Introduction to Financial Accounting Test
Preparation
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and practices used to prepare, analyze, and interpret financial statements. The course covers essential concepts such as the accounting cycle, double-entry bookkeeping, accrual versus cash accounting, and the preparation of key financial documents including the balance sheet, income statement, and statement of cash flows. Additionally, students will explore the regulatory environment, ethical considerations, and the relevance of accounting information in decision-making for organizations and external stakeholders. Through practical exercises and real-world examples, learners will develop the skills necessary to comprehend and communicate financial information effectively.
Recommended Textbook
Financial Accounting 13th Edition by Carl S.
Warren
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Page 2
Chapter 1: Introduction to Accounting and Business
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Sample Questions
Q1) Use the accounting equation to answer each of the independent questions below:
a. At the beginning of the year Norton Company assets were $75,000 and its owner's equity was $38,000. During the year, assets increased by $18,000 and liabilities increased by $4,000. What was the owner's equity at the end of the year?
b. At the beginning of the year Turpin Industries had liabilities of $44,000 and owner's equity of $66,000. If assets increased by $10,000 and liabilities decreased by $5,000, what was the owner's equity at the end of the year?
Answer: a. $75,000 - $38,000 = $37,000 beginning of year liabilities
($75,000 + 18,000) - ($37,000 + 4,000) = $52,000 end of year owner's equity
b. $44,000 + $66,000 = $110,000 beginning of year assets
($110,000 + 10,000) - ($44,000 - 5,000) = $81,000 end of year owner's equity
Q2) Explain the interrelationship between the Balance Sheet and the Statement of Cash Flows.
Answer: The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows.
Q3) Give the major disadvantage of disregarding the cost concept and constantly revaluing assets based on appraisals and opinions.
Answer: Accounting reports would become unstable and unreliable.
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3
Chapter 2: Analyzing Transactions
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Sample Questions
Q1) A credit to the cash account will increase the account.
A)True
B)False
Answer: False
Q2) If the trial balance is in balance, it can be assumed that all journal entries were posted correctly and no errors were made.
A)True
B)False
Answer: False
Q3) Which of the following group of accounts increase with a credit?
A) Capital, revenues, expenses
B) Assets, capital, revenues
C) Liabilities, capital, revenues
D) None of these
Answer: C
Q4) Journal entries can have more than two accounts as long as the debits equal the credits.
A)True
B)False
Answer: True
Page 4
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) Which account would normally not require an adjusting entry?
A) Wages Expense
B) Accounts Receivable
C) Accumulated Depreciation
D) Smith, Capital
Answer: D
Q2) Prior to the adjusting process, accrued expenses have
A) not yet been incurred, paid, or recorded
B) been incurred, not paid, but have been recorded
C) been incurred, not paid, and not recorded
D) been paid but have not yet been incurred
Answer: C
Q3) The difference between the balance of a fixed asset account and the related accumulated depreciation account is termed
A) historical cost
B) contra asset
C) book value
D) market value
Answer: C
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Round tripping is a fraudulent scheme where business A artificially inflates revenue by lending money to customer B who uses that money to buy products from A.
A)True
B)False
Q2) The following are steps in the accounting cycle. Of the following, which would be prepared last?
A) An adjusted trial balance is prepared.
B) Transactions are posted to the ledger.
C) An unadjusted trial balance is prepared.
D) Adjusting entries are journalized and posted to the ledger.
Q3) During the closing process, some balance sheet accounts are closed and end the period with a zero balance.
A)True
B)False
Q4) Any twelve-month accounting period adopted by a company is known as its fiscal year.
A)True
B)False
Q5) Describe a classified balance sheet.
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Chapter 5: Accounting Systems
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Sample Questions
Q1) Which of the following is always recorded in the general journal?
A) services rendered for cash
B) correction of error in billing client
C) purchases of equipment on account
D) purchases of equipment for cash
Q2) Month-end posting to controlling accounts in a computerized accounting system is not required because
A) controlling accounts are not used in computerized systems.
B) transactions are posted to accounts immediately.
C) the input operator can choose to post to accounts at any time.
D) computerized accounting posts entry at the end of the financial year.
Q3) A cash refund paid to a customer who overpaid an account receivable is recorded in the cash payments journal.
A)True
B)False
Q4) Sales of office supplies for cash, at cost, to a neighboring business as an accommodation, are recorded in the revenue journal.
A)True
B)False
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Chapter 6: Accounting for Merchandising Businesses
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Sample Questions
Q1) The chart of accounts for a merchandise business would include an account called Delivery Expense.
A)True
B)False
Q2) The abbreviation FOB stands for Free On Board.
A)True
B)False
Q3) Under the perpetual inventory system, all purchases of merchandise are debited to the account entitled
A) Merchandise Inventory
B) Cost of Merchandise Sold
C) Cost of Merchandise Available for Sale
D) Purchases
Q4) Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as
A) selling expenses
B) general expenses
C) other expenses
D) administrative expenses
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Chapter 7: Inventories
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Sample Questions
Q1) List three different security measures taken by stores to safeguard inventory.
Q2) All of the following are reasons to use an estimated method of costing inventory except:
A) Perpetual inventory records are not maintained.
B) Purchase records are not maintained.
C) A disaster has destroyed the inventory records and the inventory.
D) Interim financial statements are required but physical inventory is only taken at the end of the financial accounting period.
Q3) During times of rising prices, which of the following is not an accurate statement?
A) Average costing will yield results that are between those of FIFO and LIFO.
B) LIFO will result in a higher cost of goods sold than FIFO.
C) FIFO will result in a higher net income than LIFO.
D) LIFO will result in higher income taxes than FIFO.
Q4) Which of the following measures the length of time it takes to acquire, sell and replace inventory?
A) inventory turnover
B) number of days' sales in inventory
C) retail method of inventory costing
D) gross profit method of inventory costing
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Chapter 8: Sarbanes-Oxley, Internal Control, and Cash
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Sample Questions
Q1) Receipts from cash sales of $3,200 were recorded incorrectly in the cash receipts journal as $2,300. This item would be included on the bank reconciliation as a(n)
A) deduction from the balance per company's records
B) addition to the balance per bank statement
C) deduction from the balance per bank statement
D) addition to the balance per company's records
Q2) The amount of cash to be reported on the balance sheet at June 30 is the
A) total of the cash column in the cash receipts journal as of June 30
B) adjusted balance appearing in the bank reconciliation for June 30
C) total of the cash column in the cash payments journal as of June 30
D) balance as of June 30 on the bank statement
Q3) During 2010, Tempo Inc has monthly cash expenses of $115,000. On December 31, 2010, their cash balance is $1,437,500. The ratio of cash to monthly cash expenses is
A) 8.0
B) 12.5
C) 87.5
D) 11.5
Q4) List and define each of the five elements of internal control.
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Page 10
Chapter 9: Receivables
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Sample Questions
Q1) A company uses the allowance method to account for uncollectible accounts receivables. When the firm writes off a specific customer's account receivable
A) total current assets are reduced
B) total expenses for the period are increased
C) net realizable value of accounts receivable increases
D) there is no effect on total current assets or total expenses
Q2) Harper Company lends Hewell Company $40,000 on March 1, accepting a four-month, 6% interest note. Harper Company prepares financial statements on March 31. What adjusting entry should be made before the financial statements can be prepared?
A) Cash 200 Interest Revenue 200
B) Interest Receivable 800 Interest Revenue 800
C) Interest Receivable 200 Interest Revenue 200
D) Note Receivable 40,000 Cash 40,000
Q3) The balance of the Allowance for Doubtful Accounts is added to Accounts Receivable on the balance sheet.
A)True
B)False
Q4) List at least three things that indicate a receivable may be uncollectible.
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Chapter 10: Fixed Assets and Intangible Assets
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Sample Questions
Q1) A machine with a cost of $120,000 has an estimated residual value of $15,000 and an estimated life of 5 years or 15,000 hours. It is to be depreciated by the units-of-production method. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?
A) $ 5,000
B) $35,000
C) $21,000
D) $45,000
Q2) All of the following below are needed for the calculation of straight-line depreciation except
A) cost
B) residual value
C) estimated life
D) units produced
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) 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) During May, Blast sold 650 portable CD players for $50 each. Each CD player cost Blast $25 to purchase and carried a one-year warranty. If 10 percent of the goods sold typically need to be replaced over the warranty period, what amount should Blast debit Product Warranty Expense for in May?
A) $3,250
B) $1,625
C) $ 650
D) $1,300
Q3) The journal entry a company uses to record fully funded pension rights 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
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Page 13
Chapter 12: Accounting for Partnerships and Limited Liability Companies
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Sample Questions
Q1) Robert Johnson contributed equipment, inventory, and $42,000 cash to the partnership. The equipment had a book value of $25,000 and market value of $28,000. The inventory has a book value of $50,000, but only had a market value of $15,000 due to obsolescence. The partnership also assumed a $12,000 note payable owed by Robert that was originally used to purchase the equipment. What amount should Robert's capital account be recorded?
A) $85,000
B) $73,000
C) $117,000
D) $105,000
Q2) Pia and Ramona are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000 respectively. Income Summary has a credit balance of $40,000. What is Ramona's capital balance after closing Income Summary to Capital?
A) $110,000
B) $146,000
C) $106,000
D) $150,000
Q3) Describe the items which should be covered in a partnership agreement.
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Chapter 13: Corporations: Organization, Stock Transactions, and Dividends
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Q1) 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
Q2) Which statement below is not a reason for a corporation to buy back its own stock.
A) resale to employees
B) bonus to employees
C) for supporting the market price of the stock
D) to increase the shares outstanding
Q3) The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 30,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding?
A) 35,000
B) 70,000
C) 25,000
D) 30,000
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Chapter 14: Long-Term Liabilities: Bonds and Notes
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Q1) On the first day of the fiscal year, a company issues a $500,000, 8%, 10 year bond that pays semi-annual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $437,740. Journalize the entry to record the issuance of the bonds.
Q2) On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5 year bond that pays semi-annual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the first interest payment and the amortization of the related bond discount using the straight-line method. Round answer to the nearest dollar.
Q3) Bondholders are creditors of the issuing corporation.
A)True
B)False
Q4) The journal entry a company records for the payment of interest, interest expense, and amortization of bond discount is
A) debit Interest Expense, credit Cash and Discount on Bonds Payable
B) debit Interest Expense, credit Cash
C) debit Interest Expense and Discount on Bonds Payable, credit Cash
D) debit Interest Expense, credit Interest Payable and Discount on Bonds Payable
Q5) (a) Prepare the journal entry to issue $100,000 bonds which sold for $94,000. (b) Prepare the journal entry to issue $100,000 bonds which sold for $104,000.
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Chapter 15: Investments and Fair Value Accounting
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Sample Questions
Q1) On May 1, 2014, Stanton Company purchased $60,000 of Harris Company's 12% bonds at 100 plus accrued interest of $2,400. On June 30, 2014, Stanton received its first semiannual interest. On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest. The journal entry Stanton will record on June 30, 2014, will include:
A) a credit to Interest Revenue for $2,400.
B) a debit to Cash for $3,600.
C) a credit to Cash for $2,400.
D) a credit to Interest Receivable for $1,200.
Q2) Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison's dividend yield is:
A) 5%
B) 10%
C) 25%
D) 20%
Q3) On May 1, 2012, Chase Inc. purchases $60,000 of 10-year, Manus Corporation 8% bonds dated March 1, 2012 at 100 plus accrued interest. What entry would Chase record when receiving its semiannual interest on March 1, 2013?
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Chapter 16: Statement of Cash Flows
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Q1) There is no difference in the Investing and Financing sections of the statement of cash flows using the indirect and direct method.
A)True
B)False
Q2) 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
Q3) A company purchases equipment for $32,000 cash. This transaction should be shown on the statement of cash flows under
A) investing activities
B) financing activities
C) noncash investing and financing activities
D) operating activities
Q4) The statement of cash flows is an optional financial statement.
A)True
B)False
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Chapter 17: Financial Statement Analysis
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Sample Questions
Q1) Which of the following is required by the Sarbanes-Oxley Act of 2002?
A) A price-earnings ratio.
B) A report on internal control.
C) A vertical analysis.
D) A common-sized statement.
Q2) The number of days' sales in inventory is one means of expressing the relationship between the cost of goods sold and inventory.
A)True
B)False
Q3) Which of the following below generally is the most useful in analyzing companies of different sizes
A) comparative statements
B) common-sized financial statements
C) price-level accounting
D) audit report
Q4) A 15% change in sales will result in a 15% change in net income.
A)True
B)False
Q5) Define solvency and profitability. How are they alike?
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