Part
I
II
III
IV
VII
Total
Points
4
3
2
3
3
15
Score
PART I — MULTIPLE CHOICE (4 points)
__B__ 1. In order to be relevant, accounting information must
a. be neutral.
b. be verifiable.
c. help predict future events.
d. be a faithful representation.
_C___ 2. The following information is available for Lighten Company:
Sales
$130,000
Ending Merchandise Inventory 12,000
Purchases
100,000
Freight-in
Purchase Returns and Allowances
Beginning Merchandise Inventory
$10,000
5,000
15,000
Lighten’s cost of goods sold is
a. $125,000.
b. $120,000.
c. $108,000.
d. $105,000.
__B__ 3. One of the two constraints in accounting is
a. comparability.
b. materiality.
c. reliability.
d. relevance.
__B__ 4. The assumption that assumes a company will continue in operation long enough to
carry out its existing objectives is the
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. time period assumption.
__D__ 5. All of the following are intangible assets except
a. patents.
b. land improvements.
c. goodwill.
d. franchises.
__C__ 6. The constraint of conservatism is best expressed as
a. the cost of applying an accounting principle should not exceed its benefit.
b. only material items should be recorded and reported.
c. when in doubt, choose the method that will least likely overstate assets
and net income.
d. the lower of cost or market method should be used for inventories.
____ 7. If merchandise is sold for $2,000 subject to credit terms of 2/10, n/30, the entry to
record collection in full within the discount period would include a
a. credit to Sales Discounts for $40.
b. credit to Cash for $1,960.
c. credit to Accounts Receivable for $40.
d. none of the above.
____ 8. Barker Company's records show the following for the month of January:
Total Retained Earnings at January 1 ......................................
$600,000
Total Retained Earnings at January 31 ....................................
900,000
Total Revenues .......................................................................
1,005,000
Total Dividends Declared .........................................................
45,000
Total expenses for January were
a. $960,000.
b. $1,005,000.
c. $705,000.
d. $660,000.
_____ 9. Jetson Company's financial information is presented below.
Sales
$ ????
Sales Returns and Allowances
60,000
Net Sales
700,000
Beginning Merchandise Inventory
????
Purchases
340,000
Purchase Returns and Allowances $ 30,000
Ending Merchandise Inventory
70,000
Cost of Goods Sold
360,000
Gross Profit
????
The missing amounts above are:
Sales
Beginning Inventory
a. $760,000
$90,000
b. $640,000
$90,000
c. $760,000
$120,000
d. $640,000
$120,000
Gross Profit
$340,000
$400,000
$340,000
$400,000
_____ 10. The necessity of making adjusting entries relates mostly to the
a. economic entity assumption.
b. time period assumption.
c. going concern assumption.
d. monetary unit assumption.
____ 11. The preparation of closing entries
a. is an optional step in the accounting cycle.
b. results in zero balances in all accounts at the end of the period so that they are
ready for the following period's transactions.
c. is necessary before financial statements can be prepared.
d. results in transferring the balances in all temporary accounts to Retained
Earnings.
____ 12. Current liabilities are obligations that are reasonably expected to be paid from
Existing
Creation of Other
Current Assets
Current Liabilities
a.
No
No
b.
Yes
Yes
c.
Yes
No
d.
No
Yes
____ 13. Which of the following errors will cause a trial balance to be out of balance? The
entry to record a payment on account was
a. not posted at all.
b. posted as a debit to Cash and a credit to Accounts Payable.
c. posted as a debit to Cash and a debit to Accounts Payable.
d. posted as a debit to Accounts Receivable and a credit to Cash.
____ 14. The primary accounting standard-setting body in the United States is the
a. Securities and Exchange Commission.
b. Accounting Principles Board.
c. Financial Accounting Standards Board.
d. Internal Revenue Service.
____ 15 . Which of the following would not be included in the operating activities section of a
statement of cash flows?
a. Cash inflows from returns on loans (i.e., interest)
b. Cash inflows from returns on equity securities (i.e., dividends)
c. Cash outflows to governments for taxes
d. Cash outflows to reacquire treasury stock
____ 16. Which of the following combinations presents correct examples of liquidity,
profitability, and solvency ratios, respectively?
Liquidity
Profitability
Solvency
a. Inventory turnover
Inventory turnover
Times interest earned
b. Current ratio
Inventory turnover
Debt to total assets
c. Receivable turnover
Return on assets
Times
interest
earned
d. Average days collection
Payout ratio
Return on assets
____ 17. Which of the following pairs of terms in the area of financial statement analysis are
synonymous?
a. Ratio — Trend
b. Horizontal — Trend
c. Vertical — Ratio
d. Horizontal — Ratio
____ 18. The statement of cash flows is a(n)
a. required supplemental financial statement.
b. required basic financial statement.
c. optional basic financial statement.
d. optional supplementary statement.
____ 19. Which of the following should be classified as an extraordinary item?
a. Effects of major casualties not infrequent in the area
b. Write-off of a significant amount of receivables
c. Loss from the expropriation of facilities by a foreign government
d. Losses due to a bitter, lengthy labor strike
____ 20. In order to be considered extraordinary, an item must be
a. frequent and uninsured.
b. unusual and uninsured.
c. uninsured and infrequent.
d. infrequent and unusual.
PART II — MATCHING (3 points)
Instructions
Designate the terminology that best represents the definition or statement given below by
placing the identifying letter(s) in the space provided. No letter should be used more than once.
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
R.
S.
T.
U.
V.
W.
Additions and improvements
Allowance method
Amortization
Available-for-sale securities
Average cost method
Book value
Capital expenditure
Cash debt coverage ratio
Consistency
Contra asset account
Cost method
Credit memorandum
Debit memorandum
Declining-balance method
Depreciable Cost
Depreciation
Direct write-off method
Discontinued operations
Earnings per share
Economic entity assumption
Equity method
Extraordinary items
First-in, first-out method
X.
Y.
Z.
AA.
AB.
AC.
AD.
AE.
AF.
AG.
AH.
AI.
AJ.
AK.
AL.
AM.
AN.
AO.
AP.
AQ.
AR.
AS.
AT.
Full disclosure principle
Going-concern assumption
Held-to-maturity securities
Internal control
Last-in, first-out method
LIFO reserve
Matching principle
Materiality
Monetary unit assumption
Net purchases
Periodic inventory system
Permanent accounts
Perpetual inventory system
Ratio analysis
Relevance
Reliability
Revenue expenditure
Revenue recognition principle
Stock dividend
Stock split
Temporary accounts
Time period assumption
Units-of-activity method
___
1. The periodic write-off of an intangible asset.
___
2. The total amount subject to depreciation.
___
3. The principle that efforts be matched with accomplishments.
___
4. An expenditure charged against revenues as an expense when incurred.
___
5. The inventory costing method that assumes that the costs of the earliest goods
purchased are the first to be recognized as cost of goods sold.
___
6. Use of the same accounting principles and methods from period to period by the same
business enterprise.
___
7. A measure of solvency calculated as cash provided by operating activities divided by
average total liabilities.
___
8. An assumption that economic events can be identified with a particular unit of
accountability.
PART II — MATCHING (cont.)
___
9. A characteristic of information that means it is capable of making a difference in a
decision.
___ 10. Used by a bank when a previously deposited customer’s check “bounces” because of
insufficient funds.
___ 11. The assumption that the enterprise will continue in operation long enough to carry out
its existing objectives and commitments.
___ 12. The methods and measures adopted within a business to safeguard its assets and
enhance the accuracy and reliability of its accounting records.
___ 13. Revenue, expense, and dividends accounts whose balances are transferred to
retained earnings at the end of an accounting period.
___ 14. A technique for evaluating financial statements that expresses the relationship among
selected financial statement data.
___ 15. Events and transactions that are unusual in nature and infrequent in occurrence.
____ 16. The disposal of a significant segment of a business.
1.
2.
3.
4.
5.
C
O
AD
AN
W
6.
7.
8.
9.
10.
I
H
T
AL
M
11.
12.
13.
14.
15.
Y
AA
AR
AK
V
16. R
PART III — ADJUSTING ENTRIES (2 points)
The trial balance of Timlin Company shows the following balances for selected accounts on
November 30, 2008:
Prepaid Insurance
Equipment
Accumulated Depreciation
$12,000
60,000
6,600
Unearned Revenue
Notes Payable
Interest Payable
$ 4,800
30,000
450
Instructions: Using the additional information given below, prepare the appropriate monthly
adjusting entries at November 30. Show computations.
A.
Revenue for services rendered to customers, but not yet billed, totaled $6,000 on
November 30.
Accounts Receivable .............................................................................
Service Revenue ..................................................................
B.
225
450
450
An insurance policy was acquired on June 30, 2008; the premium paid for 2 years was
$14,400.
Insurance Expense ($14,400 ÷ 24) .......................................................
Prepaid Insurance ...............................................................
E.
225
The equipment was purchased on January 2, 2007, for $60,000. It has an estimated life of
10 years and an estimated salvage value of $6,000. Timlin uses the straight-line
depreciation method.
Depreciation Expense [($60,000 - $6,000) ÷ 120] ...............................
Accumulated Depreciation .................................................
D.
6,000
The note payable is a 9%, 1 year note issued September 1, 2008.
Interest Expense ($30,000 × 9% × 1/12) ..............................................
Interest Payable ...................................................................
C.
6,000
600
600
Timlin received $4,800 fees in advance from a customer on November 1, 2008. Threefourths of this amount was earned by November 30.
Unearned Revenue ($4,800 × 3/4) ........................................................
Service Revenue ..................................................................
3,600
3,600
PART IV — BANK RECONCILIATION (3 points)
A review of the November 30 bank statement and other data of James Company reveals the
following:
1.
2.
3.
4.
5.
6.
7.
8.
Balance per bank statement on November 30 ....................................................
Balance per books on November 30 ..................................................................
NSF Check from J. Smith in payment of account ...............................................
Collection of $3,000, 4-month, 9% note with a $30 collection fee. No interest
had been accrued ..............................................................................................
Deposits in transit at November 30.....................................................................
Outstanding checks at November 30..................................................................
A check written by James to Green for equipment on November 10 was
recorded as $463 but correctly cleared the bank as $436.
A check drawn on the account of Johns Company for $200 was mistakenly
charged against James' account by the bank.
$17,300
$12,173
$480
3,060
4,200
6,920
Instructions: Prepare the November 30 (a) bank reconciliation (omit heading) and (b) related
journal entries.
(a)
BANK RECONCILIATION:
Balance per bank statement
Amount
$17,300
Balance per books
Amount
$12,173
Adjusted balance per bank
$
Adjusted balance per books
$
Balance per Bank Statement
Add: Deposits in Transit
Add: Bank Error
Less: Outstanding Checks
Adjusted Balance per Bank
(b)
James Company
Bank Reconciliation
$17,300
Balance per Books
$12,173
$4,200
Add: error in Recording Check
$27
$200 $21,700 Note Collection
$3,060 $15,260
($6,920)
Less: NSF
($480)
$14,780 Adjusted Balance per Books
$14,780
ENTRIES:
Account Titles
Cash
Miscellaneous Expense
Notes Receivable
Interest Revenue
Accounts Receivable
Cash
Debit
$3,060
$30
$3,000
$90
$480
$480
Credit
Cash
Equipment
$27
$27
PART VII — RATIO ANALYSIS (3 points)
The condensed financial statements of Jenner Corporation for 2008 are presented below.
Jenner Corporation
Balance Sheet
December 31, 2008
Assets
Current assets
Cash and short-term
investments
Accounts receivable
Inventories
Total current assets
Property, plant, and
equipment (net)
Total assets
Jenner Corporation
Income Statement
For the Year Ended December 31, 2008
$ 30,000
70,000
140,000
240,000
760,000
$1,000,000
Revenues
Expenses
Cost of goods sold
Selling and administrative
expenses
Interest expense
Total expenses
Income before income taxes
Income tax expense
Net income
$2,000,000
960,000
740,000
50,000
1,750,000
250,000
100,000
$ 150,000
Liabilities and Stockholders' Equity
Current liabilities
$ 100,000
Long-term liabilities
350,000
Stockholders' equity
550,000
Total liabilities and
stockholders' equity
$1,000,000
Additional data as of December 31, 2007: Inventory = $100,000; Total assets = $800,000; Stockholders' equity =
$450,000.
Instructions: Compute the following listed ratios for 2008 showing supporting calculations.
(a)
Current ratio = _______________________________________________________________________ .
(b)
Debt to total assets ratio = ______________________________________________________________ .
(c)
Times interest earned = _________________________________________________________________ .
(d)
Inventory turnover = ___________________________________________________________________ .
(e)
Profit margin = _______________________________________________________________________ .
(f)
Return on stockholders' equity = _________________________________________________________ .
(g)
Return on assets = _____________________________________________________________________ .
(a) Current ratio = $240,000 / $100,000 = 2.4.
(b) Debt to total assets ratio = ($100,000 + $350,000) / $1,000,000 = 0.45.
(d) Inventory turnover = $960,000 / [($140,000 + $100,000)/2] = 8.
(e) Profit margin = $150,000 / $2,000,000 = 7.5%
(f)
Return on stockholders' equity = $150,000 / [($550,000 + $450,000)/2] = 30%.
(g) Return on assets = $150,000 / [($$1,000,000 + $800,000)/2] = 16.67%.