Introduction to Financial Accounting Exam Solutions
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and practices underlying the preparation and interpretation of financial statements. The course covers essential topics such as the accounting cycle, measurement and recording of business transactions, preparation of balance sheets, income statements, and cash flow statements, as well as the use of accounting information in decision-making. Emphasis is placed on understanding generally accepted accounting principles (GAAP) and the ethical responsibilities of accountants in business. Through real-world examples and exercises, students learn to analyze financial data and communicate financial information to stakeholders effectively.
Recommended Textbook
Financial Accounting Information for Decisions 6th Edition by John Wild
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Page 2
Chapter 1: Introducing Accounting in Business
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Sample Questions
Q1) What distinguishes liabilities from equity?
Answer: Liabilities are creditors' claims on assets.They reflect obligations to transfer assets or provide products or services to others.Equity is the owners' claim to assets.Equity is also called net assets or residual interest.
Q2) The accounting equation implies that: Assets + Liabilities = Equity.
A)True
B)False Answer: False
Q3) Describe the three important guidelines for revenue recognition.
Answer: The three important guidelines for revenue recognition include: (1)Revenue is recognized when earned.
(2)Assets received from selling products and services do not need to be in cash. (3)Revenue recognized is measured by cash received plus the cash equivalent of other assets received.
Q4) The four basic financial statements include the balance sheet,income statement,statement of retained earnings and statement of cash flows.
A)True
B)False Answer: True
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Chapter 2: Analyzing and Recording Transactions
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Sample Questions
Q1) The balances for the accounts of Lance's Consulting Firm,Inc.for the year ended December 31 are shown below.Each account shown had a normal balance.
\[\begin{array} { l r l r }
\text { Accounts payable } & \$ 6,400 & \text { Wages expense } & \$ 35,000 \\
\text { Accounts receivable } & 7,000 & \text { Rent expense } & 5,000 \\
\text { Cash } & 10,000 & \text { Retained Earnings } & 68,700 \\
\text { Office Supplies } & 1,000 & \text { Land } & 53,000 \\
\text { Building } & 99,000 & \text { Unearned Revenue } & 7,000 \\
\text { Supplies expense } & 15,000 & \text { Dividends } & 20,000 \\
\text { Consulting Revenue } & 150,000 & \text { Common Stock } & 12,900
\end{array}\]
Calculate Total Assets.
Answer: $7,000+10,000+1,000+99,000+53,000 = $170,000
Q2) When a company bills a customer for $600 for services rendered,the journal entry to record this transaction will include a $600 debit to Services Revenue.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Adjusting Accounts and Preparing Financial Statements
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Sample Questions
Q1) The current portion of long-term debt is classified with the _________________________.
Answer: Current Liabilities
Q2) Each letter below contains three of the steps found in the accounting cycle.Which presents the given steps in the proper sequence,first to last?
A)Adjust,Analyze transactions,Close
B)Analyze transactions,Adjust,Close
C)Prepare post-closing trial balance,Prepare statements,Close
D)Prepare statements,Post,Close
E)Prepare adjusted trial balance,Journalize,Close
Answer: B
Q3) A trial balance prepared after adjustments have been recorded is called a(n):
A)Balance sheet
B)Adjusted trial balance
C)Unadjusted trial balance
D)Classified balance sheet
E)Unclassified balance sheet
Answer: B
Q4) Profit margin = ___________________ divided by net sales. Answer: Net income
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Chapter 4: Reporting and Analyzing Merchandising Operations
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Sample Questions
Q1) The acid-test ratio reflects the ___________ of a company.
Q2) A company had expenses other than cost of goods sold of $175,000.Determine sales and gross profit given cost of goods sold was $622,000 and net loss was ($41,000).
A)Sales: $838,000: Gross Profit: $216,000
B)Sales: $756,000: Gross Profit: $134,000
C)Sales: $797,000: Gross Profit: $756,000
D)Sales: $756,000: Gross Profit: $797,000
E)Sales: $134,000: Gross Profit: $216,000
Q3) Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.
A)True
B)False
Q4) The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage Expense.
A)True
B)False
Q5) Why does Selena and Khary Cuffe's company,Heritage Link Brands,use a perpetual inventory system?
Q6) Beginning inventory plus the net cost of purchases is the
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Page 7
Chapter 5: Reporting and Analyzing Inventories
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Sample Questions
Q1) The conservatism principle:
A)Requires that when there are more than one equally likely estimate of amounts expected to be received or paid in the future,then the less optimistic amount should be used
B)Requires that a company use the same accounting methods period after period
C)Requires that revenues and expenses be reported in the period in which they are earned or incurred
D)Requires that all items of a material nature be included in financial statements
E)Requires that all inventory items be reported at full cost
Q2) All incidental costs of inventory acquisition and handling whether necessary or not,are assigned to inventory.
A)True
B)False
Q3) Physical inventory counts:
A)Are not necessary under the perpetual system
B)Are necessary to measure and adjust for inventory shrinkage
C)Must be taken at least once a month
D)Require the use of hand-held portable computers
E)Are not necessary under the cost-to benefit constraint
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Page 8
Chapter 6: Reporting and Analyzing Cash and Internal Controls
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Sample Questions
Q1) ________________ includes currency,coins and amounts on deposit in checking accounts and many savings accounts.
Q2) An invoice is a document that is used within a company to notify the appropriate persons that ordered goods have been received and to describe the quantities and condition of the goods.
A)True
B)False
Q3) A voucher is an internal document or file used to accumulate information to control cash disbursements and to ensure that a transaction is properly recorded.
A)True
B)False
Q4) The journal entry for petty cash reimbursement involves a debit to the appropriate expenses and a credit to Petty Cash.
A)True
B)False
Q5) What is a voucher system?
Q6) Describe the banking activities that promote the control of cash and identify the internal control objectives served by the banking activities.
Page 9
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Chapter 7: Reporting and Analyzing Receivables
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Sample Questions
Q1) On May 31,a company had a balance in its accounts receivable of $103,895.Prepare the company's following transactions for June.
\[\begin{array} { | l | l | }
\hline \text { June } 2 & \text { Sold merchandise on account, } \$ 14,000 \\
\hline \text { June 8 } & \begin{array} { l }
\text { Sold } \$ 15,000 \text { worth of accounts receivable to First Bank. First Bank charged a } \\
\text { 3\% factoring fee. }
\end{array} \\
\hline \text { June } 20 & \begin{array} { l }
\text { Barrowed } \$ 30,000 \text { cash from First Bank, pledging } \$ 31,500 \text { wath of accounts } \\
\text { receivable as collateral for the loan. }
\end{array} \\
\hline \end{array}\]
Q2) The accounts receivable turnover is calculated by dividing _________________ by _____________________.
Q3) The person to whom a note is payable to is known as the ______________.
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Page 10
Chapter 8: Reporting and Analyzing Long-Term Assets
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Sample Questions
Q1) The original cost of a machine was $60,000.After $45,000 of depreciation was recorded,the machine was traded in on a new machine of like purpose priced at $75,000.A $10,500 trade-in allowance was received on the old machine and the balance of $64,500 was paid in cash.Prepare the general journal entry to record this trade-in.
Q2) A company discarded a display case that it had originally purchased for $8,000.The case had $7,200 worth of accumulated depreciation.The company should recognize a(n):
A)$0 gain or loss
B)$800 loss
C)$800 gain
D)$8,000 loss
E)$7,200 loss
Q3) Since goodwill is intangible,it is amortized each year using the straight-line method,the same as other intangibles are amortized.
A)True
B)False
Q4) The three main factors in computing depreciation are: (1)____________________, (2)____________________, (3)___________________.
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Chapter 9: Reporting and Analyzing Current Liabilities
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Sample Questions
Q1) If Jefferson Company paid a bonus equal to 6.5% of net income after bonuses and the total bonus distributed was $560,000,how much was net income for the year?
Q2) A bank that is authorized to accept amounts payable to the federal government is a:
A)Credit union
B)FDIC insured bank
C)Federal depository bank
D)National bank
E)Federal reserve bank
Q3) FUTA taxes are:
A)Social Security taxes
B)Medicare taxes
C)Employee income taxes
D)Unemployment taxes
E)Employee deductions
Q4) Uncertainties from the development of new competing products are contingent liabilities.
A)True
B)False
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Page 12
Chapter 10: Reporting and Analyzing Long-Term Liabilities
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Q1) _____________________ bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.
Q2) The effective interest method yields increasing amounts of bond interest expense and decreasing amount of premium amortization over the life of the bond .
A)True
B)False
Q3) On January 1,2010,Timley issues 2,200,000 of 6%,12-year bonds at a price of 105½ that pay interest semi-annually.The straight-line method is used to amortize any bond discount.What is the journal entry to record the issuance of the bonds on January 1,2010?
Q4) The payment pattern for installment notes that consists of accrued interest plus equal amounts of principal yields cash flows of equal amounts over the life of the note.
A)True
B)False
Q5) On January 1,2010,Timley issues 2,200,000 of 6%,12-year bonds at a price of 105½.The straight-line method is used to amortize any bond discount.What is the journal entry to record the first interest payment?
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Page 13
Chapter 11: Reporting and Analyzing Equity
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Sample Questions
Q1) Book value per share:
A)Reflects the value per share if a company is liquidated at balance sheet amounts
B)Is assets divided by equity
C)Is assets divided by the number of common share outstanding
D)Measures the worth of assets
E)Is equal to par value per share
Q2) Treasury stock is classified as:
A)An asset account
B)A contra asset account
C)A revenue account
D)A contra equity account
E)A liability account
Q3) _____________________ preferred stock has a feature that allows preferred stockholders to share with common stockholders in any dividends paid in excess of the percent or dollar amount stated on the preferred stock.
Q4) ______________________________________ is the stockholders' equity applicable to common shares divided by the number of common shares outstanding.
Q5) _________________ is a corporation's own stock that has been reacquired.
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Chapter 12: Reporting and Analyzing Cash Flows
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Sample Questions
Q1) Equipment costing $100,000 with accumulated depreciation of $40,000 is sold at a loss of $10,000.This implies that $40,000 cash was received from the sale.
A)True
B)False
Q2) When the operating activities section of the statement of cash flows is reported using the direct method,the FASB requires:
A)The preparation of the statement of cash flows under the indirect method be completed and reported with the statement of cash flows prepared using the direct method
B)A reconciliation of net income to net cash provided or used by operating activities
C)Footnotes to the financial statements disclosing the difference between net income and the cash provided or used by financing activities
D)The income statement to be prepared under the cash basis of accounting
E)Noncash investing and financing activities must be included in the statement of cash flows
Q3) Define and discuss the differences between operating,investing and financing activities.
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Chapter 13: Analyzing and Interpreting Financial Statements
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Sample Questions
Q1) Financial reporting refers to:
A)The application of analytical tools to general-purpose financial statements
B)The communication of relevant financial information to decision makers
C)Financial statements only
D)Ratio analysis
E)Profitability
Q2) Comparative financial statements are reports that show financial amounts placed side by side in columns on a single statement for analysis purposes.
A)True
B)False
Q3) A company paid cash dividends on its preferred stock of $40,000 in the current year when its net income was $120,000 and its average common stockholders' equity was $640,000.What is the company's return on common stockholders' equity?
Q4) Explain the purpose of financial statement analysis for both external and internal users.
Q5) What are the standards for financial analysis comparison? Give examples of each.
Q6) The four building blocks of financial analysis are (1)____________________, (2)__________________________, (3)____________________ and (4)_____________________.
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Chapter 14: Investments and International Operations
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Sample Questions
Q1) On May 1,Franke Co.purchases 2,000 shares of Computech stock for $25,000.This investment is considered to be an available-for-sale investment.On July 31 (Franke's year-end),the stock had a market value of $28,000.Franke should record a credit to Unrealized Gain-Equity for $3,000.
A)True
B)False
Q2) ___________________________ are investments in securities that management intends to convert to cash within the longer of one year or the operating cycle and are readily convertible to cash.
Q3) Consolidated financial statements show the financial position,results of operations and cash flows of all entities under the parent's control.
A)True
B)False
Q4) Short-term investments are readily convertible to cash that are intended to be converted into cash within one year or the operating cycle,whichever is longer.
A)True
B)False
Q5) Explain how to record the sale of trading securities.
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Chapter 15: Reporting and Analyzing Partnerships
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Sample Questions
Q1) A partnership designed to protect innocent partners from malpractice or negligence claims resulting from the acts of other partners is a ____________________________ partnership.
Q2) If at the time of partnership liquidation,a partner has a $5,000 capital deficiency and pays the partnership $5,000 out of personal assets to cover the deficiency,then that partner is entitled to share in the final distribution of cash.
A)True
B)False
Q3) Elaine Valero is a limited partner in a marketing and design firm.During the previous year her return on partnership equity was 14%.During this time,the beginning and ending balances in her capital account were $210,000 and $230,000 respectively.What was Elaine's partnership net income for this year?
A)$29,400.00
B)$30,800.00
C)$32,200.00
D)$1,500,000.00
E)$1,642,857.14
Q4) Partner return on equity is calculated as
Q5) Explain the steps involved in the liquidation of a partnership.
Page 18
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Chapter 16: Reporting and Preparing Special Journals
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Q1) Discuss the differences in the special journals between a company using a perpetual inventory system and one using a periodic inventory system.
Q2) Source documents:
A)Are input devices
B)Provide the basic information processed by an accounting system
C)Cannot be electronic files
D)Store processed information for future use
E)Provide systems that interpret,transform and summarize data
Q3) ____________________ is the accounting system component that keeps data in a form accessible to information processors.
Q4) Due to electronic files and Web Communication,source documents are no longer required.
A)True
B)False
Q5) The __________________ principle requires that an accounting information system must be able to adapt to changes in the company,business environment and needs of decision makers.
Q6) Using __________________ ledgers removes unnecessary details from the general ledger.
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