Principles of Financial Accounting Solved
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Course Introduction
Principles of Financial Accounting introduces students to the foundational concepts and practices of accounting in a business environment. The course covers the recording, summarizing, and interpreting of financial transactions, emphasizing the preparation and analysis of key financial statements such as the balance sheet, income statement, and statement of cash flows. Students will explore the accounting cycle, basic accounting principles, and regulatory standards that guide financial reporting, enabling them to understand the role of accounting information in decision-making for both internal and external users. By the end of the course, students will be equipped with essential knowledge and skills to analyze financial data and appreciate the importance of ethical practices in the accounting profession.
Recommended Textbook
Horngren's Accounting 12th Edition by Tracie
L. Miller Nobles
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Page 2
Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) Which of the following financial statements is used to report the economic resources,debt,and overall financial position of a company?
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of owner's equity
Answer: B
Q2) The income statement shows whether or not a business can generate enough cash to pay its liabilities.
A)True
B)False
Answer: False
Q3) A creditor is any person who has an ownership interest in a business.
A)True
B)False
Answer: False
Q4) Equity increases when revenues are earned.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) The balances in the liability and revenue accounts are increased with a credit.
A)True
B)False
Answer: True
Q2) Revenues and the owner's contributions in the business increase owner's equity.
A)True
B)False Answer: True
Q3) The left side of the T-account for Accounts Receivable is the debit side and the left side of the T-account for Accounts Payable is the credit side.
A)True
B)False
Answer: False
Q4) A chart of accounts provides more detail than a ledger.
A)True
B)False
Answer: False
Q5) What are two ways in which a company can improve its debt ratio?
Answer: Increase assets
Reduce debt
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Chapter 3: The Adjusting Process
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Q1) The accountant of Newton Legal Services failed to make an adjusting entry for supplies that had been used for the year.Assume the supplies were initially recorded as an asset.Which of the following statements is TRUE?
A) The total liabilities will be overstated.
B) The equity will be understated.
C) The total assets will be overstated.
D) The total assets will be understated.
Answer: C
Q2) The matching principle ensures all expenses are recorded when they are incurred during the period and are matched to the cash payments for expenses.
A)True
B)False
Answer: False
Q3) The time period concept assumes that the activities of a business can be sliced into small time segments.
A)True
B)False
Answer: True
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5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Revenue may be called Profit and Net Income may be called Turnover in an income statement prepared under IFRS.
A)True
B)False
Q2) Notes Payable due within two years are classified as ________.
A) current liabilities
B) current assets
C) long-term liabilities
D) long-term assets
Q3) A net loss from the Balance Sheet decreases Owner,Capital.
A)True
B)False
Q4) The current ratio shows the profitability of a firm.
A)True
B)False
Q5) Which of the following are NOT included in a post-closing trial balance?
A) Assets and liabilities
B) Owner, Capital and assets
C) Owner, Capital and liabilities
D) Revenues and expenses
6
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Chapter 5: Merchandising Operations
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Sample Questions
Q1) Cost of Goods Sold appears on a multi-step income statement but not on a single-step income statement.
A)True
B)False
Q2) York Merchandising Company uses a perpetual inventory system.At the end of the accounting period,a physical count of merchandise inventory reveals a balance of $76,500.The books show a balance of $78,200.
(a)Prepare the adjusting entry.Omit explanation.
(b)Discuss the possible causes for the difference between the physical count and the balance in the books.
(c)How does this affect net income?
Q3) A merchandiser reports sales revenue of $24,000 and sales discounts forfeited of $1,440.The merchandiser uses a perpetual inventory system.The first entry in the closing process would include ________.
A) a credit to Income Summary for $25,440
B) a credit to Income Summary for $24,000
C) a debit to Income Summary for $25,440
D) a debit to Income Summary for $24,000
Q4) What does the gross profit percentage measure? How is it computed?
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Chapter 6: Merchandise Inventory
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Q1) During a period of declining inventory costs,which of the following inventory costing methods should be used by a company that intends to minimize its income tax expenses?
A) first-in, first-out
B) last-in, first-out
C) weighted-average
D) specific identification
Q2) When a company uses the last-in,first-out (LIFO)method,the cost of goods sold represents the costs of most recently purchased goods,and the ending inventory represents the oldest costs.
A)True
B)False
Q3) The consistency principle states that a business should use the same accounting methods and procedures from period to period.
A)True
B)False
Q4) The ending inventory of a company was $552,000 as per the perpetual inventory records.The current replacement cost for the ending inventory is $547,000.Prepare the journal entry to adjust inventory.Omit explanation.
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Chapter 7: Accounting Information Systems
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Sample Questions
Q1) St.Petersburg Company makes a $1,200 purchase of merchandise inventory for cash.This transaction will be recorded in the ________.
A) cash payments journal
B) general journal
C) cash receipts journal
D) purchase journal
Q2) In an accounting information system,outputs are the reports used for decision making,which include the financial statements.
A)True
B)False
Q3) A subsidiary ledger is a record of accounts that provides supporting details on individual balances,the total of which appears in a general ledger account.
A)True
B)False
Q4) Sales on account are recorded in a cash receipts journal.
A)True
B)False
Q5) Describe the transactions recorded in the purchases journal.
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Chapter 8: Internal Control and Cash
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Sample Questions
Q1) Which of the following items are reconciling items on the bank side of the reconciliation?
A) outstanding checks and correction of book error
B) deposit in transit and NSF check
C) deposit in transit and outstanding checks
D) bank service charge and correction of book error
Q2) Electronic funds transfers are a system that transfers cash by using paper documents.
A)True
B)False
Q3) The bank made an EFT payment of a telephone bill of $5,000.How would this information be included on the bank reconciliation?
A) an addition on the bank side
B) a deduction on the book side
C) an addition on the book side
D) a deduction on the bank side
Q4) In a bank reconciliation,a deposit in transit will be shown on the bank side of the reconciliation.
A)True
B)False
Page 10
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Chapter 9: Receivables
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Sample Questions
Q1) On June 16,2018,Evergreen Company wrote off the $200 receivable from customer M.Simmons.On October 14,2018,Evergreen unexpectedly receives $200 cash from M.Simmons.How should Evergreen record the $200 payment from M.Simmons? Evergreen uses the allowance method.
A) Debit Cash and credit Bad Debts Expense
B) Debit Accounts Receivable - M. Simmons and credit Allowance for Bad Debts; debit Cash and credit Accounts Receivable - M. Simmons
C) Debit Accounts Receivable - M. Simmons and credit Bad Debts Expense; debit Cash and credit Accounts Receivable - M. Simmons
D) Debit Cash and credit Allowance for Bad Debts
Q2) The two major types of receivables are interest receivable and taxes receivable.
A)True
B)False
Q3) Credit cards reduce the customer's bank account immediately but allow the customer to pay electronically instead of with currency or writing a check.
A)True
B)False
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Chapter 10: Plant Assets,natural Resources,and Intangibles
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Q1) An expenditure that increases the capacity or efficiency of a plant asset or that extends the asset's life is known as a revenue expenditure.
A)True
B)False
Q2) The cost of land does not include the cost of fencing and paving.
A)True
B)False
Q3) A fully depreciated plant asset that is still in service is not reported as an asset on the balance sheet.
A)True
B)False
Q4) According to Generally Accepted Accounting Principles,if the fair value of goodwill decreases below its book value,an impairment loss must be recorded. A)True
B)False
Q5) IFRS permits the presentation of plant assets at their fair market value. A)True B)False
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Chapter 11: Current Liabilities and Payroll
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Q1) Jack's gross pay for the week is $1400.His year-to-date pay is under the limit for OASDI.Assume that the rate for state and federal unemployment compensation taxes is 6% and that Jack's year-to-date pay has previously exceeded the $7000 cap.What is the total amount of payroll taxes that Jack's employer must record as payroll tax expenses? (Do not round your intermediate calculations.Assume a FICA-OASDI Tax of 6.2% and FICA-Medicare Tax of 1.45%.)
A) $86.80
B) $58.80
C) $20.30
D) $107.10
Q2) Peter earns $14.50 per hour for straight time (40 hours),and the company pays him time-and-a-half for overtime.He worked 46 hours at his job during the first week of March 2018.What was Peter's gross pay for the week?
A) $667.00
B) $671.50
C) $710.50
D) $1000.50
Q3) If the likelihood of a future event is remote,how should the company report the contingency?
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Chapter 12: Partnerships
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Q1) Which of the following is TRUE of a liquidation of a partnership?
A) It allocates the gain or loss on sale of assets to the partners' capital accounts based on the profit-and-loss-sharing ratio.
B) The remaining cash after paying all liabilities are paid to the partners based on their profit-and-loss-sharing agreement.
C) Before a business is liquidated, its books should not be adjusted or closed.
D) It involves the selling of short-term liquid assets and does not involve the sale of fixed assets.
Q2) Kenny and Jeff form a partnership.During the year,Kenny and Jeff withdraw $30,000 and $23,000,respectively.Which of the following will be included in the journal entry to record the withdrawals?
A) debit to Kenny, Withdrawals for $30,000
B) debit to Jeff, Withdrawals for $7000
C) credit to Kenny, Withdrawals for $30,000
D) credit to Jeff, Withdrawals for $23,000
Q3) Neil and Paul formed a partnership.During the year,Neil and Paul withdrew $13,000 and $6,000,respectively.Provide the journal entry to close the withdrawal accounts.Omit explanation.
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Chapter 13: Corporations
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Q1) Most well-known companies are corporations and tend to be large multinational businesses.
A)True
B)False
Q2) A corporation's income statement includes some unique items that do not often apply to smaller businesses.These items include gross profit and income from continuing operations.
A)True
B)False
Q3) Regarding the issuance of stock,which of the following statements is incorrect?
A) Large corporations cannot finance all their operations through borrowing, so they raise capital by issuing stock.
B) A company can sell its stock directly to stockholders, or it can use the services of the state's Securities and Exchange Commission.
C) The issue price is the amount the corporation receives from issuing its stock.
D) Large corporations need huge quantities of money.
Q4) Define treasury stock and provide two reasons why a corporation would purchase treasury stock.
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Chapter 14: Long-Term Liabilities
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Sample Questions
Q1) The Lakeside Company issues $518,000 of its 10%,10-year bonds at 106 on March 31,2019.The bonds pay interest on March 31 and September 30.On September 30,2019,how much cash did the company pay to the bondholders?
A) $2590
B) $51,800
C) $25,900
D) $12,950
Q2) Simple interest means that interest is calculated on the principal and on all previously earned interest.
A)True
B)False
Q3) On January 1,2019,Mullens Sales issues $10,000 in bonds for $9,400.The bonds are five-year bonds with a stated rate of 4% and pay semiannual interest on June 30 and December 31.Mullens Sales uses the straight-line method to amortize bond discount.Prepare the journal entry for the first interest payment on June 30,2019.Omit explanation.
Q4) Define financial leverage and discuss how it is used to increase earnings per share.
Q5) What is the difference between simple interest and compound interest?
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Chapter 15: Investments
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Q1) At the beginning of the year,Wilson Steel,Inc.purchased 10,000 shares of Barnes Metals,Inc.for $34,000 in exchange for cash and now holds 3.2% of the voting stock of Barnes Metals,Inc.The management of Wilson Steel intends to hold this stock for two years.Assuming no other transaction happened during the year,the ________ in the balance sheet will increase.
A) long-term assets
B) cash
C) total assets
D) current assets
Q2) The rate of return on total assets measures a company's ________.
A) ability to meet its short-term obligations
B) ability to repay its long-term debt
C) success in using assets to earn income
D) success in earning high returns on investments in stocks and bonds of other companies
Q3) The rate of return on total assets is calculated by first subtracting interest expense from net income and then dividing the result by average total assets.
A)True
B)False
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Chapter 16: The Statement of Cash Flows
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Q1) The total change in cash should equal the net income for the period.
A)True
B)False
Q2) The activities that are included in the operating activities section of the statement of cash flows are ________.
A) activities that involve stockholders' equity
B) activities that create revenue or expenses
C) activities that increase or decrease long-term assets
D) activities that pertain to construction of new facilities
Q3) The total change in cash for the period reconciles the statement of cash flows.
A)True
B)False
Q4) The financing activities section of the statement of cash flows includes paying dividends and making payments on long-term liabilities.
A)True
B)False
Q5) List (in the correct order)and briefly discuss the five steps that are followed when preparing the statement of cash flows by the indirect method.
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Chapter 17: Financial Statement Analysis
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Q1) The horizontal analysis is computed by which of the following formulas?
A) ((earlier period amount - later period amount)/base period amount) × 100
B) (later period amount/earlier period amount) × 100
C) (base period amount/dollar amount of change) × 100
D) (dollar amount of change/base period amount) × 100
Q2) Which of the following describes working capital?
A) Current assets minus merchandise inventory
B) Current assets minus current liabilities
C) Total debt minus stockholders' equity
D) Cost of goods sold divided by average merchandise inventory
Q3) The times-interest-earned ratio measures the number of times earnings before interest and taxes can cover interest expense.
A)True
B)False
Q4) An accounts receivable turnover that is too high may indicate that credit is too tight,causing the loss of sales to good customers.
A)True
B)False
Q5) What is a common-size statement? Why are these statements useful?
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Chapter 18: Introduction to Managerial Accounting
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Q1) Merchandising companies,like service companies,do not use a Cost of Goods Sold account.
A)True
B)False
Q2) For decision-making purposes,________ costs are often divided into prime costs and conversion costs.
A) fixed costs
B) product costs
C) period costs
D) sunk costs
Q3) Which of the following correctly describes the accounting for factory depreciation?
A) Factory depreciation is a product cost and is expensed as incurred.
B) Factory depreciation is a period cost and is expensed as incurred.
C) Factory depreciation is a product cost and is expensed when the manufactured product is sold.
D) Factory depreciation is a period cost and is expensed when the manufactured product is sold.
Q4) Define indirect materials and give two examples of indirect materials for a manufacturing company.
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Chapter 19: Job Order Costing
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Q1) Unlike manufacturing companies,service companies use an allocation base for allocating both direct and indirect costs.
A)True
B)False
Q2) The predetermined overhead allocation rate for a given production year is calculated ________.
A) at the end of the production year
B) before the accounting period begins
C) after completion of each job
D) after the preparation of financial statements for the year
Q3) Process costing rather than job order costing is more appropriate for service companies.
A)True
B)False
Q4) A job order costing system is used by companies that manufacture batches of unique products or provide specialized services.
A)True
B)False
Q5) Why would the manager of a service company need to use job order costing?
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Chapter 20: Process Costing
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Q1) Under process costing,a single Work-in-Process Inventory account is maintained for all processes,with a subsidiary ledger containing individual production cost reports for each process.
A)True
B)False
Q2) The production cost report for Department 2 shows that $457,000 was assigned to the 51,000 units transferred to Finished Goods Inventory.Cost of goods sold equals $457,000.Process costing is used.
A)True
B)False
Q3) When calculating the cost per equivalent unit in process costing,what is the difference between the weighted-average and FIFO methods?
A) With FIFO, prior period costs are not combined with current period costs.
B) With FIFO, prior period costs are combined with current period costs.
C) With weighted-average, prior period costs are not combined with current period costs.
D) There is no difference between the two methods.
Q4) When compared to job order costing,why are additional journal entries required in a process costing system?
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) Zander Company has fixed costs of $14,000.The company's contribution margin ratio is 46%.What is the breakeven point in sales dollars? (Round your answer to the nearest dollar.)
A) $70,000
B) $30,435
C) $6440
D) $2800
Q2) A company's proportion of fixed costs to variable costs is called its ________.
A) target profit
B) relevant range
C) mixed cost
D) cost structure
Q3) Which of the following is TRUE of the traditional format of the income statement?
A) It is prepared under the variable costing method.
B) It shows contribution margin as a line item.
C) It is not allowed under GAAP.
D) It is prepared under the absorption costing method.
Q4) How is the unit contribution margin calculated?
Q5) How is the contribution margin calculated?
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Chapter 22: Master Budgets
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Q1) For a merchandising company,the selling and administrative expense budget separates fixed and variable expenses.
A)True
B)False
Q2) Which of the following best describes the term "sensitivity analysis"?
A) It is a testing technique to determine how results would differ if key assumptions are changed.
B) It is an analysis of the emotional sensitivity of a company's employees.
C) It is an evaluation of the accuracy of the assumptions.
D) It evaluates a company's financial condition by doing financial statement analysis.
Q3) Unlike a manufacturing company,the sales budget is the cornerstone for the master budget of a merchandising company.
A)True
B)False
Q4) The financial budgets include the cash budget and the budgeted financial statements-the budgeted income statement and budgeted balance sheet.
A)True
B)False
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) Home Decor Company manufactures special metallic materials for luxury homes that require highly skilled labor.Home Decor uses standard costs to prepare its flexible budget.For the first quarter of the year,direct materials and direct labor standards for one of their popular products were as follows: Direct materials: 2 pounds per unit; $3 per pound
Direct labor: 4 hours per unit; $14 per hour
Home Decor produced 5000 units during the quarter.At the end of the quarter,an examination of the labor costs records showed that the company used 30,000 direct labor hours and actual total direct labor costs were $375,000.What is the direct labor cost variance? (Round any intermediate calculations to the nearest cent,and your final answer to the nearest dollar.)
A) $45,000 Favorable
B) $280,000 Favorable
C) $280,000 Unfavorable
D) $45,000 Unfavorable
Q2) An efficiency variance measures how well a company keeps unit costs of material and labor inputs within standards.
A)True
B)False
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Chapter 24: Cost Allocation and Responsibility Accounting
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Q1) Discuss the difference between a centralized company and a decentralized company.
Q2) The internal business perspective of the balanced scorecard is concerned with ________.
A) how customers perceive the business and its products and services
B) the company's ability to improve and create value
C) which business processes the company must excel in to meet expectations
D) whether investors and creditors view the company favorably
Q3) The balanced scorecard ________.
A) incorporates both financial and operational performance measures
B) does not consider operational performance measures
C) evaluates performance based on organizational participation in improving processes
D) treats financial indicators as the sole measurement of performance
Q4) In selecting machine usage as the primary cost driver of overhead costs for the Production Department,management feels that there is a direct relationship between the number of machine hours used and the amount of overhead costs incurred.
A)True
B)False
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Chapter 25: Short-Term Business Decisions
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Q1) Sutton Products is a price-setter that uses the cost-plus pricing approach.The products are specialty vacuum tubes used in sound equipment.The CEO is certain that the company can produce and sell 310,000 units per year,due to the high demand for the product.Variable costs are $2.40 per unit.Total fixed costs are $970,000 per year.The CEO will receive stock options if $100,000 of operating income for the year is reported.What sales price would allow the CEO to achieve the target if the cost-plus pricing method is used? (Round your answer to the nearest cent.)
A) $2.40 per unit
B) $5.85 per unit
C) $3.45 per unit
D) $5.21 per unit
Q2) Murong Enterprises is a price-setter that uses the cost-plus pricing approach.The products are specialty components used in industrial equipment.The CEO is certain that the company can produce and sell 500,000 units per year,due to the high demand for the product.Variable costs are $3.25 per unit.Total fixed costs are $860,000 per year.The target operating income for the year is $150,000.What sales price would allow the CEO to achieve the target profit if the cost-plus pricing method is used? (Round your answer to nearest cent.)Show all computations.
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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.
A)True
B)False
Q2) Carolina Logistics,Inc.is considering three investment opportunities with the following payback periods: \[\begin{array} { | l | c | c | c | }
\hline & \text { Project } X & \text { Project } Y & \text { Project } Z \\ \hline \text { Payback period } & 3 \text { years } & 2.5 \text { years } & 2.8 \text { years } \\
\hline
\end{array}\] Use the decision rule for payback to rank the projects from most desirable to least desirable,all else being equal.
A) Y, Z, X
B) X, Y, Z
C) Z, Y, X
D) Y, X, Z
Q3) The accounting rate of return method considers the time value of money.
A)True
B)False
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