Principles of Financial Accounting Exam Practice Tests
Course Introduction
Principles of Financial Accounting introduces students to the fundamental concepts and procedures used in the recording, classification, and reporting of financial transactions. The course covers the accounting cycle, preparation of financial statements, and the analysis of assets, liabilities, and equity. Emphasis is placed on understanding generally accepted accounting principles (GAAP) and how financial information is used by various stakeholders for decision-making. Through practical exercises and real-world examples, students will gain the skills needed to interpret financial statements and develop a solid foundation for further study in accounting and finance.
Recommended Textbook
Financial Accounting 9th Edition by Walter T. Harrison
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13 Chapters
2240 Verified Questions
2240 Flashcards
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Page 2
Chapter 1: The Financial Statements
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174 Flashcards
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Sample Questions
Q1) The two types of accounting are:
A) profit and nonprofit.
B) financial and managerial.
C) internal and external.
D) bookkeeping and decision-oriented.
Answer: B
Q2) When looking at the current assets section of a company's balance sheet:
A) cash equivalents are considered short-term investments.
B) short-term investments include stocks and bonds of other companies that the company intends to sell within the next year.
C) merchandise inventory is considered a prepaid expense.
D) accounts payable are amounts the company expects to collect from customers within the next year.
Answer: B
Q3) The balance sheet is also known as the:
A) statement of profit and loss.
B) operating statement.
C) assets statement.
D) statement of financial position.
Answer: D
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Chapter 2: Transaction Analysis
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Sample Questions
Q1) The normal balance of the Accounts Payable account is a ________ because it is a(n) ________ account.
A) credit; liability
B) debit; stockholders' equity
C) credit; expense
D) debit; asset
Answer: A
Q2) When a company borrows cash from the bank:
A) total assets remain the same.
B) liabilities are increased.
C) retained earnings is decreased.
D) total liabilities remain the same.
Answer: B
Q3) When services are performed on account:
A) cash is increased.
B) revenue will not be recorded until the cash is received from the customer.
C) accounts receivable is increased.
D) accounts payable is increased.
Answer: C
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Page 4
Chapter 3: Accrual Accounting Income
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Sample Questions
Q1) A liability that arises from an expense that has not yet been paid is a(n):
A) unearned expense.
B) prepaid expense.
C) accrued expense.
D) accrued revenue.
Answer: C
Q2) The expense recognition principle includes two steps:
A) measure the expenses and record the revenue.
B) identify all the expenses incurred during the accounting period and measure the expenses and match them against the revenue earned.
C) when to record revenue and the amount of revenue to record.
D) when to record the revenue and identify all the expenses incurred during the accounting period.
Answer: B
Q3) The balance sheet reports:
A) assets, liabilities and stockholders' equity.
B) the changes in retained earnings.
C) assets, liabilities, revenues and expenses.
D) revenues and expenses.
Answer: A
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Chapter 4: Internal Control Cash
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Sample Questions
Q1) The cash-budget can span any length of time.
A)True
B)False
Q2) The type of fraud committed by company managers who make false and misleading entries in the books, making the financial results of the company appear better than they actually are, is called:
A) misappropriation of assets.
B) fraudulent financial reporting.
C) embezzlement.
D) collusion.
Q3) When preparing a bank reconciliation, which of the following items should be added to the book balance?
A) EFT receipts
B) Deposits in transit
C) Collection items
D) Both EFT receipts and collection items
Q4) A purchase order informs a vendor of the company's intention to purchase merchandise.
A)True
B)False
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Chapter 5: Short-Term Investments Receivables
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Sample Questions
Q1) Allowance for uncollectible accounts is classified as:
A) a contra-expense account.
B) a contra-revenue account.
C) a contra-asset account.
D) none of the above.
Q2) When a company sells a trading investment, the gain or loss on the sale is reported in the:
A) revenues section of the income statement.
B) short-term investments section of the balance sheet.
C) other revenue, gains, and losses section of the balance sheet.
D) other revenue, gains, and losses section of the income statement.
Q3) On December 31, 2012, the payee on a $4,500, 120-day, 10% note dated November 1, 2012, will recognize: (Use a 365 day year and round to the nearest dollar.)
A) interest receivable, $148.
B) interest receivable, $75.
C) interest payable, $148.
D) interest payable, $75.
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Chapter 6: Inventory Cost of Goods Sold
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Sample Questions
Q1) Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold.
A)True
B)False
Q2) In a perpetual inventory system, a business maintains a continuous record for each inventory item.
A)True
B)False
Q3) If a company's records are destroyed by fire, there is no way to determine the amount of the inventory that was destroyed.
A)True
B)False
Q4) Inventory is an asset and cost of goods sold is an expense.
A)True
B)False
Q5) Overstating ending inventory in the current period will overstate the following year's net income.
A)True
B)False
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Chapter 7: Plant Assets, Natural Resources, Intangibles
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Sample Questions
Q1) The use of the straight-line method of computing depreciation increases a company's tax liability, thereby increasing the company's cash flow.
A)True
B)False
Q2) A purchaser is willing to pay for goodwill when they feel the company they are buying has abnormal earning power.
A)True
B)False
Q3) Credit Company purchased a delivery van on January 1, 2011, for $45,000. The equipment was expected to remain in service 4 years (or 100,000 miles) and has a residual value of $5,000. The van traveled 30,000 miles the first year, 25,000 miles the second year, and 22,500 miles in the third and fourth year.
Prepare a schedule of depreciation expense per year for the four years of the asset's life using the (a) straight-line method (b) units-of-production method and (c) double declining balance method.
Q4) Intangible assets with finite lives that can be measured are amortized.
A)True
B)False
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Page 9
Chapter 8: Long-Term Investments the Time Value of Money
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Sample Questions
Q1) An investment is a held-to-maturity investment if it is management's intent to sell the investment.
A)True
B)False
Q2) The journal entry to record the sale of an available-for-sale investment includes a gain on sale of investment of $500. The income statement will reflect:
A) an increase in net sales of $500.
B) another income of $500.
C) an extraordinary gain of $500.
D) nothing, since the entry impacts only asset accounts.
Q3) On January 1, 2012, Berger Corporation paid $800,000 to purchase 40% of the outstanding stock of Oakley Company. Oakley Company reported net income of $200,000 for the year ending December 31, 2012 and paid cash dividends of $60,000 during 2012. On January 1, 2013, Berger Corporation sells its entire investment in Oakley Company for $1,100,000. Berger Corporation will report a(n):
A) realized gain on the sale of $300,000.
B) unrealized gain on the sale of $300,000.
C) realized gain on the sale of $244,000.
D) unrealized gain on the sale of $244,000.
Page 10
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Chapter 9: Liabilities
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Sample Questions
Q1) The current portion of a long-term debt refers to the amount of interest on a note payable that must be paid in the current year.
A)True
B)False
Q2) David Corporation issued $100,000, 5-year bonds at 97 on January 1, 2008. On December 31, 2012 the bonds matured. The payment of the bonds at maturity would be reported on the statement of cash flows as a cash outflow of:
A) $97,000 in the financing activities section.
B) $97,000 in the investing activities section.
C) $100,000 in the financing activities section
D) $100,000 in the investing activities section.
Q3) On January 1, 2012, Tata Corporation issued $4,000,000, 9%, 5-year bonds at 96. The bonds pay semiannual interest on January 1 and July 1. Tata uses the straight-line method of amortization and has a calendar year end. Prepare all the journal entries that Tata Corporation would make related to this bond issue through January 1, 2013.
Q4) Lease payments are paid by the lessor.
A)True
B)False
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Page 11
Chapter 10: Stockholders Equity
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Sample Questions
Q1) Fortune, Inc. declares a 10% common stock dividend when it has 20,000 shares of $10 par value common stock outstanding. If the market value of the common stock is $25, the journal entry to record the stock dividend would include a:
A) credit to Common Stock $50,000.
B) credit to Common Stock $20,000.
C) credit to Paid-in Capital in Excess of Par Value $30,000.
D) credit to Paid-in Capital in Excess of Par Value $20,000
Q2) The entry to record common stock issued at its par value includes a:
A) debit to Retained Earnings.
B) debit to Common Stock.
C) credit to Retained Earnings.
D) credit to Common Stock.
Q3) The basic unit of ownership for a corporation is:
A) dividends.
B) stock.
C) retained earnings. D) capital.
Q4) A corporation is not an entity that is separate from its owners.
A)True
B)False
Page 12
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Chapter
Income, the Statement of Stockholders
Equity
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Sample Questions
Q1) Earnings per share (EPS) is calculated as:
A) the number of shares of common stock outstanding at the end of the year divided by net income.
B) net income divided by the number of shares of common stock outstanding at the end of the year.
C) net income divided by the average number of shares of common stock outstanding throughout the year.
D) the average number of shares of common stock outstanding throughout the year divided by net income.
Q2) All foreign transactions will result in a foreign-currency exchange rate gain or loss.
A)True
B)False
Q3) Components of earnings quality include all of the following EXCEPT:
A) low operating expenses compared to sales.
B) high and improving gross margin.
C) a low gross profit.
D) proper revenue and expense recognition.
Page 13
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Chapter 12: The Statement of Cash Flows
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Sample Questions
Q1) An increase in Interest Payable during the reporting period indicates that cash paid for interest exceeded Interest Expense on the income statement.
A)True
B)False
Q2) The direct method of preparing the statement of cash flows:
A) reports where cash came from and how it was spent on operating activities. B) is used by a vast majority of companies.
C) is preferred by FASB.
D) is much easier for companies to compute.
Q3) Using the indirect method, an increase in accounts receivable is subtracted from net income in calculating cash flows from operating activities.
A)True
B)False
Q4) A statement of cash flows indicates the sources and uses of cash at a point in time.
A)True
B)False
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Page 14
Chapter 13: Financial Statement Analysis
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Sample Questions
Q1) In performing a vertical analysis, the base for cash is:
A) total liabilities and stockholders' equity.
B) total assets.
C) total cash and cash equivalents.
D) total current assets.
Q2) In an efficient market, an investor's search for "underpriced" stock will be unsuccessful unless the investor has knowledge of confidential information.
A)True
B)False
Q3) Cash flow from operations that are consistently lower than net income may imply that:
A) a dividend has not been issued in a long time.
B) the common stock should be split.
C) the company may be facing a cash shortage.
D) working capital has decreased.
Q4) A ratio analysis, horizontal analysis, and vertical analysis are all financial analysis tools.
A)True B)False
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