Introduction to Financial Accounting Study Guide Questions
Course Introduction
Introduction to Financial Accounting provides students with a comprehensive overview of the fundamental concepts and principles underlying the preparation and analysis of financial statements. The course covers the accounting cycle, including journal entries, ledgers, trial balances, and the creation of income statements, balance sheets, and cash flow statements. Emphasis is placed on understanding how financial information is recorded, classified, and reported for external users such as investors, creditors, and regulatory agencies. Students will also learn about the ethical considerations and regulatory environment affecting accounting practices, equipping them with the foundational skills necessary for further study in accounting and finance.
Recommended Textbook Cornerstones of Financial Accounting 3rd Edition by Jay Rich
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Chapter 1: Accounting and the Financial Statements
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Q1) Bennett Motors is facing the following business decisions. Which decision will least likely require financial information?
A)A local bank is reviewing the company's loan application.
B)The company is attempting to sell its stock to the public.
C)The labor union representing the company's employees is negotiating a pay raise as part of a new labor agreement.
D)The company's management is deciding whether to detail its vehicles today or tomorrow.
Answer: D
Q2) Section in the annual report that highlights favorable or unfavorable trends and significant risks facing the company
Answer: D
Q3) Contributed capital is the residual interest that remains after deducting liabilities from stockholders' equity.
A)True
B)False
Answer: False
Q4) An accounting period that may or may not cover January 1 - December 31
Answer: B
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Chapter 2: The Accounting Information System
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Q1) A company provided services to customers then sent them invoices for the amounts owed. What effect does this transaction have on the accounting equation?
A)Assets and liabilities increase.
B)Assets and retained earnings increase.
C)Liabilities decrease and contributed capital increases.
D)Assets and liabilities decrease.
Answer: B
Q2) The ___________________ is a chronological record of all transactions entered into by a business.
Answer: journal
Q3) If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of
A)comparability.
B)consistency.
C)neutrality.
D)materiality.
Answer: A
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Chapter 3: Accrual Accounting
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Q1) Once adjustments have been made, an ____________________ is prepared to ensure the accounting equation is still in balance and to facilitate preparation of the financial statements.
Answer: adjusted trial balance
Q2) According to the revenue recognition principle, revenues are recognized when they are ____________________ and ____________________.
Answer: earned, collection reasonably assured collection reasonably assured, earned
Q3) The cost of salaries earned by employees, but not paid at the end of the accounting period, is recorded
Answer: C
Q4) During the closing process, revenues, expenses, and dividends must be closed to the Income Summary account.
A)True
B)False Answer: False
Q5) An office building was acquired for cash Answer: A
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Chapter 4: Internal Control and Cash
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Q1) Collective term for procedures put into place to ensure that employees operate within the scope of their assigned responsibilities and act for the good of the business
Q2) Which of the following statements is false regarding a credit memo and its relationship to a company's bank reconciliation procedures?
A)It must be recorded as a credit to the balance per the customer's records.
B)It is issued to notify a company of interest earned which needs to be recorded on the company's records.
C)It is issued when the bank collects a note on behalf of the company.
D)It must be recorded as a debit to the balance per the company's records.
Q3) Petty Cash is NOT considered to be a cash equivalent. A)True B)False
Q4) Bank service charge on the bank statement for new checks
Q5) Explain some internal control procedures that a fast food restaurant like McDonald's may use to control cash receipts.
Q6) In a sound system of internal control, cash receipts should be deposited daily. A)True B)False
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Chapter 5: Sales and Receivables
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Q1) A company had beginning accounts receivable of $175,000. All sales were on account and totaled $550,000. Cash collected from customers totaled $650,000. Calculate the ending accounts receivable balance.
A)$725,000
B)$275,000
C)$ 75,000
D)$175,000
Q2) Refer to Absolute Appliances. What is the maturity date of the note?
A)December 31, 2013
B)January 31, 2014
C)February 28, 2014
D)March 1, 2014
Q3) Refer to Academy Grill Supply. If the company's year ends December 31, 2013, an adjusting entry is needed to
A)increase interest revenue by $2,250.
B)increase notes receivable by $750.
C)increase interest receivable by $750.
D)increase notes receivable by $2,250.
Q4) The amount of cash the maker is to pay the payee on the maturity date of the note
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Chapter 6: Cost of Goods Sold and Inventory
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Q1) Companies that maintain three separate inventory accounts.
Q2) Refer to the information provided for Lemke Corp. How much is the cost of goods sold for the units sold on April 15th?
A)$245
B)$255
C)$260
D)$270
Q3) When a company using LIFO experiences a partial or complete liquidation of its older, lower-priced inventory, its gross margin will be ____________________ for the period.
Q4) Under a perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue.
A)True
B)False
Q5) Costs to purchase goods ready to sell.
Q6) Sales discounts decrease the cost of inventory acquired. A)True B)False
Q7) Companies such as Macy's and Target.
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Chapter 7: Operating Assets
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Q1) Refer to Fabian Woodworks. If the company uses the straight-line method of depreciation, what is the book value at December 31, 2014?
A)$ 8,000
B)$ 6,000
C)$10,000
D)$ 4,000
Q2) "You Decide" Essay
You are an entrepreneur with a great idea for a new business. In order to obtain financing, the loan officer at First Second Third National Bank has requested a budgeted set of financial statements. An accountant friend of yours has mentioned that there are several options associated with plant assets that are available to help you improve your budgeted income.Describe several decisions concerning property, plant, and equipment that have an impact on reported net income. Are there any ethical concerns in this area?
Q3) Any expenditure necessary to acquire an asset and to prepare it for use
Q4) Costs incurred to keep plant assets in normal operating condition are called revenue expenditures.
A)True
B)False
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Chapter 8: Current and Contingent Liabilities
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Q1) Which of the following statements regarding accounts payable is false?
A)Accounting for accounts payable is really just the flip side of accounts receivable.
B)Accounts payable arise when a business purchases goods or services on credit.
C)Accounts payable arise when a business promises to purchase goods or services in the future.
D)Accounts payable seldom require the payment of interest.
Q2) Obligations that require the firm to pay cash or another current asset within one year
Q3) Refer to Georgia's Salon. On May 31, 2013, all but $1,500 of the gift cards had been redeemed for salon services. Which of the following is the correct journal entry to record for the expired gift cards?
A)Unearned Sales Revenue 1,500 Accounts Payable 1,500
B)Unearned Sales Revenue 1,500 Sales Revenue 1,500
C)Loss on Gift Cards 1,500 Sales Revenue 1,500
D)No entry is necessary.
Q4) An example of a current liability is a note payable that is due in 8 months.
A)True
B)False
Q5) Taxes paid to the government by both employees and employers
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Chapter 9: Long-Term Liabilities
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Q1) The effective interest rate method will record amortization of a bond discount or premium in a manner that produces a constant rate of interest expense from period to period.
A)True
B)False
Q2) Although operating leases are not recorded on the balance sheet by the lessee, they are disclosed in the ____________________.
Q3) Knox Jewelers issued $1,000,000 of 8% interest bearing debt at the beginning of the year. The company reported net income before interest and taxes of $2,000,000 for the current year. Assuming a 40% tax rate, what is the company's net income for the year?
Q4) A company issued $10,000,000 of bonds. Assuming the most common denomination of bonds, the number of bonds sold was A)10,000.
B)100,000.
C)1,000,000.
D)10,000,000.
Q5) Refer to Kids R Kids Company. The interest coverage (accrual basis)ratio at December 31, 2013, is:
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Chapter 10: Stockholders Equity
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Sample Questions
Q1) When a corporation issues a stock dividend, which of the following is true?
A)Cash decreases.
B)Total stockholders' equity remains the same.
C)Total stockholders' equity decreases.
D)Retained earnings is increased.
Q2) What types of accounts are Treasury Stock and Paid-in Capital from Treasury Stock Transactions? Treasury Stock Paid-in Capital from Treasury Stock Transactions
A)contra equity stockholders' equity
B)contra equity contra equity
C)stockholders' equity stockholders' equity
D)retained earnings retained earnings
Q3) When a corporation declares a cash dividend, which of the following is true?
A)cash decreases
B)liabilities decrease
C)stockholders' equity decreases
D)no entry is necessary
Q4) Identify and describe the four primary rights for the owners of common stock.
Q5) The maximum number of shares the corporation may issue in each class of stock.
Q6) The number of shares sold to stockholders are ____________________ shares.
Q7) The arbitrary amount that establishes a minimum issue price for the stock.
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Chapter 11: The Statement of Cash Flows
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Q1) When using the indirect method to determine operating cash flows, how is the receipt of cash from the sale of long-term investments treated on the statement of cash flows?
A)operating activity
B)investing activity
C)financing activity
D)noncash investing or financing activity
E)not reported on the statement of cash flows
Q2) The statement of cash flows helps users understand the reasons for the differences between net income and related cash receipts and payments.
A)True
B)False
Q3) Determines operating cash flow which begins with net income and then adjusts it for noncash items.
Q4) Refer to Merry Maids Company. At the end of each year, the company's cash balance was approximately $5 to $7 million. What does this indicate about its cash management techniques?
Q5) Repaid a long-term bonds payable.
Q6) Declared cash dividends.
13
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Chapter 12: Financial Statement Analysis
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Q1) Current liabilities
Q2) The relationship between net sales and total assets.
Q3) Each of the following is included in the MD&A section of a public company's Form 10-K except
A)Material trends, events, or known uncertainties.
B)Statements about what management expects to occur in the future.
C)Management's views of the financial condition and performance of the company.
D)Names and experience of the company's managers, directors, and officers.
Q4) A measure of a company's success in earning a return for the common stockholders.
Q5) Refer to Rags to Riches. Which of the following would result from a horizontal analysis of the company's income statement?
A)Cost of goods sold is 42.1% of net sales for 2015.
B)Gross profit is 57.9% of net sales for 2015.
C)Cost of goods sold decreased 23.8% from 2014 to 2015.
D)Inventory decreased $4,000 or 20% during 2014.
Q6) Form that represents the company's annual report by providing a comprehensive overview of the corporation's business and financial condition, including audited financial statements.
Q7) What are some weaknesses of performing time series analysis alone?
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Chapter 13: Investments
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Q1) If the parent owns 90% of the subsidiary's stock, then 90% of the subsidiary's assets and liabilities are included in the consolidated balance sheet.
A)True
B)False
Q2) If the investor holds 50% or more of the common stock of the investee, then the investor is referred to as the ____________________ and the investee is referred to as the ____________________.
Q3) Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity
Q4) A passive investment is one in which the owner
A)is not attempting to exert influence over the company.
B)owns between 15-25% of the company's outstanding stock.
C)uses the equity method of accounting for the investment.
D)is gradually attempting to gain control over the company.
Q5) Ownership in a corporation is represented by shares of common or preferred stock called ____________________ securities.
Q6) Exists when another entity owes the security holder some combination of interest and principal
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Chapter 14: Time Value of Money
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Q1) Julie expects to receive payments of $1,200 at the end of the year for the next 3 years. Assuming Julie invests the payments into an account earning 8%, how much will she have at the end of the 3 years?
A)$3,985.68
B)$3,600.00
C)$10,670.81
D)$3,092.52
Q2) Jay has made a deal with his daughter to start a car fund for when she graduates college in 6 years. He has found an investment that will yield an interest rate of 8% per year. If he wants to have $25,000 to spend on the car for his daughter, how much must he initially invest?
A)$15,754.28
B)$16,113.45
C)$13,772.55
D)$14,038.95
Q3) The first cash flow in the future value of an annuity occurs when?
A)At the start of the first period.
B)At the maturity date of the loan.
C)When interest is collected.
D)At the end of the first period.
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