Business Accounting
Exam Answer Key
Course Introduction
Business Accounting provides students with a comprehensive understanding of the principles and practices used in recording, classifying, and analyzing financial transactions within a business context. The course covers fundamental topics such as the accounting cycle, preparation and interpretation of financial statements, budgeting, internal controls, and the use of accounting information for decision-making. By exploring concepts such as assets, liabilities, equity, revenues, and expenses, students gain insight into how accounting supports effective business management and meets regulatory requirements. Emphasis is placed on real-world applications and ethical considerations, equipping learners with essential skills for both entrepreneurial ventures and corporate environments.
Recommended Textbook
Financial and Managerial Accounting 12th Edition by
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Page 2
Carl S. Warren
Chapter 1: Introduction to Accounting and Business
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Sample Questions
Q1) Ramierez Company received its first electric bill in the amount of $60 which will be paid next month. How will this transaction affect the accounting equation?
Answer: Increase Liabilities (Accounts Payable) and decrease Stockholders' Equity (Utilities Expense)
Q2) Donner Company is selling a piece of land adjacent to their business. An appraisal reported the market value of the land to be $220,000. The Focus Company initially offered to buy the land for $177,000. The companies settled on a purchase price of $212,000. On the same day, another piece of land on the same block sold for $232,000. Under the cost concept, what is the amount that will be used to record this transaction in the accounting records?
A) $177,000
B) $212,000
C) $220,000
D) $232,000
Answer: B
Q3) Owners' rights to assets rank ahead of creditors' rights to assets.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Analyzing Transactions
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Sample Questions
Q1) Which of the following groups of accounts have a normal debit balance?
A) revenues, liabilities
B) assets, liabilities
C) liabilities, expenses
D) assets, expenses
Answer: D
Q2) Consuming goods and services in the process of generating revenues results in expenses.
A)True
B)False
Answer: True
Q3) The gross increases in retained earnings attributable to business activities are called A) assets
B) liabilities
C) revenues
D) expenses
Answer: C
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Page 4
Chapter 3: The Adjusting Process
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Sample Questions
Q1) Which of the following is an example of accrued revenue?
A) Swimming pool cleaning that has been paid for three months in advance.
B) Swimming pool cleaning that has been provided but has not been billed or paid.
C) An agreement has been signed for swimming pool cleaning for the next three months.
D) Swimming pool cleaning that has been provided and paid on the same day.
Answer: B
Q2) The adjusting entry to record the depreciation of equipment for the fiscal period is
A) debit Depreciation Expense; credit Equipment
B) debit Depreciation Expense; credit Accumulated Depreciation
C) debit Accumulated Depreciation; credit Depreciation Expense
D) debit Equipment; credit Depreciation Expense
Answer: B
Q3) Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned.
A)True
B)False
Answer: True
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) The income statement is prepared from:
A) either the post-closing trial balance or the unadjusted trial balance columns of the work sheet.
B) either the unadjusted trial balance or the balance sheet columns of the work sheet.
C) either the adjusted trial balance or the income statement columns of the work sheet.
D) both the adjusted trial balance and the balance sheet columns of the work sheet.
Q2) Cross-referencing is useful in assuring that the debits and credits are in balance.
A)True
B)False
Q3) Land is an example of a plant asset.
A)True
B)False
Q4) The work sheet is not considered a part of the formal accounting records.
A)True
B)False
Q5) List/describe the four closing entries in the order that they should occur.
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6
Chapter 5: Accounting for Merchandising Businesses
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Sample Questions
Q1) Emma Co. sold Isabella Co. merchandise on account FOB shipping point,, 2/10, net 30, for $15,000. Emma Co. prepaid the $750 shipping charge. Using the perpetual inventory method, which of the following entries will Isabella Co. make to record payment of the merchandise if Isabella Co. pays within the discount period?
A) Accounts Payable-Emma Co., debit $15,000; Freight In, credit $750; Cash, credit $14,250
B) Accounts Payable-Emma Co., debit $15,750; Merchandise Inventory, credit $300; Cash, credit $15,450
C) Accounts Payable-Emma Co., debit $15,000; Freight In, debit $750; Cash, credit $15,750
D) Accounts Payable-Emma Co., debit $15,750; Merchandise Inventory, debit $300; Cash, credit $16,050
Q2) Which one of the following is not a difference between a retail business and a service business?
A) in what is sold
B) the inclusion of gross profit in the income statement
C) accounting equation
D) merchandise inventory included in the balance sheet
Q3) Discuss the following statement:
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Chapter 6: Inventories
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Sample Questions
Q1) In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal.
A)True
B)False
Q2) The inventory costing method that reports the earliest costs in ending inventory is
A) FIFO
B) LIFO
C) Average cost
D) Specific identification
Q3) Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand.
A)True
B)False
Q4) The two most widely used methods for determining the cost of inventory are
A) FIFO and LIFO
B) FIFO and average
C) LIFO and average
D) gross profit and average
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Page 8
Chapter 7: Sarbanes-Oxley, Internal Control, and Cash
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Sample Questions
Q1) Why would a bank require a company to maintain a compensating balance?
Q2) Describe the features of a voucher system and list typical supporting documents for a voucher.
Q3) A petty cash fund is used to pay relatively large amounts.
A)True
B)False
Q4) Which of the following would be added to the balance per books on a bank reconciliation?
A) Service charges
B) Outstanding checks
C) Deposits in transit
D) Notes collected by the bank
Q5) A firm's internal control environment is not influenced by
A) management's operating style
B) organizational structure
C) personnel policies
D) monitoring policies
Q6) Expenditures from a petty cash fund are documented by a petty cash receipt.
A)True
B)False
Page 9
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Chapter 8: Receivables
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Q1) When comparing the direct write-off method and the allowance method of accounting for uncollectible receivables, a major difference is that the direct write-off method
A) uses a percentage of sales method to estimate uncollectible accounts.
B) is used primarily by large companies with many receivables.
C) is used primarily by small companies with few receivables.
D) uses an allowance account.
Q2) A primary difference between the direct write-off and allowance method is whether or not bad debts is based on a percentage of sales.
A)True B)False
Q3) At the end of the current year, Accounts Receivable has a balance of $90,000; Allowance for Doubtful Accounts has a credit balance of $850; and net sales for the year total $300,000. Bad debt expense is estimated at 2.5% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance of Doubtful Accounts; and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
Q4) List at least three things that indicate a receivable may be uncollectible.
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Page 10
Chapter 9: Fixed Assets and Intangible Assets
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Sample Questions
Q1) Copy equipment was acquired at the beginning of the year at a cost of $72,000 that has an estimated residual value of $9,000 and an estimated useful life of 5 years. It is estimated that the machine has an estimated 1,000,000 copies. This year 315,000 copies were made. Determine the (a) depreciable cost, (b) depreciation rate, and (c) the units-of-production depreciation for the year.
Q2) Standby equipment held for use in the event of a breakdown of regular equipment is reported as property, plant, and equipment on the balance sheet.
A)True
B)False
Q3) On December 31, Strike Company has decided to discard one of its batting cages. The initial cost of the equipment was $310,000 with an accumulated depreciation of $260,000. Depreciation has been taken up to the end of the year. The following will be included in the entry to record the disposal.
A) Accumulated Depreciation Dr. $310,000
B) Loss on Disposal of Asset Dr. $260,000
C) Equipment Cr. $310,000
D) Gain on Disposal of Asset Cr. $50,000
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Chapter 10: Current Liabilities and Payroll
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Sample Questions
Q1) The journal entry a company uses to record partially funded pension rights for its salaried employees, at the end of the year is
A) debit Salary Expense; credit Cash
B) debit Pension Expense; credit Unfunded Pension Liability
C) debit Pension Expense; credit Unfunded Pension Liability and Cash
D) debit Pension Expense; credit Cash
Q2) Form W-2 is called the Wage and Tax Statement.
A)True
B)False
Q3) On October 30, Seba Salon, Inc. issued a 90-day note with a face amount of $60,000 to Reyes Products, Inc. for merchandise inventory. Assuming a 360-day year, determine the proceeds of the note assuming the note is discounted at 8%.
A) $55,200
B) $64,800
C) $58,800
D) $61,200
Q4) FICA tax is a payroll tax that is paid only by employers.
A)True B)False
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Chapter 11: Corporations: Organization, Stock Transactions, and Dividends
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Sample Questions
Q1) When a stock dividend is declared, which of the following accounts is credited?
A) Common Sock
B) Dividend Payable
C) Stock Dividends Distributable
D) Retained Earnings
Q2) Treasury stock should be reported in the financial statements of a corporation as a(n)
A) investment.
B) liability.
C) current asset.
D) deduction from stockholders's equity.
Q3) Those most responsible for the major policy decisions of a corporation are the A) management.
B) board of directors.
C) employees.
D) stockholders.
Q4) The dates of importance in connection with a cash dividend of $50,000 on a corporation's common stock are January 15, February 15, and March 15. Journalize the entries required on each date.
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Chapter 12: Long-Term Liabilities: Bonds and Notes
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Q1) The times interest earned ratio is calculated by dividing Bonds Payable by Interest Expense.
A)True
B)False
Q2) The balance in Discount on Bonds Payable that is applicable to bonds due in 2015 would be reported on the balance sheet in the section entitled A) investments
B) long-term liabilities
C) current assets
D) intangible assets
Q3) Bonds of major corporations are traded on bond exchanges.
A)True
B)False
Q4) The market interest rate related to a bond is also called the A) stated interest rate
B) effective interest rate
C) contract interest rate
D) straight-line rate
Q5) (a) Prepare the journal entry to issue $100,000 bonds which sold for $94,000. (b) Prepare the journal entry to issue $100.000 bonds which sold for $104,000
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Chapter 13: Investments and Fair Value Accounting
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Q1) Investment in certificates of deposit and other securities that do not change in value are reported in the balance sheet as:
A) equity investments
B) available-for-sale securities
C) cash and cash equivalents
D) held to maturity securities
Q2) Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the A) investment only
B) investment plus Wendell's share of Porter's net income earned since the investment was purchased
C) investment plus the total amount of dividends Wendell has received from Porter since the investment was purchased
D) investment plus Wendell's share of Porter's net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased
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Chapter 14: Statement of Cash Flows
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Sample Questions
Q1) Free cash flow is cash flow from operations, less cash used to purchase fixed assets to maintain productive capacity and cash used for dividends.
A)True
B)False
Q2) Cash flows from investing activities, as part of the statement of cash flows, include receipts from the sale of land.
A)True
B)False
Q3) The last item on the statement of cash flows prior to the schedule of noncash investing and financing activities reports
A) the increase or decrease in cash
B) cash at the end of the year
C) net cash flow from investing activities
D) net cash flow from financing activities
Q4) If a business issued bonds payable in exchange for land, the transaction would be reported in a separate schedule on the statement of cash flows.
A)True
B)False
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Page 16
Chapter 15: Financial Statement Analysis
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Sample Questions
Q1) The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets is sometimes referred to as
A) leverage
B) solvency
C) yield
D) quick assets
Q2) The number of times interest expense is earned is computed as
A) net income plus interest expense, divided by interest expense
B) income before income tax plus interest expense, divided by interest expense
C) net income divided by interest expense
D) income before income tax divided by interest expense
Q3) When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item before income from continuing operations on the income statement.
A)True
B)False
Q4) Define solvency and profitability. How are they alike?
Q5) What is a major advantage of using percentages rather than dollar changes in doing horizontal and vertical analysis?
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Chapter 16: Managerial Accounting Concepts and Principles
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Sample Questions
Q1) Accounting designed to meet the needs of decision-makers inside the business is referred to as:
A) general accounting
B) financial accounting
C) managerial accounting
D) external accounting
Q2) Managerial accounting provides useful information to managers on product costs.
A)True
B)False
Q3) Indirect costs incurred in a manufacturing environment that cannot be traced directly to a product are treated as:
A) period costs and expensed when incurred
B) product costs and expensed when the goods are sold
C) product costs and expenses when incurred
D) period costs and expensed when the goods are sold
Q4) Another term often used to refer to factory overhead is:
A) surplus
B) period cost
C) supervisory cost
D) factory burden
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Chapter 17: Job Order Costing
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Sample Questions
Q1) Job cost sheets can provide information to managers on unit cost trends, the cost impact of continuous improvement in the manufacturing process, the cost impact of materials changes, and the cost impact of direct materials price or direct labor rate changes over time.
A)True
B)False
Q2) Crain Company budgeted 35,000 direct labor hours and incurred 40,000 direct labor hours. It incurred $780,000 of overhead and estimated overhead was $735,000. What is Crain's predetermined overhead rate? Was overhead overapplied or underapplied for the year? By how much?
Q3) The Winston Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total machine hours for the year was 54,300. The actual factory overhead for the year was $1,348,800.
a) Determine the total factory overhead amount applied.
b) Calculate the over or under applied amount for the year.
c) Prepare the journal entry to close factory overhead into Cost of Goods Sold.
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Page 19
Chapter 18: Process Cost Systems
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Q1) Department E had 4,000 units in Work in Process that were 40% completed at the beginning of the period at a cost of $12,500. 14,000 units of direct materials were added during the period at a cost of $28,700. 15,000 units were completed during the period, and 3,000 units were 75% completed at the end of the period. All materials are added at the beginning of the process. Direct labor was $32,450 and factory overhead was $18,710. The number of equivalent units of production for the period for materials if the average cost method is used to cost inventories was:
A) 15,650
B) 18,000
C) 17,250
D) 17,700
Q2) Kamin Company's mixing department had a beginning inventory of 4,000 units which had accumulated conversion costs of $55,000. During the period, the mixing department accumulated conversion costs of $92,000 and started 8,000 new units. Ending inventory was 2,500 units which were 40% complete with respect to conversion costs. Kamin uses the average cost method to cost inventories. Required:
Calculate the cost per equivalent unit for conversion costs in the mixing department.
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Page 20
Chapter 19: Cost Behavior and Cost-Volume-Profit Analysis
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Sample Questions
Q1) Cost behavior refers to the manner in which:
A) a cost changes as the related activity changes
B) a cost is allocated to products
C) a cost is used in setting selling prices
D) a cost is estimated
Q2) Cool-It Company manufactures and sells commercial air conditioners. Because of current trends, it expects to increase sales by 10 percent next year. If this expected level of production and sales occurs and plant expansion is not needed, how should this increase affect next year's total amounts for the following costs. Variable Costs Fixed
Costs Mixed Costs
A) increase increase increase
B) increase no change increase
C) no change no change increase
D) decrease increase increase
Q3) As production increases, what would you expect to happen to fixed cost per unit?
A) Increase
B) Decrease
C) Remain the same
D) Either increase or decrease, depending on the variable costs
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21
Chapter 20: Variable Costing for Management Analysis
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Q1) The contribution margin ratio is computed as contribution margin divided by sales.
A)True
B)False
Q2) For a period during which the quantity of inventory at the end was smaller than that at the beginning, income from operations reported under variable costing will be smaller than income from operations reported under absorption costing.
A)True
B)False
Q3) The systematic examination of the differences between planned and actual contribution margin is termed the:
A) gross profit analysis
B) contribution margin analysis
C) sales mix analysis
D) volume variance analysis
Q4) The absorption costing income statement does not distinguish between variable and fixed costs.
A)True
B)False
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Page 22
Chapter 21: Budgeting
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Q1) Detailed supplemental schedules based on department responsibility are often prepared for major items in the operating expenses budget.
A)True
B)False
Q2) The budget procedures used by a large manufacturer of automobiles would probably not differ from those used by a small manufacturer of paper products.
A)True
B)False
Q3) The production budget is the starting point for preparation of the direct labor cost budget.
A)True
B)False
Q4) Goal conflict can be avoided if budget goals are carefully designed for consistency across all areas of the organization.
A)True
B)False
Q5) Describe at least five benefits of budgeting.
Q6) What is a capital expenditures budget?
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Chapter 22: Performance Evaluation Using Variances From
Standard Costs
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Q1) The standard price and quantity of direct materials are separated because:
A) GAAP reporting requires this separation
B) direct materials prices are controlled by the purchasing department, and quantity used is controlled by the production department
C) standard quantities are more difficult to estimate than standard prices
D) standard prices change more frequently than standard quantities
Q2) If a company records inventory purchases at standard cost and also records purchase price variances, prepare the journal entry for a purchase of widgets that were bought at $7.45 per unit and have a standard cost of $7.15. The total amount owed to the vendor for this purchase is $33,525.
Q3) If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual was 800 units at $12, the direct materials quantity variance was $2,200 unfavorable.
A)True B)False
Q4) Standard costs should always be revised when they differ from actual costs. A)True B)False
Page 24
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Chapter 23: Performance Evaluation for Decentralized Operations
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Q1) Investment centers differ from profit centers in that they
A) are responsible for net income only.
B) are able to invest in assets.
C) have less responsibilities than cost centers and profit centers.
D) are only responsible for revenues.
Q2) Which one of the following is NOT a measure that management can use in evaluating and controlling investment center performance?
A) Rate of return on investment
B) Negotiated price
C) Residual income
D) Income from operations
Q3) Which of the following would not be considered an internal centralized service department?
A) Payroll accounting department
B) Manufacturing department
C) Information systems department
D) Purchasing department
Q4) The ratio of sales to investment is termed the rate of return on investment.
A)True
B)False
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Chapter 24: Differential Analysis and Product Pricing
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Q1) Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000 and its remaining useful life is 5 years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 and annual operating costs would be $1,500. The new machine has an estimated useful life of 5 years. Should the machine be replaced? Support your answer with calculations.
Q2) In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup.
A)True
B)False
Q3) What cost concept used in applying the cost-plus approach to product pricing includes only desired profit in the "markup"?
A) Product cost concept
B) Variable cost concept
C) Sunk cost concept
D) Total cost concept
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Chapter 25: Capital Investment Analysis
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Q1) The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $21,600, is:
A) $10,800
B) $21,600
C) $ 5,400
D) $45,000
Q2) In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values.
A)True
B)False
Q3) By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money:
A) has an international rate of exchange
B) is the language of business
C) is the measure of assets, liabilities, and stockholders' equity on financial statements
D) has a time value
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Chapter 26: Cost Allocation and Activity-Based Costing
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Q1) Challenger Factory produces two similar products - regular widgets and deluxe widgets. The total plant overhead budget is $675,000 with 300,000 estimated direct labor hours. It is further estimated that deluxe widget production will need 3 direct labor hours for each unit and regular widget production will require 2 direct labor hours for each unit. Using the single plantwide factory overhead rate with an allocation base of direct labor hours, how much factory overhead will be allocated to the deluxe widget production if the budgeted production for the period is 50,000 units and actual production for the period is 58,000 units?
A) $391,500
B) $225,000
C) $261,000
D) $337,500
Q2) Multiple production department factory overhead rates are more accurate and more costly than are plantwide factory overhead rates.
A)True
B)False
Q3) A single plantwide overhead rate method is very expensive to apply.
A)True
B)False
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Chapter 27: Cost Management for Just-In-Time
Environments
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Q1) Prevention costs and appraisal costs are considered costs of controlling quality.
A)True
B)False
Q2) Non-financial accounting information is used more often for long-term operating decisions than is financial information.
A)True
B)False
Q3) Which of the following is not an external failure cost?
A) warranty work
B) processing returned merchandise
C) rework
D) correcting invoice errors
Q4) In a just-in-time (JIT) environment, process problems are more visible than they are in a traditional environment because:
A) inventories are maintained at higher levels.
B) process problems cause production to shut down immediately.
C) the push manufacturing system leads to increased inventory level.
D) the lack of work in process inventory creates problems.
Page 29
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