Winter 2005-2006
YORK UNIVERSITY
ATKINSON FACULTY OF LIBERAL AND
PROFESSIONAL STUDIES
School of Administrative Studies
Intermediate Accounting - AK/ADMS 3585M Tuesdays 7-10PM
Director: Sandra Iacobelli
Midterm #1
January 31, 2006
Instructions:
1. This test has 1 section and 10 pages
2. The marks for the section total 45.
3. Place all answers on both the Scantron sheet and in the box below the question
number on the exam booklet. Hand both the Scantron sheet and the exam booklet
in when you are finished. Please use an HB pencil.
Section
A
Question
45
Marks
Time Allocation
45
90 minutes
Section A has multiple choice questions. Choose the most appropriate answer
Please use an HB pencil.
Write your student name and number below:
Last Name:___________________________________________________________
First Name:___________________________________________________________
Student Number:______________________________________________________
Answers provided at the end of the paper.
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Section A: Questions 1-45 45 marks (1 mark each) – 90 minutes
Choose the best answer for each of the following questions
Answer using the “mark sense sheet” (Scantron) with an HB pencil and
also place your answer in the box below the question number on the
exam booklet below. Hand both the Scantron sheet and the exam
booklet in when you are finished.
1.
The accounting professions role in the capital allocation process is:
a) to measure company performance accurately and fairly on a timely basis
b) to assess the relative risks and returns associated with investment opportunities
c) to create a healthy economy, which promotes productivity, encourages innovation and provides an
efficient and liquid market for buying and selling securities
d) both a & c
e) all of the above
2.
Financial accounting can be broadly defined as the area of accounting that prepares financial
statements to be used
a by parties internal to the business enterprise only.
b. primarily by management.
c. by parties both internal and external to the business enterprise.
d. by investors, creditors and government only.
3.
Which of the following the accounting assumptions, principals or constraints justifies the use of
consolidated financial statements:
a) Periodicity
b) Historical cost
c) Revenue recognition
d) Economic entity
e) Materiality
4.
An item is material if:
a) its inclusion or omission would influence or change the judgment of a reasonable person
b) its exclusion will have no impact on a decision maker
c) greater than 5% of income from continuing operations
d) only a & c
e) all of the above
5.
Which of the following elements of financial statements is not a component of comprehensive income?
a. Revenues
b. Losses
c. Distributions to owners
d. Gains
e. All of the above are components of comprehensive income
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6.
Charging off the cost of a calculator with an estimated useful life of 10 years as an expense of the
period when purchased is an example of the application of the
a. full disclosure principle.
b. matching principle.
c. revenue recognition principal
d. materiality constraint.
e. none of the above.
7.
Decision makers vary widely in the types of decisions they make, the methods of decision making they
employ, the information they already possess or can obtain from other sources, and their ability to process
information. Consequently, for information to be useful there must be a linkage between these users and
the decisions they make. This link is
a. relevance.
b. reliability.
c. understandability.
d. materiality.
8.
Financial information exhibits the characteristic of consistency when
a. expenses are reported as charges against revenue in the period in which they are paid.
b. accounting entities give accountable events the same accounting treatment from period to
period.
c. extraordinary gains and losses are not included on the income statement.
d. accounting procedures are adopted which give a consistent rate of net income.
9.
Information is neutral if it
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information about an enterprise at other points in time.
c. would have no impact on a decision maker.
d. cannot be selected to favour one set of stakeholders over another.
10. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in
accordance with which basic accounting concept?
a. Cost/benefit relationship
b. Periodicity assumption
c. Conservatism constraint
d. Matching principle
11. Revenue is generally recognized when performance is achieved and it is measurable and collectible.
This statement describes the
a. consistency characteristic.
b. matching principle.
c. revenue recognition principle.
d. relevance characteristic.
12. Which of the following best illustrates the accounting concept of conservatism?
a. Use of the allowance method to recognize bad debt losses from credit sales
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b.
c.
d.
Use of the lower of cost or market approach in valuing inventories
Use of the same accounting method from one period to the next in calculating amortization
expense
Utilization of a policy of deliberate understatement of asset values in order to present a
conservative net income figure
13. Which of the following is not an internal event?
a. Amortization
b. Filing and payment of corporation taxes
c. Using raw materials in the production process
d. Using supplies within the supplies inventory
e. None of these are internal events
14. A trial balance
a. proves that debits and credits are equal in the ledger.
b. supplies a listing of open accounts and their balances that are used in preparing financial
statements.
c. is normally prepared four times in the accounting cycle.
d. both a & b
e. all of these
15. Why are certain costs of doing business capitalized when incurred and then amortized over subsequent
accounting cycles?
a. To adhere to the historical cost principle
b. To reduce the income tax liability
c. To aid management in cash-flow analysis
d. To adhere to the accounting constraint of conservatism
e. To adhere to the matching principle
16. An accrued expense can best be described as an amount
a. paid and currently matched with earnings.
b. paid and not currently matched with earnings.
c. not paid and not currently matched with earnings.
d. not paid and currently matched with earnings.
e. none of these
17. Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to equity
e. A debit to expense and a credit to an asset
18. A prepaid expense can best be described as an amount
a. paid and currently matched with revenues.
b. not paid and currently matched with revenues.
c. not paid and not currently matched with revenues.
d. paid but not yet expensed
e. both a and d
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19. An unearned revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and currently matched with revenues.
c. collected and not currently matched with expenses.
d. not collected and currently matched with expenses.
e. not collected and not currently matched with expenses.
20. Stef Company purchased equipment on November 1, 2006 and gave a 6-month, 6 percent note with a
face value of $10,000. The December 31, 2006 adjusting entry is
a. debit Interest Expense and credit Interest Payable, $600.
b. debit Interest Expense and credit Interest Payable, $100
c. debit Interest Expense and credit Cash, $100.
d. debit Interest Expense and credit Interest Payable, $300.
Use the following information for questions 21 through 23:
The income statement of Smith Corporation for 2006 included the following items:
Interest revenue
Salaries expense
Insurance expense
$151,000
$130,000
$19,200
The following balances have been excerpted from Smith Corporation's balance sheets:
Accrued interest receivable
Accrued salaries payable
Prepaid insurance
December 31, 2006
$18,200
17,800
2,200
December 31, 2005
$15,000
8,400
3,000
21. The cash received for interest during 2006 was
a. $132,800
b. $147,800
c. $151,000
d. $154,200
22. The cash paid for salaries during 2006 was
a. $139,400
b. $120,600
c. $121,600
d. $147,800
23. The cash paid for insurance premiums during 2006 was
a. $18,400.
b. $16,200
c. $20,000.
d. $17,000
24. Ice Inc. loaned $50,000 to another corporation on October 1, 2006 and received a six-month, 8 percent
interest-bearing note with a face value of $50,000. What adjusting entry should Rice make on
December 31, 2006?
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a. Debit Interest Receivable and credit Interest Revenue, $4000.
b. Debit Cash and credit Interest Revenue, $1000
c. Debit Interest Receivable and credit Interest Revenue, $1000.
d. Debit Cash and credit Interest Receivable, $4000.
e. None of the above
25. The concept of transparency mandates that the financial statements
a. reflect the economic reality of running a business.
b. make no attempt to disguise or mislead.
c. reflect everything no matter how small.
d. reflect the biases of the managers.
e. only a & b
26. Information in the income statement helps users to
a. evaluate the past performance of the enterprise.
b. analyze a company’s liquidity.
c. analyze a company’s financial flexibility.
d. all of these.
e. both a & b
27. An item that should be classified as an extraordinary item is
a. write-off of goodwill.
b. gains from transactions involving foreign currencies.
c. losses from moving a plant to another city.
d. write-off of inventory
e. gains from the expropriation of property by the government.
28. When a company disposes of a discontinued operation (segment), the transaction should be included in
the income statement as a gain or loss on disposal reported as
a. a prior period adjustment.
b. an extraordinary item.
c. an amount before income from continuing operations and before extraordinary items.
d. an unusual item reported within other expenses or losses.
e. none of these.
29. Accumulated other comprehensive income would be reported
a. in net income.
b. in the retained earnings section.
c. in the shareholders’ equity section.
d. in net income from continuing operations.
e. in the statement of comprehensive income.
Use the following information for questions 30 and 31.
The financial statements of Children, Inc. for 2005 and 2006 contained the following errors:
Ending inventory
2005
$2,500 overstated
2006
$4,000 understated
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Insurance expense
1,200 understated
$650 overstated
30. Assuming that none of the errors was detected or corrected, by what amount will 2005 income before
taxes be overstated or understated?
a. $1,300 understated
b. $1,300 overstated
c. $3,700 overstated
d. $3,700 understated
e. None of these
31. Assuming that none of the errors was detected or corrected, by what amount will 2006 income before
taxes be overstated or understated?
a. $5,950 understated
b. $7,150 understated
c. $3,350 understated
d. $3,350 overstated
e. None of these
32. In 2006 Tea Company changed from straight-line to double declining-balance amortization. The total
difference in amortization for all years through 2005 was $312,000 and for 2006 the difference was
$30,000. The tax rate is 30 percent. The amount that should be reported in the statement of retained
earnings for 2006 as a change in accounting principle is
a. $218,400 credit.
b. $218,400 debit.
c. $239,400 debit.
d. $239,400 credit.
e. None of these
33. The following information was extracted from the accounts of Walco Corporation at December 31,
2006:
CR(DR)
Total reported income since incorporation
$2,250,000
Total cash dividends paid
(1,200,000)
Cumulative effect of changes in accounting principle
(180,000)
Total loss from discontinued operations
(300,000)
Correction of an error, recorded January 1, 2006
99,000
What should be the balance of retained earnings at December 31, 2006?
a. $969,000.
b. $870,000.
c. $669,000.
d. $849,000.
e. None of above
34. During 2006, PJ Corporation disposed of Track Division, a major segment of its business. PJ realized a
gain of $4,500,000, before taxes, on the sale of Track assets. Track’s operating losses, before taxes,
were $5,400,000 in 2006. How should these facts be reported in PJ’s income statement for 2006?
Income tax rate for PJ Corporation is 30%.
a.
Total Amount to be Included in
Income from
Results of
Continuing Operations
Discontinued Operations
$3,780,000 loss
$5,850,000 gain
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b.
c.
d.
e.
630,000 loss
0
4,500,000 gain
0
0
630,000 loss
3,780,000 loss
900,000 loss
35. The following information is available for Tar Company:
Payment for goods during 2006
Accounts payable, January 1, 2006
Inventory, January 1, 2006
Accounts payable, December 31, 2006
Inventory, December 31, 2006
Cost of goods sold for 2005
$248,000
36,000
41,600
28,800
38,800
350,000
Cost of goods sold for 2006 is
a. $238,000
b. $243,600
c. $268,400
d. $274,000
e. None of the above
36. Monetary assets are defined as assets that are convertible to
a. known amount of cash within one year from the balance sheet date or within the normal
operating cycle where that is longer.
b. known amounts of cash.
c. known amount of cash within one operating cycle.
d. known amount of cash within one year.
e. known amount of cash within three months
37. The basis for classifying assets as current or non-current is the period of time normally required by the
accounting entity to convert cash invested in
a. inventory back into cash, or twelve months, whichever is shorter.
b. receivables back into cash, or twelve months, whichever is longer.
c. inventory back into cash, or twelve months, whichever is longer.
d. tangible fixed assets back into cash, or twelve months, whichever is longer.
e. long-term investments into cash, or twelve months, whichever is longer.
38. Which of the following should not be considered as a current asset in the balance sheet?
a. Instalment notes receivable due over fifteen months in accordance with normal trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the business.
c. Equity or debt securities purchased with cash available for current operations.
d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary,
on its president.
e. All of these are current assets
39. When a portion of inventories has been pledged as security on a loan,
a. the value of the portion pledged should be subtracted from the debt.
b. an equal amount of retained earnings should be appropriated.
c. the fact should be disclosed but the amount of current assets should be adjusted by the amount
pledged
d. the cost of the pledged inventories should be transferred from current assets to non-current
assets.
e. the fact should be disclosed but the amount of current assets should not be affected.
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40. Which item below is not a current liability?
a. Unearned revenue
b. Dividends distributable within 30 days
c. The currently maturing portion of long-term debt
d. Trade accounts payable
e. All of the above are current liabilities
41. Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be paid from a sinking
fund
d. The portion of a long-term bond-payable due within one year
e. None of these
42. Which of the following is not an acceptable major asset classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Current liabilities
e. Prepaid expenses
43. Significant accounting policies may not be
a. selected on the basis of judgement.
b. selected from existing acceptable alternatives.
c. unusual or innovative in application.
d. omitted from financial-statement disclosure.
e. None of the above
44. The financial statement which summarizes operating, investing, and financing activities of an entity for
a period of time is the
a. statement of cash flows.
b. income statement.
c. retained earnings statement.
d. statement of financial position.
e. statement of comprehensive income
45. Preparing the statement of cash flows involves all of the following except determining the
a. cash provided by operations.
b. cash paid to suppliers during the period
c. change in cash during the period.
d. cash provided by or used in investing and financing activities.
e. none of the above
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Answers:
1. A
2. C
3. D
4. A
5. C
6. D
7. C
8. D
9. B
10. B
11. C
12. B
13. B
14. D
15. E
16. D
17. D
18. D
19. C
20. B
21. B
22. B
23. A
24. C
25. E
26. A
27. E
28. E
29. C
30. C
31. B
32. B
33. A
34. C
35. B
36. B
37. C
38. D
39. E
40. E
41. D
42. E
43. D
44. A
45. B or E
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