Introduction to Financial Accounting Exam Preparation Guide
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and techniques used to record, summarize, and interpret financial transactions. The course explores the accounting cycle, the preparation and analysis of key financial statements, and the underlying concepts that guide the reporting of financial information. Students learn how businesses measure financial performance, maintain accountability, and comply with regulatory standards, while gaining practical skills in using accounting systems and evaluating the financial health of organizations. This course is essential for anyone interested in finance, business, or entrepreneurship, serving as the basis for more advanced studies in accounting and related fields.
Recommended Textbook
Financial Accounting 15th Edition by Jan Williams
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Chapter 1: Accounting: Information for Decision Making
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Q1) In the phrase "generally accepted accounting principles," the words accounting principles refers to:
A) The standards, assumptions, and concepts that serve as "ground rules" for financial reporting.
B) Ethical standards that prohibit fraudulent or misleading financial reporting.
C) The steps in the accounting cycle.
D) The accounting practices authorized by the Financial Accounting Standards Board (FASB).
Answer: A
Q2) Which of the following are not considered "external" users of financial statements?
A) Owners.
B) Creditors.
C) Labor unions.
D) Managers.
Answer: D
Q3) Investors and creditors are interested in a company's "cash flow prospects" What two specific concerns of investors and creditors are summarized by the term "cash flow prospects?"
Answer: Return of investment and return on investment.
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Chapter 2: Basic Financial Statements
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Q1) From an accounting viewpoint, when is a business considered an entity separate from its owner(s)?
A) Only when organized as a sole proprietorship.
B) Only when organized as a partnership.
C) Only when organized as a corporation.
D) In each of the above situations, the business is an accounting entity separate from the activities of the owner(s).
Answer: D
Q2) Water world Boat Shop purchased a truck for $12,000, making a down payment of $5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
A) Total assets increased by $12,000.
B) Total liabilities increased by $7,000.
C) From the viewpoint of a short-term creditor, this transaction makes the business more solvent.
D) This transaction had no immediate effect upon the owner's equity in the business. Answer: B
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Chapter 3: The Accounting Cycle: Capturing Economic Events
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Q1) The collection of accounts receivable is recorded by a:
A) Debit to Cash and a debit to Accounts Receivable.
B) Credit to Cash and a credit to Accounts Receivable.
C) Debit to Cash and a credit to Accounts Receivable.
D) Credit to Cash and a debit to Accounts Receivable.
Answer: C
Q2) The journal entry to record a particular business transaction includes a credit to the Cash account. This transaction is most likely also to include:
A) Issuance of new capital stock.
B) The purchase of an asset on account.
C) Payment of an outstanding note payable.
D) A credit to Accounts Receivable.
Answer: C
Q3) If the trial balance has a smaller debit balance than credit balance, it signifies:
A) Assets are more than liabilities.
B) A profit.
C) A loss.
D) An error has been made.
Answer: D
Page 5
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Chapter 4: The Accounting Cycle: Accruals and Deferrals
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Q1) The purpose of adjusting entries is to:
A) Prepare the revenue and expense accounts for recording the revenue and expenses of the next accounting period.
B) Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions.
C) Correct errors made during the accounting period.
D) Update the owners' equity account for the changes in owners' equity that had been recorded in revenue and expense accounts throughout the period.
Q2) The adjusting entry to recognize an unrecorded expense is necessary:
A) When an expense is paid in advance.
B) When an expense has been neither paid nor recorded as of the end of the accounting period.
C) Whenever an expense remains unpaid at the end of an accounting period.
D) Because the accountant is likely to forget to pay these unrecorded expenses.
Q3) One of the purposes of adjusting entries is to convert assets to expenses.
A)True
B)False
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Chapter 5: The Accounting Cycle: Reporting Financial Results
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Q1) Net income from the Income Statement appears on:
A) The Balance Sheet.
B) The Retained Earnings Statement.
C) Neither the Balance Sheet nor the Retained Earnings Statement.
D) Both the Balance Sheet and the Retained Earnings Statement.
Q2) If current assets are $180,000 and current liabilities are $130,000, the current ratio will be:
A) 72%.
B) $50,000.
C) 1.4.
D) $310,000.
Q3) The adjusted trial balance contains income statement accounts and balance sheet accounts, while the after-closing trial balance will only have balance sheet accounts.
A)True
B)False
Q4) Dividends declared are an expense and reduce net income.
A)True
B)False
Page 7
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Chapter 6: Merchandising Activities
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Q1) The basic purpose of a subsidiary ledger is to:
A) Provide a chronological record of all business transactions.
B) Provide details about the individual items comprising the balance of a general ledger account.
C) Enable accountants to prepare financial statements.
D) Provide persons outside of the organization with detailed information about the company's operations.
Q2) Gross profit is the difference between:
A) Net sales and the cost of goods sold.
B) The cost of merchandise purchased and the cost of merchandise sold.
C) Net sales and net income.
D) Net sales and all expenses.
Q3) If World of Sound uses a perpetual inventory system, the journal entry to record the purchase on May 18th would include which of the following?
A) A debit to the Purchases account for $38,250.
B) A debit to the Cost of Goods Sold for $38,250.
C) A credit to Inventory for $38,250.
D) A debit to Inventory for $38,250.
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Chapter 7: Financial Assets
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Q1) Which of the following best describes the application of generally accepted accounting principles to the valuation of accounts receivable?
A) Realization principle-Accounts receivable are shown at their net realizable value in the balance sheet.
B) Matching principle-The loss due to an uncollectible account is recognized in the period in which the sale is made, not in the period in which the account receivable is determined to be worthless.
C) Cost principle-Accounts receivable are shown at the initial cost of the merchandise to customers, less the cost the seller must pay to cover uncollectible accounts.
D) Principle of conservatism-Accountants favor using the lowest reason?able estimate for the amount of uncollectible accounts shown in the balance sheet.
Q2) The lower the accounts receivable turnover rate, the longer a company must wait to collect from its credit customers.
A)True
B)False
Q3) What is the amount of the deposit in transit?
Q4) What is the adjusted cash balance in the September 30 bank reconciliation?
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9
Chapter 8: Inventories and the Cost of Goods Sold
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Q1) During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in the lowest taxable income?
A) LIFO.
B) FIFO.
C) Average cost.
D) Specific identification.
Q2) Which of the following results in the inventory being stated at the most current acquisition costs?
A) Specific identification.
B) LIFO.
C) FIFO.
D) Average cost.
Q3) If all things are equal, except one company uses LIFO during inflation and the other uses FIFO, then:
A) The LIFO company will have a higher inventory turnover.
B) The FIFO company will have a higher inventory turnover.
C) The two companies will have the same inventory turnover.
D) Inventory valuation methods do not effect inventory turnover calculations.
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10
Chapter 9: Plant and Intangible Assets
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Q1) Assume Lloyd uses straight-line depreciation with the half-year convention. Depreciation expense to be recognized in 2009 (the year of purchase) is:
A) $7,400.
B) $8,400.
C) $3,700.
D) Some other amount.
Q2) Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a useful life of 10 years and a residual salvage value of $20,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after three years, that is, at the end of the ninth year of service. Under this revised estimate, the depreciation expense for the seventh year of use would be:
A) $8,000.
B) $10,000.
C) $13,000.
D) $24,000.
Q3) Compute the book value of the stallion at May 31, 2009, the date of sale.
$______________
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Chapter 10: Liabilities
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Q1) What will be the effect on Apex's debt ratio if Apex's owner invests an additional $2 million to finance its expansion?
A) The debt ratio will decrease from .1 (2/20) to .0909 (2/22) after the additional investment.
B) The debt ratio will decrease from 2/9 before to 2/11 after the additional investment.
C) The debt ratio will increase from 20 before to 22 after the additional investment.
D) Additional investment by owner will have no effect on the debt ratio.
Q2) The adjustment necessary at December 31, Year 1 (if any), related to this bond issue involves:
A) Recognition of interest expense of $3,600,000.
B) Recognition of interest expense of $1,800,000.
C) Payment of cash of $1,800,000.
D) There is no adjustment necessary.
Q3) Over the 30-year life of the mortgage, the total amount Fisher will pay for interest charges is $________
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Page 12
Chapter 11: Stockholders Equity: Paid-In Capital
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Q1) Only preferred stock of a corporation must have a par value.
A)True
B)False
Q2) A primary disadvantage of the corporate form of organization is:
A) Unlimited personal liability for business debts.
B) Ownership is difficult to transfer.
C) Corporate earnings are subject to double taxation.
D) Management is separated from ownership.
Q3) If a corporation has issued a single class of stock, it must be:
A) Common Stock.
B) Preferred Stock.
C) Stock issued at Par-value.
D) Cumulative preferred Stock.
Q4) Which of the following is not a characteristic of most preferred stocks?
A) Preference as to dividends.
B) No voting power.
C) Convertible into common stock.
D) Preference as to assets in the event of liquidation of the company.
Q5) The average issue price per share of preferred stock: $_____ per share
Q6) The total amount of legal capital: $__________
Page 13
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Chapter 12: Income and Changes in Retained Earnings
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Q1) Sovereign Foods suffered a $1,500,000 loss (net of tax) when the FDA prohibited the sale of food products containing red dye no. 3. On its other products, Sovereign Foods had net sales of $6,580,000 and costs and other expenses of $6,505,000. Which of the following statements is not true? (Ignore taxes)
A) Sovereign Foods reports a net loss of $1,425,000 for the current year.
B) Sovereign Foods reports income before extraordinary items of $75,000.
C) Sovereign Foods combines the $1,500,000 loss with its other costs and expenses of $6,505,000, since this item does not qualify for any special disclosure.
D) Sovereign Foods shows the $1,500,000 loss in a separate section of the income statement as an extraordinary item.
Q2) The expropriation (seizure of) of a multinational company's assets by a government is an example of a discontinued operation item.
A)True
B)False
Q3) Accounting changes and prior period adjustment
Prior period adjustments affect the income of past accounting periods. Explain how prior period adjustments are shown in the financial statements.
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Page 14
Chapter 13: Statement of Cash Flows
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Q1) Alexander Company reported an increase of $185,000 in its accounts receivable during the year. The company's statement of cash flows reported $500,000 of cash received from customers. What amount of net sales must Alexander have recorded?
A) $315,000.
B) $685,000.
C) $500,000.
D) $185,000
Q2) Compute the amount of cash payments for operating expenses.
A) $138,600.
B) $141,750.
C) $189,000.
D) $174,825.
Q3) In the long run, it is more important for a business to generate positive cash flows from investing activities than from operating activities.
A)True
B)False
Q4) Free cash flow refers to the excess of cash inflows over cash outflows.
A)True
B)False
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Chapter 14: Financial Statement Analysis
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Q1) All of the following captions or subtotals are typical of a multiple-step income statement, except for:
A) Net sales.
B) Gross profit.
C) Total costs and expenses.
D) Operating income.
Q2) The quick ratio:
A) Is computed by dividing current assets by current liabilities.
B) Is always higher than the current ratio.
C) Cannot be higher than the current ratio.
D) May be higher or lower than the current ratio.
Q3) In a multiple-step income statement, interest expense usually is not classified as an operating expense because interest charges:
A) Do not contribute to the production of revenue.
B) Stem from the manner in which assets are financed, not the manner in which they are used in business operations.
C) Relate directly to the cost of goods sold.
D) The statement is incorrect. Interest usually is classified as an operating expense.
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Chapter 15: Global Business and Accounting
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Q1) Assume the exchange rate for the Canadian dollar is rising relative to the U.S. dollar. An American company will incur losses from this rising exchange rate if it is making:
A) Credit sales to Canadian companies at prices stated in Canadian dollars.
B) Credit purchases from Canadian companies at prices stated in U.S. dollars.
C) Credit sales to Canadian companies at prices stated in U.S. dollars.
D) Credit purchases from Canadian companies at prices stated in Canadian dollars.
Q2) A corporation that uses a strategy of hedging all contracts specifying a foreign currency (i.e. foreign accounts receivable and foreign accounts payable):
A) Will always be better off than if the contracts were not hedged.
B) Recognizes a net loss if the foreign exchange rate increases.
C) Avoids net losses from fluctuations in foreign exchange rates.
D) Recognizes a net gain if the foreign exchange rate increases.
Q3) As foreign exchange rates fall, importers based in the United States will lose and exporters will gain.
A)True
B)False
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Chapter 16: The Time Value of Money
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Q1) Compounding interest assumes the interest on an investment is reinvested.
A)True
B)False
Q2) The rate of interest is usually expressed as an annual rate.
A)True
B)False
Q3) How much must I invest today in order to have $25,000 in 5 years assuming 12% interest compounded annually?
A) $14,185.75.
B) $15,888.00.
C) $18,681.50.
D) $17.624.00.
Q4) Explain how compound interest applies to the time value of money.
Q5) The present value of a single amount is calculated by multiplying the future amount by the present value of $1 table.
A)True
B)False
Q6) An annuity due assumes the cash flow will occur at the beginning of the period.
A)True
B)False
Page 18
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