FINAL EXAM REVIEW
1. What is the primary objective of financial reporting?
a. to provide useful economic information to external parties
b. to assess future cash flows
c. to give accountants a job
d. both a and b
2. Which of the following groups has primary responsibility for information contained in the financial
statements?
a. The company’s auditors
b. The company’s investors
c. The SEC
d. The company’s management
3. The assumption that a business can continue to remain in operation into the future is the
a. cost principle
b. unit-of measure assumption
c. continuity assumption
d. separate-entity assumption
4. The principle that requires assets be recorded at the cash equivalent cost at the date of transaction
a. cost principle
b. revenue principle
c. matching principle
d. unit-of measure assumption
5. Which of the following is not one of the four basic financial statements?
a. The balance sheet
b. The audit report
c. The income statement
d. The statement of cash flows
6. At the beginning of 2007, Company A had stockholder’s equity of $400,000 and assets of $500,000.
During the year assets increased by $50,000 and liabilities decreased by $20,000. At the end of 2007 total
stockholder’s equity
a. decreased by $70,000
b. increased by $70,000
c. decreased by $30,000
d. increased by $30,000
7. During 2007 Company B had assets of $79,500, liabilities of $18,650, expenses of $18,950, and revenue
of $32,100. What was the net income reported on the income statement at the end of 2007?
a. $61,000
b. $13,150
c. $74,300
d. None of the above
8. Which of the following is the entry to be recorded by Company A on September 1, when they pay
$6000 in advance for September, October, and November rent?
a. Debit Prepaid Rent; Credit Cash
b. Debit Cash; Credit Prepaid Rent
c. Debit Accounts Payable; Credit Cash
d. Debit Unearned Rent Revenue; Credit Cash
9. On May 1, Nike, Inc. purchased equipment costs $500,000, paying $200,000 cash and signing a formal
promissory note to pay the balance in three years. What affect does this transaction have on the
accounting equation?
a. Assets decrease $500,000
b. Assets decrease $200,000
c. Assets increase $500,000
d. Assets increase $300,000
10. The asset account has a beginning balance of $10,000 and PacSun purchased a new truck for $26,000.
If the ending balance of assets was $31,000 much of the truck did they pay in cash?
a. $10,000
b. $5,000
c. $26,000
d. $36,000
11. Which group of accounts contains only those that normally have debit balance?
a. Retained earnings, cost of sales, wages expense
b. Prepaid expenses, wages payable, and contributed capital
c. Cash, utilities expense, accounts receivable
d. Utilities expense, unearned revenue, prepaid expenses
12. Failure to make an adjusting entry to recognize rent revenue receivable would cause
a. an understatement of assets, net income, and stockholder’s equity
b. an overstatement of assets stockholder’s equity and understatement of net income
c. no effect on assets, liabilities, net income, nor stockholder’s equity
d. an overstatement of assets, net income, and stockholder’s equity
13. Assume a company receives a bill for $10,000 for advertising done during the current year. If this bill
is not yet recorded at the end of the year, what will the adjusting journal entry include?
a. Debit to Advertising expense of $10,000
b. Credit to advertising expense of $10,000
c. Debit to accrued liabilities of $10,000
d. Need more information to determine
14. Assume the balance in prepaid insurance is $2,500 but it should be $1,500. The adjusting journal
entry should include which of the following?
a. Debit to Prepaid Insurance for $1,000
b. Credit to insurance expense for $1,000
c. Debit to Insurance expense for $1,000
d. Debit to insurance expense for $1,500
15. Which of the following does not enhance internal control?
a. Assigning different duties to different employees
b. Ensuring adequate documentation is maintained
c. Allowing access only when required to complete assigned duties
d. None of the above- all enhance internal control
16. A deposit in transit on a bank reconciliation should be
a. added to the depositors book cash balance
b. subtracted from the depositors book cash balance
c. added to the bank statement balance
d. subtracted from the bank statement balance
17. When using the allowance method, as Bad debt expense is recorded,
a. Total assets remain the same and stockholder’s equity remains the same
b. Total assets decrease and stockholder’s equity decreases
c. Total assets increase and stockholder’s equity decreases
d. Total liabilities increase and stockholder’s equity decreases
18. Company A determines on Feb. 1, 2009, that a $1000 account receivable will be uncollectible. What
affect does this write off have on the financial statements?
a. Increases bad debt expense
b. Increases the Allowance for Doubtful Accounts
c. Decreases bad debt expense
d. Has no affect
19. Item
A
B
C
D
Quantity
1500
750
3500
2500
Cost Per Unit
$3
$4
$2
$5
Market Unit Cost
$4
$2
$1
$3
What is the amount that should be reported for the ending inventory using the LCM rule applied to each
item?
a. $27,000
b. $18,500
c. $17000
d. $15000
(Use the following information for Questions 20-21)
Turnwell Corporation uses the periodic inventory system. The following information about their inventory is
available:
Date
Transaction
Number of Units
Cost per Unit
1/1
Beg Inventory
60
$200
4/12
Purchase
100
$230
7/8
Purchase
50
$210
9/22
Purchase
70
$205
During the year, 130 units were sold at a price of $225 per unit. Other operating costs equaled $200 and their
tax rate is 10%. Round final answers to the nearest dollar
20. What was the ending inventory and cost of goods sold on 12/31 under the LIFO cost flow assumption?
a. $27,150 and $32,700
b. $28,100 and $31750
c. $32,700 and $27,150
d. $31750 and $28100
21. What was the ending inventory and cost of goods sold on 12/31 under the FIFO cost flow assumption?
a. $27,150 and $32,700
b. $28,100 and $31750
c. $32,700 and $27,150
d. $31750 and $28100
22. On January 1, 2008, Company ABC purchased equipment for $70,000. The estimated salvage value is
$10,000. The estimated useful life is 12 years. Using STRAIGHT LINE depreciation, how much is the
depreciation expense per year?
a. $10,000
b. $1,200
c. $5,000
d. $80,000
23. On January 1, 2009, Company C purchases equipment for $100,000. The estimated useful life in units
is 200,000 units. The estimated salvage value is $20,000. During 2009, the equipment’s output is 15,000
units. In the next year (2010), the output is $25,000 units. What is the accumulated depreciation at the
end of 2010 (after 2 years)?
a. $6,000
b. $10,000
c. $16,000
d. $12,000
24. Company C uses double declining balance depreciation method. On January 1, 2010, they purchase a
piece of equipment for $120,000. The estimated salvage value is $10,000. Useful life is estimated to be 10
years. What is the depreciation expense for 2011 (the second year)?
a. $24,000
b. $43,200
c. 19,200
d. $11,000
25. Company C borrowed 1,000,000 on November 1, 2007. The note carried a 6% interest rate with the
principal and interest payable on June 1, 2008. What is the amount of interest expense recorded on
December 31, 2007?
a. $10,000
b. $60,000
c. $15,000
d. None of the above
26. If a bond is sold (issues) below its face value(par), the stated rate of interest was
a. higher than market rate
b. lower than market rate
c. equal to market rate
d. not related to market rate
27. Newton Corporation sold its $1,000,000, 7%, ten-year bonds to public on January 1, 2006. The bonds
pay interest annually, beginning on December 31, 2006. Newton received $1,153,420 in cash at the
issuance of the bonds. The market rate of interest when the bonds were sold was 5%. Compute the
amount of the premium that Newton Corporation should amortize on December 31, 2006, assuming the
“effective-interest” method is used.
a. $15,342
b. $14,865
c. $12,329
d. $10,276
28. When treasury stock is purchased with cash, what is the impact on the balance sheet equation?
a. No change- the reduction of asset Cash is offset with the addition of the asset Treasury Stock
b. Assets decrease and stockholder’s equity increases
c. Assets increase and stockholder’s equity decreases
d. Assets decrease and stockholder’s equity decreases
29. The effect of a stock dividend is to
a. reduce the amount of retained earnings and increase total contributed capital
b. reduce the amount of retained earnings and reduce the amount of total assets
c. reduce the amount of retained earnings and reduce total contributed capital
d. none of the above is correct
30. Company B sold 5,000 shares for $50 per share in the current year. The year after that the company
purchased 2,000 shares of its own stock for $45 per share and then resold the stock for $47 per share.
What would be the journal entry for the resale of the treasury stock?
a. Debit Cash $94,000; credit treasury stock 90,000; credit Additional PIC $4000
b. Debit Cash $100,000; credit treasury stock 90,000; credit additional PIC $10,000
c. Debit Cash $90,000, credit treasury stock 94,000; debit additional PIC $4000
d. None of the above
31. Which of the following is not an advantage of preferred stock?
a. Right to vote
b. Current dividend preferences
c. Preference on asset distributions in the event of the corporation is liquidated
d. All of the above are advantages of preferred stock
32. Which of the following is not added when computing cash flows from operations using the indirect
method?
a. the net increase in accounts payable
b. the net decrease in accounts receivable
c. the net decrease in inventory
d. all of the above should be added
33. Which of the following would not appear in the investing section of the statement of cash flows?
a. purchase of inventory
b. sale of investments
c. purchase of land
d. all of the above would appear in the investing section
34. Which of the following items is not subtracted when computing cash flows from operations using the
indirect method?
a. Increase in accounts receivable
b. Increase in prepaid expenses
c. Increase in accrued liabilities
d. Decrease in accounts payable
35. An example of an investing transaction would be
a. purchasing equipment for cash
b. buying inventory from a supplier on credit
c. selling stock to investors for cash
d. all of the above are investing transactions
36. Company C had COGS for the year of $ 60,000. The inventory at the beginning of the year totaled
$40,000 and $35,000 was left at the end of the year. How much did the company purchase during the
period?
a. $55,000
b. $75,000
c. $20,000
d. $100,000
THE GAP, INC.
CONSOLIDATED BALANCE SHEETS
January 31,
2009
($ and shares in millions except par value)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Restricted cash
Merchandise inventory
Other current assets
Total current assets
Property and equipment, net
Other long-term assets
Total assets
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable
Accrued expenses and other current liabilities
Income taxes payable
Total current liabilities
Long-term liabilities:
Long-term debt
Lease incentives and other long-term liabilities
Total long-term liabilities
Commitments and contingencies (see Notes 11 and 15)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares; Issued 1,105 and 1,100 shares;
Outstanding 694 and 734 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive earnings
Treasury stock, at cost (411 and 366 shares)
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
February 2,
2008
1,715
—
41
1,506
743
4,005
2,933
626
7,564
$
50
975
1,076
57
2,158
$
1,724
177
38
1,575
572
4,086
3,267
485
7,838
$
138
1,006
1,259
30
2,433
—
1,019
1,019
50
1,081
1,131
55
2,895
9,947
123
(8,633)
4,387
7,564
55
2,783
9,223
125
(7,912)
4,274
7,838
$
THE GAP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
($ and shares in millions except per share amounts)
Net sales
Cost of goods sold and occupancy expenses
Gross profit
Operating expenses
Operating income
Interest expense
Interest income
Earnings from continuing operations before income taxes
Income taxes
Earnings from continuing operations, net of income taxes
Loss from discontinued operation, net of income tax benefit
Net earnings
$
$
Weighted-average number of shares—basic
Weighted-average number of shares—diluted
Basic earnings per share:
Earnings from continuing operations, net of income taxes
Loss from discontinued operation, net of income tax benefit
Net earnings per share
Diluted earnings per share:
Earnings from continuing operations, net of income taxes
Loss from discontinued operation, net of income tax benefit
Net earnings per share
Cash dividends declared and paid per share
Fiscal Year
2007
2008
14,526
9,079
5,447
3,899
1,548
1
(37)
1,584
617
967
—
967
$ 15,763
10,071
5,692
4,377
1,315
26
(117)
1,406
539
867
(34)
$
833
716
719
$
791
794
1.35
—
1.35
$
$
$
1.34
—
1.34
$
0.34
$
$
2006
$ 15,923
10,266
5,657
4,432
1,225
41
(131)
1,315
506
809
(31)
$
778
831
836
1.10
(0.05)
1.05
$
$
$
1.09
(0.04)
1.05
$
0.97
(0.04)
0.93
$
0.32
$
0.32
$
$
0.97
(0.03)
0.94
THE GAP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization (a)
Share-based compensation
Tax benefit from exercise of stock options and vesting of stock units
Excess tax benefit from exercise of stock options and vesting of stock units
Non-cash and other items
Deferred income taxes
Changes in operating assets and liabilities:
Merchandise inventory
Other current assets and other long-term assets
Accounts payable
Accrued expenses and other current liabilities
Income taxes payable, net of prepaid and other tax-related items
Lease incentives and other long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Purchases of short-term investments
Maturities of short-term investments
Acquisition of business, net of cash acquired
Change in restricted cash
Change in other long-term assets
Net cash used for investing activities
Cash flows from financing activities:
Payments of long-term debt
Proceeds from share-based compensation, net
Repurchases of common stock
Excess tax benefit from exercise of stock options and vesting of stock units
Cash dividends paid
Net cash used for financing activities
Effect of exchange rate fluctuations on cash
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest during the period
Cash paid for income taxes during the period
37. What is the % change in total assets from 2007 to 2008?
-3.5%
38. What was the amount of depreciation and amortization in 2007?
$457
39. What is the par value of the common stock?
$0.05
40. What was the 2008 earnings per share?
$1.35
41. What was Gap’s tax rate in 2007 and 2008?
2007: 39%
2008: 38.3%
42. How many shares of treasury stock did GAP have at the end of 2008?
411
Fiscal Year
2007
2008
$
967
$
833
2006
$
778
568
55
5
(6)
61
10
547
52
8
(7)
54
(51)
530
54
25
(23)
11
(41)
51
34
(4)
(284)
(94)
49
1,412
252
18
199
32
(4)
148
2,081
(97)
12
(6)
56
(102)
53
1,250
(431)
1
(75)
251
(142)
(1)
(1)
(398)
(682)
11
(894)
1,287
—
7
(3)
(274)
(572)
22
(1,460)
1,841
—
11
8
(150)
(138)
75
(705)
6
(243)
(1,005)
(18)
(9)
1,724
$ 1,715
$
(326)
125
(1,700)
7
(252)
(2,146)
33
(306)
2,030
1,724
—
190
(1,050)
23
(265)
(1,102)
(3)
(5)
2,035
2,030
$
$
$
$
17
674
39
535
$
$
$
40
575
43. If Gap had accumulated depreciation of $4312 in 2008, what was PPE, gross?
$7245
44. Compute the following ratios for 2008
a. Net Profit Margin: Net Income/Net Sales Revenue
b. Gross Profit Margin: (Net Sales Revenue-COGS)/Net Sales Revenue
c. Asset Turnover Ratio: Net Sales Revenue/Average Total Assets
d. Fixed Asset Turnover Ratio: Net Sales Revenue/Average Net fixed assets
e. Return on Equity: Net Income/Average Stockholder’s equity
f. Quality of Income: Cash flow from operating activities/Net Income
g. Receivable Turnover: Net sales revenue/Average Net Receivables
h. Days to Collect: 365/Receivables Turnover Ratio
i. Inventory Turnover: COGS/Average Inventory
j. Days to Sell: 365/ Inventory Turnover Ratio
k. Current Ratio: Current Assets/Current Liabilities
l. Debt-to-Assets Ratio: Total Liabilities/Total assets