Introduction to Financial Accounting
Textbook Exam Questions
Course Introduction
Introduction to Financial Accounting offers students a thorough foundation in the principles and practices of accounting, focusing on the collection, processing, and presentation of financial information for external users. The course explores key concepts such as the accounting cycle, double-entry bookkeeping, preparation of financial statements, and the role of generally accepted accounting principles (GAAP). Emphasis is placed on the interpretation and analysis of balance sheets, income statements, and cash flow statements, enabling students to understand how businesses communicate their financial performance and position. Through practical exercises and case studies, students develop skills essential for informed decision-making in business and finance contexts.
Recommended Textbook
Principles of Accounting 11th Edition by Belverd E. Needles
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Chapter 1: Uses of Accounting Information and the Financial Statements
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Q1) Which of the following is the correct accounting equation?
A) Assets = Liabilities + Owner's Equity
B) Assets + Owner's Equity = Liabilities
C) Assets = Liabilities - Owner's Equity
D) Assets + Liabilities = Owner's Equity
Answer: A
Q2) Flores Realty Company had the following balance sheet accounts and balances:
\(\begin{array}{lrlr}
\text { Accounts Payable } & \$ 6,000 & \text { Earl Flores, Capital } & ? \\
\text { Accounts Receivable } & 1,000 & \text { Equipment } & \$ 7,000 \\
\text { Building } & 8,000 & \text { Land } & 7,000 \\
\text { Cash } & 3,000 & & \\
\end{array}\) If, $3,000 of Accounts Payable were paid in cash, what would be the total of liabilities and owner's equity?
A) $14,000
B) $23,000
C) $18,000
D) $19,000
Answer: B
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Chapter 2: Analyzing Business Transactions
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Q1) A withdrawal of cash by the owner will reduce which of the following accounts?
A) Owner's Withdrawals
B) Owner's Capital
C) Accounts Receivable
D) Accounts Payable
Answer: B
Q2) Liabilities are established with debits and eliminated with credits.
A)True
B)False
Answer: False
Q3) The Post. Ref. column in the general ledger shows that an amount has been posted when which of the following is placed in it?
A) The journal page number
B) An X
C) A check mark
D) The account number
Answer: A
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Chapter 3: Measuring Business Income
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Q1) Which of the following accounts probably would not appear in a trial balance but probably would appear in an adjusted trial balance?
A) Accumulated Depreciation-Equipment
B) Cash
C) Depreciation Expense-Equipment
D) Unearned Revenue
Answer: C
Q2) Which of the following transactions results in the recognition of an expense?
A) Expiration of the usefulness of equipment during the accounting period
B) Payment on an account payable
C) Withdrawal of cash by the owner
D) Payment on the principal portion of a loan
Answer: A
Q3) All increases to cash are from revenues.
A)True
B)False
Answer: False
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Chapter 4: Completing the Accounting Cycle
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Q1) A revenue account is closed with a credit to the revenue account and a debit to Income Summary.
A)True
B)False
Q2) The adjusting entries involving Depreciation Expense-Buildings and Supplies Expense could be reversed.
A)True
B)False
Q3) During the closing process, expenses are transferred to the credit side of the Income Summary account.
A)True
B)False
Q4) A reversing entry could include a
A) debit to a revenue account.
B) debit to an expense account.
C) credit to a revenue account.
D) debit or a credit to Cash.
Q5) The Income Summary account will appear on the post-closing trial balance. A)True B)False
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Chapter 5: Financial Reporting and Analysis
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Q1) The relevance of accounting information is also an indication of its reliability.
A)True
B)False
Q2) Operating expenses include cost of goods sold.
A)True
B)False
Q3) For a merchandising company, the difference between net sales and operating expenses is called gross margin.
A)True
B)False
Q4) Other revenues and expenses appears as a separate section on a single-step income statement.
A)True
B)False
Q5) Current assets divided by current liabilities is known as the A) profit margin.
B) current ratio.
C) working capital.
D) capital structure.
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Chapter 6: The Operating Cycle and Merchandising Operations
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Q1) Under the perpetual inventory system, which of the following accounts would not be used?
A) Cost of Goods Sold
B) Merchandise Inventory
C) Sales
D) Purchases
Q2) A company would be more likely to know the amount of inventory on hand if it used the periodic inventory system rather than the perpetual inventory system.
A)True
B)False
Q3) If it takes 45 days to sell inventory, 30 days to collect for the sale, and creditors' payment terms are 60 days, the financing period is 15 days.
A)True
B)False
Q4) An advantage of using the periodic inventory system is that it requires less recordkeeping than the perpetual inventory system.
A)True
B)False
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Chapter 7: Internal Control
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Q1) In the financial statements, the balance of the Petty Cash account and the balance of main cash account are shown separately.
A)True
B)False
Q2) Good internal control dictates that each employee should oversee only part of a transaction.
A)True
B)False
Q3) Which of the following sets of documents are in the correct sequence?
A) Purchase order, check, receiving report
B) Purchase requisition, purchase order, invoice
C) Purchase requisition, receiving report, purchase order
D) Purchase order, purchase requisition, invoice
Q4) The financial statements of nonpublic companies are not required to be audited by an independent CPA.
A)True
B)False
Q5) Taking a physical inventory is not necessary under a perpetual inventory system.
A)True
B)False
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Chapter 8: Inventories
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Q1) The LIFO method is rarely used because most companies do not sell the last goods they purchase first.
A)True
B)False
Q2) The higher the value assigned to ending inventory, the lower the gross margin.
A)True
B)False
Q3) An overstatement of beginning inventory in a period will result in an overstatement of gross margin in the next period.
A)True
B)False
Q4) Which inventory method generally best follows the matching principle?
A) Average-cost
B) LIFO
C) Whichever method is used for tax purposes
D) FIFO
Q5) What is a LIFO liquidation, and what is its effect on income before income taxes?
Q6) Why are cost flow assumptions made when accounting for merchandise inventory?
Q7) What is the chief objective of supply-chain management? How is it accomplished?
Page 10
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Chapter 9: Cash and Receivables
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Q1) Customers' accounts with credit balances should be disclosed as a(n)
A) expense on the income statement.
B) current liability on the balance sheet.
C) offset to Accounts Receivable on the asset side of the balance sheet.
D) note to the financial statements.
Q2) The following data exist for Conner Company: \(\begin{array}{lll} & 2010 & 2009 \\
\text { Accounts Receivable } & \$ 80,000 & \$ 90,000 \\
\text { Sales }& 533,000 & 410,500
\end{array}\) Calculate the receivable turnover and the average days' sales uncollected for 2010 .
Q3) The higher the receivable turnover, the lower the days' sales uncollected.
A)True
B)False
Q4) The direct charge-off method of recognizing uncollectible accounts is not in accordance with good accounting practice.
A)True
B)False
Q5) Why do businesses need to keep some currency on hand?
Page 11
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Chapter 10: Current Liabilities and Fair Value Accounting
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Q1) Sales Tax Payable is an example of a(n)
A) estimated liability.
B) contingent liability.
C) trade liability.
D) definitely determinable liability.
Q2) Interest on a promissory note is recognized when the note is issued.
A)True
B)False
Q3) First City Bank computes interest semiannually. If the interest rate is currently 6 percent pa, the amount deposited today should be multiplied by which future value factor to calculate the amount that will accumulate by the end of 10 years?
A) 20 periods at 12 percent
B) 20 periods at 3 percent
C) 10 periods at 6 percent
D) 10 periods at 3 percent
Q4) All factors in a present value of a single sum table are less than 1.000.
A)True
B)False
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Chapter 11: Long Term Assets
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Q1) Which of the following accounting principles best justifies accelerated depreciation accounting?
A) Materiality
B) Matching
C) Full disclosure
D) Consistency
Q2) A truck that cost $12,000 and on which $9,000 of accumulated depreciation has been recorded was disposed of on January 1. Assume that the truck was traded for a similar truck having a price of $13,000, that an $1,800 trade-in was allowed, and that the balance was paid in cash. The amount of the gain or loss recognized on this transaction would be
A) a $1,200 loss.
B) a $1,200 gain.
C) no gain recognized.
D) no loss recognized.
Q3) In 2010, Minneapolis Mining purchased a mineral deposit for $12,000,000. It is estimated that 15,000,000 tons can be extracted from the mine. Calculate depletion expense during 2010 when 700,000 tons were extracted and sold.
Q4) What is goodwill and when may it be recorded?
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Chapter 12: Contributed Capital
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Q1) Holders of common stock must be made aware of possible restrictions on common dividends when the preferred stock is
A) convertible.
B) cumulative.
C) callable.
D) noncumulative.
Q2) If there is no change in the number of shares authorized and issued from one year to the next, but there is a change in the number of shares outstanding on those same dates, how would you explain that change?
Q3) The board of directors of Irondale Corporation declared a cash dividend of $2.50 per share on 57,000 shares of common stock on June 14, 2010. The dividend is to be paid on July 15, 2010, to shareholders of record on July 1, 2010. The effects of the entry to record the payment of the dividend on July 15, 2010, are to
A) increase assets and decrease stockholders' equity.
B) decrease stockholders' equity and decrease liabilities.
C) decrease liabilities and decrease assets.
D) increase stockholders' equity and decrease liabilities.
Q4) Define outstanding stock.
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Chapter 13: Long Term Liabilities
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Q1) When bonds are converted to stock, any excess carrying value of the bonds over the par value of the stock is to be recorded as Additional Paid-in Capital.
A)True
B)False
Q2) Under an operating lease, each monthly payment is debited by the lessee to Rent Expense.
A)True
B)False
Q3) When bonds are called for retirement, any excess of the bonds' call price over the bonds' carrying value is reported as a gain on the income statement.
A)True
B)False
Q4) A bond agreement is referred to as the debenture.
A)True
B)False
Q5) Financial leverage is also known as trading on the equity.
A)True B)False
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Chapter 14: The Corporate Income Statement and the Statement of Stockholders Equity
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Q1) A convertible security is used in the computation of
A) diluted earnings per share.
B) simple earnings per share.
C) undiluted earnings per share.
D) primary earnings per share.
Q2) What issues must be considered when determining whether or not an uninsured loss from tornado destruction should be treated as an extraordinary item?
Q3) A business with 100,000 shares of stock outstanding for three months would use a weighted-average 25,000 shares in its earnings per share calculation.
A)True
B)False
Q4) A company had 48,000 shares outstanding from January 1 to June 1 and 72,000 shares outstanding from June 1 to December 31. What is the weighted-average number of shares used in earnings per share calculations?
A) 58,000
B) 60,000
C) 62,000
D) 64,000
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Chapter 15: The Statement of Cash Flows
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Q1) Cash flows to sales is a measure of free cash flow.
A)True
B)False
Q2) If net cash flows from operating activities were $194,000, net income were $50,000, and net sales were $600,000, the cash flow yield would equal (Round amounts to one decimal place)
A) $144,000.
B) $244,000.
C) 3.9 times.
D) $406,000
Q3) During 2009, Heckart Corporation had sales of $250,000, net income of $25,000, average total assets of $350,000, dividend payments of $17,500, net cash flows from operating activities of $36,000, purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash flows to assets equals (Round amounts to one decimal place)
A) 18.0 percent.
B) 14.4 percent.
C) 12.0 percent.
D) 10.3 percent.
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Chapter 16: Financial Performance Measurement
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Q1) The price/earnings (P/E) ratio is an indication of investor confidence in a company.
A)True
B)False
Q2) A change from FIFO to LIFO in a period of rising prices will
A) decrease both the current ratio and the inventory turnover ratio.
B) increase both the current ratio and the inventory turnover ratio.
C) increase the current ratio and decrease the inventory turnover ratio.
D) decrease the current ratio and increase the inventory turnover ratio.
Q3) Market strength is the ability to increase the wealth of stockholders.
A)True B)False
Q4) Days' payable is a measure of A) liquidity.
B) volatility.
C) long-term solvency. D) profitability.
Q5) In a common-size balance sheet, total assets are represented by 100 percent. A)True B)False
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Chapter 17: Partnerships
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Q1) Warren and Spencer are partners in a drilling operation. Warren purchased a drilling rig to be used in the partnership's operations. Is this purchase binding on Spencer even though he was not involved in it? Explain your answer.
Q2) It is possible to allocate income or loss to partners based solely on interest.
A)True
B)False
Q3) Which of the following partnership characteristics is a disadvantage?
A) Participation in partnership income
B) Ease of dissolution
C) Unlimited liability
D) Voluntary association
Q4) Total partners' equity will not change when a withdrawing partner
A) withdraws assets equal to his or her capital balance
B) withdraws assets amounting to less than his or her capital balance
C) sells his or her interest to a new or remaining partner
D) withdraws assets amounting to greater than his or her capital balance
Q5) In a partnership gain or Loss from Realization is debited for a loss.
A)True
B)False
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Chapter 18: The Changing Business Environment-A
Managers Pers
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Q1) Comparing actual performance with expected performance levels is an evaluation activity.
A)True
B)False
Q2) Benchmarking enables a company to determine whether it is making continuous improvement in its operations without regard to competition.
A)True
B)False
Q3) The main goal of total quality management is to reduce product costs.
A)True
B)False
Q4) In a JIT system, materials and parts are not stockpiled.
A)True
B)False
Q5) Financial accounting information is determined objectively and is verifiable, whereas management accounting usually represents subjective estimates of future events.
A)True B)False
Q6) Identify three uses of the costs of quality information. Page 20
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Chapter 19: Cost Concepts and Cost Allocation
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Q1) The controller for Drisau Company has gathered the following overhead data on the company's two products: estimated total overhead, $180,000 (consisting of the $70,000 for setups and $110,000 for assembly); estimated direct labor hours (Product A, 6,000; Product B, 3,000); estimated number of setups (Product A, 750; Product B, 1,250); estimated number of machine hours used in assembly (Product A, 3,000; Product B, 5,000); estimated number of units produced (Product A, 500; Product B, 200).
Using the traditional approach:
a. Calculate the predetermined overhead rate using direct labor hours as the cost driver.
b. Compute the amount of overhead costs applied to each product in total and per unit.
Q2) Which of the following financial statements is unique to a production-oriented company?
A) Balance sheet
B) Statement of cash flows
C) Income statement
D) Statement of cost of goods manufactured
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Chapter 20: Costing Systems: Job Order Costing
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Q1) In a job order costing system, when overhead costs are applied, they increase the Work in Process Inventory account.
A)True
B)False
Q2) The balance in the Work in Process Inventory account on April 1 was $25,000, and the balance on April 30 was $22,600. Costs incurred during the month were as follows: direct materials, $41,250; direct labor, $21,300; and overhead, $32,600. What amount was transferred to the Finished Goods Inventory account for April?
A) $97,550
B) $2,400
C) $88,550
D) $120,150
Q3) Job order costing is used by companies that make large or unique products. A)True B)False
Q4) In a service organization using a job order costing system, actual overhead will be the same as applied overhead.
A)True
B)False
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Chapter 21: Costing Systems Process Costing
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Q1) Which of the following is not included in conversion costs?
A) Indirect labor
B) Direct labor
C) Direct materials
D) Overhead
Q2) In a process costing system, the cost of ending work in process inventory for a period can be verified by reference to supporting analysis in
A) materials requisitions and labor time tickets.
B) cost recap included in the statement of production.
C) cost recap included in the process cost report.
D) none of the above.
Q3) Regardless of the cost accounting system used, when the products are completed, they are transferred from work in process inventory to finished goods inventory.
A)True
B)False
Q4) The number of possible combinations of product flows and production processes is limitless.
A)True
B)False
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Chapter 22: Activity-Based Systems-Abm and Lean
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Q1) Which one of the four levels of the cost hierarchy would be used by a dress manufacturer that uses activity-based management to design a pattern for a new dress style?
A) Unit-level activity
B) Batch-level activity
C) Product-level activity
D) Facility-level activity
Q2) Process value analysis (PVA) identifies all activities of a production and/or assembly operation for the purpose of
A) preparing budgets based on activity centers.
B) determining the value of the process.
C) replacing cost drivers used in cost assignment analyses with activities.
D) relating cost assignment to the activities that caused the cost to be incurred.
Q3) When managing inventory in a just-in-time environment, there is less need to control personnel.
A)True
B)False
Q4) When using a just-in-time system, what qualities should be used to evaluate a supplier?
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Chapter 23: Cost Behavior Analysis
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Q1) Adding the contribution margin as a component to cost-volume-profit computations will not change the resulting amount of breakeven units in a given situation.
A)True
B)False
Q2) Dapper Hat Makers is in the business of designing and producing specialty hats. The material used for derbies costs $4.50 per unit, and Dapper pays each of its two full-time employees $250 per week. If Employee A makes 15 derbies in one week, what is the variable cost per derby? (Round to two decimal places where necessary.)
A) $4.50
B) $15.00
C) $16.67
D) $21.17
Q3) The breakeven formula adjusted for profits may be stated as
A) S = VC - FC + P.
B) S = VC - FC - P.
C) VC + FC - P = S.
D) S = VC + FC + P.
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Chapter 24: The Budgeting Process
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Q1) Leaverton's forecast of sales is as follows: July, $60,000; August, $90,000; September, $130,000. Sales are normally 80 percent cash and 20 percent credit in any month. Credit sales are collected in full in the following month. Merchandise cost averages 60 percent of sales price. The company desires an inventory as of September 30 of $52,000. The inventory as of June 30 was $25,000. Total cash receipts for August will be
A) $72,000.
B) $66,000.
C) $98,000.
D) $84,000.
Q2) Managers do not need to know why a budget is being prepared. A)True
B)False
Q3) The last step in a master budget is to prepare a A) cost of goods manufactured budget. B) budgeted balance sheet.
C) cash budget. D) sales budget.
Q4) Describe three benefits budgeting provides to an organization's success.
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Chapter 25: Performance Management and Evaluation
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Q1) What are some items that can affect an investment center's EVA calculation, and how can EVA be improved?
Q2) The manager of Center E provides human resource support for the other centers in the company. What type of responsibility center is Center E?
A) Cost center
B) Discretionary cost center
C) Revenue center
D) Investment center
Q3) For purposes of computing EVA, the minimum desired rate or return on an investment is known as
A) ROI.
B) cost of capital.
C) residual income.
D) profit margin.
Q4) Provide three examples of something that an organization might want to measure and a performance measurement that could be utilized in each example.
Q5) Identify and describe the five different responsibility centers, and provide one example of each.
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Chapter 26: Standard Costing and Variance Analysis
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Q1) It is not necessary to provide an area on the performance report for a manager's reasons for variances.
A)True
B)False
Q2) The static budget can be adjusted automatically for changes in the level of output.
A)True
B)False
Q3) A favorable fixed overhead volume variance for a manufacturing company could indicate
A) the creation of excess inventory.
B) the actual overhead exceeded the budgeted overhead.
C) sales exceeded production.
D) variable overhead costs were less than fixed overhead costs.
Q4) When a manufacturing company employs standard costs, all costs affecting the three inventory accounts and the Cost of Goods Sold account are stated in terms of standard or predetermined costs rather than in terms of actual costs incurred.
A)True
B)False
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Chapter 27: Short Run Decision Analysis
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Q1) Which of the following statements about incremental analysis is false?
A) It is based on both historical and future information relevant to the decision at hand.
B) It focuses on the differences between alternatives.
C) It reduces the time taken to select the best course of action.
D) It makes the evaluation process easier for the decision maker.
Q2) A special order should be accepted only if it maximizes operating income.
A)True
B)False
Q3) Outsourcing production or operating activities will help in improving the cash flow by reducing investment in physical assets.
A)True
B)False
Q4) A cost that does not change between the alternatives is known as a differential cost. A)True
B)False
Q5) The cost of a previously purchased machine is an example of a sunk cost.
A)True B)False
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Chapter 28: Capital Investment Analysis
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Q1) What role do marketing specialists play in capital investment analysis?
A) They predict sales trends and new product demands.
B) They provide estimates as to how much money can be spent on capital facilities.
C) They supply a target cost of capital.
D) They designate the desired rate of return.
Q2) Cost of capital of a company will be determined in four steps.
A)True
B)False
Q3) The proposals with the highest rank are funded first in the capital investment decisions.
A)True
B)False
Q4) Smile Industries capital structure consists of $1,000,000 of debt at 6 percent interest and 1,500,000 of stockholders equity at 2 percent. The average cost of capital of Smile Industries is
A) 2.4%
B) 1.2%
C) .6%
D) 3.6%
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