Financial Accounting
Exam Answer Key
Course Introduction
Financial Accounting is an introductory course that explores the foundational principles and practices used to record, analyze, and report financial transactions of businesses and organizations. The course covers key topics such as the accounting cycle, preparation of financial statements, and understanding assets, liabilities, and equity. Students will learn how to apply generally accepted accounting principles (GAAP) to real-world situations, interpret financial information, and assess the financial health of an organization. Emphasis is placed on critical thinking, ethical decision-making, and effective communication of financial data to various stakeholders.
Recommended Textbook
Financial and Managerial Accounting 10th Edition by Belverd E. Needles
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Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) All of the following statements are true about the Sarbanes-Oxley Act except A)it applies to publicly traded companies.
B)it shields chief executives from criminal penalties.
C)it orders the SEC to draw up certain rules.
D)its primary goal is to regulate financial reporting and the accounting profession.
Answer: B
Q2) In general,one partner acting alone cannot obligate the partnership to another party.
A)True
B)False
Answer: False
Q3) Paying taxes to the government is an example of an operating activity.
A)True
B)False
Answer: True
Q4) The board of directors carries out the day-to-day operations of a corporation.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Measurement Concepts: Recording Business Transactions
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Q1) After initially recording an asset at cost,fair value is
A)the price at which an asset could be sold in a current transaction between independent parties.
B)the actual,or historical,price at which the asset was acquired.
C)the easiest value used to measure and record assets.
D)verifiable at all future dates by referring to the invoice price paid for the asset.
Answer: A
Q2) A transposition error will cause the trial balance to be out of balance by an amount that is evenly divisible by two.
A)True
B)False
Answer: False
Q3) When a company pays an employee for work performed,it is considered an economic event that is recorded as a transaction.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Measuring Business Income: Adjusting the Accounts
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Sample Questions
Q1) What is the purpose of adjusting entries?
Answer: Adjusting entries result in financial statements that include all transactions experienced during the accounting period.They are prepared to apply accrual accounting to transactions that span more than one accounting period.
Q2) When there is no direct connection between revenues and expenses,the costs are systematically allocated among the periods benefited.
A)True
B)False Answer: True
Q3) Financial statements may be prepared from an adjusted trial balance.
A)True
B)False Answer: True
Q4) Failure to adjust for expired prepaid insurance at year end will result in an A)overstatement of liabilities.
B)understatement of assets.
C)understatement of stockholders' equity.
D)overstatement of net income.
Answer: D
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Chapter 4: Foundations of Financial Reporting and the
Classified Balance Sheet
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Q1) The conservatism convention should not be used when the accountant is certain of a particular measure.
A)True
B)False
Q2) The accounting convention that is most responsible for the increase in the number of notes to financial statements is
A)materiality.
B)full disclosure.
C)consistency.
D)conservatism.
Q3) The return on equity for National Textile is
A)40 percent.
B)67 percent.
C)47 percent.
D)32 percent.
Q4) The total amount of working capital is
A)($30,000. )
B)$80,000.
C)$24,000.
D)$400,000.
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Chapter 5: Accounting for Merchandising Operations
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Sample Questions
Q1) Purchase discounts are discounts that a buyer takes for the early payment of merchandise.
A)True
B)False
Q2) The fee paid by a retailer to a credit card company is considered a contra-revenue account by the retailer.
A)True
B)False
Q3) Wolf Equipment uses a perpetual inventory method.Discuss how Wolf Equipment accounts for freight-in and freight-out.
Q4) What is the financing period for a company that takes an average of 50 days to sell inventory,takes an average of 110 days to collect for its sales,and has payment terms of 45 days on its purchases? Show calculations.
Q5) In which category would office salaries expense be included?
A)Net sales.
B)Cost of goods sold.
C)Selling expenses.
D)General and administrative expenses.
Q6) Describe how to compute the cost of goods available for sale.
7
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Chapter 6: Inventories
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Sample Questions
Q1) When applying the retail method,which of the following would not be a component of the cost-to-retail percentage?
A)Purchases
B)Beginning inventory
C)Sales
D)Freight-in
Q2) How is the matching rule applied when accounting for merchandise inventory?
Q3) Why are the amounts determined for ending inventory and cost of goods sold the same under both the periodic and perpetual inventory systems when FIFO is used but not when LIFO is used?
Q4) What is the chief objective of supply-chain management? How is it accomplished?
Q5) The average-cost method produces an ending inventory figure that is somewhere between the figures produced by FIFO and LIFO.
A)True
B)False
Q6) The lower the inventory turnover,the lower the days' inventory on hand.
A)True
B)False
Q7) Why are cost flow assumptions made when accounting for merchandise inventory?
Page 8
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Chapter 7: Cash and Internal Control
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Q1) Cash received through the mail should be handled by only one employee to achieve effective internal control.
A)True
B)False
Q2) The purchasing department prepares a purchase requisition addressed to the vendor (seller)containing instructions related to the items ordered.
A)True
B)False
Q3) Public companies must have their financial statements audited,but are not required to have their internal control systems audited.
A)True
B)False
Q4) The amount in the petty cash fund plus the sum of the petty cash vouchers should at all times equal the amount shown in the Petty Cash account.
A)True
B)False
Q5) Why is the separation of duties an important control activity in a good system of internal control?
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Chapter 8: Receivables
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Q1) Purchasing receivables with recourse is riskier than purchasing them without recourse.
A)True
B)False
Q2) Using the percentage of net sales method,uncollectible accounts expense for the year is estimated to be $44,000.If the balance of the Allowance for Uncollectible Accounts is a $9,000 credit before adjustment,what is the balance after adjustment?
A)$9,000
B)$35,000
C)$44,000
D)$53,000
Q3) Loans to company employees should be included with accounts receivable on the balance sheet.
A)True
B)False
Q4) The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Income.
A)True
B)False
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Chapter 9: Long-Term Assets
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Sample Questions
Q1) Overestimating the number of tons of a mineral that can be mined over a mineral deposit's life will result in
A)understated total assets each year.
B)understated net income each year.
C)understated depletion expense each year.
D)no effect on total assets each year.
Q2) The costs associated with the development of software,for sale or internal use,should be expensed in the period incurred.
A)True
B)False
Q3) Which of the following items is not classified as a natural resource?
A)Timberland
B)A gas reserve
C)An oil well
D)Goodwill
Q4) A capital expenditure is an expenditure that benefits only the current accounting period.
A)True
B)False
Q5) Present two arguments in favor of the use of accelerated depreciation.
Page 11
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Chapter 10: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) Usually,failure to record a liability means failure to record a(n)
A)revenue.
B)note.
C)expense.
D)asset.
Q2) Which of the following statements is true regarding the time value of money?
A)Compound interest will produce equal amounts of interest each period on a fixed deposit.
B)Earning simple interest is more beneficial than earning compound interest.
C)When making a purchase,it is better to make payment as soon as possible.
D)It is better to receive $1 now than a year from now.
Q3) Hilda wishes to deposit an amount into her savings account that will enable her to withdraw $1,600 per year for the next four years.She should deposit an amount equal to $1,600 multiplied by the
A)present value of a single sum factor.
B)present value of an ordinary annuity factor.
C)future value of a single sum factor.
D)future value of an ordinary annuity factor.
Q4) Explain why the cost of employing someone is more than just the wage or salary paid to the employee.
Page 12
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Chapter 11: Long-Term Liabilities
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Q1) Deferred income taxes are a type of long-term liability that result from using different accounting methods to calculate income taxes on the income statement and income tax liability on the income tax return.
A)True
B)False
Q2) The present value of a bond is determined by subtracting the discounted value of the payment at maturity from the discounted value of a series of fixed interest payments.
A)True
B)False
Q3) If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the present value of the face value plus the present value of all the future interest payments will equal an amount less than the face value of the bond.
A)True
B)False
Q4) When a bond sells at a premium,what is probably true about the market interest rate versus the face interest rate? Discuss.
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Chapter 12: Stockholders Equity
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Q1) How will the declaration and distribution of a 10 percent stock dividend affect the issuing corporation's balance of retained earnings and total stockholders' equity,respectively?
A)Decrease and no effect
B)No effect and no effect
C)Decrease and decrease
D)No effect and decrease
Q2) Treasury stock is considered a reduction in stockholders' equity,not a purchase of assets .
A)True
B)False
Q3) Define outstanding stock.
Q4) Dividends in arrears pertain only to cumulative preferred stock.
A)True
B)False
Q5) A corporation often uses an underwriter to guarantee the sale of stock in an initial public offering (IPO).
A)True
B)False
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Chapter 13: The Statement of Cash Flows
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Q1) What elements are used to calculate free cash flow? Indicate whether the element is added or subtracted.
Q2) Cash flows to assets is measured in "times."
A)True B)False
Q3) Net cash flows from operating activities would be needed to calculate cash flow yield,cash flows to assets,and cash flows to sales.
A)True
B)False
Q4) Lincoln Company engaged in this transaction: Purchased 30-day U.S.Treasury bill. Indicate which section,if any,the above transaction would appear in,or relate to,on a statement of cash flows.
A)Does not represent a cash flow.
B)Operating activities section.
C)Investing activities section.
D)Financing activities section.
Q5) Which accounts are analyzed to determine cash flows from financing activities?
Q6) How is it possible for a company to show a net loss for a given year,yet produce positive net cash flows from operating activities?
Page 15
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) In a trend analysis,an index number of 139 for 20x5 sales indicates that
A)sales for 20x5 were 139 percent higher than sales for the same company in the base year.
B)sales for 20x5 for this company were 139 percent of the sales figure of another company being used in the comparison.
C)sales for 20x5 were 139 percent of the sales for the same company in the base year.
D)actual sales for 20x5 exceeded budgeted sales for 20x5 by 39 percent.
Q2) Write-downs and restructurings increase current operating income and decrease future income by shifting future costs to the future periods.
A)True
B)False
Q3) Which of the following describes the return on assets ratio?
A)Average total assets divided by sales
B)Net sales divided by net income
C)Net income divided by average total assets
D)Average total assets divided by net income
Q4) Why is the quick ratio probably better than the current ratio as a measure of short-term liquidity?
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Chapter 15: Managerial Accounting and Cost Concepts
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Sample Questions
Q1) Total manufacturing costs decrease the balance of the Work in Process Inventory account.
A)True
B)False
Q2) Total variable costs remain constant within a defined time period or range of activity.
A)True
B)False
Q3) Which of the following account balances is not reported on the balance sheet?
A)Materials Inventory
B)Manufacturing Patents
C)Cost of Goods Sold
D)Work in Process Inventory
Q4) Managerial accounting's main emphasis is on full and accurate accounting for and disclosure of a company's operating results.
A)True
B)False
Q5) Management accounting is a subordinate activity to financial accounting.
A)True
B)False
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Chapter 16: Costing Systems: Job Order Costing
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Q1) The type of product costing system used by a company is dictated by the A)cost flow assumptions made by the company.
B)production process of the product.
C)inventory system used by the company.
D)selling price of the product.
Q2) WinLaw is a legal services provider.It is planning to extend its operations by providing tax consultancy services.Which of the following statements will be true if the company extends its operation as planned?
A)The cost of providing legal services is high as tax consultancy service will be in its initial stages.
B)The company cannot extend its operations since it requires additional staff.
C)The company should know the unit service cost of tax services before determining the fees.
D)The company should drop this service line if it makes lesser profit than legal services.
Q3) An advertising company would probably use a process costing system.
A)True
B)False
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Chapter 17: Costing Systems: Process Costing
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Q1) Regardless of the product costing system used,when the products are completed,they are transferred from work in process inventory to finished goods inventory.
A)True
B)False
Q2) The number of equivalent units produced by Morgan Processing with respect to conversion costs is
A)43,700.
B)45,700.
C)48,200.
D)50,200.
Q3) Process cost reports are prepared for each of the processes or work cells.
A)True
B)False
Q4) The actual physical flow of production will depend on the cost allocation method,such as the FIFO costing method or the average costing method,chosen by the company.
A)True B)False
Q5) Mention the two cost allocation methods used in a process costing system.
Page 19
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Chapter 18: Value-Based Systems: Activity-Based Costing and Lean Accounting
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Q1) Which of the following is not a concern when managing inventory in a just-in-time environment?
A)Reduction of space needed to store inventory
B)Inventory turnover
C)Labor cost
D)Inventory size reduction
Q2) The value chain is also called the supply chain.
A)True
B)False
Q3) Product storage time refers to the amount of time that a product spends in a production cell.
A)True
B)False
Q4) In a backflush environment,costs are tracked through the various production departments as products or services move through the production process.
A)True
B)False
Q5) How do managers measure an activity's performance?
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Q6) Why is process value analysis not part of the general ledger accounting system?
Chapter 19: Cost-Volume-Profit Analysis
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Q1) Understanding cost behavior helps managers in planning the optimal mix of services or products to offer.
A)True B)False
Q2) Costs that change,in total,in direct proportion to changes in productive output,or activity,are called variable costs.
A)True B)False
Q3) Adding a desired profit level to breakeven computations will lower the number of units required to be sold.
A)True
B)False
Q4) In cost-volume-profit analysis,sales revenue is computed by multiplying units sold by the selling price per unit,and the targeted profit is projected by management.
A)True B)False
Q5) Briefly explain the use of statistical methods to separate mixed cost components.
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Chapter 20: The Budgeting Process
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Q1) The cash receipts in November for October sales of Great Lake are expected to be
A)$8,000.
B)$9,600.
C)$9,408.
D)$7,840.
Q2) Given a planned production of 5,000 units,what are the planned direct materials purchases of Richard?
A)$300,000
B)$258,000
C)$240,000
D)$322,500
Q3) A company pays for 25 percent of its purchases by credit terms n/60,40 percent of its purchases by credit terms n/30,and the remaining 35 percent by a two-month advance payment.The sources for June's cash payments schedule for direct materials would not include which of the following?
A)June's schedule of expected cash payments for direct materials
B)August's schedule of expected cash payments for direct materials
C)May's schedule of expected cash payments for direct materials
D)April's schedule of expected cash payments for direct materials
Q4) Describe three benefits budgeting provides to an organization's success.
Page 22
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Chapter 21: Flexible Budgets and Performance Analysis
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Q1) Identify and describe the five different responsibility centers,and provide one example of each.
Q2) The format of a variable costing income statement is similar to a(n)
A)contribution margin income statement.
B)traditional income statement.
C)audited income statement.
D)single-step income statement.
Q3) The manager of Center E provides administrative activities for the other centers in the company.What type of responsibility center is Center E?
A)Cost center
B)Discretionary cost center
C)Revenue center
D)Investment center
Q4) To succeed,an organization must add value for all of its stakeholders in the short term only.
A)True
B)False
Q5) What are some items that can affect an investment center's EVA calculation,and how can EVA be improved?
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Chapter 22: Standard Costing and Variance Analysis
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Q1) Variance analysis involves computing the difference between standard and actual costs.
A)True
B)False
Q2) In a service company,standard unit cost related of a service will typically include direct materials,direct labor,and overhead standard costs.
A)True
B)False
Q3) The purchasing agent is responsible for developing the direct materials quantity standard.
A)True
B)False
Q4) Another name for a flexible budget is a variable budget.
A)True
B)False
Q5) Standard costs are not used for
A)determining actual costs.
B)preparing budgets and forecasts.
C)evaluating the performance of workers and management.
D)developing appropriate selling prices.
Page 24
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Chapter 23: Short-Run Decision Analysis
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Q1) Contribution margin per unit is calculated as selling price per unit less fixed costs per unit.
A)True
B)False
Q2) Information that is the same for all alternatives is considered relevant to the decision process.
A)True
B)False
Q3) Outsourcing production help in reducing a company's investment in physical assets and human resources.
A)True
B)False
Q4) Estimated future costs that differ between alternative courses of action are termed as __________ costs in management decision analysis.
A)sunk
B)relevant
C)absorption
D)replacement
Q5) What information does a manager need to gather for a make-or-buy decision?
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Chapter 24: Capital Investment Analysis
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Q1) As part of the performing stage of management,capital investment decisions are implemented with proper controls.
A)True
B)False
Q2) The payback period method of evaluating proposed capital investment does not take into account the time value of money.
A)True
B)False
Q3) Capital investment analysis involves all of the following except
A)preparing formal requests for capital investments.
B)analyzing the sales mix.
C)selecting the best alternative.
D)dividing available capital investment funds.
Q4) What criteria must be met before accepting any capital expenditure proposal with respect to minimum rate of return on investment?
Q5) Net present value analysis is based on a project's cash flows.
A)True
B)False
Q6) In what situations is the payback period method especially useful?
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Chapter 25: Pricing Decisions, including Target Costing and Transfer Pricing
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Q1) Which of the following is not one of the three commonly used methods for determining transfer prices?
A)Dictated
B)Negotiated
C)Cost-plus
D)Market
Q2) A selling division with adequate capacity to fulfill the demand of the buying division should sell to the buying division at any price that recovers incremental costs.
A)True
B)False
Q3) The gross margin pricing method computes unit selling price based on production costs rather than total costs.
A)True
B)False
Q4) The pricing method that is used primarily by service businesses is
A)return on assets pricing.
B)gross margin pricing.
C)target cost pricing.
D)time and materials pricing.
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Chapter 26: Quality Management and Measurement
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Q1) A disadvantage of SaaS is A)high acquisition costs.
B)slow implementations.
C)increased internal support staff.
D)reduced data security and internal controls.
Q2) A disadvantage of SaaS is low data security due to multiple company data co-existing on a shared web infrastructure.
A)True
B)False
Q3) The gradual and ongoing improvement of products and processes while reducing costs is known as A)TQM.
B)process mapping.
C)kaizen.
D)benchmarking.
Q4) Briefly identify the awards and organizations that promote quality in industry today.
Q5) The Deming Prize for quality originated in Japan. A)True
B)False
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Chapter 27: Accounting for Unincorporated Businesses
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Q1) Liabilities related to assets invested in a partnership by a new partner can be transferred to the partnership.
A)True
B)False
Q2) Partners' Withdrawals accounts have normal debit balances.
A)True
B)False
Q3) When a new partner invests less than the proportionate share he or she receives in the partnership,a bonus is recorded to his or her account.
A)True
B)False
Q4) Warren and Spencer are partners in a drilling operation.Warren purchased a drilling rig to be used in the partnership's operations.Is this purchase binding on Spencer even though he was not involved in it? Explain your answer.
Q5) Fred,Kristina,and Nick each receive a $14,000 salary,as well as 15 percent interest on their respective average investments of $40,000,$20,000,and $80,000.If they share remaining income in a 4:3:2 ratio,respectively,by how much would Nick's account increase assuming net income of $81,000.
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Chapter 28: Accounting for Investments
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Q1) Detailed information about a company's investments is never disclosed in the notes to the financial statements.
A)True
B)False
Q2) The equity method usually is the most appropriate method for accounting for investments of more than a 20 percent interest of another company's stock.
A)True
B)False
Q3) Which of the following is not a category of investments?
A)Held-to-maturity securities
B)Trading securities
C)Collateral securities
D)Available-for-sale securities
Q4) For available-for-sale equity securities,the Unrealized Loss on Long-Term Investments account should be reported as a(n)
A)realized loss item on the income statement.
B)prior period adjustment.
C)contra-asset on the balance sheet.
D)other comprehensive income (loss).
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