Introduction to Financial Accounting Exam Preparation Guide

Course Introduction

Introduction to Financial Accounting provides students with a comprehensive overview of the fundamental principles and concepts underlying the preparation, interpretation, and use of financial statements. The course covers essential topics such as the accounting cycle, recording business transactions, adjusting entries, and the preparation of key financial reports including the balance sheet, income statement, and statement of cash flows. Emphasis is placed on understanding generally accepted accounting principles (GAAP), analyzing financial information for decision-making, and the ethical responsibilities of accountants. This foundational course equips students with the critical skills needed to comprehend and utilize accounting information in both academic and professional settings.

Recommended Textbook

Fundamental Financial Accounting Concepts 10th Edition by Thomas P Edmonds

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Page 2

Chapter 1: An Introduction to Accounting

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Q1) An asset source transaction increases a business's assets and the claims to assets.

A)True

B)False

Answer: True

Q2) The Heritage Company is a manufacturer of office furniture.Which term best describes Heritage's role in society?

A)Conversion agent

B)Regulatory agency

C)Consumer

D)Resource owner

Answer: A

Q3) International accounting standards are formulated by the IASB.What does that acronym stand for?

A)Internationally Accepted Standards Board

B)International Accounting Standards Board

C)International Accountability Standards Bureau

D)International Accounting and Sustainability Board

Answer: B

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Chapter 2: Accounting for Accruals and Deferrals

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Q1) Which of the following types of accounts is not closed at the end of an accounting cycle?

A)Revenues

B)Retained earnings

C)Dividends

D)Expenses

Answer: B

Q2) The Sarbanes-Oxley Act includes several significant reforms that affect the auditing profession,but it did not reduce an audit firm's ability to provide non-audit services to its audit clients.

A)True

B)False

Answer: False

Q3) Which of the following is not an element of the fraud triangle?

A)Reliance

B)Rationalization

C)Opportunity

D)Pressure

Answer: A

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Page 4

Chapter 3: The Double-Entry Accounting System

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Q1) During a company's first year of operations,the asset account,Office Supplies,was debited for $2,300 for the purchases of supplies.At year-end,a physical count of the supplies on hand revealed that $825 of unused supplies were available for future use.How will the related adjusting entry affect the company's financial statements?

A)Expenses will increase and assets will decrease by $1,475.

B)Assets and expenses will both increase by $825.

C)Expenses and assets will both increase by $1,475.

D)The related adjusting entry has no effect on net income or the accounting equation. Answer: A

Q2) The general journal is a list of a business's accounts and their account numbers. A)True

B)False Answer: False

Q3) The T-account format is also called the chart of accounts. A)True

B)False Answer: False

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Chapter 4: Accounting for Merchandising Businesses

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Q1) The term FOB shipping point indicates that the seller is responsible for freight costs.

A)True

B)False

Q2) Vargas Company sold a piece of land for $39,000 that had originally cost $32,500.How does this business event affect the company's financial statements?

A)An increase in cash flows from investing activities by $39,000.

B)No effect on operating income.

C)An increase in net income by $6,500.

D)All of these answer choices are correct.

Q3) Which of the following retailers would be expected to have the highest gross margin percentage?

A)Kmart

B)Neiman Marcus

C)Walmart

D)A supermarket chain such as Safeway

Q4) Net income is not affected by a purchase of merchandise.

A)True

B)False

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Chapter 5: Accounting for Inventories

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Q1) During a period of rising inventory prices,a company's cost of goods sold would be higher using the LIFO cost flow method than with FIFO.

A)True

B)False

Q2) International Financial Reporting Standards (IFRS)do not permit the use of the LIFO inventory cost flow method.

A)True

B)False

Q3) What is the amount of gross margin assuming the weighted-average inventory cost flow method?

A)$3,015

B)$2,412

C)$1,314

D)$2,970

Q4) A loss resulting from application of the lower-of-cost-or-market rule is included in cost of goods sold if the loss is material in amount.

A)True

B)False

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Chapter 6: Internal Control and Accounting for Cash

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Q1) Which of the following is not one of the nine features of an internal control system?

A)Establishment of clear lines of authority

B)Having employees covered by a fidelity bond

C)Requiring regular vacations for certain employees

D)Customer service comment cards

Q2) Assuming that the unadjusted bank balance was $500,what is the unadjusted book balance?

A)$745

B)$455

C)$700

D)$800

Q3) Establishment of a petty cash fund is an asset exchange transaction.

A)True

B)False

Q4) For financial reporting purposes,cash generally includes currency and other items that are payable on demand,such as checks,money orders,bank drafts,and certain savings accounts.

A)True B)False

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Chapter 7: Accounting for Receivables

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Q1) Which accounting concept can be used by some companies to justify the use of the direct write-off method?

A)The entity concept

B)The materiality concept

C)The going concern concept

D)The monetary principle

Q2) Other things being equal,the longer a company's operating cycle,the higher the company's operating costs are likely to be.

A)True

B)False

Q3) The year-end adjusting entry to accrue interest on a note receivable is an asset source transaction.

A)True

B)False

Q4) Many businesses find it more efficient to offer credit directly to customers rather than to accept third-party credit cards.

A)True

B)False

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Page 9

Chapter 8: Accounting for Long-Term Operational Assets

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Q1) On March 1,Bartholomew Company purchased a new stamping machine with a list price of $34,000.The company paid cash for the machine;therefore,it was allowed a 5% discount.Other costs associated with the machine were: transportation costs,$550;sales tax paid,$1,360;installation costs,$450;routine maintenance during the first month of operation,$500.What is the cost of the machine?

A)$34,210

B)$32,300

C)$35,160

D)$34,660

Q2) Tangible assets include land,equipment,and goodwill.

A)True

B)False

Q3) A trademark is a tangible asset with an indefinite useful life.

A)True

B)False

Q4) When using the modified accelerated cost recovery system (MACRS)the highest amount of depreciation expense will be recognized in the year the asset is acquired.

A)True

B)False

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Chapter 9: Accounting for Current Liabilities and Payroll

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Q1) A company's classified balance sheet shows current assets of $8,650 and current liabilities of $6,000.What is the company's current ratio?

A)0.69 to 1

B)1.44 to 1

C)1.16 to 1

D)3.26 to 1

Q2) Payment of interest on a note payable is considered a financing activity on the statement of cash flows.

A)True

B)False

Q3) Which of the following describes the effect of remitting the sales tax to the tax authority?

A)Decreases liabilities.

B)A claims exchange transaction.

C)Decreases stockholders' equity.

D)All of these answer choices are correct.

Q4) Vacation pay is considered a contingent liability.

A)True

B)False

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Chapter 10: Accounting for Long-Term Debt

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Q1) The times-interest-earned ratio is calculated by which of the following?

A)Total assets divided by interest expense.

B)Net income divided by interest expense.

C)Earnings before interest and taxes divided by interest expense.

D)None of these answer choices are correct.

Q2) Which of the following statements is true if Wayne issued the bonds for 96?

A)The market rate of interest was equal to the stated rate of interest.

B)The market rate of interest was lower than the stated rate of interest.

C)The market rate of interest was higher than the stated interest rate.

D)The bonds carried a variable or floating rate that changed in response to market conditions.

Q3) On January 1,Year 1,Daniels Company issued bonds with a face value of $500,000,receiving $496,000 cash.When the bonds mature,Daniels will have to pay the face value of the bonds to the bondholders.

A)True

B)False

Q4) Bonds sold as separate components of a single issue may have different maturity dates.

A)True

B)False

Page 12

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Chapter 11: Proprietorships,partnerships,and Corporations

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Q1) Which of the following statements about why companies choose not to pay cash dividends is (are)true?

A)The board and management prefer to reinvest all net income for future growth.

B)The corporation does not have sufficient cash.

C)The corporation does not have sufficient retained earnings.

D)All of these statements are true.

Q2) Articles of incorporation,prepared by a business that wishes to incorporate,normally include,but are not limited to,the corporation's name and purpose,its location,and provisions for capital stock.

A)True

B)False

Q3) Which of the following is a disadvantage of a sole proprietorship?

A)Entrenched management

B)Double taxation

C)Personal liability

D)Excessive regulation

Q4) Personal liability is a significant disadvantage of the partnership form of business organization.

A)True

B)False

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Chapter 12: Statement of Cash Flows

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Q1) Which of the following would not be a cash flow from financing activities?

A)Borrowing on a long-term note payable

B)Repayment of principal on bonds payable

C)Payment of interest on bonds payable

D)Payment of a cash dividend

Q2) Companies report significant noncash investing and financing activities on a schedule that accompanies the statement of cash flows.

A)True

B)False

Q3) The FASB requires that companies report cash flow per share in their audited financial statements.

A)True

B)False

Q4) Which of the following transactions is a use of cash?

A)Short-term borrowing of cash

B)Acquisition of land by issuing a short-term note payable

C)Issuance of a stock dividend

D)Purchase of treasury stock

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Chapter 13: Financial Statement Analysis

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Q1) Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

A)Debt to assets ratio

B)Earnings per share

C)Return on investment

D)Number of times interest is earned

Q2) Knell Company paid its sales employees $15,000 in sales commissions.What impact will this transaction have on the firm's working capital?

A)No impact

B)Increase it

C)Decrease it

D)Not enough information is provided to answer the question.

Q3) Long-term creditors are usually most interested in evaluating:

A)Liquidity.

B)Managerial effectiveness.

C)Solvency.

D)Profitability.

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