Fundamentals of Accounting
Midterm Exam
Course Introduction
Fundamentals of Accounting introduces students to the basic principles and practices of accounting, including the systematic recording, reporting, and analysis of financial transactions. The course covers essential topics such as the accounting cycle, preparation of financial statements, double-entry bookkeeping, and the interpretation of financial information. Students will gain an understanding of key concepts like assets, liabilities, equity, revenues, and expenses, while developing foundational skills necessary for managing financial data and supporting decision-making processes in business environments.
Recommended Textbook
Accounting 9th Global Edition by Charles T. Horngren
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Page 2
Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) Hamilton Lawn Service earned $1,000 for services rendered. The customer promised to pay at a later time. What is the effect on accounts?
A)Accounts receivable decreases; Owner's capital increases.
B)Cash and Accounts receivable both increase.
C)Cash account increases; Accounts receivable decreases.
D)Accounts receivable increases; Owner's capital increases.
Answer: D
Q2) Which of the following concepts (or principles)would most likely require that data be complete, neutral, and free from error?
A)Cost principle
B)Faithful representation principle
C)Entity concept
D)Going-concern concept
Answer: B
Q3) A proprietor may have to pay self-employment tax in addition to income tax.
A)True
B)False
Answer: True
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3
Chapter 2: Recording Business Transactions
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Q1) Which of the following groups of accounts BOTH normally have a credit balance?
A)Assets and Expenses
B)Revenues and Expenses
C)Liabilities and Owner's equity
D)Assets and Liabilities
Answer: C
Q2) In a trial balance, total debits are always equal to total credits.
A)True
B)False
Answer: True
Q3) When a business records an expense incurred, the expense account is always credited.
A)True
B)False
Answer: False
Q4) For assets and expenses, a debit increases the account.
A)True
B)False Answer: True
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Chapter 3: The Adjusting Process
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Q1) To accrue revenue means that the cash receipt is recorded before the revenue is earned.
A)True
B)False
Answer: False
Q2) ABC Company signed a one-year $12,000 note payable at 8% interest on May 1, 2012. How much interest expense must be accrued on May 31, 2012?
A)$960
B)$320
C)$80
D)$40
Answer: C
Q3) If a company is using the accrual method of accounting, when is revenue recorded?
A)When cash is received, even though services may be rendered at a later date
B)When services are rendered, even though cash may be received at a later date
C)When cash is received, before the completion of the services
D)When cash is received, 30 days after the completion of the services
Answer: B
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5
Chapter 4: Completing the Accounting Cycle
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Q1) Which of the following is the measure of how quickly an item can be converted to cash?
A)Debt ratio
B)Current ratio
C)Liquidity
D)Accounting cycle
Q2) Which debt ratio would indicate the BEST overall ability of an organization to pay its debts?
A)25%
B)40%
C)60%
D)130%
Q3) The ________ is the time span during which cash is paid for goods and services, which are then sold to customers from whom the business collects cash.
A)operating cycle
B)accounting period
C)calendar year
D)calendar quarter
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Chapter 5: Merchandising Operations
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Q1) Which of the following means that the shipment is free on board at the point of shipment and the buyer pays all shipping costs?
A)FOB destination
B)FOB shipping point
C)COD
D)4/10, eom
Q2) A company uses the periodic inventory method. Which of the following entries would be made to record a $1,200 purchase of inventory on account?
A)The accounting entry would be a $1,200 debit to Purchases and a $1,200 credit to Accounts payable.
B)The accounting entry would be a $1,200 debit to Accounts payable and a $1,200 credit to Purchases.
C)The accounting entry would be a $1,200 debit to Inventory and a $1,200 credit to Accounts payable.
D)The accounting entry would be a $1,200 debit to Accounts payable and a $1,200 credit to Inventory.
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Chapter 6: Merchandising Inventory
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Q1) Martin Sales had a Beginning inventory balance of $120 made up of 10 units purchased for $12.00 per unit. Early in the month, they purchased 16 units at $10.00 per unit. Later that month, they sold 15 units. Martin uses a perpetual inventory system, and applies LIFO. How much is Cost of goods sold for the month?
A)$180
B)$170
C)$150
D)$110
Q2) Revenue is $400,000 and Cost of goods sold is $100,000. How much is the gross profit percent?
A)75%
B)25%
C)60%
D)40%
Q3) Using the FIFO costing method will always produce the same results whether a company uses perpetual or periodic inventory.
A)True
B)False
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8
Chapter 7: Internal Control and Cash
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Q1) An accountant is under pressure to maximize the company's net income at year-end. He is told to delay orders of important services until the following year. This action would be considered unethical because it is a misrepresentation of actual transactions.
A)True
B)False
Q2) Which of the following would be included in the entry to record the replenishment of a petty cash fund?
A)A credit to Petty cash
B)A debit to Cash in bank
C)A credit to Cash in bank
D)A credit to various expenses and assets
Q3) Before any internal control procedure is initiated, a question which should be addressed by the company is:
A)Will this stop all theft?
B)Is this the best security money can buy?
C)How much benefit will be derived from the cost of the procedure?
D)Will this prevent all accounting errors?
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9
Chapter 8: Receivables
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Q1) Zorro Company has significant amounts of accounts receivable, and experiences uncollectible accounts from time to time. Zorro uses the direct write-off method. When Zorro Company writes off an uncollectible receivable, what is the effect of that single transaction?
A)It will reduce net income.
B)It will have no effect on net income.
C)It will increase total assets of the company.
D)It will generate positive cash flow.
Q2) The Allowance for uncollectible accounts currently has a credit balance of $900. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging method, the company's management estimates that uncollectible accounts will be $15,000. What will be the balance of the Allowance for uncollectible accounts reported on the balance sheet?
A)$15,000
B)$14,900
C)$15,900
D)$14,100
Q3) The two major types of receivables are interest receivable and taxes receivable.
A)True
B)False
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Chapter 9: Plant Assets and Intangibles
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Q1) An asset was purchased for $12,000. The asset's estimated useful life was 5 years, and its residual value was $2,000. Straight-line depreciation was used. How much gain or loss is reported if the asset is sold for $4,500 at the end of the fourth year?
A)$1,500 gain
B)$500 gain
C)No gain or loss
D)$1,500 loss
Q2) Treating a cost which should be an expense as a capital expenditure will make a company's net income higher.
A)True
B)False
Q3) Albatross Services scrapped a van. The van originally cost $40,000 and had accumulated depreciation of $38,000. What was the effect of scrapping the van?
A)Gain of $2,000
B)No gain or loss
C)Loss of $1,600
D)Loss of $2,000
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Chapter 10: Current Liabilities and Payroll
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Q1) Which of the following is the proper treatment for a liability that exists, but the exact amount of which is not known?
A)The liability should be treated as a contingent liability.
B)The amount of the liability should be estimated and recorded.
C)The liability should be ignored.
D)The liability should be reported in the notes to the financial statements.
Q2) Ensuring efficiency of the payroll process is one of the two key controls for payroll.
A)True
B)False
Q3) Where does Unearned subscription revenue appear on the balance sheet?
A)Under Long-term investments
B)Under Current liabilities or Long-term liabilities
C)Under Current assets or Long-term investments
D)Under Long-term assets
Q4) Notes payable are considered short-term if they are due within the current operating cycle.
A)True
B)False
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Chapter 11: Long-Term Liabilities, Bonds Payable, and
Classification of Liabilities on the Balance Sheet
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Q1) On January 2, 2014, Mahoney Sales issued $10,000 in bonds for $9,400. They were 5-year bonds with a stated rate of 4%, and pay semiannual interest payments. Mahoney Sales uses the straight-line method to amortize the bond discount. After the second interest payment on December 31, 2014, what was the bond carrying amount?
A)$9,520
B)$9,400
C)$9,460
D)$9,880
Q2) If the difference between the effective-interest method of amortizing bond discount and the straight-line method is immaterial, then GAAP permits use of the straight-line method.
A)True
B)False
Q3) If a bond's stated interest rate is higher than the market rate, which of the following is TRUE?
A)The bond will be issued at a premium.
B)The bond will be issued at par.
C)The bond will be issued at a discount.
D)The bond will be issued for an amount lower than the maturity value.
Page 13
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Chapter 12: Corporations: Paid-In Capital and the Balance Sheet
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Q1) Hot Tamale Company had $120,000 of revenues and $125,000 of expenses. No dividends were paid. The third of the year-end closing entries should include which of the following line items?
A)Credit Retained earnings $5,000.
B)Debit Retained earnings $5,000.
C)Debit Income summary $5,000.
D)Credit Income summary $125,000.
Q2) When a corporation sells 10,000 shares of $10 par value common stock for $120,000, the Common stock account is credited for $100,000.
A)True
B)False
Q3) Hot Tamale Company had $120,000 of revenues and $113,000 of expenses. No dividends were paid. These factors will result in which of the following?
A)Retained earnings will go down.
B)Retained earnings will go up.
C)Paid-in capital will go down.
D)Paid-in capital will go up.
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Page 14
Chapter 13: Corporations: Effects on Retained Earnings and the
Income Statement
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Q1) On March 1, 2014, Parkinson Company originally issued 10,000 shares of common stock at $4.00 per share. The stock had a par value of $0.01 per share. On March 1, 2015, Parkinson distributed a 12% stock dividend; the market price at that time had dropped to $3.75 per share. Which of the following statements is TRUE?
A)Parkinson will record a loss of $300 on the transaction.
B)Parkinson will record a gain of $300 on the transaction.
C)Parkinson will record neither a gain nor a loss on the transaction.
D)Parkinson will record sales revenues of $4,500 for the stock issued.
Q2) Which of the following does NOT require a formal journal entry?
A)Cash dividend
B)Stock dividend
C)Stock split
D)Issuance of new shares
Q3) Which of the following would have the same effect on the number of shares issued and outstanding as a 2-for-1 stock split?
A)A 20% stock dividend
B)A 200% stock dividend
C)A 100% stock dividend
D)A 120% stock dividend
Page 15
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Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) Of the following, which is NOT a cash inflow from a financing activity?
A)Sell treasury stock
B)Issue common stock
C)Earn interest revenue
D)Borrow money on a long-term note
Q2) Which of the following would NOT appear on a statement of cash flows prepared using the direct method?
A)Collections from customers
B)Payments to suppliers
C)Interest received
D)Increase/decrease in current liabilities
Q3) 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
Q4) Cash equivalents are assets that can be converted to cash within one year.
A)True
B)False
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Chapter 15: Financial Statement Analysis
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Q1) What kind of information does a company's debt ratio provide?
A)What proportion of the company's debts are long-term liabilities
B)What proportion of the company's assets are financed by debt, as opposed to equity
C)How well a company is positioned to pay off all of its long-term debt
D)How much profit is generated by each share of stock
Q2) When comparing one company to another, what kind of information does the accounts receivable turnover provide?
A)How effective each company is at collecting cash from its credit customers
B)How well each company manages the financing of its assets
C)How profitable each company is based on the sale of its products
D)How much profit is generated by a share of stock of each company
Q3) The current ratio is used for which kind of evaluation?
A)The ability of a company to pay its current liabilities
B)The ability of a company to collect its receivables
C)The overall profitability of a company
D)Evaluating stock in a company from an investor's perspective
Q4) Rate of return on net sales is a measure of a company's profitability.
A)True
B)False
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Chapter 16: Introduction to Management Accounting
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Q1) Managerial accounting's focus is to provide information for internal planning and control.
A)True
B)False
Q2) Which of the following is NOT one of the key standards of ethical practice published by the IMA?
A)Competence
B)Environmental sensitivity
C)Integrity
D)Confidentiality
Q3) Product costs, such as direct materials, are expensed during the period that they were incurred.
A)True
B)False
Q4) Which of the following is NOT a part of manufacturing overhead?
A)Indirect materials
B)Indirect labor
C)Factory insurance
D)Depreciation on delivery vehicles
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Chapter 17: Job Order and Process Costing
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Q1) Overallocation of manufacturing overhead would require which of the following year-end adjustments?
A)A credit to Finished goods inventory
B)A credit to Manufacturing overhead
C)A debit to Work-in process inventory
D)A credit to Cost of goods sold
Q2) Which of the following would NOT be considered a manufacturing overhead cost?
A)Insurance for the factory
B)Indirect labor cost
C)Property tax for the plant
D)Direct labor
Q3) When job order costing is used in the service industry, the allocation of indirect costs is normally based on direct labor hours.
A)True
B)False
Q4) The cost of goods manufactured is recorded as a debit to the Work in process account.
A)True
B)False
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Chapter 18: Activity-Based Costing and Other Cost Management Tools
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Q1) In a just-in-time costing system, any remaining balance in the conversion costs account at the end of an accounting period is usually cleared to which account?
A)Raw and in process inventory
B)Cost of goods sold
C)Work in process inventory
D)Finished goods inventory
Q2) Activity-based costing systems and traditional costing systems will produce the same results for product cost and profitability, although they use different methods of calculation.
A)True
B)False
Q3) Activity-based costing systems combine many various elements of overhead into a single cost pool.
A)True
B)False
Q4) Internal failure costs occur when poor-quality goods or services are not detected until after delivery to customers.
A)True
B)False
Page 20
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Chapter 19: Cost-Volume-Profit Analysis
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Q1) Taizhong Semiconductor Company mass produces several common computer chips. Type A sells for $1.20 per unit. Variable cost is $0.95 per unit and the fixed costs are $32,000 per month. Taizhong currently sells 140,000 units per month. Under intense pressure to boost profits, the production manager has a plan which will reduce fixed costs by 10%. How will this affect the breakeven point in terms of sales revenue?
A)It will go down $3,200.
B)It will go down by $15,360.
C)It will go up by $9,460.
D)It will go down by $16,200.
Q2) Fixed costs per unit decrease as production levels decrease.
A)True
B)False
Q3) If all other factors are constant, an increase in fixed costs will increase the breakeven point.
A)True
B)False
Q4) The mixed cost per unit is constant throughout the relevant range of activity.
A)True
B)False
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Chapter 20: Short-Term Business Decisions
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Q1) Perfect Time Company manufactures and sells watches for $36 each. Value Products Company has offered Perfect Time $16 per watch for a one time order of 1,000 watches. The total manufacturing cost per watch, using standard absorption costing, is $24 per unit, and consists of variable costs of $18 per watch and fixed overhead costs of $6 per watch. Assume that Perfect Time has excess capacity and that the special order would not adversely impact regular sales. What is the change in operating income that would result from accepting the special sales order?
A)Increase of $2,000
B)Decrease of $18,000
C)Increase of $16,000
D)Decrease of $2,000
Q2) The benefit foregone by NOT choosing an alternative course of action is referred to as a(n):
A)opportunity cost.
B)sunk cost.
C)variable cost.
D)incremental cost.
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Chapter 21: Capital Investment Decisions and the Time Value of Money
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Q1) Considering the four common methods of evaluating investments payback, rate of return, net present value, and internal rate of return the discounted cash flow methods are superior because they consider both the time value of money and the profitability of the investment.
A)True
B)False
Q2) Juan has just received a prize which entitles him to receive annual payments of $10,000 for the next 10 years. In order to calculate the overall value of the prize today, which of the following tables would be the best for him to use?
A)Present Value of $1
B)Present Value of an Annuity of $1
C)Future Value of $1
D)Future Value of an Annuity of $1
Q3) Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash flows when they are received.
A)True
B)False
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Page 23
Chapter 22: The Master Budget and Responsibility Accounting
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Q1) Assume that AAA Company's Procurement Department is a centralized service department serving all business units, which of the following would be the MOST appropriate cost driver or assignment basis?
A)Number of purchase orders
B)Number of employees
C)Number of reports prepared
D)Number of service hours provided
Q2) Which of the following statements is TRUE about the operating budget?
A)It is a part of the financial budget.
B)It includes the capital expenditures budget.
C)It includes the operating expenses budget.
D)Its final component is the cash budget.
Q3) Which of the following statements is TRUE about the capital expenditures budget?
A)It is a part of the financial budget.
B)It must be completed before the budgeted income statement is prepared.
C)It includes the sales budget.
D)It must be completed before the cash budget can be prepared.
Q4) The cash budget can be prepared before the sales budget.
A)True
B)False
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Chapter 23: Flexible Budgets and Standard Costs
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Q1) Western Outfitters Mountain Sports projected 2011 sales of 75,000 units at a unit sale price of $12.00. Actual 2011 sales were 72,000 units at $14.00 per unit. Variable costs were budgeted at $4.00 per unit; actual amount was $4.75 per unit. Budgeted fixed costs totaled $375,000 while actual fixed costs amounted to $400,000. What is the flexible budget variance for operating income?
A)$48,000 unfavorable
B)$65,000 favorable
C)$65,000 unfavorable
D)$41,000 favorable
Q2) Which of the following BEST describes flexible budgets?
A)Flexible budgets have contingency funds to allow flexibility of spending.
B)Flexible budgets summarize financial results at several different volume levels.
C)Flexible budgets are an integral part of the master budget.
D)Flexible budgets can accommodate several different price structures.
Q3) An unfavorable sales volume variance in operating income suggests a(n):
A)increase in volume.
B)decrease in volume.
C)increase in variable expenses per unit.
D)decrease in fixed costs.
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Chapter 24: Performance Evaluation and the Balanced Scorecard
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Q1) New product development time is a measure pertaining to the balanced scorecard's:
A)learning and growth perspective.
B)internal business perspective.
C)financial perspective.
D)customer perspective.
Q2) Which of the following is NOT one of the four perspectives of a balanced scorecard?
A)Financial perspective
B)Customer perspective
C)Technological perspective
D)Learning and growth perspective
Q3) Which of the following would be considered a profit center?
A)A company's accounting department
B)A company's sales department
C)A company's product line
D)A company's operating divisions
Q4) Profit margin is defined as operating income divided by sales.
A)True
B)False
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