Fundamentals of Financial Accounting Solved Exam Questions
Course Introduction
Fundamentals of Financial Accounting introduces students to the basic principles, concepts, and procedures underlying financial accounting systems. This course covers the accounting cycle, preparation of financial statements, and the interpretation of financial information for external users. Students learn how businesses record, summarize, and report economic events in accordance with generally accepted accounting principles (GAAP), with an emphasis on understanding the impact of transactions on the balance sheet, income statement, and statement of cash flows. Key topics include accrual accounting, asset valuation, liability measurement, and the ethical considerations in financial reporting.
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Financial Accounting 15th Edition by Jan Williams
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Chapter 1: Accounting: Information for Decision Making
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Sample Questions
Q1) The financial statements of a business entity:
A) Include the balance sheet, income statement, and income tax return.
B) Provide information about the cash flow prospects of the company.
C) Are the first step in the accounting process.
D) Are prepared for a fee by the Financial Accounting Standards Board.
Answer: B
Q2) Which of the following has the least impact upon the reliability of financial statements issued by publicly owned corporations?
A) Federal securities laws.
B) Professional judgment of the accountants who prepare the financial statements.
C) Audits of the financial statements by the Internal Revenue Service.
D) Competence and integrity of the CPAs who perform audits.
Answer: C
Q3) One purpose of generally accepted accounting principles is to make accounting information prepared by different companies more comparable.
A)True
B)False
Answer: True
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3
Chapter 2: Basic Financial Statements
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Sample Questions
Q1) If a company purchases equipment for $65,000 by issuing a note payable:
A) Total assets will increase by $65,000.
B) Total assets will decrease by $65,000.
C) Total assets will remain the same.
D) The company's total owners' equity will decrease.
Answer: A
Q2) A net profit results from having more revenues than liabilities.
A)True
B)False
Answer: False
Q3) On January 6, total assets of the business amount to:
A) $826,650.
B) $994,950
C) $957,000.
D) $950,400.
Answer: B
Q4) Total assets must always equal total liabilities plus total owners' equity.
A)True
B)False
Answer: True
Page 4
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Chapter 3: The Accounting Cycle: Capturing Economic Events
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Sample Questions
Q1) When making a general journal entry, there can only be one debit and one credit.
A)True
B)False
Answer: False
Q2) Before the journal entry above, Martin had assets of $900,000; liabilities of $460,000; and owners' equity of $440,000. Total assets immediately after the above transaction has been recorded amount to:
A) $905,000.
B) $921,000.
C) $956,000.
D) $794,000.
Answer: A
Q3) Transactions are recorded in the general journal in:
A) Numerical order.
B) Chronological order.
C) Account number order.
D) Financial statement order.
Answer: B
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Chapter 4: The Accounting Cycle: Accruals and Deferrals
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Sample Questions
Q1) Great Kids Co. began providing day care for the children of employees of a large corporation on January 15 for an agreed monthly fee of $9,000. The first payment is to be received on February 15. The adjusting entry required by Great Kids Co. on January 31 includes:
A) A credit to Child Care Fees Earned of $4,500.
B) A debit to Child Care Fees Receivable of $9,000.
C) A debit to Unearned Child Care Revenue of $4,500.
D) A debit to Fees Receivable of $9,000.
Q2) On June 1, 2008, the park purchased a 12-month insurance policy. Give the adjusting entry to record insurance coverage expiring in January. (Hint: The company adjusts its books on a monthly basis.)
Q3) The adjusted trial balance combines the trial balance items with the adjusting entries to determine the adjusted balances.
A)True
B)False
Q4) An expenditure that benefits year one but is paid for in year two should not be capitalized until year two.
A)True
B)False
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Chapter 5: The Accounting Cycle: Reporting Financial
Results
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Sample Questions
Q1) Materiality
(a) Identify several factors considered by an accountant in deciding whether an item is "material."
(b) Does the concept of materiality complicate or simplify the process of making adjusting entries? Give an illustration to support your answer.
Q2) Real accounts can only be closed at the end of the year with a single compound entry.
A)True
B)False
Q3) If current assets are $90,000 and current liabilities are $70,000, the current ratio will be:
A) 77%.
B) $20,000.
C) 1.3.
D) $160,000.
Q4) The report form of the balance sheet lists liabilities and owners' equity below assets. A)True B)False
Page 7
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Chapter 6: Merchandising Activities
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Sample Questions
Q1) In comparing a perpetual inventory system with a periodic inventory system, which of the following statements is not correct?
A) Most large companies use perpetual inventory systems.
B) A periodic system does not include an inventory subsidiary ledger.
C) The perpetual method is easier to apply in a manual accounting system.
D) Regardless of the system in use, most businesses take a physical inventory at least once a year.
Q2) In a periodic inventory system, the ending inventory can be determined from the accounting records, and a physical count of the merchandise on hand will confirm the amount.
A)True
B)False
Q3) In a periodic inventory system, which of the following accounts may be closed by debiting Cost of Goods Sold?
A) Sales, Inventory (beginning), and Gross Profit.
B) Inventory (beginning) and Purchases.
C) Purchases and Inventory (ending).
D) Sales, Inventory (beginning), and Cost of Goods Available for Sale.
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8
Chapter 7: Financial Assets
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Sample Questions
Q1) Anthony loaned $2,000 to Cleopatra for one year at 10% interest, all due at maturity. He insisted the terms of the transaction be formalized in a promissory note. In this situation:
A) The maturity value of the note is $2,000.
B) Anthony is considered the maker of the note and records the note as an asset in his accounting records.
C) Anthony is considered the maker of the note and records the note as a liability in his accounting records.
D) Cleopatra is considered the maker of the note and records the note as a liability in her [his] accounting records.
Q2) In regard to the accounts receivable turnover rate:
A) The higher the better.
B) The lower the better.
C) In some industries it is better higher and in some industries it is better to be lower.
D) The auto industry prefers a lower rate.
Q3) Cash management
(a.) What is meant by the term "cash management"?
(b.) Identify at least three basic objectives of effective cash management.
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Chapter 8: Inventories and the Cost of Goods Sold
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Sample Questions
Q1) Inventory turnover
In the spaces provided, indicate the likely effect of each of the following events or strategies upon the inventory turnover rate. Use the following code letters: I for Increase, D for Decrease, and NE for No Effect.
____ (a) Switched from the LIFO flow assumption to FIFO during a period of rising prices. ____ (b) Dramatically increased advertising expense.
____ (c) Increased the sales price of merchandise that is so popular it is difficult to keep in stock.
____ (d) Implemented internal control procedures to reduce a serious inventory shrinkage problem.
____ (e) Switched from a restrictive credit policy to offering liberal terms to credit customers.
Q2) Assume that Castle TV, Inc. uses the LIFO flow assumption. The cost of the 200 units in the year-end inventory is:
A) $37,000.
B) $46,000.
C) $41,500.
D) $83,000.
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10
Chapter 9: Plant and Intangible Assets
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Q1) Which depreciation method is most commonly used among publicly owned corporations?
A) Straight-line.
B) Double-declining balance.
C) Units-of-output.
D) All of the various depreciation methods are used equally.
Q2) When straight-line depreciation is in use, the depreciation rate of an asset is equal to:
A) 1 divided by the life of the asset.
B) 1 divided by the cost of the asset.
C) The cost of the asset divided by the life of the asset.
D) The cost of the asset less its salvage value divided by the life of the asset.
Q3) Charging an expenditure directly to an expense account is based on the assumption that the benefits of that expenditure have been used up in the current period.
A)True
B)False
Q4) Compute to the nearest full month depreciation for the fractional period from January 1, 2009 to May 31 of 2009. $______________
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Chapter 10: Liabilities
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Sample Questions
Q1) A capital lease is recorded in the accounting records of the lessee by an entry:
A) Debiting Rent Expense and crediting Cash each time a lease payment is made.
B) Debiting Cash and crediting Rental Revenue each time a lease payment is received.
C) Debiting an asset account and crediting a liability account for the present value of the future lease payments.
D) Debiting an asset account and crediting Sales for the present value of the future lease payments.
Q2) Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of:
A) Off-balance-sheet financing.
B) A loss contingency which should be disclosed in notes to Ultimate Company's financial statements.
C) An estimated liability which must appear in Ultimate Company's balance sheet.
D) A loss in purchasing power caused by inflation.
Q3) How much of the first payment made on December 31, 2009, is allocated to repayment of principal? $________
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Page 12
Chapter 11: Stockholders Equity: Paid-In Capital
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Sample Questions
Q1) In a "pump-and-dump" scheme, the owners of the company:
A) Falsely claim the business has high growth potential.
B) Artificially raise the price of the stock.
C) Sell the stock at a high price.
D) Falsely claim the business has high growth potential, artificially raise the price of the stock, and sell the stock at a high price.
Q2) The following information is taken from the balance sheet and related disclosures of Maxwell, Inc.: Which of the following statements is (are) true? (Fr this question, more than one answer may be correct.)
A) The preferred dividends in arrears amount to $120,000 and should appear as a liability in the corporate balance sheet.
B) The book value per share of common stock is $35.
C) The stockholders' equity section of the balance sheet should include a deficit (negative amount in retained earnings) of $700,000.
D) The company has paid no dividend on its common stock during the past two years.
Q3) The total amount of paid-in capital: $__________
Q4) The average issue price per share of preferred stock: $_____ per share
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Chapter 12: Income and Changes in Retained Earnings
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Q1) Refer to the information above. A small stock dividend of 1,000 shares was declared and distributed during 2009. What was the market price per share on the date of declaration?
A) $8.00 per share.
B) $2 per share.
C) $16 per share.
D) $28.00 per share.
Q2) Large stock dividends tend to keep stock prices down.
A)True
B)False
Q3) Dividends are first recorded and retained earnings are reduced on:
A) The ex-dividend date.
B) The date of record.
C) The date of declaration.
D) The date of payment.
Q4) A stock dividend provides a stockholder with more shares of stock, but his or her percentage of ownership in the company is no larger than before.
A)True
B)False
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Chapter 13: Statement of Cash Flows
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Sample Questions
Q1) In a statement of cash flows, cash transactions are classified into three major categories. Which of the following is not one of these three categories?
A) Managing activities.
B) Operating activities.
C) Financing activities.
D) Investing activities.
Q2) Cash flows and accounting records
In a business with an accrual-based accounting system, is a statement of cash flows based upon account balances shown in the adjusted trial balance? Explain.
Q3) In a statement of cash flows, the term cash includes both cash and cash equivalents.
A)True
B)False
Q4) If accounts receivable decrease during the period, cash received from customers probably exceeds net sales.
A)True
B)False
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Chapter 14: Financial Statement Analysis
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Q1) Percentage changes; p/e ratios and investors' expectations Shown below are Gamma, Inc.'s earnings per share for a four-year period, along with the per-share market price of the company's stock at each year-end. The earnings in 2011 were the highest in the company's history.
(a) Compute the percentage change in earnings per share in 2009, 2010, and 2011. (Place your answers in the spaces provided above.)
(b) Compute the p/e ratio of stock at the end of each of the four years. (Place your answers in the spaces provided above.)
(c) What does the p/e ratio at the end of 2011 indicate about investors' expectations of earnings per share for the coming year? Explain your reasoning.
\[\begin{array} { | l | c | c | c | c | }
\hline & 2011 & 2010 & 2009 & 2008 \\
\hline \text { Earnings per share } & \$ 9 & \$ 7 & \$ 6 & \$ 7 \\
\hline \text { Percentage change } & \% & \% & \% & \% \\
\hline \text { Year-end stock price } & \$ 77 & \$ 140 & \$ 84 & \$ 70 \\
\hline \text { Price-earnings ratio } & - & - & - & - \\
\hline \end{array}\]
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Chapter 15: Global Business and Accounting
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Q1) The accounting profession has been slow to develop in Asian countries because of strict governmental control of accounting regulations.
A)True
B)False
Q2) In a planned economy, ownership of land and the means of production are private and markets dictate the allocation of resources and the output among segments of the economy.
A)True
B)False
Q3) An exchange rate represents the price of one currency stated in terms of another. A)True
B)False
Q4) Although cultural differences are significant in business dealings, they pose no difficulties to the design and implementation of an accounting system.
A)True
B)False
Q5) Explain the major provisions of the Foreign Corrupt Practices Act as amended in 1986.
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Chapter 16: The Time Value of Money
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Q1) If you receive $20,000 as a gift and invest it at 12% compounded quarterly, how much will you have at the end of three years?
A) $32,020.60.
B) $28,515.20.
C) $22,497.20.
D) $14,027.60.
Q2) The present value of an ordinary annuity is the amount that equals payments made at the end of successive equal periods is worth today.
A)True
B)False
Q3) The difference between the present value and the future value of a sum of money depends upon:
A) The rate of interest.
B) The length of time.
C) The rate of interest and the length of time.
D) Neither the rate of interest nor the length of time.
Q4) The future value of an investment gradually increases toward the present amount.
A)True
B)False
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