Part 1 - Multiple Choice/Matching
In the space provided, enter the letter that best responds to the question asked, or best completes the given sentence:
Question 1 – 50 marks (25 items @2 marks each)
A. Accounting Multiple Choice
_____1. Which is an advantage of corporations compared to partnerships and proprietorships?
a)harder to raise funds
b)harder to transfer ownership
c)harder to organize
d)reduced legal liability for investors
_____2. The full disclosure principle dictates that:
a)financial statements should disclose all assets at their cost
b)financial statements should disclose only those events that can be measured in dollars
c)financial statements should disclose all events and circumstances that would matter to the statements’ users
d)financial statements should be prepared on a timely basis in order to be useful.
_____3. Which of the following forms of business organization is an “artificial person” and must obtain legal approval from the federal government or a province to conduct business?
a)law firm
b)proprietorship
c)partnership
d)corporation
_____4. The economic resources of a business are called:
a)assets
b)liabilities
c)shareholders’ equity
d)accounts payable
_____5. The performance of a service for a customer or client and immediate receipt of cash will:
a)increase one asset and decrease another asset
b)increase an asset and increase shareholders’ equity
c)decrease an asset and decrease a liability
d)increase an asset and increase a liability
_____6. You have purchased some T-shirts for $500 and can sell them immediately for $1000. What accounting concept or principle governs the amount at which to record the goods you purchased?
a)entity concept
b)reliability principle
c)cost principle
d)going-concern principle
_____7. A building-cleaning firm began March with $160 worth of supplies on hand. During the month, the firm purchased supplies of $290. At March 31, supplies on hand total $210. What is the supplies expense for the month?
a)$210
b)$240
c)$290
d)$450
_____8. The links between the financial statements are:
a)net income from the income statement to the retained earnings statement
b)ending retained earnings from the retained earnings statement to the balance sheet
c)both (a) and (b) above
d)none of the above
_____9. Which of the following items appears on the bank side of a bank reconciliation?
a)book error
b)outstanding cheque
c)NSF cheque
d)NSF cheque
_____10. The balance in retained earnings is not affected by :
a)net earnings
b)net loss
c)common shares
d)dividends
_____11. Genesis Inc. buys a $900 machine on credit. This transaction will affect:
a)statement of earnings only
b)balance sheet only
c)statement of earnings and statement of retained earnings only
d)statement of earnings, statement of retained earnings , and balance sheet
_____12. Which of the following is incorrect about the cash flow statement?
a)it is a fourth basic financial statement
b)it provides information about a company’s cash receipts and cash payments during a period
c)it reconciles the ending cash account balance to the balance per the bank statement
d)it provides information about the operating, investing and financing activities of the business.
_____13. Which is an example of a cash flow from an investing activity?
a)a receipt of cash from the issue of bonds payable
b)a payment of cash to repurchase common shares
c)a receipt of cash from the sale of equipment
d)a payment of cash to suppliers of inventory
_____14. A successful company’s major source of cash should be :
a)operating activities
b)investing activities
c)financing activities
d)a combination of the above
_____15. Manufacturing costs include which of the following?
a)direct materials
b)indirect materials
c)manufacturing overhead
d)all of the above
_____16. Variable costs are costs that:
a)vary in total directly and proportionately with changes in the activity level
b)remain the same per unit at every activity level
c)none of the above
d)both (a) and (b) above
_____17. Mixed costs consist of :
a)a variable cost element and a fixed cost element
b)a fixed cost element and a controllable cost element
c)a relevant cost element and a controllable cost element
d)a variable cost element and a relevant cost element
_____18. One of the following is not involved in CVP (cost-volume-profit) analysis. That factor is:
a)variable cost per unit
b)unit selling prices
c)fixed costs per unit
d)volume or level of activity
_____19. The equation for calculating sales to obtain target net income is as follows: required sales =
a)variable costs + target net income
b)variable costs + fixed costs + target net income
c)fixed costs + target net income
d)no correct answer is given
_____20. Cournot Ltd. sells 100,000 wrenches at $12 per unit. Total fixed costs are $300,000 and net income is $200,000. What should be reported as variable expenses in the CVP income statement (contribution margin approach)?
a)$500,000c) $900,000
b)$700,000d) $1,000,000
B. Business Mathematics Multiple Choice
The following tables may be useful in solving the problems in this part of the exam.
Business Math Formulas
Simple Interest I = pin
Simple Amount A = P(1+in); PV of Simple Amount = A/(1+in)
Compound Amount (FV) A = P(1 + i)n
Present Value (PV) of a Compound Amount P = A(1+ i)-n
Future Value of an Annuity(FV) Sn = R[(1+i)n – 1]
i
Present Value of an Annuity (PV) An = R[1 – (1+i)-n]
i
Effective Rate of Interest IE = (1+ i)n -1
_____21. Find the effective rate of 9.6% compounded monthly.
a)9.6%c) 10.03%
b).8%d) none of the above
_____22. A cheque for $6389 was used to pay off a loan which was made at a rate of 8.2% simple interest for 9 months. How much money was borrowed originally?
a)$5977.11c) $6000
b)$3664.56d) none of the above
_____23. In order to buy a new house, a family obtains a mortgage of $150,000 for 30 years at 7.5% compounded monthly. What are the monthly payments?
a)$5498.95c) $1048.82
b)$11,250d) none of the above
_____24. Find the future value of an annuity if $3000 is deposited into an account each year for 4 years and the account pays 7.3% compounded annually.
a)$3796.68c) $13379.12
b)$3962.98d) none of the above
_____25.. In a typical loan amortization schedule, the dollar amount of interest paid each period:
a)increases with each payment
b)decreases with each payment
c)remains constant with each payment
C. Managerial Accounting Matching
Question 2 – 10 marks
Given below is a list of cost items and a list of brief descriptive settings where these items are described.
Required: Match the items with the settings, selecting the setting that seems to be the best fit, and enter your answer letter in the space provided.
a. loss / d. sunk cost / g. opportunity costb. differential cost / e. selling cost / h. variable cost
c. period cost / f. mixed cost / i. administrative cost
Brief Descriptive Setting / Cost Item
a.In deciding whether to get rid of the Camaro, Bob reminded himself that it didn’t really matter how much money he had spent on rebuilding the engine. The money was spent and gone! All that was important now was what it would cost him, to continue owning the car.
b.Lionel was having a hard time deciding whether to return to school or not. He was concerned about the good salary he would have to give up for the next four years.
c. Maria Sanchez was disgusted. Her entire inventory of silk blouses had been ruined by a leaky roof. The inventory wasn’t insured, and all she could do was write off the cost of the inventory. Well, at least some tax savings might be realized.
d. The director of radiology argued that the cost of X ray film increased in direct proportion to the number of X rays taken – not the number of patients served.
e. The rental agreement on the company car called for a payment of $200 per month plus $0.20 per mile driven. There was no penalty for excess use. At the end of the agreement, however, ownership of the car reverted to the lessor.
PART 2 – LONG ANSWER
Question 3 (10 marks)
Elite Deck Products Ltd. produces a kit for cleaning backyard decks with the following results budgeted for the production and sales of 50,000 units:
Sales (50,000 units) / $1,500,000Cost of Goods Sold:
Direct Materials / 390,000
Direct Labour / 240,000
Variable Manufacturing Overhead / 120,000
Fixed manufacturing overhead / 360,000
Total Cost of Goods Sold / 1,110,000
Gross Margin / 390,000
Operating Expenses:
Sales commissions ($3 per unit) / 150,000
Head office salaries / 240,000
Total Operating Expenses / 390,000
Net Operating Income / $0
Required:
a)Reformat the budgeted income statement into one in the contribution margin format.
b)How many units would the company have to produce and sell if it desired an operating income of $120,000?
c)The company is considering reducing the kit’s selling price to $27 per unit and using a new production process. The new production process would reduce variable manufacturing costs by 40 percent but would increase fixed manufacturing costs by 30 percent.
(i) What would be the new breakeven point?
(ii) Should the company make the changes if sales are expected to be 90,000 units?
Question 4( 10 marks)
The budget committee of Voltex has assembled the following data concerning cash receipts from sales and cash disbursements as payment for purchases and sundry monthly expenses at April 30, 2002. You are a junior accountant and your task is to prepare the cash budget portion of the master budget for May and June.
On April 30, 2002, the balance sheet showed the following balances:
Cash$12,000
Accounts payable 5,100
Sales in April were $30,000. You forecast that sales will increase by 1.4 percent in both May and June. Voltex’s sales are 60 percent cash and 40 percent credit each month. Credit sales are collected in the month after sale.
Monthly purchases average 55 percent of the following month’s budgeted sales. Sales budgeted for July are $31,500. Purchases are paid 70 percent in the month of purchase, and 30 percent in the following month.
Monthly salaries amount to $4000. Sales commissions equal 5 percent of monthly salaries. (Combine salaries and commission into a single salary figure). Salaries and sales commissions are paid half in the month they are earned, and half in the next month.
Other monthly expenses are as follows:
a) Rent Expense $2,700 -paid as incurred
b) Amortization Expense 500
c) Insurance Expense 100 - as expiration of a prepaid amount
d) Income tax20% of operating income – paid at the end of the year.
Required:
1. Prepare schedules of (1) budgeted cash collections from customers, (2) budgeted cash payments to suppliers, and (3)budgeted cash payments for operating expenses. Show amounts for each month and totals for May and June.
2. Prepare a cash budget for the months of May and June. If the company did not feel it was necessary to borrow from the bank during May and June, what is the budgeted cash balance on June 30, 2002?
Question 5 (10 marks)
In January, 2006, Mark Peeble, the owner of Peebles’s Hardware, decided to expand his business by buying out a local lumberyard. To finance the purchase, Mark will have to obtain financing from a local bank. As support for the loan application, the bank has asked Mark to provide financial statements for the year ended December 31, 2005. Mark is very busy managing the store and has not made time to review the store’s financia;l operations over the past year.
When the bookkeeper provides Mark with the hastily prepared financial statements, Mark is pleasantly surprised to learn that the hardware store has had a significant increase in net income over the past year. He comments, “With financial results like these, we should have no trouble obtaining the bank loan”.
In January, 2006, the following transactions occurred:
a)Salaries of $20,000 were paid on January 2. A review of the time cards shows that the salaries relate to work performed in the last two weeks of December, 2005.
b)On January 3, 2006, Mark repaid a $100,000 loan. The loan, a one-year, 10% term loan was repaid in full including interest. No interest expense was recorded in 2005.
c)Goods that originally cost $9,000 and had been sold in December of 2005 for $12,300 were returned by the customer on January 4, 2006. Accompanying the goods was a letter that stated, “As we agreed on December 30, 2005, these goods are not what we ordered and are therefore being returned for full credit”.
d)Peeble’s received a bill for utilities on January 5, 2006 for $700. The bill was for the period ending December 31, 2005. The bill was recorded as an accounts payable in January, 2006.
Mark is concerned that some of these transactions may affect the ability of Peeble’s to obtain the necessary bank financing, and has instructed the bookkeeper not to make any adjustments to the 2005 statements for these accounts.
Required:
- Calculate the overall effect of these transactions on Peeble’s reported net income.
- How should Mark proceed, given this information?
Question 6 (10 marks)
The information needed to prepare a bank reconciliation for Wicked Pony at March 31 is listed below:
1. Cash balance per accounting records of Wicked Pony, $18,106.69
2. The bank statement showed a balance of $22,134.27 at March 31.
3. Accompanying the bank statement was a cheque for $186 from a customer D . Otay. The cheque was returned NSF.
4. Cheques outstanding as of March 31 were as follows: no. 84 for $1,841.02; no.88 for $1,323.00; no. 89 for $16.26.
5. Also accompanying the bank statement was a memo for $44.80 to cover safety deposit box rent. The bank had erroneously charged this item to the account of Wicked Pony.
6. On March 29, the bank collected a non-interest bearing note for Wicked Pony. The note was for $2,963.
7. A deposit of $2,008.50 on March 31 was made too late for the bank to record it as a deposit on the March bank statement.
8. In recording a $160 cheque received on account from a customer, Ross Company, the accountant for Wicked Pony erroneously recorded the amount collected as $16.00. The cheque appeared correctly among the deposits on the March bank statement.
9. The bank service charge for March amounted to $20.40.
Required: Prepare a bank reconciliation at March 31.