Introduction to Financial Accounting
Exam Answer Key
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and practices used to record, summarize, and interpret business financial transactions. The course explores key concepts such as the accounting cycle, preparation of financial statements, and the roles of assets, liabilities, and equity. Through practical examples and case studies, students learn how financial information is used by various stakeholders to make informed decisions, ensuring a solid basis for more advanced studies in accounting and finance.
Recommended Textbook
Using Financial Accounting Information The Alternative to Debits and Credits 10th Edition by Gary
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Chapter 1: Accounting As a Form of Communication
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Sample Questions
Q1) ______________________ consists of all activities necessary to provide the members of an economic system with goods and services.
Answer: Business
Q2) The income statement is a statement that summarizes revenues and expenses for a period.
A)True
B)False Answer: True
Q3) Which of the following organizations is responsible for setting auditing standards followed by public accounting firms in conducting independent audits of financial statements?
A)Financial Accounting Standards Board (FASB)
B)Securities and Exchange Commission (SEC)
C)Public Company Accounting Oversight Board (PCAOB)
D)International Accounting Standards Board (IASB)
Answer: C
Q4) An asset is a future economic benefit to a business.
A)True
B)False Answer: True
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Chapter 2: Financial Statements and the Annual Report
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Sample Questions
Q1) Independent auditors (CPAs)render an opinion that the financial statements do or do not fairly present a company's financial position,operating results,and cash flows.
A)True
B)False
Answer: True
Q2) Which one of the following is not a major category for long-term assets?
A)Receivables
B)Property,plant,and equipment
C)Intangibles
D)Investments
Answer: A
Q3) The ability of a company to pay its debt when due refers to ____________________.
Answer: liquidity
Q4) The operating cycle for all businesses is one year.
A)True
B)False
Answer: False
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Chapter 3: Processing Accounting Information
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Sample Questions
Q1) An internal or external event must be ____________________ to be recognized.
Answer: measureable
Q2) Refer to the transactions for Hennigan Rentals. ?
Based on the December 31 transaction,Hennigan will record which of the following in its accounting records?
A)A credit in Accounts Payable for $500
B)A credit in Accounts Receivable for $500
C)A debit in Accounts Payable for $500
D)A debit in Accounts Receivable for $500
Answer: B
Q3) Which one of the following best defines an external event in terms of accounting?
A)A measured event that must be recognized
B)An event recognized in a set of financial statements
C)A happening of consequence to an entity
D)An interaction between an entity and its environment
Answer: D
Q4) Liabilities and stockholders' equity are ____________________ by debits.
Answer: decreased
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5
Chapter 4: Income Measurement and Accrual Accounting
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Sample Questions
Q1) Roman Industries' plant operates five days per week with a daily payroll of $6,000.Employees are paid every Saturday for the workweek just completed (Monday through Friday).The last day of the month is Wednesday,March 31.What is the amount of Wages Expense recorded on the next payday,Saturday,April 3?
A)$0
B)$30,000
C)$12,000
D)$18,000
Q2) Expense accounts are closed or zeroed out in the closing process.
A)True B)False
Q3) Expenses originate from
A)using an asset or recognizing liabilities.
B)incurring liabilities or providing services to customers.
C)collecting cash from customers.
D)paying off liabilities.
Q4) Every adjustment involves at least one income statement and one balance sheet account.
A)True
B)False
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Chapter 5: Inventories and Cost of Goods Sold
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Sample Questions
Q1) Which of the following statements is not true regarding the gross profit ratio?
A)The gross profit ratio is calculated by dividing net sales by gross profit.
B)The gross profit ratio is a measure of profitability.
C)The gross profit ratio can help investors decide whether or not to buy a company's stock.
D)The gross profit ratio should be compared with both a company's prior years' ratios and competitors'.
Q2) Which method of inventory costing is not acceptable for financial accounting purposes?
A)Specific Identification
B)FIFO
C)LIFO
D)Replacement Cost
Q3) When inventory is sold by a wholesaler or retailer,it is recorded in a different account on the income statement than a manufacturer would use.
A)True
B)False
Q4) The understatement of ending inventory in one period leads to a(n)__________ of cost of goods sold expense in the same period.
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Chapter 6: Cash and Internal Control
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Sample Questions
Q1) A bank informs a customer that a service charge has been assessed on its account by including a credit memorandum on the monthly bank statement.
A)True
B)False
Q2) Annual reports must include an internal control report.In this report,which group has the primary responsibility for establishing and maintaining an adequate control structure and procedures for financial reporting?
A)Management
B)The company's CPAs
C)The company's internal audit staff
D)The audit committee of the company's board of directors
Q3) Which of the following represents the subset of board of directors that acts as a direct contact between stockholders and the independent accounting firm?
A)External auditors
B)Internal audit staff
C)Audit committee
D)Stockholders' representative
Q4) What rational is used in order to determine if an amount is "cash"?
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Chapter 7: Receivables and Investments
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Sample Questions
Q1) When Company X buys stock in Company Y,Company X is referred to as the investee. A)True
B)False
Q2) If a company has a choice of acceptable methods to estimate bad debts,what factors should be considered in the selection?
Q3) Wagner's Bookstore acquires a 6%,$12,000 certificate of deposit on September 1.The term of the CD is six months.At that time,all principal and accrued interest will be paid in cash.Indicate the effect on the financial statements at December 31.
A)Interest Receivable increases $240,Interest Revenue increases $240
B)Interest Receivable increases $360,Interest Revenue increases $360
C)Interest Receivable increases $480,Interest Revenue increases $480
D)Interest Receivable increases $720,Interest Revenue increases $720
Q4) The accounts receivable turnover ratio is computed by dividing __________ by average accounts receivable.
Q5) Identify two methods of accelerating cash from sales.
Q6) What is the purpose of an aging schedule?
Q7) The amount of cash the maker is to pay the payee on the maturity date of the note is called the __________.
Page 9
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Chapter 8: Operating Assets: Property, Plant, and Equipment, and Intangibles
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Sample Questions
Q1) International accounting standards require companies to revalue their property,plant,and equipment to reflect fair market values.
A)True
B)False
Q2) Depreciation is
A)an effort to achieve proper matching of the cost of operating assets.
B)an accumulation of funds to replace the related plant asset.
C)the difference between the original cost and salvage value of an asset.
D)the cash allocated each period to maintain a plant asset.
Q3) Which of the following factors is not related to the decline in the usefulness of plant and equipment assets,and therefore does not need to be considered in selecting an appropriate depreciation method?
A)Physical deterioration
B)Obsolescence
C)Repair and maintenance policies
D)Current replacement cost
Q4) Relative to plant assets,how can a company report a net loss for a period and yet still have positive cash flows from operating activities?
Q5) Distinguish between current assets and operating assets.
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Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
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Sample Questions
Q1) What is the correct classification of the account Discount on Notes Payable?
A)An asset
B)An expense
C)A revenue
D)A contra liability
Q2) Which of the following would appear on the balance sheet as a current liability?
A)A loss from an anticipated strike by employees
B)Potential damages from possible explosions in a fireworks factory
C)Premium offers in cereal boxes
D)The possible loss from a lawsuit
Q3) You just purchased an automobile for $19,450 and must decide how to pay for it.Your local bank has granted you a five-year loan.Annual payments on the loan will be made at the end of each year and the amount of the loan payments,which include principal and interest,is $5,000 per year.What interest rate is being charged on the loan?
Q4) The terms referring to contingencies differ between U.S.GAAP and IFRS.
A)True
B)False
Q5) If the present and future values are known along with the number of periods,then the __________ can be determined.
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Chapter 10: Long-Term Liabilities
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Sample Questions
Q1) Tampa Corporation's balance sheet showed the following amounts for their liabilities and stockholders' equity accounts: Current Liabilities,$20,000;Bonds Payable,$60,000;Lease Obligations,$12,000;and Deferred Income Taxes,$2,000.Total stockholders' equity was $42,000.The debt-to-equity ratio is
A)0.45.
B)0.58.
C)1.76.
D)2.24.
Q2) Discount on Bonds Payable is shown on the balance sheet as a(n)__________.
Q3) Which of the following statements regarding amortization is true?
A)Amortization of the premium causes the Premium on Bonds Payable account to increase.
B)Amortization of the premium causes the amount of interest expense to increase.
C)Cash interest payments on bonds equals interest expense on the income statement when there is amortization of a bond premium.
D)Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero.
Q4) The bond issue price equals the __________ of the cash flows that the bond will produce.
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Chapter 11: Stockholders Equity
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Sample Questions
Q1) Which of the following is true concerning a sole proprietorship?
A)It is a separate legal entity.
B)It may have more than one class of stock outstanding.
C)It is owned by one or more persons.
D)The separate entity concept applies.
Q2) Which of the following statements regarding partnerships is true?
A)Partnerships have two owners.
B)The partnership ends when a new partner is added.
C)The partnership is responsible for its own taxes.
D)The partnership is a separate legal entity from its owners.
Q3) Which of the following is true regarding the statement of cash flows?
A)The sale of stock to stockholders is an investing activity.
B)The repurchase of stock from stockholders is an investing activity.
C)The declaration of stock dividends is a financing activity.
D)The payment of cash dividends is a financing activity.
Q4) Which of the following is an account in stockholders' equity?
A)Dividends Payable
B)Loss on Sale of Equipment
C)Retained Earnings
D)Net Income
Page 13
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Chapter 12: The Statement of Cash Flows
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Sample Questions
Q1) Which of the following is not a current reporting requirement for a statement that reports changes in cash over a period of time?
A)This statement must classify cash flows into three categories: operating,investing,and financing activities.
B)Cash equivalents must be combined with cash in preparing this statement.
C)Working capital may be used as a substitute for cash in preparing this statement.
D)The title for this statement is "Statement of Cash Flows."
Q2) If the balance of accounts receivable decreases during the year,then cash collections will __________ sales on account for the period.
Q3) Cash flows from borrowing and paying off a 90-day bank loan are classified as
A)operating activities.
B)investing activities.
C)financing activities.
D)purchasing activities.
Q4) Under the indirect method,a loss from the retirement of bonds is __________ to net income in the Operating Activities section of the statement of cash flows.
Q5) The purchase of merchandise is an important __________ activity for a retailer.
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Chapter 13: Financial Statement Analysis
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Sample Questions
Q1) A company that uses leverage is attempting to earn an overall return that is higher than the cost of funds received from
A)preferred and common stockholders.
B)common stockholders only.
C)preferred stockholders and borrowed funds.
D)borrowed funds only.
Q2) The concept of leverage refers to the practice of using borrowed funds and amounts received from preferred stockholders in an attempt to earn an overall return that is higher than the cost of these funds.
A)True
B)False
Q3) Refer to the data for Fawnsworth Industries.
Based on this information,what is Fawnsworth's number of days' sales in receivables (assuming a 360-day year)?
A)32.4 days
B)36.0 days
C)28.8 days
D)25.2 days
Q4) Why is liquidity important for businesses?
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Chapter 14: International Financial Reporting Standards
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Sample Questions
Q1) Discuss at least four reasons that accounting standards currently differ between countries.
Q2) Which of the following inventory costing methods is prohibited under IFRS?
A)FIFO
B)Weighted average
C)LIFO
D)Perpetual
Q3) Both U.S.GAAP and IFRS apply the lower-of-cost-or-market rule in a similar manner to inventory.
A)True
B)False
Q4) Which of the following is a true statement about the terms used on the balance sheet?
A)U.S.GAAP requires a standard set of terms on the balance sheet.
B)IFRS require a standard set of terms on the balance sheet.
C)Terminology is consistent across all countries.
D)Neither IFRS nor U.S.GAAP requires a standard set of terms on the balance sheet.
Q5) Summarize some of the common differences between U.S.GAAP and IFRS.
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