Introduction to Financial Accounting
Question Bank
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and procedures of accounting that are essential for measuring, recording, and communicating financial information. The course covers key topics such as the accounting cycle, preparation and analysis of financial statements, and the roles of assets, liabilities, equity, revenues, and expenses. Emphasis is placed on understanding Generally Accepted Accounting Principles (GAAP), the application of double-entry bookkeeping, and interpretation of financial data for informed decision-making. This course is ideal for those seeking to grasp how financial information is used to support business operations and strategy.
Recommended Textbook
Financial Accounting 15th Edition by Jan Williams
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Chapter 1: Accounting: Information for Decision Making
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Q1) Objectives of financial reporting
List and briefly describe the objectives of financial reporting beginning with the most general and ending with the most specific.
Answer: (1.) Provide information useful in making investment and credit decisions. (2.) Provide information useful in assessing the amount, timing, and uncertainty of future cash flows.
(3.) Provide information about economic resources, claims to economic resources, and changes in resources and claims.
Q2) Generally accepted accounting principles were established by the American Accounting Association in 1934 and are updated annually by Congress. A)True B)False
Answer: False
Q3) The information is intended to be used for planning and control decisions. Answer: Management
Q4) The information is summarized in a set of statements distributed to the public. Answer: Financial
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Chapter 2: Basic Financial Statements
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Q1) A statement of cash flows for August, would report net cash flows from investing activities of:
A) $26,000.
B) $32,400.
C) $40,000.
D) $46,400.
Answer: C
Q2) Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.
A)True
B)False
Answer: False
Q3) For the month of August, net cash flows from operating activities for Astoria were:
A) $33,500.
B) $7,500.
C) $20,000.
D) $26,000.
Answer: B
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Chapter 3: The Accounting Cycle: Capturing Economic Events
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Q1) On June 18, Baltic Arena paid $6,600 to Marvin Maintenance, Inc. for cleaning the arena following a monster truck show held on June 9th. This transaction:
A) Is recorded by debiting the Retained Earnings account.
B) Is recorded by debiting Cash and crediting Cleaning Expense.
C) Causes a decrease in owners' equity by increasing expenses for June.
D) May not be recorded until all revenue generated from the monster truck show has been collected in cash.
Answer: C
Q2) According to the rules of debit and credit for balance sheet accounts:
A) Increases in asset, liability, and owners' equity accounts are recorded by debits.
B) Decreases in asset and liability accounts are recorded by credits.
C) Increases in asset and owners' equity accounts are recorded by debits.
D) Decreases in liability and owners' equity accounts are recorded by debits.
Answer: D
Q3) The matching principle refers to the relationship between revenues and expenses.
A)True
B)False
Answer: True
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Chapter 4: The Accounting Cycle: Accruals and Deferrals
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Q1) Which of the following would not be a proper application of the concept of materiality by Millridge Corporation?
A) Transactions involving small dollar amounts are not recorded in Millridge's accounting records.
B) Estimates of supplies on hand are used to determine the supplies expense for the period.
C) On a monthly basis, utility bills are expensed in the month paid, rather than in the month in which services are used.
D) Immaterial items are ignored in making end-of-period adjusting entries.
Q2) Which of the following situations does not require Empire Company to record an adjusting entry at the end of January?
A) On January 1, Empire Company purchased delivery equipment with an estimated useful life of five years.
B) On January 1, Empire Company began delivery service for a large client who will pay at the end of a three-month period.
C) At the end of January, Empire Company pays the custodian for January office cleaning services.
D) On January 1, Empire Company paid rent for six months on its office building.
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Chapter 5: The Accounting Cycle: Reporting Financial
Results
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Q1) Which of the following journal entries is required to close the Income Summary account of a profitable company?
A) Debit Income Summary, credit Retained earnings.
B) Credit Income Summary, debit Retained earnings.
C) Debit Income Summary, credit Capital Stock.
D) Credit Income Summary, debit Capital Stock.
Q2) The income summary account appears, as stated, on the statement of retained earnings.
A)True
B)False
Q3) In regard to disclosures that are required to be contained in annual reports, the FASB has no well-defined list of items that must be included.
A)True
B)False
Q4) Dividends will have what effect upon retained earnings?
A) Increase.
B) Decrease.
C) No effect.
D) Depends upon if there is income or loss.
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Chapter 6: Merchandising Activities
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Q1) Instead of paying for merchandise purchased on account, Olympic Corp. returned this merchandise to the supplier. Olympic should record this transaction by debiting Accounts Payable and crediting Sales Returns and Allowances.
A)True
B)False
Q2) Net sales and gross profit
Mayflower Supply House had gross sales revenue of $1,700,000, cost of goods sold of $950,000, sales returns and allowances of $52,500, and allowed sales discounts of $30,000.
Compute for the year:
\(\begin{array}{|l|l|}
\hline \text { (a) Net sales. } & \$ \underline{\quad\quad}\\
\hline \text { (b) Gross profit. } & \$\underline{\quad\quad} \\ \hline \text { (c) Gross profit rate. } &\underline{\quad\quad}\% \\ \hline
\end{array}\)
Q3) Today, most large merchandising companies use a perpetual inventory system. A)True
B)False
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Page 8
Chapter 7: Financial Assets
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Q1) Marketable securities
(a.) Explain how investments in available-for-sale marketable securities are valued in the investor's balance sheet. the objectivity principle?
(c.) What does Unrealized Holding Gain (or Loss) on Investments represent? How is this item reported in the financial statements?
Q2) Cash equivalents are the most liquid of assets.
A)True
B)False
Q3) All the following are steps included in the preparation of a bank reconciliation except:
A) Comparing deposits listed on the bank statement with the deposits shown in the accounting records.
B) Arranging checks by serial numbers and comparing with those listed in the accounting records.
C) Deducting any debit memoranda from the balance on the bank statement.
D) Preparing journal entries for any adjustments to the depositor's records.
Q4) Internal control will aid in achieving accurate accounting for cash.
A)True B)False
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Chapter 8: Inventories and the Cost of Goods Sold
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Q1) Lower-of-cost-or-market Elite Systems sells a single product. At December 31, the company's perpetual inventory records indicate 2,500 units on hand with a total cost (FIFO basis) of $155,000. The replacement cost of this product at this date is $35 per unit. Prepare journal entries to record (a) the write-down of the inventory to the lower-of-cost-or-market value at December 31, and (b) the cash sale of 100 units on January 4 at a retail price of $50 per unit.
(a) Dec. 31
(b) Jan. 4
\[\begin{array} { | l | c | }
\hline \text { Date } & \text { General Journal } \\
\hline 20 & \\
\hline
\end{array}\]
Q2) What was the cost of goods sold for the month?
A) $129,000.
B) $171,000.
C) $235,000.
D) $304,750.
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Chapter 9: Plant and Intangible Assets
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Q1) An asset which costs $28,800 and has accumulated depreciation of $6,000 is sold for $21,600. What amount of gain or loss will be recognized when the asset is sold?
A) A gain of $1,200.
B) A loss of $1,200.
C) A loss of $7,200.
D) A gain of $7,200.
Q2) Which depreciation method is most commonly used among publicly owned corporations?
A) Straight-line.
B) Double-declining balance.
C) Units-of-output.
D) All of the various depreciation methods are used equally.
Q3) An asset which costs $14,400 and has accumulated depreciation of $8,000 is sold for $5,600. What amount of gain or loss will be recognized when the asset is sold?
A) A gain of $800.
B) A loss of $800.
C) A loss of $2,400.
D) A gain of $2,400.
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Chapter 10: Liabilities
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Q1) What will be the effect on Gamma's debt ratio if Gamma's owner invests an additional $5 million to finance its expansion?
A) The debt ratio will decrease from .1 (3/30) to .0857 (3/35) after the additional investment.
B) The debt ratio will decrease from 3/27 before to 3/32 after the additional investment.
C) The debt ratio will increase from 30 before to 35 after the additional investment.
D) Additional investment by owner will have no effect on the debt ratio.
Q2) A discount on bonds payable is best described as:
A) An element of future interest expense.
B) A bonus paid by the bondholders to the issuing corporation because of the unusually high interest rate stated in the bonds.
C) The present value of the future interest payments of bond interest and principal.
D) An amount below par which the bondholders may be called upon to make good.
Q3) A high interest coverage ratio is a sign of creditworthiness.
A)True
B)False
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Chapter 11: Stockholders Equity: Paid-In Capital
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Q1) Stock that had been issued by a corporation, and later reacquired, is classified as:
A) Treasury stock.
B) Non-participating preferred stock.
C) Restricted stock.
D) Issued shares.
Q2) Refer to the information above. If Vision did not pay a dividend for the last two years, but declared a dividend this year, how much will they have to declare in order for the common stockholders to receive $.45 per share?
A) $189,000.
B) $306,000.
C) $108,000.
D) $162,000.
Q3) When a state authorizes the sale of stock to stockholders, the corporation will credit Retained Earnings for the par value of the stock.
A)True
B)False
Q4) The total amount of legal capital: $__________
Q5) The total amount of paid-in capital: $__________
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Chapter 12: Income and Changes in Retained Earnings
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Q1) Diluted earnings per share represents a hypothetical case, showing what earnings per share would be if certain securities were converted into additional shares of common stock.
A)True
B)False
Q2) Comprehensive income can be displayed to users of financial statements in which of the following way(s):
A) As a second income statement.
B) As a single income statement that includes both the components of net income and the components of other comprehensive income.
C) As an element in the changes in stockholders' equity displayed as a column in the statement of stockholders' equity.
D) Either as a second income statement, as a single income statement that includes both the components of net income and the components of other comprehensive income, or as an element in the changes in stockholders' equity displayed as a column in the statement of stockholders' equity.
Q3) Stock dividends
What is the effect of a stock dividend?
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Chapter 13: Statement of Cash Flows
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Q1) Both the direct method and the indirect method of computing net cash flow from operating activities convert accrual-based income statement amounts into cash flows.
A)True
B)False
Q2) Free cash flow arises out of:
A) Operating activities.
B) Investing activities.
C) Financing activities.
D) All three types of activities.
Q3) Chapin Company reported net income of $410,000 for 2009. Balances of selected current asset and current liability accounts are as shown on the indicated dates: Depreciation expense for 2009 amounted to $65,000. Using only the above information, compute Chapin's net cash flow from operating activities (indirect method) for 2009:
A) $470,600.
B) $467,400.
C) $460,600.
D) $448,600.
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Chapter 14: Financial Statement Analysis
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Q1) The price-earnings ratio is measured by dividing:
A) Book value by earnings per share.
B) Par value by earnings per share.
C) Market value by earnings per share.
D) Market value by total net income.
Q2) The current ratio is calculated by:
A) Dividing current assets by total assets.
B) Dividing current assets by total liabilities.
C) Dividing current assets by stockholders' equity.
D) Dividing current assets by current liabilities.
Q3) What is the quick ratio?
A) 1.5 to 1.
B) .7 to 1.
C) .45 to 1.
D) .8 to 1.
Q4) The current ratio will be _______________ the quick ratio.
A) less than
B) greater than or equal to
C) the same as
D) always different than
Page 16
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Chapter 15: Global Business and Accounting
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Questions
Q1) Rochester, Inc. purchased cameras from a Japanese company at a price of 4 million yen. On the purchase date, the exchange rate was $0.0100 per Japanese yen, but when Rochester, Inc., paid the liability, the exchange rate was $0.0103 per yen. When this foreign account payable was paid, Rochester, Inc., recorded a:
A) Debit to Inventory of $1,200.
B) Loss of $1,200.
C) Credit to Accounts Payable of $41,200.
D) Gain of $1,200.
Q2) Hayden, Inc. purchased knobs from a Greek company for 185,000 Euros. On the purchase date the exchange rate was $0.80 per Euro, but when Hayden paid the liability, the exchange rate was $0.70 per Euro. When this foreign account payable was paid, Hayden, Inc., recorded a:
A) Debit to Inventory of $18,500.
B) Loss of $18,500.
C) Credit to Accounts Payable of $148,000.
D) Gain of $18,500.
Q3) Making accurate estimates of costs is a challenge for global companies.
A)True
B)False
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Chapter 16: The Time Value of Money
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Q1) The lower the discount rate of an investment, the lower the present value of the investment.
A)True
B)False
Q2) The time value of money is based on the idea that:
A) The value of money in the future equals the interest received in the present.
B) The value of money in the future will be greater than an amount available today.
C) The value of money at present over some length of time will be reduced by inflation.
D) The future value of money will become the current value as time passes.
Q3) Discounting a future amount of a cash receipt will determine the present value of that receipt.
A)True
B)False
Q4) The market price of a bond is equal to its present value.
A)True
B)False
Q5) Explain how compound interest applies to the time value of money.
Q6) Explain what is meant by the "time value of money." Provide examples.
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