Financial Accounting Exam Study Guide – Step-by-Step Guidance

Q1. Which financial statement shows:

• Company performance?

• Financial position?

• Cash inflows and outflows?

• What the company did with its profits?

Background

Topic: Types of Financial Statements

This question tests your understanding of the four main financial statements and their purposes.

Key Terms:

• Income Statement

• Balance Sheet

• Statement of Cash Flows

• Statement of Retained Earnings

Step-by-Step Guidance

1. Review the purpose of each financial statement. For example, the income statement shows revenues and expenses over a period.

2. Match each description (performance, position, cash flows, profits) to the correct statement based on its function.

3. Think about which statement reports assets, liabilities, and equity at a point in time.

4. Consider which statement explains changes in retained earnings.

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Q2. On which statement(s) does Net Income appear? Retained Earnings? Dividends?

Background

Topic: Flow of Information Between Financial Statements

This question tests your knowledge of how key figures move between statements.

Key Terms:

• Net Income

• Retained Earnings

• Dividends

Step-by-Step Guidance

1. Recall where net income is calculated and where it is reported after calculation.

2. Think about how retained earnings are updated and which statements show this.

3. Identify where dividends are declared and how they affect retained earnings.

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Q3. Define the following account types:

• Assets

• Liabilities

• Equity

• Revenue

• Expenses

Background

Topic: Basic Account Types in Financial Accounting

This question tests your understanding of the fundamental categories used in accounting.

Key Terms:

• Asset: Resources owned by the company

• Liability: Obligations owed to others

• Equity: Owner's residual interest

• Revenue: Income from operations

• Expense: Costs incurred in earning revenue

Step-by-Step Guidance

1. Write a brief definition for each account type, focusing on its role in the accounting equation.

2. Consider examples for each type to clarify your understanding.

3. Think about how each account type affects the financial statements.

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Q4. What are the equations for the three statements?

• Income Statement

• Statement of Retained Earnings

• Balance Sheet

Background

Topic: Fundamental Accounting Equations

This question tests your ability to recall and apply the basic equations underlying each financial statement.

Key Formulas:

• Income Statement: $\text{Net Income} = \text{Revenues} - \text{Expenses}$

• Statement of Retained Earnings: $\text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}$

• Balance Sheet: $\text{Assets} = \text{Liabilities} + \text{Equity}$

Step-by-Step Guidance

1. Write out each equation and identify the components involved.

2. Think about how the net income from the income statement flows into the statement of retained earnings.

3. Consider how the ending retained earnings appears on the balance sheet.

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Q5. How would the issuance of common stock for cash affect the accounting equation?

Background

Topic: Effects of Transactions on the Accounting Equation

This question tests your understanding of how issuing stock impacts assets, liabilities, and equity.

Key Terms:

• Common Stock

• Assets

• Liabilities

• Stockholders' Equity

Step-by-Step Guidance

1. Recall the accounting equation: $\text{Assets} = \text{Liabilities} + \text{Equity}$

2. Think about what happens when cash is received for issuing stock (which accounts increase).

3. Identify which side of the equation is affected and whether liabilities are involved.

4. Review the answer choices and eliminate those that do not match the transaction's effect.

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Q6. Find the missing values using the accounting equation. Which company appears to have the strongest financial position?

Background

Topic: Analyzing Financial Position Using the Accounting Equation

This question tests your ability to use the accounting equation to find missing values and interpret financial strength.

Key Formula:

• $\text{Assets} = \text{Liabilities} + \text{Equity}$

Step-by-Step Guidance

1. For each company, use the accounting equation to solve for the missing value (assets, liabilities, or equity).

2. Calculate the percentage of liabilities relative to assets for each company.

3. Compare the percentages to determine which company has the lowest proportion of liabilities.

4. Interpret which company has the strongest financial position based on your calculations.

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Q7. Oz Corp retained earnings calculation

Oz Corp had a retained earnings balance of $20 million on January 1st. During the year sales revenue was $70 million, while expenses totaled $25 million. The company declared and paid $6 million in cash dividends during the year. What was the balance of retained earnings at the end of the year?

Background

Topic: Statement of Retained Earnings

This question tests your ability to calculate ending retained earnings using the statement of retained earnings formula.

Key Formula:

• $\text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}$

• $\text{Net Income} = \text{Revenues} - \text{Expenses}$

Step-by-Step Guidance

1. Calculate net income: $\text{Net Income} = 70\text{ million} - 25\text{ million}$

2. Plug the beginning retained earnings, net income, and dividends into the formula for ending retained earnings.

3. Set up the equation for ending retained earnings, but do not solve for the final value yet.

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Q8. How do the different account types increase and decrease?

Background

Topic: Rules of Debits and Credits

This question tests your understanding of how debits and credits affect various account types.

Key Terms:

• Debit

• Credit

• Assets, Liabilities, Equity, Revenue, Expenses, Dividends

Step-by-Step Guidance

1. Recall the basic rules: assets increase with debits, liabilities and equity increase with credits.

2. Fill in the table for each account type, indicating whether debits or credits increase or decrease the account.

3. Think about exceptions, such as contra accounts.

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Q9. Put the accounting cycle tasks in order:

• Post to Ledger (t-account)

• Prepare trial balance

• Record journal entries in chronological order in the journal

• Prepare Financial Statements

Background

Topic: The Accounting Cycle

This question tests your knowledge of the sequence of steps in the accounting cycle.

Key Terms:

• Journal

• Ledger

• Trial Balance

• Financial Statements

Step-by-Step Guidance

1. Recall the typical order: journalize transactions, post to ledger, prepare trial balance, prepare financial statements.

2. Arrange the tasks in the correct sequence based on the flow of information.

3. Think about why each step must precede the next.

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Q10. Journalize and post transactions for supplies purchased and paid

Oz Corp. purchased supplies on account for $5,000. Later Oz Corp. paid $3,500 on account.

Background

Topic: Journal Entries and T-Accounts

This question tests your ability to record transactions and post to T-accounts.

Key Terms:

• Journal Entry

• Accounts Payable

• Supplies

• Cash

Step-by-Step Guidance

1. Write the journal entry for purchasing supplies on account: debit Supplies, credit Accounts Payable.

2. Write the journal entry for paying cash on account: debit Accounts Payable, credit Cash.

3. Post both entries to the Accounts Payable T-account, showing increases and decreases.

4. Calculate the balance in Accounts Payable after both transactions, but do not state the final amount.

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Q11. When should revenue be recognized according to U.S. GAAP?

Background

Topic: Revenue Recognition Principle

This question tests your understanding of the timing of revenue recognition under GAAP.

Key Terms:

• Revenue Recognition Principle

• GAAP

Step-by-Step Guidance

1. Review the options and recall the principle that revenue is recognized when earned, not necessarily when cash is received.

2. Eliminate choices that do not match the principle.

3. Identify the correct timing for revenue recognition based on service or delivery.

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Q12. What are the three types of adjusting entries?

Background

Topic: Adjusting Entries

This question tests your knowledge of the types of adjustments made at period end.

Key Terms:

• Prepaid Expenses

• Accrued Revenues

• Accrued Expenses

• Unearned Revenues

Step-by-Step Guidance

1. Recall the main categories: accruals and deferrals.

2. List the three types and briefly describe each.

3. Think about examples for each type.

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Q13. What are the three types of temporary accounts? What account do we close temporary accounts to? What financial statement does NOT contain temporary accounts?

Background

Topic: Closing Process

This question tests your understanding of temporary vs. permanent accounts and the closing process.

Key Terms:

• Temporary Accounts

• Permanent Accounts

• Retained Earnings

Step-by-Step Guidance

1. List the three types of temporary accounts.

2. Identify the account to which temporary accounts are closed.

3. Determine which financial statement excludes temporary accounts.

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Q14. Oz Corp. rent payment and adjusting entry

Oz Corp. pays rent for their office in one annual payment of $24,000 on September 1st. The lease covers the period of 9/1/25-8/31/26. Oz Corp. has a year-end of December 31st.

• Journalize the annual rent payment of $24,000 on 9/1

• Journalize the adjusting entry for rent expense on 12/31

• What is the balance of Prepaid Rent at 12/31/25?

Background

Topic: Prepaid Expenses and Adjusting Entries

This question tests your ability to record prepaid expenses and make adjusting entries.

Key Terms:

• Prepaid Rent

• Rent Expense

• Adjusting Entry

Step-by-Step Guidance

1. Record the initial payment as a debit to Prepaid Rent and a credit to Cash.

2. Calculate the portion of rent expense for the period from 9/1 to 12/31.

3. Journalize the adjusting entry to transfer the appropriate amount from Prepaid Rent to Rent Expense.

4. Set up the calculation for the remaining balance in Prepaid Rent after the adjustment.

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Q15. Oz Corp. rent revenue journal entries

• Journalize Oz Corp. earning Rent Revenue of $2,000 on account and then journalize collecting $1,000 on account.

• Journalize Oz. Corp. receiving $8,000 in advance and then journalize the earning of $2,000 as Rent Revenue.

Background

Topic: Revenue Recognition and Unearned Revenue

This question tests your ability to record revenue earned and received in advance.

Key Terms:

• Rent Revenue

• Accounts Receivable

• Unearned Revenue

• Cash

Step-by-Step Guidance

1. Write the journal entry for earning revenue on account: debit Accounts Receivable, credit Rent Revenue.

2. Write the journal entry for collecting cash on account: debit Cash, credit Accounts Receivable.

3. Write the journal entry for receiving cash in advance: debit Cash, credit Unearned Revenue.

4. Write the journal entry for earning part of the advance: debit Unearned Revenue, credit Rent Revenue.

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Q16. Accrual vs. Cash Basis Accounting for Oz Corp.

During 2024 Oz Corp. earns revenue of $740 thousand. Expenses total $600 thousand. Oz collected all but $25 thousand of the revenue and paid $620 thousand on its expenses.

• Under Accrual Accounting, what amount of revenue should be reported for 2024?

• What is the Revenue Recognition Principle?

• Under Accrual Accounting, what amount of total expenses should be reported for 2024?

• What is the Expense Recognition & Matching Principle?

• Using the CASH basis method, what amount of revenue would be recognized? Expenses?

• What statement reports cash receipts and cash payments?

Background

Topic: Accrual vs. Cash Basis Accounting

This question tests your understanding of the differences between accrual and cash basis accounting and related principles.

Key Terms:

• Accrual Accounting

• Cash Basis Accounting

• Revenue Recognition Principle

• Expense Recognition (Matching) Principle

• Statement of Cash Flows

Step-by-Step Guidance

1. Recall that under accrual accounting, revenue is recognized when earned, not when cash is received.

2. Apply the revenue and expense recognition principles to determine what should be reported.

3. Calculate the amounts recognized under cash basis by considering only cash received and paid.

4. Identify which financial statement reports cash receipts and payments.

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Q17. Record closing entries for Oz Corp.

• Close revenues, expenses, and dividends separately.

• Post journal entries to retained earnings t-account and find the ending balance of R/E (note the beginning balance of retained earnings in the account list below).

Background

Topic: Closing Process and Retained Earnings

This question tests your ability to record closing entries and update retained earnings.

Key Terms:

• Closing Entries

• Retained Earnings

• Temporary Accounts

Step-by-Step Guidance

1. Identify which accounts need to be closed (revenues, expenses, dividends).

2. Write the journal entries to close each type of account to Retained Earnings.

3. Post the entries to the Retained Earnings T-account, showing increases and decreases.

4. Set up the calculation for the ending balance, but do not solve for the final value.

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Q18. What item flows from the income statement to the statement of retained earnings?

Background

Topic: Flow of Information Between Statements

This question tests your understanding of how figures move between statements.

Key Terms:

• Net Income

• Retained Earnings

Step-by-Step Guidance

1. Recall what is calculated on the income statement and what is needed for the statement of retained earnings.

2. Identify the item that links the two statements.

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Q19. What item flows from the statement of retained earnings to the balance sheet?

Background

Topic: Flow of Information Between Statements

This question tests your understanding of how figures move between statements.

Key Terms:

• Retained Earnings

• Equity

Step-by-Step Guidance

1. Recall what is calculated on the statement of retained earnings and what is reported on the balance sheet.

2. Identify the item that links the two statements.

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Q20. Debt Ratio and Practice Financial Statements

• Understand Debt Ratio and what it tells us about a company’s financial position. Is a bigger or smaller debt ratio preferred?

• Debt Ratio = Total Liabilities / Total Assets

Background

Topic: Financial Ratios

This question tests your understanding of the debt ratio and its implications for financial health.

Key Formula:

• $\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}}$

Step-by-Step Guidance

1. Recall the formula for debt ratio and what it measures.

2. Think about what a higher or lower ratio means for a company's financial risk.

3. Consider which ratio is generally preferred by creditors and investors.

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Q21. Which ratio measures the ability to pay current liabilities with current assets?

Background

Topic: Liquidity Ratios

This question tests your knowledge of ratios used to assess short-term financial health.

Key Formula:

• $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$

Step-by-Step Guidance

1. Recall the formula for the current ratio and what it measures.

2. Think about how this ratio is used to assess liquidity.

3. Consider why this ratio is important for creditors.

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