Foundations of Accounting Exam Answer
Key
Course Introduction
Foundations of Accounting introduces students to the basic principles and concepts of financial and managerial accounting. The course covers essential topics such as the accounting cycle, preparation and analysis of financial statements, recording and reporting business transactions, and the role of ethics in accounting. Through practical exercises and real-world examples, students will develop an understanding of how accounting information supports business decision-making and gain the fundamental skills needed for further study in accounting and related fields.
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Financial Accounting 15th Edition by Jan Williams
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2
Chapter 1: Accounting: Information for Decision Making
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Q1) A complete set of financial statements for Citywide Company, at December 31, 2009, would include each of the following, except:
A) Balance sheet as of December 31, 2009.
B) Income statement for the year ended December 31, 2009.
C) Statement of projected cash flows for 2009.
D) Notes containing additional information that is useful in interpreting the financial statements.
Answer: C
Q2) The best definition of an accounting system is:
A) Journals, ledgers, and worksheets.
B) Manual or computer-based records used in developing information about an entity for use by managers and also persons outside the organization.
C) The personnel, procedures, devices, and records used by an entity to develop accounting information and communicate this information to decision makers.
D) The concepts, principles, and standards specifying the information which should be included in financial statements, and how that information should be presented.
Answer: C
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3
Chapter 2: Basic Financial Statements
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Q1) For the month of October, net cash flows from operating activities for Waldorf were:
A) $18,500.
B) $22,500.
C) $78,000.
D) $100,500.
Answer: B
Q2) Which of the following best describes liquidity?
A) The ability to increase the value of retained earnings.
B) The ability to pay the debts of the company as they become due.
C) Being able to buy everything the company requires for cash.
D) Purchasing everything the company requires on credit.
Answer: B
Q3) An accounting entity may best be described as:
A) An individual.
B) A particular economic unit.
C) A publicly owned corporation.
D) Any corporation, regardless of size.
Answer: B
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4
Chapter 3: The Accounting Cycle: Capturing Economic Events
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Q1) Eagle News has a $6,000 account receivable from one of its advertisers, Allwood Floors. When Eagle receives $3,600 from Allwood as partial payment:
A) Eagle should debit Accounts Receivable for $3,600.
B) Eagle should credit Cash for $3,600.
C) Eagle should credit Accounts Receivable for $3,600.
D) Eagle makes no journal entry until the total of $6,000 is received from Allwood.
Answer: C
Q2) What is the balance in the Cash account at the end of May?
A) $210,000.
B) $390,000.
C) $600,000.
D) $810,000.
Answer: B
Q3) Which of the following accounts normally does not have a debit balance?
A) Dividends.
B) Wage Expense.
C) Building.
D) Capital Stock.
Answer: D
Page 5
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Chapter 4: The Accounting Cycle: Accruals and Deferrals
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Q1) Hahn Corp. has three employees. Each earns $600 per week for a five day work week ending on Friday. This month the last day of the month falls on a Wednesday. The company should make an adjusting entry:
A) Debiting Wage Expense for $1,080 and crediting Wages Payable for $1,080.
B) Debiting Wage Expense for $360 and crediting Wages Payable for $360.
C) Crediting Wage Expense for $1,080 and debiting Wages Payable for $1,080.
D) Crediting Wage Expense for $360 and debiting Wages Payable for $360.
Q2) Adjusting entries are needed:
A) Whenever revenue is not received in cash.
B) Whenever expenses are not paid in cash.
C) Only to correct errors in the initial recording of business transactions.
D) Whenever transactions affect the revenue or expenses of more than one accounting period.
Q3) Which statement is true about an adjusted trial balance?
A) It is prepared before adjusting entries.
B) Revenue accounts and expense accounts should not appear on the adjusted trial balance.
C) Balance sheet items are presented before income statement items.
D) Accumulated depreciation should equal depreciation expense.
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Page 6
Chapter 5: The Accounting Cycle: Reporting Financial Results
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Q1) Which of the following accounts will be closed to Income Summary?
A) Prepaid Expenses.
B) Unearned Revenue.
C) Dividends.
D) Earned Revenue.
Q2) Refer to the information above. The total debits in the After-Closing Trial Balance will equal:
A) $25,375.
B) $29,125.
C) $40,875.
D) $18,125.
Q3) If current assets are $180,000 and current liabilities are $130,000, the current ratio will be:
A) 72%.
B) $50,000.
C) 1.4.
D) $310,000.
Q4) Publicly owned companies are typically managed by their stockholders. A)True B)False
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Chapter 6: Merchandising Activities
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Sample Questions
Q1) The basic purpose of a subsidiary ledger is to:
A) Provide a chronological record of all business transactions.
B) Provide details about the individual items comprising the balance of a general ledger account.
C) Enable accountants to prepare financial statements.
D) Provide persons outside of the organization with detailed information about the company's operations.
Q2) All of the following accounts normally have debit balances except:
A) Transportation-in.
B) Cost of Goods Sold.
C) Sales Returns & Allowances.
D) Purchase Returns & Allowances.
Q3) In a periodic inventory system, the Cost of Goods Sold account may be created during the closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the Purchases account.
A)True
B)False
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Page 8
Chapter 7: Financial Assets
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Q1) Which of the following actions is least likely to increase a company's accounts receivable turnover?
A) Encouraging customers to use bank credit cards, such as Visa and MasterCard, rather than other national credit cards, such as American Express.
B) Offer customers larger cash discounts for making early payments.
C) Borrowing money, pledging accounts receivable as collateral.
D) Sell accounts receivable to a factor.
Q2) Which of the following activities affects net income, but has no immediate impact upon cash flows?
A) Collection of an account receivable.
B) Making the end-of-period adjustment to record estimated uncollectible accounts.
C) Investing excess cash in marketable securities.
D) Write-off of an uncollectible account receivable against the allowance.
Q3) The term "financial asset" is synonymous with the term "cash equivalent."
A)True
B)False
Q4) What is the adjusted cash balance in the September 30 bank reconciliation?
Q5) What is the amount of the deposit in transit?
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Chapter 8: Inventories and the Cost of Goods Sold
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Q1) Some companies that use a perpetual inventory system and the LIFO flow assumption restate their inventories at year-end to the amount indicated by periodic LIFO costing procedures. The primary reason for this adjustment is that:
A) Periodic LIFO often results in a higher valuation of inventory, thus reducing taxable income.
B) This adjustment is necessary to record shrinkage losses.
C) Periodic LIFO often results in a lower valuation of inventory, thus reducing taxable income.
D) Periodic and perpetual costing procedures produce the same results if the year-end inventory has been counted properly. No adjustment would be needed.
Q2) Compute the cost of the ending inventory based on the FIFO method of inventory valuation.
A) $12,500.
B) $29,175.
C) $10,975.
D) $27,650.
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Chapter 9: Plant and Intangible Assets
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Q1) Cranston Instrumentation sold a depreciable asset for cash of $150,000. The original cost of the asset was $600,000. Cranston recognized a gain of $22,500 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale?
A) $472,500.
B) $127,500.
C) $577,500.
D) $495,000.
Q2) Sales tax on equipment is not part of the acquisition cost and should not be capitalized.
A)True
B)False
Q3) For the financial statements of publicly traded companies, MACRS:
A) Is recommended.
B) Is required.
C) Is optional.
D) Is not considered to be in conformity with GAAP.
Q4) Compute to the nearest full month depreciation for the fractional period from January 1, 2009 to May 31 of 2009. $______________
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Page 11
Chapter 10: Liabilities
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Q1) Each of the following must be disclosed in the financial statements, except:
A) The total amounts of long-term debt maturing in each of the next five years.
B) The company's debt ratio and interest coverage ratio for the current year.
C) Loss contingencies, when a reasonable possibility exists that a material loss has been incurred.
D) The fair value of long-term liabilities, when this value is significantly different from the amount shown in the balance sheet.
Q2) An operating lease:
A) Creates an asset and a liability on the balance sheet.
B) Is a form of off-balance sheet financing.
C) Is always preferable to a capital lease.
D) Transfers title to the asset being leased.
Q3) A bond that is not secured is also known as:
A) A sinking fund.
B) A mortgage.
C) A debenture.
D) A junk bond.
Q4) Loss contingencies stem from past events.
A)True
B)False
Page 12
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Chapter 11: Stockholders Equity: Paid-In Capital
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Q1) Which of the following best describes the relationship between revenue and retained earnings?
A) Revenue increases net income, which in turn increases retained earnings.
B) Revenue represents a cash receipt; retained earnings is an element of stockholders' equity.
C) Revenue represents the price of goods sold or services rendered; retained earnings represents cash available for paying dividends.
D) Retained earnings is equal to assets minus expenses.
Q2) Treasury stock represents:
A) Shares of ownership in the United States Treasury Department.
B) A current asset.
C) Authorized shares that have never been issued.
D) Previously outstanding shares that have been repurchased by the issuing company.
Q3) The purchase of treasury stock for cash will:
A) Increase stockholders' equity.
B) Not increase nor decrease stockholders' equity.
C) Decrease stockholders' equity.
D) Not change total assets.
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Chapter 12: Income and Changes in Retained Earnings
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Q1) A stock split changes the par value of a stock, whereas a stock dividend does not.
A)True
B)False
Q2) Dividends are first recorded and retained earnings are reduced on:
A) The ex-dividend date.
B) The date of record.
C) The date of declaration.
D) The date of payment.
Q3) Doogle Corporation sold a segment of its operations in 2009 and suffered an extraordinary loss in 2010. Which of the following would be the most useful in attempting to predict Doogle's performance for 2011?
A) Doogle's income from continuing operations in 2009 and 2010.
B) Doogle's net income in 2009 and 2010.
C) Doogle's total assets at the end of 2010.
D) Doogle's retained earnings at the end of 2010.
Q4) Comprehensive income is a component of net income.
A)True
B)False
Q5) What was the average issue price per share of preferred stock?
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Chapter 13: Statement of Cash Flows
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Q1) Under the indirect method, depreciation, increase in inventories, and "non-operating" losses are added to net income to arrive at net cash flow from operating activities.
A)True
B)False
Q2) Which of the following indicates cash receipts?
A) Debit entries in the Notes Receivable account.
B) Credit entries in the Marketable Securities account.
C) Debit entries in the Notes Payable account.
D) Credit entries in the Accumulated Depreciation account.
Q3) Which of the following indicates a cash receipt?
A) A decrease in accrued expenses, such as wages payable.
B) A decrease in accounts receivable.
C) An increase in inventory.
D) A decrease in accounts payable.
Q4) Which of the following is an investing activity?
A) Purchase of equipment.
B) Payment of interest.
C) Issuing common stock.
D) Issuing long-term debt.
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) Quick assets include which of the following?
A) Cash, marketable securities, and receivables.
B) Cash, marketable securities, and inventories.
C) Cash, inventories, and receivables.
D) Market securities, receivables, and inventories.
Q2) During the years 2009 through 2011, Powers, Inc., reported the following amounts of net income (dollars in thousands): Relative to the prior year, the percentage change in net income:
A) Was the same in 2010 and 2011.
B) Was larger in 2011 than in 2010.
C) Was smaller in 2011 than in 2010.
D) Cannot be determined without knowing how many shares of stock were outstanding.
Q3) ROI: What and why?
In general terms, what do all "ROI" ratios measure? Why are such computations useful?
Q4) A company cannot be increasing its market share if its net sales are declining.
A)True B)False
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Chapter 15: Global Business and Accounting
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Q1) A U. S. public corporation's decision to globalize impacts all of following except:
A) Internal procedures.
B) Who owns stock in the company.
C) Production processes.
D) Accounting outputs.
Q2) Hedging refers to the strategy of taking offsetting positions so that gains in one currency offset losses in another currency.
A)True
B)False
Q3) The Foreign Corrupt Practices Act distinguishes between influence peddling and facilitating payments. Peddling is prohibited, while facilitating payments are allowed.
A)True
B)False
Q4) Whenever an American corporation sells merchandise to a foreign company, the transaction must be stipulated in U.S. dollars.
A)True
B)False
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Chapter 16: The Time Value of Money
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Q1) If you receive $20,000 as a gift and invest it at 12% compounded quarterly, how much will you have at the end of three years?
A) $32,020.60.
B) $28,515.20.
C) $22,497.20.
D) $14,027.60.
Q2) The market price of a bond is equal to its present value.
A)True
B)False
Q3) The present value of an annuity is calculated by multiplying the periodic cash flows by the discounted factor from the future value of an annuity table.
A)True
B)False
Q4) As the discount rate required by an investor increases, the present value of an investment decreases.
A)True
B)False
Q5) Explain what is meant by the "time value of money." Provide examples.
Q6) Explain how compound interest applies to the time value of money.
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