Financial Accounting
Textbook Exam Questions
Course Introduction
Financial Accounting introduces students to the principles, concepts, and procedures involved in recording, summarizing, and reporting financial transactions of a business. The course covers the preparation and interpretation of key financial statements such as the balance sheet, income statement, and cash flow statement, emphasizing the role of accounting in decision-making for internal and external stakeholders. Students will learn about the accounting cycle, the use of accounting information in evaluating organizational performance, and the regulatory framework governing financial reporting, ensuring a strong foundation in both theory and practical application of accounting standards.
Recommended Textbook
Horngrens Financial and Managerial Accounting 6th Edition by Tracie L. Nobles
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Chapter 1: Accounting and the Business Environment
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Q1) The income statement provides information about profitability for a particular period for the company.
A)True
B)False
Answer: True
Q2) In a limited-liability company (LLC),the members are personally liable for the debts of the business.
A)True
B)False
Answer: False
Q3) A corporation purchased office supplies on account.As a result of this transaction,expenses and liabilities will increase.
A)True
B)False Answer: False
Q4) To be useful,accounting must be relevant and have faithful representation.
A)True
B)False Answer: True
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Chapter 2: Recording Business Transactions
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Q1) Which of the following is a source document that provides the evidence and data for accounting transactions?
A)Journal
B)Sales invoice
C)Ledger
D)Trial balance
Answer: B
Q2) The balances in the liability and revenue accounts are increased with a credit.
A)True
B)False
Answer: True
Q3) Which of the following sequences states the order in which accounts are listed on a trial balance?
A)Equity Assets Liabilities
B)Liabilities Assets Equity
C)Assets Equity Liabilities
D)Assets Liabilities Equity
Answer: D
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Chapter 3: The Adjusting Process
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Q1) Aquatic Supplies,Inc.purchased $2,000 of supplies on account.Under the accrual basis of accounting,no entry is made until the amount is paid.
A)True
B)False
Answer: False
Q2) The asset account,Office Supplies had a beginning balance of $5,300.During the accounting period,office supplies were purchased,on account,for $5,500.A physical count,on the last day of the accounting period,shows $2,800 of office supplies on hand.What is the amount of Supplies Expense for the accounting period?
A)$5,500
B)$2,600
C)$8,000
D)$2,500
Answer: C
Q3) Contra asset accounts,such as Accumulated Depreciation,always have normal debit balances.
A)True
B)False
Answer: False
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Chapter 4: Completing the Accounting Cycle
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Q1) The operating cycle is the time span required for a business to repay its long-term liabilities.
A)True
B)False
Q2) Only temporary accounts appear on the post-closing trial balance.
A)True
B)False
Q3) The worksheet helps accountants to ________.
A)prepare the trial balance
B)prepare the financial statements
C)prepare the unadjusted trial balance
D)maintain books of accounts without a journal
Q4) List the steps of the accounting cycle that take place during the period.
Q5) Reversing entries are used in conjunction with ________.
A)accrual-type adjustments
B)deferred revenues
C)deferred expenses
D)Unearned Revenue and Prepaid Rent
Q6) List the steps of the accounting cycle that take place at the end of the period.
Q7) Why are temporary accounts not included in the post-closing trial balance?
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Chapter 5: Merchandising Operations
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Q1) Which of the following is the correct order of subtotals that appear on a multi-step income statement?
A)Operating income,Gross profit,Net income
B)Gross profit,Net sales revenue,Net income
C)Net income,Operating income,Net income
D)Gross profit,Operating income,Net income
Q2) On a multi-step income statement,Sales Discounts Forfeited is reported as part of operating income.
A)True
B)False
Q3) Gross profit is the excess of cost of goods sold over net sales revenue.
A)True
B)False
Q4) List four items from an invoice that are needed to record a purchase of merchandise inventory.
Q5) The perpetual inventory system keeps a running computerized record of inventory and cost of goods sold.
A)True
B)False
Q6) What does the gross profit percentage measure? How is it computed?
Page 7
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Chapter 6: Merchandise Inventory
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Q1) Under the last-in,first-out (LIFO)method,the cost of goods sold is based on the oldest purchases.
A)True
B)False
Q2) Which of the following values is considered the market value when valuing inventory at lower-of-cost-or-market under U.S.GAAP?
A)sales price less the company's normal mark-up percentage
B)current replacement cost
C)cost plus the company's normal mark-up percentage
D)historic cost
Q3) James Sales sold 450 units of product to a customer on account.The company uses the perpetual inventory system and the FIFO inventory costing method.The selling price was $28 per unit,and the cost,according to the company's inventory records,was $12 per unit.Prepare the journal entries to record the sale.Omit explanations.
Q4) Companies often disclose that the LCM rule is followed in notes to their financial statements.
A)True
B)False
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Chapter 7: Internal Control and Cash
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Q1) The controller at Business Services Consulting needs new computers for the accounting department.However,there are no guidelines specifying whether the controller can approve purchases of office equipment.Which internal control procedure needs strengthening?
A)assignment of responsibilities
B)competent,reliable,and ethical personnel
C)separation of duties
D)documents
Q2) The security measures are the same for any type of cash receipts.
A)True
B)False
Q3) As proof of the deposit transaction,a customer receives a canceled check from the bank.
A)True
B)False
Q4) A signature card is a card that shows each authorized person's signature for a bank account.
A)True
B)False
Q5) Define internal control.
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Chapter 8: Receivables
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Sample Questions
Q1) On August 14,Second Street Bank lent $210,000 to City Restaurant on a 75 day,4% note.What is the maturity date of the note?
A)Oct.27
B)Oct.28
C)Oct.29
D)Oct.30
Q2) On December 1,2018,Atlas,Inc.sold machinery to a customer for $24,000.The customer could not pay at the time of sale but agreed to pay 10 months later and signed a 10-month note at 12% interest.How much interest revenue was earned during 2019? (Round any intermediate calculations to two decimal places,and your final answer to the nearest dollar. )
A)$1,440
B)$2,880
C)$2,640
D)$2,160
Q3) After a company has written off an account,the company continues to attempt to collect on the receivable.
A)True
B)False
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Chapter 9: Plant Assets, natural Resources, and Intangibles
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Q1) Geller Electronics paid $200,000 to acquire Tabletz,Inc. ,an electronic gadget-advertising website.At the time of the acquisition,Tabletz's balance sheet reported total assets of $200,000 and liabilities of $100,000.The fair market value of Tabletz's assets was $200,000.The fair market value of its liabilities was $100,000.Journalize the acquisition of Tabletz in the books of Geller Electronics.Omit explanation.
Q2) The cost of a building depends on whether the company is constructing the building or is acquiring an existing one.
A)True
B)False
Q3) Impairment of an intangible asset occurs when the book value of an asset is less than the fair value.
A)True
B)False
Q4) Which of the following costs related to a business car would be capitalized?
A)the cost to install an engine with higher horsepower
B)the cost to change the oil
C)the cost to replace a broken windshield
D)the cost of new tires
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Chapter 10: Investments
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Q1) Trading debt investments are categorized as noncurrent assets.
A)True
B)False
Q2) When a trading debt security is disposed of,the amount of gain or loss is calculated as the difference between the cash received and the cost of the debt security disposed of.
A)True
B)False
Q3) Controlling interest equity investments are debt securities in which the investor owns more than 50% of the investee's voting stock.
A)True
B)False
Q4) The Loss on Disposal of Equity Investments is reported in the ________.
A)other income and (expenses)section of the income statement
B)stockholders' equity section of the income statement
C)stockholders' equity section of the balance sheet
D)losses section of the statement of retained earnings
Q5) List and discuss two common reasons why companies invest in debt or equity securities.
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Chapter 11: Current Liabilities and Payroll
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Q1) Maywood,Inc.withholds $720 from Steve's paycheck for federal income tax.This amount is part of the company's payroll tax expense.
A)True
B)False
Q2) Which of the following statements about the times-interest-earned ratio is true?
A)A lower ratio indicates a higher debt paying ability.
B)Debt reduction leads to an increase in interest expense.
C)The times-interest-earned ratio is also called the interest-coverage ratio.
D)The times-interest-earned ratio is calculated by dividing gross income by interest expense.
Q3) Tony's gross pay for the month is $2700.Tony's deduction for federal income tax is based on a rate of 21%.Tom has no voluntary deductions.Tony's year-to-date pay is under the limit for OASDI.What is the amount of FICA tax withheld from Tony's pay? (Assume a FICA-OASDI Tax of 6.2% and FICA-Medicare Tax of 1.45%.Do not round any intermediate calculations,and round your final answer to the nearest cent. )
A)$773.55
B)$206.55
C)$567.00
D)$387.45
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Chapter 12: Long-Term Liabilities
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Q1) Financial leverage occurs when a company earns less income on borrowed money than the related interest expense.
A)True
B)False
Q2) Bonds are short-term debt issued to multiple lenders called bondholders,usually in increments of $1,000 per bond.
A)True
B)False
Q3) On December 1,2018,Garden Products borrowed $92,000 on a 5%,10-year note with annual installment payments of $9200 plus interest due on December 1 of each subsequent year.Which of the following describes the first installment payment made on December 1,2019? (Round your answer to the nearest whole number. )
A)$9200 principal plus $4600 interest
B)$9200 principal plus $460 interest
C)$9200 principal plus $9200 interest
D)$4600 interest only
Q4) Define financial leverage and discuss how it is used to increase earnings per share.
Q5) When computing the present value of a bond,which interest rate is used? Why?
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Chapter 13: Stockholders Equity
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Q1) Charger Corporation currently has 120,000 shares outstanding of $1 par value common stock.The stock was originally issued for $12 per share.On March 15,the board of directors declares and distributes a 10% stock dividend when the stock is selling for $16 per share.Prepare the journal entry to record the stock dividend.Omit explanation.
Q2) O'Malley,Inc.issued 60,000 shares of common stock in exchange for manufacturing equipment.The equipment has a fair value of $1,420,000.The stock has a par value of $0.05 per share.The journal entry to record this transaction includes a ________.
A)debit to Cash for $14,170,000
B)credit to Gain on Sale of Common Stock for $1,480,000
C)credit to Paid-In Capital in Excess of Par-Common for $1,417,000
D)credit to Common Stock-$0.05 Par Value for $1,420,000
Q3) Double taxation occurs when corporations make dividend payments to stockholders.
A)True
B)False
Q4) A small stock dividend,a large stock dividend and a stock split have no effect on total assets.
A)True
B)False
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Chapter 14: The Statement of Cash Flows
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Q1) New York Production Company uses the indirect method to prepare its statement of cash flows.The Treasury Stock account had a debit balance of $11,000 at the beginning of the year and a debit balance of $16,000 at the end of the year.No treasury stock was sold during the year.The financing section of the statement of cash flows will show a positive cash flow of $5,000 for the buyback of treasury stock.
A)True
B)False
Q2) The ________ section of the statement of cash flows includes increases and decreases in long-term assets.
A)investing activities
B)financing activities
C)operating activities
D)non-cash operating activities
Q3) Using the direct method,interest expense paid on a note payable is included in the operating activities section of the statement of cash flows.
A)True
B)False
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Chapter 15: Financial Statement Analysis
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Q1) Dollar value bias is the bias one sees from comparing numbers in relative (dollars)rather than absolute (percentage)terms.
A)True
B)False
Q2) Ratio analysis is used most effectively to measure a company against other companies in different industries.
A)True B)False
Q3) A vertical analysis percent is computed by dividing the base amount by the specific item and then multiplying by 100.
A)True
B)False
Q4) Horizontal analysis compares each item in the income statement to the net sales amount.
A)True B)False
Q5) The debt ratio is the ratio of total debt divided by total equity. A)True B)False
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Chapter 16: Introduction to Managerial Accounting
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Q1) ________ is a philosophy of continuous improvement of products and processes.
A)Just-in-Time (JIT)Management
B)Enterprise Resource Planning (ERP)
C)Supply Chain Management (SCM)
D)Total Quality Management (TQM)
Q2) Which of the following is true of service companies?
A)All costs of service companies are product costs.
B)Service companies modify and resell products they buy from manufacturers.
C)Revenues of service companies are only recorded on cash receipt.
D)Service companies carry no inventories of products for sale.
Q3) How does a manufacturing company calculate unit product cost? Why do managers need to know the unit product cost?
Q4) The managerial role that involves the day-to-day running of the business is the ________.
A)directing function
B)planning function
C)controlling function
D)strategic planning function
Q5) How does a service company calculate unit cost per service? Why do managers need to know the unit cost per service?
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Chapter 17: Job Order Costing
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Q1) Dezire Travel Services provided the following information: Direct labor rate: $86 per hour
Predetermined allocation rate for indirect costs: $15 per direct labor hour If Dezire records revenue of $1,800 for a job requiring 10 hours of direct labor,then Dezire will make a profit of $940.
A)True
B)False
Q2) Hosanna Furnishings finished Job A40,which involved $4,000 of direct materials and $600 of direct labor.Hosanna uses a predetermined overhead allocation rate based on 40% of direct labor costs.Provide the journal entry needed to record the completion of the job.Omit explanation.
Q3) Define a job order costing system and list two types of businesses that would use a job order costing system.
Q4) Traditionally companies have used direct labor hours,direct labor costs and machine hours as the primary cost drivers of manufacturing overhead costs.
A)True
B)False
Q5) Why would the manager of a service company need to use job order costing?
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Chapter 18: Process Costing
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Q1) The production cost report for Department 2 shows that $454,000 was assigned to the 50,000 units transferred to Finished Goods Inventory.Cost of goods manufactured equals $454,000.Process costing is used.
A)True
B)False
Q2) Under the first-in,first-out (FIFO)method,the current period equivalent units of production for the units in the beginning inventory are always 100% complete.
A)True
B)False
Q3) Quince,Inc.uses a process costing system.It prepares a production cost report for each processing department.How will the managers of Quince use these production cost reports to prepare the balance sheet at the end of an accounting period?
A)to determine the amount of current liabilities of the period
B)to determine the balance of inventory accounts
C)to determine the cost of goods sold during the period
D)to determine the amount of revenues generated during the period
Q4) List the four steps,in the order of occurrence,that are used in preparing a production cost report.
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Q1) Which of the following statements is true of the just-in-time costing system?
A)It increases the need for suppliers to deliver raw materials on time.
B)It records summary journal entries before the units are purchased.
C)It results in increased inventory storage costs.
D)It increases the risk of the inventory becoming obsolete or unsalable.
Q2) Define target cost.How is target cost determined?
Q3) In ABC systems,the best allocation base is the primary factor that causes the cost to increase or decrease.
A)True
B)False
Q4) Flasket,Inc.manufactures water bottles for children.Similar water bottles are available in the market for $14.Flasket desires a 30% net profit margin.Flasket's target cost is ________.(Round your answer to the nearest cent. )
A)$9.80
Q5) What is a quality management system? What is the common factor in all quality management systems?
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Chapter 20: Cost-Volume-Profit Analysis
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Q1) Gitli Company sells its product for $60 and has variable cost of $35 per unit.The total fixed costs are $26,000.What will be the effect on the breakeven point in units if variable cost increases by $5 due to an increase in the cost of direct materials? (Round your answer up to the nearest whole unit. )
A)It will increase by 260 units.
B)It will decrease by 260 units.
C)It will decrease by 176 units.
D)It will increase by 176 units.
Q2) If Smart Touch Learning increases its production of tablet computers,what will be the effects on the variable and fixed costs per tablet?
A)variable costs per tablet decrease,fixed costs per tablet increase
B)variable costs per tablet increase,fixed costs per tablet is constant
C)variable costs per tablet increase,fixed costs per tablet decrease
D)variable costs per tablet is constant,fixed costs per tablet decrease
Q3) When the total fixed costs increase,the contribution margin per unit ________.
A)increases
B)decreases
C)increases proportionately
D)remains the same
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Chapter 21: Variable Costing
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Questions
Q1) Luis Perez,a production supervisor at Serum Medical,Inc. ,uses variable costing for any cost control decisions that he has to make.Which of the following is the reason for his choice?
A)Fixed costs are not relevant in the long run.
B)Only variable costs are controllable in the long and short run.
C)Absorption costing is not relevant for long-run decisions.
D)Lower management usually does not have control over most fixed costs.
Q2) The contribution margin format of the income statement categorizes costs by their behavior.
A)True
B)False
Q3) Absorption costing considers direct materials,direct labor,variable manufacturing overhead,and fixed manufacturing overhead as product costs.
A)True
B)False
Q4) The calculation of contribution margin ratio for service companies is significantly different from that of manufacturing companies.
A)True
B)False
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Chapter 22: Master Budgets
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Q1) Why is the forecast of sales revenue considered to be the cornerstone of the master budget?
Q2) The production budget is the first component of the operating budget.
A)True
B)False
Q3) What is the cornerstone of the master budget for a merchandising company? Why?
Q4) When preparing the cost of goods sold budget,________.
A)ignore balances in Finished Goods Inventory
B)start by calculating the projected cost to produce each unit
C)ignore the inventory costing method
D)multiply units produced by the total projected cost per unit
Q5) The cost accountant works directly with the corporate president to develop the selling and administrative expense budget.
A)True
B)False
Q6) The manufacturing overhead budget calculates the budgeted overhead cost for the year and also the predetermined overhead allocation rate for the year.
A)True
B)False
24
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) When a manufacturing company uses a standard cost system,Work-in-Process Inventory is debited at standard input quantities and standard costs.
A)True
B)False
Q2) A standard cost system helps management set performance standards.
A)True
B)False
Q3) Fixed overhead volume variance is a flexible budget variance.
A)True
B)False
Q4) When a manufacturing company uses a standard cost system,an unfavorable variance is a contra expense.
A)True
B)False
Q5) List the direct labor variances and briefly describe each.
Q6) The sales volume variance is the difference between the expected results in the flexible budget for the actual units sold and the static budget.
A)True
B)False
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) Because profit centers are only responsible for controlling costs,their performance reports include only information on actual costs versus budgeted costs.
A)True
B)False
Q2) Companies evaluate investment centers using the same measures as the profit centers.
A)True
B)False
Q3) One of the advantages of decentralization is that it allows top management to concentrate on long-term strategic planning.
A)True
B)False
Q4) Centralized companies split their operations into segments and top management delegates decision making to the segment managers.
A)True
B)False
Q5) How is the use of a balanced scorecard as a performance evaluation system helpful to companies?
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Chapter 25: Short-Term Business Decisions
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Q1) Differential analysis is a method that looks at how operating income would differ under each budget scenario.
A)True
B)False
Q2) Links Golf Course is planning for the coming golfing season.Investors would like to earn a 10% return on the company's $60,000,000 of assets.The company primarily incurs fixed costs to groom the greens and fairways.Fixed costs are projected to be $32,000,000 for the season.About 600,000 rounds of golf are expected to be played each year.Variable costs are about $15 per round of golf.Links Golf Course is a price-taker and will not be able to charge more than its competitors,who charge $75 per round of golf.Compute the operating profit that will be earned.
A)$4,000,000
B)$6,000,000
C)$86,000,000
D)$45,000,000
Q3) The cost-plus pricing approach is emphasized by price-setters.
A)True
B)False
Q4) Define the terms "Relevant Cost" and "Sunk Cost."
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Chapter 26: Capital Investment Decisions
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Q1) When evaluating a potential investment,managers should use only one measure for making a sound investment decision.
A)True B)False
Q2) Brooks Company will receive $10,000 a year at the end of each of the next five years.Using a discount rate of 14%,the present value of the receipts can be stated as ________.
A)PV = $10,000 (Ordinary Annuity FV factor,i = 14%,n = 5)
B)PV = $10,000 (PV factor,i = 14%,n = 5)
C)PV = $10,000 (Ordinary Annuity PV factor,i = 14%,n = 5)
D)PV = $10,000 (FV factor,i = 14%,n = 5)
Q3) The accounting rate of return method focuses on operating income instead of net cash inflow generated by an asset.
A)True
B)False
Q4) The accounting rate of return shows the effect of the investment on the company's accrual-based income.
A)True B)False
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Chapter 27: Accounting Information Systems
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Q1) Purchases on account are recorded in the purchases journal.
A)True
B)False
Q2) Ocean Corporation sells a product for $500 on account to Great Atlantic Sales.This transaction will be recorded in the ________.
A)cash payments journal
B)sales journal
C)cash receipts journal
D)purchase journal
Q3) The purchase of three computers for the sales staff,on account,is recorded in the ________ journal.
A)general
B)purchases
C)cash payments
D)equipment
Q4) Depreciation expense is recorded in a ________.
A)cash payments journal
B)sales journal
C)cash receipts journal
D)general journal
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