Introduction to Financial Accounting Pre-Test
Questions
Course Introduction
Introduction to Financial Accounting provides students with a foundational understanding of the principles and practices used to record, categorize, and report financial information for business entities. The course covers key concepts such as the accounting cycle, preparation and analysis of financial statements, and the role of accounting in decision-making. Students will explore the use of accepted standards, such as Generally Accepted Accounting Principles (GAAP), and develop skills in identifying, measuring, and communicating financial data to a variety of stakeholders, including investors, creditors, and managers. By the end of the course, students will be equipped to interpret basic financial statements and understand the ethical implications of accounting practices.
Recommended Textbook
Financial and Managerial Accounting 10th Edition by Belverd E. Needles
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Page 2
Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) A company's ability to attract and hold investment capital ultimately depends on its A)budgeting.
B)planning.
C)liquidity.
D)profitability.
Answer: D
Q2) For accounting purposes,a business and its owner are considered the same entity.
A)True
B)False
Answer: False
Q3) Financial position may be assessed by referring to a balance sheet.
A)True
B)False
Answer: True
Q4) At the beginning of the year,Shannon Company's assets were $150,000 and its stockholders' equity was $100,000.During the year,assets decreased $30,000 and liabilities increased $15,000.What was the stockholders' equity at the end of the year?
Answer: [($150,000 - $30,000)- ($50,000 + $15,000)] = $55,000
Page 3
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Chapter 2: Measurement Concepts: Recording Business Transactions
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Sample Questions
Q1) When a company receives a product previously ordered,a recordable transaction has occurred.
A)True
B)False Answer: True
Q2) All sales transactions generate immediate cash.
A)True
B)False Answer: False
Q3) All expenses incurred by a business are paid immediately in cash.
A)True
B)False Answer: False
Q4) A transaction should be recorded when title to merchandise passes from the supplier to the purchaser and creates an obligation to pay.
A)True
B)False Answer: True
Page 4
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Chapter 3: Measuring Business Income: Adjusting the Accounts
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Sample Questions
Q1) Revenue is produced when accounts receivable are collected. A)True
B)False Answer: False
Q2) Which of the following pairs of accounts could possibly appear in the same adjusting entry?
A)Interest Income and Interest Payable.
B)Revenue from Services and Cash.
C)Service Revenue and Unearned Revenue.
D)Rent Expense and Depreciation Expense.
Answer: C
Q3) The amount of a depreciable asset's annual depreciation expense can typically be obtained by referring to the balance sheet.
A)True
B)False
Answer: False
Q4) Revenue should be recognized,even when collectibility is not reasonably assured. A)True
B)False Answer: False
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Chapter 4: Foundations of Financial Reporting and the
Classified Balance Sheet
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Sample Questions
Q1) Cape Company purchased a patent for use in the corporation's primary business activities.Where on the balance sheet is the patent reported?
A)Property,plant,and equipment
B)Investments
C)Current assets
D)Intangible assets
Q2) Profitability means having enough cash on hand to pay bills when they become due.
A)True
B)False
Q3) Full disclosure of all important facts aids in overcoming the limitations of accounting information.
A)True
B)False
Q4) The asset turnover for National Textile is
A)1.00 times.
B)1.33 times.
C)0.83 times.
D)1.20 times.
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Chapter 5: Accounting for Merchandising Operations
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Sample Questions
Q1) Which of the following activities is not a component of the operating cycle?
A)Payment of employees' wages
B)Sale of merchandise
C)Purchase of merchandise
D)Collection of cash from merchandise sales
Q2) The entry to record a purchase of $12,000 in merchandise assuming terms of 2/10,n/30 and a periodic inventory system would include a(n)
A)increase to Accounts Payable for $12,000.
B)increase to Purchases Discounts for $240.
C)decrease to Purchases for $12,000.
D)decrease to Accounts Payable for $11,760.
Q3) General and administrative expenses are a category of operating expense.
A)True
B)False
Q4) Taking a physical inventory refers to making a count of all merchandise on hand at a particular time.
A)True
B)False
Q5) Describe how to compute the cost of goods available for sale.
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Chapter 6: Inventories
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Sample Questions
Q1) When the average-cost method is applied to a perpetual inventory system,a moving average cost per unit is computed with each purchase.
A)True
B)False
Q2) Merchandise inventory is valued on the balance sheet at the expected resale price.
A)True
B)False
Q3) The gross profit method requires that records be kept at both cost and retail.
A)True
B)False
Q4) Which costing method tends to level out the effects of cost increases or decreases?
A)Specific identification
B)FIFO
C)Average-cost
D)LIFO
Q5) Why is the LIFO cost flow assumption an acceptable valuation method for merchandise inventory when it rarely matches the physical movement of the product?
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Chapter 7: Cash and Internal Control
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Sample Questions
Q1) A good system of internal control is designed to achieve all of the following except A)efficiency of operations.
B)reliability of financial reporting.
C)compliance with relevant laws and regulations.
D)attainment of target sales.
Q2) Under a perpetual inventory system,is it necessary to take a physical inventory at the end of the period? Why or why not?
Q3) Which of the following bank reconciliation items would result in a journal entry?
A)Checks outstanding
B)An adjustment for a check recorded for the wrong amount
C)Deposits in transit
D)A bank error on the bank statement
Q4) When the balance of a petty cash fund is increased,the entry would contain a credit to Petty Cash.
A)True
B)False
Q5) Why do businesses need to keep some currency on hand?
Q6) On a balance sheet,what items normally are included in Cash?
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Chapter 8: Receivables
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Sample Questions
Q1) The entry to record Uncollectible Accounts Expense would be:
A)Uncollectible Accounts Expense 21,500 Allowance for Uncollectible Accounts
B)Uncollectible Accounts Expense 17,000 Allowance for Uncollectible Accounts
C)Allowance
Q2) If the amount of uncollectible accounts expense is overstated at year end,
A)Allowance for Uncollectible Accounts will be understated.
B)net income will be overstated.
C)net Accounts Receivable will be understated.
D)total liabilities and stockholders' equity will be overstated.
Q3) Which of the following situations results in a contingent liability?
A)Making a credit card sale
B)Dishonoring a note
C)Estimating uncollectible accounts expense
D)Discounting a note
Q4) Explain the two methods used to estimate uncollectible accounts.
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Chapter 9: Long-Term Assets
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Sample Questions
Q1) Which of the following items is not classified as a natural resource?
A)Timberland
B)A gas reserve
C)An oil well
D)Goodwill
Q2) When an asset is sold,a gain is calculated as the difference between
A)sale price and the depreciable cost of the asset sold.
B)sale price and the carrying value of the asset sold.
C)carrying value and the residual value of the asset sold.
D)sale price and the original cost of the asset sold.
Q3) Depreciation for tax purposes is identical to depreciation for financial reporting purposes.
A)True
B)False
Q4) Accelerated depreciation assumes all of the following except that
A)asset benefit increases with each year of use.
B)the asset provides more benefit in the early years.
C)obsolescence makes an asset less valuable in its later years.
D)repair expense is less in the early years than in the later years.
Q5) Present two arguments in favor of the use of accelerated depreciation.
Page 11
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Chapter 10: Current Liabilities and Fair Value Accounting
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Q1) If any portion of a long-term debt is to be paid in the next year,that portion should be classified as a current liability.
A)True
B)False
Q2) Which of the following is a measure of liquidity?
A)Payables turnover
B)Current ratio
C)Working capital
D)All of these are used to evaluate a company's liquidity.
Q3) Which of the following statements is true regarding the time value of money?
A)Compound interest will produce equal amounts of interest each period on a fixed deposit.
B)Earning simple interest is more beneficial than earning compound interest.
C)When making a purchase,it is better to make payment as soon as possible.
D)It is better to receive $1 now than a year from now.
Q4) Failure to record a liability probably will
A)result in an overstated net income.
B)result in overstated total liabilities and stockholders' equity.
C)have no effect on net income.
D)result in overstated total assets.
Page 12
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Chapter 11: Long-Term Liabilities
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Sample Questions
Q1) A bond sells at the face value when the face interest rate of the bond is identical to the market interest rate for similar bonds on the date of the issue.
A)True
B)False
Q2) Term bonds are bonds that
A)are also called serial bonds.
B)may be called in and redeemed by the issuing corporation prior to their scheduled maturity date.
C)are secured by specific assets of the issuing corporation.
D)mature in one lump sum at a single maturity date.
Q3) On January 2,20x5,Clair Inc.signed a 9% mortgage payable for $200,000 with equal monthly payments of $2,400.When Clair makes the first payment,how much interest expense will be recorded?
A)$0
B)$1,500.
C)$18,000.
D)$750.
Q4) When determining the value of a bond using present value,what are the two components used in the calculation?
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Chapter 12: Stockholders Equity
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Sample Questions
Q1) Mariposa Corporation had a Retained Earnings balance on January 1,20x4,of $936,000;declared cash dividends during 20x4 in the amount of $159,900,of which $39,000 were not paid until 20x5;and reported an ending balance of Retained Earnings of $1,326,000.Based on these facts alone,net income for 20x4 for Mariposa Corporation must have been
A)$211,900.
B)$419,900.
C)$510,900.
D)$549,900.
Q2) The par value of stock is an arbitrary amount assigned to each share of stock. A)True B)False
Q3) When common stock with a par value is sold for a price that exceeds par value,the Common Stock account is credited for the cash proceeds received from the sale of the shares.
A)True B)False
Q4) Return on equity equals net income divided by average stockholders' equity. A)True B)False
Page 14
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Chapter 13: The Statement of Cash Flows
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Q1) If net cash flows from operating activities were $388,000,net income were $100,000,and net sales were $1,200,000,the cash flow yield would equal (Round amounts to two decimal places)
A)$288,000.
B)$812,000.
C)3.88 times.
D)3.09 times.
Q2) When a statement of cash flows is prepared using the indirect method,
A)net income is the starting point in determining cash flows from operations.
B)cash paid for dividends is not included.
C)the increase in cash is different than when the direct method is used.
D)the amount of cash collected from customers is calculated.
Q3) On a statement of cash flows prepared using the indirect method,the amount representing cash paid for interest would
A)be included in the net cash flows from financing activities section.
B)not be shown.
C)be included in the net cash flows from investing activities section.
D)be included in the net cash flows from operating activities section.
Q4) Which accounts are analyzed to determine cash flows from financing activities?
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) The sale of plant assets and the payment of dividends will increase free cash flow. A)True B)False
Q2) It is possible for horizontal analysis to indicate an increase in revenues from one year to another and a decrease in net income.
A)True B)False
Q3) In a common-size income statement,each item is expressed as a percentage of net income.
A)True B)False
Q4) Ratios are most useful in identifying A)causes. B)differences.
C)relationships. D)trends.
Q5) What is vertical analysis,and why is it useful in performing financial performance measurement?
Q6) Briefly explain a "big bath" including when it occurs and why it occurs.
Page 16
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Chapter 15: Managerial Accounting and Cost Concepts
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Sample Questions
Q1) Cost of sugar is an indirect cost in the manufacture of candy bars.
A)True
B)False
Q2) Period costs flow through three types of inventory accounts before becoming part of the cost of goods sold amount.
A)True
B)False
Q3) Woodies Inc.produces wooden desks.Which of the following is not an indirect material for Woodies?
A)Wood in a desk
B)Nails in a desk
C)Screws in a desk
D)Lubricants for production machinery
Q4) Some period costs can be found in inventory accounts on the balance sheet.
A)True
B)False
Q5) Inventoriable cost is a synonym of product cost.
A)True
B)False
Q6) Give two examples of each stage in the management process.
Page 17
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Chapter 16: Costing Systems: Job Order Costing
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Sample Questions
Q1) Which of the following will help mangers set reasonable selling prices?
A)Previous year net income of the company
B)Number of employees in the company
C)Unit cost knowledge of the product
D)Previous year's income tax variance
Q2) Service organizations incur little or no cost for A)services.
B)overhead.
C)materials.
D)labor.
Q3) In a service organization using a job order costing system,actual overhead will be the same as applied overhead.
A)True
B)False
Q4) The type of product costing system used by a company is dictated by the A)cost flow assumptions made by the company.
B)production process of the product.
C)inventory system used by the company.
D)selling price of the product.
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Chapter 17: Costing Systems: Process Costing
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Q1) The use of the FIFO costing method would result in a company's process cost report showing
A)units transferred out as one amount with no distinction made for beginning inventory. B)units transferred out as two amounts: one for beginning inventory and the other for units started and completed during the month.
C)units transferred out as two amounts: one for units completed during the period and one for ending inventory.
D)units transferred out as three amounts: one for beginning inventory,one for units started and completed during the period,and one for ending inventory.
Q2) The average costing method in process costing disregards the ending inventory assuming that direct material costs and conversion costs are pertaining to the immediate next period.
A)True
B)False
Q3) Process cost reports are prepared for each of the processes or work cells.
A)True
B)False
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19
Chapter 18: Value-Based Systems: Activity-Based Costing and Lean Accounting
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Q1) A just-in-time operation seeks to eliminate all product support functions.
A)True
B)False
Q2) Backflush costing eliminates the use of a Work in process account.
A)True
B)False
Q3) How much was charged to the Cost of Goods Sold account during June?
A)$378,000
B)$380,000
C)$375,000
D)$368,000
Q4) One of the drawbacks of full product cost is that it is relevant only for companies providing services.
A)True
B)False
Q5) Activity-based management focuses on identifying product costs as either variable or fixed.
A)True B)False
Page 20
Q6) How can activity-based systems help managers in a global marketplace?
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Chapter 19: Cost-Volume-Profit Analysis
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Q1) Theoretical capacity reduced by normal and expected work stoppages is called
A)practical capacity.
B)normal capacity.
C)ideal capacity.
D)excess capacity.
Q2) Which of the following is true of the engineering method of separating costs?
A)It is generally used to estimate the cost of activities and new products.
B)It is sometimes called a time and motion study.
C)It separates costs by performing a step-by-step analysis of various elements involved.
D)All of these choices are correct.
Q3) Costs that change,in total,in direct proportion to changes in productive output,or activity,are called variable costs.
A)True
B)False
Q4) The breakeven point is the level of activity at which only variable costs are recovered.
A)True
B)False
Q5) Explain what cost-volume-profit analysis is and how managers use it.
Page 22
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Chapter 20: The Budgeting Process
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Q1) Budgets facilitate congruence between organizational and personal goals.
A)True
B)False
Q2) Which of the following is not a guideline for budget preparation?
A)Revise budget to include planning decisions
B)Know the sources of budget information
C)Limit the use of a budget to one user group
D)Establish the format of the budget
Q3) Budgeting is the process of identifying,gathering,summarizing,and communicating financial and nonfinancial information about an organization's future activities.
A)True
B)False
Q4) A cash budget
A)is an optional feature of a master budget.
B)requires input from all parts of the organization.
C)involves nonmonetary information.
D)can only be prepared at year end.
Q5) List the contents of a master budget for a manufacturing organization by identifying the two major components and the budgets within each of them.
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Chapter 21: Flexible Budgets and Performance Analysis
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Q1) For purposes of computing EVA,the minimum desired rate or return on an investment is known as
A)ROI.
B)cost of capital.
C)residual income.
D)profit margin.
Q2) The learning and growth perspective of Sweetcake Restaurant shows increasing customer satisfaction as an objective.Which of the following will be an appropriate performance measure of this objective?
A)Number of new chefs trained in each department
B)Order delivery time
C)Percentage growth in sales
D)Percentage growth in profit
Q3) The use of quantitative tools to gauge an organization's performance in relation to a specific goal or an expected outcome is known as
A)responsibility accounting.
B)an asset turnover.
C)a performance center.
D)a performance measurement.
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Chapter 22: Standard Costing and Variance Analysis
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Q1) Standard costs are not used for
A)determining actual costs.
B)preparing budgets and forecasts.
C)evaluating the performance of workers and management.
D)developing appropriate selling prices.
Q2) Using the above information provided for Underfoot Products,compute the variable overhead variance.
A)$42,000 (F)
B)$42,000 (U)
C)$30,000 (U)
D)$32,000 (F)
Q3) In a service company,standard unit cost related of a service will typically include direct materials,direct labor,and overhead standard costs.
A)True
B)False
Q4) The flexible budget formula is an equation that determines budgeted costs for any level of output.
A)True
B)False
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Chapter 23: Short-Run Decision Analysis
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Q1) Segment profitability analysis includes the preparation of a segmented income statement.
A)True
B)False
Q2) Avoidable costs are the direct variable costs and direct fixed costs traceable to the segments.
A)True
B)False
Q3) Many management decisions are unique and hence incompatible with strict rules,steps,or timetables.
A)True
B)False
Q4) A segment margin is a segment's sales revenue minus its direct variable costs and direct fixed costs traceable to the segment.
A)True
B)False
Q5) Why is the book value of equipment irrelevant when considering the replacement of equipment?
Q6) What information does a manager need to gather for a make-or-buy decision?
Page 26
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Chapter 24: Capital Investment Analysis
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Q1) Implementing capital investment decisions with proper controls falls under which stage of the management process?
A)Planning
B)Performing
C)Evaluating
D)Communicating
Q2) Which of the following is true of the net present value method?
A)It measures a project's time-adjusted rate of return.
B)It discounts cash flows at the minimum desired rate of return.
C)It ignores cash flows beyond the payback period.
D)It applies only to mutually exclusive investment proposals.
Q3) The accounting rate-of-return method is widely used to measure the estimated performance of a capital investment,primarily because it uses time value of money concepts.
A)True
B)False
Q4) The company's minimum rate of return is also referred to as its profit margin.
A)True
B)False
Q5) In what situations is the payback period method especially useful?
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Chapter 25: Pricing Decisions, including Target Costing and Transfer Pricing
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Q1) An internal issue to be considered when setting a price is
A)whether the process is labor-intensive or automated.
B)the customer's preferences for quality versus price.
C)current prices of competing products or services.
D)the life of the product or service.
Q2) Because a business should have as its primary objective the earning of a minimum rate of return on assets,the return on assets pricing method has a great deal of appeal and support.
A)True
B)False
Q3) For an organization to stay in business,its selling price must A)be competitive and acceptable to customers.
B)recover all the costs incurred in bringing the product or service to market.
C)return a profit.
D)cover all of these options.
Q4) Target costing identifies a competitive price and then subtracts the desired profit to determine a target cost.
A)True
B)False
Page 28
Q5) Explain how target costing differs from traditional cost-based pricing methods.
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Chapter 26: Quality Management and Measurement
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Q1) Which of the following is a good indicator of management's strong commitment to product quality?
A)Product recalls increased as a percentage of sales
B)Nonconformance costs increased as a percentage of total quality costs
C)Customer service costs reduced by 70 percent over the previous year
D)High costs of conformance to quality
Q2) The primary focus of a management information system is on the management of A)people.
B)costs.
C)activities.
D)time.
Q3) Using an MIS system to improve quality through quality control and quality assurance falls under which stage of the management process?
A)Planning
B)Performing
C)Evaluating
D)Communicating
Q4) Name four categories of nonfinancial measures of quality and provide an example of each.
Q5) Describe how MIS aids in the evaluating stage of the management process.
Page 29
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Chapter 27: Accounting for Unincorporated Businesses
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Q1) After selling all the assets and paying the liabilities in a liquidation of a partnership,the partners share any remaining cash according to the stated ratios.
A)True
B)False
Q2) Which of the following statements is correct regarding partnerships?
A)Accounting for a partnership is similar to accounting for a sole proprietorship.
B)If the partnership assumes a liability related to an asset invested in the partnership,the asset is debited,the partner's capital account is credited and a liability account is credited.
C)It is necessary to maintain separate Capital and Withdrawals accounts for each partner.
D)All of these choices.
Q3) Gains on the sale of assets in a liquidation are divided among partners according to the stated ratios.
A)True
B)False
Q4) List four advantages and four disadvantages of the partnership form of business.
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Chapter 28: Accounting for Investments
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Q1) For available-for-sale equity securities,the Unrealized Loss on Long-Term Investments account should be reported as a(n)
A)realized loss item on the income statement.
B)prior period adjustment.
C)contra-asset on the balance sheet.
D)other comprehensive income (loss).
Q2) All of the following are conditions that could affect the valuation of investments on the balance sheet except
A)changes in the general purchasing power of the dollar.
B)changes in the operations of investee companies.
C)changes in the market value or fair value of the investments.
D)changes caused by the passage of time.
Q3) Which is the only type of investment that is always classified as short-term?
A)Trading securities
B)Held-to-maturity securities
C)Available-for-sale securities
D)Equity securities
Q4) Another term for short-term investments is marketable securities.
A)True
B)False
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