Introduction to Financial Accounting Practice Questions
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and processes underlying the preparation and interpretation of financial statements. This course covers essential topics such as the accounting cycle, double-entry bookkeeping, accrual accounting, and the analysis of key financial reports including the balance sheet, income statement, and cash flow statement. Emphasizing real-world applications, students will learn how financial information is used by managers, investors, and external stakeholders to make informed decisions. By the end of the course, students will have developed the skills to record business transactions, understand the regulatory environment, and critically evaluate an organizations financial health.
Recommended Textbook
Horngrens Financial and Managerial Accounting 6th 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) Managerial accounting focuses on providing information for external decision makers.
A)True
B)False
Answer: False
Q2) The Public Company Accounting Oversight Board is a watchdog agency that monitors the work of independent accountants who audit public companies.
A)True
B)False
Answer: True
Q3) Mulberry Corporation collected $16,000 from one of its customers,the amount owed from the previous month.How does this affect the accounting equation for Mulberry?
A)Assets increase by $16,000;liabilities decrease by $16,000.
B)Assets increase by $16,000;assets decrease by $16,000.
C)Assets increase by $16,000;liabilities increase by $16,000.
D)Assets increase by $16,000;equity increases by $16,000.
Answer: B
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) Baytown Paper Company has a debt ratio of 25%,which means that 75% of the assets are financed by creditors.
A)True
B)False
Answer: False
Q2) A business pays $800 cash for office supplies.Which of the following accounts is credited?
A)Cash
B)Accounts Payable
C)Office Supplies
D)Office Supplies Expense
Answer: A
Q3) Which one of the following account groups normally has a debit balance?
A)assets and expenses
B)revenues and expenses
C)liabilities and revenues
D)assets and liabilities
Answer: A
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4
Chapter 3: The Adjusting Process
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Q1) On September 1,Advantage Maintenance Company contracted to provide monthly maintenance services for the next five months at a rate of $3,000 per month.The client paid Advantage $15,000 on September 1.The maintenance services began on that date.Assuming Advantage records deferred revenues using the alternative treatment,what would be the adjusting entry recorded on December 31?
A)No entry is needed since revenue was recorded on September 1.
B)Debit Service Revenue and credit Unearned Revenue for $3,000.
C)Debit Service Revenue and credit Unearned Revenue for $15,000.
D)Debit Unearned Revenue and credit Service Revenue for $12,000.
Answer: B
Q2) At the time the transaction occurred,which of the following would result in an increase in net income under the accrual basis of accounting,but would not result in an increase in net income under cash basis accounting?
A)purchase of supplies for cash
B)performance of services on account
C)use of supplies purchased earlier
D)receipt of cash for services that were performed earlier on account
Answer: B
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Which of the following entries will be necessary to close the Insurance Expense account at the end of the year?
A)debit Insurance Expense and credit Income Summary
B)debit Insurance Expense and credit Common Stock
C)debit Retained Earnings and credit Insurance Expense
D)debit Income Summary and credit Insurance Expense
Q2) Assets and liabilities are presented in a different order on a balance sheet prepared following IFRS than on a balance sheet prepared following U.S.GAAP.
A)True
B)False
Q3) Which of the following is an example of an intangible asset?
A)Equipment
B)Plant
C)Property
D)Copyright
Q4) The ending balance in the Retained Earnings account is shown on the income statement columns of the worksheet.
A)True
B)False
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Chapter 5: Merchandising Operations
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Q1) Under the perpetual inventory system,discounts taken on an invoice by the buyer would be ________.
A)debited to Merchandise Inventory
B)credited to Merchandise Inventory
C)debited to Cost of Goods Sold
D)credited to Cost of Goods Sold
Q2) On November 1,2019,Alpha Omega,Inc.sold merchandise for $15,000,FOB destination,with payment terms,n/30.The cost of goods sold was $5,100.On November 3,the customer returns on this sale amounted to $6,000.The company received the balance on November 9,2019.Calculate the cost of goods sold from these transactions.
A)$2,040
B)$5,940
C)$5,100
D)$3,060
Q3) On a multi-step income statement,Sales Discounts Forfeited is reported as part of operating income.
A)True
B)False
Q4) What does the gross profit percentage measure? How is it computed?
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Chapter 6: Merchandise Inventory
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Q1) Which of the following is the correct formula to calculate inventory turnover?
A)Inventory turnover = Cost of goods sold / Average merchandise inventory
B)Inventory turnover = Cost of goods sold × Average merchandise inventory
C)Inventory turnover = Cost of goods sold + Average merchandise inventory
D)Inventory turnover = Cost of goods sold - Average merchandise inventory
Q2) Martha,Inc.had 21,000 units of ending inventory that were recorded at the cost of $8.00 per unit using the FIFO method.The current replacement cost is $4.25 per unit.Which of the following amounts would be reported as ending Merchandise Inventory on the balance sheet using the lower-of-cost-or-market rule?
A)$168,000
B)$257,250
C)$189,000
D)$89,250
Q3) Which of the following inventory valuation methods should be used for unique items?
A)first-in,first-out
B)last-in,first-out
C)weighted-average
D)specific identification
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Chapter 7: Internal Control and Cash
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Sample Questions
Q1) Under the net method of handling credit and debit card payments,the ________.
A)net amount of the sale is credited to the Sales Revenue account on the date of sale
B)credit to the sales revenue is selling price less the transaction fee
C)business writes a check to the third-party processor for the processing fee
D)processing fee is debited to the Credit Card Expense account on the date of sale
Q2) The bank recorded a $3,000 deposit as $300.How would this information be included on the bank reconciliation?
A)a deduction on the bank side
B)a deduction on the book side
C)an addition on the book side
D)an addition on the bank side
Q3) It is difficult and costly to plan controls that can prevent collusion.
A)True
B)False
Q4) The security measures are the same for any type of cash receipts.
A)True
B)False
Q5) List and briefly discuss the five components of internal control.
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Page 9
Chapter 8: Receivables
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Sample Questions
Q1) A company reports net accounts receivable of $152,000 on its December 31,2019 balance sheet.The Allowance for Bad Debts has a credit balance of $19,000.What is the balance of Accounts Receivable?
A)$157,000
B)$152,000
C)$171,000
D)$133,000
Q2) A debtor is a party to a credit transaction who will receive the cash for the transaction at a later date.
A)True
B)False
Q3) Under the allowance method,if a customer makes payment on a receivable that has already been written off,the company needs to reverse the write-off to the Allowance for Bad Debts account.
A)True
B)False
Q4) In counting the number of days in a note term,omit the date the note was issued.
A)True
B)False
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Chapter 9: Plant Assets, natural Resources, and Intangibles
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Sample Questions
Q1) Which of the following is true of goodwill?
A)Goodwill must be capitalized when acquired and amortized over seven years or less.
B)Both created and acquired goodwill must be recorded in the books.
C)Goodwill must be expensed when acquired.
D)Goodwill is not amortized.
Q2) Depreciation is the allocation of a plant asset's cost to expense over its useful life.
A)True
B)False
Q3) On January 2,2017,Barnes Enterprises purchased equipment for $42,000 cash,expecting the equipment to remain in service for five years,with a $4,000 residual value.Barnes uses straight-line depreciation.On April 30,2019,Barnes sold the equipment for $20,000 cash.
Requirement:
Prepare the journal entries to record the purchase of the equipment;depreciation for 2017,2018,and 2019;and the sale of the equipment.Omit explanations and round to the nearest dollar.
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11
Chapter 10: Investments
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Sample Questions
Q1) A 9% rate of return on total assets means that the company earned $0.09 for each $1.00 invested in the company's average long-term assets.
A)True
B)False
Q2) Which of the following is true of available-for-sale (AFS)debt investments?
A)They are always reported as current assets in the balance sheet.
B)They are always reported as long-term assets in the balance sheet.
C)They are reported as current assets on the balance sheet only if the business expects to sell them within the first two years.
D)They are reported as long-term assets on the balance sheet only if they are planned to be held for longer than a year.
Q3) When a company receives interest revenue on a long-term investment in bonds,________.
A)long-term assets decrease
B)long-term assets increase
C)equity increases
D)current assets decrease
Q4) 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) Sales Tax Payable is usually calculated as a percentage of the amount of the sale.
A)True
B)False
Q2) Which of the following deductions is paid by both the employer and employee?
A)federal income taxes
B)federal unemployment taxes
C)FICA taxes
D)SUTA taxes
Q3) Which of the following accounts is credited by the seller when tax is collected on retail sales?
A)Accounts Payable
B)Payroll Tax
C)Sales Tax Payable
D)Unearned Revenue
Q4) If the likelihood of a future event is probable and the amount of the expense cannot be estimated,how should the company report the contingency?
Q5) If the likelihood of a future event is probable and the amount of the expense can be estimated,how should the company report the contingency?
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Chapter 12: Long-Term Liabilities
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Sample
Questions
Q1) On December 31,2018,Anderson Hardware Company purchases $300,000 of property by paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance.The amortization schedule shows that the company will pay $46,072 per year.Journalize the first yearly payment on December 31,2019.Omit explanation.
Q2) Hardwood Flooring Company buys a building for $115,000,paying $30,000 cash and signing a 30-year mortgage note for $85,000 at 11% annual interest.The payments will be made in equal monthly installments of $809.Prepare the journal entry for the first monthly payment.(Round your answers to the nearest whole dollar number. )Omit explanation.
Q3) On January 1,2018,Brazos Company purchased equipment and signed a six-year mortgage note for $97,000 at 15%.The note will be paid in equal annual installments of $25,631,beginning January 1,2019.On January 1,2019,the journal entry to record the first installment payment will include a ________.(Round your answer to the nearest whole number. )
A)debit to Mortgage Payable for $25,631
B)debit to Interest Expense for $14,550
C)credit to Cash for $11,081
D)credit to Mortgage Payable for $97,000
Q4) What does the debt to equity ratio show,and how is it calculated?
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Chapter 13: Stockholders Equity
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Sample Questions
Q1) Preferred stockholders ________.
A)receive a dividend preference over common stockholders
B)are guaranteed that they will not have a loss on their investment
C)generally have voting rights
D)have more investment risk compared to common stockholders
Q2) Cash dividends and stock splits decrease the Retained Earnings account.
A)True
B)False
Q3) A company that reports a discontinued operation item must also report earnings per share for the item.
A)True
B)False
Q4) Which of the following actions will increase the Common Stock account?
A)cash dividend
B)stock split
C)stock dividend declared and distributed
D)purchase of treasury stock
Q5) Most corporations set par value low and issue common stock at a premium. A)True
B)False
Page 15
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Chapter 14: The Statement of Cash Flows
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Q1) Which of the following describes the financing activities section of the statement of cash flows?
A)It includes increases and decreases in long-term assets.
B)It includes cash inflows and outflows related to long-term liabilities and equity.
C)It includes interest and dividend income and cash payments for interest expense.
D)It reports on activities that create revenue or expenses for the entity's business.
Q2) Oregon Company is preparing its statement of cash flows using the indirect method.During the year,the company purchased equipment for $15,000 cash.Which of the following statements is true?
A)$15,000 would be shown as a negative cash flow in the operating activities section.
B)$15,000 would be shown as a negative cash flow in the investing activities section.
C)$15,000 would be shown as a positive cash flow in the investing activities section.
D)$15,000 would be shown as a positive cash flow in the financing activities section.
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16
Chapter 15: Financial Statement Analysis
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Sample Questions
Q1) The cash ratio helps to determine a company's ability to meet its short-term obligations using cash and cash equivalents.
A)True
B)False
Q2) In a vertical analysis of the income statement,each line item is shown as a percentage of net sales revenue.
A)True
B)False
Q3) Investors and creditors cannot evaluate a company by examining only one year of data.
A)True
B)False
Q4) Normally,companies with low gross profit percentages will have low asset turnover. A)True
B)False
Q5) What is a common-size statement? Why are these statements useful?
Q6) An annual report provides information about a company's financial condition. A)True B)False
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Chapter 16: Introduction to Managerial Accounting
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Sample Questions
Q1) An accounting field that helps managers plan and control operations.
A)Controlling
B)Managerial accounting
C)Organizational chart
D)Planning
E)Line position
F)Financial accounting
G)Directing
Q2) The officer of the company who has the ultimate responsibility for implementing the company's long and short-term goals is the ________.
A)Chief Financial Officer
B)Chair of the Board
C)Chief Executive Officer
D)Chief Officer for Human Relations
Q3) Freight costs paid to ship raw materials to a company warehouse are considered product costs.
A)True
B)False
Q4) Define direct cost.
Q5) Describe the flow of product costs for a manufacturer.
Page 18
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Chapter 17: Job Order Costing
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Q1) Why would the manager of a service company need to use job order costing?
Q2) In a manufacturing operation,depreciation of plant equipment should be debited to the Depreciation Expense account.
A)True
B)False
Q3) What is an advantage of using a raw materials subsidiary ledger?
A)It includes only one large record for all materials used,so materials details are combined into one location.
B)It is less detailed than the general ledger,giving a broader overview for decision purposes.
C)It allows for better control of inventory because it tracks each type of material used in production.
D)It contributes to easier recordkeeping since the sum of the balances of the subsidiary ledger do not have to match general ledger totals.
Q4) The total amount of manufacturing overhead costs incurred during the period is recorded on the credit side of the Manufacturing Overhead account.
A)True
B)False
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Chapter 18: Process Costing
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Q1) The combined production costs from all departments for completed products are transferred to the Cost of Goods Sold account immediately after the completion of all production processes.The perpetual inventory system is used.
A)True
B)False
Q2) At the end of an accounting period,the costs assigned to a production department can be split into the cost of units fully completed and transferred out,and the cost of units partially completed and remaining in the Work-in-Process Inventory of that department.
A)True
B)False
Q3) Under process costing,the costs incurred by each department are reported in a separate production cost report for each department.
A)True
B)False
Q4) The equivalent units of production for direct materials and conversion costs must be the same.
A)True B)False
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Chapter
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Q1) Quality management systems emphasize external failure costs.
A)True
B)False
Q2) A modification of the overhead allocation method which uses a single plantwide rate,is to use multiple predetermined overhead allocation rates that have different allocation bases.
A)True
B)False
Q3) Just-in-time costing is also known as ________.
A)job costing
B)batch costing
C)backflush costing
D)process costing
Q4) Use of a single plantwide overhead rate assumes that there is a direct relationship between the allocation base and overhead costs in all plant activities.
A)True
B)False
Q5) Why is using a single plantwide predetermined overhead allocation rate not always accurate?
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Chapter 20: Cost-Volume-Profit Analysis
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Q1) An increase in sales price per unit decreases the contribution margin per unit.
A)True
B)False
Q2) The asymmetrical change in costs when there is a decrease in the volume of activity is called ________.
A)cost stickiness
B)contribution costs
C)curvilinear costs
D)cost adhering
Q3) Higher fixed costs decrease the total contribution margin required to break even.
A)True
B)False
Q4) Thrills Amusement Park provides a variety of attractions.Thrills sells tickets at $50 per person as a one-day entrance fee.Variable costs are $28 per person,and fixed costs are $178,800 per month.
Assume that Thrills reduces fixed costs from $178,800 per month to $166,500 per month.Compute the new breakeven point in tickets and in sales dollars.
Q5) How is the contribution margin calculated?
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Chapter 21: Variable Costing
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Q1) A business segment is an identifiable part of the company for which financial information is available.
A)True
B)False
Q2) Intricate Computer Solutions provides services to corporate and individual customers.During the month of June,the corporate business segment provided services to 300 customers and earned $70,000 in revenue.The individual business segment provided services to 300 customers and earned $40,000 in revenue.The variable costs for the corporate and individual business segments amounted to $33,000 and $25,100,respectively.In addition,the fixed costs of the company amounted to $8000.Calculate the contribution margin from each corporate customer.(Round your answer to the nearest cent. )
A)$49.67
B)$96.67
C)$23.00
D)$123.33
Q3) When units produced are less than units sold,how does operating income differ between variable costing and absorption costing? Explain your answer.
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Chapter 22: Master Budgets
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Q1) For a merchandising company,the budgeted total sales equals the expected number of units sold multiplied by the budgeted selling price per unit.
A)True
B)False
Q2) The inventory,purchases,and cost of goods sold budget determines cost of goods sold for the budgeted income statement,and ending Merchandise Inventory for the budgeted balance sheet.
A)True
B)False
Q3) When preparing the direct labor budget,________.
A)the production manager projects the average direct labor costs
B)direct labor hours needed for production are multiplied by the direct labor cost per hour
C)the actual direct labor cost per hour must be known
D)budgeted units to be produced are multiplied by direct labor cost per hour to determine budgeted direct labor cost
Q4) List the four budgeting objectives.Why is this process a loop?
Q5) Why is the forecast of sales revenue considered to be the cornerstone of the master budget?
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) Favorable and unfavorable variances are netted together in the same way debits and credits are.
A)True
B)False
Q2) Static budget variance
A)the difference between actual results and expected results in the flexible budget for the actual units sold
B)measures how well the business keeps unit material and labor costs within standards C)the difference between the expected results in the flexible budget for the actual units sold and the static budget
D)the difference between actual results and the expected results in the static budget
E)measures how well the business uses its materials or human resources
Q3) When a manufacturing company uses a standard cost system,an unfavorable variance is a contra expense.
A)True
B)False
Q4) What does the variable overhead efficiency variance measure?
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) A cost center responsibility report ________.
A)includes depreciation expense
B)typically focuses on the flexible budget variance
C)is the same as a performance report
D)shows all costs incurred by the department
Q2) The transfer price should be an amount between the market price and the variable cost.
A)True
B)False
Q3) Which of the following is most likely to appear on the responsibility report for a manufacturing production supervisor?
A)direct labor costs
B)factory rent
C)advertising costs
D)depreciation
Q4) A cost-based transfer price considers the cost of producing the goods when determining the price.
A)True
B)False
Q5) Explain the difference between a controllable and a noncontrollable cost.
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Chapter 25: Short-Term Business Decisions
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Q1) ________ refers to the benefit given up by choosing an alternative course of action.
A)Opportunity cost
B)Sunk cost
C)Relevant cost
D)Irrelevant cost
Q2) Managerial accountants assist managers in the decision-making process by gathering and analyzing relevant information.
A)True
B)False
Q3) Which of the following is NOT one of the steps in the managerial decision-making process?
A)basing decisions on sunk costs
B)defining business goals
C)identifying alternative courses of action
D)gathering and analyzing relevant information
Q4) Managers should only consider financial information when making a decision.
A)True
B)False
Q5) Explain the difference between price-takers and price-setters.
Page 27
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Chapter 26: Capital Investment Decisions
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Q1) Which of the following best describes the profitability index?
A)an index of projects based on their net income
B)the ratio of present value of net cash inflows to initial investment
C)the ratio of total cash inflows to initial investment
D)an array of possible investment outcomes at different discount rates
Q2) An annuity is a series of unequal payments over equal intervals.
A)True
B)False
Q3) The payback and accounting rate of return (ARR)methods are suitable for investments with a relatively short time span.
A)True
B)False
Q4) Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.
A)True B)False
Q5) The accounting rate of return method considers the time value of money. A)True
B)False
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Chapter 27: Accounting Information Systems
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Q1) What are the two basic components of a computerized accounting information system?
A)sales journal and purchase journal
B)hardware and software
C)cash payments journal and cash receipts journal
D)network and cloud computing
Q2) Adjusting entries are recorded in the ________.
A)cash payments journal
B)purchases journal
C)cash receipts journal
D)general journal
Q3) When using a computerized accounting information system,sales transactions are only recorded when the cash is received.
A)True
B)False
Q4) Two popular entry-level software packages for accounting information systems are QuickBooks and Excel.
A)True
B)False
Q5) Describe the transactions recorded in the purchases journal.
Page 29
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