Introduction to Financial Accounting Test
Questions
Course Introduction
Introduction to Financial Accounting provides students with a comprehensive overview of the fundamental principles and concepts of financial accounting. The course covers the accounting cycle, including the recording, summarizing, and reporting of financial transactions, and introduces key financial statements such as the balance sheet, income statement, and statement of cash flows. Students will learn to analyze and interpret financial information, understand the regulatory environment, and apply accounting standards for informed decision-making. Emphasis is placed on the role of financial accounting in businesses and its importance for managers, investors, and other stakeholders.
Recommended Textbook
Fundamental Accounting Principles 23rd Edition by John Wild
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Page 2
Chapter 1: Accounting in Business
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Q1) Identify each of the following business activities 1 through 6 into the appropriate category a, b, and c.
a. Operating
b. Investing
c. Financing
____ 1. Paid utilities expenses.
____ 2. Withdrawal of funds by owners.
____ 3. Purchase of land.
____ 4. Sale of used equipment.
5. Borrowed money from a bank on a long-term note.
6. Paid employee wages.
____ 7. Received investment from owner.
____ 8. Paid an amount due on a long-term bank loan.
Answer: 1. A; 2. C; 3. B; 4. B; 5. C; 6. A; 7. C; 8. C
Q2) The income statement shows the financial position of a business on a specific date.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Analyzing and Recording Transactions
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Sample Questions
Q1) Explain how accounts are used in recording information about a business's transactions.
Answer: Accounts are classified into three general categories: assets, liabilities and equity accounts. Accounts are records of increases and decreases in specific items in these categories. Information from an account is analyzed, summarized, and presented in reports and financial statements.
Q2) The heading on every financial statement lists the three W's-Who (the name of the business); What (the name of the statement); and Where (the organization's address).
A)True
B)False
Answer: False
Q3) To increase an asset account we would ________ it and to increase a liability account, we would ________ it.
Answer: debit; credit
Q4) The posting process is the link between the ________ and the ________.
Answer: journal; ledger
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4
Chapter 3: Adjusting Accounts and Preparing Financial Statements
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Sample Questions
Q1) Adjusting entries result in a better matching of revenues and expenses for the period. A)True
B)False Answer: True
Q2) A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account. A)True
B)False Answer: False
Q3) The adjusted trial balance contains information pertaining to:
A) All general ledger accounts.
B) Balance sheet accounts only.
C) Revenue accounts only.
D) Income statement accounts only.
E) Asset accounts only.
Answer: A
Q4) Profit margin =____________ divided by net sales.
Answer: Net Income
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Chapter 4: Completing the Accounting Cycle
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Q1) The Income Summary account is used to close the permanent accounts at the end of an accounting period.
A)True
B)False
Q2) A worksheet can be helpful in showing the effects of proposed or "what if" transactions but not in helping to prepare interim financial statements.
A)True
B)False
Q3) Closing entries are designed to transfer the end-of-period balances in the revenue accounts, the expense accounts, and the withdrawals account to owner's capital.
A)True
B)False
Q4) After posting the entries to close all revenue and expense accounts, Marker Company's Income Summary account has a credit balance of $6,000, and its Marker, Withdrawals account has a debit balance of $2,500. These balances indicate that net income for the current accounting period amounted to $3,500.
A)True
B)False
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6
Chapter 5: Accounting for Merchandising Operations
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Q1) On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 28 is:
A) Debit Accounts Payable $1,800; credit Cash $1,800.
B) Debit Cash $1,600; credit Accounts Payable $1,600.
C) Debit Merchandise Inventory $1,600; credit Cash $1,600.
D) Debit Accounts Payable $1,600; credit Cash $1,600.
E) Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.
Q2) A merchandiser:
A) Earns net income by buying and selling merchandise.
B) Earns profit from fares only.
C) Earns profit from commissions only.
D) Receives fees only in exchange for services.
E) Buys products from consumers.
Q3) From the adjusted trial balance given below for the Grayson Company, prepare a multiple-step income statement in good form. Salaries expense and building depreciation expense should be equally divided between selling activities and the general and administrative activities.
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Chapter 6: Inventories and Cost of Sales
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Q1) A company's cost of inventory was $219,500. Due to phenomenal demand the market value of its inventory increased to $221,700. This company should record the inventory at its market value.
A)True
B)False
Q2) The inventory turnover ratio:
A) Reveals how many times a company sells its merchandise inventory during a period.
B) Is used to measure solvency.
C) Calculation depends on the company's inventory valuation method.
D) Is used to analyze profitability.
E) Reveals how many days a company can sell inventory if no new merchandise is purchased.
Q3) A company must disclose any change in its inventory costing method in its financial statements.
A)True
B)False
Q4) The ________ ratio reflects how much inventory is available in terms of days' sales.
Q5) Identify and describe the four inventory valuation methods.
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Chapter 7: Accounting Information Systems
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Sample Questions
Q1) The ________ principle requires that an accounting information system report useful, understandable, timely, and pertinent information for effective decision making.
Q2) When a company uses special journals, the general journal is used to record selected transactions and events including:
A) Credit purchases.
B) Closing entries.
C) Sales on credit.
D) Credit sales.
E) Cash payments.
Q3) Individual transactions in the purchases journal are regularly posted to creditor accounts in the accounts payable ledger.
A)True
B)False
Q4) A schedule of accounts receivable is a listing of all customer accounts and account balances.
A)True
B)False
Q5) A ________ journal is used to record and post transactions of similar type.
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Chapter 8: Cash and Internal Controls
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Sample Questions
Q1) Spencer Co. has a $200 petty cash fund. At the end of the first month the accumulated receipts represent $43 for delivery expenses, $127 for merchandise inventory, and $12 for miscellaneous expenses. The fund has a balance of $18. The journal entry to record the reimbursement of the account includes a:
A) Credit to Inventory for $127.
B) Credit to Cash for $182.
C) Debit to Cash Over and Short for $18.
D) Debit to Petty Cash for $200.
E) Credit to Cash Over and Short for $18.
Q2) Plenty Co. established a petty cash fund of $150 on October 1. On October 10, the petty cash fund was replenished when there was $49 remaining and there were petty cash receipts for: office supplies, $47; transportation-in on inventory purchased, $32; and postage, $22. On October 15, the petty cash fund was decreased to $125 in total. Plenty Co. uses the perpetual inventory system. Record the above transactions in general journal form.
Q3) Internal control of cash receipts aims to ensure that all cash received is properly recorded and deposited.
A)True
B)False
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Page 10
Chapter 9: Accounting for Receivables
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Sample Questions
Q1) A promissory note received from a customer in exchange for an account receivable is recorded by the payee as:
A) A note payable.
B) A note receivable.
C) An account receivable.
D) A cash equivalent.
E) A short-term investment.
Q2) Explain the options a company may use to convert its receivables to cash before they are due.
Q3) Craigmont uses the allowance method to account for uncollectible accounts. Its year-end unadjusted trial balance shows Accounts Receivable of $104,500, allowance for doubtful accounts of $665 (credit) and sales of $925,000. If uncollectible accounts are estimated to be 0.5% of sales, what is the amount of the bad debts expense adjusting entry?
A) $5,290
B) $4,625
C) $4,750
D) $4,825
E) $3,960
Q4) ________ is the charge for using borrowed money until its due date.
Page 11
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Chapter 10: Plant Assets Natural Resoures and Intangibles
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Q1) The first step in accounting for an asset disposal is to calculate the gain or loss on disposal.
A)True
B)False
Q2) A company discarded a computer system originally purchased for $18,000. The accumulated depreciation was $17,200. The company should recognize a(an):
A) $7,200 loss.
B) $8,000 loss.
C) $800 loss.
D) $800 gain.
E) $0 gain or loss.
Q3) Once the estimated depreciation expense for an asset is calculated:
A) The estimate itself cannot be changed; however, new information should be disclosed in financial statement footnotes.
B) Any changes are accumulated and recognized when the asset is sold.
C) It may be revised based on new information.
D) It cannot be changed, based on the historical cost principle.
E) It cannot be changed, based on the consistency principle.
Q4) The federal income tax rules for depreciating assets are known as ________.
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Chapter 11: Current Liabilities and Payroll Accounting
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Sample Questions
Q1) The state unemployment tax rates applied to an employer are adjusted according to an employer's merit rating.
A)True
B)False
Q2) Early Co. offers its employees a bonus equal to 2% of the company's net income. The estimated net income for the year is expected to be $800,000. Prepare the general journal entry to record the estimated employee bonus plan expense.
Q3) On June 1, Jasper Company signed a $25,000, 120-day, 6% note payable to cover a past due account payable.
a. What is the total amount of interest to be paid on this note?
b. Prepare Jasper Company's general journal entry to record the issuance of the note payable.
c. Prepare Jasper Company's general journal entry to record the payment of the note on September 29.
Q4) Describe contingent liabilities and how to account for and/or report them.
Q5) Gross pay less all deductions is called ________.
Q6) A single liability cannot be divided between current and noncurrent liabilities.
A)True
B)False
Page 13
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Chapter 12: Accounting for Partnerships
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Sample Questions
Q1) When a partner is unable to pay a capital deficiency:
A) The partner must take out a loan to cover the deficient balance.
B) The deficient partner is relieved of the liability.
C) The remaining partners must wait for the deficiency to be paid before cash is distributed.
D) The partnership ends before distribution of cash.
E) The deficiency is absorbed by the remaining partners before distribution of cash.
Q2) Under this agreement, the shares of the partners when the partnership earns $105,000 in income are:
A) $70,000 to Zheng; $60,000 to Murray.
B) $35,000 to Zheng; $70,000 to Murray.
C) $52,500 to Zheng; $52,500 to Murray.
D) $57,500 to Zheng; $47,500 to Murray.
E) $42,500 to Zheng; $62,500 to Murray.
Q3) When a partner leaves a partnership, the present partnership ends.
A)True
B)False
Q4) Explain the steps involved in the liquidation of a partnership.
Q5) A partner can be admitted into a partnership by ________ or by ________.
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Chapter 13: Accounting for Corporations
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Sample Questions
Q1) A company had a beginning balance in retained earnings of $430,000. It had net income of $60,000 and paid out cash dividends of $56,250 in the current period. The ending balance in retained earnings equals:
A) $490,000.
B) $116,250.
C) $433,750.
D) $546,250.
E) $426,250.
Q2) The amount of income earned per share of a company's outstanding common stock is known as:
A) Continuing operations per share.
B) Earnings per share.
C) Dividends per share.
D) Restricted retained earnings per share.
E) Book value per share.
Q3) Common Stock Dividend Distributable is an equity account.
A)True
B)False
Q4) What is a corporation? Identify the key advantages and disadvantages of corporations.
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Chapter 14: Long-Term Liabilities
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Q1) A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $4,500. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement?
A) $1,500 loss.
B) $3,000 loss.
C) $3,000 gain.
D) $0 gain or loss.
E) $1,500 gain.
Q2) The Discount on Bonds Payable account is:
A) A contra expense.
B) A contra liability.
C) A contra equity.
D) A liability.
E) An expense.
Q3) A premium reduces the interest expense of a bond over its life.
A)True
B)False
Q4) What are methods that a company may use to retire its bonds?
Q5) Describe installment notes and the nature of the typical payment pattern.
Q6) Bonds issued in the names and addresses of their holders are__________ bonds.
Page 16
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Chapter 15: Investments
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Q1) When an investment in an equity security is sold, the sale proceeds are compared with the cost, and if the cost is greater than the proceeds, a gain on the sale of the security is recorded.
A)True
B)False
Q2) Washington Corp. held 1,500 of Vashon Company common stock with a cost of $74,387. These shares were classified as a Long-Term available-for-sale investment. It sold the shares on December 13 for $55,275. Prepare the journal entry to record Washington's sale.
Q3) Explain how equity securities having significant influence are accounted for and reported in the financial statements. Include a discussion of the criterion for these securities in terms of an investee's voting stock.
Q4) If a U.S. company's credit sale to an international customer allows payment to be made in a foreign currency, the sale transaction is recorded using the exchange rate on the date of sale.
A)True
B)False
Q5) What is comprehensive income and how is it usually reported in the financial statements?
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Chapter 16: Reporting the Statement of Cash Flows
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Q1) The statement of cash flows reports all but which of the following:
A) Cash flows from operating activities.
B) The financial position of the company at the end of the accounting period.
C) Cash flows from investing activities.
D) Cash flows from financing activities.
E) Significant noncash financing and investing activities.
Q2) A company had net cash flows from operations of $120,000, cash flows from financing of $330,000, total cash flows of $500,000, and average total assets of $2,500,000. The cash flow on total assets ratio equals:
A) 20.0%.
B) 24.0%.
C) 5.0%.
D) 20.8%.
E) 4.8%.
Q3) When preparing the operating activities section of the statement of cash flows using the indirect method, non-operating gains are added to net income.
A)True
B)False
Q4) Explain how cash flows from investing and financing activities are determined.
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Chapter 17: Analysis of Financial Statements
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Q1) Quick assets divided by current liabilities is the:
A) Working capital ratio.
B) Acid-test ratio.
C) Quick asset turnover ratio.
D) Current ratio.
E) Current liability turnover ratio.
Q2) Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.
A)True
B)False
Q3) A brief focus on important analysis results and conclusions is usually included in which of the following sections of a financial statement analysis report:
A) Executive summary.
B) Evidential conclusions.
C) Factor analysis.
D) Analysis overview.
E) Inferences.
Q4) Describe the purpose of vertical financial statement analysis and how it is applied.
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Chapter 18: Managerial Accounting Concepts and Principles
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Q1) Both financial and managerial accounting affect user's decisions and actions. A)True
B)False
Q2) A direct cost is a cost that is:
A) Does not change with the volume of activity.
B) Identifiable as controllable.
C) Traceable to multiple cost objects.
D) Traceable to a single cost object.
E) Traceable to the company as a whole.
Q3) The Institute of Management Accountants (IMA) Statement of Ethical Professional Practice requires that management accountants be competent and act with integrity.
A)True
B)False
Q4) There are many differences between financial and managerial accounting. Identify and explain at least three of these differences.
Q5) The schedule of cost of goods manufactured is also known as a manufacturing statement.
A)True
B)False
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Chapter 19: Job Order Costing
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Q1) The journal entry to record the factory payroll is:
A) Debit Work in Process Inventory $150,000; credit Cash $150,000.
B) Debit Work in Process Inventory $150,000; debit Factory Overhead $40,000; credit Factory Wages Payable $190,000.
C) Debit Work in Process Inventory $110,000; credit Factory Overhead $40,000; credit Factory Wages Payable $150,000.
D) Debit Work in Process Inventory $110,000; debit Factory Overhead $40,000; credit Factory Wages Payable $150,000.
E) Debit Work in Process Inventory $150,000; credit Factory Overhead $40,000; credit Factory Wages Payable $110,000.
Q2) A company's file of job cost sheets for jobs that are completed but not yet sold equals the balance in the Finished Goods Inventory account. A)True B)False
Q3) When the actual overhead incurred during an accounting period is more than the overhead applied to jobs, the overhead is said to be ________.
Q4) When factory payroll for indirect labor is assigned, ________ is debited.
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21
Chapter 20: Process Costing
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Q1) In a process costing system costs are measured upon completion of each job.
A)True
B)False
Q2) Williams Company computed its cost per equivalent unit for direct materials to be $2.60 and its cost per equivalent unit for conversion to be $3.75. A total of 250,000 units of product were completed and transferred out as finished goods during the month, and 36,000 of equivalent units remained unfinished at the end of the month. The amount that should be reported in Finished Goods Inventory is:
A) $135,000.
B) $1,816,100.
C) $228,600.
D) $1,587,500.
E) $650,000.
Q3) Conversion cost per equivalent unit is the combined costs of direct labor and factory overhead.
A)True
B)False
Q4) When the completed goods are sold, the cost of the completed goods are transferred to ________.
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) Income for year 2 using absorption costing is:
A) $117,000.
B) $109,000.
C) $111,000.
D) $106,600.
E) $115,000.
Q2) Solving problems to determine the relationship of cost, volume, and profit often commences with the measurement of the ________ point. Further analysis emphasizing profitability may be accomplished by measuring the ________ and
Q3) The total product cost per unit under absorption costing is:
A) $28 per unit.
B) $35 per unit.
C) $23 per unit.
D) $17 per unit.
E) $16 per unit.
Q4) A step-wise variable cost can be separated into a fixed component and a variable component.
A)True
B)False
Page 23
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Chapter 22: Master Budgets and Planning
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Q1) Wichita Industries' sales are 10% for cash and 90% on credit. Credit sales are collected as follows: 30% in the month of sale, 50% in the next month, and 20% in the following month. On December 31, the accounts receivable balance includes $12,000 from November sales and $42,000 from December sales. Assume that total sales for January and February are budgeted to be $50,000 and $100,000, respectively. What are the expected cash receipts for February from current and past sales?
A) $71,500.
B) $80,500.
C) $59,500.
D) $61,500.
E) $34,500.
Q2) The sales budget comes from a careful analysis of forecasted economic and market conditions, business capacity, and advertising plans.
A)True
B)False
Q3) The sequence of the budgets within the master budget are dictated by GAAP. A)True
B)False
Q4) Briefly describe the process by which budgets are developed and administered.
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Chapter 23: Flexible Budgets and Standard Costs
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Q1) A ______________contains relevant information that compares actual results to planned activities.
Q2) Based on this information, the direct materials quantity variance for the month was:
A) $5,800 favorable
B) $5,800 unfavorable
C) $1,000 favorable
D) $1,800 favorable
E) $1,800 unfavorable
Q3) Which of the following is not part of the flow of events in variance analysis:
A) Identifying questions and their explanations.
B) Working to ensure that all variances are favorable.
C) Preparing a standard cost performance report.
D) Taking corrective and strategic actions.
E) Computing and analyzing variances.
Q4) An overhead cost variance is the difference between the total overhead actually incurred for the period and the standard overhead applied to products.
A)True
B)False
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Chapter 24: Performance Measurement and Responsibility Accounting
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Q1) An accounting system that accumulates and reports costs incurred by each service department for management to evaluate the performance of a department is a:
A) Standard accounting system.
B) Cost accounting system.
C) Departmental accounting system.
D) Service accounting system.
E) Revenue accounting system.
Q2) A company pays $15,000 per period to rent a small building that has 10,000 square feet of space. This cost is allocated to the company's three departments on the basis of the amount of the space occupied by each. Department One occupies 2,000 square feet of floor space, Department Two occupies 3,000 square feet of floor space, and Department Three occupies 5,000 square feet of floor space. If the rent is allocated based on the total square footage of the space, Department One should be charged rent expense for the period of:
A) $3,000.
B) $2,200.
C) $2,000.
D) $4,400.
E) $4,000.
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Chapter 25: Capital Budgeting and Managerial Decisions
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Q1) If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?
A) Project Y.
B) Project X.
C) Neither X nor Y is an acceptable project.
D) Both X and Y are acceptable projects.
E) Project Y because it has a lower initial investment.
Q2) A company is considering two projects, Project A and Project B. The following information is available for each project:
\(\begin{array} { l r r }
&{ \text { Project A } } &{ \text { Project B } } \\
\text { Investment } & \$ 2,500,000 & \$ 2,000,000 \\ \text { Net present value of cash flows } &\$ 900,000 & \$ 800,000 \end{array}\)
Calculate the profitability index for each project. Based on the profitability index, which project should the company pursue and why?
Q3) A sunk cost will change with a future course of action.
A)True
B)False
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Chapter 26: Present and Future Values in Accounting
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Q1) The present value of an annuity table can be used to determine the value today of a series of payments to be received in the future.
A)True
B)False
Q2) A series of equal payments made or received at the end of each period is an ordinary annuity.
A)True B)False
Q3) Explain the concept of the future value of a single amount.
Q4) A company is setting up a sinking fund to pay off $8,654,000 in bonds that are due in 7 years. The fund will earn 7% interest, and the company intends to put away a series of equal year-end amounts for 7 years. What is the amount of the annual deposits that the company must make?
Q5) Garcia Brass Fixtures is planning on replacing one of its machines in five years by making aone-time deposit of $20,000 today and four yearly contributions of $5,000 beginning at the end of year 1. The deposits will earn 10% interest. How much money will Garcia have accumulated at the end of five years to replace the machine?
Q6) The interest rate is also called the ________ rate.
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Chapter 27: Activity-Based Costing
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Sample Questions
Q1) After all activity costs are accumulated in an activity cost pool account, overhead rates are computed and costs are allocated to cost objects based on:
A) Indirect factors.
B) Opportunity cost principles.
C) Cost drivers.
D) Joint cost principles.
E) Direct factors.
Q2) How much of the headquarters cost allocation should Atlanta expect to receive next year?
A) $280,000
B) $560,000
C) $409,500
D) $472,500
E) $504,000
Q3) In activity-based costing, there are a number of activity cost pools, which consist of activities that belong to the same process and/or are caused by the same cost driver.
A)True
B)False
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