Introduction to Financial Accounting
Final Test Solutions
Course Introduction
Introduction to Financial Accounting offers students a foundational understanding of how financial information is measured, recorded, and communicated within organizations. The course introduces key accounting principles and practices, focusing on the preparation and analysis of financial statements such as the balance sheet, income statement, and cash flow statement. Students learn to interpret financial data, understand the regulatory environment, and explore the role of accounting in decision-making for businesses and external stakeholders such as investors and creditors. Through practical examples and exercises, the course equips learners with essential skills for further study and professional development in business and finance.
Recommended Textbook Principles of Accounting 12th Edition by Belverd E.
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Needles
Chapter 1: Accounting Principles and the Financial Statements
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Sample Questions
Q1) A company's ability to attract and hold investment capital ultimately depends on its A)budgeting.
B)planning.
C)liquidity.
D)profitability.
Answer: D
Q2) The purpose of an audit is to
A)determine whether or not a company is a good investment.
B)comply with income tax regulations.
C)determine whether or not a company is a good credit risk.
D)ascertain that the financial statements follow GAAP.
Answer: D
Q3) A major function of financial accounting is to provide the investor with relevant and useful information.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Analyzing and Recording Business Transactions
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Q1) Journal entries are typically posted to the ledger only at the end of the year.
A)True
B)False Answer: False
Q2) Which of the following accounts should be debited in a journal entry?
A)Accounts Receivable,when it has been decreased.
B)Withdrawals,when it has been increased.
C)Wages Payable,when it has been increased.
D)All of these choices.
Answer: B
Q3) All sales transactions generate immediate cash.
A)True
B)False Answer: False
Q4) The normal balance of an account is the side (debit or credit)used to decrease the account.
A)True
B)False Answer: False
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Chapter 3: Adjusting the Accounts
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Sample Questions
Q1) The primary purpose of an expense is to generate revenue.
A)True
B)False
Answer: True
Q2) Gravel Manufacturing had supplies on hand costing $480 on December 31.During the same year,supplies costing $320 were purchased,and $640 in supplies were consumed during the year.What was the cost of supplies on hand on January 1 of that year?
Answer: ($480 + $640 - $320)= $800
Q3) The cash basis of accounting is prohibited for income tax purposes.
A)True
B)False
Answer: False
Q4) What is the purpose of adjusting entries?
Answer: Adjusting entries result in financial statements that include all transactions experienced during the accounting period.They are prepared to apply accrual accounting to transactions that span more than one accounting period.
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) An expense account is closed with a credit to the expense account and a debit to Income Summary.
A)True
B)False
Q2) Which of the following entries could not be a legitimate reversing entry?
A)Debit Wages Payable and credit Wages Expense
B)Debit Fees Earned and credit Accounts Receivable
C)Debit Interest Payable and credit Interest Expense
D)Debit Interest Receivable and credit Interest Income
Q3) The total amount of expenses for the period is
A)$200.
B)$400.
C)$900.
D)$500.
Q4) Which of the following accounts is a real account?
A)Building
B)Depreciation Expense-Buildings
C)Interest Expense
D)Service Revenue
Q5) Why will the Income Summary account never appear on any financial statement?
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Chapter 5: Foundations of Financial Reporting and the
Classified Balance Sheet
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Sample Questions
Q1) Which of the following would not appear in the owner's equity section of a corporation?
A)I.Muller,Capital
B)Retained earnings
C)Additional paid-in capital
D)Common stock
Q2) Intangible assets could include all except
A)Trademark
B)Land held for future use
C)Patent
D)Goodwill
Q3) The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that,to their knowledge,the quarterly and annual statements that their companies file with the SEC are
A)100 percent accurate and contain no misstatements,errors,or mistakes.
B)accurate and complete.
C)subject to interpretation due to the many accounting rules and regulations.
D)not to be used except by individuals working for the company.
Q4) State the definition of a current asset.
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Chapter 6: Accounting for Merchandising Operations
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Sample Questions
Q1) Distinguish between the cost of goods available for sale and the cost of goods sold.
Q2) Describe how to compute the cost of goods available for sale.
Q3) When the terms are FOB shipping point,the title passes at the destinationand the seller pays the transportation costs.
A)True
B)False
Q4) Under the perpetual inventory system,the return of goods from a customer is recorded with a debit to Sales Returns and Allowances.
A)True
B)False
Q5) The periodic inventory system has traditionally been used most commonly by companies that sell
A)low-priced,high-volume merchandise.
B)low-priced,low-volume merchandise.
C)high-priced,low-volume merchandise.
D)high-priced,high-volume merchandise.
Q6) Wolf Equipment uses a perpetual inventory method.Discuss how Wolf Equipment accounts for freight-in and freight-out.
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Chapter 7: Inventories
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Sample Questions
Q1) To increase their levels of inventory,many merchandisers and manufacturers use supply-chain management in conjunction with a just-in-time operating environment.
A)True
B)False
Q2) Under the perpetual inventory system,cost of goods sold is not recorded until the end of the accounting period.
A)True
B)False
Q3) Which of the following inventory methods when used for income tax purposes must also be used for reporting purposes?
A)Specific identification
B)LIFO
C)FIFO
D)Average-cost
Q4) Ending inventory under LIFO is
A)$452.
B)$429.
C)$214.
D)$237.
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Chapter 8: Cash and Internal Control
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Sample Questions
Q1) When a petty cash fund is established,the entry contains a credit to Cash.
A)True
B)False
Q2) A petty cash fund is established for small payments for which writing a check would be impractical.
A)True
B)False
Q3) A result of a separation of duties is that
A)operations become extremely inefficient because of constant training of employees.
B)more employees will need to be bonded.
C)theft by employees becomes impossible.
D)theft is possible only if several employees scheme together
Q4) A good system of internal control is designed to achieve all of the following except A)efficiency of operations.
B)reliability of financial reporting.
C)compliance with relevant laws and regulations.
D)attainment of target sales.
Q5) Why do businesses need to keep some currency on hand?
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Chapter 9: Receivables
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Sample Questions
Q1) What is a contingent liability,and how does it relate to the discounting of a note receivable at the bank?
Q2) A discounted note represents a contingent liability to the original holder.
A)True
B)False
Q3) When using the direct charge-off method,year-end adjustments for uncollectible accounts expense are not made.
A)True
B)False
Q4) One might infer from a debit balance in Allowance for Uncollectible Accounts that A)a posting error has been made.
B)Uncollectible Accounts Expense has been overestimated.
C)the accounts receivable aging method apparently is being used. D)more has been written off than had been estimated.
Q5) Under the allowance method,uncollectible accounts must be estimated if the matching rule is to be followed.
A)True
B)False
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Chapter 10: Long -Term Assets
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Sample Questions
Q1) Intangible assets are also called wasting assets.
A)True
B)False
Q2) It is necessary to distinguish between capital and revenue expenditures because of which of the following accounting rules or principles?
A)Matching
B)Full disclosure
C)Materiality
D)Consistency
Q3) In calculating the depletion of a natural resource,its useful life in years is irrelevant.
A)True
B)False
Q4) Improperly classifying large expenditures as assets rather than expenses
A)could constitute fraud.
B)understates income for the period.
C)understates equity on the balance sheet.
D)results in none of these options.
Q5) What is goodwill and when may it be recorded?
Q6) What commitments must a company account for in determining its free cash flow?
Page 12
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Chapter 11: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) The amount recorded for Payroll Taxes and Benefits Expense is borne entirely by the employee.
A)True
B)False
Q2) Calculate answers to the following scenarios.
a.Jackson Company purchased machinery by executing a $50,000 non-interest-bearing note due in four years.Assuming the going rate for similar notes is 6 percent and using the appropriate present value table,for how much should the machinery be recorded?
b.Wendy Kwon is making bank deposits of $3,000 at the beginning of each year for three years for purposes of buying a car.Assuming an interest rate of 7 percent compounded annually,how much will she have saved for the purchase at the end of year 3? (Calculate manually and round to the nearest dollar. )
c.Ashton Jones would like to make a lump-sum deposit today so that he can withdraw $15,000 at the end of each year for the next three years.Assuming a 9 percent interest rate and using the appropriate present value table,what should she invest today?
Q3) Explain why the cost of employing someone is more than just the wage or salary paid to the employee.
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Chapter 12: Accounting for Partnerships
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Sample Questions
Q1) The division of income is one area in which a partnership differs from a corporation.
A)True
B)False
Q2) Which of the following is a characteristic of partnerships?
A)Unlimited life
B)Limited liability
C)Involuntary association
D)Mutual agency
Q3) The potential loss of all partners in an ordinary partnership is limited only by personal bankruptcy laws.
A)True
B)False
Q4) When individuals invest property in a partnership,the property becomes an asset of the partnership and is owned jointly by the partners.
A)True
B)False
Q5) List four advantages and four disadvantages of the partnership form of business.
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Page 14
Chapter 13: Accounting for Corporations
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Sample Questions
Q1) The book value of one share of callable preferred stock is equal to the call value of the preferred share minus any dividends in arrears.
A)True
B)False
Q2) Define outstanding stock.
Q3) Holders of preferred stock normally do not have
A)preference as to dividends.
B)preference as to assets in liquidations.
C)full voting rights.
D)ownership interests in the corporation.
Q4) The price/earnings (P/E)ratio is a measure of investors' confidence in a company's future.
A)True B)False
Q5) A stock dividend exceeding 20 to 25 percent is properly treated as a stock split. A)True B)False
Q6) Describe at least three reasons why a corporation would want to buy back its own stock.
Page 15
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Chapter 14: Long Term Liabilities
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Sample Questions
Q1) Baylor Enterprises has bonds outstanding with a face value of $200,000 and a carrying value of $206,000 on December 31,20x5.If the company calls in and retires these bonds on December 31,20x5,for $210,000,the entry to record the retirement will include a
A)debit to Bonds Payable for $206,000.
B)credit to Cash for $206,000.
C)debit to Loss on Retirement of Bonds for $6,000.
D)debit to Loss on Retirement of Bonds for $4,000.
Q2) The effective interest method of amortization of bond premiums and discounts is superior to the straight-line method because it results in a(n)
A)more variable interest rate.
B)uniform rate of interest.
C)interest rate that increases or decreases slightly over time.
D)interest rate that is close to the market interest rate.
Q3) The entry to record the issuance of bonds at a discount includes a credit to the Unamortized Bond Discount account.
A)True
B)False
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Page 16
Chapter 15: The Statement of Cash Flows
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Q1) For 20x5,Sahara Company had average total assets of $520,000,sales of $450,000,net income of $50,000,net cash flows from operating activities of $75,000,dividend payments of $25,000,purchases of plant assets of $60,000,and sales of plant assets of $55,000.Using this information,compute (a)cash flow yield, (b)cash flows to sales, (c)cash flows to assets,and (d)free cash flow.Round amounts to one decimal place.
Q2) Issuance of notes,either long- or short-term,would be reflected in the financing activities section of the statement of cash flows.
A)True
B)False
Q3) Transaction 4 would be found on the statement of cash flows in the A)cash flows from investing activities section.
B)cash flows from operating activities section. C)cash flows from financing activities section.
D)noncash investing and financing transactions section.
Q4) The purchase of treasury stock qualifies as a financing activity,but it is not a cash flow.
A)True B)False
Q5) Which accounts are analyzed to determine cash flows from financing activities?
Page 17
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Chapter 16: Financial Statement Analysis
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Sample Questions
Q1) Dividend yield is a liquidity ratio.
A)True
B)False
Q2) Lois Kent has owned and managed the operations of a small chain of sporting goods stores for the past two years.She has asked her administrative assistant to provide her with some annual reports of other companies that sell sporting goods as well as some published reports showing norms for the sporting goods industry so that Lois can compare the financial ratios of her company with those of other companies that sell sporting goods.Discuss the limitations of using comparisons with other companies and industry norms,which Lois needs to remember.
Q3) In a common-size financial statement,a designation of 25 percent could not be given to
A)total stockholders' equity.
B)cost of goods sold.
C)net earnings.
D)total assets.
Q4) Companies file their quarterly reports with the SEC on Form 8-Q.
A)True
B)False
Q5) Briefly explain a "big bath" including when it occurs and why it occurs.
Page 18
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Chapter 17: Managerial Accounting and Cost Concepts
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Q1) Some period costs can be found in inventory accounts on the balance sheet.
A)True
B)False
Q2) Materials and supplies that cannot be traced conveniently to specific products are called
A)indirect materials.
B)raw materials.
C)waste materials.
D)direct materials.
Q3) Minor materials and other production supplies that cannot be conveniently traced to specific products are accounted for as indirect materials.
A)True
B)False
Q4) The amount of cost of goods sold and cost of goods manufactured will be the same if a company sells all of the units it produced.
A)True
B)False
Q5) Give two examples of each stage in the management process.
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Chapter 18: Costing Systems: Job Order Costing
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Sample Questions
Q1) What is the overapplied or underapplied overhead for Ad-on International for March,2014?
A)$181,000 underapplied
B)$181,000 overapplied
C)$19,000 underapplied
D)$19,000 overapplied
Q2) Companies that produce custom-made products usually use a process costing system.
A)True
B)False
Q3) Job order cost cards and cost flows through the inventory accounts form the core of a job order costing system.
A)True
B)False
Q4) An allocation base used in the process cost allocation is known as A)cost processor.
B)cost object.
C)cost driver.
D)cost pooler.
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Chapter 19: Costing Systems Process Costing
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Q1) If 45,000 units of ending work in process inventory are 60 percent complete as to conversion costs,27,000 equivalent units of conversion costs must be incurred to complete these units during the next period.
A)True
B)False
Q2) Under the average costing method in a process costing system,the costs in beginning inventory are combined with current period costs to compute an average product unit cost.
A)True
B)False
Q3) One reason for preparing a process cost report for a particular department is to determine the amount of costs to transfer to the next department or to the Finished Goods Inventory account at the end of the period.
A)True
B)False
Q4) Mention the two cost allocation methods used in a process costing system.
Q5) How are costs recognized,matched,and measured in a process costing system?
Q6) Describe how the process costing information is used by managers in every stage of the management process.
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Chapter 20: Value-Based Systems: Activity-Based Costing and Lean Accounting
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Q1) Distinguish between push-through and pull-through production methods.How does pull-through production meet the requirements of a just-in-time operating environment?
Q2) A framework for classifying activities according to the level at which their costs are incurred is called a
A)bill of activities.
B)full product cost.
C)value chain.
D)cost hierarchy.
Q3) Lean uses ABC to assign overhead costs to the product by using appropriate cost drivers.
A)True
B)False
Q4) The use of computer monitoring allows product costs to be traced directly to work cells.
A)True
B)False
Q5) What would a company using an activity-based management approach attempt to do in regard to activities that add value to the product and those that do not?
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) How many units must BAC Company sell to break even if the selling price per unit is $8.50,variable costs are $4.00 per unit,and fixed costs are $9,000?
A)1,000 units
B)1,059 units
C)2,000 units
D)2,250 units
Q2) When fixed costs are $18,000 and the contribution margin per unit is $4,the breakeven point is
A)4,500 units.
B)2,230 units.
C)$22,300.
D)$72,000.
Q3) A product line's contribution margin represents its contribution to paying off variable costs and to generating a profit.
A)True
B)False
Q4) If direct materials costs are increased,the breakeven point will decrease.
A)True
B)False
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Chapter 22: The Budgeting Process
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Q1) Operating budgets are plans used in daily operations.
A)True
B)False
Q2) Which of the following forms the base of all operating budgets?
A)Direct materials purchases in units
B)Production budget (units)
C)Capital expenditures budget
D)Unit sales forecast
Q3) What would be the total of the 2014 sales budget of Johnson?
A)$378,000
B)$375,000
C)$379,500
D)$376,500
Q4) After management has set short-term goals,the budgeting process typically starts with
A)a clearly defined timetable of events.
B)input only from the accounting personnel.
C)the naming of an efficient coordinator or director.
D)a set of procedures or instructions.
Q5) Describe three benefits budgeting provides to an organization's success.
Page 24
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Chapter 23: Flexible Budgets and Performance Analysis
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Q1) The concern of responsibility accounting is limited to nonmonetary information.
A)True
B)False
Q2) Performance reports should include
A)all costs and revenues for a specific responsibility center.
B)all costs,revenues,and resources for a specific responsibility center.
C)noncontrollable costs for a specific responsibility center.
D)controllable costs,revenues,and resources for a specific responsibility center.
Q3) For residual income figures to be comparable on a companywide basis,all investment centers must have equal access to resources and similar asset investment bases.
A)True
B)False
Q4) Cost of capital is the minimum desired rate of return on a particular investment.
A)True
B)False
Q5) Why are managers more likely to achieve their objectives in both the short term and the long term when they utilize a tool such as the balanced scorecard?
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Chapter 24: Standard Costing and Variance Analysis
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Q1) A purpose of standard costing is to
A)control costs.
B)allocate costs more accurately.
C)replace subjective decision making.
D)compute the breakeven point.
Q2) Using the above information provided for Underfoot Products,compute the variable overhead spending variance.
A)$10,000 (F)
B)$10,000 (U)
C)$40,000 (F)
D)$40,000 (U)
Q3) Using the above information provided for James Corporation,the standard overhead cost for each unit is
A)$45.
B)$33.
C)$30.
D)$63.
Q4) Standard costing can be used only with a process costing system.
A)True
B)False
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Chapter 25: Short-Run Decision Analysis and Capital Budgeting
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Q1) The purpose of incremental analysis is to find the alternative A)with a few relevant costs.
B)that brings in the highest revenue.
C)that contributes the most to profits.
D)with the lowest fixed costs.
Q2) "Variable costs are relevant and fixed costs are irrelevant." Explain why you agree or disagree with this statement.
Q3) What two criteria must be met for information to be considered relevant to decision making?
Q4) Using the above information for Memphis,the machine's actual rate of return is A)negative.
B)greater than 10 percent.
C)less than 10 percent.
D)10 percent.
Q5) The carrying value of the old asset in a machine replacement decision is relevant. A)True
B)False
Q6) What are the two steps in the analysis of a sales mix decision?
Page 27
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