Introduction to Financial Accounting Exam Solutions
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and practices used to record, classify, and summarize financial transactions. The course covers the accounting cycle, preparation of financial statements, and the use of financial information for decision-making by various stakeholders. Emphasis is placed on key concepts such as accrual accounting, revenue recognition, asset valuation, and internal controls, providing students with the tools necessary to analyze financial data and understand the role of accounting in business operations.
Recommended Textbook
Corporate Financial Accounting 15th Edition by Carl S. Warren
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Page 2
Chapter 1: Accounting and Business
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Sample Questions
Q1) Financial accounting provides information to all users, while the main focus for managerial accounting is to provide information to the management.
A)True
B)False
Answer: True
Q2) An account receivable is typically classified as a revenue.
A)True
B)False
Answer: False
Q3) List the five steps in the process by which accounting provides information to users.
Answer: 1. Identify users.
2. Assess users' information needs.
3. Design the accounting information system to meet users' needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
Q4) What are the three sections of the statement of cash flows?
Answer: Operating Activities, Investing Activities, and Financing Activities
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Chapter 2: Double-Entry Accounting
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Sample Questions
Q1) Which of the following stockholders' equity accounts follows the same debit and credit rules as liabilities?
A) expense accounts only
B) dividends accounts only
C) revenue, common stock, and retained earnings accounts
D) expense and dividends accounts
Answer: C
Q2) Which are the parts of the T account?
A) title, date, total
B) date, debit side, credit side
C) title, debit side, credit side
D) title, debit side, total
Answer: C
Q3) Revenues are equal to the difference between cash receipts and cash payments.
A)True
B)False
Answer: False
Q4) Prepare a journal entry on October 12 for the fees earned on account, $14,600. Omit explanation.
Answer: 11ea84e6_b038_faf4_9a63_03d6a891bead_TB2281_00_TB2281_00
Page 4
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Chapter 3: Adjustments: Accruals and Deferrals
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Sample Questions
Q1) Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting.
A)True
B)False
Answer: True
Q2) At the end of the fiscal year, the usual adjusting entry to accrue wages due on the last day of the fiscal period was omitted. Which of the following is true?
A) total assets will be understated at the end of the current year
B) the balance sheet and income statement will be misstated but the statement of stockholders' equity will be correct for the current year
C) net income will be overstated for the current year
D) total assets and total liabilities will be understated
Answer: C
Q3) When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent of net income.
A)True
B)False
Answer: False
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5
Chapter 4: The Accounting Cycle
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Sample Questions
Q1) Which of the following is not true about closing entries?
A) There are four closing entries that update the stockholders' equity account.
B) After the second closing entry, the income summary account is equal to the net income or loss for the period.
C) All real accounts are closed at the end of the period.
D) By closing nominal accounts at the end of the period to zero, it is possible to isolate next period's information correctly.
Q2) Prepaid insurance is reported on the balance sheet as a
A) current asset
B) fixed asset
C) current liability
D) long-term liability
Q3) The trial balance may be listed on the end-of-period spreadsheet instead of being prepared separately.
A)True
B)False
Q4) The income summary account is closed to the retained earnings account.
A)True
B)False
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Chapter 5: Accounting for Retail Businesses
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Sample Questions
Q1) Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts.
A)True
B)False
Q2) Bountiful Company had sales of $650,000 and cost of goods sold of $200,000 during a year. The total assets balance at the beginning of the year was $175,000 and at the end of the year was $167,000. Calculate the asset turnover ratio.
A) 3.00
B) 3.80
C) 0.29
D) 0.26
Q3) Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the goods sold is $24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above transactions?
Q4) Sales is equal to the cost of goods sold less the gross profit.
A)True
B)False
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Chapter 6: Inventories
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Sample Questions
Q1) If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in inventory according to the lower of cost or market is
A) $15
B) $60
C) $75
D) $135
Q2) Safeguarding inventory and proper reporting of the inventory in the financial statements are the reasons for controlling the inventory.
A)True
B)False
Q3) Which of the following will be the same amount regardless of the cost flow assumption adopted?
A) number of items ordered
B) gross profit
C) cost of goods sold
D) ending inventory
Q4) Generally, the lower the number of days' sales in inventory, the better.
A)True
B)False
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Chapter 7: Internal Control and Cash
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Sample Questions
Q1) The actual cash received during the week ended October 31 for cash sales was $23,447 and the amount indicated by the cash register total was $23,457. Journalize the entry to record the cash receipts and cash sales. \[\begin{array} { | c | c | c | c | c | }
\hline && { \text { Journal } } \\
\hline \text { Date } & \text { Description } & \text { P ost. Ref. } & \text { Debit } & \text { Credit } \\
\hline & & & & \\
\hline & & & & \\
\hline & & & & \\
\hline
\end{array}\]
Q2) Procedures designed to protect cash from theft and misuse from the time it is received until it can be deposited in a bank are called
A) accounting controls
B) cash controls
C) FASB controls
D) GAAP controls
Q3) Why would a bank require a company to maintain a compensating balance?
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Chapter 8: Receivables
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Sample Questions
Q1) Allowance for Doubtful Accounts has a debit balance of $1,100 at the end of the year (before adjustment), and an analysis of customers' accounts indicates uncollectible receivables of $12,900. Which of the following entries records the proper adjustment for bad debt expense?
A) debit Bad Debt Expense, $14,000; credit Allowance for Doubtful Accounts, $14,000
B) debit Allowance for Doubtful Accounts, $14,000; credit Bad Debt Expense, $14,000
C) debit Allowance for Doubtful Accounts, $11,800; credit Bad Debt Expense, $11,800
D) debit Bad Debt Expense, $11,800; credit Allowance for Doubtful Accounts, $11,800
Q2) A debit balance in the Allowance for Doubtful Accounts
A) is the normal balance for that account
B) indicates that actual bad debt write-offs have been less than what was estimated C) cannot occur if the percentage of receivables method of estimating bad debts is used
D) indicates that actual bad debt write-offs have exceeded previous provisions for bad debts
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10
Chapter 9: Long-Term Assets: Fixed and Intangible
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Sample Questions
Q1) A machine costing $57,000 with a 6-year life and $54,000 depreciable cost was purchased January 1. Compute the yearly depreciation expense using straight-line depreciation.
Q2) A machine costing $185,000 with a 5-year life and $20,000 residual value was purchased January 2. Compute depreciation for each of the five years, using the double-declining-balance method.
Q3) On October 1, Sebastian Company acquired new equipment with a fair market value of $458,000. Sebastian received a trade-in allowance of $92,000 on the old equipment of a similar type and paid cash of $366,000. The following information about the old equipment is obtained from the account in the equipment ledger: Cost, $336,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $220,000; annual depreciation, $20,000. Assuming the exchange has commercial substance, journalize the entries to record: (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on October 1.
Q4) A capital expenditure results in a debit to
A) an expense account
B) a capital account
C) a liability account
D) an asset account
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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies
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Sample Questions
Q1) The cost of a product warranty should be included as an expense in the
A) period the cash is collected for a product sold on account
B) future period when the cost of repairing the product is paid
C) period of the sale of the product
D) future period when the product is repaired or replaced
Q2) The journal entry a company uses to record pension rights that have not been funded for its salaried employees at the end of the year is
A) debit Salary Expense; credit Cash
B) debit Pension Expense; credit Unfunded Pension Liability
C) debit Pension Expense; credit Unfunded Pension Liability and Cash
D) debit Pension Expense; credit Cash
Q3) The accounting for defined benefit plans is usually very easy and straightforward.
A)True
B)False
Q4) The entry to record accrual of employer's payroll taxes would include a
A) debit to Payroll Tax Expense for $2,500
B) debit to FICA Taxes Payable for $1,800
C) credit to Payroll Tax Expense for $248
D) debit to Payroll Tax Expense for $1,148
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Chapter 11: Liabilities: Bonds Payable
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Sample Questions
Q1) A corporation issues for cash $9,000,000 of 8%, 30-year bonds, interest payable semiannually. The amount received for the bonds will be
A) present value of 60 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years
B) present value of 30 annual interest payments of $720,000
C) present value of 30 annual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years
D) present value of $9,000,000 to be repaid in 30 years, less present value of 60 semiannual interest payments of $360,000
Q2) A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for $475,000. Journalize the redemption of the bonds.
Q3) The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be
A) debit Bonds Payable, credit Cash
B) debit Cash and Discount on Bonds Payable, credit Bonds Payable
C) debit Cash, credit Premium on Bonds Payable and Bonds Payable
D) debit Cash, credit Bonds Payable
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Chapter 12: Corporations: Organization, Stock Transactions, and Dividends
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Sample Questions
Q1) If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported on the income statement.
A)True
B)False
Q2) On April 10, Maranda Corporation issued for cash 11,000 shares of no-par common stock at $25. On May 5, Maranda issued at par 1,000 shares of 4%, $50 par preferred stock for cash. On May 25, Maranda issued for cash 15,000 shares of 4%, $50 par preferred stock at $55.
Journalize the entries to record the April 10, May 5, and May 25 transactions.
Q3) On April 1, 10,000 shares of $5 par common stock were issued at $22, and on April 7, 5,000 shares of $50 par preferred stock were issued at $104. Journalize the entries for April 1 and 7.
Q4) If 50,000 shares are authorized, 41,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 43,000.
A)True
B)False
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Chapter 13: Statement of Cash Flows
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Sample Questions
Q1) The net income reported on the income statement for the current year was $210,000. Depreciation recorded on equipment and a building amount to $62,500 for the year. Balances of the current asset and current liabilities accounts at the beginning and end of the year are as follows:
\[\begin{array} { | l | r | r | }
\hline & \text { End of Year } & \text { Beginning of Year } \\
\hline \text { Cash } & \$ 56,000 & \$ 59,500 \\
\hline \text { Accounts receivable (net) } & 71,000 & 73,400 \\
\hline \text { Inventories } & 140,000 & 126,500 \\
\hline \text { Prepaid expenses } & 7,800 & 8,400 \\
\hline \text { Accounts payable (merchandise creditors) } & 62,600 & 66,400 \\
\hline \text { Sal aries payable } & 9,000 & 8,250 \\
\hline
\end{array}\]
(a) Prepare the cash flows from operating activities section of the statement of cash flows, using the indirect method.
(b) If the direct method had been used, would the net cash flow from operating activities have been the same? Explain.
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Page 15
Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) Accumulated other comprehensive income is presented in the financial statements A) either on the income statement or in a separate statement of comprehensive income. B) on the balance sheet as part of stockholders' equity. C) on the income statement only. D) in a separate statement only.
Q2) Comparative information taken from the Friction Company's financial statements is shown below: \[\begin{array} { l r r } & \text { Year } 2 & \text { Year } 1 \\
\text { (a) Notes receivable } & \$ 25,500 & \$ 30,000 \\
\text { (b) Accounts receivable } & 106,200 & 90,000 \\
\text { (c) Retained earnings } & 77,000 & 70,000 \\
\text { (d) Sales } & 654,000 & 600,000 \\
\text { (e) Operating expenses } & 160,000 & 200,000 \\
\text { (f) Income taxes payable } & 28,000 & 20,000
\end{array}\] Using horizontal analysis, show the percentage change and direction (increase or decrease) from Year 1 to Year 2 with Year 1 as the base year.
Q3) Define solvency and profitability. How are they alike?
Q4) The following data are available for Martin
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Page 16
Chapter 15:Investments
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Sample Questions
Q1) Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a
A) credit to cash for $9,000
B) debit to the investment account for $9,000
C) credit to the investment account for $9,000
D) credit to a loss account for $9,000
Q2) When a corporation owns less than 20% of the stock of another company, dividends received are not treated as income.
A)True
B)False
Q3) The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the A) fair value method
B) market method
C) income method
D) equity method
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