Financial Reporting
Pre-Test Questions
Course Introduction
Financial Reporting is a comprehensive course designed to introduce students to the principles and practices of preparing, analyzing, and interpreting financial statements. The course covers the conceptual framework underpinning financial reporting, including the recognition, measurement, and disclosure of assets, liabilities, equity, revenues, and expenses in accordance with international and national accounting standards. Students will gain an understanding of how transactions are recorded and how financial information is communicated to stakeholders such as investors, creditors, and regulators. Emphasis is placed on ethical considerations, regulatory environments, the use of financial reports in decision-making, and the impact of recent developments on reporting practices.
Recommended Textbook
Horngrens Financial Accounting 8th Edition by Tracie Nobles
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Chapter 1: The Role of Accounting in Decision Making
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Q1) A proprietor has unlimited liability for the debts and obligations of the proprietorship.
A)True
B)False Answer: True
Q2) Which of the following financial statements shows the changes in Owners' equity during a period of time?
A)Balance sheet
B)Statement of changes in equity
C)Cash flow statement
D)Income statement Answer: B
Q3) Outside investors would ordinarily use financial accounting information to decide whether or not to invest in a business.
A)True
B)False Answer: True
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Chapter 2: Recording Business Transactions
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Q1) Accountants first record transactions in the:
A)trial balance.
B)journal.
C)ledger.
D)chart of accounts.
Answer: B
Q2) For Accounts payable,the category of account and its normal balance are:
A)Assets and a credit balance.
B)Liabilities and a credit balance.
C)Owners' equity and a credit balance.
D)Assets and a debit balance.
Answer: B
Q3) When a business makes a cash payment,the Cash account is always debited.
A)True
B)False
Answer: False
Q4) When a business collects cash,the Cash account is debited.
A)True
B)False
Answer: True
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Chapter 3: The Adjusting Process
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Q1) To accrue revenue means that the cash receipt is recorded before the revenue is earned.
A)True
B)False
Answer: False
Q2) Healthy Living,a diet magazine,collected $1,440,000 in subscription revenue on 31 May.Healthy Living earns a minimum of $1,080,000 from the buyers who are not the subscribers.Each subscriber will receive an issue of the magazine for each of the next 12 months,beginning with the June issue.The company uses the accrual method of accounting.By the end of December,what is the amount of Subscription revenue that has been earned?
A)$1,080,000
B)$840,000
C)$600,000
D)$1,440,000
Answer: B
Q3) Prepaid insurance is an asset account.
A)True
B)False
Answer: True
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Chapter 4: Completing the Accounting Cycle
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Q1) The post-closing trial balance shows the updated Capital balance.
A)True
B)False
Q2) Which of the following does the debt ratio measure?
A)The proportion of the company's assets that are financed with equity
B)The company's ability to invest in growth
C)The company's overall ability to pay its liabilities
D)The company's ability to pay current liabilities with current assets
Q3) The post-closing trial balance is an optional step.
A)True
B)False
Q4) Which of the following do NOT show up on a post-closing trial balance?
A)Capital and liabilities
B)Assets and liabilities
C)Capital and assets
D)Revenues and expenses
Q5) The worksheet is NOT a journal,a ledger or a financial statement.
A)True
B)False
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Chapter 5: Retailing Operations
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Q1) Smith Company has a low number of days in inventory.This indicates that:
A)their inventory sales are producing low profits.
B)their inventory is turning over rapidly.
C)the cost of inventory is very high.
D)the firm has a low Gross profit percentage.
Q2) The ATO will refund any GST a registered firm pays to a supplier.
A)True
B)False
Q3) A company purchased inventory for $2000 from a vendor on credit,FOB shipping point,with terms of2/10,n/30.The company paid the shipper $100 cash for freight in.The company then returned damaged goods worth $200.The invoice has been paid 8 days after the sale.Assuming that there was no beginning inventory balance,the cost of inventory would be: (Assume a perpetual inventory system. )
A)$1864.
B)$1900.
C)$1960.
D)$1764.
Q4) GST is a flat percentage charge levied on the supply of goods and services.
A)True
B)False
Page 7
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Chapter 6: Retail Inventory
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Q1) Rubal Ltd earned revenue of $600,000 and incurred cost of sales of $340,000.Calculate the gross profit percentage.
A)21.65%
B)56.7%
C)100%
D)43.3%
Q2) A company decides to ignore a very small error in its inventory balance.This is an example of which of the following principles?
A)Relevance principle
B)Comparability principle
C)Materiality concept
D)Accounting conservatism
Q3) A company discovers that its Cost of sales is understated by an insignificant amount.They do NOT need to correct the error because of the conservatism principle.
A)True
B)False
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Chapter 7: Accounting Information Systems
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Q1) Which of the following is not a feature of an ERP system?
A)It feeds data into software for all firm activities.
B)It requires little staff training.
C)The impact of changes in one part of the organisation is automatically reflected elsewhere.
D)Separate systems for payroll and sales may be unnecessary.
Q2) The chart of accounts lists all the accounts and their account numbers.
A)True
B)False
Q3) Horn Music has recently decided to add harpsichords to its musical instrument product line.The accounting information system feature that would allow this change to be handled efficiently is:
A)compatibility.
B)flexibility.
C)control.
D)favourable cost-benefit relationship.
Q4) Design of an accounting information system begins with a trial balance.
A)True B)False
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Chapter 8: Internal Control and Cash
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Q1) In a bank reconciliation,a dishonoured cheque will be shown on the bank side of the reconciliation.
A)True
B)False
Q2) A company has a petty cash fund amount of $300.When replenished,it has petty cash slips of $30 for petrol expense,$30 for postage expense,$13 for supplies expense and $10 for miscellaneous expenses.Assume the cash balance is not over or short.In the journal entry,Cash would be credited with:
A)$73
B)$70
C)$60
D)$83
Q3) Cheque number 6135 for $576 was incorrectly entered as $657.Which adjustment needs to be made?
A)Decrease the book balance.
B)Increase the bank statement balance.
C)Decrease the bank statement balance.
D)Increase the book balance.
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Chapter 9: Receivables
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Q1) The following information is from the records of Armadillo Camera Shop: \(\begin{array}{|l|l|}
\hline \text { Accounts receivable, } 31 \text { December } 2016 & \$ 85,000 \text { (debit) } \\
\hline \text { Net credit sales for } 2016 & 160,000 \\
\hline \text { Accounts written off as uncollectable during 2016 } & 15,000 \\
\hline \text { Cash sales during 2016 } & 41,000 \\
\hline \end{array}\) The company uses the direct write-off method for bad debts.What is the amount of bad debts expense?
A)$15,000
B)$85,000
C)$60,000
D)$41,000
Q2) The accounts receivable turnover ratio measures:
A)how many days it takes,on average,to sell the inventory.
B)how well a company can pay its current liabilities with its current assets.
C)how many days it takes,on average,to collect receivables.
D)the number of times per year a company sells goods and collects receivables.
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Chapter 10: Non-Current Assets: Property, Plant and Equipment, and Intangibles
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Q1) Steel Rolling Company purchased a mine on 1 January 2016 for $529,000 and it is estimated to contain 37,000 tonnes of iron ore.There is no residual value.The company extracted 8500 tonnes of ore in 2016 and 12,800 tonnes of ore in 2017.What is depletion expense for 2017? (Do not round your intermediate calculations. )
A)$183,005
B)$143,527
C)$153,005
D)$122,527
Q2) Iverycoast Ltd purchased a van on 1 January 2016 for $840,000.Estimated life of the van was five years,and its estimated residual value was $91,000.Iverycoast uses the straight-line method of depreciation.At the beginning of 2018,the company revised the total estimated life of the asset from five years to six years.The estimated residual value remained the same as estimated earlier.Calculate the depreciation expense for the year 2018.
A)$112,350
B)$152,250
C)$115,500
D)$149,800
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Chapter 11: Current Liabilities and Payroll
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Q1) Bike World offers warranties on all their bikes.They estimate warranty expense at 5.5% of sales.At the beginning of 2016,the Estimated warranty payable account had a credit balance of $2000.During the year,Bike World had $296,000 of sales,and had to pay out $5400 in warranty payments.How much Warranty expense will be reported on the 2016 income statement?
A)$7400
B)$14,280
C)$12,880
D)$16,280
Q2) Which of the following is included in the entry to record warranty expense?
A)A credit to Inventory
B)A credit to Warranty expense
C)A debit to Warranty expense
D)A debit to Estimated warranty payable
Q3) Which of the following principles requires that warranty expense be recorded in the period that revenue is recorded?
A)Consistency principle
B)Matching principle
C)Materiality concept
D)Profit recognition principle
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Chapter 12: Non-Current Liabilities, Debentures Payable
and Classification of Liabilities on the Balance Sheet
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Q1) On 1 November 2016,Archangel Services issued $332,000 of 8-year debentures with a stated rate of 11% at par.The debentures make semiannual payments on 30 April and 31 October.At 31 December 2016,Archangel made an adjusting entry to accrue interest at year-end.How much Interest expense will be recorded at 31 December 2016? (Round to the nearest dollar. )
A)$6087
B)$36,520
C)$761
D)$18,260
Q2) On 1 March 2017,Vinnie Services issued a 5% long-term note payable for $18,000.It is payable over a 3-year term in $6000 principal instalments on 1 March of each year,beginning 1 March 2018.Each yearly instalment will include both principal repayment of $6000 and interest payment for the preceding one-year period.What is the amount of total cash payment that the Vinnie will make on 1 March 2018?
A)$6900
B)$6450
C)$6000
D)$18,000
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Chapter 13: Partnerships
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Q1) The key difference between a partnership income statement and a standard business income statement is that the partnership income statement:
A)is split into separate columns,one for each partner.
B)does not show sales revenues.
C)shows the distribution of profit/(loss)to each partner below the profit/(loss)line.
D)shows the division of each expense into partners' respective interests.
Q2) Arlene Dominic is a partner in a partnership,and at 1 July 2017,her capital balance was $42 000.On the same day,she made withdrawals of $4 000 from the partnership.What entry is made on the partnership books?
A)Debit A.Dominic,capital;credit Cash
B)Debit Cash;credit A.Dominic,drawings
C)Debit A.Dominic,drawings;credit Cash
D)Debit Cash;credit A.Dominic,capital
Q3) When one partner leaves the partnership for any reason,the old partnership ceases to exist.
A)True
B)False
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Chapter 14: Companies: Formation and Shareholders
Equity
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Q1) Which of the following is the amount guaranteed to preference shareholders in the event the company goes out of business?
A)Book value
B)Market value
C)Amortised value
D)Liquidation value
Q2) Which of the following factors may cause a difference between book profit and taxable income?
A)The company has a deposit in transit at year-end.
B)The company sells shares right before the end of the year.
C)The company uses straight-line depreciation for books and accelerated depreciation for tax.
D)The company pays its federal income taxes quarterly as opposed to annually.
Q3) Which of the following is NOT part of the role of the board of directors?
A)electing a chairperson
B)appointing the chief executive officer
C)setting company policy
D)electing non-executive board members
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Chapter 15: Companies: Capital Management and the
Income Statement
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Q1) Which of the following BEST describes the appropriation of retained earnings?
A)Restricting cash dividends or share buy-backs so that the company maintains adequate levels of equity
B)Limiting company transactions in order to boost earnings and profits
C)Designating certain amounts of retained earnings for cash dividends to be paid out to shareholders
D)Earmarking certain amounts for specific business purposes,such as for growth or expansion projects
Q2) Which of the following best describes discontinued operations on the income statement?
A)The gains and losses from transactions that are not part of the normal operations of the business
B)The profit or loss generated from the normal operations of the business
C)The profit or loss from segments of the business that have been sold or terminated
D)The profit or loss generated from unusual or infrequent events
Q3) A share buy-back requires a credit to the Ordinary share capital account.
A)True
B)False
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Chapter 16: The Cash Flow Statement
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Q1) Which of the following is NOT a cash outflow from an operating activity?
A)Payment of interest on a loan
B)Payment for purchasing inventory
C)Payments to the government for taxes
D)Payment of dividends
Q2) For purposes of the cash flow statement,cash includes cash on hand,cash in the bank and cash equivalents.
A)True
B)False
Q3) In creating a cash flow statement using the indirect method,which of the following statements is TRUE about depreciation expense?
A)It is added back to purchases of non-current assets under investing activities.
B)It is added back as an adjustment to profit in the operating activities section.
C)It is shown as a negative cash flow under operating activities.
D)It is shown as a negative cash flow in the investing activities section.
Q4) Cash equivalents are assets that can be converted to cash within one year.
A)True
B)False
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Chapter 17: The Framework of Accounting
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Q1) The objective of financial reporting is to provide useful information to investors,creditors and others to aid in making and evaluating decisions about the allocation of scarce resources.
A)True
B)False
Q2) All of the following accounting practices are examples of conservatism,except:
A)completed contract method.
B)lower-of-cost-and-net-realisable-value inventory method.
C)accelerated depreciation.
D)FIFO method when prices are increasing.
Q3) A business decides to expense the cost of minor repair tools rather than capitalise them.This is an example of which principle?
A)materiality
B)understandability
C)relevance
D)matching
Q4) In most businesses,profit is recognised at the point of sale.
A)True
B)False
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Chapter 18: Financial Statement Analysis
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Q1) What kind of information does the dividend payout ratio provide?
A)How much profit each shareholder makes when he sells his shares
B)What proportion of a share's earnings are paid out in dividends
C)How much the dividend is in proportion to the share's market price
D)How much dividend revenue a company earns on its short-term investments
Q2) What kind of information does a company's asset turnover ratio provide?
A)How well a company collects cash from its customers
B)The amount of net sales generated by each dollar of assets invested
C)How often a company acquires new assets
D)What proportion of each dollar of sales revenue generates profit
Q3) Investors and creditors generally evaluate a company by using one year's data.
A)True
B)False
Q4) Common-size statements allow the comparison of two or more companies with different amounts of net sales and assets.
A)True
B)False
Q5) A common-size statement reports only percentages-no dollar amounts.
A)True
B)False
Page 20
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