating the earnings per share, when is the stock dividend or stock split considered to have occurred?
A) at the beginning of the earliest comparative period for which earnings per share information is presented
B) at the end of the earliest comparative period for which earnings per share information is presented
C) at the beginning of the year declared
D) as of the date of declaration
Q3) When a property dividend is declared, fair value is determined on the ex-dividend date.
A)True
B)False
Q4) ......
Q5) When computing diluted earnings per share, a company may use the if converted method and the treasury stock method.
Required:
Describe when and why a company would use each method.
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Chapter 17: Advanced Issues in Revenue Recognition
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Sample Questions
Q1) On April 15, 2014 Pandora shipped 15 various pieces of furniture to By Design Company for a total of $12,500 plus shipping of $50 a piece. The furniture had a cost of 5 pieces for $500 each and 10 pieces for $1,000 each. Payment was required at year end for any furniture sold. On December 31, 2014, the consignee reported that it sold all 5 of the $500 pieces for $1,250 each and 5 of the $1,000 pieces for $1,850 each. The consignee paid Pandora under the agreement less a 10% commission fee and advertising costs of $1,500.
Required:
1) Prepare the 2014 journal entries for By Design.
2) Prepare the 2014 journal entries for Pandora.
Q2) You are conducting a seminar for health spa accountants on how to determine net income for long-term service contracts using the proportional performance method.
Required:
a.Describe the different ways revenue can be recognized on long-term service contracts using proportional performance.
b.Discuss how the different types of long-term service contract costs are recognized as expenses.
Q3) What three factors decide when to recognize revenue?
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20
Chapter 18: Accounting for Income Taxes
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Q1) In 2014, its first year of operations, Wilber Company reported pretax accounting income of $60,000. Included in the $60,000 was an expense for accrued, unpaid warranty costs of $8,000, which are not deductible until paid for income tax purposes. Wilber's income tax rate was 20%. The entry to record the income tax expense would include a
A) credit to Income Tax Expense for $12,000
B) credit to Income Taxes Payable for $12,000
C) credit to Deferred Tax Liability for $1,600
D) debit to Deferred Tax Asset for $1,600
Q2) Intraperiod tax allocation would be appropriate for
A) an extraordinary gain
B) a loss from operations of a discontinued segment
C) retrospective adjustments
D) all of these
Q3) When Congress changes the tax laws or rates, a corporation's deferred tax liability and asset accounts
A) are not adjusted
B) are adjusted as of the end of the year in which the change occurred
C) are adjusted as of the beginning of the year in which the change occurred
D) are adjusted using the average of the old and new tax rates
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Chapter 19: Accounting for Postretirement Benefits
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Q1) The IASB amendment was to remove the smoothing of devices in pension accounting, which companies will have to recognize all changes in their projected benefit obligation and plan assets in the current period. These changes will be recorded in pension expense or other comprehensive income. With this change pension expense will have two components what are they and provide a brief explanation of both?
Q2) In 2014, the Ballaster Company decided to amend its defined benefit pension plan. The amendment gave 7 employees the right to receive future benefits based upon their prior service. Ballaster's actuary determined that the prior service cost for this amendment amounts to $550,000. One employee will retire in 1 year, 2 expect to retire in 2 years, 1 in three years, 1 in 4 years, and 2 in five years. Required:
Using the straight line method compute the following:
1) the remaining service life (round to 5 decimals) 2) prepare an amortization schedule to amortize the prior service cost
Q3) Under contributory plans the employees bear the majority of the costs of the plan and contribute towards the plan with deductions from their salaries.
A)True B)False
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Chapter 20: Accounting for Leases
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Q1) Because the risks and benefits of ownership transfer to the lessor with a capital lease, the executed costs incurred do not get included when determining the present value of the minimum lease payments.
A)True
B)False
Q2) A six-year operating lease requires annual rent payments of $15,000 for years 1, 2, and 3, and annual rent payments of $10,000 for years 4, 5, and 6. The agreement also requires the lessor to pay a $2,800 annual insurance premium for the leased property. Which of the following amounts should be recognized as the rental revenue in year 1 by the lessor?
A) $10,000
B) $13,500
C) $15,000
D) $16,800
Q3) A capital lease is a lease where by risks and benefits of ownership is in economic substance a purchase by the lessee and a sale or financing arrangement by the lessor.
A)True
B)False
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Chapter 21: The Statement of Cash Flows
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Q1) Refer to Exhibit 21-1. What is Raymond's net cash provided by operating activities?
A) $11,540
B) $12,210
C) $12,860
D) $14,800
Q2) According to current GAAP, cash flow per share statistics
A) should be disclosed only if EPS information is disclosed
B) should not be disclosed
C) should not be disclosed if EPS information is disclosed
D) should be disclosed in all situations
Q3) Current GAAP permits two methods of calculating and reporting a company's net cash flow from operating activities on its statement of cash flows.
Required:
Identify the two methods. Which method does the FASB prefer? Which method do most companies use and why?
Q4) According to GAAP, what must a company's statement of cash flows show?
Q5) What working paper information does a company need for its statement of cash flows under the direct method?
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Chapter 22: Accounting for Changes and Errors
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Q1) According to GAAP how should items be reported in order that information is reported in a relevant manner?
Q2) What is a change in reporting entity and how is an adjustment handled?
Q3) On December 31, 2014, the Maggie Company recognized $15,000 in revenue from rent of $5,000 due in 2015 and $10,000 due in 2016, all collected in advance from another company. Ignoring income taxes, if this error is not detected
A) Retained Earnings at December 31, 2015, will be overstated by $10,000
B) Retained Earnings at December 31, 2015, will be understated by $10,000
C) Retained Earnings will be overstated by $15,000 until the error is discovered
D) Retained Earnings at December 31, 2015, will be understated by $15,000
Q4) A counterbalancing error will automatically correct itself in the next accounting period even if it is never discovered.
A)True
B)False
Q5) A change in accounting estimate does not result in a retrospective adjustment to previously issued financial statements.
A)True B)False
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Chapter 23: Time Value of Money Module
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Q1) Parker Posie wants to determine how much she must deposit today at 14% interest to provide four withdrawals of $26,000 at the end of each year, beginning five years from now. This is an example of the present value of
A) an ordinary annuity
B) an annuity due
C) a single sum
D) a deferred ordinary annuity
Q2) On July 7, 2014, Lawrence Company sold some machinery to Johnson Construction Company. The sales contract requires Johnson to pay five equal annual payments of $75,000 each, beginning on July 7, 2014. What present value concept is appropriate for this situation?
A) present value of an annuity due of $1 for five periods
B) present value of an ordinary annuity of $1 for five periods
C) future value of an annuity of $1 for five periods
D) future value of $1 for five periods
Q3) The present values of ordinary annuities, annuities due, and deferred annuities were discussed in the textbook. Discuss the ways these three annuities are similar and dissimilar.
Q4) In what situations would a company use present or future value?
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