Exam 1, Chapters 1 3

Accounting 303Name ______

Exam 1, Chapters 1 – 3

Spring 2010Section ______Row ______

I.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

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

erealization

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?

Cash BasisAccrual Basis

a.$3,400,000$3,400,000

b.$5,400,000$2,400,000

c.$6,400,000$3,400,000

d.$6,400,000$2,400,000

e.none of the above are correct

11.Which of the following entries could not be a correct adjusting entry?

a.Prepaid Rentxxx

Rent Expensexxx

b.Accounts Receivablexxx

Unearned Revenuexxx

c.Bad Debt Expensexxx

Allowance for Uncollectible Accountsxxx

d.Interest Expensexxx

Interest Payablexxx

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.

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 / Liabilities and Equity
Cash / 25,000 / Accounts Payable / 40,000
Accounts Receivable / 60,000 / Salaries Payable / 5,000
Inventory / 95,000 / Notes Payable (due 1/1/2012) / 100,000
Land, Buildings, and Equipment (net) / 90,000 / Capital Stock / 60,000
Intangible Assets / 5,000 / Retained Earnings / 90,000
275,000 / 275,000

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

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)

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.Economic entity assumptionF.Full-disclosure principle

B.Going concern assumptionG.Historical cost principle

C.Monetary unit assumptionH.Matching principle

D.Periodicity assumptionI.Materiality principle

E.Realization 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.

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

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 / $ 21,000
Accounts Receivable / $ 206,000
Accrued Liabilities / $ 5,000
Accum Depreciation-Bldg & Equip / $ 121,000
Allowance for Uncollectible Accts / $ 25,000
Bad Debts Expense / $ 5,000
Buildings and Equipment / $ 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 / $ 210,000
Prepaid Rent / $ 5,000
Retained Earnings / $ 50,000
Salaries Expense / $ 185,000
Sales Revenue / $ 760,000
Total / $ 1,392,000 / $ 1,392,000

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.

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

Answers

Question / Answer / Question / Answer
1 / b / 11 / b
2 / e / 12 / b
3 / d / 13 / d
4 / c / 14 / b
5 / a / 15 / b
6 / a / 16 / a
7 / b / 17 / c
8 / d / 18 / b
9 / e / 19 / e
10 / c / 20 / d

Problems

1. a.

(1)predictive value

(2)feedback value

(3)timeliness

(1)verifiability

(2)representational faithfulness

(3)neutrality

Question / Answer
a / G
b / A
c / E
d / H
e / F
f / D

a.Supplies Expense330

Supplies330

b.Prepaid Insurance125

Insurance Expense125

c.Wages Expense960

Wages Payable960

d.Utilities Expense190

Utilities Payable190

e.b,c,d

4.Sales Revenue 760,000

Cost of Goods Sold 310,000

Depreciation Expense 27,000

Interest Expense 13,000

Bad Debts Expense 5,000

Salaries Expense 185,000

Retained Earnings 220,000

Bran Castle Corporation

Balance Sheet

December 31, 2009