Sample Test Key for Midterm 1 (Chapters 1 – 4)

Name______________________ Sample Test Key for Midterm 1 (Chapters 1 – 4) Multiple Choice - Circle the one best answer. 1. The primary accounting standard-setting body in the United States is the a. Securities and Exchange Commission. b. Internal Revenue Service. c. Financial Accounting Standards Board. d. Corporate Board of Directors. 2. An increase in an expense a. increases revenues. b. increases assets. c. decreases liabilities. d. decreases capital. 3. A corporation with total owners’ equity of $85,000 paid a $5,000 business debt. As a result of this transaction, total capital equity a. did not change. b. increased by $5,000. c. decreased by $5,000. d. increased to $90,000. 4. The right side of an account is always a. the debit side. b. the credit side. c. the balance of that account. d. carried forward to the next accounting period. 5. Posting is the process of a. preparing a chart of accounts. b. adding a column of figures. c. transferring journal entries to ledger accounts. d. recording entries in a journal. 6. The purpose of recording depreciation on productive assets is to a. reflect the decline in the market value of the assets each period. b. reduce income when the company has an exceptionally profitable year. c. be in conformity with the revenue recognition principle. d. allocate the original cost of a productive asset to expense over its useful life. 7. Murray Company debited Prepaid Insurance for $960 on July 1, 2001, for a one-year fire insurance policy. If the company prepares monthly financial statements, failure to make an adjusting entry on July 31, for the amount of insurance that has expired would cause a. assets to be overstated by $960 and expenses to be understated by $960. b. expenses to be overstated by $80 and assets to be understated by $80. c. assets to be overstated by $80 and expenses to be understated by $80. d. expenses to be overstated by $960 and assets to be understated by $960. 8. Which one of the following accounts is not closed at the end of an accounting period? a. Capital account b. Dividends account c. Service Revenue account d. Insurance Expense account 9. The revenue recognition principle dictates that revenue should be recognized in the accounting period in which it is a. collected. b. earned. c. earned and collected. d. most likely to be collected. 10. Gross profit is calculated by a. subtracting total expenses from total revenues. b. subtracting cost of goods sold from net sales. c. subtracting the ending inventory from cost of goods sold. d. adding cost of goods sold to net sales. 11. GAAP refers to a. General Accounting and Auditing Principles. b. Guidelines for American Accounting Procedures. c. General Association of Accounting Practitioners. d. none of the above. 12. The requirement that only transaction data capable of being expressed in terms of money be included in the accounting records relates to the a. cost principle. b. monetary unit assumption. c. economic entity assumption. d. both a and b above. 13. A financial statement that reports accounting data at a specific date is the a. income statement. b. retained earnings statement. c. balance sheet. d. statement of cash flows. 14. 15. 16. Which of the following is not considered an external user of accounting information? a. Creditor b. Regulatory Agency c. Labor Union d. Officers Which of the following is a separate legal entity? a. Proprietorship b. Partnership c. Corporation d. Sole proprietorship Which of the following is false? a. Current assets are listed in the order of magnitude (size). b. Obligations expected to be paid after one year are classified as long-term liabilities. c. Intangible assets are noncurrent assets that do not have physical substance. d. Property, plant, and equipment are assets with relatively long useful lives that are used in operating the business. 17. The primary source of GAAP in the United States is the a. Accounting Principles Board. b. Internal Revenue Service. c. Financial Accounting Standards Board. d. Securities and Exchange Commission. 18. To be relevant, accounting information must a. improve the company’s internal control. b. be presented on the balance sheet. c. be recorded at historical cost. d. be capable of making a difference in a decision. 19. In accounting, conservatism means choose the solution that will a. understate assets or income. b. be least likely to overstate assets or income. c. reduce expenses, thereby increasing income. d. reduce liabilities. 20. Financial statements combining the operations of Sears and Kmart would violate the a. monetary unit assumption. b. economic entity assumption. c. cost principle. d. full disclosure principle. 21. The owners’ equity had a beginning total of $40,000 and an ending total of $50,000. If $10,000 of withdrawals were paid during the period, net income must have been a. $20,000. b. $40,000. c. $10,000. d. $30,000. Matching - Match the items below by entering the appropriate letter in the space. 1. Liabilities D 2. Revenues 3. Ledger G F 4. Matching principle C 5. Unearned revenues 6. Income summary A E 7. Going concern assumption B Adjusting Entries The following information for Nance Company is available on July 31, 2001, the end of a monthly accounting period. You are to prepare the necessary adjusting journal entries for the Nance Company for the month of July for each situation given. Appropriate adjusting entries had been recorded in previous months. You may omit journal entry explanations. 1. Nance Company purchased a 2-year insurance policy on March 1, 2001, and debited Prepaid Insurance for $2,400. Insurance Expense............................................................................................100 Prepaid Insurance....................................................................................... 100 2. On February 1, 2001, a tenant in an apartment building owned by the Nance Company paid $5,100, which represents six months' rent in advance. The amount received was credited to the Unearned Rent account. Unearned Rent...............................................................................................850 Rent Earned............................................................................................. 850 3. On July 1, 2001, the balance in the Office Supplies account was $200. During July, office supplies costing $580 were purchased. A physical count of office supplies at July 31 revealed that there was $240 still on hand. Office Supplies Expense............................................................................................540 Office Supplies.................................................................................................... 540 4. On March 31, 2001, the Nance Company purchased a delivery van for $33,000. It is estimated that the annual depreciation will be $6,600. Depreciation Expense............................................................................................550 Accumulated Depreciation – Delivery Van...................................................... 550 5. The Nance Company has two office employees who earn $80 and $100 per day, respectively. They are paid each Friday for a five-day work week that begins each Monday. July 31 is a Thursday in 2001. Salaries Expense............................................................................................720 Salaries Payable....................................................................................... 720 Ratios The following data are taken from the financial statements of Marcum Company. The data are in alphabetical order: Accounts payable Accounts receivable Average assets Cash Gross profit $ 22,000 55,000 250,000 35,000 190,000 Net income $ 40,000 Net sales 400,000 Other current liabilities 12,000 Salaries payable 6,000 Owners’ equity 100,000 Instructions Compute the following: (a) Current ratio = Current assets ÷ Current liabilities = $90,000 ÷ $40,000 = 2.25 : 1 (b) (c) (d) Debt to total assets ratio = Total debt ÷ Total assets = $150,000 ÷ $250,000 = 60% (Total debt = Total assets – Owners’ equity = $250,000 - $100,000) Profit margin ratio = Net income ÷ Net sales = $40,000 ÷ $400,000 = 10% Return on assets ratio = Net income ÷ Total assets = $40,000 ÷ $250,000 = 16% Selected information from the financial statements of Buyman Company for the year ended December 31, 2001, appears below: 2001 Current assets $ 350,000 Total assets (beginning) 1,200,000 Current liabilities 140,000 Long-term liabilities 400,000 Net sales 1,500,000 Gross profit 600,000 Net income 150,000 Total assets (ending) 800,000 Instructions Answer the following questions relating to the year ended December 31, 2001. Show computa-tions. 1. The current ratio for 2001 is 2.5 times. 2. The debt to total assets ratio for 2001 is 45%. 3. The profit margin ratio for 2001 is 10%. 4. The return on assets ratio for 2001 is 15%. Assumptions, Principles, and Constraints Using the following codes, classify each of the items listed below as either an assumption, a principle, or a constraint. A P C 1. Matching Materiality C 6. P Monetary unit 8. Assumption Principle Constraint 2. A 3. Economic entity Going concern A 7. Revenue recognition P A 4. Cost P 5. C Time period 9. Full disclosure P Conservatism A 10. SHORT PROBLEMS Instructions Present the solutions, with appropriate supporting calculations, for each of the following independent problems. A. Given the following information, compute 2001 net income for Coret Company. Owners’ equity—January 1, 2001 Owners’ equity—December 31, 2001 Investments during 2001 Withdrawals paid during 2001 Ending owners’ equity, 12/31/01...................................................... Beginning owners’ equity, 1/1/01..................................................... Increase in owners’ equity............................................................... Withdrawals paid during 2001.......................................................... $140,000 115,000 25,000 28,000 53,000 Investments during 2001.................................................................. 10,000 Net income in 2001.......................................................................... $43,000 $115,000 140,000 10,000 28,000 B. Given the following information, determine the three missing amounts. Beginning of the Year Total Assets $70,000 Total Liabilities ??? Total Stockholders’ Equity 25,000 End of the Year Total Assets $75,000 Total Liabilities 50,000 Total Stockholders’ Equity ??? Total Change Total liabilities, $45,000 (Beginning of year). Total owners’ equity, $25,000 (End of year). Expenses during the year, $55,000. Stockholders’ Equity Changes During the Year Investments $10,000 Withdrawals 20,000 Revenues 70,000 Expenses ??? 5,000 TYPES OF ACCOUNTS Instructions Place a check in the appropriate columns to designate whether each of the following accounts is an asset, a liability, or a stockholders’ equity account. Account Asset Liability Owners’ Equity 1. Service Revenue X 2. Insurance Expense X 3. Supplies 4. Capital 5. Accounts Payable X 6. Salaries Payable X 7. Withdrawals 8. Accounts Receivable X 9. Prepaid Insurance X 10. Mortgage Payable X X X X BALANCE SHEET CLASSIFICATIONS Instructions Match the account titles given below with the appropriate Balance Sheet classification. An individual classification may be used more than once, or not at all. An account may also not appear in the balance sheet. Classifications A. Current Assets E. Current Liabilities B. Long-term Investments F. Long-term Liabilities C. Property, Plant and Equipment G. Owners’ Equity D. Intangible Assets H. Not separately presented on the Balance Sheet Account Titles 1. Insurance Withdrawals G 10. Prepaid A 2. Bonds Payable Unearned Rent Revenue E 11. F 3. Supplies A 12. 4. Accounts Payable E 5. Patents 6. F Salaries Payable 7. Equipment D Taxes Payable 13. 14. E Copyrights D Accounts Receivable A Payable 8. Depreciation—Equipment C 9. E C Service Revenue Rent Expense H H 18. 15. Mortgage 16. Dividends 17. Accumulated Capital G H