Introduction to Financial Accounting Exam Bank
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and practices involved in preparing and interpreting financial statements. The course covers key concepts such as the accounting cycle, double-entry bookkeeping, accrual accounting, and the measurement and reporting of assets, liabilities, equity, revenues, and expenses. Students will learn how to analyze financial information for decision-making purposes and understand the ethical and regulatory environment in which accounting operates. By the end of the course, students will be able to prepare basic financial statements, including the balance sheet, income statement, and statement of cash flows, and appreciate their importance in both internal and external business contexts.
Recommended Textbook
Financial Accounting 13th Edition by Carl S. Warren
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Chapter 1: Introduction to Accounting and Business
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Q1) Kim Hsu is the owner of Hsu's Financial Services. At the end of its accounting period, December 31, 2011, Hsu's has assets of $575,000 and owner's equity of $335,000. Using the accounting equation and considering each case independently, determine the following amounts.
a. Hsu's liabilities as of December 31, 2011.
b. Hsu's liabilities as of December 31, 2012, assuming that assets increased by $56,000 and owner's equity decreased by $32,000.
c. Net income or net loss during 2012, assuming that as of December 31, 2012, assets were $592,000, liabilities were $450,000, and there were no additional investments or withdrawals.
Answer: a. $575,000 - 335,000 = $240,000
b. ($575,000 + 56,000) - ($335,000 - 32,000) = $328,000
c. $592,000 - 450,000 = $142,000
$335,000 - 142,000 = $193,000 net loss
Q2) Collins Landscape Company purchased various landscaping supplies on account to be used for landscape designs for their customers. How will this business transaction affect the accounting equation?
Answer: Increase Assets (Supplies) and increase Liabilities (Accounts Payable)
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Chapter 2: Analyzing Transactions
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Sample Questions
Q1) Which of the following statements is not true about liabilities?
A) Liabilities are debts owed to outsiders.
B) Account titles of liabilities often include the term "payable".
C) Cash received before services are performed are considered to be liabilities.
D) Liabilities do not include wages owed to employees of the company.
Answer: D
Q2) When a business receives a bill from the utility company, no entry should be made until the invoice is paid.
A)True
B)False
Answer: False
Q3) On the chart of accounts, the balance sheet accounts are normally listed in the following order
A) liabilities, assets, owner's equity
B) assets, liabilities, owner's equity
C) owner's equity, assets, liabilities
D) assets, owner's equity, liabilities
Answer: B
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much.
Answer: The adjustment for accrued fees of $1,170 was journalized as a debit to Accounts Receivable for $1,170 and a credit to Fees Earned for $1,107. The total will be unequal with a debit total higher by $63 ($1,170 - $1,107).
Q2) Unearned rent, representing rent for the next six months' occupancy, would be reported on the landlord's balance sheet as a(n)
A) asset
B) liability
C) capital account
D) contra liability
Answer: B
Q3) The company determines that the interest expense on a note payable for period ending December 31st is $775. This amount is payable on January 1st. Prepare the journal entries required on December 31st and January 1st.
Answer: 11ea8f91_7c8e_4640_b161_c753b5294ffd_TB2085_00_TB2085_00_TB2085_00
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Which one of the fixed asset accounts listed below will not have a related contra asset account?
A) Office Equipment
B) Land
C) Delivery Equipment
D) Building
Q2) It is necessary to post the closing entries to the general ledger.
A)True
B)False
Q3) Round-tripping is when
A) a selling company sells to a customer company with huge discounts.
B) a selling company pretends to sell to a fictitious company with the intent of inflating revenues
C) a selling company lends money to a customer company to increase assets.
D) a selling company lends money to a customer company to be used to purchase goods from the selling company.
Q4) A post-closing trial balance should be prepared before the financial statements are prepared.
A)True
B)False
Page 6
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Chapter 5: Accounting Systems
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Q1) In computerized accounting systems, reports may be generated at any time.
A)True
B)False
Q2) The three phases of setting up an accounting system are, in order
A) design, implementation, analysis
B) analysis, design, implementation
C) design, analysis, implementation
D) implementation, design, analysis
Q3) The discovery and correction of errors is important in a computerized system. What kind of error(s) might occur in these systems? What type of error(s) will be prevented in a computerized system?
Potential errors:
1. Failing to record transactions.
2. Recording a transaction more than once.
3. Recording a transaction in incorrect accounts.
4. Entering an incorrect number in both the debit and credit parts of the transaction.
Q4) A controlling account is used to record the details of the individual accounts.
A)True
B)False
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Chapter 6: Accounting for Merchandising Businesses
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Sample Questions
Q1) When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the
A) account form
B) comparative form
C) horizontal form
D) report form
Q2) As we compare a merchandise business to a service business, the financial statement that changes the most is the Balance Sheet.
A)True
B)False
Q3) The ending merchandise inventory for 2010 is the same as the beginning merchandise inventory for 2011.
A)True
B)False
Q4) During the current year, merchandise is sold for $86,000 cash and for $93,950 on account. The cost of the merchandise sold is $76,240. What is the amount of the gross profit?
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8
Chapter 7: Inventories
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Q1) If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be included in the inventory of the
A) consignee
B) retailer
C) manufacturer
D) shipper
Q2) If merchandise inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income?
A) average cost
B) LIFO
C) FIFO
D) weighted average
Q3) If the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for purchases of merchandise.
A)True
B)False
Q4) List three different security measures taken by stores to safeguard inventory.
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Chapter 8: Sarbanes-Oxley, Internal Control, and Cash
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Sample Questions
Q1) An example of a preventive control is
A) a single person handles the responsibilities for operations, custody of assets, and accounting
B) separation of the Purchasing Department and Accounting Department personnel
C) bonding employees who handle cash
D) accepting payment in currency only
Q2) For strong internal control system over cash, it is important to have the duties related to cash receipts and cash payments divided among different employees.
A)True
B)False
Q3) A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. This item would be included in the bank reconciliation as a(n)
A) deduction from the balance per the company's records
B) addition to the balance per the bank statement
C) deduction from the balance per the bank statement
D) addition to the balance per the company's records
Q4) List the principal advantage of Electronic Funds Transfers.
Q5) Why would a bank require a company to maintain a compensating balance?
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Chapter 9: Receivables
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Q1) At the end of the current year, Accounts Receivable has a balance of $675,000; Allowance for Doubtful Accounts has a debit balance of $5,400; and net sales for the year total $3,000,000. An analysis of receivables indicates the uncollectible receivables are estimated to be $45,000.
Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance of Doubtful Accounts; and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
Q2) The direct write-off method of accounting for uncollectible accounts
A) emphasizes balance sheet relationships.
B) is often used by small companies and companies with few receivables.
C) emphasizes cash realizable value.
D) emphasizes the matching of expenses with revenues.
Q3) If the allowance method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible?
A) Uncollectible Accounts Expense
B) Allowance for Doubtful Accounts
C) Accounts Receivable
D) Interest Expense
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Chapter 10: Fixed Assets and Intangible Assets
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Q1) The Bacon Company acquired new machinery with a price of $15,200 by trading in similar old machinery and paying $12,700. The old machinery originally cost $9,000 and had accumulated depreciation of $5,000. In recording this transaction, Bacon Company should record
A) the new machinery at $16,700
B) the new machinery at $12,700
C) a gain of $1,500
D) a loss of $1,500
Q2) The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called
A) depletion
B) deferral
C) amortization
D) depreciation
Q3) Once the useful life of a depreciable asset has been estimated and the amount to be depreciated each year has been determined, the amounts can be changed.
A)True
B)False
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Chapter 11: Current Liabilities and Payroll
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Q1) Most employers are required to withhold from employees which of the following employment taxes?
A) FICA tax
B) FICA tax, state and federal unemployment compensation tax
C) only state unemployment compensation tax
D) only federal unemployment compensation tax
Q2) Research Company sells merchandise with a one year warranty. In 2012, sales consisted of 2,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2012 and 70% in 2013. In the 2012 income statement, Research should show warranty expense of
A) $25,000
B) $7,500
C) $17,500
D) $0
Q3) The payroll summary for December 31 for Waters Co. revealed total earnings of $80,000. Earnings subject to 6% social security tax were $60,000; earnings subject to 1.5% Medicare tax were $80,000; and earnings of $3,000 were subject to 4.3% state and 0.8% federal unemployment compensation tax. Journalize the entry to record the accrual of payroll taxes.
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Page 13
Chapter 12: Accounting for Partnerships and Limited Liability Companies
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Sample Questions
Q1) Use the following information to answer the following questions. Izabelle and Marta are forming a partnership. Izabelle will invest a piece of equipment with a book value of $7,500 and a fair market value of $20,000. Marta will invest a building with a book value of $40,000 and a fair market value of $58,000. What amount will be recorded to Marta's capital account ?
A) $18,000
B) $20,000
C) $40,000
D) $58,000
Q2) Franco and Elisa share income equally. During the current year the partnership net income was $40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the beginning of the year, the capital account balances were: Franco capital, $42,000; Elisa capital, $58,000. Elisa's capital account balance at the end of the year is
A) $81,000
B) $50,000
C) $61,000
D) $95,000
Q3) Describe the items which should be covered in a partnership agreement.
Page 14
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Chapter 13: Corporations: Organization, Stock Transactions, and Dividends
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Q1) A restriction/appropriation of retained earnings
A) decreases total assets
B) increases total retained earnings
C) decreases total retained earnings
D) has no effect on total retained earnings
Q2) The number of shares of outstanding stock is equal to the number of shares authorized minus the number of shares issued.
A)True
B)False
Q3) A prior period adjustment should be reported as an adjustment to the retained earnings balance at the beginning of the period in which the adjustment was made.
A)True
B)False
Q4) If Everly Company issues 1,000 shares of $5 par value common stock for $75,000, the account
A) Common Stock will be credited for $75,000.
B) Paid-in Capital in excess of Par Value will be credited for $5,000.
C) Paid-in Capital in excess of Par Value will be credited for $70,000.
D) Cash will be debited for $70,000.
Page 15
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Chapter 14: Long-Term Liabilities: Bonds and Notes
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Q1) If $1,000,000 of 8% bonds are issued at 103 1/2, the amount of cash received from the sale is
A) $1,080,000
B) $965,000
C) $1,000,000
D) $1,035,000
Q2) Bonds with a face amount $1,000,000, are sold at 108. The entry to record the issuance is
A) Cash 1,000,000 Premium on Bonds Payable 80,000
Bonds Payable 1,080,000
B) Cash 1,080,000 Premium on Bonds Payable 80,000
Bonds Payable 1,000,000
C) Cash 1,080,000 Discount on Bonds Payable 80,000 Bonds Payable 1,000,000
D) Cash 1,080,000 Bonds Payable 1,080,000
Q3) The market interest rate related to a bond is also called the A) stated interest rate
B) effective interest rate
C) contract interest rate
D) straight-line rate
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Chapter 15: Investments and Fair Value Accounting
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Q1) When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded.
A)True
B)False
Q2) Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semi-annually. The journal entry to record the purchase would be:
A) Debit: Investment in Bonds $101,500; Credit: Cash $101,500
B) Debit: Investment in Bonds $100,000; Credit: Interest Revenue $1,500 and Cash $98,500
C) Debit: Investment in Bonds $100,000 and Interest Receivable $1,500; Credit: Cash $101,500
D) Investment in Bonds $100,000; Credit: Cash $100,000
Q3) Which of the following statements below is not a reason a company may purchase another company's stock?
A) earning a return on excess cash
B) sustain the other company's stock price
C) gaining control of another company's operations
D) developing or maintaining business relationships
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Chapter 16: Statement of Cash Flows
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Q1) The last item on the statement of cash flows prior to the schedule of noncash investing and financing activities reports
A) the increase or decrease in cash
B) cash at the end of the year
C) net cash flow from investing activities
D) net cash flow from financing activities
Q2) Under the direct method of reporting cash flows from operations, the major source of cash is cash received from customers.
A)True
B)False
Q3) Cost of merchandise sold reported on the income statement was $155,000. The accounts payable balance increased $5,000, and the inventory balance increased by $11,000 over the year. Determine the amount of cash paid for merchandise.
Q4) Cash flows from operating activities, as part of the statement of cash flows, include cash transactions that enter into the determination of net income.
A)True
B)False
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Chapter 17: Financial Statement Analysis
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Q1) Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive guides for action.
A)True
B)False
Q2) An extraordinary loss of $300,000 that results in income tax savings of $90,000 should be reported as an extraordinary loss (net of tax) of $210,000 on the income statement.
A)True
B)False
Q3) A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability. The amount of working capital immediately after payment is
A) $845,000
B) $595,000
C) $720,000
D) $125,000
Q4) What is a major advantage of using percentages rather than dollar changes in doing horizontal and vertical analysis?
Q5) Define solvency and profitability. How are they alike?
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