Introduction to Financial Accounting Study Guide
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Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and procedures used to collect, record, and interpret financial information for organizations. The course covers key concepts such as double-entry bookkeeping, the accounting cycle, preparation of financial statements, and the analysis of those statements to inform decision-making. Emphasis is placed on understanding generally accepted accounting principles (GAAP) and the ethical responsibilities of accountants. Through practical exercises and real-world examples, students develop the ability to analyze financial data and communicate financial information effectively to stakeholders.
Recommended Textbook
Financial Accounting An Introduction to Concepts Methods and Uses 14th Edition by Roman L. Weil
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Chapter 1: Introduction to Business Activities and Overview
of Financial Statements and the Reporting Process
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Q1) _____ reports information about cash generated from (or used by) operating, investing, and financing activities during specified time periods.
A)Statement of sources and uses of cash
B)Statement of cash flows
C)Statement of cash receipts and disbursements
D)Funds flow statement
E)Balance sheet
Answer: B
Q2) Management operates the productive capacity of the firm to generate earnings.
A)True
B)False
Answer: True
Q3) Current liabilities represent obligations a firm expects to pay within one year.
A)True
B)False
Answer: True
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Chapter 2: The Basics of Record Keeping and Financial
Statement Preparation: Balance Sheet
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Q1) Which of the following is/are true regarding the T-account?
A)the name or title of the account appears on the horizontal line.
B)dates and other information can appear in T-accounts.
C)one side of the space formed by the vertical line records increases in the item and the other side records decreases.
D)all of the above
E)none of the above
Answer: D
Q2) Which of the following is/are true regarding the T-account?
A)Actual practice does not use this form of the account, except perhaps for memoranda or preliminary analyses
B)looks like the letter T, with a horizontal line bisected by a vertical line.
C)satisfies the requirement of an account and is easy to use.
D)all of the above
E)none of the above
Answer: D
Q3) The date of the balance sheet appears at the bottom of the balance sheet.
A)True
B)False
Answer: False
Page 4
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Chapter 3: The Basics of Record Keeping and Financial
Statement Preparation: Income Statement
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Sample Questions
Q1) A manufacturing firm has manufacturing costs which become product costs. These manufacturing costs do not include:
A)direct material costs (or raw material costs).
B)direct labor costs.
C)manufacturing overhead costs (sometimes called indirect manufacturing costs).
D)expenditures for administrative staff.
E)expenditures for supervisors' salaries, factory utilities, property taxes, insurance, and depreciation on manufacturing plant and equipment.
Answer: D
Q2) The firm recognizes an expense when the following condition(s) hold(s):
A)The consumption of the asset results from a transaction that leads to the recognition of revenue.
B)The consumption of the asset results from the passage of time.
C)The expenditures on advertising must be recognized as expense in the period of expenditure.
D)The expenditures on research must be recognized as expense in the period of expenditure.
E)all of the above
Answer: E
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Chapter 4: Balance Sheet: Presenting and Analyzing
Resources and Financing
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Q1) _____ means that the information is pertinent to the decisions of users of financial reports, in the sense that the information can make a difference in those decisions.
A)Conservatism
B)Realization
C)Recognition
D)Relevance
E)Reliability
Q2) A prefabricated steel storage shed is purchased for $20,000 cash and a $80,000 interest-bearing note payable over a 5-year period at an annual interest rate of 10 percent per annum.The cost to be recorded as an asset (in addition to the $100,000 purchase price) should include all of the following except
A)shipping and handling charges.
B)insurance while in transit.
C)interest on the note payable.
D)reassembly and installation costs.
E)All of these answer choices are costs to be recorded as assets.
Q3) Describe Asset recognition, definition, and measurement.
Q4) What is conservatism?
Q5) Discuss shareholders' equity, how it is measured and disclosed.
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Chapter 5: Income Statement: Reporting Results of Operating Activities
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Q1) Expenditures on advertising and research must be recognized as expense in the period of expenditure, regardless of the firm's expectation of future benefits.
A)True
B)False
Q2) A manufacturing firm has manufacturing costs which become product costs. These manufacturing costs do not include:
A)direct material costs (or raw material costs)
B)direct labor costs
C)manufacturing overhead costs (sometimes called indirect manufacturing costs)
D)expenditures for administrative staff
E)expenditures for supervisors' salaries, factory utilities, property taxes, insurance, and depreciation on manufacturing plant and equipment
Q3) A firms decision to sell its headquarters building at a gain
A)would increase income in the year of sale.
B)is not part of the core business.
C)would be aggregated with other noncore, nonoperating items.
D)reported below operating income, probably as Other Income.
E)all of the above
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Chapter 6: Statement of Cash Flows
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Q1) Using the accrual basis of accounting to measure net income creates the need for a separate financial statement that reports the impact of operations on cash flows.
A)True
B)False
Q2) The primary difference between a cash flow statement prepared using the indirect method and one prepared using the direct method is
A)the financing section is different.
B)the investing section is different.
C)the operating section is different.
D)all three sections of the cash flow statement are different.
E)the investing and financing sections are different.
Q3) In a statement of cash flows, proceeds from the issuance of common stock should be classified as cash inflows for
A)operating activities.
B)financing activities.
C)investing activities.
D)lending activities.
E)exchange transactions.
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Chapter 7: Introduction to Financial Statement Analysis
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Q1) Discuss the accounts receivable turnover ratio.
Q2) A small leverage ratio may indicate that a company is A)well managed.
B)financed with a relatively large amount of common shareholders' equity.
C)financed with a relatively large number of shares of common and preferred stock.
D)financed with a relatively large amount of debt.
E)financed with a relatively large amount of debt and preferred stock.
Q3) (CMA adapted, Dec 93 #17) Norton Inc.has a 2 to 1 current ratio.This ratio would increase to more than 2 to 1 if
A)a previously declared stock dividend were distributed.
B)the company wrote off an uncollectible receivable.
C)the company sold merchandise on open account that earned a normal gross margin.
D)the company purchased inventory on open account.
E)none of the above.
Q4) Discuss how the rate of return on common shareholders' equity is calculated.
Q5) Explain how common-size balance sheets are used by analysts.
Q6) Describe the relationship between return on assets and return on common shareholders' equity.
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Chapter 8: Revenue Recognition, Receivables, and
Advances From Customers
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Q1) Recognizing income after the time of sale is
A)never appropriate.
B)always appropriate.
C)never in accordance with U.S.GAAP.
D)appropriate for some specific circumstances.
E)never in accordance with IFRS.
Q2) When firms that are temporarily short of cash and unable to borrow from usual sources convert accounts receivable into cash by pledging the accounts receivable, they disclose this information
A)on the income statement, only.
B)on the balance sheet, only.
C)on both the income statement and the balance sheet.
D)by a footnote to the financial statements.
E)in managements' discussion and analysis.
Q3) Describe the accounts receivable recognition process.
Q4) The write-off of specific customers' accounts using the allowance method has no effect on the income statement.
A)True
B)False
Q5) Discuss how accounts receivable can be analyzed.
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Chapter 9: Working Capital
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Q1) Which of the following is/are true regarding the Raw Materials Inventory account?
A)The Raw Materials Inventory account includes the cost of raw materials purchased but not yet transferred to the factory floor.
B)The manufacturing firm records purchases of raw materials as debits to the Raw Materials Inventory account.
C)When the manufacturer physically transfers raw materials to the factory floor, it also transfers the cost of the raw materials from the Raw Materials Inventory account to the Work-in-Process Inventory account.
D)When the manufacturer physically transfers raw materials to the factory floor, it records this transfer as a credit to the Raw Materials Inventory account for the cost of the raw materials transferred and a debit to the Work in Process Inventory account.
E)all of the above
Q2) What are the cost-flow assumptions used in inventory measurement?
Q3) Working capital is the difference between a firm's current assets and its current liabilities.
A)True
B)False
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Chapter 10: Long-Lived Tangible and Intangible Assets
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Q1) Depreciation and amortization is a measure of the decline in economic value of a long-lived asset.
A)True
B)False
Q2) An impairment loss on a trademark arises when
A)the book value of the trademark exceeds the undiscounted cash flows.
B)the book value of the trademark exceeds the market value.
C)the market value of the trademark exceeds the undiscounted cash flows.
D)the book value of the trademark exceeds the discounted cash flows.
E)the book value of the trademark exceeds the net realizable value.
Q3) Long-lived financial assets include investments in securities.
A)True
B)False
Q4) Firms sometimes acquire assets by exchanging an asset other than cash or by issuing common stock.In these cases, acquisition cost is either the fair value of the consideration given or the fair value of the asset received, depending on which value the firms can more reliably measure.
A)True
B)False
Q5) Describe several issues in the accounting for long-lived assets.
Page 12
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Chapter 11: Notes, Bonds, and Leases
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Q1) A firm classifies liabilities which fall due within the operating cycle, usually one year, as
A)a current liability.
B)a long-term liability.
C)a noncurrent asset.
D)part of shareholders' equity.
E)a contingent liability.
Q2) When the stated interest rate for a loan equals the yield required by the lender, then the amount borrowed equals the
A)principal amount of the loan.
B)principal amount of the loan plus a premium.
C)principal amount of the loan less a discount.
D)fair amount of the loan.
E)fair amount of the loan less a discount.
Q3) The capital lease method classifies all of the lease payment each period as an operating use of cash on the statement of cash flows.
A)True
B)False
Q4) What are the general principles for measuring financial instruments?
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Chapter 12: Liabilities: Off-Balance Sheet Financing, Retirement
Benefits, and Income Taxes
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Q1) Describe the complexities of permanent and temporary differences on the financial reporting requirements for income taxes.
Q2) Modern, an electric utility, reports the following information about its income taxes for three recent years (amounts in millions): \(\begin{array}{lrrr}\text { Components of Income Tax Expense }&2015&20147&2013\\
\text { Currently Payable }&\$ 46 & \$ 415 & \$(96) \\ \text { Deferred }&344 & (74) & 368\\
\text { Total Income Tax Expense }&\$390&\$341&\$272 \end{array}\)
a. Give the journal entries to record income tax expense for 2013, 2014, and 2015.
b. Describe the likely reasons for the pattern of taxes currently payable and deferred for each year.Assume that deferred taxes relate primarily to depreciation temporary differences.The effective tax rate was relatively stable for the three years.
Q3) Do firms confront ethical issues when engaging in off-balance-sheet financing?
Q4) Describe the accounting for income taxes for financial reporting purposes.
Q5) Discuss the interpretation of retirement benefit disclosures.
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Chapter 13: Marketable Securities and Derivatives
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Q1) Marco Insurance Marco Insurance acquired shares of Penny Systems' common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Marco Insurance sold these shares on January 3, 2014, for $405,000. (Refer to the Marco Insurance) The journal entries to measure trading securities at fair value and recognize unrealized holding gain in net income on December 31, 2013. A)Cash..................2,000
Marketable Securities...............2,000
B)Other Comprehensive Income.................2,000
Marketable Securities................2,000
C)Marketable Securities............2,000
Other Comprehensive Income...........2,000
D)Marketable Securities...........2,000
Unrealized Holding Gain on Trading Securities.............2,000
E)Marketable Securities................2,000
Realized Holding Gain on Trading Securities..............2,000
Q2) Describe the fair value option applied to marketable securities and derivatives.
Q3) How are securities measured at acquisition?
Q4) What is the accounting treatment for securities available for sale?
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Chapter 14: Intercorporate Investments in Common Stock
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Q1) Intercompany sales
A)do not need to be eliminated as long as the sales have been completed to an outside party.
B)must be eliminated from both the sales and cost of goods sold accounts.
C)do not need to be eliminated if made at arm's length values.
D)must be eliminated only if not in the ordinary course of trade or business.
E)do not need to be eliminated.
Q2) If Barton Company purchases a minority active interest in Laramie Company for $150,000, Barton will make which of the following entries to record the purchase using the equity method?
A)Equity in Laramie Company 150,000 Cash 150,000
B)Investment in Laramie Company 150,000 Cash 150,000
C)Deferred Revenue--Laramie Company 150,000 Cash 150,000
D)Common Stock--Laramie Company 150,000 Cash 150,000
E)Paid-in-Capital--Laramie Company 150,000 Cash 150,000
Q3) The accounting for investments in common stock depends on (1) the expected holding period, and (2) the purpose of the investment, as determined by both the percentage held and management intent.
A)True
B)False
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Chapter 15: Shareholders Equity: Capital Contributions and Distributions
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Q1) All corporations must issue preferred stock.
A)True
B)False
Q2) Describe the accounting for employee stock options (ESOs).
Q3) Discuss callable preferred shares from the issuer's point-of-view.
Q4) The accounting for employee stock options involves the firm debiting _____ and crediting _____ for the amortized amount of the fair value of the stock options on the date of the grant over the requisite service period.
A)Compensation Expense; Additional Paid-In Capital (Stock Options)
B)Stock Option Expense; Additional Paid-In Capital (Stock Options)
C)Stock Option Expense; Retained Earnings
D)Compensation Expense; Retained Earnings
E)Compensation Expense; Common Stock
Q5) Earnings per share tells the shareholder the amount of
A)cash generated per share of common stock.
B)dividends earned by each common shareholder.
C)dividend per share of common stock.
D)income per share as if preferred stock dividends had been paid.
E)income per share as if common and preferred stock dividends had been paid.
Q6) Compare the features of stock options and stock rights.What are stock warrants? Page 17
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Chapter 16: Statement of Cash Flows: Another Look
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Q1) Describe the effects of transactions involving investments on the statement of cash flows.
Q2) The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in deriving cash flow from operations depends on the nature of its operations. _____ usually show an addback for deferred tax expense, whereas firms that _____ show a subtraction.
A)Rapidly growing firms; have operating losses
B)Firms that have operating losses; are profitable
C)Profitable firms; have operating losses
D)Firms that stop growing or that shrink; rapidly growing firms
E)Rapidly growing firms; stop growing or that shrink
Q3) The accountant prepares the statement of cash flows after completing the
A)balance sheet, only.
B)income statement, only
C)balance sheet and the income statement.
D)funds flow statement.
E)statement of retained earnings.
Q4) Firms typically report cash flows from operations using the direct method.
A)True
B)False
Page 19
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Chapter 17: Synthesis and Extensions
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Q1) Explain the accounting for redeemable preferred shares.
Q2) The FASB's conceptual framework does not include which of the following as financial reporting objectives?
A)Provide information useful for making irrational investment and credit decisions.
B)Provide information to help current and potential investors and creditors assess the amount, timing, and uncertainty of past cash flows.
C)Provide information about the economic resources of a firm's customers and the claims on those resources.
D)Provide information about a firm's expected operating performance during the next period.
E)all of the above
Q3) The write-off of a particular customer's account that becomes uncollectible involves a debit to Allowance for Uncollectibles and a credit to Accounts Receivable.
A)True
B)False
Q4) Discuss the definition, recognition, and measurement of assets.
Q5) What are the financial reporting objectives?
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