Introduction to Financial Accounting
Exam Materials
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles, concepts, and procedures used in the preparation and interpretation of financial statements. The course covers the accounting cycle, including the recording of transactions, adjusting entries, and the preparation of income statements, balance sheets, and cash flow statements. Students will explore the role of accounting in decision-making for businesses and other organizations, gain insights into key accounting standards, and develop analytical skills for evaluating financial information. This course is ideal for those seeking to build essential skills for careers in business, finance, or further studies in accounting.
Recommended Textbook
Horngren's Accounting 11th Edition by Tracie L. Miller Nobles
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Chapter 1: Accounting and the Business Environment
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Q1) Genity Company records business transactions in dollars and disregards changes in the value of a dollar over time.Which of the following accounting assumptions does this represent?
A)economic entity assumption
B)going concern assumption
C)accounting period assumption
D)monetary unit assumption
Answer: D
Q2) Which of the following is a characteristic of a corporation?
A)A corporation is owned by stockholders.
B)Lenders of a corporation do not have the right to claim the corporation's assets to satisfy their obligations.
C)All shares of a corporation must be held by a single individual.
D)Each stockholder has the authority to commit the corporation to a binding contract through his/her actions.
Answer: A
Q3) What is the calculation for return on assets (ROA)? What does ROA measure?
Answer: Return on Assets = Net income / Average total assets.
ROA measures how profitably a company uses its assets.
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) The trial balance is an internal document used only by employees of the company.
A)True
B)False
Answer: True
Q2) Which of the following statements is true of expenses?
A)Expenses increase equity,so an expense account's normal balance is a credit balance.
B)Expenses decrease equity,so an expense account's normal balance is a credit balance.
C)Expenses increase equity,so an expense account's normal balance is a debit balance.
D)Expenses decrease equity,so an expense account's normal balance is a debit balance.
Answer: D
Q3) A trial balance is the list of only a company's debit accounts along with their account numbers at a point in time.
A)True
B)False
Answer: False
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Chapter 3: The Adjusting Process
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Q1) On the first day of January,Harris Company borrowed $3,000 on a one-year note payable bearing interest at 5% per year.The note specifies that principal and interest must be paid in full at the end of the one-year period.On June 30,the adjusted trial balance will show Interest Payable of ________.
A)$75 credit
B)$75 debit
C)$150 credit
D)$150 debit
Answer: A
Q2) For accounting purposes,depreciation refers to the ________.
A)method of allocating the cost of a plant asset to expense it over its useful life
B)method of declining the market value of an asset to its book value
C)method of estimating an asset's current market value
D)process of selling a used asset
Answer: A
Q3) Prepaid Insurance is an asset account that appears on the balance sheet.
A)True
B)False
Answer: True
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Chapter 4: Completing the Accounting Cycle
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Q1) In the closing process,the Owner,Withdrawals account is closed to the Owner,Capital account.
A)True
B)False
Q2) In an accounting cycle,which of the following steps takes place only at the end of the accounting period?
A)start with the beginning account balances
B)journalize transactions that occur
C)analyze transactions as they occur
D)journalize adjusting entries
Q3) Which of the following accounts will be included in a post-closing trial balance?
A)Service Revenue
B)Interest Payable
C)Interest Expense
D)Utilities Expense
Q4) The Owner,Capital account is a permanent account.
A)True
B)False
Q5) List the steps of the accounting cycle that take place at the end of the period.
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Chapter 5: Merchandising Operations
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Q1) The net income calculated using either the single-step or multi-step income statement formats is always the same.
A)True
B)False
Q2) G-mart,a small-scale grocer,wants to introduce an inventory system to track its inventory.G-mart does not currently use optical scanning registers and computer systems.The perpetual inventory system is most suitable for its operations.
A)True
B)False
Q3) Credit terms of a merchandising company are 1/15,net 40.This means that the buyer can receive a discount of 1% if the invoice is paid within 40 days of the invoice date. A)True
B)False
Q4) A single-step income statement shows subtotals for gross profit and operating income.
A)True
B)False
Q5) What does the gross profit percentage measure? How is it computed?
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Chapter 6: Merchandise Inventory
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Sample Questions
Q1) Which of the following inventory valuation methods minimizes income tax expense during a period of rising inventory costs?
A)first-in,first-out
B)last-in,first-out
C)weighted-average
D)specific identification
Q2) Which of the following inventory costing methods yields the highest net income during a period of rising inventory costs?
A)specific identification
B)weighted-average
C)last-in,first-out
D)first-in,first-out
Q3) The disclosure principle states that a company should disclose all major accounting methods and procedures in the ________.
A)balance sheet
B)income statement
C)footnotes to the financial statements
D)internal accounting documents
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Chapter 7: Accounting Information Systems
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Sample Questions
Q1) The purchases journal of a business that uses the periodic inventory system will include a column titled ________.
A)Cost of Goods Sold DR
B)Purchases DR
C)Accounts Payable DR
D)Merchandise Inventory DR
Q2) The collection of time records is an accounting information system activity that is classified as a business transaction involving the sale of merchandise inventory.
A)True
B)False
Q3) A control account ________.
A)does not appear on the balance sheet
B)has a balance that equals the sum of the balances in a group of related accounts in a subsidiary ledger
C)is equivalent to a contra account and represents the offsetting nature of debits and credits on a firm's financial statements
D)holds individual accounts that support a general ledger account
Q4) Describe the transactions recorded in the purchases journal.
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Chapter 8: Internal Control and Cash
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Q1) For good controls over cash payments,the person who orders goods from a supplier should always be different from the person who approves the payment.
A)True B)False
Q2) As a part of the internal control over cash receipts by mail,the mailroom sends both the customer checks and the remittance advices to the accounting department.
A)True B)False
Q3) Why is it necessary to journalize transactions from the bank reconciliation? List two examples of items that need to be journalized.
Q4) Journal entries are required for the reconciling items on the book side because ________.
A)those transactions have not yet been recorded by the bank
B)the adjusted balances on both sides are the same amounts
C)the amounts are immaterial
D)those transactions have not yet been recorded on the company's books
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Chapter 9: Receivables
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Sample Questions
Q1) Which of the following is a disadvantage when a business accepts credit cards or debit cards from customers?
A)The business bears the responsibility of collecting cash from the customer.
B)The business bears the risk of nonpayment by the customer.
C)The business pays a processing fee.
D)The business checks customers' credit ratings.
Q2) On August 14,Main Street Bank lent $300,000 to City Cafe on a 75 day,5% note.What is the maturity date of the note?
A)Oct.27
B)Oct.28
C)Oct.29
D)Oct.30
Q3) On December 1,2017,Sheehan,Inc.sold machinery to a customer for $2,000.Sheehan regularly sells machinery.The customer could not pay at the time of sale but agreed to pay 9 months later and signed a 9-month note at 12% interest.Prepare the journal entry to record the revenue at the time of sale.Ignore the entry for cost of goods sold.
Q4) A receivable is a monetary claim against a business or an individual.
A)True
B)False
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Chapter 10: Plant Assets, natural Resources, and Intangibles
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Sample Questions
Q1) MacLean Corp.purchased a mine on January 1,2016,for $500,000 .The mine is estimated to contain 30,000 tons of iron ore.There is no residual value.The business has extracted and sold 2,500 tons of ore in 2016.Prepare the journal entry to record depletion expense for 2016.(Round your intermediate calculations to the nearest cent. )
Q2) The type of intangible asset related to the exclusive right to reproduce and sell a book or intellectual property is a ________.
A)franchise
B)trademark
C)copyright
D)patent
Q3) Capitalizing a cost involves crediting the asset account.
A)True
B)False
Q4) Prepare the journal entry to record the acquisition of a plant asset for $5,000 cash.
Q5) The asset turnover ratio is calculated by dividing cost of goods sold by average total assets.
A)True
B)False
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Chapter 11: Current Liabilities and Payroll
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Q1) Net pay is the total amount of compensation that an employee takes home after the deductions are made.
A)True
B)False
Q2) Cambridge Sales,Inc.has gross salaries and wages for March of $45,000.Provide the journal entry to record salaries and wages expense and payroll withholdings.(Assume a FICA-OASDI Tax of 6.2% and FICA-Medicare Tax of 1.45%. )Salaries and wages to date are under the OASDI limit.Assume no federal or state income taxes are due.
Q3) Sandstorm,Inc.signed a 200-day,5%,$5,000 note on April 1,2017,and this was the only note payable for the company.Calculate the times-interest-earned ratio of Sandstorm,Inc.if its earnings before interest and taxes for the year ending December 31,2017,is $4,300.(Use a 360-day year. )
Q4) Which of the following accounts will be credited by the borrower when a promissory note is issued?
A)Note Payable
B)Note Receivable
C)Interest Payable
D)Cash
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Chapter 12: Partnerships
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Sample Questions
Q1) When a partner dies,the partnership ceases to exist,and the deceased partner's estate will have ownership of the partner's equity in the partnership.
A)True
B)False
Q2) Steve and Roger allocate 2/3 of their partnership's profits and losses to Steve and 1/3 to Roger.If the net income of the firm is $30,000,calculate the share of Roger's net income.
A)$20,000
B)$10,000
C)$30,000
D)$25,000
Q3) Marshall retires from the partnership of Marshall,Mark,and Dennis.Marshall had a capital balance of $25,000.If Marshall received $25,000 as final settlement,how will this transaction affect the balance sheet items?
A)Cash will increase.
B)Liabilities will increase.
C)Liabilities will decrease.
D)Equity will decrease.
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Chapter 13: Corporations
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Q1) Lerner,Inc.had the following transactions in 2017,its first year of operations:
Issued 25,000 shares of common stock.The stock has a par value of $2.00 per share and was issued at $14.00 per share.
Issued 1,700 shares of $150 par value preferred stock at par.
Earned net income of $36,000.
Paid no dividends.
At the end of 2017,what is total stockholders' equity?
A)$641,000
B)$305,000
C)$300,000
D)$605,000
Q2) The declaration of a cash dividend does not create an obligation for the corporation. A)True B)False
Q3) No journal entry is made on the dividend declaration date.
A)True B)False
Q4) Define treasury stock and provide two reasons why a corporation would purchase treasury stock.
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Chapter 14: Long-Term Liabilities
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Q1) Hernandez Carpets Company buys a building for $115,000,paying $30,000 cash and signing a 30-year mortgage note for $85,000 at 11%.Prepare the journal entry for the purchase.
Q2) What does the debt to equity ratio show,and how is it calculated?
Q3) On January 1,2016,Bratios Company purchased equipment and signed a six-year mortgage note for $194,000 at 15%.The note will be paid in equal annual installments of $51,262,beginning January 1,2017.On January 1,2017,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 $51,262
B)debit to Interest Expense for $29,100
C)credit to Cash for $22,162
D)credit to Mortgage Payable for $194,000
Q4) When using the effective-interest amortization method,the discount amortization is the excess of the calculated interest payment over the interest payment.
A)True
B)False
Q5) List the two categories of liabilities reported on the balance sheet and provide an example of each.
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Chapter 15: Investments
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Q1) Long-term investments ________.
A)include all debt securities that are trading investments or held-to-maturity investments
B)are investments in debt and equity securities that are highly liquid and that the investor intends to sell in one year or less
C)include debt and equity securities that the investor expects to hold longer than one year or debt or equity securities that are not readily marketable
D)are investments in debt securities or equity securities in which the investor holds less than 20 percent of the voting stock and that the investor plans to sell in the very near future
Q2) When a company invests in equity securities with 20% to 50% ownership in the investee's voting stock,the investor can significantly influence the investee's decisions.
A)True
B)False
Q3) List and briefly describe the method used to account for investments in equity securities with 50% or more ownership.
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Chapter 16: The Statement of Cash Flows
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Q1) A debtor of Adams Company owes $500,000 but does not have enough cash to repay the debt.Following lengthy negotiations,the parties agreed that the debtor will issue 200,000 shares of common stock to settle the debt.This transaction will be reported in the investing activities section of the statement of cash flows for Adams Company.
A)True
B)False
Q2) Investors who want to know the amount of cash a company has available for new opportunities,such as expanding into a new sales region,should analyze the company's
A)free cash flow
B)net cash flow from investing activities
C)acid ratio
D)earnings per share
Q3) Issuing preferred stock to stockholders in exchange for cash is shown under the financing activities section of the statement of cash flows.
A)True
B)False
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Chapter 17: Financial Statement Analysis
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Q1) The gross profit percentage is an indicator of how well a company is positioned to pay off its short-term liabilities.
A)True
B)False
Q2) A vertical analysis of a financial statement reveals the relationship of each statement item to its base amount,which is 100%.
A)True
B)False
Q3) A vertical analysis would be used if an analyst wants to see how gross profit of a company has changed from one year to the next.
A)True
B)False
Q4) The dividend payout ratio measures the annual dividend per share as a proportion of the market price per share.
A)True
B)False
Q5) List the two distinctly different gains and losses that are included on the income statement after continuing operations.
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Chapter 18: Introduction to Managerial Accounting
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Questions
Q1) Financial statements prepared for investors and creditors often include forward-looking information because they make decisions based on a company's future prospects.
A)True
B)False
Q2) Which of the following is true of service companies?
A)All costs of service companies are product costs.
B)Service companies modify and resell products they buy from manufacturers.
C)Revenues of service companies are only recorded on cash receipt.
D)Service companies carry no inventories of products for sale.
Q3) In a manufacturing company,wages and benefits of factory managers are considered as product costs.
A)True
B)False
Q4) The IMA standards of ethical practice require managerial accountants to maintain their professional competence.
A)True
B)False
Q5) Define planning.List and briefly discuss a planning tool that managers can use.
Q6) Describe the flow of product costs for a manufacturer.
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Chapter 19: Job Order Costing
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Sample Questions
Q1) Broxsie Fabrication,Inc.issued $60,000 of direct materials and $15,500 of indirect materials to production.Prepare the journal entry to record the transaction.
Q2) Highland,Inc. ,an engineering firm,uses a job order costing system to accumulate client-related costs.The predetermined overhead allocation rate is 50% of staff labor cost.The work by engineers is charged to jobs at a rate of $33 per staff labor hour.A recent job for a client used 70 staff labor hours.How much was the total job cost?
A)$1,155
B)$2,310
C)$3,465
D)$35
Q3) At the end of the year,Beta,Inc.has an unadjusted debit balance in the Manufacturing Overhead account of $3,990.The adjusting journal entry needed to adjust the balance to zero will include a ________.
A)debit to Cost of Goods Sold $3,990 and credit to Manufacturing Overhead $3,990
B)debit to Manufacturing Overhead $3,990 and credit to Cost of Goods Sold $3,990
C)debit to Work-in-Process Inventory $3,990 and credit to Manufacturing Overhead $3,990
D)debit to Gross Profit $3,990 and credit to Cost of Goods Sold $3,990
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Chapter 20: Process Costing
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Q1) Under process costing,depreciation on plant machinery is debited to the respective department's Work-in-Process Inventory.
A)True
B)False
Q2) Which of the following is an example of how managers use product cost reports to control costs?
A)setting product prices high enough for the company to be profitable
B)providing cost of goods sold for the income statement
C)determining if newer,more efficient equipment should be acquired
D)promoting products that are most profitable
Q3) The first-in,first-out (FIFO)method creates better month-to-month cost comparisons than the weighted-average method ________.
A)because it does not recognize transferred in units from other processes
B)when there are substantial quantities of units in process at the end of the period
C)because it merges costs from the prior period with the current period
D)because it is used by industries that do not experience significant cost changes
Q4) Why are extra journal entries required in a process costing system?
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) When the total fixed costs increases,the contribution margin per unit ________.
A)increases
B)decreases
C)increases proportionately
D)remains the same
Q2) Which of the following statements is true of the behavior of total variable costs,within the relevant range?
A)They will decrease as production increases.
B)They will remain the same as production levels change.
C)They will decrease as production decreases.
D)They will increase as production decreases.
Q3) Under variable costing,the units in the beginning Finished Goods Inventory contain fixed manufacturing overhead costs.
A)True
B)False
Q4) When the variable cost per unit decreases,the contribution margin on each unit sold also decreases.
A)True B)False
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Chapter 22: Master Budgets
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Q1) Use of advanced technology makes it more cost effective for managers to conduct sensitivity analysis.
A)True
B)False
Q2) The cost accountant works with the office and sales managers to develop the selling and administrative expense budget.
A)True
B)False
Q3) Purchases of direct material for May were $114,000,while expected purchases for June and July are $121,000 and $140,000,respectively.All purchases are paid 75% in the month of purchase and 25% the following month.Calculate the budgeted payments for the month of June.
A)$119,250
B)$115,750
C)$121,000
D)$30,250
Q4) Sensitivity analysis is a what-if technique.
A)True
B)False
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) Define variance.What is the difference between a favorable and an unfavorable variance?
Q2) The static budget,at the beginning of the month,for Steak Frites Company follows:
Static budget:
Sales volume: 1,100 units;Sales price: $70.00 per unit
Variable costs: $32.00 per unit;Fixed costs: $38,500 per month
Operating income: $3,300
Actual results,at the end of the month,follows:
Actual results:
Sales volume: 995 units;Sales price: $74.00 per unit
Variable costs: $36.00 per unit;Fixed costs: $35,000 per month
Operating income: $2,810
Calculate the sales volume variance for revenue.
A)$3,500 U
B)$7,350 U
C)$3,990 U
D)$3,980 F
Q3) What does the fixed overhead volume variance measure?
Q4) What does the variable overhead efficiency variance measure?
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Chapter 24: Cost Allocation and Responsibility Accounting
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Q1) A high rate of employee turnover indicates that ________.
A)employees of the organization leave their jobs frequently
B)pay packages of employees are at par with that of the industry
C)the employee retention ratio is also high
D)employees also participate in the decision making process
Q2) A profit center responsibility report ________.
A)should not include costs for which the profit center manager is not accountable
B)does not include revenues since that information only appears on the revenue center responsibility report
C)includes traceable fixed expenses
D)is the same as a performance report
Q3) Which of the following internal business perspective key performance indicators (KPIs)is commonly used to assess the innovation process?
A)number of new products developed
B)number of warranty claims
C)employee turnover rate
D)rate of on-time deliveries
Q4) List and briefly discuss the two limitations of financial performance measures.
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Chapter 25: Short-Term Business Decisions
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Q1) Companies that are price-takers have considerable flexibility in setting the prices of their products.
A)True
B)False
Q2) Target full product cost equals the revenue at the market price minus the desired profit.
A)True
B)False
Q3) If a company wants to be a price-taker,which of the following strategies should be taken?
A)Enter a competitive market and focus on cost cutting.
B)Produce a unique product.
C)Exploit the value of a fashionable brand name.
D)Differentiate the product clearly from the competitors.
Q4) Special pricing orders increase operating income if the special price exceeds the differential costs of filling the special order.
A)True
B)False
Q5) Explain the difference between price-takers and price-setters.
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Chapter 26: Capital Investment Decisions
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Q1) Compound interest assumes that all interest earned will remain invested and earn additional interest at the same interest rate.
A)True
B)False
Q2) A post-audit in capital budgeting is a comparison of the actual results of capital investments with the projected results.
A)True
B)False
Q3) Software Hub is deciding whether to purchase new accounting software.The cost of the software package is $68,000,and its expected life is ten years.The payback for this investment is four years.Assuming equal yearly cash flows,what are the expected annual net cash savings from the new software? (Assume the investment has no residual value. )
A)$6,800
B)$51,000
C)$17,000
D)$272,000
Q4) When using the accounting rate of return,what is the basis for making the decision to make the investment?
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