Accounting 2021 Final Exam Review (with Answers)

2021 Final Exam Review (with answers) Below is the breakdown of topics from each chapter & examples directly from Thursday’s (04/16) Final Exam Review. Full examples and explanations are provided in the lecture video. Chapter 7: Breakdown:  Know how to journalize credit sales (Accounts Receivable), cash receipts for sales on credit, credit card sales  Know how to post each of the above entries  Understand how the Accounts Receivable subsidiary accounts and control account are related  Understand what an installment accounts receivable is  Know the two methods for accounting for uncollectible debts, and what advantages or disadvantages exist over using one over the other  Know how to record the bad debt expense under each method.  Know the matching principle and the materiality constraint  Know the three methods for estimating bad debts expense, and understand that in 2 methods the bad debts expense will simply be a plug that must be determined.  Know how to write off and recover a bad debt under the Allowance method  Understand the key terms of a Notes Receivable  Know how to compute the interest and maturity date on a Note  Know how to record the inception of a Notes Receivable, receipt of cash on a Note, a dishonored Note, end-of-period interest adjustments, and how to record a cash receipt after the end of the period (When an Interest Receivable balance on the Note exists)  Understand different ways that a company may dispose of a Notes Receivable  Know the Accounts Receivable Turnover Ratio Examples: 1) What is the supplementary record that a company creates and maintains in a separate account for each customer called? Answer: C. The accounts receivable subsidiary ledger 2) Which is an appropriate way to report credit card expense on the income statement? Answer: D. Either B or C 3) What is the total interest (360-day year) on a $1,500, 12%, 120-day note? Answer: B. $60.00 4) Accounts receivable valued at $40,000 are sold for $38,000. How is the difference of $2,000 treated in the entry to record the sale? Answer: B. As a debit to Factoring Fee Expense 5) Beginning accounts receivable were $100,000 and the ending accounts receivable are $130,000. Net sales for the period total $1,265,000. What is the accounts receivable turnover? 2021 Final Exam Review (with answers) Answer: A. 11.00 6) Which of the following is a method used to account for uncollectible accounts? Answer: E. Both A and B above 7) A company that uses the direct write-off method of accounting for bad debts expense has recovered a bad debt that was written off one year ago. Which of the following would be included in the two entries used to record this transaction? Answer: C. A credit to the Bad Debts Expense account Chapter 8: Breakdown:  Understand what costs are include in the cost of a building  Understand what costs are include in the cost of machinery and equipment,  Know what type of assets qualify as land improvements  Know how to allocate the purchase price amongst a lump-sum asset purchase  Know the multiple depreciation methods and how to calculate depreciation under each  Know how to record depreciation  Always remember to look at dates, as you may need to calculate partial depreciation  Know how to adjust for changes in estimates for depreciation  Understand how depreciation is reported on the balance sheet  Know the differences between a Capital Expenditure and a Revenue Expenditure and what types of expenditures fall under which category  Understand how to record the acquisition and disposal of plant assets, including removal of accumulated depreciation and the recognition of any loss/gain  Know how to calculate depletion for natural resources and how to record depletion expense  Understand what an intangible asset is and the various types that exist, as well as which can be amortized  Know how to record amortization expense on intangibles  Understand what goodwill is and how to calculate this amount.  Know the Total Asset Turnover Ratio Examples: 1) An asset is being depreciated over a 10-year useful life. At the end of the fifth year, company management determines that the asset will only be used for three more years. How should this change be handled? Answer: D. The change should be reflected in the current and future years’ financial statements. 2) The net sales for the year total $4,000,000 and the December 31 cash balance is $50,000. Assets totaled $600,000 at the beginning of the year and $1,000,000 at the end of the year. What is the total asset turnover? 2021 Final Exam Review (with answers) Answer: C. 5.00 3) Which of the following costs would not be debited to the Equipment account? Answer: D. Repairs to keep the asset in working condition. 4) An asset having a four-year service life and a salvage value of $5,000 was acquired for $45,000 cash on April 2. Using straight-line depreciation, what will be the depreciation expense at the end of the first year, December 31? Answer: A. $7,500 5) A company purchased a machine on January 1 for $11,000. The machine is expected to have a salvage value of $1,000 at the end of its useful life of 10 years. Using the doubledeclining balance method, what is the amount of depreciation that will be recorded during the second-year of its useful life? Answer: A. $1,760 6) Adding a new wing to a building is an example of which of the following? Answer: E. Both C and D 7) The Oxide Mining Company acquired an iron ore deposit for $2,000,000. The company's geologist estimated the deposit to contain 1,000,000 tons of iron ore. At the end of the first year, 60,000 tons had been extracted. The end-of-year journal entry to record the depletion of the iron ore would require which of the following? Answer: B. A credit to Accumulated Depletion of $120,000 Chapter 9: Breakdown:  Know what determines a current liability and a Long-Term Liability  Know how to calculate and record a sale with sales tax payable  Know how to record cash received in advance as Unearned Revenue and how to reverse it after the Revenue has been earned  Know how to reclassify an Accounts Payable as a Notes Payable, and the subsequent entries necessary to record interest payable and the payoff of the Note  Understand what a Promissory Note is  Know how to record borrowing from a bank  Know how to record end-of-period adjusting entries (Interest Payable)  Know the differences of Payroll Liabilities and who’s responsible for what portion o Employee  FICA taxes  Social Security – 6.2% in 2014  Medicare – 1.45% in 2014  Federal Income Tax  State and Local Income Taxes o Employer 2021 Final Exam Review (with answers)       FICA taxes  Social Security – 6.2% in 2014  Medicare – 1.45% in 2014  Federal & State Unemployment Taxes  Combined 6.2% of first $7,000 paid to each employee Understand what employee voluntary deductions exist Know how to record salary/payroll expenses for employee and employer portions. Understand how to calculate and record certain estimated liabilities o Health and Pension Benefits o Vacation Benefits o Bonus Plans o Warranty Liabilities Understand what creates a contingent liability Know the Times Interest Earned Ratio Examples: 1) Which of the following is true about current liabilities? Answer: D. All of the above. 2) When should a contingent liability be recorded in the face of the financial statements? Answer: A. When the future event is probable and can be reasonable estimated 3) Which of the following is not a contingent liability? Answer: A. Product warranty 4) The following information is available from the company's financial statements: cash $40,000, net income $450,000, interest expenses $40,000, depreciation expense $30,000, and income tax expense $20,000. What is the times interest earned? Answer: E. None of the above 5) A $10,000, 9% 90-day note payable is signed on December 1, 2010. What is the amount of accrued, but unpaid interest relating to this note at December 31? Answer: A. $75 6) Which of the following taxes would not be included in payroll tax expense of an employer? Answer: C. Federal and state income tax 7) An employer offers a bonus to its employees equal to 4% of the company's annual net income (to be equally shared by all). The company's expected annual net income is $700,000. What is the amount of the company's bonus expense? Answer: A. $26,923 2021 Final Exam Review (with answers) Chapter 10: Breakdown:  Know the advantages and disadvantages of issuing bonds  Understand how bond payments work  Know how to calculate interest payments  Know how to record bond issuance and interest payments o Remember differences exist when premium or discount exists  Understand what causes a bond to be issued at discount or premium (contract vs. market rate)  Know how to calculate interest expense when a discount or premium exists o Under the straight line method  Understand what differences will exist when using effective interest method to calculate interest expense versus straight line  Know common ways to retire bonds and how to record retirement, including any gains or losses that may exist  Know characteristics of Notes Payable  Know the different kinds of Bonds o Secured or Unsecured o Term or Serial o Registered or Bearer o Convertible o Callable  Know the Debt-to-Equity Ratio  Know how to calculate the present value of a bond  Understand how bonds are accounted for when issued between interest payment dates Examples: 1) Which of the following describes a disadvantage of bonds? Answer: C. Bonds require payment of periodic 2) Which type of bond gives the issuing corporation the option of retiring the bond, at a predetermined price, prior to the bond's maturity date? Answer: E. Callable bond 3) The debt-to-equity ratio is 6.0. If total equity is $10,000, what is the amount of total liabilities? Answer: D. $60,000 4) A company issues $400,000 of 8% bonds, which mature in 10 years, at par on January 1, 2011. The bonds pay interest semiannually on each June 30 and December 31. What entry should be made on December 31, 2009? Answer: D. Debit Bond Interest Expense $16,000; Credit Cash $16,000. 2021 Final Exam Review (with answers) 5) Which of the following statements are not correct regarding bonds sold at a discount? Answer: D. The balance of Bonds Payable account will get larger each year. 6) When $100,000 of 6% annual interest, 10-year bonds are sold at 103,500. What will be the total interest expense on the bonds? Answer: B. $56,500 7) Bonds with a par value of $100,000 and a carrying value of $103,600 are retired at a call price of $101,000. The journal entry to retire the bonds would include which of the following? Answer: E. All of the above Chapter 12: Breakdown:  Understand what Cash Equivalents are  Know the different sections of the Cash Flows Statement and what type of activities fall under each o Operating o Investing o Financing  Understand how to calculate total Operating Cash Flows under each method below:  Indirect Method  Net Income  + Losses and – Gains  +/- Changes in Current Assets/Liabilities (See slide 12-16)  + Noncash expenses (Depreciation/Amortization/Depletion)  Direct Method  Operating Cash Receipts  - Operating Cash Payments  Understand how to calculate total Investing and Financing Cash Flows  Know how to calculate Cash Flow on Total Assets Examples: 1) Which of the following activities is an operating activity? Answer: C. Collecting the interest on an investment 2) Which of the following activities would not be reported as an investing activity on a statement of cash flows? Answer: D. Cash dividends received from an investment made in another company 3) Interest earned on a long-term note receivable would be included in which section of the statement of cash flows? Answer: A. Operating 2021 Final Exam Review (with answers) 4) Which of the following would be considered a noncash investing or financing transaction? Answer: D. All of the above 5) The cash provided from operations was $33,000. The net increase in cash was $22,000. If the net cash inflow from financing activities was $15,000, then what was the net cash flow from investing activities? Answer: B. A net outflow of $26,000 6) The company's statement of cash flows reported the following for the current year: cash flows provided by operating activities of $60,000, cash used by investing activities of $20,000, cash provided by financing activities of $10,000, and a net increase in cash and cash equivalents of $50,000. Assets totaled $900,000 at the beginning of the year and $1,100,000 at the end of the year. What is the cash flow on total assets ratio? Answer: D. 6% 7) Which section is affected by the decision to use either the direct method or the indirect method to prepare the statement of cash flows? Answer: A. Operating Chapter 13: Breakdown:  Understand the following terms: o Liquidity and Efficiency o Solvency o Profitability o Market Prospects  Know the various tools of analysis o Horizontal Analysis  Be able to calculate Change in dollar amount and Change as a percent for Comparative Statements  Perform Trend Analysis to obtain a Trend percent ratio o Vertical Analysis  Be able to calculate Common-Size Percent o Ratio Analysis  Be able to look at financial statements and calculate the following liquidity ratios:  Current Ratio  Acid-Test (Quick) Ratio  Accounts Receivable Turnover  Total Asset Turnover  Days’ Sales in Inventory  Days’ Sales Uncollected  Inventory Turnover  Be able to look at financial statements and calculate the following solvency ratios: 2021 Final Exam Review (with answers)    Debt Ratio  Equity Ratio  Debt-to-Equity Ratio  Times Interest Earned Be able to look at financial statements and calculate the following profitability ratios:  Profit Margin  Gross Margin  Return on Total Assets  Return on Common Stockholders’ Equity  Book Value per Common Share  Basic Earnings per Share Be able to look at financial statements and calculate the following market prospects ratios:  Price-Earnings Ratio  Dividend Yield Examples: 1) Financial statement analysis focuses on one or more elements of a company's financial condition or performance. Which area of inquiry relates to the company's ability to provide financial rewards sufficient to attract and retain financing? Answer: C. Profitability 2) Which of the following is the measurement of key relationships between financial statements? Answer: C. Ratio analysis 3) Which type of analysis is a comparison of a company's financial condition and performance across time? Answer: A. Horizontal analysis 4) A company has the following data: sales $500,000, cost of goods sold $200,000, operating expenses $100,000, average inventory $8,000, and accounts receivable $10,000. What is its number of days' sales uncollected? Answer: B. 7.3 days 5) If a company has sales of $500,000, cost of goods sold of $100,000, operating expenses of $100,000, average inventory of $8,000, average accounts receivable of $10,000, and average total assets of $35,000, what is its total asset turnover: Answer: C. 14.29 6) Which of the following ratios would be of the most interest to the long-term creditor of the business? Answer: B. Times interest earned 7) Which ratio is viewed as an indicator of future growth and risk for a stock? Answer: C. Price-earnings ratio