Introduction to Financial Accounting Study Guide Questions
Course Introduction
Introduction to Financial Accounting provides students with a comprehensive overview of the fundamental principles and practices involved in the preparation, interpretation, and communication of financial information. Through an exploration of the accounting cycle, including recording transactions, adjusting entries, and preparing financial statements, students develop an understanding of how organizations report financial performance and position to external stakeholders. Emphasis is placed on the concepts underlying the measurement and reporting of assets, liabilities, equity, revenues, and expenses, as well as the importance of ethics and regulatory frameworks in accounting. This course equips students with the analytical skills needed to critically evaluate financial information for decision-making in a variety of business contexts.
Recommended Textbook
Financial Accounting 13th Edition by Carl S. Warren
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Chapter 1: Introduction to Accounting and Business
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Q1) The Sarbanes-Oxley Act prohibits CPAs from providing nonaudit investment banking services.
A)True
B)False
Answer: True
Q2) Which of the following financial statements reports information as of a specific date?
A) income statement
B) statement of owner's equity
C) statement of cash flows
D) balance sheet
Answer: D
Q3) Liabilities are reported on the A) income statement
B) statement of owner's equity
C) statement of cash flows
D) balance sheet
Answer: D
Q4) What are the three sections of the Statement of Cash Flows?
Answer: Operating Activities, Investing Activities, and the Financing Activities
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Chapter 2: Analyzing Transactions
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Q1) On October 17th Nikle Company purchased a building and a plot of land for $750,000. The building was valued at $500,000 while the land carried a value of $250,000. Nikle paid $300,000 down in cash and signed a notes payable for the balance. In the space below write the journal entry.
Answer: 11ea8f91_7c82_5ef1_b161_7f29ad94fcfa_TB2085_00_TB2085_00_TB2085_00
Q2) Which of the following accounts is an owner's equity account?
A) Cash B) Accounts Payable
C) Prepaid Insurance D) Ross Morris, Capital Answer: D
Q3) For a month's transactions for a typical medium-sized business, the accounts payable account is likely to have only credit entries. A)True B)False
Answer: False
Q4) On October 30th Damien Lawson withdraws $3,330 from JumpStart for personal use. Journalize this event.
Answer: 11ea8f91_7c82_ad15_b161_e77d5b4381b6_TB2085_00_TB2085_00_TB2085_00
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Chapter 3: The Adjusting Process
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Q1) Which of the following is the proper adjusting entry, based on a prepaid insurance account balance before adjustment of $14,000 and unexpired insurance of $3,000, for the fiscal year ending on April 30?
A) debit Insurance Expense, $3,000; credit Prepaid Insurance, $3,000
B) debit Insurance Expense, $14,000; credit Prepaid Insurance, $14,000
C) debit Prepaid Insurance, $11,000; credit Insurance Expense, $11,000
D) debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000
Answer: D
Q2) By matching revenues and expenses in the same period in which they incur
A) net income or loss will always be underestimated.
B) net income or loss will always be overestimated.
C) net income or loss will be properly reported on the income statement
D) net income or loss will not be determined.
Answer: C
Q3) Adjusting entries always include
A) only income statement accounts.
B) only balance sheet accounts.
C) the cash account.
D) at least one income statement account and one balance sheet account.
Answer: D
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) In the accounting cycle, the last step is
A) preparing the financial statements
B) journalizing and posting the adjusting entries
C) preparing a post-closing trial balance
D) journalizing and posting the closing entries
Q2) The Income Statement will include the following accounts
A) Revenues less Expenses (ordered largest to smallest amount) with Miscellaneous Expense listed last
B) Revenues less Expenses (ordered smallest to largest amounts) with Miscellaneous Expense listed last
C) Revenues less Expenses (ordered in alphabetical order)
D) Revenues less Expenses (order is not important)
Q3) Any twelve-month accounting period adopted by a company is known as its fiscal year.
A)True
B)False
Q4) At the end of the fiscal period, prepaid expenses are reported on the income statement as expenses.
A)True
B)False
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Chapter 5: Accounting Systems
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Q1) Adjusting journal entries are recorded in a special journal.
A)True
B)False
Q2) A withdrawal of cash made by the owner will be found in the
A) cash receipts journal
B) cash payments journal
C) revenue journal
D) purchases journal
Q3) When posting the column totals of a cash payments journal, a debit should be posted to
A) Cash
B) Accounts Payable
C) Sales Discounts
D) Unearned Revenue
Q4) The subsidiary ledger that includes customer account activity is called the A) asset ledger
B) accounts payable ledger
C) expense ledger
D) accounts receivable ledger
Q5) Briefly describe the three-step process of accounting system development.
Page 7
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Chapter 6: Accounting for Merchandising Businesses
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Q1) A business using the perpetual inventory system, with its detailed subsidiary records, does need to take a physical inventory.
A)True
B)False
Q2) Because many companies use computerized accounting systems, periodic inventory is widely used.
A)True
B)False
Q3) When a buyer returns merchandise purchased for cash, the buyer may record the transaction using the following entry
A) debit Merchandise Inventory; credit Cash
B) debit Cash; credit Merchandise Inventory
C) debit Cash; credit Sales Returns and Allowances
D) debit Sales Returns and Allowances; credit Cash
Q4) Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point.
A)True
B)False
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Chapter 7: Inventories
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Q1) When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown.
A)True
B)False
Q2) The inventory costing method that reports the earliest costs in ending inventory is
A) FIFO
B) LIFO
C) Average cost
D) Specific identification
Q3) The method of computing inventory that uses records of the selling prices of the merchandise is called
A) retail method
B) last-in, first-out
C) first-in, first-out
D) average cost
Q4) The average cost method will always yield results between FIFO and LIFO.
A)True
B)False
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Chapter 8: Sarbanes-Oxley, Internal Control, and Cash
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Q1) The bank reconciles its statement to the company's records.
A)True
B)False
Q2) The objectives of internal control are to
A) control the internal organization of the accounting department personnel and equipment
B) provide reasonable assurance that operations are managed to achieve goals, financial reports are accurate, and laws and regulations are complied with C) prevent fraud, and promote the social interest of the company
D) provide control over "internal-use only" reports and employee internal conduct
Q3) In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by the bank is added to the balance per company's records.
A)True
B)False
Q4) Why would a bank require a company to maintain a compensating balance?
Q5) Distinguish preventive controls from detective controls and give examples of each as they relate to cash.
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Chapter 9: Receivables
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Q1) A note receivable due in 18 months is listed on the balance sheet under the caption
A) long-term liabilities
B) fixed assets
C) current assets
D) investments
Q2) Allowance for Doubtful Accounts is a liability account.
A)True
B)False
Q3) If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible?
A) Uncollectible Accounts Expense
B) Accounts Receivable
C) Allowance for Doubtful Accounts
D) Interest Expense
Q4) The accounts receivables turnover ratio is computed by dividing total gross sales by the average net receivables during the year.
A)True
B)False
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Chapter 10: Fixed Assets and Intangible Assets
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Q1) Assets may be grouped according to common traits and depreciated by using a single composite rate.
A)True
B)False
Q2) During construction of a building, the cost of interest on a construction loan should be charged to an expense account.
A)True
B)False
Q3) When determining whether to record an asset as a fixed asset, what two criteria must be met?
A) Must be an investment and must be long lived.
B) Must be long lived and must use the asset in a productive manner.
C) Must be short lived and must be a tangible asset.
D) Must be a tangible asset and must be an investment.
Q4) The difference between the balance in a fixed asset account and its related accumulated depreciation account is the asset's book value.
A)True
B)False
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Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) A pension plan which promises employees a fixed annual pension benefit, based on years of service and compensation, is called a(n)
A) defined contribution plan
B) defined benefit plan
C) unfunded plan
D) compensation plan
Q2) The journal entry a company uses to record the issuance of an interest-bearing note for the purpose of borrowing funds for the business is
A) debit Accounts Payable; credit Notes Payable
B) debit Cash; credit Notes Payable
C) debit Notes Payable; credit Cash
D) debit Cash and Interest Expense; credit Notes Payable
Q3) Federal unemployment compensation taxes that are collected by the federal government are paid directly to the unemployed but are allocated among the states for use in state programs.
A)True
B)False
Q4) List five internal controls that relate directly to payroll.
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Chapter 12: Accounting for Partnerships and Limited Liability Companies
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Q1) The Craig-Doran Partnership owns inventory that was purchased for $85,000, has a current replacement cost of $54,500, and is priced to sell for $98,000. At what amount should the inventory be recorded in the accounts of the new partnership if Alexis is to be admitted?
A) $98,000
B) $54,500
C) $85,000
D) $79,167
Q2) A partnership is subject to federal income taxes.
A)True
B)False
Q3) When a partner invests noncash assets in a partnership, the assets are recorded at the partner's book value.
A)True
B)False
Q4) If the share of losses on realization of the sale of noncash assets exceed the balance in a partner's capital account, the resulting balance is called a deficiency.
A)True
B)False
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Chapter 13: Corporations: Organization, Stock Transactions, and Dividends
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Q1) Alma Corp. issues 1,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to:
A) Common Stock $14,000.
B) Common Stock $10,000 and Paid-in Capital in Excess of Par Value $4,000.
C) Common Stock $4,000 and Paid-in Capital in Excess of Stated Value $10,000.
D) Common Stock $10,000 and Retained Earnings $4,000.
Q2) A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at $9. Subsequently, the company declared a 2% stock dividend on a date when the market price was $10 a share. The effect of the declaration and issuance of the stock dividend is to
A) decrease retained earnings, increase common stock, and increase paid-in capital
B) increase retained earnings, decrease common stock, and decrease paid-in capital
C) increase retained earnings, decrease common stock, and increase paid-in capital
D) decrease retained earnings, increase common stock, and decrease paid-in capital
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Chapter 14: Long-Term Liabilities: Bonds and Notes
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Sample Questions
Q1) Zero-coupon bonds do provide for interest payments.
A)True
B)False
Q2) The price of a bond is equal to the sum of the interest payments and the face amount of the bonds.
A)True
B)False
Q3) Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption?
A) $10,000 loss
B) $25,000 loss
C) $25,000 gain
D) $15,000 gain
Q4) When callable bonds are redeemed below carrying value
A) Gain on Redemption of Bonds is credited
B) Loss on Redemption of Bonds is debited
C) Retained Earnings is credited
D) Retained Earnings is debited
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Chapter 15: Investments and Fair Value Accounting
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Q1) Held-to-Maturity securities
A) are reported at their fair market value on the balance sheet date
B) include both stocks and bonds
C) are primarily purchased to earn interest revenue
D) all of the above
Q2) Which of the following is not a part of comprehensive income?
A) foreign currency items
B) cash flows from stock investments
C) unrealized gains and losses
D) pension liability adjustments
Q3) Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a
A) Credit to cash for $9,000
B) Debit to the investment account for $9,000
C) Credit to the investment account for $9,000
D) Credit to a loss account for $9,000
Q4) Discuss the appropriate financial treatment when an investor has a greater than 50% ownership in another company.
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Chapter 16: Statement of Cash Flows
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Q1) If cash dividends of $135,000 were paid during the year and the company sold 1,000 shares of common stock at $30 per share, the statement of cash flows would report net cash flow from financing activities as $165,000.
A)True
B)False
Q2) Cash paid to acquire treasury stock should be shown on the statement of cash flows from investing activities.
A)True
B)False
Q3) On the statement of cash flows, the cash flows from investing activities section would include
A) receipts from the issuance of capital stock
B) payments for dividends
C) payments for retirement of bonds payable
D) receipts from the sale of investments
Q4) The statement of cash flows shows the effects on cash of a company's operating, investing, and financing activities.
A)True
B)False
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Chapter 17: Financial Statement Analysis
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Q1) The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as
A) solvency and leverage
B) solvency and profitability
C) solvency and liquidity
D) solvency and equity
Q2) The percent of fixed assets to total assets is an example of
A) vertical analysis
B) solvency analysis
C) profitability analysis
D) horizontal analysis
Q3) Comparing dividends per share to earnings per share indicates the extent to which the corporation is retaining its earnings for use in operations.
A)True
B)False
Q4) Current position analysis indicates a company's ability to liquidate current liabilities.
A)True
B)False
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