Test 1 Acct5312 Summer 2012 Student:___________________________________
Chapters 1-6
Questions 1-5 are 4 points each
1. Which of the following is not a transaction to be recorded in the accounting records of an entity?
A. Investment of cash by the owners.
B. Sale of product to customers.
C. Receipt of a plaque recognizing the firm's encouragement of employee participation in the United Way fund
drive.
D. Receipt of services from a "quick-print" shop in exchange for the promise to provide advertising design
services of equivalent value.
2. The distinction between a current asset and other assets:
A. is based on how long the asset has been owned.
B. is based on amounts that will be paid to other entities within a year.
C. is based on the ability to determine the current fair market value of the asset.
D. is based on when the asset is expected to be converted to cash, or used to benefit the entity.
3. The purpose of the income statement is to show the:
A. change in the fair market value of the assets from the prior income statement.
B. market value per share of stock at the date of the statement.
C. revenues collected during the period covered by the statement.
D. net income or net loss for the period covered by the statement.
4. The Statement of Changes in Owners' Equity shows:
A. the change in cash during a year.
B. revenues, expenses, and liabilities for the period.
C. net income and dividends for the period.
D. paid-in capital and long-term debt at the end of the period.
5. Paid-in Capital represents:
A. Earnings retained for use in the business.
B. The amount invested in the entity by the owners.
C. Market value of the entity's common stock.
D. Net assets of the entity at the date of the statement.
6. (20 points) Presented below are the comparative balance sheets of Big Apple, Inc., at December 31, 2011,
and 2010. Sales for the year ended December 31, 2011, totaled $890,000.
Required:
A) Calculate ROI for 2011.
B) Calculate ROE for 2011.
C) Calculate working capital at December 31, 2011.
D) Calculate the current ratio at December 31, 2011.
E) Calculate the acid-test ratio at December 31, 2011.
7. (20 points) At the beginning of the current fiscal year, the balance sheet of Arches Co. showed liabilities of
$380,000. During the year liabilities increased by $10,000, assets increased by $55,000, and paid-in capital
increased $20,000 to $165,000. Dividends declared and paid during the year were $60,000. At the end of the
year, owners' equity totaled $402,000. Calculate net income or loss for the year.
8. (20 points) The following are data available for Richards Co. for the month of May:
Calculate cost of goods sold and ending inventory under the following cost flow assumptions:
(1.) Weighted average
(2.) FIFO
(3.) LIFO
9. (20 points) Lone Star Sales & Service acquired a new machine that cost $42,000 in early 2010. The machine
is expected to have a five-year useful life and is estimated to have a salvage value of $7,000 at the end of its
life. (Round your final answers to the nearest dollar).
(a.) Using the straight-line depreciation method, calculate the depreciation expense to be recognized in the
second year of the machine's life and calculate the accumulated depreciation after the third year of the machine's
life.
(b.) Using the double declining balance depreciation method, calculate the depreciation expense for the third
year of the machine's life and the net book value of the machine at this point in time.
(c.) Using the sum-of-the-years digits depreciation method, calculate the amount of accumulated depreciation
after the third year of the machine's life.
Test 1 Acct5312 Summer 2012 Key
1. Which of the following is not a transaction to be recorded in the accounting records of an entity?
A. Investment of cash by the owners.
B. Sale of product to customers.
C. Receipt of a plaque recognizing the firm's encouragement of employee participation in the United Way fund
drive.
D. Receipt of services from a "quick-print" shop in exchange for the promise to provide advertising design
services of equivalent value.
2. The distinction between a current asset and other assets:
A. is based on how long the asset has been owned.
B. is based on amounts that will be paid to other entities within a year.
C. is based on the ability to determine the current fair market value of the asset.
D. is based on when the asset is expected to be converted to cash, or used to benefit the entity.
3. The purpose of the income statement is to show the:
A. change in the fair market value of the assets from the prior income statement.
B. market value per share of stock at the date of the statement.
C. revenues collected during the period covered by the statement.
D. net income or net loss for the period covered by the statement.
4. The Statement of Changes in Owners' Equity shows:
A. the change in cash during a year.
B. revenues, expenses, and liabilities for the period.
C. net income and dividends for the period.
D. paid-in capital and long-term debt at the end of the period.
5. Paid-in Capital represents:
A. Earnings retained for use in the business.
B. The amount invested in the entity by the owners.
C. Market value of the entity's common stock.
D. Net assets of the entity at the date of the statement.
6. Presented below are the comparative balance sheets of Big Apple, Inc., at December 31, 2011, and 2010.
Sales for the year ended December 31, 2011, totaled $890,000.
Required:
A) Calculate ROI for 2011.
B) Calculate ROE for 2011.
C) Calculate working capital at December 31, 2011.
D) Calculate the current ratio at December 31, 2011.
E) Calculate the acid-test ratio at December 31, 2011.
A) ROI = Margin * Turnover = (Net Income/Sales) * (Sales/Average assets) = ($74,000/$890,000) *
[$890,000/(($580,000 + $624,000) /2))] = 8.31% * 1.478 = 12.3%
B) ROE = Net income/Average owners' equity= $74,000/[($279,000 + $332,000)/2] = 24.2%
C) Working capital = Current assets - Current liabilities= $380,000 - $205,000 = $175,000
D) Current ratio = Current assets/Current liabilities = $380,000/$205,000 = 1.85
E) Acid-test ratio = (Cash + Accounts Receivable)/Current liabilities = ($45,000 + $134,000)/$205,000 = 0.87
7. At the beginning of the current fiscal year, the balance sheet of Arches Co. showed liabilities of $380,000.
During the year liabilities increased by $10,000, assets increased by $55,000, and paid-in capital increased
$20,000 to $165,000. Dividends declared and paid during the year were $60,000. At the end of the year, owners'
equity totaled $402,000. Calculate net income or loss for the year.
Steps: (1.) $402,000 - 165,000 = $237,000
(2.) $380,000 + 10,000 = 390,000
(3.) $390,000 + 402,000 = $792,000
(4.) $165,000 - 20,000 = $145,000
(5.) $792,000 - 55,000 = $737,000
(6.) $737,000 - 380,000 - 145,000 = 212,000
(7.) $212,000 + Net Income - $60,000 = $237,000: Net Income = $85,000
Short cut Approach:
$55,000 = 10,000 + 20,000 + Net Income -$60,000
Net Income = $85,000
8. The following are data available for Richards Co. for the month of May:
Calculate cost of goods sold and ending inventory under the following cost flow assumptions:
(1.) Weighted average
(2.) FIFO
(3.) LIFO
Compute goods available for sale in units and dollars; these amounts are common to all three inventory costing
methods:
* $8 difference due to rounding (weighted average).
9. Lone Star Sales & Service acquired a new machine that cost $42,000 in early 2010. The machine is expected
to have a five-year useful life and is estimated to have a salvage value of $7,000 at the end of its life. (Round
your final answers to the nearest dollar).
(a.) Using the straight-line depreciation method, calculate the depreciation expense to be recognized in the
second year of the machine's life and calculate the accumulated depreciation after the third year of the machine's
life.
(b.) Using the double declining balance depreciation method, calculate the depreciation expense for the third
year of the machine's life and the net book value of the machine at this point in time.
(c.) Using the sum-of-the-years digits depreciation method, calculate the amount of accumulated depreciation
after the third year of the machine's life.
(a) Depreciation expense = $42,000 - 7,000/5 = $7,000 per year
After three years the accumulated depreciation = 7,000 * 3 = $21,000.
(b) Straight line rate = 1/5 = 20% * 2 = 40% DDBM
Depreciation expense = Net book value on 1/1 x 40%
(c) Accumulated Depreciation after 3 years =
(5 + 4 + 3)/15 * (42,000 - 7,000) = 12/15 x 35,000 = 28,000