BAF3M · Exam review

Financial Accounting Exam Review

A practice exam with questions from all 4 units, then the key facts from every lesson, unit by unit. For a deeper look at one unit, open its test review.

Unit test reviews

Practice exam

32 questions, the same number from each unit. Each one shows the lesson it comes from.

Unit 1: What Is Accounting?
1
Which task is bookkeeping rather than accounting?
Unit 1: Forms of Business Organization
2
Which owner risks their personal house if the business cannot pay its debts?
Unit 1: GAAP: The Rules Behind the Numbers
3
A business records a building at what it originally paid for it, even though it could sell for more today. This follows the...
Unit 1: The Balance Sheet and the Accounting Equation
4
If total assets are $47,000 and owner's equity is $30,000, what are total liabilities?
$
Unit 1: The Balance Sheet and the Accounting Equation
5
A business has cash $5,000, equipment $20,000, accounts payable $6,000, and a bank loan $9,000. What is owner's equity?
$
Unit 1: Accounts Receivable and Accounts Payable
6
In your own words, distinguish a debtor from a creditor.
Unit 1: Ethics, Audits, and Careers in Accounting
7
A business owner pressures an employee to overstate revenue before a loan application. The correct response is to...
Unit 1: Technology in Accounting
8
Give an example of a decision accounting software cannot make on its own.
Unit 2: The Account, Debits, and Credits
9
Which side of an account is the credit side?
Unit 2: The Trial Balance
10
A trial balance proves that...
Unit 2: The Income Statement
11
Why might a brand-new business show a net loss in its first year even though it's not failing?
Unit 2: The General Journal
12
Trillium's opening entry debits Cash $10,000, Equipment $6,000, and Truck $9,000. If credits are Bank Loan $8,000 and Capital $X, what is X?
$
Unit 2: Source Documents
13
Which document does a seller create to record a credit sale?
Unit 2: Adjusting Entries
14
Which accounting basis does GAAP require?
Unit 2: Depreciation
15
Why does straight-line depreciation subtract salvage value before dividing by useful life?
Unit 2: Closing the Books
16
On Trillium's post-closing trial balance, if total debits are $25,380, what must total credits equal?
$
Unit 3: Service vs. Merchandising vs. Manufacturing
17
A furniture factory that turns lumber into finished chairs is best classified as a:
Unit 3: The Sales Account
18
Sales $145,000; Sales Returns and Allowances $6,000; Sales Discounts $1,800. Find Net Sales.
$
Unit 3: Periodic vs. Perpetual Inventory
19
Give one advantage of the periodic method over the perpetual method for a very small business.
Unit 3: GST, HST, and PST
20
In a province still charging GST and PST separately, PST paid on a business's own purchases is usually:
Unit 3: The Special Journal System
21
Which journal would a business use to record a $2,000 sale of merchandise on account?
Unit 3: Bank Reconciliation
22
An outstanding cheque should be:
Unit 3: Bad Debts & the Allowance Method
23
Which two accounts are affected when a specific customer's account is written off?
Unit 3: Merchandising Financial Statements
24
Delivery Expense $6,000, Sales Commissions $14,000, Office Salaries $20,000, Insurance $3,000, Advertising $5,000. Find total Selling Expenses.
$
Unit 4: The Cash Flow Statement
25
Cash received from a customer paying an account receivable belongs under:
Unit 4: Budgets
26
A company budgeted $40,000 for advertising but actually spent $46,000. This is:
Unit 4: Comparative & Common-Size Statements
27
Administrative expenses were $54,000 out of Net Sales of $600,000. Find the vertical percentage.
%
Unit 4: Liquidity Ratios
28
A company has $8,000 cash, $22,000 accounts receivable, no marketable securities, and $18,750 current liabilities. Find the Quick Ratio.
Unit 4: Activity Ratios
29
Cost of Goods Sold $210,000; Opening Inventory $30,000; Closing Inventory $40,000. Find Merchandise Turnover.
Unit 4: Profitability & Using Accounting for Decisions
30
If Gross Profit Margin is stable but Net Profit Margin is falling, the most likely cause is:
Unit 4: Payroll Accounting
31
A worker is paid $3.00 per unit and assembles 275 units in a week. Find Gross Earnings.
$
Unit 4: Corporations & Manufacturing Companies
32
In a limited partnership, a limited partner's liability is generally:

Key facts by unit

Unit 1: The World of Accounting

What Is Accounting?

Bookkeeping = recording. Accounting = recording, classifying, summarizing, AND interpreting.
Internal users (owners, managers, employees) use accounting information to run the business.
External users (creditors, investors, CRA, buyers) use it to decide whether to deal with the business.
A business transaction is always an exchange of things of value.
Accounting information exists to support decisions made with limited money, time, or resources.

Forms of Business Organization

Sole proprietorship: one owner, unlimited personal liability, easy and cheap to start.
General partnership: two+ owners, all with unlimited liability; limited partnership splits partners into general (unlimited) and limited (liability capped at investment).
Corporation: a separate legal entity; shareholders have limited liability; public corporations trade on a stock exchange, private corporations do not.
The partnership agreement sets out capital contributions, profit/loss sharing, and how the partnership dissolves.
Non-profits and co-operatives exist to serve members/a mission rather than to maximize owner profit.

GAAP: The Rules Behind the Numbers

Business entity principle: business records are kept separate from the owner's personal finances.
Cost principle: assets are recorded at their original acquisition cost, not current market value.
Matching principle: expenses are recorded in the same period as the revenue they helped earn.
Revenue recognition principle: revenue is recorded when it is definitely earned, not necessarily when cash arrives.
Conservatism: when in doubt between two acceptable treatments, pick the one that doesn't overstate income or assets.
Public companies use IFRS; most private companies use ASPE.

The Balance Sheet and the Accounting Equation

$A = L + OE$ — assets always equal liabilities plus owner's equity.
Assets: items of value owned. Liabilities: debts owed. Owner's equity: the owner's claim after paying all liabilities.
A balance sheet reports financial position at one specific date, never for a period of time.
Personal net worth = Assets − Liabilities, the personal version of owner's equity.
Assets are listed in liquidity order: cash first, then items closest to becoming cash.
The heading needs three lines: who, what, and the specific date ("as at").

Accounts Receivable and Accounts Payable

Accounts receivable: total amount due from debtors (customers), usually within 30 days — an asset.
Accounts payable: total amount owed to creditors for goods/services purchased — a liability.
A debtor owes the business money; a creditor is owed money by the business.
Equities = claims by creditors (liabilities) and owners (owner's equity) against a business's assets.
Selling on credit increases accounts receivable; buying on credit increases accounts payable.

Ethics, Audits, and Careers in Accounting

Ethical accounting means honest, objective, unbiased reporting, because real people rely on the numbers to make real decisions.
An audit is a systematic, independent check of accounting records and procedures.
Today's Canadian professional designation is CPA (Chartered Professional Accountant), under CPA Canada.
CA, CMA, and CGA were the three legacy designations that merged into CPA in the 2010s.
Career paths include public accounting, private/industry accounting, government accounting, and forensic accounting.

Technology in Accounting

A data entry sheet organizes accounts, amounts, and explanations before entry into computerized accounting software.
Cloud accounting stores data remotely so it can be accessed securely from anywhere and shared among several users at once.
A POS terminal is an electronic cash register linked to a computer that records sales directly into the accounting system.
EFT (electronic funds transfer) and debit cards move money electronically between bank accounts without paper cheques or cash.
Computers handle arithmetic and data entry reliably; professional judgment (materiality, conservatism, objectivity) still requires a person.

Unit 2: The Accounting Cycle: Service Business

The Account, Debits, and Credits

Debit = left side of an account. Credit = right side of an account. Neither word means "good" or "bad."
Assets increase with debits and decrease with credits (normal debit balance).
Liabilities and Capital increase with credits and decrease with debits (normal credit balance).
Drawings and Expenses increase with debits (they both reduce owner's equity, like assets do to the equation's balance).
Revenue increases with credits (it increases owner's equity, like Capital).
The debit/credit rules exist to keep $A = L + OE$ balanced after every single transaction.

Double-Entry Accounting

Double-entry accounting: every transaction is recorded with equal total debits and total credits.
A business transaction is always an exchange of things of value.
The four-step analysis: identify accounts → classify each → decide increase/decrease → apply debit/credit rules.
If total debits don't equal total credits on a transaction, there is an error to find before moving on.

The Trial Balance

A trial balance lists every ledger account balance; total debits must equal total credits.
A trial balance proves mathematical accuracy of the ledger, NOT that every transaction was recorded correctly or in the right account.
A transposition error swaps two digits (e.g., $918 written as $981); a slide error shifts a decimal point.
If the debit/credit difference divides evenly by 9, suspect a transposition or slide error.
If the difference divides evenly by 2, suspect an amount posted to the wrong side.

The Income Statement

Revenue: amounts earned from selling goods or services. Expenses: costs of items/services used up.
Net Income = Revenue − Expenses, when Revenue > Expenses. Net Loss occurs when Expenses > Revenue.
An income statement covers a period of time ("for the year/month ended"), unlike the balance sheet's single date ("as at").
The time period principle requires consistent-length accounting periods so results can be compared.
Profit is the increase in owner's equity from successfully operating the business — the accounting meaning of net income.

Drawings and the Statement of Owner's Equity

The drawings account records assets withdrawn from the business by the owner for personal use.
Drawings is NOT a business expense — it never appears on the income statement.
The statement of owner's equity shows how Capital moved: beginning balance + investments + net income (− net loss) − drawings = ending Capital.
Net income increases Capital; net loss and drawings both decrease Capital.
The ending Capital figure on the statement of owner's equity must match the Capital shown on the balance sheet.

The General Journal

A journal records transactions in chronological order; journalizing is the act of recording them.
Standard format: debit account and amount first, credit account (indented) and amount second, then a short explanation.
A compound entry has more than one debit or more than one credit, but total debits must still equal total credits.
The opening entry records a business's starting assets, liabilities, and owner's equity, and is often compound.
The general journal is usually the main, first-stop journal of a business.

Posting to the Ledger

Posting: the transfer of information from a journal to the general ledger.
A balance-column ledger account has three amount columns — debit, credit, and running balance.
A chart of accounts lists every account's name and number in the ledger.
Account numbers usually follow financial-statement order: assets, liabilities, equity, revenue, expenses.
Cross-referencing (posting references) lets you trace any amount between the journal and the ledger.

Source Documents

The principle of objectivity: accounting data must be free from bias and verifiable — supported by a real source document.
Sales invoice: the seller's record of a credit sale. Purchase invoice: the buyer's proof of a purchase on account.
Endorsement: a signature on the back of a cheque by the person depositing it; a restrictive endorsement controls what happens to the funds.
Bank credit memo increases a customer's bank account; bank debit memo decreases it.
A data entry sheet organizes a source document's information before it's typed into accounting software.

The Work Sheet

A work sheet organizes account data for preparing financial statements; it is an internal tool, not a financial statement itself.
Six columns: Trial Balance, Income Statement, and Balance Sheet, each split into Debit and Credit.
"Extending" means copying a balance from the Trial Balance section into either the Income Statement or Balance Sheet section, based on account type.
Net income (Credit > Debit on Income Statement) or net loss (Debit > Credit) is found by comparing the Income Statement column totals.
The net income/loss figure is added to the smaller Balance Sheet column so both Balance Sheet columns balance.

Adjusting Entries

Adjustments are recorded at the end of a period so account balances are correct before statements are prepared.
Accrual basis: revenue/expenses recorded when earned/incurred. Cash basis: recorded only when cash changes hands.
GAAP requires the accrual basis, which is why adjusting entries are necessary.
Common adjustments: supplies used, prepaid expenses expiring, unrecorded (late-arriving) expenses, and depreciation.
An adjusting entry is a normal double-entry transaction — equal debits and credits, journalized and posted like any other.

Depreciation

Depreciation allocates a fixed asset's cost to the periods it's used; it's an expense on the income statement.
Accumulated Depreciation is a contra-asset account; Book Value = Cost − Accumulated Depreciation.
Straight-line: Annual Depreciation = (Cost − Salvage Value) ÷ Useful Life — same amount every year.
Declining-balance: Depreciation = Book Value at start of year × Rate — larger amounts in early years, salvage value ignored in the formula.
Depreciation is called Capital Cost Allowance (CCA) for income tax purposes.

Classified Financial Statements

A classified balance sheet groups items into current assets, fixed assets, current liabilities, and long-term liabilities.
Current asset: converted to cash, sold, or consumed within a year. Listed in liquidity order.
Fixed assets: long life (over a year); shown at cost minus accumulated depreciation (book value).
Current liabilities: due within a year. Long-term liabilities: due in more than a year.
A supporting schedule provides extra detail behind a single line item on a main financial statement.

Closing the Books

Closing the books reduces revenue, expense, and drawings accounts to zero at period-end.
Temporary accounts (Revenue, Expenses, Drawings) don't carry forward; permanent accounts (Assets, Liabilities, Capital) do.
Four closing entries: close Revenue to Income Summary, close Expenses to Income Summary, close Income Summary to Capital, close Drawings to Capital.
The post-closing trial balance lists only permanent accounts, and its debits must still equal its credits.
The full accounting cycle: journalize → post → trial balance → work sheet/adjustments → statements → close → post-closing trial balance.

Unit 3: The Accounting Cycle: Merchandising Business

Service vs. Merchandising vs. Manufacturing

Service company = sells labour/expertise; no Merchandise Inventory account.
Merchandising company = buys finished goods and resells them as-is.
Manufacturing company = builds the finished goods from raw materials.
Merchandise Inventory is a current asset: goods on hand, ready for resale.
The operating cycle: buy → hold → sell → collect → buy again.

The Purchases Account

Purchases (debit balance) records the cost of merchandise bought for resale.
Purchases Returns and Allowances (credit, contra-Purchases) records goods sent back or price reductions.
Purchases Discounts (credit, contra-Purchases) rewards paying within the discount period, e.g. 2/10, n/30.
Transportation-in (debit) is ADDED to Purchases — freight is part of the cost of the goods.
Net Purchases = Purchases − Purchases Returns and Allowances − Purchases Discounts + Transportation-in.

The Sales Account

Sales (credit balance) records the selling price of merchandise sold.
Sales Returns and Allowances (debit, contra-revenue) records customer returns and price allowances.
Sales Discounts (debit, contra-revenue) records the discount given for early customer payment.
Net Sales = Sales − Sales Returns and Allowances − Sales Discounts.
Delivery Expense (seller's outgoing freight) is an operating expense, never part of Cost of Goods Sold.

Periodic vs. Perpetual Inventory

Periodic system: Merchandise Inventory is only updated at period end, based on a physical count.
Perpetual system: Merchandise Inventory updates continuously, transaction by transaction.
A physical inventory count is a count of all goods actually on hand.
A point-of-sale terminal (electronic register + computer) makes a true perpetual system practical.
Even perpetual systems still count inventory physically, to catch shrinkage.

Cost of Goods Sold & Gross Profit

COGS = Opening Inventory + Net Purchases − Closing Inventory.
Cost of Goods Available for Sale = Opening Inventory + Net Purchases.
Gross Profit = Net Sales − Cost of Goods Sold.
A schedule presents the COGS calculation's detail; only the final total flows to the income statement.
A higher closing inventory (all else equal) means a LOWER Cost of Goods Sold for the period.

GST, HST, and PST

Ontario HST rate = 13% (a blend of the federal and provincial portions).
HST Payable (credit, liability) = HST collected on sales; HST Refundable (debit, contra-liability) = HST paid on eligible purchases.
Input Tax Credit = the HST a business paid on purchases, which it can claim back from the CRA.
Amount remitted (or refunded) = HST Payable − HST Refundable.
The Quick Method lets a small business remit a reduced flat percentage instead of tracking every input tax credit.

Subsidiary Ledgers & Control Accounts

Subsidiary Ledger = a group of accounts of one type, kept outside the general ledger.
Control Account = the general ledger total that must equal the sum of its subsidiary ledger.
Accounts Receivable Control Account replaces individual customer accounts in the general ledger.
A Schedule of Accounts Receivable/Payable proves the subsidiary ledger's mathematical accuracy against the control account.
Batch journalizing records one journal entry for a group of source documents; each document is still posted individually to its own subsidiary account.

The Special Journal System

Purchases Journal records purchases on account; Sales Journal records sales on account.
Cash Receipts Journal records all cash received; Cash Payments Journal records all payments.
The General Journal still exists for anything that doesn't fit the other four (adjusting, closing, correcting entries).
Matching process = comparing the purchase order, purchase invoice, and receiving report before paying.
Extension = quantity × unit price on an invoice line.

Cash Control & Petty Cash

Internal Accounting Control protects assets and ensures reliable records.
Separation of Duties: the person handling cash should not be the same person recording it.
Cash Short and Over records small shortages (debit) and overages (credit) at the till.
A Petty Cash Fund pays small expenses; every payment needs a signed Petty Cash Voucher.
Replenishing petty cash always brings the fund back up to its original fixed amount.

Bank Reconciliation

Reconciliation Statement brings the bank's records into agreement with the depositor's (company's) records.
Outstanding cheques and deposits in transit adjust the BANK side; they need no journal entry.
NSF cheques and bank service charges adjust the BOOK side; they DO need a journal entry.
Cancelled cheques are cheques the bank has already cashed, confirming they cleared.
Both sides of the reconciliation must arrive at the exact same true (adjusted) cash balance.

Bad Debts & the Allowance Method

Bad Debts Expense must be ESTIMATED and matched to the period of the related sale, not the period the loss is discovered.
Income statement method: Bad Debts Expense = Net Sales × estimated %.
Balance sheet method: Bad Debts Expense = (Accounts Receivable × estimated %) − existing Allowance balance.
An age analysis assigns a higher uncollectible % to older, longer-overdue balances.
Net Realizable Accounts Receivable = Accounts Receivable − Allowance for Uncollectible Accounts.
Writing off a specific account never touches Bad Debts Expense and never changes Net Realizable Accounts Receivable.

Accruals & Deferrals

Accrued expenses/salaries: incurred but not yet paid — debit the expense, credit a payable.
Accrued revenue: earned but not yet billed or collected — debit a receivable, credit revenue.
Unearned revenue: cash already received, but not yet earned — starts as a liability, moves to revenue as earned.
Accruals: cash has NOT moved yet. Deferrals: cash HAS already moved.
All four adjustments exist to satisfy the matching principle under accrual-basis accounting.

Merchandising Financial Statements

Classified income statement sections: Revenue, Cost of Goods Sold, Operating Expenses.
Operating expenses split into Selling Expenses and Administrative Expenses.
Net Income = Gross Profit − Total Operating Expenses.
Statement of Financial Position = another name for the balance sheet.
Interim financial statements are practical under a perpetual inventory system, since COGS and inventory stay current all year.

Unit 4: Financial Analysis & Decision Making

The Cash Flow Statement

Cash Flow Statement shows incoming and outgoing cash for a period, unlike the accrual-based income statement.
Operating Activities: cash tied to normal day-to-day selling and expenses.
Investing Activities: cash tied to buying/selling long-term assets.
Financing Activities: cash tied to loans, owner investment/withdrawals, and dividends.
Net Income and net cash flow can differ significantly in the same period — profit is not the same as cash.

Budgets

Budget = a financial plan for a specific future accounting period.
Master Budget = the overall company budget, built from several connected smaller budgets.
Sales Budget is the starting point — every other budget is built from its forecast.
Capital Budget plans equipment and building purchases for the period.
Variance = the difference between budgeted and actual results; can be favourable or unfavourable.

Comparative & Common-Size Statements

Comparative Financial Statements show dollar changes across two or more years, side by side.
Horizontal Analysis = year-to-year percentage change, compared to a chosen Base Year.
Vertical Analysis = comparison within one year, each item as a % of a major total (Net Sales or Total Assets).
Common-Size Statements present only percentages, no dollar figures, making very different-sized companies comparable.
Horizontal analysis formula: % change = (Current − Base) ÷ Base × 100.

Liquidity Ratios

Liquidity ratios measure a business's ability to pay short-term debts.
Working Capital = Total Current Assets − Total Current Liabilities (a dollar amount).
Current Ratio = Current Assets ÷ Current Liabilities.
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities — excludes inventory and prepaids.
What counts as a "good" ratio depends heavily on the industry.

Solvency Ratios

Solvency ratios measure the mix of debt vs. equity financing a business relies on.
Equity Ratio = Owner's Equity ÷ Total Assets.
Debt Ratio = Total Liabilities ÷ Total Assets.
Equity Ratio + Debt Ratio always equal 100% of Total Assets.
Higher leverage (more debt, less equity) means higher risk, but also the potential for higher returns to the owner.

Activity Ratios

Merchandise Turnover = Cost of Goods Sold ÷ Average Merchandise Inventory.
Average Merchandise Inventory = (Opening Inventory + Closing Inventory) ÷ 2.
Accounts Receivable Collection Period = (Average Accounts Receivable ÷ Net Credit Sales) × 365.
Higher turnover and a shorter collection period generally both signal a faster, more efficient operating cycle.
Both ratios measure SPEED/efficiency, unlike the balance-based liquidity and solvency ratios.

Profitability & Using Accounting for Decisions

Gross Profit Margin = Gross Profit ÷ Net Sales.
Net Profit Margin = Net Income ÷ Net Sales.
Return on Equity = Net Income ÷ Owner's Equity.
A falling gross margin usually signals a purchasing/pricing problem; a falling net margin with a stable gross margin signals an operating-expense problem.
Ratios should be compared over time or against similar businesses, and combined with judgment — no single ratio tells the whole story.

Payroll Accounting

Gross Earnings − Deductions = Net Earnings.
Compulsory deductions: income tax, CPP, EI. Voluntary deductions: union dues, RPP contributions, etc.
TD1 Form claims non-refundable tax credits; T1 Form is the annual personal income tax return.
The employer pays its own matching share of CPP (dollar-for-dollar) and EI (about 1.4× the employee's share) — and these rates change yearly.
Form PD7A is the official remittance form sending all withheld and matched amounts to the CRA.

Corporations & Manufacturing Companies

Sole proprietorship: one owner, unlimited personal liability. Partnership: two or more owners, liability set by a partnership agreement.
Corporation: a separate legal entity; shareholders' liability is generally limited to their investment.
Common shares: one vote per share, no guaranteed dividend. Preferred shares: no vote, prior claim on assets/income.
Retained Earnings = accumulated net income the corporation has kept, after dividends, since it began.
Manufacturing costs = Direct Materials + Direct Labour + Overhead Costs.