Financial Accounting
Study Guide Questions
Course Introduction
Financial Accounting is an introductory course that explores the fundamental principles and concepts of accounting as they relate to the preparation, analysis, and interpretation of financial statements. Students will learn how to systematically record, summarize, and report the financial transactions of businesses and organizations. The course covers essential topics such as the accounting cycle, accruals, inventories, receivables, assets, liabilities, and equity, as well as the regulatory environment governing financial reporting. By the end of the course, students will be equipped to analyze financial data and understand the role of accounting in informed business decision-making.
Recommended Textbook
Corporate Financial Accounting 15th Edition by Carl
S. Warren
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Chapter 1: Accounting and Business
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Sample Questions
Q1) All of the following statements regarding the ratio of liabilities to stockholders' equity are true except
A) a ratio of 1 indicates that liabilities equal stockholders' equity
B) sole proprietorships can use this ratio but substitute total owner's equity for total stockholders' equity
C) the higher this ratio, the better able a business is to withstand poor business conditions and pay creditors
D) the lower this ratio, the better able a business is to withstand poor business conditions and pay creditors
Answer: C
Q2) Ramos Repair Company is paying a cash dividend. How does this transaction affect Ramos Repair Company's accounting equation?
A) increase in assets (Accounts Receivable) and decrease in assets (Cash)
B) decrease in assets (Cash) and decrease in stockholders' equity (Dividends)
C) decrease in assets (Cash) and decrease in liabilities (Accounts Payable)
D) increase in assets (Cash) and decrease in stockholders' equity (Dividends)
Answer: B
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Page 3
Chapter 2: Double-Entry Accounting
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Sample Questions
Q1) Of the following, which is true about assets?
A) Assets include both physical and intangible items.
B) Assets include only physical items.
C) Assets are the personal property of the stockholders of the company.
D) Assets are not increased as a result of selling products or services to customers.
Answer: A
Q2) The ____ is where a transaction can first be found in the accounting records.
A) chart of accounts
B) income statement
C) balance sheet
D) journal
Answer: D
Q3) Liabilities are increased with debits and decreased with credits.
A)True
B)False
Answer: False
Q4) Prepare a journal entry for the purchase of a truck on April 4 for $85,700, paying $15,000 cash and the remainder on account. Omit explanation. Answer: 11ea84e6_b038_acca_9a63_0f528a2b1fa2_TB2281_00_TB2281_00
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Chapter 3: Adjustments: Accruals and Deferrals
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Sample Questions
Q1) Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting.
A)True
B)False
Answer: True
Q2) The matching principle requires expenses be recorded in the same period that the related revenue is recorded.
A)True
B)False
Answer: True
Q3) Which of the following pairs of accounts could not appear in the same adjusting entry?
A) Fees Earned and Unearned Fees
B) Interest Income and Interest Expense
C) Rent Expense and Prepaid Rent
D) Salaries Payable and Salaries Expense
Answer: B
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Chapter 4: The Accounting Cycle
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Sample Questions
Q1) All companies must use a calendar year as their fiscal year.
A)True
B)False
Q2) The difference between the totals of the debit and credit columns of the Adjusted Trial Balance columns on the end-of-period spreadsheet
A) is the amount of net income or loss
B) indicates there is an error on the end-of-period spreadsheet
C) is the amount of retained earnings
D) is the difference between revenue and expenses
Q3) Which one of the fixed asset accounts listed below will not have a related contra asset account?
A) Office Equipment
B) Land
C) Delivery Equipment
D) Building
Q4) An end-of-period spreadsheet includes columns for
A) adjusting entries
B) closing entries
C) reversing entries
D) adjusting and closing entries
Page 6
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Chapter 5: Accounting for Retail Businesses
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Sample Questions
Q1) When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.
A)True
B)False
Q2) Which of the following accounts carry a normal credit balance?
A) Sales Tax Payable, Cost of Goods Sold, and Sales
B) Inventory, Delivery Expense, and Sales
C) Customer Refunds Payable, Estimated Returns Inventory, and Sales
D) Sales Tax Payable, Customer Refunds Payable, and Sale
Q3) Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Revenue on the multiple-step income statement.
A)True
B)False
Q4) When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.
A)True
B)False
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Chapter 6: Inventories
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Sample Questions
Q1) FIFO is the inventory costing method that follows the physical flow of the goods.
A)True
B)False
Q2) What is the year-end inventory balance using the average cost method? Use the information provided in the table to answer this question
A) $1,380
B) $1,375
C) $1,510
D) $1,250
Q3) Assuming that the company uses the perpetual inventory system, determine the gross profit for the sale of May 23 using the FIFO inventory cost method.
A) $108
B) $120
C) $72
D) $180
Q4) A perpetual inventory system is an effective means of control over inventory.
A)True
B)False
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Chapter 7: Internal Control and Cash
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Sample Questions
Q1) Sarbanes-Oxley applies to
A) publicly held companies
B) not-for-profit organizations
C) privately held businesses
D) all of these
Q2) The bank reconciles its statement to the company's records.
A)True
B)False
Q3) The petty cash fund eliminates the need for a bank checking account.
A)True
B)False
Q4) A debit or credit memo describing entries in the company's bank account may be enclosed with the bank statement. An example of a credit memo is A) deposited checks returned for insufficient funds
B) a promissory note left for collection
C) a service charge
D) notification that a customer's check for $375 was recorded by the company as $735 on the deposit ticket
Q5) List the principal advantages of electronic funds transfers.
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Chapter 8: Receivables
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Sample Questions
Q1) At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $250. The credit sales for the period total $500,000. If the company estimates uncollectible accounts at 1% of credit sales, the amount of bad debt expense to be recorded in an adjusting entry is $4,750.
A)True
B)False
Q2) If the maker of a note fails to pay the debt on the due date, the note is said to be dishonored.
A)True
B)False
Q3) A 60-day, 9% note for $10,000, dated May 1, is received from a customer on account. The maturity value of the note is
A) $10,000
B) $10,150
C) $10,900
D) $9,100
Q4) When a note is written to settle an open account, no entry is necessary.
A)True
B)False
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Chapter 9: Long-Term Assets: Fixed and Intangible
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Sample Questions
Q1) A machine with a cost of $120,000 has an estimated residual value of $15,000 and an estimated life of 5 years or 15,000 hours. It is to be depreciated by the units-of-output method. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?
A) $5,000
B) $35,000
C) $21,000
D) $45,000
Q2) A fixed asset's estimated value at the time it is to be retired from service is called
A) book value
B) residual value
C) market value
D) carrying value
Q3) Exterior and interior painting
A)Ordinary maintenance and repairs
B)Asset improvements
C)Extraordinary repairs
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11
Chapter 10: Liabilities: Current, Installment Notes, and Contingencies
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Sample Questions
Q1) Assume that social security taxes are payable at a 6% rate and Medicare taxes are payable at a 1.5% rate with no maximum earnings, and that federal and state unemployment compensation taxes total 6.2% on the first $7,000 of earnings. If an employee earns $2,500 for the current week and the employee's year-to-date earnings before this week were $6,800, what is the total employer payroll taxes related to the current week?
A) $187.50
B) $199.90
C) $342.50
D) $12.40
Q2) Martin Jackson receives an hourly wage rate of $30, with time and a half for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to Jackson?
A) $1,470.00
B) $1,009.75
C) $1,097.95
D) $460.25
Q3) List five internal controls that relate directly to payroll.
Page 12
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Chapter 11: Liabilities: Bonds Payable
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Sample Questions
Q1) On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. Prepare entries to record the following transactions for the current fiscal year. (a) Issuance of the bonds.
(b) Second semiannual interest payment.
(c) Amortization of bond premium for the first year, using the straight-line method of amortization.
Q2) Balance sheet and income statement data indicate the following: \(\begin{array}{lrr}&\text { Company A } & \text { Company B } \\
\text { Bonds payable, } 8 \%, 24 \text {-year bonds } & \$ 1,200,000 & \$ 900,000 \\
\text { Income before income tax for year } & 495,000 & 130,000 \\
\text { Income tax for year } & 75,000 & 12,000 \\
\text { Interest payable } & 50,000 & 0 \\
\text { Interest receivable } & 21,000 & 28,000
\end{array}\) (a) For each company, what is the times interest earned ratio? (Round to one decimal place)
(b) Which company gives potential creditors more protection?
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Page 13
Chapter 12: Corporations: Organization, Stock Transactions, and Dividends
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Sample Questions
Q1) Wonder Sales is authorized to issue 100,000 shares of 2%, $100 par preferred stock and 1,000,000 shares of $10 par common stock. Journalize the following transactions.
(a) On January 2, Wonder Sales issues 5,000 shares of preferred stock for $110 per share and 65,000 shares of common stock at $10 per share.
(b) On January 25, Wonder Sales issued 250 shares of preferred stock to a Morton Law Firm for settlement of a $36,000 invoice for incorporation services.
(c) On January 31, Wonder Sales issues 500 shares of common stock to Setup Inc. for fixtures that have a fair market value of $8,500.
Q2) Characteristics of a corporation include
A) a limited lifespan
B) direct management by the shareholders (owners)
C) its inability to own property
D) shareholders who have limited liability
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Chapter 13: Statement of Cash Flows
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Sample Questions
Q1) Acquisition of treasury stock
A)Increase cash from operating activities
B)Decrease cash from operating activities
C)Increase cash from investing activities
D)Decrease cash from investing activities
E)Increase cash from financing activities
F)Decrease cash from financing activities
G)Noncash investing and financing activity
Q2) Exchange of land for note payable
A)Operating activities
B)Financing activities
C)Investing activities
D)Schedule of noncash financing and investing
Q3) Cash payments for merchandise were
A) $39,000
B) $33,000
C) $29,000
D) $23,000
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15
Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) Current position analysis is used by short-term creditors to assess how quickly they will be repaid.
A)True
B)False
Q2) The particular analytical measures chosen to analyze a company may be influenced by all of the following except
A) industry type
B) general economic environment
C) diversity of business operations
D) product quality or service effectiveness
Q3) In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets.
A)True
B)False
Q4) The excess of current assets over current liabilities is referred to as working capital. A)True
B)False
Q5) Define solvency and profitability. How are they alike?
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Chapter 15:Investments
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Sample Questions
Q1) In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments.
A)True
B)False
Q2) On May 1, Knox Inc. purchases $100,000 of 10-year, 6% Madison Corporation bonds dated March 1 at 100 plus accrued interest. What entry would Knox record when purchasing the bonds?
Q3) When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded.
A)True
B)False
Q4) As with other assets, the cost of a bond investment includes all costs related to the purchase.
A)True
B)False
Q5) Compare and contrast why companies invest cash in short-term temporary investments vs. long-term investments.
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