Introduction to Financial Accounting Exam Preparation Guide
Course Introduction
Introduction to Financial Accounting offers a foundational understanding of the principles and practices that govern the preparation and interpretation of financial statements. Through this course, students learn the accounting cycle, including recording transactions, adjusting entries, and preparing key financial reports such as the balance sheet, income statement, and cash flow statement. Emphasis is placed on understanding the relevance of financial information for decision-making by external users such as investors, creditors, and regulatory agencies. Real-world case studies and practical exercises help students develop skills necessary to analyze and communicate financial data effectively, ensuring readiness for more advanced studies or entry-level positions in the field of accounting.
Recommended Textbook
Financial and Managerial Accounting 10th Edition by Belverd E. Needles
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Page 2
Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) Which of the following is a regulatory agency?
A)IASB
B)SEC
C)FASB
D)GASB
Answer: B
Q2) The purchase of equipment is an example of an investing activity.
A)True
B)False
Answer: True
Q3) The expenses incurred by an accounting firm would appear on its balance sheet.
A)True
B)False
Answer: False
Q4) Staff accountants express their duty to ensure financial reports are not false or misleading in the management report that appears as part of the company's annual report.
A)True
B)False
Answer: False
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Chapter 2: Measurement Concepts: Recording Business Transactions
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Q1) Using the following transactions,calculate the ending balance of (A)total assets, (B)total liabilities, (C)Cash,and (D)Stockholders' Equity.Indicate whether each balance is debit or credit.
a.Began doing business by selling shares of common stock to investors for $72,000 in cash.
b.Paid one year's insurance in advance,$4,800.
c.Billed customers for services rendered,$12,000.
d.Received utility bill,to be paid next month,$800.
e.Received $1,600 in advance of performing a service.
f.Received $8,800 from customers billed in c.
g.Paid $600 on the utility bill of d.
h.Dividends of $4,000 were paid to common stock holders.
Answer: a.$81,000 debit ($72,000 + $12,000 + $1,600 - $600 - $4,000)
b.$1,800 credit ($800 + $1,600 - $600)
c.$73,000 debit ($72,000 + $1,600 + $8,800 - $4,800 - $600 - $4,000)
d.$79,200 credit ($72,000 + $12,000 - $800 - $4,000)
Q2) A transaction that increases expenses will decrease stockholders' equity.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Measuring Business Income: Adjusting the Accounts
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Sample Questions
Q1) An adjusted trial balance will probably list fewer accounts than are listed in the trial balance.
A)True
B)False
Answer: False
Q2) An adjusting entry can include a debit to a(n)
A)expense and a credit to an asset.
B)cash and a credit to a revenue.
C)liability and a credit to cash.
D)liability and a credit to an asset.
Answer: A
Q3) Revenue should be recognized,even when collectibility is not reasonably assured.
A)True
B)False
Answer: False
Q4) The primary purpose of an expense is to generate revenue. A)True
B)False
Answer: True
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Chapter 4: Foundations of Financial Reporting and the
Classified Balance Sheet
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Sample Questions
Q1) The current ratio for Cane Construction is
A)1.75.
B)0.57.
C)1.4.
D)2.0.
Q2) Which accounting convention could cause an overload of information for the financial statement user?
A)Consistency
B)Conservatism
C)Full disclosure
D)Materiality
Q3) The debt to equity ratio equals
A)stockholders' equity divided by total liabilities.
B)stockholders' equity divided by long-term liabilities.
C)total liabilities divided by stockholders' equity.
D)current liabilities divided by average stockholders' equity.
Q4) A material item is one that is likely to affect a user's decision.
A)True
B)False
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Chapter 5: Accounting for Merchandising Operations
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Q1) Under the perpetual inventory system,in addition to making the entry to record a sale,a company would
A)record an increase in inventory corresponding to the amount of the sale.
B)record a decrease in inventory and an increase in cost of goods sold for the cost of the merchandise sold.
C)record an increase in inventory corresponding to the cost of the inventory.
D)make no additional entry until the end of the period.
Q2) Positive operating income will result if gross margin exceeds A)operating expenses.
B)purchases.
C)cost of goods sold.
D)cost of goods sold minus operating expenses.
Q3) Operating expenses include cost of goods sold.
A)True
B)False
Q4) Which of the following activities is not a component of the operating cycle?
A)Payment of employees' wages
B)Sale of merchandise
C)Purchase of merchandise
D)Collection of cash from merchandise sales
Page 7
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Chapter 6: Inventories
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Q1) Which of the following costs usually would not be included in the inventory cost?
A)Storage costs
B)Related tariffs
C)Invoice price less purchases discounts
D)Insurance on goods in transit
Q2) Merchandise inventory is valued on the balance sheet at the expected resale price.
A)True
B)False
Q3) A retail store had goods available for sale during the period of $250,000 at retail and $100,000 at cost.It has ending inventory of $28,500 at retail.What is the estimated cost of goods sold?
A)$71,500
B)$94,300
C)$88,600
D)$82,900
Q4) The gross profit method requires that records be kept at both cost and retail.
A)True
B)False
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Chapter 7: Cash and Internal Control
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Q1) The bonding of employees is an example of which feature of a good system of internal control?
A)Authorization of transactions
B)Sound personnel policies
C)Separation of duties
D)Limited access to assets
Q2) In the financial statements,the balance of the Petty Cash account and the balance of the Cash account are shown separately.
A)True
B)False
Q3) The Sarbanes-Oxley Act of 2002 requires management to acknowledge its responsibility for internal control
A)in the company's annual report.
B)in a public statement posted on social media.
C)in a posted notice at the front of company headquarters.
D)in all of these.
Q4) Bonding provides a guarantee against theft.
A)True
B)False
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Chapter 8: Receivables
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Q1) A company that factors its receivables will have a less favorable receivable turnover than a company that does not factor.
A)True
B)False
Q2) Under the allowance method,uncollectible accounts must be estimated if the matching rule is to be followed.
A)True
B)False
Q3) A company performs the aging of accounts receivable calculation and arrives at an estimate for uncollectible accounts of $900.If Allowance for Uncollectible Accounts has a debit balance of $200 prior to the year-end adjustment,for how much should the adjustment be journalized?
A)$200
B)$700
C)$900
D)$1,100
Q4) A discounted note represents a contingent liability to the original holder.
A)True
B)False
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Chapter 9: Long-Term Assets
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Q1) Horshack Mining Company purchases a gravel pit for $5,000,000.It estimates that 10,000,000 tons of gravel can be extracted over the pit's useful life.If 2,000,000 tons are extracted during the first year but only 1,440,000 tons are sold,what amount should be recorded for Gravel Inventory and Depletion Expense,respectively?
A)$280,000 and 720,000
B)$720,000 and $280,000
C)$720,000 and 720,000
D)$280,000 and $1,000,000
Q2) Whether exchanging similar or dissimilar assets,accounting for the transaction is the same.
A)True
B)False
Q3) A copyright should be amortized over its legal life regardless of its expected useful life.
A)True
B)False
Q4) Inventory is classified as a long-term asset.
A)True
B)False
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Chapter 10: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) Salaries Payable would be recorded for
A)$21,520.
B)$23,968.
C)$25,952.
D)$28,400.
Q2) Which of the following is not a component of the operating cycle?
A)Sales to customers
B)Collection of accounts receivable
C)Recognition of depreciation
D)Purchases from suppliers
Q3) A business accepts a 12 percent,$94,000 note due in three years.Assuming simple interest,how much will the business receive when the note falls due?
A)$105,280
B)$127,840
C)$116,560
D)$94,000
Q4) Liabilities generally arise from expected future transactions.
A)True
B)False
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Chapter 11: Long-Term Liabilities
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Sample Questions
Q1) When determining the value of a bond using present value,what are the two components used in the calculation?
Q2) Parson Company issues $500,000 of 30-year,8 percent bonds at 106.Interest is paid semiannually,and the effective interest method is used for amortization.Assume that the market interest rate for similar investments is 7 percent and that the bonds are issued on an interest date.
a.What amount was received for the bonds?
b.How much interest is paid each interest period?
c.How much bond interest expense is recorded on the first interest date (after the issue date)?
d.What is the carrying value of the bonds after the first interest date (after the issue date)?
Q3) A corporation issues bond certificates to A)owners.
B)principals.
C)creditors.
D)debtors.
Q4) When fixed mortgage payments are made,in what way does the interest portion change each month,and why?
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Chapter 12: Stockholders Equity
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Sample Questions
Q1) Treasury stock is considered a reduction in stockholders' equity,not a purchase of assets .
A)True
B)False
Q2) A corporation's residual equity is its
A)preferred stock.
B)retained earnings.
C)common stock.
D)cash.
Q3) The entry to record the declaration of a cash dividend will
A)not affect working capital.
B)reduce working capital.
C)not affect total stockholders' equity.
D)increase total stockholders' equity.
Q4) On the balance sheet,treasury stock owned by the company is classified properly as A)contra-stockholders' equity.
B)current assets.
C)investments.
D)a note to the financial statements.
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Chapter 13: The Statement of Cash Flows
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Q1) Which of the following is reported as a noncash investing and financing transaction on the statement of cash flows?
A)Purchase of a building by taking out a long-term mortgage.
B)Purchase of treasury stock.
C)Payment of long-term debt.
D)Sale of preferred stock.
Q2) Lincoln Company engaged in this transaction: Accrued employee wages earned but not yet paid at year-end.
Indicate which section,if any,the above transaction would appear in,or relate to,on a statement of cash flows.
A)Financing activities section.
B)Investing activities section.
C)Does not represent a cash flow.
D)Operating activities section.
Q3) Since investing activities center on the long-term assets shown on the balance sheet,they do not include any short-term investments shown under current assets on the balance sheet
A)True
B)False
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) What is the inventory turnover for this corporation? Round your answer to one decimal place.
A)1.2 times
B)1.6 times
C)2.4 times
D)4.0 times
Q2) Which of the following describes the interest coverage ratio?
A)Income before income taxes plus interest expense divided by interest expense
B)Income after income taxes plus interest expense divided by interest expense
C)Income after income taxes divided by interest expense
D)Income before income taxes minus interest expense divided by interest expense
Q3) Cash flows to sales and cash flows to assets are measured in terms of A)times.
B)a percentage.
C)dollars.
D)days.
Q4) The lower the current ratio,the more likely the company will be able to meet its liabilities.
A)True
B)False
Page 16
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Chapter 15: Managerial Accounting and Cost Concepts
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Sample Questions
Q1) As units are completed,their costs are transferred from the Materials Inventory account to the Finished Goods Inventory account.
A)True
B)False
Q2) The evaluation stage of management process includes comparing actual with the established standards.
A)True B)False
Q3) Consider the following information: direct materials used totaled $124,700;direct labor amounted to $412,000;overhead was computed to be $789,600;Work in Process Inventory on March 1,2014,was $482,500;and Work in Process Inventory on March 31,2014,was $597,100.What was the cost of goods manufactured?
A)$1,211,700
B)$729,200
C)$1,440,900
D)$422,100
Q4) In a manufacturing company,an accountant's salary is a value-adding cost.
A)True
B)False
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Chapter 16: Costing Systems: Job Order Costing
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Q1) Ad-on International is an advertising company.It estimated the overhead costs for March,2014,to be $950,000 and direct labor hours to be 5,000 hours.In March,it incurred overhead costs of $1,150,000 and 5,100 labor hours. What is the predetermined overhead rate for March,2014?
A)$186 per direct labor hour
B)$190 per direct labor hour
C)$225 per direct labor hour
D)$230 per direct labor hour
Q2) Which of the following products would probably be produced by a company using a process costing system?
A)House
B)Wedding gowns
C)Bags
D)Movie
Q3) Which of the following represents the product costs on the income statement?
A)Cost of goods sold
B)Sales revenue
C)Sales commissions
D)None of these
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Chapter 17: Costing Systems: Process Costing
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Q1) Direct materials costs and conversion costs for the current period on a FIFO process cost report are divided by their respective units of equivalent production to arrive at the A)units to be started.
B)transferred-in cost per unit.
C)beginning inventory cost per unit.
D)cost per equivalent unit.
Q2) The company uses average process costing method. Equivalent units for conversion costs of Daylight during the month totaled A)9,500.
B)8,190.
C)8,690.
D)9,000.
Q3) When computing the cost per equivalent unit,the FIFO costing method considers A)current costs only.
B)current costs plus ending work in process inventory costs.
C)current costs less ending work in process inventory costs.
D)current costs plus beginning work in process inventory costs.
Q4) How are costs recognized,matched,and measured in a process costing system?
Q5) Mention the two cost allocation methods used in a process costing system.
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Chapter 18: Value-Based Systems: Activity-Based Costing and Lean Accounting
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Q1) Which of the four levels of the cost hierarchy would be used by a ice cream producer using an activity-based management for a production run of a certain quantity of ice cream of vanilla flavor?
A)Unit-level activity
B)Batch-level activity
C)Product-level activity
D)Facility-level activity
Q2) Backflush costing aims at decreasing waste in the production process.
A)True
B)False
Q3) Engineering design is an activity vital to the success of any motor vehicle manufacturer.Identify the level at which engineering design would be classified in the cost hierarchy used with ABC for a maker of a line of automobiles sold throughout the world.
A)Batch-level activity
B)Product-level activity
C)Facility-level activity
D)Unit-level activity
Q4) When using a just-in-time system,what qualities should be a supplier posses?
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Q5) Why is process value analysis not part of the general ledger accounting system?
Chapter 19: Cost-Volume-Profit Analysis
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Q1) Last year,RC Rancho's revenue was $120,000,000,variable costs were $90,000,000 and fixed costs were $15,000,000.RC Rancho's contribution margin ratio was 25 percent.
A)True
B)False
Q2) The new Corina watch has an expected selling price per watch of $42,the projected variable cost per unit is $24,and estimated fixed costs per month are $24,120. The expected breakeven point in sales dollars is
A)$48,240.
B)$32,160.
C)$40,200.
D)$56,280.
Q3) A contribution margin income statement is formatted to emphasize cost behavior rather than organizational functions.
A)True
B)False
Q4) Briefly explain the use of statistical methods to separate mixed cost components.
Q5) Explain what cost-volume-profit analysis is and how managers use it.
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Chapter 20: The Budgeting Process
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Q1) In estimating cash receipts and cash payments for the cash budget,many organizations prepare supporting schedules.
A)True
B)False
Q2) Financial budgets include
A)pro forma financial statements,a sales budget,and a cost of goods manufactured budget.
B)a budgeted income statement and budgeted balance sheet only.
C)a budgeted income statement,budgeted balance sheet,and cash budget.
D)pro forma financial statements,a capital expenditures budget,and a cash budget.
Q3) Which of the following do not serve as a source of data while preparing a cash budget?
A)A sales budget
B)Collection records
C)A budgeted balance sheet
D)A budgeted income statement
Q4) Budgets facilitate congruence between organizational and personal goals.
A)True
B)False
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Chapter 21: Flexible Budgets and Performance Analysis
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Q1) Which of the following types of incentives encourages an employee to think as both investor and employee?
A)Profit-sharing plans
B)Awards
C)Cash bonuses
D)Stock option programs
Q2) Awards are often used to encourage
A)intermediate performance.
B)short-term performance.
C)long-term performance.
D)both short-term and long-term performance.
Q3) The effectiveness of a performance management and evaluation system depends on how well it coordinates the goals of
A)the entire company.
B)responsibility centers.
C)managers.
D)All of these choices
Q4) Identify and describe the five different responsibility centers,and provide one example of each.
Q5) Write a brief note on the performance-based pay.
Page 23
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Chapter 22: Standard Costing and Variance Analysis
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Q1) The standard fixed overhead rate is usually based on the expected number of standard labor hours.
A)True B)False
Q2) The flexible budget formula is an equation that determines budgeted costs for any level of output.
A)True B)False
Q3) Compute the variable overhead spending variance.
A)$10,000 (F)
B)$10,000 (U)
C)$40,000 (F)
D)$40,000 (U)
Q4) Variance analysis includes all of the following except A)taking corrective action.
B)investigating all significant and insignificant variances.
C)developing performance measures to track activities causing the variance.
D)computing variances.
Q5) Discuss the keys to preparing a performance report based on standard costs and related variances.
24
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Chapter 23: Short-Run Decision Analysis
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Q1) Sunk costs are irrelevant for decision making.
A)True
B)False
Q2) Implementing an outsourcing decision that affects current operations falls under which stage of the management process?
A)Planning
B)Performing
C)Evaluating
D)Communicating
Q3) What are the two steps in the analysis of a sales mix decision?
Q4) A segment margin is a segment's sales revenue minus its direct variable costs and direct fixed costs traceable to the segment.
A)True
B)False
Q5) What is the relevant cost to produce one unit?
A)$52
B)$60
C)$78
D)$86
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Chapter 24: Capital Investment Analysis
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Q1) Assume revenues are received in cash and expenses,except for depreciation,are paid in cash.Based on this assumption,which of the following statements is true?
A)Net cash flows for a period are equal to net income minus depreciation expense.
B)Net cash flows for a period are equal to net income.
C)Net cash flows for a period are equal to net income plus depreciation expense.
D)Net cash flows for a period are equal to net income plus income tax expense.
Q2) As part of the performing stage of management,capital investment decisions are implemented with proper controls.
A)True
B)False
Q3) Using the above information for Memphis,the machine's net present value is
A)$21,800.
B)$(3,285).
C)$79,915.
D)$(4,286).
Q4) Why is the residual value of equipment relevant when considering the replacement of equipment?
Q5) In what situations is the payback period method especially useful?
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Chapter 25: Pricing Decisions, including Target Costing and Transfer Pricing
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Q1) Marginal cost is the change in total cost caused by a one-unit change in output.
A)True
B)False
Q2) Using a negotiated-price approach,what is the negotiation floor for Division A?
A)$13.70
B)$16.35
C)$16.44
D)$17.72
Q3) Preparing reports that explain the results of past pricing policies and recommend new ones falls under which stage of the management process?
A)Planning
B)Performing
C)Evaluating
D)Communicating
Q4) One approach to the development of a transfer price is to use the market value if the item has an existing market at the time of transfer.
A)True
B)False
Q5) What are the four pricing rules managers must follow to stay in business?
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Chapter 26: Quality Management and Measurement
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Q1) Two respected techniques made popular by Six Sigma are
A)TQM and ROQ.
B)TQM and kaizen.
C)kaizen and benchmarking.
D)benchmarking and process mapping.
Q2) The costs of nonconformance are made up of
A)prevention costs and appraisal costs.
B)internal failure costs and external failure costs.
C)vendor performance and customer satisfaction.
D)product design and production performance.
Q3) Based on the graph above,which company is taking the most serious approach to TQM?
A)A Co.
B)B Co.
C)C Co.
D)Insufficient data to determine answer.
Q4) Warranty claims are an example of internal failure costs of nonconformance to customer standards.
A)True
B)False
Page 28
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Chapter 27: Accounting for Unincorporated Businesses
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Q1) Which of the following statements is correct regarding partnerships?
A)Accounting for a partnership is similar to accounting for a sole proprietorship.
B)If the partnership assumes a liability related to an asset invested in the partnership,the asset is debited,the partner's capital account is credited and a liability account is credited.
C)It is necessary to maintain separate Capital and Withdrawals accounts for each partner.
D)All of these choices.
Q2) If a partnership agreement does not specify how income is to be distributed,the partners share the income equally.
A)True
B)False
Q3) When a new partner invests less than the proportionate share he or she receives in the partnership,a bonus is recorded to his or her account.
A)True
B)False
Q4) Describe how a dissolution of a partnership is different from a liquidation of a partnership.
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Chapter 28: Accounting for Investments
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Q1) When a company receives a dividend from its investee,what will be the effect on the financial statements of the investing company if it uses the equity method?
Q2) As long as an investment can be sold within a short period of time,it must be classified as a current asset.
A)True
B)False
Q3) Short-term available-for-sale securities are valued on the balance sheet at A)market value.
B)cost,adjusted for the effects of interest.
C)cost.
D)lower of cost or market.
Q4) With few exceptions,all subsidiaries in which the parent company owns a controlling interest (more than 50 percent)must be consolidated with the parent company for financial reporting purposes.
A)True B)False
Q5) Trading securities are valued on the balance sheet at market value. A)True B)False
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