Financial Accounting
Textbook Exam Questions
Course Introduction
Financial Accounting introduces students to the principles and practices of recording, classifying, and summarizing financial transactions for business entities. The course covers the preparation and analysis of key financial statements including the balance sheet, income statement, and cash flow statement while exploring foundational concepts such as accrual accounting, revenue recognition, and the accounting cycle. Emphasis is placed on understanding generally accepted accounting principles (GAAP), the role of ethics in accounting, and the use of financial information for internal and external decision making. By the end of the course, students will be equipped to interpret financial data and apply accounting techniques to real-world business scenarios.
Recommended Textbook
Horngrens Accounting Global Edition 10th Edition by Tracie L. Nobles
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Page 2
Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) Which of the following will be categorized as an operating activity on the statement of cash flows?
A) cash received by selling old equipment
B) cash paid for purchase of new machinery
C) cash paid for purchase of raw materials
D) cash received from issue of shares
Answer: C
Q2) Scott's Camera Shop started the year with total assets of $80,000 and total liabilities of $40,000. During the year, the business earned revenues of $120,000 and incurred expenses of $70,000. Scott made no additional capital contributions during the year, but did make withdrawals of $60,000. Calculate Scott's net income for the year.
A) $50,000
B) $120,000
C) $70,000
D) $80,000
Answer: A
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3
Chapter 2: Recording Business Transactions
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Sample Questions
Q1) A liability account is increased by a debit.
A)True
B)False
Answer: False
Q2) Accountants first record transactions in a:
A) chart of accounts.
B) trial balance.
C) journal.
D) ledger.
Answer: C
Q3) Which of the following accounts has a normal debit balance?
A) Revenue
B) Notes Payable
C) Cash
D) Accounts Payable
Answer: C
Q4) The Owner's Withdrawals account is increased by a debit.
A)True
B)False
Answer: True
Page 4
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) Revenue that has been earned but not yet collected in cash is called a(n):
A) accrued revenue.
B) prepaid expense.
C) unearned revenue.
D) accrued expense.
Answer: A
Q2) All of a company's accounts and their balances appear on the:
A) statement of retained earnings.
B) balance sheet.
C) adjusted trial balance.
D) income statement.
Answer: C
Q3) The accountant of Skyscrapers Architectural Services failed to make an adjusting entry to record $7,000 of depreciation expense. Which of the following statements is true?
A) The total liabilities will be overstated.
B) The equity will be understated.
C) The total assets will be overstated.
D) The total assets will be understated.
Answer: C
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) In an accounting cycle, which of the following steps takes place only at the end of the accounting period?
A) Start with the beginning account balances.
B) Journalize transactions that occur.
C) Analyze transactions as they occur.
D) Journalize adjusting entries.
Q2) Patents, copyrights, and trademarks are examples of:
A) short-term investments.
B) fixed assets.
C) long-term investments.
D) intangible assets.
Q3) As a part of the closing process, revenues and expenses are closed to a temporary account called the Net Income (loss) account.
A)True
B)False
Q4) The Salaries Payable account is a permanent account.
A)True
B)False
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6
Chapter 5: Merchandising Operations
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Sample Questions
Q1) Refer to the table above.Give the journal entry to close the Sales Revenue account.
Q2) A company using the perpetual inventory system purchased inventory worth $25,000 on account with terms of 2/10, n/30. Defective inventory of $2,000 was returned 2 days later and the accounts were appropriately adjusted. If the invoice is paid within 10 days, the amount of the purchase discount that would be available to the company is:
A) $460.
B) $540.
C) $500.
D) $490.
Q3) The main expense of a merchandiser is:
A) cost of goods sold.
B) current assets.
C) selling and administrative cost.
D) production overheads.
Q4) An amount that a merchandiser earns by selling its inventory is known as Sales Revenue or Sales.
A)True
B)False
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Chapter 6: Merchandise Inventory
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Sample Questions
Q1) The ending merchandise inventory for the current year is overstated by $20,000. What effect will this error have on the following year's Net Income?
A) Net income will be overstated by $40,000.
B) Net income will be overstated by $20,000.
C) Net income will be understated by $20,000.
D) Net income will be understated by $40,000.
Q2) The total cost spent on inventory that was available to be sold during a period is called cost of goods sold.
A)True
B)False
Q3) A high rate of inventory turnover indicates difficulty in selling inventory.
A)True
B)False
Q4) When a company uses the perpetual inventory method, which of the following would be the entry to adjust inventory to lower-of-cost-or-market?
A) Debit Purchases and credit Merchandise Inventory
B) Debit Inventory and credit Purchases
C) Debit Cost of Goods Sold and credit Merchandise Inventory
D) Debit Inventory and credit Cost of Goods Sold
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Chapter 7: Accounting Information Systems
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Sample Questions
Q1) While recording a transaction in the cash receipts journal, the Other Accounts CR column is used when a transaction involves a credit entry that is not listed in the headings (columns) of the cash receipts journal.
A)True
B)False
Q2) Which of the following accounting information system activities is completed when merchandise inventory is sold?
A) preparation and payment of payroll
B) processing of sales invoice
C) receipt of goods or services
D) payment for goods or services
Q3) When a sales journal is posted to the general ledger at the end of the month, the accountant totals the Accounts Receivable DR, Sales Revenue CR and Cost of Goods
Sold DR, Merchandise Inventory CR columns. This process is commonly called:
A) scalping.
B) ticking.
C) footing.
D) framing.
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9
Chapter 8: Internal Control and Cash
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Sample Questions
Q1) Cash is a highly liquid asset, but cash equivalents are not highly liquid assets.
A)True
B)False
Q2) The following information is needed to reconcile the cash balance for Fire Steel Inc.
A deposit of $5,800 is in transit.
Outstanding checks total $1,500.
The book balance is $6,800 at February 28, 2013.
The bookkeeper recorded a $1,740 check as $17,400 in payment of the current month's rent.
The bank balance at February 28, 2013 was $18,000.
A deposit of $400 was credited by the bank for $4,000.
A customer's check for $3,700 was returned for nonsufficient funds.
The bank service charge is $60.
What was the adjusted book balance?
A) $18,720
B) $18,060
C) $18,700
D) $18,820
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10
Chapter 9: Receivables
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Sample Questions
Q1) Which of the following describes the key significance of the acid-test ratio?
A) It measures a company's ability to pay its current liabilities if they are due immediately.
B) It measures the ability of the company to earn profits out of the sales made by it.
C) It reflects how much long-term debt a company has.
D) It indicates how much cash could be realized by selling the inventory.
Q2) Companies that follow GAAP are required to use the direct write-off method for uncollectible accounts receivable.
A)True
B)False
Q3) The allowance method violates the matching principle.
A)True
B)False
Q4) The accounts receivable turnover ratio indicates whether a company could pay all its current liabilities if they were become due immediately.
A)True
B)False
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11
Chapter 10: Plant Assets, Natural Resources, and Intangibles
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Sample Questions
Q1) The gain or loss on the sale of a plant asset is determined by comparing:
A) sale value and book value.
B) sale value and residual value.
C) sale value and original cost.
D) book value and residual value.
Q2) A lump-sum purchase or basket purchase involves paying a single price for several assets as a group.
A)True
B)False
Q3) An intangible asset is an asset with no physical form that is valuable because of the special rights it carries.
A)True
B)False
Q4) Which of the following categories of assets should be depreciated?
A) tangible property, plant and equipment, other than land
B) intangible property
C) land
D) natural resources
Q5) Give journal entry to record the acquisition of a plant asset for cash.
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Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) Federal income taxes are:
A) deducted to arrive at an employee's gross pay.
B) added to arrive at an employee's net pay.
C) deducted to arrive at an employee's net pay.
D) not borne by the employee.
Q2) Unearned revenues relating to a one-year service contract are current liabilities until they are earned.
A)True
B)False
Q3) Which of the following is included in the entry to record estimated warranty payable?
A) a credit to Estimated Warranty Payable
B) a credit to Merchandise Inventory
C) a credit to Warranty Expense
D) a debit to Estimated Warranty Payable
Q4) Which of the following is true of a contingent liability?
A) It is a potential liability that depends on a future event.
B) It is an actual liability that is difficult to estimate.
C) It is an actual liability that depends on a past event.
D) It is a liability resulting from a lawsuit settled in court.
Page 13
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Chapter 12: Partnerships
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Sample Questions
Q1) Aries and Eros start a partnership firm with capital contributions of $40,000 and $60,000, respectively. In course of the year, Aries withdraws $5,000 from the business in order to meet his personal expenses. Which of the following is the correct journal entry to record the above withdrawal?
A) \[\begin{array} { | c | r | r | }
\hline \text { Aries, Withdrawals } & 5,000 & \\
\hline \text { Cash } & & 5,000 \\
\hline
\end{array}\]
B) \[\begin{array} { | c | r | r | }
\hline \text { Aries, Withdrawals } & 5,000 & \\
\hline \text { Aries, Capital } & & 5,000 \\
\hline
\end{array}\]
C) No entry
D) \[\begin{array} { | c | r | r | }
\hline \text { Aries, Withdrawals } & 5,000 & \\
\hline \text { Eros, Capital } & & 5,000 \\
\hline
\end{array}\]
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Page 14
Chapter 13: Corporations
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Sample Questions
Q1) Stock dividends have no impact on the total amount of stockholders' equity.
A)True
B)False
Q2) The account to be debited when a stock dividend is declared and distributed on the same date would be:
A) Common Stock-Par Value.
B) Retained Earnings.
C) Cash.
D) Paid-In Capital in Excess of Par-Common.
Q3) Restrictions on retained earnings:
A) require adjusting journal entries.
B) are usually reported in the notes to the financial statements.
C) are reported on the income statement.
D) are designed to maximize dividends paid to shareholders.
Q4) A net loss for the year decreases the balance in Retained Earnings.
A)True
B)False
Q5) The declaration of a stock dividend creates a liability for the corporation.
A)True
B)False
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Chapter 14: Long-Term Liabilities
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Sample Questions
Q1) The Current Portion of Notes Payable would normally be shown on the balance sheet under current liabilities.
A)True
B)False
Q2) A bond is sold for an amount less than its face value. Which of the following statements is true?
A) The bond's stated rate is lower than the prevailing market rate at the time of sale.
B) The bond's stated rate is the same as the prevailing market rate at the time of sale.
C) The bond's stated rate is higher than the prevailing market rate at the time of sale.
D) The bond is not secured by specific assets of the issuer.
Q3) On April 1, 2015, Ardoos Products borrowed $100,000 on a 15%, 10-year note with annual installment payments of $10,000 plus interest due on April 1 of each succeeding year. Provide the first journal entry for the issuance of the note.
Q4) On January 1, 2013, Davie Services issued $20,000 of 8% bonds that mature in five years. They were issued at par. Provide the journal entry to issue bonds.
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Page 16
Chapter 15: Investments
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Sample Questions
Q1) When a company receives a cash dividend on its equity investments, which represents 2% of the investee, its total equity will remain unaffected.
A)True
B)False
Q2) Debra Technologies invested $50,000 to buy $50,000 face value, 8%, five-year in municipal bonds on January 2, 2010. The bonds will mature on January 2, 2015. The bonds pay interest semiannually on January 2 and July 2 every year till maturity. When the company receives interest payments, how will the balance sheet line items be affected?
A) Assets will decrease.
B) Total asset will remain unchanged.
C) Liabilities will decrease.
D) Equity will increase.
Q3) Which of the following is true of debt securities?
A) The payments made by debt securities are perpetual in nature.
B) Debt securities typically pay interest for a fixed period.
C) Debt securities include preferred stocks.
D) Debt securities represent ownership interests of the investors.
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Chapter 16: The Statement of Cash Flows
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Q1) Which of the following are the three major categories included on the statement of cash flows?
A) investing, operating and financing activities
B) investing, capital and financing activities
C) investing, operating and contracting activities
D) financial, operating and internal control activities
Q2) Which of the following sections from the statement of cash flows include borrowing money and paying off loans?
A) the investing section
B) the operating section
C) the financing section
D) the non-cash investing and financing section
Q3) Interest Expense paid on a Note Payable would be included in the operating activities section of the statement of cash flows.
A)True
B)False
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Chapter 17: Financial Statement Analysis
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Sample Questions
Q1) A quarterly report filed with the Securities and Exchange Commission is called a Form 10-K.
A)True
B)False
Q2) Which of the following best describes trend analysis?
A) calculating key ratios to evaluate performance
B) expressing each figure as a percentage of a budgeted figure
C) comparing a company's financial statements with that of other companies
D) expressing each year's figures as a percentage of the base year figures
Q3) Benchmarking is the practice of comparing a company with other leading companies.
A)True
B)False
Q4) An adverse opinion is issued if the auditor finds that the financial statements are not presented fairly.
A)True
B)False
Q5) The audit report is prepared by an internal auditor of a company.
A)True
B)False
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Chapter 18: Introduction to Managerial Accounting
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Sample Questions
Q1) Which of the following formulas represents cost of goods sold for a merchandising business?
A) Beginning Inventory - Ending Inventory = Cost of Goods Sold
B) Purchases and Freight In - Ending Inventory = Cost of Goods Sold
C) Ending Inventory + Purchases and Freight In - Beginning Inventory = Cost of Goods Sold
D) Beginning Inventory + Purchases and Freight In - Ending Inventory = Cost of Goods Sold
Q2) In a manufacturing firm, the salary of sales staff is an example of period cost.
A)True
B)False
Q3) Anything for which managers want a separate measurement of cost is called:
A) a responsibility center.
B) a cost object.
C) a profit object.
D) a conversion cost.
Q4) Repair and maintenance costs of vehicles used to deliver products to customers are product costs.
A)True
B)False
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Chapter 19: Job Order Costing
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Sample Questions
Q1) Happy Clicks Inc. uses a predetermined overhead allocation rate of $4.75 per machine hour. Actual overhead costs incurred during the year are as follows:
\[\begin{array} { | l | r | }
\hline \text { Indirect materials } & \$ 5,200 \\
\hline \text { Indirect labor } & \$ 3,750 \\
\hline \text { Plant depreciation } & \$ 4,800 \\
\hline \text { Plant utilities and insurance } & \$ 9,530 \\
\hline \text { ther plant overhead costs } & \$ 12,700 \\
\hline \text { Total machine hours used during the year } & 7,520 \text { hours } \\ \hline
\end{array}\] What is the amount of manufacturing overhead cost allocated to Work-in-Process Inventory during the year?
A) $35,980
B) $8,950
C) $27,030
D) $35,720
Q2) Broxsie Fabrication Company issued $60,000 of direct materials and $15,500 of indirect materials to production. Prepare the journal entry to record the transaction.
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Chapter 20: Process Costing
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Sample Questions
Q1) Delaware Company purchased raw materials worth $500 for cash. The journal entry to record this transaction will include:
A) a debit to Cash for $500 and a credit to Raw Materials Inventory for $500.
B) a debit to Accounts Payable for $500 and a credit to Raw Materials Inventory for $500.
C) a debit to Raw Materials Inventory for $500 and a credit to Accounts Payable for $500.
D) a debit to Raw Materials Inventory for $500 and credit to Cash for $500.
Q2) During August, the Filtering Department of Olive Company had beginning transferred in units of 200 with costs of $50,000. 500 units were started in production during the month. It had 100 units in ending Work-in-Process Inventory. Under the first-in, first-out (FIFO) method, current-period equivalent units of production for transferred in units in beginning Work-in-Process Inventory of the Filtering Department is:
A) 0 units.
B) 500 units.
C) 200 units.
D) 100 units.
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22
Chapter 21: Cost-Volume-Profit Analysis
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Sample Questions
Q1) Refer to the table above,Using variable costing, how much is the net operating income for April?
A) $6,900
B) $7,480
C) $7,125
D) $6,250
Q2) Venus Inc. has fixed costs of $300,000. Total costs, both fixed and variable, are $450,000 when 30,000 units are produced. Calculate the total costs if the volume increases to 60,000 units.
A) $750,000
B) $1,200,000
C) $600,000
D) $450,000
Q3) When the variable cost per unit decreases, the contribution margin on each unit sold also decreases.
A)True
B)False
Q4) Total fixed costs can change from one relevant range to another. A)True
B)False
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Chapter 22: Master Budgets
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Q1) Which of the following is an example of the planning function of a budget?
A) A budget demands integrated input from different business units and functions.
B) Employees are motivated to achieve the goals set by the budget.
C) Budget figures are used to evaluate the performance of managers.
D) The budget outlines a specific course of action for the coming period.
Q2) Which of the following is true of the sales budget?
A) It provides sales values that are used to prepare financial statements for external reporting purposes.
B) It captures the variable and fixed expenses of the business.
C) It is used in the production budget.
D) It shows the value of expected production in a period.
Q3) An operating budget is a short-term financial plan that coordinates activities to achieve short-term goals.
A)True
B)False
Q4) A goal of the budgeting process is to communicate a consistent set of plans throughout the company.
A)True
B)False
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) Which of the following does the efficiency variance measure?
A) the difference between the quantity used by the company and the quantity used by its competitors
B) the change in quantities used over time
C) the difference between actual and standard quantity used
D) how quickly materials are processed into finished goods
Q2) Which of the following is an example of a labor cost standard?
A) $40 per direct labor hour
B) 50 square feet per unit
C) $0.95 per square foot
D) 0.5 direct labor hours per unit
Q3) Which of the following variances considers only the cost variance to be included in the calculation of the total production cost flexible budget variance?
A) total fixed overhead variance
B) total variable overhead variance
C) total direct materials variance
D) total direct labor variance
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Chapter 24: Cost Allocation and Responsibility Accounting
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Q1) The predetermined overhead allocation rate is an estimated overhead cost per unit of the allocation base and is calculated at the beginning of the accounting period.
A)True
B)False
Q2) Centralized operations are better for small companies due to the smaller scope of their operations.
A)True
B)False
Q3) Which of the following statements is true of performance reporting?
A) Responsibility reports should focus on the person responsible for unfavorable variances, rather than information.
B) Managers should not be held accountable for uncontrollable variances.
C) Only unfavorable variances should be explained in the reports.
D) Every variance, regardless of magnitude, must be investigated by the managers.
Q4) Companies evaluate investment centers using the same measures as the profit centers.
A)True
B)False
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Chapter 25: Short-Term Business Decisions
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Q1) A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month. Assume the company could eliminate all fixed costs by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. How will it affect monthly operating income, if the company outsources?
A) Operating income will go up by $2,300.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will go up by $4,800.
Q2) Which of the following statements is true?
A) Companies are price-takers when their products are unique.
B) Companies are price-setters for a product when there is intense competition.
C) Companies are price-takers for a product when pricing approach emphasizes cost-plus pricing.
D) Companies are price-takers when they have little or no control over the prices of their products or services.
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Chapter 26: Capital Investment Decisions
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Q1) The fact that invested cash earns income over time is called the time value of money.
A)True
B)False
Q2) The payback period and accounting rate of return (ARR) methods are suitable to investments with a short time span.
A)True
B)False
Q3) Which of the following is a capital budgeting method?
A) return on assets
B) net present value
C) inventory turnover
D) return on equity
Q4) Capital budgeting is:
A) the process of planning the investment in long-term assets.
B) preparing the budget for operating expenses.
C) the process of evaluating the profitability of a business.
D) the process of making pricing decisions for products.
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