Introduction to Financial Accounting Exam Practice Tests
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the concepts, principles, and practices involved in the preparation and analysis of financial statements. This course covers the accounting cycle, including recording transactions, adjusting entries, and preparing key financial reports such as the balance sheet, income statement, and statement of cash flows. Emphasis is placed on understanding the role of financial accounting in business decision-making, applying generally accepted accounting principles (GAAP), and developing the ability to interpret financial information for users both inside and outside the organization.
Recommended Textbook
Fundamental Accounting Principles 21st Edition by John J. Wild
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Page 2
Chapter 1: Accounting in Business
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Sample Questions
Q1) The accounting concept that requires financial statement information to be supported by independent,unbiased evidence other than someone's belief or opinion is:
A)Business entity assumption.
B)Monetary unit assumption.
C)Going-concern assumption.
D)Time-period assumption.
E)Objectivity
Answer: E
Q2) The Sarbanes-Oxley Act (SOX)requires each issuer of securities to disclose whether is has adopted a code of ethics for its senior financial officers and the contents of that code.
A)True
B)False
Answer: True
Q3) The income statement shows the financial position of a business on a specific date.
A)True
B)False
Answer: False
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Chapter 2: Analyzing and Recording Transactions
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Sample Questions
Q1) Wisconsin Rentals purchased office supplies on credit.The general journal entry made by Wisconsin Rentals will include a:
A)Debit to Accounts Payable.
B)Debit to Accounts Receivable.
C)Credit to Cash.
D)Credit to Accounts Payable.
E)Credit to Wisconsin Rentals, Capital.
Answer: D
Q2) The journal is known as a book of original entry.
A)True
B)False
Answer: True
Q3) A debit:
A)Always increases an account.
B)Is the right-hand side of a T-account.
C)Always decreases an account.
D)Is the left-hand side of a T-account.
E)Is not need to record a transaction.
Answer: D
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Page 4
Chapter 3: Adjusting Accounts and Preparing Financial Statements
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Sample Questions
Q1) A company has 20 employees who each earn $500 per week for a 5-day week that begins on Monday.December 31 of Year 1 is a Monday,and all 20 employees worked that day.
a)Prepare the required adjusting journal entry to record accrued salaries on December 31,Year 1.
b)Prepare the journal entry to record the payment of salaries on January 4,Year 2.
Answer: 11ea7277_ef07_ed2f_9608_6923f5fccb37_TB2411_00 (20 employees * $500/week * 1/5 week = $2,000 expense)
11ea7277_ef08_1440_9608_31c855bbd10a_TB2411_00
Q2) Profit margin reflects the percent of profit in each dollar of revenue.
A)True
B)False
Answer: True
Q3) _____________ expenses are those costs that are incurred in a period but are both unpaid and unrecorded.
Answer: Accrued
Q4) Profit margin = ___________________ divided by net sales.
Answer: Net Income
Page 5
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) The recurring steps performed each reporting period,starting with analyzing and recording transactions in the journal and continuing through the post-closing trial balance,is referred to as the:
A)Accounting period.
B)Operating cycle.
C)Accounting cycle.
D)Closing cycle.
E)Natural business year.
Q2) After posting the entries to close all revenue accounts and all expense accounts,the Income Summary account of Waif Services has a $4,000 debit balance.This result implies that Waif Services earned a net income of $4,000.
A)True
B)False
Q3) A company's post-closing trial balance has a debit total of $475,000 and a credit total of $457,000.This indicates that __________________________.
Q4) Describe a work sheet and explain why it is useful.
Q5) The current portion of long-term debt is classified with the______________.
Q6) What is the purpose of a post-closing trial balance?
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Chapter 5: Accounting for Merchandising Operations
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Sample Questions
Q1) Gross profit is also called gross margin.
A)True
B)False
Q2) A merchandising company's ___________ begins with the purchase of merchandise and ends with the collection of cash from merchandise sales.
Q3) A company purchases merchandise with a catalog price of $20,000.The company receives a 35% trade discount from the seller.The seller also offers credit terms of 2/10,n/30.Assuming no returns were made and that payment was made on within the discount period,what is the net cost of the merchandise?
A)$13,720.
B)$19,600.
C)$6,860.
D)$13,000.
E)$12,740.
Q4) Delivery expense is reported as part of general and administrative expense in the seller's income statement.
A)True
B)False
Q5) The acid-test ratio reflects the ___________ of a company.
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Chapter 7: Accounting Information Systems
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Sample Questions
Q1) ____________________ is the accounting system component that keeps data in a form accessible to information processors.
Q2) With on-line systems,all information storage should be off-line to protect the data.
A)True
B)False
Q3) Auditors rely on accounting system databases when they audit financial statements and a company's controls.
A)True
B)False
Q4) The use of an Accounts Payable controlling account:
A)Reduces the number of accounts in the subsidiary ledger.
B)Reduces the total number of accounts maintained.
C)Reduces the number of entries in the general journals.
D)Reduces the number of accounts in the general ledger.
E)Increases the number of columns in the journals.
Q5) Describe the posting process for special journals.
Q6) Explain the purposes,types,and uses of special journals.
Q7) A __________________ journal is used to record and post transactions of similar type.
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Chapter 8: Cash and Internal Controls
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Sample Questions
Q1) The internal document that is prepared to notify the appropriate persons that ordered goods have been received and describes the quantities and condition of the goods is the
A)Purchase requisition.
B)Purchase order.
C)Invoice.
D)Receiving report.
E)Invoice approval.
Q2) Basic bank services include:
A)Bank accounts.
B)Bank deposits.
C)Checking.
D)Electronic funds transfer.
E)All of the choices are basic bank services.
Q3) An invoice is an itemized statement of goods prepared by the vendor listing the customer's name,items sold,sales prices,and terms of sale.
A)True
B)False
Q4) What is a voucher system?
Q5) Define an internal control system and describe its purpose.
Page 9
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Chapter 9: Accounting for Receivables
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Sample Questions
Q1) The quality of receivables refers to the likelihood of collection without loss.
A)True
B)False
Q2) The ____________________ of a note is the day the principle plus interest of a note must be repaid.
Q3) On November 19,Hayes Company receives a $15,000,60-day,10% note from a customer as payment on his account.What adjusting entry should be made on the December 31 year-end?
A)Debit Interest Receivable $175; credit Interest Revenue $175.
B)Debit Interest Receivable $250; credit Interest Revenue $250.
C)Debit Interest Receivable $75; credit Interest Revenue $75.
D)Debit Interest Revenue $175; credit Interest Receivable $175.
E)Debit Interest Revenue $250; credit Interest Receivable $250.
Q4) The process of using accounts receivable as security for a loan is known as factoring accounts receivable.
A)True
B)False
Q5) ____________________ is the charge for using (not paying)money until a later date.
Q6) Explain the difference between honoring and dishonoring a note receivable.
Page 10
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Chapter 10: Plant Assets, natural Resources, and Intangibles
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Sample Questions
Q1) Thomas Enterprises purchased a depreciable asset on October 1,Year 1 at a cost of $100,000.The asset is expected to have a salvage value of $15,000 at the end of its five-year useful life.If the asset is depreciated on the double-declining-balance method,the asset's book value on December 31,Year 3 will be:
A)$27,540
B)$21,600
C)$32,400
D)$18,360
E)$90,000
Q2) A company had a building destroyed by fire.The building originally cost $650,000,and its accumulated depreciation as of the date of the fire was $300,000.The company received $400,000 cash from an insurance policy that covered the building and will use that money to help rebuild.Prepare the single journal entry to record the destruction of the building and the receipt of cash from the insurance company.
Q3) Gain or loss on the disposal of assets is determined by comparing the disposed asset's book value to the value of any assets received.
A)True
B)False
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11
Chapter 11: Current Liabilities and Payroll Accounting
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Sample Questions
Q1) On June 1,Martin Company signed a $25,000,120-day,6% note payable to cover a past due account payable.
a.What is the total amount of interest to be paid on this note?
b.Prepare Martin Company's general journal entry to record the issuance of the note payable.
c.Prepare Martin Company's general journal entry to record the payment of the note on September 29.
Q2) __________ are obligations due within one year or the company's operating cycle,whichever is longer.
Q3) A company has 2 employees.The company's total salaries for the month of January were $8,000.The federal income tax rate for both employees is 15%.The FICA-social security tax rate is 6.2% and the FICA-Medicare tax rate is 1.45%.Calculate the amount of employee taxes withheld and prepare the company's journal entry to record the January payroll assuming these were the only deductions.
Q4) Blake Company pays its employees for two weeks vacation each year.The total annual cost of the vacation benefit is $113,000.Prepare the journal entry to record the weekly accrued vacation expense.
Q5) Identify and explain the types of employer payroll taxes.
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Chapter 12: Accounting for Partnerships
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Sample Questions
Q1) Suze and Bess formed the Suzy B Company by making capital contributions of $130,000 and $195,000 respectively.The annual partnership income of $230,000 is to be allocated assuming a salary allowance of $40,000 to Suze and $35,000 to Bess; interest allowances of 12% on their initial capital investments; and the balance shared equally.Prepare the entries to record the initial capital investments,the allocation of net income,and close the partner's withdrawal accounts assuming that Suze withdrew $50,000 and Bess withdrew $55,000.
Q2) A partner can be admitted into a partnership by _______________ or by
Q3) During the closing process,partner's capital accounts are _______________ for their share of net income and _________________ for their share of net loss.
Q4) The withdrawals account of each partner is:
A)Closed to that partner's capital account with a credit.
B)Closed to that partner's capital account with a debit.
C)A permanent account that is not closed.
D)Credited with that partner's share of net income.
E)Debited with that partner's share of net loss.
Q5) __________________ implies that each partner in a partnership can be called on to pay a partnership's debts.
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Chapter 13: Accounting for Corporations
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Sample Questions
Q1) The costs of bringing a corporation into existence,including legal fees,promoter fees,and amounts paid to obtain a charter are called:
A)Minimum legal capital.
B)Stock subscriptions.
C)Organization expenses.
D)Selling expenses.
E)Prepaid fees.
Q2) Companies report the cost of stock options in the:
A)Statement of cash flows.
B)Balance sheet.
C)Statement of retained earnings.
D)Income statement.
E)No disclosure is required.
Q3) Cumulative preferred stock carries the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to common shareholders.
A)True
B)False
Q4) Stock that is not assigned a value per share by the corporate charter is called
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Chapter 14: Long-Term Liabilities
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Sample Questions
Q1) Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.
A)True
B)False
Q2) Harrison Company's balance sheet reflects total assets of $250,000 and total liabilities of $150,000.Calculate the company's debt-to-equity ratio.
Q3) The carrying (book)value of a bond payable is the par value of the bonds plus the discount.
A)True
B)False
Q4) A basic present value concept is that cash paid or received in the future is worth less than the same amount of cash today.
A)True
B)False
Q5) Bond interest paid by a corporation is an expense,whereas dividends paid are not an expense of the corporation.
A)True
B)False
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Chapter 15: Investments and International Operations
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Sample Questions
Q1) A company had net income of $45,000,net sales of $390,000,and average total assets of $250,000 for the current year.Calculate the company's profit margin,total asset turnover,and return on total assets.
Q2) Debt securities:
A)Can be short-term investments.
B)Can be long-term investments.
C)Can have a cost higher than the maturity value of the debt security.
D)Can have a cost lower than the maturity value of the debt security.
E)All of the choices describe a debt security.
Q3) NSC Corporation has invested in 10% of the outstanding stock of VC Corporation.NSC intends to actively manage this investment for profit.This investment is classified as:
A)an available-for-sale security.
B)a held-to-maturity security.
C)a trading security.
D)a significant influence security.
E)a controlling influence security.
Q4) Return on total assets is computed by dividing ___________ by __________.
Q5) Foreign exchange rates fluctuate due to changing _______________ and ___________ conditions.
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Chapter 16: Reporting the Statement of Cash Flows
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Sample Questions
Q1) Both the direct and indirect methods yield the identical net cash flow amount provided or used by operating activities.
A)True
B)False
Q2) The statement of cash flows reports:
A)Assets, liabilities, and equity.
B)Revenues, gains, expenses, and losses.
C)Cash inflows and cash outflows for an accounting period.
D)Equity, net income, and dividends.
E)Changes in equity.
Q3) Hancock reported assets of $13,362 million at January 1 and $13,369 million as of December 31 of the current year.Hancock's net cash flows from operations were $2,204 million.Calculate the cash flow on total assets ratio for Hancock.
Q4) Business activities that generate or use cash are classified as operating,investing,or financing activities on the statement of cash flows.
A)True
B)False
Q5) Explain how cash flows from investing and financing activities are determined.
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Chapter 17: Analysis of Financial Statements
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Sample Questions
Q1) Internal users of financial information:
A)Are not directly involved in operating a company.
B)Are those individuals involved in managing and operating the company.
C)Include shareholders and lenders.
D)Include directors and customers.
E)Include suppliers, regulators, and the press.
Q2) Explain the purpose of financial statement analysis for both external and internal users.
Q3) Standards for comparison are necessary when making judgments about a company's performance.
A)True
B)False
Q4) A good financial report does not link interpretations and conclusions of analysis with the underlying information.
A)True
B)False
Q5) The base amount for a common-size balance sheet is usually total assets.
A)True
B)False
Q6) Identify and explain the four building blocks of financial statement analysis.
Page 18
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Chapter 18: Managerial Accounting Concepts and Principles
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Q1) Expenditures directly associated with the manufacture of finished goods that include direct materials and direct labor are _____________________ costs.
Q2) Raw materials purchased plus beginning raw materials inventory equals the ending balance of raw materials inventory.
A)True
B)False
Q3) Which of the following items are management concepts that were created to improve companies' performances?
A)Just-in-time manufacturing.
B)Customer orientation.
C)Total quality management.
D)Continuous improvement.
E)All of the above are ways that management can improve companies' performances.
Q4) The Institute of Management Accountants Statement of Ethical Professional Practice requires that management accountants be competent and act with integrity.
A)True
B)False
Q5) Identify the three categories of manufacturing costs.
Page 19
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Chapter 19: Job Order Costing
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Q1) The two basic types of cost accounting systems are:
A)Job order costing and perpetual costing.
B)Job order costing and customized product costing.
C)Job order costing and customized service costing.
D)Job order costing and process costing.
E)Job order costing and periodic costing.
Q2) Docksider Boats uses a job order cost accounting system.During one month Docksider purchased $153,000 of raw materials on credit; issued materials to production of $164,000 of which $24,000 were indirect.Docksider incurred a factory payroll of $95,000,paid in cash,of which $25,000 is classified as indirect labor.Docksider uses a predetermined overhead application rate of 170% of direct labor cost.The journal entry to record the allocation of factory payroll to production is:
A)Debit Goods in Process Inventory $95,000; credit Factory Payroll $95,000.
B)Debit Goods in Process Inventory $95,000; credit Cash $95,000.
C)Debit Factory Payroll $95,000; credit Cash $95,000.
D)Debit Goods in Process Inventory $70,000; debit Factory Overhead $25,000; credit Factory Payroll $95,000.
E)Debit Goods in Process Inventory $70,000; debit Factory Overhead $25,000; credit Cash $95,000.
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Chapter 20: Process Costing
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Q1) Browning Company had 8,700 units in beginning inventory with accumulated costs for direct materials of $17,900,$16,500 direct labor,and $13,200 of overhead.During July,the company completed and transferred 50,000 units to finished goods.Costs incurred in the current period included $45,000 of direct materials,$58,500 of direct labor,and $46,800 of factory overhead.Ending inventory consisted of 12,000 units which were 80% complete with respect to materials and 50% complete with respect to labor and overhead.Compute the value assigned to ending inventory based on the weighted average method of inventory costing.
Q2) Which of the following products is least likely to be produced in a process manufacturing system?
A)Compact disks
B)Slacks for casual wear
C)Baseball hats
D)Calculators
E)Custom cabinets
Q3) Process cost accounting systems are commonly used by companies that manufacture standardized products by passing them through a series of manufacturing steps.
A)True
B)False
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Chapter 21: Cost-Volume-Profit Analysis
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Q1) Cost-volume-profit analysis is a precise tool for perfectly predicting the profit consequences of cost changes,price changes,and volume changes.
A)True
B)False
Q2) A company manufactures a product and sells it for $120 per unit.The total fixed costs of manufacturing and selling the product are expected to be $155,250,and the variable costs are expected to be $75 per unit.What is the company's break-even point in (a)units and (b)dollar sales?
Q3) Use the following information to determine the margin of safety in dollars:
Unit sales 50,000 Units
Dollar sales
Fixed costs
Variable costs
A)$ 88,500.
B)$108,500.
C)$173,600.
D)$326,400.
E)$500,000.
$500,000
$204,000
$187,500
Q4) Briefly describe a CVP chart,including its major components.
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Chapter 22: Master Budgets and Planning
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Q1) For budgets to be effective:
A)Goals should be attainable.
B)Employees affected by a budget should be consulted when it is prepared.
C)Evaluations should be made carefully with opportunities to explain any failures.
D)They should be properly applied to avoid negative effects.
E)All of the options are correct.
Q2) If budgeted beginning inventory is $8,300,budgeted ending inventory is $9,400,and budgeted cost of goods sold is $10,260,budgeted purchases should be:
A)$ 860
B)$ 1,100
C)$ 1,960
D)$ 9,160
E)$11,360
Q3) Describe at least five benefits of budgeting.
Q4) The master budget consists of three major groups of budget components: the operating budgets,the capital expenditures budgets,and the financial budgets.
A)True
B)False
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Chapter 23: Flexible Budgets and Standard Costs
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Q1) Variable budget is another name for:
A)Cash budget.
B)Flexible budget.
C)Fixed budget.
D)Manufacturing budget.
E)Rolling budget.
Q2) Use the following cost information to calculate the direct labor rate and efficiency variances and indicate whether they are favorable or unfavorable.
Q3) A flexible budget is also called a _______________ budget.
Q4) A flexible budget expresses variable costs on a per unit basis and fixed costs on a total basis.
A)True
B)False
Q5) A volume variance is the difference between overhead at maximum production volume and that at the budgeted production volume.
A)True
B)False
Q6) At the end of the accounting period,immaterial variances are closed to
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Chapter 24: Performance Measurement and Responsibility Accounting
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Q1) A company produces two joint products (called 101 and 202)in a single operation that uses one raw material called Casko.Four hundred gallons of Casko were purchased at a cost of $800 and were used to produce 150 gallons of Product 101,selling for $5 per gallon,and 75 gallons of Product 202,selling for $15 per gallon.How much of the $800 cost should be allocated to each product,assuming that the company allocates cost based on sales revenue?
Q2) Using the information below,compute the manufacturing cycle time:
\[\begin{array} { | l | r | }
\hline \text { Process time } & 6.0 \text { hours } \\
\hline \text { Inspection time } & .5 \text { hours } \\
\hline \text { Move time } & .6 \text { hours } \\
\hline \text { Wait time } & .9 \text { hours } \\
\hline \text { Warehouse storage time } & 72.0 \text { hours } \\
\hline \end{array}\]
A)7.5 hours.
B)6.5 hours.
C)8.0 hours.
D)80.0 hours.
E)7.1 hours.
Page 25
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Chapter 25: Capital Budgeting and Managerial Decisions
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Q1) Briefly describe the time value of money.Why is the time value of money important in capital budgeting?
Q2) A company inadvertently produced 3,000 defective products.The product cost $15 each to be manufactured and normally sells for $35 each.A salvage company will purchase the defective units as they are for $12 each.The production manager reports that the defects can be corrected for $5 per unit,enabling the company to sell them at a discounted price of $22.00.The repair operations would not affect other production operations.Prepare an analysis that shows which action should be taken.
Q3) How does the calculation of break-even time (BET)differ from the calculation of payback period (PBP)?
Q4) The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period. A)True B)False
Q5) A capital budgeting method that considers how quickly a project recovers costs is known as ______________. An enhancement to this method that considers the time value of money is called ____________.
Q6) Identify the five steps involved in managerial decision making.
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Chapter 26: Time Value of Money B
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Q1) You are little late planning your retirement,but are looking forward to retiring in 10 years.You expect to save $6,000 a year at an annual rate of 8%.How much will you have accumulated when you retire?
Q2) A company expects to invest $5,000 today at 12% annual interest and plans to receive $15,529 at the end of the investment period.How many years will elapse before the company accumulates the $15,529?
A)0.322 years
B)3.1058 years
C)5 years
D)8 years
E)10 years
Q3) A company has $50,000 today to invest in a fund that will earn 7%.How much will the fund contain at the end of 8 years?
Q4) An annuity is a series of equal payments.
A)True
B)False
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Chapter 27: Activity-Based Costing C
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Q1) Activity cost pools are an important part of the allocation of overhead costs using activity-based costing.
A)True
B)False
Q2) If a firm uses activity-based costing to allocate costs,it must:
A)Combine costs in appropriate pools.
B)Select appropriate cost drivers.
C)Calculate an appropriate rate for each pool.
D)Allocate costs based on predetermined rates for cost pools.
E)Perform all of these steps.
Q3) Why would a firm use activity-based costing (ABC)rather than traditional two-stage methods of cost allocation for overhead?
Q4) A system of assigning costs to departments and products on the basis of a variety of activities instead of only one allocation base is called:
A)A responsibility accounting system.
B)A cost center accounting system.
C)Controllable costing.
D)Activity-based costing.
E)Performance costing.
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