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York University - Atkinson Faculty
School of Administrative Studies
AK/ADMS 1500 3.0
An Introduction to Accounting: The Analysis and Use of Financial Information
Sample Exam, Fall, 2011
Instructions
1. Practice under examination conditions prior to the Review Class
2. For each question circle a b c d or e as appropriate.
3. Simple calculators without text memory are permitted.
Part A – Multiple Choice (70 / 100 marks – two hours)
1. Financial statements are required to be produced by ____________.
a) Tax law
b) The Canada Business Corporations Act and its provincial equivalents
c) The accounting equation
d) Generally accepted accounting principles
e) None of the above
2. The ratio of operating income to total assets is ____________.
a) A profitability ratio
b) Always 2:1 or more
c) A cash flow concept
d) Part of the income statement
e) None of the above
3. Investors buy shares in Quietus Ltd. for $5 million. On Day One of the company’s operations, $3
million is spent on assets and $4 million is borrowed from the Bank. By the end of the first month
they have also bought $10 million of goods for resale on credit and made sales of $25 million on
credit. The remaining inventory had a cost of $3 million. Ignore all other transactions and expenses.
The operating profit for the month was ____________.
a) $25 million
b) $20 million
c) $18 million
d) $15 million
e) None of the above
4. Tom & Dick go into business together as partnership, selling computer software through the
internet. On January 1, they each put in $6,000 as capital, and this goes into the Tom & Dick account
at their local bank. They buy computer equipment for $10,000 (paid in cash) and set up for business
in Dick’s dad’s basement. The cost of the computer equipment will be amortized over the next three
years, with a disposal value of $1,000. Dick’s dad has agreed to let them operate out of his basement
if they pay him a rent of 10% of their annual profit, or $1,200 per year, whichever is greater. At the
end of the first month of business they have made no sales and incurred no expenses, other than the
amortization of the computer equipment and the rent (which is owed to Dick’s dad). During February
they make sales of $5,000, all of which is paid for by customers’ credit cards. By the end of February
they are still waiting to receive the cash. In addition to another month’s rent and amortization, they
have bought the software that was sold to customers at a cost of $2,000, which they paid by cheque.
The cash at bank at the end of February is ____________.
a) $2,000
b) $1,900
c) $1,400
d) nil
e) None of the above
5. The accounting concept most relevant to reporting sales revenue is ______________.
a) Matching
b) Historic cost
c) Recognition
d) Periodicity
e) None of the above
6. The financial statement that measures the change in wealth over a period of time is called the
_______________.
a) Balance sheet
b) Income statement
c) Cash flow statement
d) Statement of retained earnings
e) None of the above
f) None of the above
7. A project with a positive net present value is _______________.
a) Economically feasible
b) One with a short payback period
c) One with a return on investment of 15% or more
d) It has a high level of risk
e) None of the above
8. Pearl’s Pizza has cash of $5,000, inventory of $100,000, and accounts receivable of $45,000.
Current liabilities are $50,000 and long-term liabilities are $25,000. Pearl’s Pizza’s quick ratio is
__________.
a) 3:1
b) 2:1
c) 1.25
d) 1:1
e) None of the above
9. Pearl’s Pizza is financed from $75,000 of debt and $175,000 of equity. Its debt-to-assets ratio is
__________.
a) 50.0%
b) 42.9%
c) 30.0%
d) 25.0%
e) None of the above
10. Profilo Co. has the following assets and liabilities: Assets: cash, $100; accounts receivable, $150;
Inventory, $240; land, $200; plant, net of accumulated depreciation: 300. Liabilities: short-term bank
loan, 60; accounts payable, $160; long-term mortgage loan, $160. Its debt-to-equity ratio is
__________.
a) 75.0%
b) 62.3%
c) 50.0%
d) 38.4%
e) None of the above
11. Orion Co. is financed by $200,000 of debt carrying 6% interest, $100,000 of 8% preference
shares, and $500,000 of equity. Operating profit was $100,000, and Orion Co. pays tax on profits
(after interest) at the rate of 40%. How much did the preference shareholders get in dividends?
a) $12,000
b) $ 8,000
c) $ 8,000, plus the same dividend as the common shareholders
d) 60%
e) None of the above
12. The cash flow statement __________.
a) Is stated “at a point in time”
b) Is a voluntary additional report
c) Is a required report
d) Measures the company’s efficiency
e) None of the above
13. Digman Co. had retained earnings of $400,000 and $50,000 in cash on January 1st. It made a net
income of $300,000 in the year. Amortization expense was $250,000. Digman Co. issued additional
common shares for $500,000 and borrowed $600,000 from the Bank of Toyland. Cash from
financing activities was __________.
a) $1,100,000
b) $ 900,000
c) $ 600,000
d) $ 500,000
e) None of the above
14. Mississauga Mining Co. made a net income of $25 million in 2010, after the deduction of
amortization expense of $8 million, interest of $5 million and taxes of $10 million. During 2007, it
sold mining equipment for $2 million and bought a new computer system for $3 million. During
2007, it issued new shares for $15 million and used the proceeds to repay loans of $10 million; the
remainder went into the bank’s current account. The cash from operations was __________ ($
million).
a) $17
b) $25
c) $27
d) $33
e) None of the above
15. Mississauga Mining Co. made a net income of $25 million in 2010, after the deduction of
amortization expense of $8 million, interest of $5 million and taxes of $10 million. During 2007, it
sold mining equipment for $2 million and bought a new computer system for $3 million. During
2007, it issued new shares for $15 million and used the proceeds to repay loans of $10 million; the
remainder went into the bank’s current account. The cash received from the sale of the shares would
be shown in __________.
a) The statement of retained earnings
b) The statement of cash flows
c) The balance sheet
d) (a) & (b), but not (c)
e) (a), (b) & (c)
16. Production and sales volumes are linked through __________.
a) Changes in inventories of finished goods
b) Changes in inventories of raw materials
c) Changes in competitors actions
d) Changes in the weather
e) None of the above
17. Bankruptcy is the result of __________.
a) Running out of raw material supplies
b) Running out of cash
c) Poor sales forecasting
d) Budgetary irregularities
e) None of the above
18. Ms. Greengrass is preparing the budget for the H.R. Department, of which she is manager. She
has taken last years’ budget and critically examined each item to see if this year’s activities should be
reflected in the same amount, a higher, or a lower figure. She is using __________.
a) Zero-based budgeting
b) Kaizan budgeting
c) Benchmarking
d) Incremental budgeting
e) Random budgeting
19. Sales for the year at Monica’s Mantles are forecast to be 22,000 mantles at an average selling
price of $125 each. Opening inventory is expected to be 500 mantles. Monica wants to have 1,400
mantles in inventory at the end of the year. Mantle purchases for the year should be __________.
a) 23,400
b) 22,900
c) 22,500
d) 22,000
e) 21,500
20. Sales at Monica’s Mantles last year were $2,400,000. Assume that the sales occurred evenly
throughout the year. Assume also that customers owed $200,000 at the start of the year, and that all
customers took one month to pay. There were no bad debts or late payers. Cash collection from
customers in the year was __________.
a) $2,000,000
b) $2,200,000
c) $2,400,000
d) $2,500,000
e) None of the above
21. Beaches Coffee Shop is a coffee bar in the Beaches area of Toronto. Sales volume for the last
four years has been as follows:
2004: 50,000 units
2005: 55,000 units
2006: 60,500 units
2007: 66,550 units
The year-on-year growth rate has been __________.
a) 5%
b) 7.5%
c) 8%
d) 10%
e) None of the above
22. Jemima's Outfits has a store in Dixie Outlet Mall. Jemima's Outfits specializes in high-class
ladies fashions and sells complete outfits for a uniform price of $75 each. The sales budget for 2011
was to sell 6,000 outfits. Assume that 50% of the sales were made for cash, and 50% were made on
credit terms. Of the credit customers, 70% pay by the end of the month following the sale, 28% pay
by the end of the next month following, and 2% turn into bad debts. The bad debt expense for the
year 2011 would be __________.
a) $6,000
b) $7,500
c) $8,500
d) $9,000
e) None of the above
23. The balanced scorecard is __________.
a) One of the four financial statements required to be published
b) A useful way of linking strategy and control
c) Limited to financial outcomes
d) Purely qualitative
e) None of the above
24. Comparing actual results with planned results and taking appropriate action are the functions of
__________.
a) Budgeting
b) The budget committee
c) The balanced scorecard
d) Budgetary control
e) None of the above
25. Jemima's Outfits has a store in Dixie Outlet Mall. It specializes in high-class ladies fashions and
sells complete outfits for a uniform price of $75 each. The outfits are budgeted to cost $50 each. The
sales budget for 2010 was to sell 6,000 outfits. If the outfits actually cost $48 each to buy, there
would be __________.
a) A favorable sales variance
b) An unfavorable sales variance
c) A favorable cost variance
d) An unfavorable cost variance
e) None of the above
26. Monica’s Mantles planned to spend $100,000 designing new mantles to keep ahead of fashion
trends. The company actually spent $75,000. This is __________.
a) A good thing, as the company under spent its budget
b) A good thing, as keeping ahead of fashion trends is not important
c) A bad thing, as it will reduce the operating profit
d) A bad thing, as it means the company is not moving towards achieving its strategic objective
e) None of the above
27. Monica’s Mantles has a strategic objective of offering high quality mantles to discerning
customers who are prepared to pay a premium price. The financial section of the balanced scorecard
includes “% reduction in cost of sales per unit”. This is __________.
a) A good thing, as reduced cost of sales increases gross margin % and is in line with strategic
objectives
b) A bad thing, as reduced cost of sales may increase gross margin %, but it is not in line with
strategic objectives
c) A good thing, as it enables price reductions and sales volume increases
d) A bad thing, as profitability will decline
e) None of the above
28. The difference between actual results and planned results is called __________.
a) Management by objectives
b) A variance
c) A disaster
d) The master budget
e) None of the above
29. Which of the following is an example of a variable cost?
a) Supervisory salaries
b) Rent
c) Insurance
d) Raw materials used
e) None of the above
30. Which of the following is an example of a fixed cost?
a) Supervisory salaries
b) Direct labor
c) Raw materials used
d) Commission on sales
e) None of the above
31. The "make or buy" type of decision is about _______________.
a) Activity-based management
b) Break-even analysis
c) Outsourcing vs. internal production
d) Human resource management
e) None of the above
32. B Company has a machine shop that can process 25,000 units of product per month, but it is only
processing 17,500 units per month. The rent of the premises is a _______________.
a) Fixed cost
b) Sunk cost
c) Cost that is marginal to a production decision
d) (a) & (b), but not (c)
e) (a), (b) & (c)
33. Sarnia Safety Co. makes fire extinguishers. The standard cost of its most popular model, XL5, is
as follows:
Body $6.00
Filling $3.00
Packing $1.00
Labour $5.00
Overhead $7.50
Total $22.50
You are told that overhead is allocated to products on the basis of 150% of direct labour cost, and
that overhead is one-third variable and two-thirds fixed. The XL5 is sold to distributors for $30, and
the distributors sell them to end users for various prices between $40 and $50. Wal-Mart has been
considering carrying Sarnia Safety’s XL5 extinguisher in its stores. The volume of sales would be
significant, so Sarnia Safety is prepared to offer an unusually low price to Wal-Mart. If Sarnia Safety
decides that it would be content with a contribution margin of $5 per extinguisher, the price it should
quote to Wal-Mart is _______________.
a) $30.00
b) $27.50
c) $22.50
d) $17.50
e) None of the above
34. Computer Peripherals makes scanners and printers. Its income statement for last year was as
follows:
Scanners Printers Total
Units sold 5,000 10,000 15,000
Selling price per unit $ 120 $ 75
Sales revenue $600,000 $750,000 $1,350,000
Direct materials $200,000 $150,000
Direct labour 40,000 50,000
Production overhead 200,000 250,000
Administrative & selling overhead 50,000 100,000
Total $490,000 $550,000 $1,040,000
Product profitability $110,000 $200,000 $ 310,000
You are told that the materials and labour costs are variable expense, and production overhead and
the selling & administrative overhead are all fixed expenses. Production overhead has been allocated
to products on the basis of $5 of production overhead for each $1 of labour cost. Administrative &
selling expense is allocated to products in proportion to sales units. The variable cost per unit for
scanners is _______________.
a) $120
b) $88
c) $58
d) $48
e) None of the above
35. Computer Peripherals makes scanners and printers. Its income statement for last year was as
follows:
Scanners Printers Total
Units sold 5,000 10,000 15,000
Selling price per unit $ 120 $ 75
Sales revenue $600,000 $750,000 $1,350,000
Direct materials $200,000 $150,000
Direct labour 40,000 50,000
Production overhead 200,000 250,000
Administrative & selling overhead 50,000 100,000
Total $490,000 $550,000 $1,040,000
Product profitability $110,000 $200,000 $ 310,000
You are told that the materials and labour costs are variable expense, and production overhead and
the selling & administrative overhead are all fixed expenses. Production overhead has been allocated
to products on the basis of $5 of production overhead for each $1 of labour cost. Administrative &
selling expense is allocated to products in proportion to sales units. The full cost per unit for a printer
is _______________.
a) $55
b) $25
c) $20
d) $15
e) None of the above
36. Computer Peripherals makes scanners and printers. Its income statement for last year was as
follows:
Scanners Printers Total
Units sold 5,000 10,000 15,000
Selling price per unit $ 120 $ 75
Sales revenue $600,000 $750,000 $1,350,000
Direct materials $200,000 $150,000
Direct labour 40,000 50,000
Production overhead 200,000 250,000
Administrative & selling overhead 50,000 100,000
Total $490,000 $550,000 $1,040,000
Product profitability $110,000 $200,000 $ 310,000
You are told that the materials and labour costs are variable expense, and production overhead and
the selling & administrative overhead are all fixed expenses. Production overhead has been allocated
to products on the basis of $5 of production overhead for each $1 of labour cost. Administrative &
selling expense is allocated to products in proportion to sales units. Computer Peripherals is
concerned that it does not make enough profit on scanners, compared to printers. It is considering
closing down the scanner line. If it did so, all fixed costs will remain the same in total and the sale of
printers would double from 10,000 units to 20,000 units. Operating profit would be
_______________.
a) $500,000
b) $400,000
c) $310,000
d) $300,000
e) None of the above
37. Student Painting Inc. is in the business of house renovation and decoration. The company
employs a full-time staff of supervisors. It uses students to sell its services on commission. It
employs students as casual labour to do the actual jobs. Its pricing policy for a house-painting job is
to estimate the amount of materials required based on the size of the house and then uses a markup
on the estimated cost of materials to get the selling price. Materials (paint and supplies), painters'
wages, and sales commissions are variable costs; all other costs are fixed.
Data for 2010 are as follows:
Sales revenue $960,000
Paint and supplies 320,000
Gross margin $640,000
Painters' wages $224,000
Supervisors’ wages 116,000
Commissions 96,000
Vehicle expenses 34,000
Office expenses 20,000 490,000
Operating profit $150,000
The break-even point for year 2010 was _______________.
a) $960,000
b) $640,000
c) $510,000
d) $500,000
e) None of the above
38. Debt is ____________________.
a) Capital provided by the owners
b) Money owed by the company
c) Retained earnings
d) Preference shares
e) None of the above
39. An amount paid to shareholders out of profits is referred to as ____________________.
a) Interest
b) Preference dividend
c) Preferred share capital
d) Dividend
e) None of the above
40. Shuttleworth Co. has $100,000 of assets, financed entirely by common shares and retained
earnings. The operating profit was $40,000, and tax was paid on the profits at the rate of 25%. The
return on assets was _______________.
a) 40%
b) 30%
c) 25%
d) 12.5%
e) None of the above
41. Shuttleworth Co. has $100,000 of assets, financed entirely by common shares and retained
earnings. The operating profit was $40,000, and tax was paid on the profits at the rate of 25%. There
was $60,000 of retained earnings before adding the net income for the current year. The maximum
dividend payable would be _______________.
a) $100,000
b) $ 90,000
c) $ 60,000
d) $ 40,000
e) $ 30,000
42. Minden Co. had $500,000 of equity share capital, on which the return was 16%, and $1,500,000
of debt, on which the interest rate was 10%. The tax rate was 40%. The weighted average cost of
capital was _______________.
a) 15.6%
b) 13%
c) 12%
d) 8.5%
e) None of the above
43. Minden Co. had operating profit of $450,000. The company paid interest at a rate of 10% on
$1,500,000 of debt and tax of $150,000. The company also paid a dividend of $75,000. The interest
cover ratio was _______________.
a) 3X
b) 2X
c) 1X
d) Not applicable; interest was not covered
e) None of the above
44. Minden Co. had operating profit of $450,000. The company paid interest at a rate of 10% on
$1,500,000 of debt and tax of $150,000. The company also paid a dividend of $75,000. The dividend
cover ratio was _______________.
a) 3X
b) 2X
c) 1X
d) Not applicable; the dividend was not covered
e) None of the above
45. The definition of _______________ is average operating income divided by initial investment.
a) Discounted cash flow
b) Payback
c) Discounted payback
d) Return on investment
e) None of the above
46. A project is economically feasible if _______________.
a) It has a short payback period
b) It has a return on investment of 15% or more
c) It has a positive net present value
d) It has a discounted cash flow
e) None of the above
47. Alberta Inc. is considering buying new computer software that will help the company in efficient
production planning and cost reduction. The cost is $100,000. The benefit will be an additional cash
inflow of $40,000 for five years, at which point the software will
need replacing with a more modern version. Alberta Inc.’s cost of capital is 10%. The net present
value of the project is _______________.
a) $51,632
b) $50,000
c) $25,935
d) $15,887.50
e) None of the above
48. Minden Co. is considering buying new computer software that will assist customers in their
product choices. The cost is $50,000. The benefit will be an additional cash inflow of $25,000 for
four years, at which point the software will need replacing with a more modern version. The payback
is _______________.
a) 1 year
b) 2 years
c) 3 years
d) 4 years
e) None of the above
49. Minden Co. is considering buying new computer software that will assist customers in their
product choices. The cost is $50,000. The benefit will be an additional cash inflow of $25,000 for
four years, at which point the software will need replacing with a more modern version. The return
on initial investment is _______________.
a) 10.0%
b) 12.5%
c) 15.0%
d) 25.0%
e) None of the above
50. Minden Co. has current assets of $180,000 (cash, $20,000; accounts receivable, $70,000;
inventory, $90,000), and long-term assets that had cost $400,000, with amortization to date of
$180,000. Sales were $500,000, and operating profit was $50,000. Tax was $20,000 and interest paid
was $10,000. A dividend of $10,000 was paid to the common shareholders. There are 1,000 shares in
issue. Minden Co.’s earnings per share is: _______________.
a) $1
b) $2
c) $10
d) $20
e) None of the above
Part B – Financial Accounting, Financial Statement Analysis and Non Profit Organizations (15
/ 100 marks – 30 minutes)
Scarb
Consider the following information drawn
from the financial statements of two
municipal job retraining assistance
facilities: Banton
in thousands of dollars
Balance Sheet
ASSETS
Operating fund
Cash
$ 3,000
Student fees receivable
3,000
Total
$ 6,000
Capital fund
Fixed assets
$ 25,000
LIABILITIES AND FUND BALANCES
Operating fund
Current liabilities
$ 5,000
Fund balance
1,000
Total
$ 6,000
Capital fund
Mortgage payable
$ 20,000
Fund balance
5,000
Total
$ 25,000
Operating Fund —
Statement of Operations and Fund Balance
REVENUE
Student tuition fees
$ 24,000
Government grant
76,000
Total
$100,000
EXPENSES
99,500
Excess of revenue over expense
$ 500
(expense over revenue)
$ 2,500
$ 3,000
$ 5,500
$21,000
$ 3,000
2,500
$ 5,500
$10,000
11,000
$21,000
$15,000
53,000
$68,000
70,000
($ 2,000)