Introduction to Financial Accounting Exam Preparation Guide
Course Introduction
Introduction to Financial Accounting is a foundational course that explores the principles, concepts, and practices involved in the preparation and analysis of financial statements. Students will learn about the accounting cycle, the double-entry system, and the application of Generally Accepted Accounting Principles (GAAP). The course emphasizes the recording and reporting of business transactions, preparation of balance sheets, income statements, and cash flow statements, as well as the interpretation of financial information for decision-making purposes. This course is essential for understanding how organizations track, communicate, and utilize financial data.
Recommended Textbook
Financial Accounting Information for Decisions 7th Edition by John J Wild
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Chapter 1: Introducing Financial Accounting
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Sample
Questions
Q1) Identify and describe the three major activities of a business organization.
Answer: The three major activities of a business are operating,financing,and investing.Operating activities use resources to research,develop,purchase,produce,distribute,and market products and services.Financing activities provide the means organizations use to pay for resources like land,buildings,and equipment.Investing activities are the acquiring and disposing of long-term assets that are used to operate the business.
Q2) Legion Design Studio provided $5,000 of design services on account.How would Legion Claire Spa record this transaction?
A)Accounts Receivable increases by $5,000 and Design Services Revenue increases by $5,000.
B)Cash increases by $5,000 and Design Services Revenue increases by $5,000.
C)Cash increases by $5,000 and Accounts Receivable decreases by $5,000.
D)Accounts Receivable increases by $5,000 and Design Services Revenue decreases by $5,000
E)Cash decreases by $5,000 and Accounts Receivable increases by $5,000.
Answer: A
Q3) ______________ is the area of accounting aimed at serving external users. Answer: Financial accounting
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Page 3
Chapter 2: Accounting System and Financial Statements
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Sample Questions
Q1) What is another name for the general journal?
A)The book.
B)The ledger.
C)The book of original entry.
D)The record.
E)The account book.
Answer: C
Q2) On December 30,2014,Sheffield Industries paid $12,000 cash to its landlord to rent office space for the six-month period beginning January 1,2015.How would Sheffield record this transaction?
A)Debit Prepaid Insurance for $12,000 and credit Cash for $12,000.
B)Debit Cash for $12,000 and credit Prepaid Rent for $12,000.
C)Debit Cash for $12,000 and credit Rent Expense for $12,000.
D)Debit Prepaid Rent for $12,000 and credit Cash for $12,000.
E)Debit Rent Expense for $12,000 and credit Cash for $12,000.
Answer: D
Q3) A company had total assets of $350,000; total liabilities of $101,500; and total equity of $248,500.Calculate its debt ratio.
Answer: $101,500/$350,000 = 29%
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Page 4
Chapter 3: Adjusting Accounts for Financial Statements
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Sample Questions
Q1) Which of the following accounts would not be on the post- closing trial balance?
A)Accounts Payable
B)Accounts Receivable
C)Common Stock
D)Dividends
E)Retained Earnings
Answer: D
Q2) The Supplies account had an adjusted balance of $2,000 on December 31,2013.During 2014,the company purchased $5,000 of supplies.A physical count of supplies at December 31,2014,shows $3,000 of supplies available.(Assume that prepaid expenses are initially recorded in asset accounts and that fees collected in advance of work are initially recorded as liabilities.) How would the company record the related adjusting entry at December 31,2014?
A)Debit Supplies Expense for $4,000 and credit Supplies for $4,000.
B)Debit Supplies Expense for $3,000 and credit Supplies for $3,000.
C)Debit Supplies for $3,000 and credit Supplies Expense for $3,000.
D)Debit Supplies for $7,000 and credit Cash for $7,000.
E)Debit Supplies for $3,000 and credit Cash for $3,000.
Answer: A
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Page 5
Chapter 4: Reporting and Analyzing Merchandising Operations
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Sample Questions
Q1) A company has net sales of $1,832,000,sales commissions of $194,000,net income of $366,400,and the gross profit ratio of 60%.What is the amount of cost of goods sold?
A)$ 538,800
B)$ 732,800
C)$ 655,200
D)$ 879,360
E)$1,099,200
Q2) Maxwell Inc.uses the periodic inventory method.Maxwell requested a price reduction from a vendor because the merchandise that was purchased did not meet specifications.The vendor sent Maxwell a credit memorandum for $4,100 to resolve the issue.How would Maxwell record this transaction?
A)Debit Cost of Goods Sold for $4,100 and credit Accounts Payable for $4,100.
B)Debit Merchandise Inventory for $4,100 and credit Accounts Payable for $4,100.
C)Debit Accounts Payable for $4,100 and credit Merchandise Inventory for $4,100.
D)Debit Purchase Returns and Allowances for $4,100 and credit Accounts Payable for $4,100.
E)Debit Accounts Payable for $4,100 and credit Purchase Returns and Allowances for $4,100.
Q3) Distinguish between selling expenses and general and administrative expenses.
Page 6
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Chapter 5: Reporting and Analyzing Inventories
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Sample Questions
Q1) Explain the difference between the retail inventory method and gross profit inventory method for valuing inventory.
Q2) What is the effect of an error in the ending inventory balance on the income statement?
Q3) All incidental costs of inventory acquisition and handling,whether necessary or not,are assigned to inventory.
A)True B)False
Q4) If damaged and obsolete goods cannot be sold,they are not included in inventory. A)True B)False
Q5) The inventory turnover ratio is calculated as:
A)Cost of goods sold divided by average merchandise inventory.
B)Sales divided by cost of goods sold.
C)Ending inventory divided by cost of goods sold.
D)Cost of goods sold divided by ending inventory.
E)Cost of goods sold divided by ending inventory times 365.
Q6) LIFO assumes that inventory costs flow in the order they were incurred.
A)True
B)False
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Chapter 6: Reporting and Analyzing Cash and Internal Controls
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Sample Questions
Q1) The entry to increase the balance in petty cash from $50 to $75 would be to credit the Petty Cash account in the amount of $25.
A)True
B)False
Q2) A company plans to decrease a $200 petty cash fund to $75.The current balance in the account includes $45 in receipts and $165 in currency.The entry to reduce the fund will include a:
A)Debit to Cash Short and Over for $10.
B)Debit to Cash for $90.
C)Debit to Miscellaneous Expenses for $35.
D)Credit to Petty Cash for $165.
E)Credit to Cash for $90.
Q3) _______________________ are deposits made and recorded by the depositor but not yet recorded on the bank statement.
Q4) Discuss how the principles of internal control apply to cash receipts.
Q5) Having external auditors test the company's financial records and evaluate the effectiveness of the internal control system is part of the internal control principle of
Q6) Discuss the purpose of a bank reconciliation.
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Chapter 7: Reporting and Analyzing Receivables
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Sample Questions
Q1) The maturity date of a note receivable:
A)Is the day of the credit sale.
B)Is the day the note was signed.
C)Is the day the note is due to be paid.
D)Is the date of the first payment.
E)Is the last day of the month.
Q2) As long as a company accurately records total credit sales information,it is not necessary to have separate accounts for specific customers.
A)True
B)False
Q3) The person to whom a note is payable to is known as the ______________.
Q4) Explain how to record the receipt of a note receivable.
Q5) How are the direct write-off method and the allowance method applied in accounting for uncollectible accounts receivables?
Q6) If a customer owes interest on accounts receivable,the company should debit Interest Revenue and credit Accounts Receivable.
A)True
B)False
Q7) How does Kevin Plank of UnderArmour,view decisions involving sales on credit?
Page 9
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Chapter 8: Reporting and Analyzing Long-Term Assets
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Sample Questions
Q1) On April 1 of the current year,a company traded an old machine that originally cost $32,000 and that had accumulated depreciation of $24,000 for a similar new machine that had a cash price of $40,000.
a.Give the entry to record the exchange under the assumption that a $5,000 trade-in allowance was received and the balance of $35,000 was paid in cash.
b.Give the entry to record the exchange under the assumption that instead of a $5,000 trade-in allowance,a $12,500 trade-in allowance was received and the balance of $27,500 was paid in cash.
Q2) A company's old machine,which cost $40,000 and had accumulated depreciation of $30,000,was traded in on a new machine of like purpose having an estimated 20-year life with an invoice price of $50,000.The company also paid $43,000 cash,along with its old machine to acquire the new machine.The value of new machine should be recorded at:
A)$40,000
B)$47,000
C)$50,000
D)$53,000
E)$10,000
Q3) Define plant assets and identify the four primary issues in accounting for them.
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Page 10
Chapter 9: Reporting and Analyzing Current Liabilities
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Sample Questions
Q1) All expected future payments are liabilities.
A)True
B)False
Q2) Employers must pay FICA taxes that are equal to the amount being withheld from their employees.
A)True
B)False
Q3) Conner Company borrows $185,600 cash on November 1,2013,by signing a 120-day,8% note.What is the total amount of interest that Conner will recognize for this note?
A)$4,949.
B)$14,848.
C)$2,467.
D)$0,no interest expense is recognized.
E)$1485.
Q4) An employee earnings report is a cumulative record of an employee's hours worked,gross earnings,deductions,and net pay.
A)True
B)False
Q5) Describe how to account for and report on contingent liabilities.
Page 11
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Chapter 10: Reporting and Analyzing Long-Term Liabilities
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Sample Questions
Q1) _______________ bonds have specific assets of the issuing company pledged as collateral.
Q2) When a bond sells at a premium:
A)The contract rate is above the market rate.
B)The contract rate is equal to the market rate.
C)The contract rate is below the market rate.
D)It means that the bond is a zero coupon bond.
E)The bond pays no interest.
Q3) What is the debt to equity ratio for a company that has $700,000 in total liabilities and $3,500,000 in total equity?
A)20%
B)5
C)$2,100,000
D)2%
E).5
Q4) Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate.
A)True
B)False
Q5) How are bond issue prices determined?
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Chapter 11: Reporting and Analyzing Equity
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Sample Questions
Q1) The costs of bringing a corporation into existence,including legal fees,promoter fees,and amounts paid to obtain a charter,are called:
A)Minimum legal capital
B)Stock subscriptions
C)Organization costs
D)Cumulative costs
E)Prepaid fees
Q2) Dividend yield is the percent of cash dividends paid to common shareholders relative to the:
A)Common stock's market value.
B)Earnings per share.
C)Investors' purchase price of the stock.
D)Amount of retained earnings.
E)Amount of cash.
Q3) A corporation has $1,750,000 in stockholders' equity and 350,000 shares of common stock outstanding.Calculate the book value per common share.
Q4) _____________________ is a general term that refers to any shares issued to obtain owner financing in a corporation.
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Chapter 12: Reporting and Analyzing Cash Flows
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Sample Questions
Q1) The primary purpose of the statement of cash flows is to report all major cash receipts (inflows) and cash payments (outflows) during a period.
A)True
B)False
Q2) A company reported average total assets of $496,000 in 2012 and $604,000 in 2013.Its net operating cash flow was $41,150 in 2012 and $55,500 in 2013.Calculate its cash flow on total assets ratio for both years.Comment on the results.
Q3) The gain or loss from retirement of debt is reported under cash flows from operations on the statement of cash flows using the direct method.
A)True
B)False
Q4) Cash paid out for merchandise is considered to be an operating activity. A)True B)False
Q5) The use of a spreadsheet for analysis is especially useful when preparing the statement of cash flows using the _____________ method.
Q6) Explain how to determine cash flows from investing and financing activities.
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Page 14
Chapter 13: Analyzing and Interpreting Financial Statements
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Sample Questions
Q1) A company reports basic earnings per share of $3.50,cash dividends per share of $0.75,and a market price per share of $64.75.The company's dividend yield equal is equal to 21.4%.
A)True
B)False
Q2) The comparison of a company's financial condition and performance to a base amount is known as _____________________________.
Q3) The percent change is computed by subtracting the analysis period amount from the base period amount,then dividing the result by the base period amount and then multiplying that result by 100.
A)True
B)False
Q4) Net sales divided by average total assets is equal to the:
A)Profit margin.
B)Total asset turnover.
C)Current ratio.
D)Sales return ratio.
E)Return on total assets.
Q5) Explain the form and content of a complete income statement.
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Chapter 14: Applying Present and Future Values
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Sample Questions
Q1) A company is considering investing in a project that is expected to return $350,000 four years from now.How much is the company willing to pay for this investment if the company requires a 12% return?
A)$ 55,606
B)$137,681
C)$222,425
D)$265,764
E)$350,000
Q2) The future value of $100 compounded semiannually for three years at 12% equals $140.49.
A)True
B)False
Q3) The present value of $5,000 per year for three years at 12% compounded annually is $12,009.
A)True
B)False
Q4) A company is setting aside $21,354 today and wishes to have $30,000 at the end of three years for a down payment on a piece of property.What interest rate must the company earn?
Q5) Explain the concept of the future value of a single amount.
Page 16
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Chapter 15: Investments and International Operations
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Q1) Investments in held-to-maturity debt securities are always current assets.
A)True
B)False
Q2) Long-term investments:
A)Are current assets
B)Include funds earmarked for a special purpose such as bond sinking funds
C)Must be readily convertible to cash
D)Are expected to be converted into cash within one year
E)Include only equity securities
Q3) Long-term investments can include funds set aside for special purposes such as bond sinking funds.
A)True
B)False
Q4) When using the equity method of accounting for investments in equity securities,the receipt of cash dividends is recorded as revenue.
A)True
B)False
Q5) Investments in trading securities are always classified as ______________ and are reported as _______________ on the balance sheet.
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Chapter 16: Accounting for Partnerships
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Sample Questions
Q1) Partners' withdrawals of assets are:
A)Credited to their withdrawals accounts.
B)Debited to their withdrawals accounts.
C)Credited to their retained earnings.
D)Debited to their retained earnings.
E)Debited to their asset accounts.
Q2) A partnership cannot use salary allowances or interest allowances if it uses the stated ratio method to allocate income and losses to the partners.
A)True
B)False
Q3) Arthur,Barnett and Cummings form a partnership.Arthur contributes $250,000 cash and Barnett contributes $230,000 in cash.Cummings contributes equipment worth $255,000.Prepare the single journal entry to record the formation of this partnership.
Q4) Admitting a partner into a partnership by accepting assets is a personal transaction between one or more current partners and the new partner.
A)True
B)False
Q5) How are partners' investments in a partnership recorded?
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Chapter 17: Accounting With Special Journals
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Sample Questions
Q1) The Consumer Products segment of a company had a segment return on assets of 53%.If the revenues and operating income of this segment were $872,630 million and $517,916 million,respectively,what is the segment's average total assets amount?
A)$462,493 million
B)$977,200 million
C)$695,273 million
D)$274,495 million
E)$736,989 million
Q2) A __________________ journal is used to record and post transactions of similar type.
Q3) Assume that a company uses a sales journal,a purchases journal,a cash receipts journal,a cash disbursements journal,and a general journal.A sales return for credit on account would be recorded in the:
A)Sales journal
B)General journal
C)Cash receipts journal
D)Accounts receivable ledger
E)Cash disbursements journal
Q4) Explain the purposes,types,and uses of special journals.
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