Introduction to Financial Accounting
Exam Answer Key
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and practices involved in the preparation and analysis of financial statements. The course covers the accounting cycle, including recording transactions, adjusting entries, and preparing key financial statements such as the balance sheet, income statement, and cash flow statement. Students will learn how financial information is used by stakeholders to make informed decisions and will explore the regulatory framework, ethical considerations, and key concepts such as accrual accounting, revenue recognition, and asset valuation. This course equips students with essential skills to interpret and communicate financial data within a business context.
Recommended Textbook
Cornerstones of Financial Accounting 2nd Edition by Jay Rich
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Page 2
Chapter 1: Accounting and the Financial Statements
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Sample Questions
Q1) Creditors use accounting information to evaluate whether to loan money to a company.
A)True
B)False
Answer: True
Q2) The type of business activity that relates to obtaining funds from either issuing stock or borrowing money is called ____________________.
Answer: Financing
Q3) Which of the following represents one of the purposes of the Auditor's Report?
A)To provide a place for management to justify questionable items in the statements.
B)To provide comparative ratios for the company's financial data
C)To provide the CPA's opinion of the fairness of the financial statements.
D)To satisfy the need for full disclosure of all the facts relevant to a company's results and financial position
Answer: C
Q4) Both net income and dividends can be found on this financial statement: ____________________.
Answer: Statement of Retained Earnings
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3
Chapter 2: The Accounting Information System
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Sample Questions
Q1) "You Decide" Essay
You are the accounting manager for a small machine shop.Your bookkeeper has asked you to review a journal entry that she made:
\[\begin{array} { | l | l | l | l | }
\hline \text { Date } & \text { Account and Explanation } & \text { Debit } & \text { Credit } \\
\hline \text { May 5 } & \text { Cash } & 2,500 & 2,500 \\
\hline & \text { ServiceRevenue } \\ & \text { For services to be vendered) } & & \\
\hline
\end{array}\] Is this journal entry correct? Why or why not?
Answer: Given the explanation contained in the journal entry,you conclude that an error was made.Since your company hasn't yet performed the service,the bookkeeper should have recorded a liability such as Unearned service revenue.The revenue cannot be recognized until the service has been performed.
Q2) For liabilities,stockholders' equity,and revenue accounts,debits will _____________ the account balance.
Answer: decrease
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Page 4
Chapter 3: Accrual Accounting
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Sample Questions
Q1) Which one of the following adjustments decreases net income for the period?
A)Recognition of depreciation on plant assets
B)Recognition of interest earned on a note receivable
C)Recognition of services that had been provided to customers but the cash has not yet been received
D)Recognition of rent earned that had been received in advance from customers
Answer: A
Q2) Which of the following places the steps in preparing a worksheet in the correct order:
1 - Adjusted trial balance 4 - Income statement
2 - Adjustments 5 - Retained earnings
3 - Balance sheet 6 - Unadjusted trial balance
A)6 - 2 - 1 - 3 - 4 - 5
B)6 - 1 - 2 - 5 - 4 - 3
C)6 - 2 - 1 - 4 - 5 - 3
D)6 - 2 - 1 - 4 - 3 - 1
Answer: C
Q3) The ____________________ principle attempts to associate the revenue of the period with all costs necessary to generate that revenue.
Answer: matching
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Page 5
Chapter 4: Internal Control and Cash
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Sample Questions
Q1) Which of the assets listed below is considered the most liquid?
A)Accounts receivable
B)Cash
C)Inventory
D)Prepaid insurance
Q2) Which of the following statements best describes the act of collusion?
A)Collusion is caused by an overstatement of ending inventory.
B)Collusion is an intentional act of two or more employees to accomplish theft of company assets.
C)Collusion is one of the necessary outcomes of a system of internal control over financial reporting.
D)Collusion is enhanced by an effective system of independent reconciliations and other checks on recorded amounts.
Q3) The establishment of a petty cash fund has no effect on the company's total cash balance.
A)True
B)False
Q4) Items that are included on a bank statement and increase the bank account balance are called ____________________.
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Chapter 5: Sales and Receivables
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Q1) A sales invoice that bears the notation 2/10 means ____________________.
Q2) Airport Support Company reported its accounts receivable turnover ratio at 10 times.Its credit terms are 2/10,n/20.What does this ratio tell you about this company?
Q3) Refer to A&B Foods.If the company estimates its bad debts at 4% of net credit sales,what amount will be reported as bad debt expense for 2012?
A)$50,000
B)$75,000
C)$78,000
D)$84,000
Q4) Action Signs recorded credit sales of $10,000 on the gross method.Terms are 2/20,n/30.Select the correct statement about the entry to record this sale.
A)Accounts receivable increases $10,000.
B)Sales increase $9,800
C)Sales discounts increase $200
D)All of the above are correct
Q5) A(n)____________________ is the buyer of receivables,who acquires the right to collect the receivables and assumes the risk of uncollectibility.
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Page 7
Chapter 6: Cost of Goods Sold and Inventory
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Sample Questions
Q1) Refer to the information provided for Gbane Company.How much will the company report as net purchases for 2013?
A)$221,520
B)$231,600
C)$241,680
D)$253,320
Q2) The weighted average cost per unit must be continually updated under the perpetual inventory system.
A)True
B)False
Q3) For a merchandising company,the cost of goods sold is subtracted from net sales to arrive at gross profit.
A)True
B)False
Q4) Refer to the information provided for Paschal Exports.If the FIFO method of inventory costing is used,determine the following amounts:
A)Cost of goods sold for the units sold on July 10th?
B)Ending inventory on July 31st?
Q5) Shipping terms of ____________________ mean that the buyer pays shipping costs.
8
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Chapter 7: Operating Assets
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Q1) Explain what costs are included in the acquisition cost of operating assets.
Q2) Focal Point Engineering purchased a trademark at the beginning of 2012 for $200,000.Although the trademark's legal life is 20 years,economic benefits were expected for only 10 years.Also,during 2012,the company incurred research and development costs of $200,000.The book value of the trademarks at December 31,2012,is
A)$200,000
B)$180,000
C)$175,000
D)$280,000
Q3) Two reasons why a company might choose an accelerated depreciation method are _______________,and ______________
Q4) What impact does materiality have on the determination of how a cost related to a plant asset is reported on the financial statements?
Q5) FASB allows companies to use different depreciation methods so they can capture declining service potential of an operating asset.
A)True
B)False
Q6) Distinguish between capital and revenue expenditures.
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Chapter 8: Current and Contingent Liabilities
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Sample Questions
Q1) A company has total assets of $350,000 consisting of current assets of $115,000,property,plant,and equipment of $200,000,and other assets of $35,000.The company has total liabilities of $100,000 consisting of current liabilities of $65,000 and other liabilities of $35,000.What is the current ratio?
A)3.50
B)1.15
C)1.77
D)5.38
Q2) Refer to Gainesville Truck Center.When the company journal entry is recorded for the payment of these wages and related liabilities,which of the following statements is true regarding the impact on the accounting equation?
A)Both assets and liabilities will decrease.
B)Assets,liabilities,and stockholders' equity will all decrease.
C)Assets and stockholders' equity will decrease,while liabilities will increase.
D)Both assets and liabilities will increase.
Q3) Accounts payable represent amounts owed to outside suppliers of goods and services;whereas ____________________ reflect amounts owed in which a formal agreement or contract has been signed.
Q4) Why are unearned revenues considered current liabilities?
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Chapter 9: Long-Term Liabilities
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Q1) With the Effective Interest Method of Amortization,the amortization of a bond premium results in a(n)
A)increase in liabilities.
B)decrease of stockholders' equity.
C)increase in interest expense.
D)decrease in interest expense.
Q2) The market value of a bond is determined by calculating its present value,which is based on the face amount,the number of periods,and the market rate of interest.
A)True
B)False
Q3) The effective interest rate method will record amortization of a bond discount or premium in a manner that produces a constant rate of interest expense from period to period.
A)True
B)False
Q4) The amortization of a bond premium increases the effective interest expense incurred each period for the issuer.
A)True
B)False
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Chapter 10: Stockholders Equity
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Q1) Refer to Ladder Distributors.Suppose the company reissued 1,000 shares of its treasury stock on June 1,2015,for $44 each.Which of the following is true regarding the entry required to record this transaction?
A)A debit to treasury stock is required for $44,000.
B)A credit to treasury stock is required for $50,000.
C)A credit to retained earnings is required for $6,000.
D)A debit to paid-in capital from treasury stock transactions is required for $6,000.
Q2) Large corporations are profitable enough to maintain their own stockholder lists and arrange for the issuance of their stock certificates to stockholders rather than having to retain an independent stock transfer agent to do those things.
A)True
B)False
Q3) A stock option is the same as a stock warrant.
A)True
B)False
Q4) What is the difference between authorized,issued,and outstanding shares?
Q5) Identify and describe the four primary rights for the owners of common stock.
Q6) What is treasury stock and how is it reported in the financial statements?
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Chapter 11: The Statement of Cash Flows
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Q1) The cash flow adequacy ratio is defined as Free Cash Flow / Average Amount of Debt Maturing over the Next Five Years.
A)True
B)False
Q2) "You Decide" Essay
You are financial news reporter for the Wall Street Journal.During a recent press conference with the Chief Financial Officer of Lackluster Video,Inc.the executive stated that the company's financial health was excellent and that she expected their recent history of successful and strategic growth to continue to generate significant profits in the future as they expanded their video stores into several new major geographical markets.
To corroborate the CFO's statements,you examined the statement of cash flows and found that the company has reported negative operating cash flows,positive investing cash flows,and positive financing cash flows for each of the last five years. Does the statement of cash flows support the CFO's statements?
Q3) If an analysis of the balance sheet shows that Accounts Payable increased during the period,then the increase would have to be _______________ to net income to convert net income to cash
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Chapter 12: Financial Statement Analysis
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Sample Questions
Q1) "You Decide" Essay
A couple of years ago you inherited a substantial sum of money.This morning one of your second cousins approached you about her struggling day spa business that caters to college students.She would like to borrow $20,000 for a state-of-the-art tanning room for her business.She assures you that the business is steadily growing and promises that you will have your money back in six to nine months at the latest.You are concerned about the day spa's ability to generate sufficient resources to repay the loan.What financial ratios can you examine to assess the short-term liquidity of your cousin's day spa? Provide the formula for each ratio.
Q2) Various financial ratios,including payout ratios,are categorized as ____________________ ratios.
Q3) Refer to Randstad,Inc.The dividend payout ratio for 2015 is
A)10%
B)28%
C)32%
D)38%
Q4) What is meant by the concept of efficiency as it relates to turnover ratios? Explain.
Q5) Trend analysis is another name for ____________________ analysis.
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