Principles of Accounting
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Course Introduction
Principles of Accounting introduces students to the fundamental concepts and practices of financial and managerial accounting. The course covers the accounting cycle, including recording, classifying, and summarizing transactions, preparing financial statements, and understanding the role of accounting information in business decision-making. Students will learn about generally accepted accounting principles (GAAP), the use of journals and ledgers, internal controls, and the ethical considerations in accounting. Emphasis is placed on developing analytical skills for interpreting financial data and understanding how accounting supports the effective management of organizations.
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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Sample Questions
Q1) The accounting equation is ________.
Answer: Assets = Liabilities + Owner's Equity
Q2) A company's balance sheet shows: cash $22,000, accounts receivable $16,000, office equipment $50,000, and accounts payable $17,000. What is the amount of owner's equity?
A) $17,000.
B) $71,000.
C) $105,000.
D) $88,000.
E) $29,000.
Answer: B
Q3) What distinguishes liabilities from equity?
Answer: Liabilities are creditors' claims on assets. They reflect obligations to transfer assets or provide products or services to others in a future outflow of resources. Equity is owner's claim to assets. It includes the investments of the owner and what the company earns on the owner's behalf. Equity is also called net assets or residual interest.
Q4) Resources such as cash removed from the business by the business owner for personal use are called ________. Answer: withdrawals
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Chapter 2: Analyzing and Recording Transactions
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Q1) The posting process is the link between the ________ and the ________.
Answer: journal; ledger
Q2) Identify the account below that is classified as a liability in a company's chart of accounts:
A) Cash
B) Accounts Receivable
C) Supplies
D) Salaries Expense
E) Unearned Revenue
Answer: E
Q3) ________ and ________ are the starting points for the analyzing and recording process.
Answer: Business transactions; Events
Q4) Explain the recording and posting processes.
Answer: Information from business transactions and events is recorded in the journal in the form of journal entries. The journal entries include the date, the account titles, and debit and credit amounts. Journal entries may also include a further description of the transaction. During the posting process the debit and credit amounts recorded in the journal are transferred to the individual accounts in the ledger.
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Chapter 3: Adjusting Accounts and Preparing Financial Statements
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Q1) Adjusting entries result in a better matching of revenues and expenses for the period.
A)True
B)False
Answer: True
Q2) Companies experiencing seasonal variations in sales often choose a fiscal year corresponding to their ________ year.
Answer: natural business
Q3) The length of time covered by a set of periodic financial statements, primarily a year for most companies, is referred to as the:
A) Calendar year.
B) Accounting period.
C) Business cycle.
D) Fiscal year.
E) Natural business year.
Answer: B
Q4) If a prepaid expense account were not adjusted for the amount used, on the balance sheet assets would be ________ and equity would be ________.
Answer: overstated; overstated
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Chapter 4: Completing the Accounting Cycle
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Q1) Explain the difference between temporary and permanent accounts.
Q2) Which of the following accounts would be included in a post-closing trial balance?
A) Depreciation Expense-Equipment.
B) Salaries Expense.
C) S. Stills, Withdrawal.
D) Accounts Receivable.
E) Consulting Fees Earned.
Q3) The ________ refers to the steps in preparing financial statements for users.
Q4) If a company has current assets of $15,000 and current liabilities of $9,500, its current ratio is 1.6
A)True
B)False
Q5) A benefit of using a work sheet is that it aids in the preparation of the financial statements.
A)True
B)False
Q6) A ________ is an optional working paper that helps in preparing financial statements, is useful in preparing interim statements, and is helpful in showing the effects of proposed transactions.
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Chapter 5: Accounting for Merchandising Operations
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Q1) A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of inventory.
A)True
B)False
Q2) On August 16, it paid the full amount due. The amount of the cash paid on August 16 equals:
A) $8,152.50.
B) $8,167.50.
C) $9,750.00.
D) $8,250.00.
E) $9,652.50.
Q3) A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items. A)True
B)False
Q4) Cost of goods sold is an expense, and is reported on the income statement. A)True
B)False
Q5) Identify and explain the key components of a merchandiser's net income.
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Chapter 6: Inventories and Cost of Sales
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Q1) A company had the following ending inventory costs:
\[\begin{array} { | c | c | r | r | }
\hline \text { Product } & \text { Units of Hand } & \text { Unit Cost } & \text { Market Value } \\
\hline \text { A } & 10 & \$ 5 &\$ 6 \\
\hline \text { B } & 50 & 8 & 7 \\
\hline \text { C } & 35 & 10 & 11 \\
\hline \end{array}\] Required:
Calculate the lower of cost or market (LCM) value for each individual item.
Q2) A company has beginning inventory of 15 units at a cost of $12 each on October 1. On October 5, it purchases 10 units at $13 per unit. On October 12 it purchases 20 units at $14 per unit. On October 15, it sells 30 units. Using the FIFO periodic inventory method, what is the value of the inventory at October 15 after the sale?
A) $380
B) $590
C) $140
D) $160
E) $210
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Chapter 7: Accounting Information Systems
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Q1) The ________ principle requires that the benefits from an activity in an accounting information system outweigh the costs of that activity.
Q2) Which of the following is not an output device?
A) Web communications.
B) Printers.
C) Bar code readers.
D) Projectors.
E) Monitors.
Q3) The basic components of an accounting information system include all of the following except:
A) Source documents.
B) Information storage.
C) Warehouses.
D) Information processors.
E) Output devices.
Q4) Each transaction recorded in the sales journal yields a debit to Accounts Receivable and a credit to Sales.
A)True
B)False
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Chapter 8: Cash and Internal Controls
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Q1) A company had the following transactions during January: \(\begin{array}{|l|l|}
\hline \text { Jan. 2 } & \text { Purchased merchandise, invoice price of } \$ 16,000, \text { with terms } 2 / 10, \mathrm{n} / 30 . \\
\hline 4 & \begin{array}{l}
\text { Received a credit memorandum for } \$ 4,000, \text { the invoice price on } \\ \text { merchandise returned from the purchase of January } 2 . \end{array} \\
\hline 12 & \text { Purchased merchandise, invoice price of } \$ 15,000, \text { with terms } 3 / 15, \mathrm{n} / 30 . \\
\hline 26 & \text { Paid for the merchandise purchased on January } 12 . \\
\hline 30 & \text { Paid for the merchandise purchased on January 2. } \\
\hline
\end{array}\)
Using the net method of recording purchases, prepare the journal entries to record these January transactions.
Q2) List the principles of internal control.
Q3) What is the purpose of the days' sales uncollected ratio?
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Chapter 9: Accounting for Receivables
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Q1) The accounts receivable method to estimate bad debts obtains the estimated balance in the Allowance for Doubtful Accounts in one of two ways: (1) computing the percent uncollectible from the total accounts receivable or (2) aging accounts receivable.
A)True
B)False
Q2) The allowance method based on the idea that a given percent of a company's credit sales for the period is uncollectible is:
A) The percent of accounts receivable method.
B) Factoring method.
C) The percent of sales method.
D) Direct write-off method.
E) The aging of accounts receivable method.
Q3) Prudence Co. receives a $26,000, 90-day, 4% note receivable. What is the amount of interest that is due at maturity?
Q4) Explain the options a company may use to convert its receivables to cash before they are due.
Q5) The ________ of a note is the day the principle plus interest of a note must be repaid.
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Chapter 10: Plant Assets Natural Resoures and Intangibles
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Q1) Using the units-of-production method, what is the book value of the machine at the end of the second year?
A) $81,600.
B) $190,000.
C) $180,000.
D) $144,400.
E) $108,400.
Q2) Compute the depletion expense for the first year assuming 38,000 tons were removed and sold.
A) $112,100.
B) $12,881.
C) $98,333.
D) $93,158.
E) $38,000.
Q3) An asset can be disposed of by all of the following except:
A) Donating it to charity.
B) Selling it.
C) Continuing to use it after it is fully depreciated.
D) Exchanging it for another asset.
E) Discarding it.
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Chapter 11: Current Liabilities and Payroll Accounting
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Q1) If a company uses a special payroll bank account:
A) There is no need to issue W-2's.
B) The company does not need to issue paychecks.
C) The company draws one check for the entire payroll on the regular bank account and deposits it in the payroll bank account.
D) The company must use a federal depository bank for the payroll bank account.
E) There is no need for a payroll register.
Q2) The total compensation an employee earns including wages, salaries, commissions, bonuses, and any compensation earned before deductions such as taxes is called
Q3) Short-term notes payable:
A) Are not negotiable.
B) Cannot replace an account payable.
C) Are a conditional promise to pay.
D) Can be issued in return for money borrowed from a bank.
E) Rarely involve interest charges.
Q4) Explain how to calculate times interest earned and how it is used to analyze a company's risk.
Q5) ________ are amounts owed to suppliers for products or services purchased on credit.
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Chapter 12: Accounting for Partnerships
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Q1) What is Barber's return on equity?
A) 33.8%
B) 41.3%
C) 36.5%
D) 32.7%
E) 43.9%
Q2) Bannister invested $110,000 and Wilder invested $99,000 in a new partnership. Their partnership agreement called for Wilder to receive a $70,000 annual salary allowance. Under this agreement, what are the income or loss shares of the partners if the annual partnership income is $90,000?
Q3) Define the partner return on equity ratio and explain how a specific partner would use this ratio.
Q4) Kramer and Feldman Company is organized as a partnership. At the prior year-end, Kramer's equity balance was $352,000 and Feldman's was $256,000. For the current year, partnership net income is $137,000 ($77,000 allocated to Kramer and $60,000 allocated to Feldman); withdrawals are $87,000 ($45,000 for Kramer and $42,000 for Feldman).
Compute the total partnership return on equity and the individual partner return on equity ratios.
Q5) Explain the steps involved in the liquidation of a partnership.
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Chapter 13: Accounting for Corporations
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Q1) Treasury stock is classified as:
A) A contra asset account.
B) A liability account.
C) An asset account.
D) A revenue account.
E) A contra equity account.
Q2) The date of record is the date that directors vote to pay a cash dividend to shareholders.
A)True
B)False
Q3) Explain the difference between a large stock dividend and a small stock dividend. In addition, explain how to record these two types of stock dividends.
Q4) The group responsible for and have final authority for managing a corporation's activities is (are) the ________.
Q5) On September 20, Fletcher Corporation issued 25,000 shares of no-par common stock for equipment having a market value of $85,000. Prepare the general journal entry to record this transaction.
Q6) What is a stock split? How is a stock split different from a stock dividend?
Q7) What is treasury stock? What reasons might a company hold treasury stock?
Page 15
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Chapter 14: Long-Term Liabilities
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Q1) The ________ ratio is used to assess the risk of a company's financing structure.
Q2) Bonds that mature at more than one date with the result that the principal amount is repaid over a number of periods are known as:
A) Registered bonds.
B) Serial bonds.
C) Bearer bonds.
D) Callable bonds.
E) Sinking fund bonds.
Q3) The journal entry to record the issuance of the bond is:
A) Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177.
B) Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000.
C) Debit Cash $312,177; credit Bonds Payable $312,177.
D) Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash $312,177.
E) Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000.
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Chapter 15: Investments
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Q1) Landmark Corp. buys $300,000 of Schroeter Company's 8%, 5-year bonds payable at par value on September 1. Interest payments are made semiannually. Landmark plans to hold the bonds for the 5-year life. The journal entry to record the purchase should include:
A) A debit to Short-Term Investments-Trading $300,000.
B) A debit to Long-Term Investments-HTM $300,000.
C) A debit to Cash $300,000.
D) A debit to Short-Term Investments-AFS $300,000.
E) A debit to Long-Term Investments-AFS $300,000.
Q2) Segmental Manufacturing owns 35% of Glesson Corp. stock. Glesson pays a total of $47,000 in cash dividends for the period. Segmental's entry to record the dividend transaction would include a:
A) Credit to Investment Revenue for $47,000.
B) Credit to Long-Term Investments for $16,450.
C) Credit to Cash for $16,450.
D) Debit to Long-Term Investments for $16,450.
E) Debit to Cash for $47,000.
Q3) Land used in the company's operations is reported as a long-term investment. A)True B)False
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Chapter 16: Reporting the Statement of Cash Flows
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Q1) When preparing the operating activities section of the statement of cash flows using the direct method, non-operating losses are added to net income.
A)True
B)False
Q2) When analyzing the changes on a spreadsheet used to prepare a statement of cash flows, the cash flows from operating activities generally affect:
A) Noncurrent liability and equity accounts.
B) Noncurrent assets.
C) Net income, current assets, and current liabilities.
D) Equity accounts only.
E) Both noncurrent assets and noncurrent liabilities.
Q3) The indirect method separately lists each major item of operating cash receipts and cash payments.
A)True
B)False
Q4) Cash paid for merchandise is an operating activity.
A)True
B)False
Q5) All cash transactions eventually affect noncash ________ accounts.
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Chapter 17: Analysis of Financial Statements
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Q1) External users of financial information:
A) Make operating decisions for a company.
B) Are not directly involved in operating the company.
C) Make strategic decisions for a company.
D) Include internal auditors and consultants.
E) Are those individuals involved in managing and operating the company.
Q2) Carducci Corporation reported Net sales of $3.6 million and beginning Total assets of $0.9 million and ending Total assets of $1.3 million. The average Total asset amount is:
A) $0.36 million.
B) $2.3 million.
C) $0.25 million.
D) $2.7 million.
E) $1.1 million.
Q3) Liquidity and efficiency are the ability to meet short-term obligations and to efficiently generate revenue.
A)True
B)False
Q4) Explain the purpose of financial statement analysis for both external and internal users.
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Chapter 18: Managerial Accounting Concepts and Principles
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Q1) All of the following statements regarding manufacturing costs are true except:
A) Direct material costs that increase in total with volume of production are called variable costs.
B) When overhead costs don't vary with production, they are called fixed overhead.
C) Overhead can be both variable and fixed.
D) The reporting of fixed and variable costs separately is not helpful to managers in analyzing cost behavior.
E) When overhead costs vary with production, they are called variable overhead.
Q2) A manufacturing company's beginning finished goods inventory was $29,000; cost of goods manufactured was $316,000; and the ending finished goods inventory was $31,000. What is the cost of goods sold for that year?
Q3) Just-in-time manufacturing techniques can be useful in _____________ days' sales in raw materials inventory.
A) changing upward
B) lowering
C) increasing
D) keeping constant
E) adding to
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Chapter 19: Job Order Costing
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Q1) The job order cost sheets used by Greene Company revealed the following:
\(\begin{array} { c c c }
\text { Job. No. } & \text { Bal., May 1 } & \text { May Production Costs } \\
134 & \$ 1,700 & \$0 \\
135 & 1,200 & 300 \\
136 &0 &900 \\ & &
\end{array}\)
Job No. 135 was completed during May and Jobs No. 134 and 135 were shipped to customers in May. What was the company's cost of goods sold for May and the Work in Process inventory on May 31?
A) $2,900; $1,200.
B) $1,700; $1,200.
C) $3,200; $900.
D) $4,100; $0.
E) $1,200; $2,900.
Q2) Factory overhead is often collected and summarized in a subsidiary factory overhead ledger.
A)True
B)False
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Chapter 20: Process Costing
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Q1) The following journal entry would be made to record the use of $6,100 of direct labor in a production department during the reporting period: \(\begin{array}{llr}
\text { Factory Payroll.} &6,100\\
\text { Goods in Process Inventory } &&6,100\\ \end{array}\)
A)True B)False
Q2) Manufacturers that utilize process operations produce large quantities of identical products. A)True B)False
Q3) The second step in accounting for production activity in a period, after determining the physical flow of units, is to compute ________.
Q4) The third step in accounting for production activity in a period, before assigning and reconciling costs, is to compute the ________.
Q5) Describe the flow of labor in a process costing system, including accounts used.
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) Scatter diagrams plot volume (units) on the horizontal axis and cost on the vertical axis.
A)True
B)False
Q2) The absorption costing method is required for external financial reporting.
A)True
B)False
Q3) The sales level at which a company neither earns a profit nor incurs a loss is the:
A) Relevant range.
B) Break-even point.
C) Margin of safety.
D) Contribution margin.
E) Step-wise variable level.
Q4) Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.
A)True
B)False
Q5) What is operating leverage? How can the degree of operating leverage be used in analyzing changes in sales?
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Chapter 22: Master Budgets and Planning
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Q1) Which of the following budgets is not an operating budget?
A) Sales budget.
B) Production budget.
C) Cash budget.
D) Selling expenses budget.
E) General and administrative expense budget.
Q2) What is activity-based budgeting?
Q3) Funcycle Manufacturing's budget includes the following credit sales for the current year: September, $145,000; October, $136,000; November, $120,000; December, $157,000. Experience has shown that payment for the credit sales is received as follows: 15% in the month of sale, 50% in the first month after sale, and 35% in the second month after sale. What are the cash collections of credit sales in the month of December?
A) $83,550.
B) $107,600.
C) $157,000.
D) $131,150.
E) $23,550.
Q4) Briefly describe the process by which budgets are developed and administered.
Q5) What are rolling budgets? Why are rolling budgets prepared?
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Chapter 23: Flexible Budgets and Standard Costs
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Q1) Claymore Corp. has the following information about its standards and production activity for September. The controllable variance is: \(\begin{array}{lll}
\text { Actual total factory overhead incured } &\$28,175\\
\text {Standard factory overhead: } &\\
\text { Variable overhead } &\$3.10&\text { per unit produced }\\
\text { Fixed overhead } &\\
\text { \( \$ 12,000 / 6,000 \) estimated units to be produced } &\$2&\text {per unit}\\
\text { Actual units produced } &4,800&\text { units}\\ \end{array}\)
A) $2,400U.
B) $1,295F.
C) $1,295U.
D) $3,695U.
E) $2,400F.
Q2) In the analysis of variances, management commonly focuses on four categories of production costs: ________ cost, ________ cost; ________ cost; and ________ cost.
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Chapter 24: Performance Measurement and Responsibility Accounting
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Q1) A department that incurs costs without directly generating revenues is a:
A) Profit center.
B) Production center.
C) Cost center.
D) Service center.
E) Performance center.
Q2) A unit of a business that generates revenues and incurs costs is called a:
A) Expense center.
B) Responsibility center.
C) Profit center.
D) Performance center.
E) Cost center.
Q3) Return on investment can be split into which of the following two measures?
A) Profit margin and net income.
B) Profit margin and investment turnover.
C) Residual income and operating income.
D) Investment center average assets and investment turnover.
E) Investment center income and profit margin.
Q4) Describe the information found on a responsibility accounting performance report.
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Chapter 25: Capital Budgeting and Managerial Decisions
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Q1) A company purchases a machine for $800,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly after-tax net income of $60,000 to be received uniformly throughout each year. What is the accounting rate of return?
Q2) The concept of incremental cost is the same as the concept of differential cost. A)True
B)False
Q3) The accounting rate of return is calculated as:
A) The annual average investment divided by the after-tax income.
B) The after-tax income divided by the total investment.
C) The cash flows divided by the annual average investment.
D) The cash flows divided by the total investment.
E) The after-tax income divided by the annual average investment.
Q4) A company is evaluating the purchase of a machine for $750,000 with a six-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?
Q5) The ________ is the rate that yields a net present value of zero for an investment.
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Chapter 26: Present and Future Values in Accounting
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Q1) 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?
Q2) A company has $50,000 today to invest in a fund that will earn 7%. How much will the fund contain at the end of 8 years?
Q3) An annuity is a series of equal payments occurring at equal intervals.
A)True B)False
Q4) Giuliani Co. lends $524,210 to Craig Corporation. The terms of the loan require that Craig make six semiannual period-end payments of $100,000 each. What semiannual interest rate is Craig paying on the loan?
Q5) An interest rate is also called a discount rate.
A)True B)False
Q6) Interest is the borrower's payment to the owner of an asset, for its use.
A)True B)False
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Chapter 27: Activity-Based Costing
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Sample Questions
Q1) Activity-based costing uses pre-determined overhead rates to allocate costs.
A)True
B)False
Q2) Activity-based costing generally requires less effort to implement and maintain than a traditional cost system.
A)True
B)False
Q3) In traditional costing, all overhead is lumped together and a predetermined overhead rate per unit of an allocation base is computed and used to assign overhead to jobs and processes.
A)True
B)False
Q4) Using activity-based costing for assigning overhead costs, the activity rate for quality inspections is:
A) $60 per inspection
B) $80 per inspection
C) $120 per inspection
D) $240 per inspection
E) $100 per inspection
Q5) Briefly describe the process of activity-based costing.
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