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Accounting 303
Exam 1, Chapters 1 – 3
Spring 2010
I.
Name _______________________
Section _______
Row _______
Multiple Choice Questions. (2 points each, 40 points in total) Read each question
carefully and indicate your answer by circling the letter preceding the one best answer.
1. Which of the following is not a current or previous policy-making body given the authority
to establish financial accounting standards in the USA?
a. Accounting Principles Board
b. Financial Standards Board
c. Committee on Accounting Procedures
d. Financial Accounting Standards Board
e. International Financial Reporting Standards Board
2. Which organization has the most legal authority to establish financial accounting standards?
a. Accounting Standards Executive Committee
b. Cost Accounting Standards Board
c. Financial Accounting Standards Board
d. Governmental Accounting Standards Board
e. Securities and Exchange Commission
3. A firm's comprehensive income
a. is the same as its net income.
b. is greater than its net income
c. is less than its net income
d. could be greater than, less than, or equal to net income.
4. Of the following measurement bases, which one is usually the most verifiable?
a. current replacement cost
b. fair market value
c. historical cost
d. net realizable value
e. present value of future cash flows
5. Which of the following financial statements is prepared as of a given point in time?
a. balance sheet
b. cash flow statement
c. income statement
d. statement of retained earnings
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6. The FASB Conceptual Framework concluded that the primary objective of financial
reporting is to
a. provide information useful in the decisions of external users.
b. meet the needs of internal users.
c. provide information about an entity's earnings.
d. provide information about an entity's cash flows.
7. A state legislature is currently debating a bill which, if passed, would require the Rom
Services Company to go out of business. Which of the following principles or assumptions
related to the preparation of Rom Services' financial statements is most directly affected by
this impending vote of the legislature?
a. economic entity
b. going concern
c. monetary unit
d. periodicity
e realization
8. Which of the following groups of accounts are all increased with credits?
a. rent expense, cost of goods sold, unearned revenue, and prepaid rent
b. sales revenue, capital stock, accounts payable, and patents
c. accumulated depreciation, accounts receivable, cost of goods sold, and rent expense
d. retained earnings, notes payable, unearned revenue, and allowance for bad debts
9. Which of the following is a contra account?
a. depreciation expense
b. retained earnings
c. sales revenue
d. unearned revenue
e. accumulated depreciation
10. On June 1, Royal Corp. began operating a service company with an initial cash investment
by shareholders of $2,000,000. The company provided $6,400,000 of services in June and
received full payment in July. Royal also incurred expenses of $3,000,000 in June that were
paid in August. During June, Royal paid its shareholders cash dividends of $1,000,000.
What was the company's income before income taxes for the two months ended July 31
under the following methods of accounting?
a.
b.
c.
d.
e.
Cash Basis Accrual Basis
$3,400,000 $3,400,000
$5,400,000 $2,400,000
$6,400,000 $3,400,000
$6,400,000 $2,400,000
none of the above are correct
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11. Which of the following entries could not be a correct adjusting entry?
a.
b.
c.
d.
Prepaid Rent
Rent Expense
xxx
Accounts Receivable
Unearned Revenue
xxx
Bad Debt Expense
Allowance for Uncollectible Accounts
xxx
Interest Expense
Interest Payable
xxx
xxx
xxx
xxx
xxx
12. Which of the following errors could be detected by a trial balance?
a. recording a complete $100 transaction as $200
b. posting a credit to accounts payable as a debit to accounts receivable
c. not recording a complete sales transaction
d. recording a complete purchases transaction twice
13. When a company accrues federal income taxes at the end of the accounting period
a. its acid-test ratio increases.
b. its current ratio increases.
c. working capital is unchanged.
d. its debt to equity ratio increases.
14. Liquidity refers to
a. the amount of cash on hand at a given time.
b. the readiness of an asset to be converted to cash.
c. the period of time until cash is used and refinancing becomes necessary.
d. financial leverage.
15. The principal concern with accounting for related party transactions is
a. the size of the transaction.
b. differences between economic substance and legal form.
c. the absence of legally binding contracts.
d. the lack of accurate data to record transactions.
16. Cash equivalents do not include
a. cash sinking funds for future plant expansion.
b. money market funds.
c. U.S. treasury bills.
d. bank drafts.
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17. Which of the following statements is false?
a. The accounts shown on a balance sheet represent the basic accounting equation for a
particular business.
b. The retained earnings balance shown on the balance sheet must agree with the ending
retained earnings balance shown on the statement of retained earnings.
c. The balance sheet reports the changes in specific account balances over a period of
time.
d. The balance sheet reports the amount of assets, liabilities, and stockholders' equity of an
accounting entity at a point in time.
Use the following information for questions 18-20.
Prut, Inc.
Balance Sheet
December 31, 2010
Assets
Cash
Accounts Receivable
Inventory
Land, Buildings, and Equipment (net)
Intangible Assets
25,000
60,000
95,000
90,000
5,000
275,000
Liabilities and Equity
Accounts Payable
Salaries Payable
Notes Payable (due 1/1/2012)
Capital Stock
Retained Earnings
18. What is Prut's current ratio at December 31, 2010?
a. 1.24
b. 4.00
c. 6.11
d. 1.90
e. some other amount
19. What is Prut's debt to equity ratio at December 31, 2010?
a. 16.4%
b. 45.5%
c. 52.7%
d. 111.50%
e. some other amount
20. What is Prut's working capital at December 31, 2010?
a. $ 35,000
b. $ 40,000
c. $130,000
d. $135,000
e. some other amount
40,000
5,000
100,000
60,000
90,000
275,000
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II. Problems – (60 points in total)
1.
(9 points) Answer each of the following questions with the appropriate word or phrase.
You do not need to write complete sentences. Just supply the word or short phrase.
a.
The FASB Conceptual Framework indicates that the primary qualitative characteristics
of useful accounting information are relevance and reliability. According to the
Conceptual Framework, what are the three characteristics that make information
relevant?
(1)
(2)
(3)
b. According to the Conceptual Framework, what are the three characteristics that make
information reliable?
(1)
(2)
(3)
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2.
(9 points) Below is a list of basic accounting principles. Following the list is a series of
descriptive statements that illustrate the violation of a basic accounting principle. In the
space provided, indicate the principle being violated by writing the appropriate letter.
NOTE: Each letter may be used once, more than once, or not at all.
A.
B.
C.
D.
Economic entity assumption
Going concern assumption
Monetary unit assumption
Periodicity assumption
E.
Realization principle
F.
G.
H.
I.
Full-disclosure principle
Historical cost principle
Matching principle
Materiality principle
_______
a.
Andrei Corporation’s accountant increased the book value of a patent from its
original cost of $1 million to its recently appraised value of $6 million.
_______
b.
Corina Corporation paid for the personal travel of its chief financial officer
and charged the amount to travel expense.
_______
c.
Near the end of 2009, Luca, Inc. received an order from a customer for
$60,000. The merchandise will ship early in 2010. Because the sale was
made to a long-time customer that makes frequent purchases and the invoice
was paid in 2009, the controller recorded the sale in 2009.
_______
d.
In the middle of its 2009 fiscal year, Mihai Company paid $12,000 to its
insurance company for a one-year comprehensive insurance coverage. Mihai
Company recorded the entire expenditure as an expense of 2009.
_______
e.
The Radu Pharmaceutical Company omitted any mention in its financial
statements about a pending lawsuit against the company because it might put
the company in a negative light.
_______
f.
The Rodica Corporation, a company whose securities are publicly traded,
decided to increase its accounting year to 13 months so as to report a larger
net income.
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3.
(14 points) Chişinău Music Corporation is in the process of preparing its year-end financial
statements for 2009. Since certain accounts in the trial balance do not reflect all activities
that have occurred, prepare the necessary adjusting journal entries for the following items.
Make the journal entries in proper general journal entry form and show the work for any
calculations you make.
a.
The Supplies account shows a balance of $540, but a count of supplies reveals only
$210 on hand at the end of the year.
b. Chişinău Music Corporation initially records the payments of all insurance premiums as
expenses. The trial balance shows a balance of $420 in Insurance expense. A review of
insurance policies reveals that $125 of insurance is unexpired.
c. Chişinău Music Corporation's employees work Monday through Friday, and salaries of
$2,400 per week are paid each Friday. Chişinău Music Corporation's year-end falls on
Tuesday.
d. On December 31, 2009, Chişinău Music Corporation received a utility bill for
December electricity usage of $190 that will be paid in early January.
e.
If Chişinău Music Corporation chose to make reversing entries, which of the above
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adjustments (a - d) would be reversed?
Use the following adjusted, pre-closing December 31, 2009 trial balance for problems 4 and
5. Note that the accounts listed in the trial balance are in alphabetical order.
Bran Castle Corporation
Trial Balance
December 31, 2009
Accounts Payable
Accounts Receivable
$ 21,000
$ 206,000
Accrued Liabilities
$ 5,000
Accum Depreciation-Bldg & Equip
$ 121,000
Allowance for Uncollectible Accts
$ 25,000
Bad Debts Expense
Buildings and Equipment
$ 5,000
$ 425,000
Capital Stock
$ 200,000
Cash
$ 31,000
Cost of Goods Sold
$ 310,000
Depreciation Expense
$ 27,000
Interest Expense
$ 13,000
Inventory
$ 45,000
Land
$ 140,000
Notes Payable Due 5/1/2014
Prepaid Rent
$ 210,000
$ 5,000
Retained Earnings
Salaries Expense
$ 50,000
$ 185,000
Sales Revenue
$ 760,000
Total
$ 1,392,000
$ 1,392,000
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4.
(11 points) Using the trial balance for Bran Castle Corporation, prepare December 31, 2009
closing entries. Make the entries in proper general journal entry form.
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5.
(17 points) Using the trial balance for Bran Castle Corporation, prepare a December 31,
2009 classified balance sheet.
Bran Castle Corporation
Balance Sheet
December 31, 2009
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Answers
Question Answer
1
b
2
e
3
d
4
c
5
a
6
a
7
b
8
d
9
e
10
c
Question Answer
11
b
12
b
13
d
14
b
15
b
16
a
17
c
18
b
19
e
20
d
Problems
1. a.
(1) predictive value
(2) feedback value
(3) timeliness
b.
(1) verifiability
(2) representational faithfulness
(3) neutrality
2.
Question Answer
a
G
b
A
c
E
d
H
e
F
f
D
3.
a. Supplies Expense
Supplies
330
330
b. Prepaid Insurance
Insurance Expense
125
c. Wages Expense
Wages Payable
960
125
960
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d. Utilities Expense
Utilities Payable
190
190
e. b,c,d
4.
Sales Revenue
Cost of Goods Sold
Depreciation Expense
Interest Expense
Bad Debts Expense
Salaries Expense
Retained Earnings
760,000
310,000
27,000
13,000
5,000
185,000
220,000
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5.
Bran Castle Corporation
Balance Sheet
December 31, 2009
Assets
Current
Cash
Accounts Receivable
Less: Allow for Uncollectibles
Inventory
Prepaid Rent
Total Current Assets
Noncurrent
Land
Buildings and Equipment
Less: Accumulation Depr.
Total Noncurrent Assets
Total Assets
Liabilities
Current
Accounts Payable
Accrued Liabilities
Total Current Liabilities
Noncurrent
Notes Payable
Total Liabilities
Stockholders' Equity
Capital Stock
Retained Earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
$
206,000
25,000
$
31,000
$
$
$
181,000
45,000
5,000
$ 262,000
$
$
425,000
121,000
$
140,000
$
304,000
$ 444,000
$ 706,000
$
$
21,000
5,000
$
26,000
$
210,000
$ 236,000
$
$
200,000
270,000
$ 470,000
$ 706,000