Introduction to Financial Accounting
Textbook Exam Questions
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and practices of accounting as it applies to financial reporting. The course covers key topics such as the accounting cycle, preparation and analysis of financial statements, and the principles underlying asset, liability, and equity valuation. Students will gain hands-on experience in recording transactions, adjusting accounts, and interpreting financial information to aid decision-making in business settings. Emphasis is placed on the role of financial accounting in communicating business results to stakeholders, as well as the ethical and regulatory environment shaping accounting practices.
Recommended Textbook
Financial Accounting 5th Canadian Edition by
Walter T. Harrison
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Page 2
Chapter 1: The Financial Statements
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Sample Questions
Q1) Cost of goods sold is:
A) added to sales on the income statement
B) deducted from sales on the balance sheet
C) deducted from sales on the income statement
D) added to sales on the retained earnings statement
Answer: C
Q2) To determine a company's gross margin for the period, an investor would look on the:
A) balance sheet
B) cash flow statement
C) income statement
D) statement of retained earnings
Answer: C
Q3) From a legal perspective, sole proprietors, partners and shareholders are personally liable for the debts of their businesses they invest in.
A)True
B)False
Answer: False
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) A credit always decreases an asset account.
A)True
B)False
Answer: True
Q2) Purchasing a three-year insurance policy for cash would include a:
A) debit to Cash and a credit to Accounts Receivable
B) debit to Insurance Expense and a credit to Dividends
C) debit to Prepaid Insurance and a credit to Accounts Payable
D) debit to Prepaid Insurance and a credit to Cash
Answer: D
Q3) The normal balance of a revenue account is a ________ because revenues increase ________.
A) debit, assets
B) debit, dividends
C) credit, liabilities
D) credit, shareholders' equity
Answer: D
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Chapter 3: Accrual Accounting and the Financial Statements
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Sample Questions
Q1) Cash for services to be performed in 2014 is received in 2013. Using the accrual basis of accounting, the revenue should appear on:
A) the 2014 income statement
B) both the 2013 and 2014 income statements
C) neither the 2013 nor 2014 income statement
D) the 2013 income statement
Answer: A
Q2) Deferred revenue occurs when cash is received from a customer before work or the sale is completed.
A)True
B)False
Answer: True
Q3) Which of the four accounts listed below would be considered the most liquid?
A) Inventory
B) Equipment
C) Land
D) Accounts Receivable
Answer: D
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Chapter 4: Internal Control and Cash
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Sample Questions
Q1) Which of the following does not require a journal entry for a bank reconciliation?
A) outstanding cheques
B) bank service charge
C) collection by the bank of a note receivable
D) NSF cheque returned by the bank
Q2) Internal control procedures include: proper approvals, unlimited access, adequate records and safeguard controls.
A)True
B)False
Q3) Identify and briefly describe the process of preparing a cash budget and how this information can be used for planning purposes.
Q4) Which characteristic will not be found in an effective system of internal control?
A) a combination of duties
B) a separation of duties
C) competent, reliable, and ethical personnel
D) documents and records
Q5) Differentiate between the role of an external and internal auditor.
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Chapter 5: Short-Term Investments and Receivables
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Sample Questions
Q1) Under the allowance method, the entry to record the estimated bad debts for the period includes a credit to Accounts Receivable.
A)True
B)False
Q2) Under the direct write-off method, the entry to write off an uncollectible account of $1,250 includes:
A) a debit to Accounts Receivable for $1,250
B) a credit to Bad Debt Expense for $1,250
C) a debit to Bad Debt Expense for $1,250
D) a debit to Allowance for Uncollectible Accounts for $1,250
Q3) Using the aging-of-accounts-receivable method to estimate uncollectible receivables, Records Management Corp. estimates that $8,000 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a debit balance of $2,000. Bad debt expense to be reported on the income statement is:
A) $10,000
B) $8,000
C) $6,000
D) $2,000
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Page 7
Chapter 6: Inventory and Cost of Goods Sold
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Sample Questions
Q1) A firm can change their inventory costing method if it provides more reliable and relevant information.
A)True
B)False
Q2) A widely used method for estimating the value of ending inventory is the:
A) the lower-of-cost-or-market method
B) gross margin method
C) periodic method
D) perpetual method
Q3) Under a perpetual inventory system, which of the following entries would record the purchase of merchandise on credit?
A) Debit Inventory and credit Accounts Payable
B) Credit Purchases and Debit Cost of Goods Sold
C) Credit Sales and debit Accounts Receivable
D) Debit Purchases and credit Accounts Payable
Q4) If a company makes an error when counting ending inventory in 2013, the effect of the error will cancel out at the end of 2014.
A)True
B)False
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Chapter 7: Property, Plant, and Equipment, and Intangible Assets
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Sample Questions
Q1) Blockware Corporation has selected to use the revaluation model for its assets. Recently it had its building appraised. The appraiser placed a $5.0 M value on the building. Back in 2012 this building was purchased for $4.0M. This increases in value over cost requires a:
A) Dr. to accumulated depreciation
B) Cr. to the building account
C) Cr. to revaluation surplus
D) Dr. to revaluation surplus
Q2) Land is purchased for $60,000. Back taxes paid by the purchaser were $2,400, clearing and grading costs were $3,000, fencing costs were $2,500, and lighting costs were $500. What is the cost of the land?
A) $60,000
B) $65,400
C) $66,400
D) $68,400
Q3) The cost of land does not include the cost of paving to construct a parking lot.
A)True
B)False
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Chapter 8: Long-Term Investments and the Time Value of Money
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Sample Questions
Q1) A short-term investment is not:
A) referred to as a temporary investment
B) referred to as a marketable security
C) a current asset
D) intended to be converted to cash in more than one year
Q2) As described in Chapter 8 of the textbook, hedging is a legal and ethical accounting method companies use to protect themselves from the effects of:
A) fluctuating foreign-currency exchange rates
B) fluctuating interest rates
C) fluctuating stock prices
D) fluctuating demand for the company's products
Q3) If a company owns between 20 and 50% of the voting share of an investee it must normally use the equity method to account for its investment.
A)True
B)False
Q4) Why is understanding the extent to which ATCO Ltd. influences another company important for accounting purposes? What impact does the degree of influence ATCO Ltd. has over another company have on accounting?
Page 10
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Chapter 9: Liabilities
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Sample Questions
Q1) New Growth greenhouse purchases 500 watering cans for $1500 plus 13% HST for a total of $1,695.
In the spring New Growth sells these watering cans for $3000 plus HST for a total of $3,390.
Prepare the following journal entries for:
a the purchase of the watering cans by New Growth
b the sale of the watering cans
c the remittance of the HST
Q2) Under the effective-interest method of amortization, the cash payment on each interest payment date is calculated by multiplying the:
A) carrying value of the bonds times the effective-interest rate for the appropriate time period
B) face value of the bonds times the stated interest rate for the appropriate time period
C) face value of the bonds times the effective-interest rate for the appropriate time period
D) carrying value of the bonds times the stated interest rate for the appropriate time period
Q3) Describe the two interest rates included in setting the price of a bond.
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11
Chapter 10: Shareholders Equity
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Sample Questions
Q1) The entry to record the issuance of 12,500 common shares at $2.50 per share includes a:
A) debit to Retained Earnings for $31,250
B) credit to Retained Earnings for $31,250
C) credit to Common Shares for $31,250
D) credit to Contributed Surplus for $31,250
Q2) A company may repurchase their own shares for the following reasons except:
A) the company has issued all its authorized shares and needs the repurchased shares for distributions to employees under stock purchase plans
B) the company needs more financing
C) management wants to avoid a takeover by an outside party
D) the purchase may help support the share's current market price by decreasing the supply of shares available to the public
Q3) When a cash dividend is declared:
A) the Cash account is debited.
B) the Cash account is credited.
C) the Retained Earnings account is debited.
D) the Retained Earnings account is credited.
Q4) Describe the rights typically enjoyed by common shareholders.
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Statement of Shareholders Equity
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Sample Questions
Q1) Income tax expense is based on ________ from the income statement while income tax payable is based on ________ from the income tax return.
A) net income, taxable income
B) taxable income, net income
C) pretax accounting income, taxable income
D) taxable income, pretax accounting income
Q2) A statement of shareholders' equity would not include which type of transaction?
A) repurchased shares reacquired by the corporation
B) land exchanged for machinery and equipment
C) cumulative translation adjustment
D) cash dividends declared by the board of directors
Q3) An unqualified (or clean) opinion issued by an external auditor means:
A) the financial statements are reliable, except for one or more items stated in the third paragraph
B) the financial statements are unreliable
C) the auditor was unable to reach a professional opinion
D) the statements are reliable
Q4) Channel stuffing is a common fraud technique used to increase revenue.
A)True
B)False Page 13
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Page 14
Chapter 12: The Statement of Cash Flows
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Sample Questions
Q1) If the cash collections from customers amounted to $634,800 and the Accounts Receivable account decreased $19,400 during the same period, sales for the period were:
A) $615,400
B) $634,800
C) $654,200
D) indeterminable from the information given
Q2) Which of the following activities creates revenues and expenses in a company's major line of business?
A) operating activities
B) investing activities
C) financing activities
D) warehousing activities
Q3) Activities which lead to an increase or decrease in long-term debt of a corporation are referred to as:
A) operating activities
B) investing activities
C) financing activities
D) future debt activities
Q4) Why is the statement of cash flows necessary?
Page 15
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Chapter 13: Financial Statement Analysis
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Sample Questions
Q1) An efficient capital market is one in which market prices fully reflect all information available to the public.
A)True
B)False
Q2) Benchmarking is the process of comparing a company to a standard set by one or more other companies, with a view toward improvement.
A)True
B)False
Q3) When performing vertical analysis on a balance, share capital is calculated as a percentage of total shareholders' equity.
A)True
B)False
Q4) Briefly state the information provided by the following ratios and briefly discuss how they are used in financial analysis:
a. price/earnings ratio
b. dividend yield
Q5) Based upon recent accounting scandals, identify potential red flags that may be discovered in financial analysis.
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