Introduction to Financial Accounting
Chapter Exam Questions
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles, concepts, and techniques used in collecting, analyzing, and reporting financial information for business entities. The course covers the accounting cycle, preparation and interpretation of financial statements, the measurement of business transactions, and the ethical considerations integral to the accounting profession. Emphasis is placed on understanding how accounting information facilitates decision-making by external stakeholders, such as investors, creditors, and regulators, preparing students for further studies in business and finance.
Recommended Textbook
Horngrens Accounting 10th Edition by Miller Nobles Mattison
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Page 2
Chapter 1: Accounting and the Business Environment
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Q1) In a limited-liability company:
A)the members are personally liable to pay the entity's debts.
B)tax on earnings is paid by the business.
C)the members are liable for each other's actions.
D)the members pay tax on their share of earnings.
Answer: D
Q2) Business owners use accounting information to set goals, evaluate progress toward those goals, and make adjustments when needed.
A)True
B)False
Answer: True
Q3) Venus Inc. paid $5,000 for account payable. How does this transaction affect the accounting equation of Venus?
A)Assets decrease by $5,000 and equity increases by $5,000.
B)Assets decrease by $5,000 and liabilities decrease by $5,000.
C)Assets increase by $5,000 and equity decreases by $5,000.
D)Assets increase by $5,000 and liabilities increase by $5,000.
Answer: B
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3
Chapter 2: Recording Business Transactions
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Q1) A chart of accounts is a list of all of a company's accounts with their account numbers.
A)True
B)False
Answer: True
Q2) The following transactions for the month of March have been journalized and posted to the proper accounts. Mar. 1 Martinez invested $9,000 cash in his new design services business.
Mar. 2 Paid the first month's rent of $800.
Mar. 3 Purchased equipment by paying $3,000 cash and executing a note payable for $5,000.
Mar. 4 Purchased office supplies for $750 cash.
Mar. 5 Billed a client for $10,000 of design services completed.
Mar. 6 Received $8,000 on account for the services previously recorded. What is the ending balance in the Service Revenue account?
A)$19,000
B)$9,000
C)$10,000
D)$8,000
Answer: C
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Page 4
Chapter 3: The Adjusting Process
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Sample Questions
Q1) The revenue recognition principle guides accountants in:
A)ensuring only revenues received in cash are recorded.
B)determining when to record expenses.
C)determining when to record revenues.
D)ensuring expenses are deducted from revenues.
Answer: C
Q2) Which of the following statements is true of accrual basis accounting?
A)Accrual basis accounting is allowed by Generally Accepted Accounting Principles (GAAP).
B)Accrual basis accounting records expenses only when cash has been paid for them.
C)Accrual basis accounting records revenue only when cash is received.
D)It always results in greater net income than cash basis accounting.
Answer: A
Q3) On December 15, Duncan collected revenue of $3,000 in advance from a new client, and agreed to provide services to the client for the period of December 15 through January 15 of the following year. Assuming Duncan records unearned revenues using the alternative treatment, journalize the adjusting entry recorded on December 31.
Answer: 11ea8243_1008_4b03_bbd8_5953fce8fa52_TB2803_00
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Chapter 4: Completing the Accounting Cycle
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Q1) Net income (loss)is the difference between the total debits and the total credits in the income statement columns of the worksheet.
A)True
B)False
Q2) The post-closing trial balance shows the updated capital balance.
A)True
B)False
Q3) Reversing entries are:
A)the exact opposite of a prior adjusting entry.
B)dated the last day of the new period.
C)are required to be passed as per the Generally Accepted Accounting Principles (GAAP).
D)expensive to record and time consuming.
Q4) The operating cycle is the time span required for a business to repay its long-term liabilities.
A)True B)False
Q5) The Owner's Name, Capital account is a permanent account. A)True
B)False
6
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Chapter 5: Merchandising Operations
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Q1) An amount that a merchandiser earns by selling its inventory is known as Sales Revenue or Sales.
A)True
B)False
Q2) When a company uses a perpetual inventory system, all merchandise transactions are updated as and when they occur; so, the inventory account will show the current balance at all times.
A)True
B)False
Q3) Under the perpetual inventory system, what is the difference between a sales return and a sales allowance?
A)A sales return reduces the amount receivable from the customer, but an allowance does not.
B)A sales return involves an adjustment to Merchandise Inventory, but a sales allowance does not.
C)A sales return requires a debit to Sales Returns and Allowances, but a sales allowance does not.
D)A sales allowance is deducted from Sales revenue to calculate net sales, but a sales return is not.
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Page 7
Chapter 6: Merchandise Inventory
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Q1) A company is uncertain whether a complex transaction should be recorded as an asset or an expense. Under the conservatism principle, they should choose to treat it as an asset.
A)True
B)False
Q2) The ending inventory of a company was $450,000 as per the perpetual inventory records. The current replacement cost for the ending inventory is $410,000. Prepare the journal entry to adjust inventory.
Q3) Under GAAP, which of the following amounts would be reported as Merchandise Inventory on the balance sheet of a company if the cost of an item is $85 and the current replacement cost is $70?
A)$155
B)The average of $70 and $85
C)$85
D)$70
Q4) Perez Company sold 500 units of inventory at $25 per unit for cash. The company uses the perpetual inventory system. The cost of the units sold was $10 per unit. Provide the journal entries to record the sale.
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Chapter 7: Accounting Information Systems
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Sample Questions
Q1) An automobile company purchases spark plugs, on cash, for the production of its vehicles. When using a manual accounting information system, where should the company record this transaction?
A)purchases journal
B)general journal
C)cash payments journal
D)sales journal
Q2) Which of the following is true of a control account?
A)It is a valuation account from which balances are added to another account.
B)Its balance equals the sum of the balances in a group of related accounts in a subsidiary ledger.
C)It is equivalent to a contra account and represents the offsetting nature of debits and credits on a firm's financial statements.
D)It holds individual accounts that support a general ledger account.
Q3) Which of the following are the debit columns of a typical cash payments journal?
A)Merchandise Inventory column and Cash column
B)Other Accounts column and Accounts Payable column
C)Merchandise Inventory column and Accounts Payable column
D)Other Accounts column and Cash column
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Page 9
Chapter 8: Internal Control and Cash
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Q1) A key to strong control over petty cash is to ensure that several persons serve as custodian at one time.
A)True
B)False
Q2) Which of the following describes the control environment?
A)Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to ensure that the accounting records are accurate.
B)The control environment is the "tone at the top" of the business.
C)The control environment is designed to ensure that the business earns profit.
D)A company must identify its risks.
Q3) Having a cash ratio below 1 is a good thing.
A)True
B)False
Q4) The environment is the culture of a business, and it starts with the owner and the top managers.
A)True
B)False
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Chapter 9: Receivables
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Q1) Under the direct write-off method, which of the following is included in the entry to write off an uncollectible account?
A)a credit to the Allowance for Bad Debts
B)a credit to the customer's Account Receivable
C)a debit to Allowance for Uncollectible Accounts
D)No entry is made to write off uncollectible accounts.
Q2) A six-month note receivable for $4,000 at 12%, dated September 1, 2015, has accrued interest revenue of ________ on December 31, 2015.
A)$480
B)$240
C)$160
D)$80
Q3) The entry to write off an account receivable under the allowance method will:
A)reduce net income.
B)have no effect on net income.
C)increase total assets.
D)increase net income.
Q4) Give journal entry to record the dishonor of a note receivable at the maturity date.
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Chapter 10: Plant Assets, Natural Resources, and Intangibles
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Q1) Iverycoast Inc. purchased a van on January 1, 2015, for $800,000. Estimated life of the van was 5 years, and its estimated residual value was $90,000. Iverycoast uses the straight-line method of depreciation. At the beginning of 2017, the company revised the total estimated life of the asset from 5 years to 4 years. The estimated residual value remained the same as estimated earlier. Calculate the depreciation expense for the year 2017.
A)$220,000
B)$213,000
C)$145,000
D)$250,000
Q2) Cost of an asset is $1,000,000 and its residual value is $100,000. Estimated useful life of the asset is four years. Calculate depreciation for the first year using the double-declining-balance method of depreciation.
A)$450,000
B)$500,000
C)$250,000
D)$225,000
Q3) On June 30, 2015, Regal Furniture discarded a fully depreciated equipment costing $35,000. Journalize the disposal of the equipment.
Page 12
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Chapter 11: Current Liabilities and Payroll
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Q1) Felix Sales offers warranties on all their electronic goods. Warranty expense is estimated at 3.5% of sales revenue. In 2015, Felix had $333,000 of sales. In the same year, Felix paid out $8,750 of warranty payments. Provide the journal entry to record the warranty expense.
Q2) Jane Services sells a service plan for commercial computer maintenance. The price is $1,350 per year, paid in advance. On October 1, 2015, Jane sells a service plan to a new customer for cash, and the plan covers the period October 1, 2015 to September 30, 2016. Provide the journal entry to record the adjustment needed on December 31, 2015.
Q3) The times-interest- earned ratios of Benin Inc. are 20.56 and 7.35 for the years 2013 and 2014, respectively. Which of the following can be the possible reason for such a change?
A)Benin Inc. incurred less debt specifically in its revolving line of credit.
B)Benin Inc. incurred more debt specifically in its revolving line of credit.
C)Benin Inc. paid less interest in its revolving line of credit.
D)Benin Inc.'s debt-paying ability increased.
Q4) Amounts owed for products or services purchased on account are accounts receivable.
A)True
B)False
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Chapter 12: Partnerships
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Questions
Q1) Rex and Sandy are partners. Rex has a capital balance of $350,000 and Sandy has a capital balance of $280,000. Marcus invests a building worth $210,000 to acquire interest in the new partnership. How much will be the partnership share of Marcus after he makes the investment? (Assume no bonus to any partner.)
A)25%
B)20%
C)30%
D)15%
Q2) In a general partnership, the general partners have unlimited personal liability for the debts of the business.
A)True
B)False
Q3) Upon liquidation of a partnership, the cash received from the sale of assets is first used to return the capital balances of the partners. The remaining cash is then used to pay off the liabilities of the business.
A)True
B)False
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Chapter 13: Corporations
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Q1) Which of the following will decrease the balance in Retained Earnings?
A)repayment of bond principal
B)stock split
C)stock dividend declared
D)purchase of treasury stock
Q2) Which of the following is true of stockholders?
A)Stockholders have a right to access confidential information about the business before the information is disseminated to the public.
B)Stockholders can claim a portion of the corporate assets after the corporation pays it debts in the event the company is liquidated.
C)Stockholders may authorize a business contract on behalf of the corporation.
D)Stockholders may determine at what price the company issues stock.
Q3) Paid-in capital is externally generated capital and results from transactions with outsiders.
A)True B)False
Q4) Rick Co. purchases 8,500 shares of the company's $6 par common stock for $8 per share. Journalize the transaction.
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15
Chapter 14: Long-Term Liabilities
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Q1) FICA-OASDI tax payable would normally be shown on the balance sheet under long-term liabilities.
A)True
B)False
Q2) On January 1, 2013, Davie Services issued $20,000 of 8% bonds that mature in five years. They were issued at par. Provide the journal entry to issue bonds.
Q3) The interest rate on which cash payments to bondholders are based is the:
A)market rate.
B)discount rate.
C)stated rate.
D)amortization rate.
Q4) A stream of equal cash payments made at equal time intervals is called a(n): A)present value.
B)annuity.
C)compound interest.
D)future value.
Q5) If a bond is issued at a discount, it will sell for more than face value.
A)True
B)False
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Chapter 15: Investments
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Q1) Long-term investments:
A)should be reported in the liabilities section of the balance sheet.
B)are investments in debt and equity securities that are highly liquid and that the investor intends to sell in one year or less.
C)include debt and equity securities that the investor expects to hold longer than one year or debt or equity securities that are not readily marketable.
D)are investments in debt securities or equity securities in which the investor holds less than 20% of the voting stock and that the investor plans to sell in the very near future.
Q2) Investment income may come from interest earned from debt investments, dividends earned from stock investments, and/or increases in the market value of the security.
A)True
B)False
Q3) The rate of return on total assets is calculated by subtracting interest expense from net income and dividing it by average assets.
A)True
B)False
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Chapter 16: The Statement of Cash Flows
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Q1) While preparing a statement of cash flows using the indirect method, the Depreciation Expense:
A)is added back as an adjustment to Net Income in the operating activities section.
B)is shown as a negative cash flow in the investing activities section.
C)is added back to Purchases of Plant Assets under investing activities.
D)is shown as a negative cash flow under operating activities.
Q2) The financing activities section of the statement of cash flows includes activities that affect current assets and current liabilities on the balance sheet.
A)True
B)False
Q3) Which of the following transactions would be shown in the non-cash investing and financing activities section of the statement of cash flows?
A)sold equipment with book value of $6,500 in exchange for $6,500 cash
B)settled a long-term Note Payable by issuing Common Stock
C)issued 20,000 shares of stock at $4 per share
D)purchased land for $30,000 cash
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18
Chapter 17: Financial Statement Analysis
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Sample Questions
Q1) The audit report is prepared by an internal auditor of a company.
A)True
B)False
Q2) Income from continuing operations helps investors to make predictions about past performance of the company.
A)True
B)False
Q3) Days' sales in receivables measures the return on average receivables using credit sales.
A)True
B)False
Q4) In a vertical analysis of the income statement, each line item is shown as a percentage of net sales.
A)True
B)False
Q5) A company, reporting a discontinued operation or an extraordinary item, must report earnings per share also for each of these line items.
A)True
B)False
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Chapter 18: Introduction to Managerial Accounting
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Q1) Which of the following describes the cost of goods manufactured?
A)the cost of the goods that were sold during the period
B)the total cost of all goods that were completed, or partially completed during the period
C)the cost of those goods which were completed during the period
D)total costs in inventory at the end of the period
Q2) In a manufacturing firm, administrative costs are included in period costs.
A)True
B)False
Q3) ________ is a philosophy of continuous improvement of products and processes.
A)Just-in-time (JIT)management
B)Enterprise resource planning (ERP)
C)Supply chain management
D)Total quality management (TQM)
Q4) Sales commissions are included in manufacturing overhead.
A)True
B)False
Q5) Repair and maintenance costs for factory equipment are product costs.
A)True
B)False
20
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Chapter 19: Job Order Costing
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Q1) Hosanna Furnishings finished Job A40 which involved $4,000 of direct materials and $600 of direct labor. Hosanna uses a predetermined overhead allocation rate based on 40% of percent of direct labor costs. Provide the journal entry needed to record the completion of the job.
Q2) Dexter Accounting expects its accountants to work a total of 24,000 direct labor hours per year. Dexter's estimated total indirect costs are $240,000. Direct labor hours is the allocation base for indirect costs. What is the indirect cost allocation rate?
A)$10 per hour
B)$20 per hour
C)$100 per hour
D)$120 per hour
Q3) When a job is completed, the total cost of the job is recorded with a debit to Finished Goods Inventory and a credit to Work-in-Process Inventory.
A)True
B)False
Q4) At the end of the year, Martin Company has an unadjusted credit balance in the Manufacturing Overhead account of $95. Provide the year-end adjusting entry needed to clear the balance to zero.
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Page 21
Chapter 20: Process Costing
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Q1) Under a process costing system, direct labor costs are assigned to the Work-in-Process account of the department for which they are incurred.
A)True
B)False
Q2) Iowa Inc. purchased raw materials for $6,000 and $25,000 for cash and on account, respectively. Provide the journal entry to record purchase of raw materials.
Q3) Which of the following businesses is most likely to use a process costing system?
A)an accounting firm
B)a law firm
C)a soda manufacturer
D)a construction company
Q4) Which of the following statements is true of process costing?
A)It uses one Work in Process Inventory account.
B)It tracks and assigns both period costs and product costs to units produced.
C)It accumulates product costs by production departments.
D)It assigns manufacturing overhead costs to products only in the last production process.
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22
Chapter 21: Cost-Volume-Profit Analysis
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Q1) Nancy was reviewing the water bill for her dog day care and spa and determined that her highest bill, $3,800, occurred in May when she washed 400 dogs and her lowest bill, $2,400, occurred in November when she washed 200 dogs. What was the variable cost per dog associated with Nancy's water bill?
A)$6.00
B)$12.00
C)$9.50
D)$7.00
Q2) Margaret sells hand-knit scarves at a flea market. Each scarf sells for $25. Margaret pays $30 to rent a vending space for one day. The variable costs are $15 per scarf. How many scarves should she sell each day in order to break even?
A)4 scarves
B)3 scarves
C)5 scarves
D)2 scarves
Q3) Pluto Company sells a product for $80 per unit. Variable costs are $25 per unit and fixed costs are $4,000 per month. Pluto sold 2,000 units in October, 2014. Prepare an income statement for October using the contribution margin format.
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Page 23
Chapter 22: Master Budgets
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Q1) The amount of accumulated depreciation for the budgeted balance sheet can be obtained from:
A)the selling and administrative expenses budget.
B)the selling and administrative expenses budget and the prior balance sheet.
C)the cash payments for S&A expenses budget.
D)the financial budget.
Q2) Preparation of the production budget is the first step in the preparation of operating budget.
A)True
B)False
Q3) A company has prepared the operating budget and the cash budget and is now preparing the budgeted balance sheet. The balance of retained earnings can be taken from:
A)the inventory, purchases and cost of goods sold budget.
B)the operating budget.
C)the cash budget.
D)the budgeted income statement plus the balance sheet from the prior year.
Q4) The cash budget is the prerequisite for the master budget.
A)True
B)False
Page 24
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) When a manufacturing company uses standard costing system, an unfavorable variance has the effect of being a contra expense.
A)True
B)False
Q2) The total variable overhead variance is obtained by adding variable overhead cost variance and:
A)total manufacturing overhead variance.
B)total direct labor variance.
C)fixed overhead cost variance.
D)variable overhead efficiency variance.
Q3) When management is investigating overhead variances, they need to further determine whether cost increases were controllable or if the cost standard needs to be updated.
A)True
B)False
Q4) A manufacturer using standard costing system has purchased raw material of 250 units at the actual cost of $2 per unit. The standard cost per unit of raw material is $1.85. Give journal entry to record the material cost variance at the time of purchase.
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Chapter 24: Cost Allocation and Responsibility Accounting
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Q1) Traditional costing provides more detailed information on costs of activities and the drivers of these costs than activity-based costing.
A)True
B)False
Q2) The balanced scorecard is a performance evaluation system that requires management to consider financial performance measures of performance, but not nonfinancial measures.
A)True
B)False
Q3) Managers of investment centers are responsible not only for generating profits, but also for ensuring efficient use of assets of the investment center.
A)True
B)False
Q4) Which of the following is the correct formula for calculating residual income?
A)Weighted Average Cost of Capital - Net Operating Profit After Tax
B)Operating income - Minimum acceptable operating income
C)Historical cost of assets - Accumulated depreciation
D)Operating income ÷ Average assets
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Chapter 25: Short-Term Business Decisions
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Q1) Custom Furniture manufactures a small table and a large table. The small table sells for $900, has variable costs of $560 per table, and takes ten direct labor hours to manufacture. The large table sells for $1,500, has variable costs of $980, and takes eight direct labor hours to manufacture. The company has a maximum of 5,000 direct labor hours per month when operating at full capacity. If there are no constraints on sales of either of the products, and the company could choose any proportions of product mix that they wanted, the maximum contribution margin that the company could earn will be:
A)$250,000
B)$425,000
C)$330,000
D)$325,000
Q2) Which of following statements is true of short-term decision making?
A)Fixed costs and variable costs must be analyzed separately.
B)All costs behave in the same way.
C)Unit manufacturing costs are variable costs.
D)All costs involved in a decision are considered relevant.
Q3) Price-setters emphasize a cost-plus pricing approach.
A)True
B)False
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Chapter 26: Capital Investment Decisions
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Q1) Zane has received a prize which entitles him to receive annual payments of $10,000 for the next 10 years. Which of the following is to be referred to in order to calculate the total value of the prize today?
A)Present Value of $1
B)Present Value of an Annuity of $1
C)Future Value of $1
D)Future Value of an Annuity of $1
Q2) If an investment project's IRR is higher than the company's required rate of return, the company should reject the investment.
A)True
B)False
Q3) Out of all methods of evaluating capital investments, the discounted cash flow methods are superior because they consider both the time value of money and the profitability of the investment.
A)True
B)False
Q4) All else being equal, investments with longer payback periods are preferable.
A)True
B)False
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