Accounting 303 Exam 1, Chapters 1 3 & 5 Fall 2013 Section Row

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1 1 Accounting 303 Name Exam 1, Chapters 1 3 & 5 Fall 2013 Section Row I. Multiple Choice Questions. (2 points each, 54 points in total) Read each question carefully and indicate your answer by circling the letter preceding the one best answer. 1. What is the objective of financial reporting? a. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors. b. Provide information that is useful to management in making decisions. c. Provide information that clearly portrays nonfinancial transactions. d. Provide information that excludes claims to the resources. 2. Accrual accounting is used because a. cash flow information is not used by investors and creditors. b. it provides a better indication of a company s ability to generate cash flows than the cash basis. c. it recognizes revenues when cash is received and expenses when cash is paid. d. it is a simpler method of accounting than is the cash basis of accounting. 3. What is due process in the context of standard setting at the FASB? a. The FASB operates in full view of the public. b. Public hearings are held on proposed accounting standards. c. Interested parties can make their views known. d. All of the answer choices are correct. 4. Which organization was responsible for issuing Accounting Research Bulletins? a. The Accounting Principles Board. b. The Committee on Accounting Procedure. c. The SEC. d. The FASB. 5. Which organization is responsible for issuing Emerging Issues Task Force Statements? a. The FASB b. The CAP c. The APB d. The SEC 6. The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is a. the FASB issues exposure drafts of proposed standards. b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions. c. all members of the FASB possess extensive experience in financial reporting. d. a majority of the members of the FASB are CPAs drawn from public practice.

2 7. The purpose of the International Accounting Standards Board is to a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. b. develop a uniform currency in which the financial transactions of companies through-out the world would be measured. c. promote uniform accounting standards among countries of the world. d. arbitrate accounting disputes between auditors and international companies. 8. What is the primary objective of financial reporting as indicated in the conceptual framework? a. Provide information that is useful to those making investing and credit decisions. b. Provide information that is useful to management. c. Provide information about those investing in the entity. d. All of these answer choices are correct. 9. Which of the following is a fundamental quality of useful accounting information? a. Comparability. b. Relevance. c. Neutrality. d. Materiality. 10. The two fundamental qualities that make accounting information useful for decision making are a. comparability and timeliness. b. materiality and neutrality. c. faithful representation and comparability. d. relevance and faithful representation. 11. The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is a. relevance. b. faithful representation. c. verifiability. d. neutrality. 12. A decrease in net assets arising from peripheral or incidental transactions is called a(n) a. capital expenditure. b. expense. c. cost. d. loss. 13. What accounting concept justifies the usage of depreciation and amortization policies? a. Going concern assumption b. Fair value principle c. Full disclosure principle d. Monetary unit assumption 2

3 3 14. According to the FASB's conceptual framework, which of the following relates to both relevance and faithful representation? Comparability Neutrality a. Yes Yes b. Yes No c. No Yes d. No No 15. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more a. verifiable. b. relevant. c. indicative of the entity's purchasing power. d. conservative. 16. Which of the following is an income statement account? a. Unearned Service Revenue b. Salaries and Wages Expense c. Inventory d. Retained Earnings 17. When a corporation pays a note payable and interest, a. the account notes payable will be increased. b. the account interest expense will be decreased. c. they will debit notes payable and interest expense. d. they will debit cash. 18. When a company receives a payment from one of its customers, it will make a journal entry that will include a a. debit to Accounts Receivable. b. credit to Accounts Receivable. c. debit to Accounts Payable. d. credit to Accounts Payable. 19. Reversing entries are: 1. normally prepared for prepaid, accrued, and estimated items. 2. required to achieve a proper matching of revenue and expense. 3. useful in simplifying the recording of transactions in the next accounting period. a. 1 b. 2 c. 3 d. 1 and 2

4 20. On September 1, 2013, Lowe Co. issued a note payable to National Bank in the amount of $900,000, bearing interest at 9%, and payable in three equal annual principal payments of $300,000 each. The first payment for interest and principal was made on September 1, At December 31, 2014, Lowe should record accrued interest payable of a. $27,000. b. $24,000. c. $18,000. d. $16, The balance sheet is useful for analyzing all of the following except a. liquidity. b. solvency. c. profitability. d. financial flexibility. 22. The net assets of a business are equal to a. current assets minus current liabilities. b. total assets plus total liabilities. c. total assets minus total stockholders' equity. d. none of these answer choices are correct. 23. Current assets are presented in the balance sheet in a. reverse order of their liquidity. b. ascending order of their balances. c. descending order of their balances. d. order of their liquidity. 24. Which of the following is not an acceptable major asset classification? a. Deferred charges b. Property, plant, and equipment c. Long-term investments d. Current assets 25. Kohler Company owns the following investments: Trading securities (fair value) $120,000 Available-for-sale securities (fair value) 80,000 Held-to-maturity securities (amortized cost) 94,000 Kohler will report securities in its long-term investments section of a. exactly $200,000. b. exactly $214,000. c. exactly $294,000. d. $174,000 or an amount less than $174,000, depending on the circumstances. 4

5 5 26. Stine Corp.'s trial balance reflected the following account balances at December 31, 2014: Accounts receivable (net) $19,000 Trading securities 6,000 Accumulated depreciation on equipment and furniture 15,000 Cash 16,000 Inventory 30,000 Equipment 25,000 Patent 4,000 Prepaid expenses 2,000 Land held for future business site 18,000 In Stine's December 31, 2014 balance sheet, the current assets total is a. $90,000. b. $82,000. c. $77,000. d. $73, In a statement of cash flows, a payment to acquire 1,000 shares of Microsoft stock should be classified as a cash outflow for a. operating activities. b. investing activities. c. financing activities. d. lending activities.

6 6 II. Problems (46 points in total) 1. (16 points) The following trial balance was taken from the books of Y.Y. Touré Corporation on December 31, Prepare the necessary adjusting entries indicated below. Accounts Debit Credit Cash $ 9,000 Accounts Receivable 50,000 Allowance for Doubtful Accounts $ 1,800 Inventory 44,000 Prepaid Insurance 4,800 Equipment 110,000 Accumulated Depreciation--Equip. 15,000 Accounts Payable 10,800 Notes Payable (due March 31, 2018) 38,000 Common Stock 44,000 Retained Earnings 17,000 Sales Revenue 280,000 Cost of Goods Sold 126,000 Salaries and Wages Expense 50,000 Rent Expense 12,800 Totals $397,600 $415,600 a. Unexpired insurance at year-end is $2,000. b. Depreciation on equipment, 10% per year on original cost. c. The note payable was taken out on March 31, 2013, and interest at the rate of 8% will be paid at the maturity of the loan. No principle or interest was paid in d. One year s rent on Touré s warehouse was paid in advance on December 1, 2013, in the amount of $5,400 (originally charged to rent expense). e. Accrued salaries and wages at December 31, 2013, amounts to $5,800.

7 7 2. (11 points) The following trial balance was taken from the books of S. Nasri, Inc. on December 31, Prepare the necessary closing entries. Accounts Debit Credit Cash 12,400 Equity Investment 4,050 Accounts Receivable 30,000 Allow. for Doubtful Accounts 420 Inventory 16,800 Supplies 1,040 Equipment 65,000 Accum. Depr.-Equip. 9,500 Accounts Payable 4,400 Notes Payable 10,000 Common Stock 40,000 Retained Earnings 29,690 Sales Revenue 340,000 Cost of Goods Sold 235,520 Wages Expense 20,800 Commissions Expense 39,000 Rent Expense 9,400 Totals $434,010 $434,010

8 3. (19 points) Given the following December 31, 2013, account information for V. Kompany Corporation, prepare a balance sheet in proper GAAP form as of December 31, All accounts have their normal balance. Omit the balance sheet title. Write legibly and small enough to get the entire balance sheet to fit in the space below on this page. Plug retained earnings to balance the statement. Accounts Receivable 102,000 Interest Expense 2,400 Accumulated Depr. - Bld. 15,000 Interest Payable 600 Accumulated Depr. - Equip. 10,000 Land 137,320 Advertising Expense 1,560 Notes Payable (due in 6 months) 29,400 Bonds Payable 78,000 Prepaid Advertising 5,000 Buildings 80,400 Retained Earnings? Cash 45,000 Salaries Expense 53,040 Common Stock 70,000 Salaries Payable 3,900 Depreciation Expense 8,000 Service Revenue 341,400 Equipment 60,000 Supplies 1,860 Utilities Expense 1,320 8

9 9 Answers Multiple Choice Question Answer Question Answer 1 a 15 a 2 b 16 b 3 d 17 c 4 b 18 b 5 a 19 c 6 b 20 c 7 c 21 c 8 a 22 d 9 b 23 d 10 d 24 a 11 c 25 d 12 d 26 d 13 a 27 b 14 b Solution to Problem 1 a. Insurance Expense... 2,800 Prepaid Insurance... 2,800 b. Depreciation Expense... 11,000 Accumulated Depreciation--Equip ,000 c. Interest Expense... 2,280 Interest Payable... 2,280 d. Prepaid Rent... 4,950 Rent Expense... 4,950 f. Salaries Expense... 5,800 Salaries Payable... 5,800 Solution Problem 2 Sales ,000 Cost of Goods Sold ,520 Wages Expense... 20,800 Commissions Expense... 39,000 Rent Expense... 9,400 Retained Earnings... 35,280

10 10 Solution Problem 3 V. Kompany Corporation Balance Sheet December 31, 2013 Assets Current Assets Cash $ 45,000 Accounts Receivable 102,000 Supplies 1,860 Prepaid advertising 5,000 Total current assets $ 153,860 Land, Buildings, and Equipment Land 137,320 Building $ 80,400 Accumulated depreciation buildings (15,000) 65,400 Equipment 60,000 Accumulated depreciation equipment (10,000) 50, ,720 Total assets $ 406,580 Liabilities & Stockholders' Equity Current Liabilities Notes payable $ 29,400 Salaries payable 3,900 Interest payable 600 Total current liabilities $ 33,900 Long-term liabilities Bonds payable 78,000 Total liabilities 111,900 Common stock 70,000 Retained earnings 224,680 Total stockholders' equity 294,680 Total liabilities & stockholders' equity $ 406,580