Introduction to Financial Reporting Practice Exam
Course Introduction
Introduction to Financial Reporting provides students with a foundational understanding of how organizations communicate financial information to external stakeholders. The course covers the principles and practices underlying the preparation, presentation, and interpretation of financial statements, including the balance sheet, income statement, and cash flow statement. Emphasis is placed on the accounting standards, conceptual framework, and regulatory environment that guide financial reporting. Students will learn to analyze financial reports to assess organizational performance and gain insights into the decision-making processes of investors, creditors, and other users of financial statements.
Recommended Textbook
Horngrens Financial and Managerial Accounting 4th Edition by Miller Nobles
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Page 2
Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) The total of the amount of assets that a business possesses may or may not be equal to the total of liabilities and equity of the business.
A)True
B)False
Answer: False
Q2) By looking at a statement of retained earnings,the effect of dividends on the ending balance in retained earnings can be determined.
A)True
B)False
Answer: True
Q3) The statement of cash flows informs users about how much of the earnings were kept and reinvested in the company.
A)True
B)False
Answer: False
Q4) Dividends are the expenses of a business.
A)True
B)False Answer: False
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) Which of the following is the correct formula to calculate the debt ratio?
A)Debt ratio = Total liabilities × Total assets
B)Debt ratio = Total liabilities + Total assets
C)Debt ratio = Total liabilities - Total assets
D)Debt ratio = Total liabilities ÷ Total assets
Answer: D
Q2) A business borrows cash by signing a note payable.Which of the following accounts will be debited?
A)Notes Payable
B)Accounts Payable
C)Bank
D)Cash Answer: D
Q3) The ability of a company to repay its liabilities can be determined from its
A)bankers
B)creditors
C)debt ratio
D)journal Answer: C
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) The liability created when a business collects cash from its customers before completing a service or delivering a product is called ________.
A)accrued revenue
B)accrued expense
C)deferred revenue
D)prepaid expense
Answer: C
Q2) On March 1,2014,Nortons Inc.paid $60,000 as office rent covering the three-month period ending May 31,2014.Journalize the entry on March 1 by using the alternative treatment of prepaid expenses.
Answer: 11ea84d1_111a_9f1a_83dc_5b65fe570519_TB3006_00
Q3) If a company fails to make an adjusting entry for prepaid expense,the assets will be overstated.Assume the prepaid expense is initially recorded as an asset. A)True
B)False
Answer: True
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) The financial statement that reports assets,liabilities,and stockholders' equity as of the last day of the period is called the ________.
A)income statement
B)statement of retained earnings
C)balance sheet
D)unadjusted trial balance
Q2) Liquidity is a measure of how ________.
A)quickly an asset may be converted into cash
B)long an asset can be used
C)easily an asset can be exchanged for another asset
D)short an operating cycle is
Q3) The formula for computing the current ratio is:
A)Current ratio = Current assets ÷ Total assets
B)Current ratio = Current assets ÷ Total liabilities
C)Current ratio = Current assets ÷ Stockholders' Equity
D)Current ratio = Current assets ÷ Current liabilities
Q4) Reversing entries ease the burden of accounting for transactions in a later period.
A)True
B)False
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Chapter 5: Merchandising Operations
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Sample Questions
Q1) Merchandise Inventory and Cost of Goods Sold appear ________.
A)on the balance sheet and statement of retained earnings,respectively
B)on the statement of retained earnings and income statement,respectively
C)on the balance sheet and income statement,respectively
D)on the income statement and statement of cash flows,respectively
Q2) On a multi-step income statement,both merchandisers and service companies report operating expenses in two categories-selling expenses and administrative expenses.
A)True
B)False
Q3) Best Value Inc.started its operations on January 1,2015.It engages in buying and selling different types of electronic gadgets.The first step in its operating cycle would be to ________.
A)collect cash from customers
B)sell goods to customers
C)purchase inventory from vendors
D)record the sales in accounts
Q4) Give the journal entry to close the Sales Revenue account.
Q5) Give journal entry to close the expense accounts and contra revenue accounts with a debit balance.
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Chapter 6: Merchandise Inventory
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Sample Questions
Q1) The tracking of inventory shrinkage due to theft,damage,or errors is done with the help of a (n)________ of inventory.
A)authorization
B)sale
C)physical count
D)delivery
Q2) Using the first-in,first-out (FIFO)method of inventory valuation will always produce the same results whether a company uses perpetual or periodic inventory.
A)True
B)False
Q3) When a company uses the last-in,first-out (LIFO)method,the cost of goods sold correlates to the most recently purchased goods,and the ending inventory correlates to the oldest goods in stock.
A)True
B)False
Q4) Pluto Inc.purchased 500 units of inventory at $25 per unit by payment of cash.Provide the journal entry to record the purchase of inventory.(Assume a perpetual inventory system.)
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8
Chapter 7: Internal Control and Cash
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Sample Questions
Q1) The journal entry to open a new petty cash fund includes a debit to the Petty Cash account and a credit to the Cash account.
A)True
B)False
Q2) Which of the following led to the passage of the Sarbanes-Oxley Act?
A)the stock market crash of 2002
B)the savings and loan bailout
C)the accounting scandals of WorldCom and Enron
D)the mounting government deficit
Q3) An information system is one of the five components by which a company can achieve its internal control objectives.
A)True
B)False
Q4) External auditors evaluate company controls to ensure the financial statements are presented fairly in accordance with Generally Accepted Accounting Principles.
A)True
B)False
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Chapter 8: Receivables
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Sample Questions
Q1) The Allowance for Bad Debts account has a credit balance of $2,000.The company's management estimates that 2% of net credit sales will be uncollectible for the year 2015.Net credit sales for the year amounted to $250,000.What will be the amount of Bad Debts Expense reported on the income statement for 2015?
A)$5,000
B)$3,075
C)$2,875
D)$2,675
Q2) Bad debts expense is estimated by the percent-of-sales method.Management estimates that 3% of net credit sales will be uncollectible.The balance of the Allowance for Bad Debts account after adjustment will be ________.
A)$7,000
B)$3,450
C)$2,850
D)$3,750
Q3) The amount of Accounts Receivable is generally reported at its gross amount on the balance sheet.
A)True
B)False
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Page 10
Chapter 9: Plant Assets, natural Resources, and Intangibles
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Sample Questions
Q1) What amount should be recorded as the cost of land in the books of the corporation?
A)$16,800
B)$15,800
C)$16,660
D)$16,200
Q2) Businesses should not deplete natural resources because these do not decrease in value with time.
A)True
B)False
Q3) On January 1,2015,a corporation acquired a truck for $600,000.Residual value was estimated to be $20,000.The truck can be driven for 50,000 miles over the next 3 years.Actual usage of the truck was recorded as 8,640 miles for the first year.Give journal entry to record depreciation for the first year calculated as per the units-of-production method.(Do not round your intermediate calculations.)
Q4) On June 30,2015,Adilide Inc.discarded equipment costing $40,000.Accumulated Depreciation as of December 31,2014,was $25,000.Assume annual depreciation on the equipment is $2,500.Journalize the partial year depreciation expense and disposal of the equipment.
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Page 11
Chapter 10: Investments
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Sample Questions
Q1) Which of the following is a condition to record an investment as an available-for-sale security?
A)There should not be any annual cash flows from the investment.
B)It should have a maturity of less than two years.
C)It should be a debt security.
D)The ownership in the voting stock of the investee should be less than 20%.
Q2) Which of the following is true of the Fair Value Adjustment account for trading investments?
A)It will always have a credit balance.
B)It will always have a debit balance.
C)It is considered as an adjunct account if it has a credit balance.
D)It is considered as an adjunct account if it has a debit balance.
Q3) Which of the following is an example of debt securities?
A)preferred stocks
B)forex investment
C)common stocks
D)corporate bonds
Q4) Debt securities do not include U.S.government securities.
A)True
B)False
Page 12
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Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) Where does unearned revenue to be earned in six months appear on the balance sheet?
A)under long-term investments
B)under current liabilities
C)under current assets
D)under long-term assets
Q2) Bison Inc.reported sales revenue for 2013 of $900,000.The products were sold with a nine-month warranty.Members of Bison's management estimate that the cost of the warranty will be equal to 5% of sales revenue.Which of the following will be included in the entry to record the actual amounts paid out as a result of warranty claims?
A)a debit to Estimated Warranty Payable for the actual amount of payments
B)a credit to Estimated Warranty Payable for $45,000
C)a debit to Estimated Warranty Payable for $45,000
D)a debit to Warranty Expense for the actual amount of payments
Q3) Applied Foods Corp.had cash sales of $598,000 during the month of August.Sales taxes of 6.5% were collected on the sales.Prepare a compound journal entry to record the sales revenue and sales tax for the month.
Q4) Which portion is classified as the long-term portion of Notes Payable at December 31,2014?
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Chapter 12: Long-Term Liabilities
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Sample Questions
Q1) A Bonds Payable is reported on the balance sheet as the balance in Bonds Payable plus any discount or minus any premium.
A)True
B)False
Q2) An instrument that matures at one specified time is known as a ________.
A)preferred share
B)common share
C)bond
D)letter of credit
Q3) After the first interest payment on June 30,2015,what will be the balance in the Discount Account?
A)Debit of $275
B)Debit of $300
C)Debit of $325
D)Credit of $25
Q4) A bond once sold to a bondholder,can be resold to another investor on the bond market.
A)True
B)False
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Chapter 13: Stockholders Equity
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Sample Questions
Q1) The journal entry for the purchase of treasury stock includes a credit to the Cash account.
A)True
B)False
Q2) Stock dividends have no impact on the total amount of stockholders' equity.
A)True
B)False
Q3) The account to be debited when a stock dividend is declared and distributed on the same date would be ________.
A)Common Stock-Par Value
B)Retained Earnings
C)Cash
D)Paid-In Capital in Excess of Par-Common
Q4) Stockholders of a corporation are not personally liable for the corporation's debt.
A)True
B)False
Q5) Rimsone Inc.purchases 8,500 shares of the company's $6 par common stock for $8 per share.Journalize the transaction.
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Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) The only part that differs in a statement of cash flows prepared by the direct method from one prepared by the indirect method is the ________.
A)financing activities section
B)investing activities section
C)operating activities section
D)non-cash investing and financing activities section
Q2) Which of the following describes the operating activities section of the statement of cash flows?
A)It includes cash transactions that essentially increase or decrease the long-term assets of a business.
B)It includes cash transactions affecting the capitalization of the business.
C)It includes cash transactions that primarily affect current assets and current liabilities.
D)It shows the beginning and ending balances of cash.
Q3) Free cash flow is calculated by adding cash payments planned for investments in long-term assets and cash dividends to the amount of net cash provided by operating activities.
A)True
B)False
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16
Chapter 15: Financial Statement Analysis
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Sample Questions
Q1) 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
Q2) The rate of return on total assets measures a company's success in using its assets to earn income.
A)True
B)False
Q3) The study of percentage changes in comparative financial statements is called horizontal analysis.
A)True
B)False
Q4) Extraordinary items are unusual and infrequent in nature.
A)True
B)False
Q5) Benchmarking is the practice of comparing a company with other leading companies.
A)True
B)False
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Chapter 16: Introduction to Managerial Accounting
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Sample Questions
Q1) What is the ending balance in the Work-in-Process Inventory account?
A)$24,650
B)$12,000
C)$49,500
D)$65,350
Q2) ________ 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 (SCM)
D)Total quality management (TQM)
Q3) Which of the following is most likely a service company?
A)a law firm
B)a car dealership
C)a grocery store
D)a patisserie
Q4) Direct costs and indirect costs can be easily traced directly to a cost object.
A)True
B)False
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Chapter 17: Job Order Costing
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Sample Questions
Q1) When direct materials are received on the production floor,they are recorded on the job cost record.
A)True B)False
Q2) The cost of goods manufactured is recorded with a debit to the Work-in-Process Inventory account and a credit to the Cost of Goods Manufactured account.
A)True B)False
Q3) Which of the following will be categorized as a manufacturing overhead cost?
A)depreciation on factory plant and equipment
B)salaries paid to assembly line workers
C)administration charges of showroom
D)cost of direct materials used
Q4) Overallocated manufacturing overhead is adjusted by debiting the Cost of Goods Sold account.
A)True B)False
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Chapter 18: Process Costing
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Sample Questions
Q1) In a process costing system,costs can be controlled with the aid of a production cost report.
A)True
B)False
Q2) In most organizations,managers are often rewarded based on how well they meet the budget.
A)True
B)False
Q3) Under process costing,the unit cost of the completed units is less than the unit cost of the incomplete units.
A)True
B)False
Q4) The journal entry to record indirect labor costs incurred includes a debit to Manufacturing Overhead and credit to Wages Payable.
A)True B)False
Q5) 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.
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Chapter 19: Cost Management Systems: Activity-Based, just-In-Time, and Quality Management Systems
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Sample Questions
Q1) Manufacturing overhead costs,which are also known as indirect costs,cannot be cost-effectively traced to products.
A)True
B)False
Q2) Cilia Corp.specializes in the production of finials which is mostly sold within the territory.The selling price for each finial is $15.Using the traditional allocation method to allocate manufacturing overhead,the full-product cost is determined to be $10.The company recently introduced activity-based costing method to allocate its overhead.The refinement of costs shows that the full-product cost is less by $2.50 from the traditional estimate.
Requirement:
1.Calculate and analyze the change in net profit percentage as a result of introduction of activity-based costing.
2.The desired net profit margin of the company is 60%.If the production costs cannot be reduced,by how much should the selling price be increased in order to achieve the desired profit? (Use the cost estimates under activity-based costing.)
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21
Chapter 20: Cost-Volume-Profit Analysis
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Sample Questions
Q1) When the variable cost per unit decreases,the contribution margin on each unit sold also decreases.
A)True B)False
Q2) What is the variable cost per minute?
A)$1.25
B)$0.67
C)$1.08
D)$0.58
Q3) Variable cost per unit,within the relevant range,will ________.
A)increase as production decreases
B)decrease as production decreases
C)remain the same as production levels change
D)decrease as production increases
Q4) Fixed costs per unit is inversely proportional to the volume of units produced. A)True B)False
Q5) The sales level at which operating income is zero is called breakeven point. A)True B)False
22
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Chapter 21: Variable Costing
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Sample Questions
Q1) Which of the following will appear as a line item in the traditional format of an income statement?
A)contribution margin
B)total variable costs (manufacturing and non-manufacturing)
C)total fixed costs (manufacturing and non-manufacturing)
D)gross profit
Q2) The operating profit calculated using variable costing and absorption costing amounted to $9,270 and $11,250,respectively.There were no beginning inventories.Determine the total number of units produced during 2014.
A)500 units
B)620 units
C)513 units
D)120 units
Q3) When there is no beginning inventory and all the goods that are produced are sold,the operating income ________.
A)will be higher under absorption costing than variable costing
B)will be lower under absorption costing than variable costing
C)will be higher than the gross profit under variable costing
D)will be the same for both absorption costing and variable costing
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Page 23
Chapter 22: Master Budgets
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Sample Questions
Q1) Calculate the ending merchandise inventory for the month of March.
A)$38,750
B)$52,000
C)$33,750
D)$39,000
Q2) While preparing the budgeted balance sheet of a merchandising company,the amount of merchandise inventory can be obtained from the ________.
A)merchandise inventory account
B)inventory,purchases,and cost of goods sold budget
C)production budget.
D)capital expenditure budget and cash budget
Q3) The cash balance on April 1 is $12,000.Assume that there will be no financing transactions or costs during the quarter.Calculate the cash balance at the end of May.
A)$51,800
B)$40,800
C)$33,900
D)$21,800
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Sample Questions
Q1) Mountain Sports Equipment Company projected sales of 78,000 units at a unit sale price of $12 for the year 2015.Actual sales of 2015 were 75,000 units at $14.00 per unit.Variable costs were budgeted at $3 per unit and the actual amount was $4 per unit.Budgeted fixed costs totaled $375,000,while actual fixed costs amounted to $400,000.What is the sales volume variance for total revenue?
A)$23,000 favorable
B)$23,000 unfavorable
C)$36,000 unfavorable
D)$36,000 favorable
Q2) Quality Brand Products uses standard costing to manage its direct s and overhead costs.Overhead costs are allocated based on direct labor hours.In the first quarter,Quality Brand had an unfavorable efficiency variance for their variable overhead costs.Which of the following scenarios would be a reasonable explanation for that variance?
A)The actual number of direct labor hours was lower than the budgeted hours.
B)The actual variable overhead costs were higher than the budgeted costs.
C)The actual variable overhead costs were lower than the budgeted costs.
D)The actual number of direct labor hours was higher than the budgeted hours.
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) The manager of a cost center is responsible for controlling costs and generating revenues of the company.
A)True
B)False
Q2) How much is the percentage variance for the flexible budget variance for sales revenue?
A)1.7 % F
B)1.7 % U
C)3.4 % U
D)3.4 % F
Q3) Responsibility reports for a profit center include ________.
A)revenues only
B)invested capital
C)both revenues and costs
D)returns on investments
Q4) A unique factor of responsibility accounting performance reports is the focus on responsibility and controllability.
A)True
B)False
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Chapter 25: Short-Term Business Decisions
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Q1) Assuming the Football Helmet line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the Football Helmet line is used to double the production of Baseball Helmets,operating income will be ________.
A)$250,000
B)$180,000
C)$320,000
D)$410,000
Q2) With the current cost structure,Rica cannot achieve its profit goals.It will have to reduce either the fixed costs or the variable costs.Assuming that fixed costs cannot be reduced,what will be the target variable costs per year? Assume all units produced are sold.
A)$10,315,000
B)$5,115,000
C)$5,600,000
D)$5,200,000
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) When a company is evaluating an investment proposal with high risk,a low discount rate should be used,and vice versa.
A)True
B)False
Q2) If an investment project's internal rate of return (IRR)is higher than a company's required rate of return,the company should reject the investment.
A)True
B)False
Q3) The payback considers only those cash flows that occur during the payback period and ignores any cash flows that occur after that period.
A)True
B)False
Q4) Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash flows whenever they are received.
A)True
B)False
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28
Chapter 27: Accounting Information Systems
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Sample Questions
Q1) Which of the following transactions is recorded in the "Invoices" function of QuickBooks?
A)a firm paying $2,500 electricity bill
B)a firm writing down the value of an impaired asset
C)a firm making a sale on account to a customer
D)a firm making accounting adjustments to depreciation expense
Q2) Depreciation of fixed assets is recorded in a ________.
A)cash payments journal
B)sales journal
C)cash receipts journal
D)general journal
Q3) On May 4,a retail firm pays a rent of $1,500 for the month of April.Which of the following is true when this transaction is recorded in a cash payment journal?
A)Both assets and equity will increase by $1,500.
B)Both assets and liabilities will decrease by $1,500.
C)Both assets and equity will decrease by $1,500.
D)Both liabilities and equity will increase by $1,500.
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