Principles of Accounting Exam Questions
Course Introduction
Principles of Accounting introduces students to the foundational concepts and practices used in the preparation and analysis of financial information. The course emphasizes understanding the accounting cycle, including recording transactions, preparing financial statements, and interpreting key financial data. Topics such as accrual versus cash accounting, internal controls, and the ethical responsibilities of accountants are covered. By the end of the course, students will be equipped to comprehend the role of accounting in decision-making processes for businesses and organizations.
Recommended Textbook
Horngrens Financial and Managerial Accounting 6th Edition by Tracie L. Nobles
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Page 2
Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) Decision makers are looking for an international accounting language because the most significant change in the business world in the last decade has been the huge increase in international commerce.
A)True
B)False
Answer: True
Q2) The assets of Star Company are $120,000 and the total liabilities are $10,000.The equity is ________.
A)$120,000
B)$130,000
C)$10,000
D)$110,000
Answer: D
Q3) Which of the following is included on the balance sheet?
A)Revenues
B)Expenses
C)Assets
D)Dividends
Answer: C
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Page 3
Chapter 2: Recording Business Transactions
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Sample Questions
Q1) Which of the following statements regarding the accounting equation is incorrect?
A)The equation is the basic tool of accounting.
B)The equation consists of three categories: assets,liabilities,and equity.
C)Each category of the accounting equation contains accounts.
D)The equation can be stated as assets plus liabilities equals equity.
Answer: D
Q2) A cash payment of $5,000 was made for dividends.Which of the following accounts is debited?
A)Cash
B)Dividends
C)Dividend Expense
D)Common Stock
Answer: B
Q3) Source documents provide the evidence and data for accounting transactions.
A)True
B)False
Answer: True
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4
Chapter 3: The Adjusting Process
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Sample Questions
Q1) The asset account,Office Supplies had a beginning balance of $5,300.During the accounting period,office supplies were purchased,on account,for $5,500.A physical count,on the last day of the accounting period,shows $2,800 of office supplies on hand.What is the amount of Supplies Expense for the accounting period?
A)$5,500
B)$2,600
C)$8,000
D)$2,500
Answer: C
Q2) The accountant of Residential Architectural Services failed to make an adjusting entry to record $7,000 of depreciation expense.Which of the following statements is true?
A)The total liabilities will be overstated.
B)The equity will be understated.
C)The total assets will be overstated.
D)The total assets will be understated.
Answer: C
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Which of the following statements is true if the income statement credit column exceeds the income statement debit column on a worksheet?
A)The company made a net profit.
B)The company incurred a net loss.
C)The retained earnings account decreased during the period.
D)An error was made.
Q2) The entries that transfer the revenue,expense,and dividends balances to the Retained Earnings account to prepare the company's books for the next period are called ________ entries.
A)closing
B)opening
C)adjusting
D)end of period
Q3) The operating cycle is the time span required for a business to repay its long-term liabilities.
A)True
B)False
Q4) Why are temporary accounts not included in the post-closing trial balance?
Q5) List the steps of the accounting cycle that take place at the end of the period.
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Chapter 5: Merchandising Operations
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Q1) Sales are recorded at the amount of the sale less any sales discounts.
A)True
B)False
Q2) The net cost of inventory purchased equals the purchase cost less purchase returns and allowances less purchase discounts.
A)True
B)False
Q3) On the income statement,a merchandising company reports the cost of merchandise inventory that has been sold to customers.
A)True
B)False
Q4) Gross profit represents the mark-up on ________.
A)sales revenue
B)merchandise inventory
C)operating expenses
D)transportation cost
Q5) A retailer can buy merchandise either from a manufacturer or a wholesaler.
A)True
B)False
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Chapter 6: Merchandise Inventory
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Q1) What does inventory turnover measure? What does a high rate of inventory turnover indicate?
Q2) The materiality concept states that a company must ________.
A)report only such information that enhances the financial position of the company
B)perform strictly proper accounting only for significant items
C)report enough information for outsiders to make knowledgeable decisions about the company
D)use the same accounting methods and procedures from period to period
Q3) Under which of the following inventory costing methods is the ending inventory based on the costs of the most recent purchases?
A)specific identification
B)weighted-average
C)last-in,first-out
D)first-in,first-out
Q4) Maintaining good controls over merchandise inventory ensures that inventory purchases and sales are properly authorized and accounted for by the accounting system.
A)True
B)False
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Chapter 7: Internal Control and Cash
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Q1) If the bank reconciliation includes a bank service charge,a journal entry is required,which debits Bank Expense and credits Cash.
A)True
B)False
Q2) Under the net method of handling credit and debit card payments,the ________.
A)net amount of the sale is credited to the Sales Revenue account on the date of sale
B)credit to the sales revenue is selling price less the transaction fee
C)business writes a check to the third-party processor for the processing fee
D)processing fee is debited to the Credit Card Expense account on the date of sale
Q3) The Sarbanes-Oxley Act was passed by the Public Company Accounting Oversight Board.
A)True
B)False
Q4) Which of the following is representative of safeguarding assets?
A)attaching electronic sensors to merchandise inventory
B)reducing expenses to increase operating profit
C)increasing operating profit to increase net income
D)allowing company accountants to handle cash
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Page 9
Chapter 8: Receivables
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Sample Questions
Q1) The employees who handle cash know how customers pay and thus are in the best position to grant credit to customers.
A)True
B)False
Q2) GAAP requires companies to ________ method to record bad debts expense.
A)use the direct write-off
B)use the allowance
C)select either the direct write-off or allowance
D)use the fair value
Q3) Under both the allowance method and the direct-write off method of accounting for uncollectible accounts,the amount of bad debts expense is estimated at the end of each accounting period.
A)True
B)False
Q4) A receivable is a monetary claim against a business or an individual.
A)True
B)False
Q5) Prepare the journal entry to record an uncollectible accounts receivable of $10,000,using the direct write-off method.Omit explanation.
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Chapter 9: Plant Assets, natural Resources, and Intangibles
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Q1) Which of the following is true of goodwill?
A)Goodwill must be capitalized when acquired and amortized over seven years or less.
B)Both created and acquired goodwill must be recorded in the books.
C)Goodwill must be expensed when acquired.
D)Goodwill is not amortized.
Q2) The cost of land does not include the cost of fencing and paving.
A)True
B)False
Q3) Exchanges of plant assets that have commercial substance require any gain or loss on the transaction to be recognized.
A)True
B)False
Q4) When a plant asset is sold for less than its book value,a gain is recorded. A)True
B)False
Q5) Franchises are privileges granted by a business to sell goods and services under specified conditions.
A)True
B)False
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Chapter 10: Investments
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Sample Questions
Q1) Which of the following is the least desirable business reason for a company to invest in debt or equity securities?
A)to generate investment income
B)to invest short-term,excess cash
C)to pursue certain business strategies
D)to weaken the relationship between the investing company and a key vendor.
Q2) Available-for-sale (AFS)debt investments are reported as ________ if the business expects to sell them within one year.
A)current assets
B)equity
C)long-term assets
D)either current assets or long-term assets
Q3) Which of the following is true of the Fair Value Adjustment - Trading account for trading debt investments?
A)It will always have a credit balance.
B)It will always have a debit balance.
C)It is considered as an adjunct account if it has a credit balance.
D)It is considered as an adjunct account if it has a debit balance.
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Chapter 11: Current Liabilities and Payroll
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Q1) Superior Sales,Inc.offers warranties on all its electronic goods.Warranty expense is estimated at 3.5% of sales revenue.In 2018,Superior had sales of $333,000.In the same year,Superior replaced defective goods with merchandise inventory costing $8,750.Prepare the journal entry to record the warranty expense.Omit explanation.
Q2) Which of the following is an example of an estimable probable contingency?
A)FICA Taxes Payable
B)Income Taxes Payable
C)Warranty Payable
D)Accounts Payable
Q3) A contingency was evaluated at year-end and considered to have a remote possibility of becoming an actual liability.If this was not reported on the balance sheet or in the notes to the financial statements,what effect would this have on the financial reporting of the company?
A)There would be no effect.
B)The liabilities on the balance sheet would be understated.
C)The information about the transaction would be inadequately disclosed in the notes.
D)The net income of the company would be understated.
Q4) What is a contingent liability? Provide two examples of contingencies.
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Chapter 12: Long-Term Liabilities
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Q1) Debentures are backed only by the goodwill of the bond issuer.
A)True
B)False
Q2) Future value is always less than present value.
A)True
B)False
Q3) Installment payments for mortgages generally contain both an amount for principal repayment and an amount for interest.
A)True
B)False
Q4) When bonds are retired at maturity,assuming the last interest payment has already been recorded,the journal entry includes a debit to the Bonds Payable account and a credit to the Cash account.
A)True
B)False
Q5) The reason investors buy bonds is to ________.
A)earn interest
B)own controlling interest in the company
C)exercise voting rights in a company
D)receive dividend payments
Page 14
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Chapter 13: Stockholders Equity
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Q1) A corporation has 14,000 shares of 13%,$104 par noncumulative preferred stock outstanding and 22,000 shares of no-par common stock outstanding.At the end of the current year,the corporation declares a dividend of $220,000.What is the dividend per share for preferred stock and for common stock? (Round your answer to the nearest cent. )
A)The dividend per share is $13.52 to preferred stock and $1.40 to common stock.
B)The dividend per share is $8.26 to preferred stock and $1.40 to common stock.
C)The dividend per share is $13.52 to preferred stock and $13.52 to common stock.
D)The dividend per share is $13.52 to preferred stock and $27.50 to common stock.
Q2) The issue price is the price the stock initially sells for the first time it is sold.
A)True
B)False
Q3) Accounting for stated value common stock is identical to accounting for par value stock.
A)True
B)False
Q4) List the four basic rights of stockholders.
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Page 15
Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) Use the following information to calculate the free cash flow of Jarvis,Inc.
Net cash provided by operating activities,$25,000
Net cash provided by financing activities,$35,000
Net cash used for planned investment in long-term assets,$12,000
Net cash used for investing activities,$20,000
Cash dividends paid,$10,000.
Q2) Buying property,plant,and equipment for cash is considered a cash outflow for the financing activities section of the statement of cash flows.
A)True
B)False
Q3) Companies sometimes obtain financing and do not receive cash.Although such transactions do not directly involve cash,they still must be reported in the financing section of the statement of cash flows.
A)True
B)False
Q4) The balance sheet shows why cash increased or decreased.
A)True
B)False
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Chapter 15: Financial Statement Analysis
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Q1) Horizontal analysis is the study of percentage changes in line items in comparative financial statements.
A)True
B)False
Q2) The price/earnings ratio shows the ________.
A)dividend yield of the company
B)market price of $1 of earnings
C)proportion of total assets financed by debt
D)value that the stock market places on the dividends paid by the company
Q3) The times-interest-earned ratio measures the number of times earnings before interest and taxes can cover interest expense.
A)True
B)False
Q4) A company reports total assets of $910,000 and stockholders' equity of $530,000.Calculate the debt ratio.(Round your answer to two decimal places. )
A)36.81%
B)41.76%
C)58.24%
D)71.7%
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Chapter 16: Introduction to Managerial Accounting
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Sample Questions
Q1) The role managers play when they are motivating employees
A)Controlling
B)Managerial accounting
C)Organizational chart
D)Planning
E)Line position
F)Financial accounting
G)Directing
Q2) Which of the following would be considered a period cost for a manufacturing company?
A)indirect materials
B)factory utilities
C)direct labor
D)sales salaries
Q3) Which of the following is true of product costs?
A)They are expensed in the period they are paid.
B)For external reporting,GAAP requires that they be expensed before the products are sold.
C)They are first recorded in an inventory account.
D)For merchandising companies,product costs do not include freight costs.
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Chapter 17: Job Order Costing
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Q1) The records at Smith and Jones,Inc.show that Job 110 is charged with $10,000 of direct materials and $13,000 of direct labor.Smith and Jones,Inc.allocate manufacturing overhead at 85% of direct labor cost.What is the total cost of Job No.110?
A)$31,500
B)$34,050
C)$23,000
D)$13,000
Q2) The predetermined overhead allocation rate is calculated by dividing ________.
A)the total estimated overhead costs by total number of days in a year
B)the estimated amount of cost driver by actual total overhead costs
C)the actual overhead costs by actual amount of the cost driver or allocation base
D)the estimated overhead costs by total estimated quantity of the overhead allocation base
Q3) On June 30,Cleopatra,Inc.finished Job 70 with total job costs of $40,000 and transferred the costs to Finished Goods Inventory.On July 6,Cleopatra completed the sale of the goods to a customer for $55,000 on account.Provide the journal entry to record the sales revenue.Omit explanation.
Q4) Why would the manager of a service company need to use job order costing?
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Chapter 18: Process Costing
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Q1) Which of the following is used to calculate the number of units to account for under the first-in,first-out (FIFO)method of inventory valuation of process costing? This is the second department in a company using process costing.
A)To account for = Beginning balance + Started and completed + In process
B)To account for = Beginning balance + Amount transferred in
C)To account for = Beginning balance + In process
D)To account for = Beginning balance + Started and completed
Q2) Companies that manufacture identical items through a series of uniform production steps use ________ to determine the cost per unit produced.
A)a process costing system
B)a job order costing system
C)both of the above systems
D)neither of the above systems
Q3) Both job order costing and process costing ________.
A)maintain a single Work-in-Process Inventory account
B)treat all period costs as product costs
C)follow last-in,first-out method for inventory valuation
D)have the same type of product costs
Q4) How is a production cost report prepared using the FIFO method?
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Chapter 19: Cost Management Systems:
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Q1) An activity-based costing system is developed in four steps:
A.Compute the predetermined overhead allocation rate for each activity.
B.Identify activities and estimate their total indirect costs.
C.Identify the allocation base for each activity and estimate the total quantity of each allocation base.
D.Allocate indirect costs to the cost object.
Which of the following is the correct order for performing these steps?
A)a,b,c,d
B)c,a,b,d
C)b,c,a,d
D)b,a,c,d
Q2) List and briefly discuss three major differences between just-in-time costing (JIT)and traditional costing.
Q3) In the first step in developing an activity-based costing system for a manufacturing company,the management team must determine the activities that incur the majority of the product and period costs.
A)True
B)False
Q4) Define target cost.How is target cost determined?
Page 21
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Chapter 20: Cost-Volume-Profit Analysis
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Q1) Sensitivity analysis allows managers to see how various business strategies will affect profit levels.
A)True
B)False
Q2) Contribution margin ratio is the ratio of contribution margin to net income.
A)True
B)False
Q3) Fixed costs per unit decrease as production levels decrease.
A)True
B)False
Q4) An increase in contribution margin per unit can be created by a(n)________ in sales price per unit and a(n)________ in variable costs per unit.
A)increase,decrease
B)decrease,increase
C)increase,increase
D)decrease,decrease
Q5) Increases in total fixed costs ________ contribution margin per unit and ________ the breakeven point.
Q6) How is the contribution margin ratio calculated?
Page 22
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Chapter 21: Variable Costing
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Q1) For which of the following decisions is absorption costing most appropriate?
A)decisions related to using the sales mix to maximize profitability
B)decisions related to controlling short-term costs
C)decisions related to setting sales prices in the long run
D)decisions related to increasing contribution margin
Q2) When more units are sold than produced,operating income is higher under absorption costing than variable costing.
A)True
B)False
Q3) Absorption costing is more appropriate when determining the product costs for long-term production planning.
A)True
B)False
Q4) Under variable costing,the units in the beginning Finished Goods Inventory contain fixed manufacturing overhead costs.
A)True
B)False
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Chapter 22: Master Budgets
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Q1) When preparing the cost of goods sold budget,________.
A)ignore balances in Finished Goods Inventory
B)start by calculating the projected cost to produce each unit
C)ignore the inventory costing method
D)multiply units produced by the total projected cost per unit
Q2) Kuzma Foods,Inc.has budgeted sales for June and July at $690,000 and $720,000,respectively.Sales are 90% credit,of which 70% is collected in the month of sale and 30% is collected in the following month.What is the budgeted Accounts Receivable balance on July 31?
A)$216,000
B)$194,400
C)$186,300
D)$648,000
Q3) The inventory costing method affects the process of preparing the cost of goods sold budget.
A)True B)False
Q4) The forecast of sales revenue is the cornerstone of the master budget. A)True B)False
Page 24
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) The static budget,at the beginning of the month,for La Verne Company follows:
Static budget:
Sales volume: 2100 units: Sales price: $57.00 per unit
Variable cost: $13.00 per unit: Fixed costs: $25,000 per month
Operating income: $67,400
Actual results,at the end of the month,follows:
Actual results:
Sales volume: 1900 units: Sales price: $58.00 per unit
Variable cost: $17.00 per unit: Fixed costs $35,000 per month
Operating income: $42,900
Calculate the sales volume variance for variable costs.
A)$8800 U
B)$2600 F
C)$200 U
D)$8800 F
Q2) What does the fixed overhead cost variance measure?
Q3) List three ways in which using a standard cost system helps managers.
Q4) An unfavorable variance means more cost has been incurred than planned.
A)True
B)False
Page 25
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) Profit center responsibility reports include ________.
A)revenues only
B)invested capital
C)both revenues and expenses
D)returns on investments
Q2) A company may prefer to use residual income over return on investment for performance evaluation because ________.
A)residual income is a ratio but return on investment is an absolute figure
B)residual income is more likely to lead to goal congruence than return on investment
C)residual income is easier to calculate than return on investment
D)residual income considers three elements but return on investment considers only two elements
Q3) Goal congruence is the practice of comparing the company's achievements against the best practices in the industry.
A)True
B)False
Q4) List two objectives in setting transfer prices.
Q5) Explain the difference between a controllable and a noncontrollable cost.
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Chapter 25: Short-Term Business Decisions
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Q1) ________ refers to the benefit given up by choosing an alternative course of action.
A)Opportunity cost
B)Sunk cost
C)Relevant cost
D)Irrelevant cost
Q2) Woodstock Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $580 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1500,has variable costs of $970,and takes eight direct labor hours to manufacture.The company has a maximum of 5000 direct labor hours per month when operating at full capacity.If there are no constraints on sales of either product,and the company could choose any proportions of product mix that they wanted,what is the optimum product mix to maximize operating income of the company?
A)500 units of small and 625 units of large
B)0 units of small and 625 units of large
C)625 units of small and 500 units of large
D)500 units of small and 0 units of large
Q3) List three questions managers should consider when deciding whether to drop a product or a business segment.
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Chapter 26: Capital Investment Decisions
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Q1) The Accounting Rate of Return method evaluates the lifetime return of an investment,whereas Return on Investment evaluates the annual return of an investment.
A)True
B)False
Q2) The last step in the capital budgeting process is control,which compares the actual results with the projected results.These comparisons are known as ________.
A)net cash inflows
B)post-audits
C)rankings
D)variance analysis
Q3) List two strengths and one weakness of the accounting rate of return capital budgeting method.
Q4) Which capital budgeting method uses accrual accounting,rather than net cash inflows,as a basis for calculations?
A)payback
B)accounting rate of return
C)net present value
D)internal rate of return
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Chapter 27: Accounting Information Systems
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Q1) An accounting information system creates the structure to encourage adherence to management policies.
A)True
B)False
Q2) Which of the following is true of source documents in an accounting information system?
A)All journal entries can be considered as source documents in an accounting information system.
B)Source documents provide control and reliability in an accounting information system.
C)A manual document cannot be considered as a source document in an accounting information system.
D)In a manual accounting information system,source documents refer to financial statements.
Q3) In an accounting information system,outputs are the reports used for decision making,which include the financial statements.
A)True
B)False
Q4) List and describe two features of an effective accounting information system.
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