Introduction to Accounting Final
Test Solutions
Course Introduction
Introduction to Accounting provides students with a foundational understanding of the principles and practices of financial accounting. The course covers the basic concepts of recording, classifying, and summarizing financial transactions, as well as the preparation and interpretation of financial statements such as the balance sheet, income statement, and cash flow statement. Students will explore the accounting cycle, essential conventions, ethical considerations, and the role of accounting in business decision-making, equipping them with crucial skills for further study in business and finance.
Recommended Textbook
Horngren's Accounting 12th Edition by Tracie L. Miller Nobles
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Page 2
Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) Accounting is the information system that measures business activities,processes the information into reports,and communicates the results to decision makers.
A)True
B)False
Answer: True
Q2) As per the ________,the entity will remain in operation for the foreseeable future.
A) economic entity concept
B) monetary unit assumption
C) going concern assumption
D) cost principle
Answer: C
Q3) The owner's claim to the assets of the business is called ________.
A) return on assets
B) expenses
C) equity
D) debt
Answer: C
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Page 3
Chapter 2: Recording Business Transactions
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Sample Questions
Q1) State whether the normal balance of each of the following accounts is a debit or credit.
\[\begin{array} { | l | l | }
\hline \text { Account } & \text { Normal Balance } \\
\hline \text { Service Revenue } & \\
\hline \text { Tones, Withdrawals } & \\
\hline \text { Accounts Payable } & \\
\hline \text { Prepaid Insurance } & \\
\hline \end{array}\]
Answer: \[\begin{array} { | l | l | }
\hline \text { Account } & \text { Normal Balance } \\
\hline \text { Service Revenue } & \text { Credit } \\
\hline \text { Tones, Withdrawals } & \text { Debit } \\
\hline \text { Accounts Payable } & \text { Credit } \\
\hline \text { Prepaid Insurance } & \text { Debit } \\
\hline \end{array}\]
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Page 4
Chapter 3: The Adjusting Process
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Sample Questions
Q1) Accumulated Depreciation is a(n)________ account and carries a normal ________ balance.
A) revenue; debit
B) expense; debit
C) contra asset; credit
D) liability; credit
Answer: C
Q2) An internal document that helps summarize data for the preparation of financial statements is called a ________.
A) journal
B) ledger
C) worksheet
D) chart of accounts
Answer: C
Q3) Advance cash payments of future expenses are called ________.
A) accrued revenues
B) deferred expenses
C) deferred revenues
D) accrued expenses
Answer: B
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Which of the following adjusted balances would appear in the balance sheet credit column of a worksheet?
A) Rent Revenue
B) Insurance Expense
C) Salaries Payable
D) Equipment
Q2) Assets that are expected to be converted to cash,sold,or used up during the next 12 months,or within the business's normal operating cycle if the cycle is longer than a year,are called ________ assets.
A) intangible
B) plant
C) long-term
D) current
Q3) Under which of the following categories would bonds held as an investment for more than a year appear?
A) Current assets
B) Long-term liabilities
C) Long-term assets
D) Current liabilities
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Page 6
Chapter 5: Merchandising Operations
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Sample Questions
Q1) When using the periodic inventory system,the Merchandise Inventory account is
A) not used
B) never used when recording purchase discounts, or returns of inventory
C) replaced on the balance sheet with the Purchases account
D) updated after each sale
Q2) On a multi-step income statement,which of the following is added to operating income to arrive at net income?
A) sales revenue
B) interest expense
C) sales discounts forfeited
D) operating expenses
Q3) When a company uses a perpetual inventory system,all merchandise transactions are updated as they occur.However,the inventory account may not show the correct balance at all times.
A)True
B)False
Q4) Gross profit percentage reflects a business's ability to raise selling prices.
A)True
B)False
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Chapter 6: Merchandise Inventory
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Sample Questions
Q1) Which of the following inventory costing methods yields the lowest net income during a period of rising inventory costs?
A) specific identification
B) weighted-average
C) last-in, first-out
D) first-in, first-out
Q2) Michigan Motors is considering which inventory costing method it should use.The business wants to show the highest Merchandise Inventory balance during a period of declining costs.Which inventory method should Michigan Motors select? Discuss your selection.
Q3) A company purchased 200 units for $40 each on January 31.It purchased 200 units for $30 each on February 28.It sold a total of 250 units for $100 each from March 1 through December 31.If the company uses the last-in,first-out inventory costing method,calculate the cost of ending inventory on December 31.(Assume that the company uses a perpetual inventory system.)
A) $4,500
B) $9,000
C) $6,000
D) $150
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Page 8
Chapter 7: Accounting Information Systems
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Sample Questions
Q1) Ocean Company 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
Q2) Cash sales are recorded in the ________ journal.
A) general
B) sales
C) cash receipts
D) cash sales
Q3) In a purchases journal,the total of the ________ column is not posted to the general ledger.
A) Merchandise Inventory DR
B) Other Accounts DR, Amount
C) Accounts Payable CR
D) Office Supplies DR
Q4) Describe the transactions recorded in the cash payments journal.
Q5) List and briefly discuss the two basic components of a computerized accounting information system.
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Chapter 8: Internal Control and Cash
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Sample Questions
Q1) In addition to the account number,a check shows the 9-digit routing number.
A)True
B)False
Q2) The Sarbanes-Oxley Act requires all private companies in the United States to maintain an internal control system.
A)True
B)False
Q3) Evaluated receipts settlement (ERS)is a streamlined process that bypasses paper documents altogether.
A)True
B)False
Q4) A receiving report should be matched with the supplier invoice before a payment to the supplier is approved.
A)True
B)False
Q5) To be IFRS compliant,foreign companies are not required to have their internal controls audited by outside auditors.
A)True
B)False
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Chapter 9: Receivables
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Sample Questions
Q1) Under the allowance method,the entry to write off a receivable increases the amount of the Allowance for Bad Debts account.
A)True
B)False
Q2) Which of the following is an example of exercising internal control over receivables?
A) separating cash collection and credit approval duties
B) extending credit to all customers who apply for credit
C) combining the duties of the credit and accounting departments
D) allowing credit department employees to collect cash from customers
Q3) The days' sales in receivables for Beckham Sales is 35.The days' sales in receivables for Xanadu Company is 25.This suggests that Xanadu is having greater difficulty than Beckham in collecting its accounts receivable.
A)True
B)False
Q4) When a business pledges its accounts receivable,it transfers the right to collect cash from customers to the bank.
A)True
B)False
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Chapter 10: Plant Assets,natural Resources,and Intangibles
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Sample Questions
Q1) Which of the following is an intangible asset?
A) copyright
B) building
C) land
D) equipment
Q2) Provide definitions for the following terms.
1.Depreciation
2.Extraordinary Repair
3.Property,Plant,and Equipment
Q3) Brandy Enterprises discarded a computer that was fully depreciated and had no residual value.As a result of this transaction,Brandy will ________.
A) report a loss equal to the historical cost of the computer
B) Debit the Computer account and credit the Accumulated Depreciation - Computer account
C) Debit the Accumulated Depreciation - Computer account; debit Loss on Disposal of Computer account, and credit the Computer account
D) zero out the Computer and Accumulated Depreciation - Computer accounts
Q4) Prepare the journal entry to record the acquisition of fences and signs for $5,000 cash.Omit explanation.
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Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) State unemployment compensation tax (SUTA)is paid by the employer and is not deducted from an employee's gross earnings.
A)True
B)False
Q2) Angie Pereira and Ferro Schwartz are employees of Free Star Company.In February 2019,Angie's gross pay was $6000,and Ferro's gross pay was $7400.All earnings are subject to FICA-OASDI Tax of 6.2% and FICA-Medicare Tax of 1.45%.Which of the following would be included in the entry to record the salaries expense for February?
A) a debit to Salaries Payable to employees for $830.80
B) a debit to FICA-Medicare Taxes Payable for $830.80
C) a credit to FICA-OASDI Taxes Payable for $830.80
D) a credit to Salaries Expense for $830.80
Q3) The employer is required to directly deposit the employee's take-home pay into the employee's bank account.
A)True B)False
Q4) A pension plan is a plan that provides benefits to retired employees.
A)True B)False
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Chapter 12: Partnerships
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Sample Questions
Q1) A partnership is a ________.
A) firm listed on a stock exchange, in which no owner owns a controlling majority of equity
B) business with two or more owners that is not organized as a corporation
C) corporation in which the owners have limited liability for the organization's liabilities
D) private firm in which all owners have equal ownership and limited liability in the event of a bankruptcy
Q2) The income of a limited liability company cannot be taxed to the members as though they were partners.
A)True
B)False
Q3) Which of the following is an advantage of a partnership?
A) Partnerships are less expensive to organize than corporations.
B) The owners of a partnership are generally exempted from personal income taxes.
C) The owners who contribute an asset to the partnership retain absolute claim on the asset.
D) Mutual agency creates personal obligations for each partner.
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Chapter 13: Corporations
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Sample Questions
Q1) Prior period adjustments ________.
A) always increase the beginning balance of retained earnings
B) are shown on the statement of retained earnings as corrections to the beginning balance
C) can be ignored because the financial statements have already been issued
D) must be recorded in the period in which the error occurred
Q2) Noncumulative preferred stock is in arrears if the dividend has not been paid for the year.
A)True
B)False
Q3) Which of the following actions will decrease the amount of Total Stockholders' Equity?
A) cash dividend declared
B) stock split
C) stock dividend declared
D) repayment of bond principal
Q4) When a company has issued both preferred and common stock,the common stockholders receive their dividends first.
A)True
B)False
Page 15
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Chapter 14: Long-Term Liabilities
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Sample Questions
Q1) When bonds are retired at maturity ________.
A) the bondholders are paid the face value plus the unamortized premium or less the unamortized discount
B) the carrying value equals the face value plus the unamortized premium or less the unamortized discount
C) the carrying value always equals the face value
D) the entry to retire the bonds may include a gain or loss on retirement of bonds
Q2) When computing a bond's cash flow for interest,which interest rate is used? Why?
Q3) Which of the following statements is TRUE if a bond's stated interest rate is the same as the market rate?
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.
Q4) If a bond is issued at a discount,the issue price is greater than face value.
A)True
B)False
Q5) When computing the present value of a bond,which interest rate is used? Why?
Q6) List three disadvantages of borrowing.
Page 16
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Chapter 15: Investments
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Sample Questions
Q1) Significant influence equity investments must be accounted for using the equity method.
A)True
B)False
Q2) Investments in equity securities are classified into three specific types based on the investor's level of influence over the investee company.
A)True
B)False
Q3) The unrealized holding gains and losses on available-for-sale debt investments are reported on the income statement.
A)True
B)False
Q4) Unrealized holding gains or losses on trading debt investments are reported in the ________.
A) current assets section of the balance sheet
B) operating expenses section of the income statement
C) other income and (expenses) section of the income statement
D) accumulated other comprehensive income section of stockholder's equity
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Page 17
Chapter 16: The Statement of Cash Flows
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Sample Questions
Q1) The net cash provided by operating activities is calculated in the same way,whether the company uses the direct or the indirect method of preparing the statement of cash flows.
A)True
B)False
Q2) On a statement of cash flows prepared using the direct method,cash received from selling merchandise is considered a ________.
A) cash inflow from investing activities
B) cash inflow from operating activities
C) cash outflow from financing activities
D) cash outflow from investing activities
Q3) A company purchased machinery by issuing a long-term note payable.This is an example of a non-cash investing and financing activity for the statement of cash flows.
A)True
B)False
Q4) The total change in cash for the period reconciles 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) The following is a summary of information presented on the financial statements of a company on December 31,2019. \[\begin{array} { | l | r | r | }
\hline{ \text { Account } } & { \mathbf { 2 0 1 9 } } & { \mathbf { 2 0 1 8 } } \\
\hline \text { Current Assets } & \$ 88,000 & \$ 80,000 \\
\hline \text { Accounts Receivable } & 94,000 & 67,000 \\
\hline \text { Merchandise Inventory } & 62,000 & 58,000 \\
\hline \text { Current Liabilities } & 56,000 & 49,000 \\
\hline \text { Long-term Liabilities } & 44,000 & 53,000 \\
\hline \text { Common Stock } & 76,000 & 57,000 \\
\hline \text { Retained Earnings } & 68,000 & 46,000 \\
\hline
\end{array}\] With respect to long-term liabilities,a horizontal analysis reveals
A) long-term liabilities decreased by $19,000
B) long-term liabilities decreased by 33.33%
C) long-term liabilities decreased by 16.98%
D) long-term liabilities decreased by $7000
Q2) What is a common-size statement? Why are these statements useful?
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Chapter 18: Introduction to Managerial Accounting
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Sample Questions
Q1) Nurix,Inc.is a business consulting firm.During the month of February,Nurix earned $55,600 of revenues by providing services to 47 clients.Operating costs for February were $8500 and non-operating costs were $6000.What is the unit cost per service? (Round your answer to the nearest cent.)
A) $127.66
B) $180.85
C) $1182.98
D) $308.51
Q2) A manufacturer produced 7,500 total units.The cost of goods manufactured is $88,000 and the cost of goods sold is $71,000.The unit product cost is $9.47.
A)True
B)False
Q3) An Enterprise Resource Planning system (ERP)________.
A) is a cost management system in which a company produces products just in time to satisfy needs
B) requires the implementation of Total Quality Management
C) integrates all worldwide functions, departments, and data of a company into a single system
D) cannot be implemented in service companies
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Chapter 19: Job Order Costing
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Sample Questions
Q1) The predetermined overhead rate is calculated ________.
A) after actual overhead costs have been determined
B) at the end of the accounting period
C) before the accounting period begins
D) after indirect materials and labor have been used in production
Q2) Groot Promotional Services uses a job order system for costing and billing promotional services for dance and ballet performances.Groot has four public relations specialists plus an office staff.At the beginning of the year,Groot estimated the total cost of salaries and benefits for the public relations specialists at $675,000 and a total of 7500 billable hours for the year.All remaining office and administrative costs were estimated at $405,000.The allocation base for office and administrative costs is billable hours.In June,Groot signed a contract for a Russian ballet performance.It estimated the new contract would require 34 hours of specialist time.What is the total cost estimate for this contract?
A) $1836
B) $4896
C) $3060
D) $1224
Q3) Why would the manager of a service company need to use job order costing?
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Chapter 20: Process Costing
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Q1) The task of summarizing the flow of physical units is one of the four steps involved in the preparation of the production cost report.
A)True
B)False
Q2) In a process costing system,each process or department has its own Work-in-Process Inventory account.
A)True
B)False
Q3) Vermillion,Inc.has two processes-Dyeing Department and Finishing.The company sold 2,000 bolts of cloth for $220,000,of which $150,000 was sold on account.The total production cost was $385,000 for 5,500 bolts of cloth.The perpetual inventory system and process costing are used.What are the journal entries to record a sale if the company follows a process costing system?
Q4) The equivalent units of production for transferred in units are always 100%.
A)True
B)False
Q5) What are conversion costs? In determining equivalent units of production,why are conversion costs calculated separately from direct materials?
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) When the sales price per unit decreases,the contribution margin per unit ________.
A) increases proportionately
B) increases
C) remains the same
D) decreases
Q2) In its first year of business,Lakota,Inc.produced 600 units and sold 400 units.If Lakota uses variable costing,________.
A) its operating income for the period will be higher than under absorption costing
B) its operating income for the period will be lower than under absorption costing
C) its value of ending Finished Goods Inventory reported in the balance sheet will be higher than under absorption costing
D) its operating income will be the same as under absorption costing
Q3) The traditional income statement format is prepared under absorption costing. A)True B)False
Q4) How is the contribution margin ratio calculated?
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Chapter 22: Master Budgets
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Q1) The starting point in developing the master budget is the preparation of the
A) cash budget
B) production budget
C) sales budget
D) budgeted income statement
Q2) A strategic budget will be as detailed as an operational budget.
A)True
B)False
Q3) Budgeting requires managers to develop overall business goals and budget for specific actions to achieve the goals.
A)True
B)False
Q4) The production budget determines the number of units to be produced during the period.
A)True
B)False
Q5) A budget represents the plans that a company has in place to achieve its goals.
A)True
B)False
Page 24
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) Define variance.What is the difference between a favorable and an unfavorable variance?
Q2) Which department is usually responsible for a direct labor cost variance attributable to inexperienced workers on the assembly line?
A) purchasing
B) production
C) human resources
D) engineering
Q3) A favorable variance reflects a decrease in operating income.
A)True
B)False
Q4) What does the variable overhead cost variance measure?
Q5) A manufacturer,using a standard cost system,purchased 250 units of direct materials at a cost of $2 per unit.The standard cost per unit of direct materials is $1.85.Prepare the journal entry to record the direct materials cost variance at the time of purchase.Omit explanation.
Q6) List the direct materials variances,and briefly describe each.
Q7) What does the fixed overhead volume variance measure?
Q8) What does the variable overhead efficiency variance measure?
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Chapter 24: Cost Allocation and Responsibility Accounting
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Q1) Stealth,Inc.produces two types of drones,rotary and fixed wing.Stealth estimated $850,000 of manufacturing overhead,and 62,500 machine hours for the year.The allocation base for overhead costs is machine hours.The rotary model actually consumed 28,000 machine hours,and the fixed wing type consumed 34,500 machine hours.How much overhead is allocated to the fixed wing model? (Round intermediary calculations to the nearest cent.)
A) $380,800
B) $469,200
C) $280,000
D) $234,600
Q2) The production manager is responsible for ________.
A) all product costs
B) decisions to acquire new equipment
C) his or her own salary
D) efficiently and effectively producing quality products
Q3) In decentralized companies,performance evaluation systems provide upper management with the feedback it needs to maintain control over the entire organization.
A)True
B)False
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Chapter 25: Short-Term Business Decisions
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Q1) Define the terms Relevant Cost and Sunk Cost.
Q2) Rocky River Company is a price-taker and uses target pricing.Refer to the following information: \[\begin{array} { | l | l | l | }
\hline \text { Production volume } & \$ 02,000 & \text { units per year } \\
\hline \text { Market price } & \$ 30 & \text { per unit } \\
\hline \text { Desired operating income } & 15 \% & \text { of total assets } \\
\hline \text { Total assets } & \$ 13,700,000 & \\
\hline
\end{array}\] What is the target full product cost per unit? (Round your answer to nearest cent.)Assume all units produced are sold.
A) $30.00
B) $26.59
C) $4.50
D) $25.50
Q3) Differential analysis is a common approach to making long-term business decisions.
A)True
B)False
Q4) Explain the difference between price-takers and price-setters.
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Chapter 26: Capital Investment Decisions
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Q1) Compound interest means that interest is calculated only on the principal amount.
A)True
B)False
Q2) The residual value is discounted as a single lump sum because it will be received only once,when the asset is sold.
A)True
B)False
Q3) Which of the following is the rate of return,based on discounted cash flows,a company can expect to earn by investing in a capital asset?
A) accounting rate of return
B) bank interest rate
C) internal rate of return
D) return on investment
Q4) The discounted cash flow methods of evaluating capital investments are superior because they consider both the time value of money and the profitability of the investment.
A)True
B)False
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