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Final Exam Chapters 1-15

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					Final Exam: Chapters 1-15                               Name _________________________
Financial Accounting, Fifth Edition                     Instructor ______________________
                                                        Section # _______ Date _________



         Part      I        II      III      IV         V      VI         VII   VIII    Total

        Points    90       25       14       15         12     15         14    15       200

        Score




PART I — MULTIPLE CHOICE (90 points)
Instructions
Designate the best answer for each of the following questions.

Questions 1 and 2 are based on the following information:
  Cain Company recently incurred the following costs:
  (1)    Purchase price of land and dilapidated building                               $250,000
  (2)    Real estate broker's commission                                                 14,000
  (3)    Net demolition costs of dilapidated building                                    39,000
  (4)    Excavation costs for new building                                               44,000
  (5)    Architect's fees and building permits                                           30,000
  (6)    Costs associated with new building construction                                950,000
  (7)    Costs associated with new furniture and equipment                              250,000
  (8)    Actual interest costs during building construction                             168,000
  (9)    Actual interest cost after completion of building construction                 120,000
 (10)    Costs of walks, driveways, and parking lot                                      55,000

____ 1. The building should be recorded on Cain's books at
        a. $980,000.
        b. $1,024,000.
        c. $1,063,000.
        d. $1,192,000.

____ 2. Land should be recorded on Cain's books at
        a. $250,000.
        b. $264,000.
        c. $303,000.
        d. $333,000.
FE-2     Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

____ 3. Benson Supply bought equipment at a cost of $24,000 on January 2, 2000. It originally
        had an estimated life of ten years and a salvage value of $4,000. Benson uses the
        straight-line depreciation method. On December 31, 2003, Benson decided the useful
        life likely would end on December 31, 2007, with a salvage value of $2,000. The
        depreciation expense recorded on December 31, 2003, should be
        a. $2,000.
        b. $2,200.
        c. $3,200.
        d. $4,400.

____ 4. In order to be relevant, accounting information must
        a. be neutral.
        b. be verifiable.
        c. help predict future events.
        d. be a faithful representation.

____ 5. Riodan Company sold old equipment for $25,000. The equipment had a cost of
        $50,000 and accumulated depreciation of $30,000. The entry to record the sale of the
        equipment would include a
        a. loss on disposal of $25,000.
        b. gain on disposal of $25,000.
        c. loss on disposal of $5,000.
        d. gain on disposal of $5,000.

____ 6. The cost of intangible assets should be
        a. amortized over the assets' estimated useful life, or 20 years, whichever is shorter.
        b. amortized over a period not exceeding 5 years.
        c. amortized over the assets' estimated useful life.
        d. charged to an expense account at acquisition.

____ 7. In a period of rising prices, the inventory method that results in the lowest income tax
        payment is
        a. LIFO.
        b. FIFO.
        c. average cost.
        d. specific identification.

____ 8. On November 30, Thatcher Company issued a $8,000, 6%, 4-month note to the
        National Bank. The entry on Thatcher's books to record the payment of the note at
        maturity will include a credit to Cash for
        a. $8,000.
        b. $8,480.
        c. $8,160.
        d. $8,320.

____ 9. The inventory methods that result in the most current costs in the income statement
        and balance sheet are
                Income Statement         Balance Sheet
           a.        FIFO                     FIFO
           b.        LIFO                     FIFO
           c.        LIFO                     LIFO
           d.        FIFO                     LIFO
                                                                               Final Exam    FE-3

____ 10. The following information is available for Lighten Company:
           Sales                       $130,000        Freight-in                        $10,000
           Ending Merchandise Inventory 12,000         Purchase Returns and Allowances     5,000
           Purchases                     90,000        Beginning Merchandise Inventory    15,000

           Lighten’s cost of goods sold is
           a. $115,000.
           b. $110,000.
           c. $98,000.
           d. $95,000.

____ 11. If ending inventory is understated, net income and assets will be
             Net Income               Assets
         a. Understated             Understated
         b. Overstated              Overstated
         c. Understated             Unaffected
         d. None of the above.

____ 12. One of the two constraints in accounting is
         a. comparability.
         b. materiality.
         c. reliability.
         d. relevance.

____ 13. The assumption that assumes a company will continue in operation long enough to
         carry out its existing objectives is the
         a. economic entity assumption.
         b. going concern assumption.
         c. monetary unit assumption.
         d. time period assumption.

____ 14. All of the following are intangible assets except
         a. patents.
         b. land improvements.
         c. goodwill.
         d. franchises.

____ 15. A daily cash count of register receipts made by a cashier department supervisor
         demonstrates an application of which of the following internal control principles?
         a. Documentation procedures
         b. Segregation of duties
         c. Establishment of responsibility
         d. Independent internal verification

____ 16. When the allowance method is used for bad debts, the entry to write off an individual
         account known to be uncollectible involves a
         a. debit to an expense account.
         b. credit to an expense account.
         c. credit to the Allowance account.
         d. debit to the Allowance account.
FE-4      Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

____ 17. Shipping terms of FOB destination mean that the
         a. purchaser is responsible for the shipping charges.
         b. shipping charges are debited to Freight-Out.
         c. items should be in the purchaser's inventory account at year-end if the items are in
            transit.
         d. both (a) and (c) above.

____ 18. Helig Company has a $150,000 balance in Accounts Receivable and a $1,000 debit
         balance in Allowance for Doubtful Accounts. Credit sales for the period totaled
         $900,000. What is the amount of the bad debt adjusting entry if Helig uses a
         percentage of receivables basis (at 10%)?
         a. $15,000
         b. $14,000
         c. $16,000
         d. $15,200

____ 19. The constraint of conservatism is best expressed as
         a. the cost of applying an accounting principle should not exceed its benefit.
         b. only material items should be recorded and reported.
         c. when in doubt, choose the method that will least likely overstate assets and net
            income.
         d. the lower of cost or market method should be used for inventories.

____ 20. If merchandise is sold for $1,000 subject to credit terms of 2/10, n/30, the entry to
         record collection in full within the discount period would include a
         a. credit to Sales Discounts for $20.
         b. credit to Cash for $980.
         c. credit to Accounts Receivable for $20.
         d. none of the above.

____ 21. Barker Company's records show the following for the month of January:
         Total Retained Earnings at January 1 ......................................             $400,000
         Total Retained Earnings at January 31 ....................................               500,000
         Total Revenues ........................................................................  670,000
         Total Dividends Declared .........................................................        30,000
             Total expenses for January were
             a. $740,000.
             b. $770,000.
             c. $570,000.
             d. $540,000.
                                                                              Final Exam    FE-5

     22. Jetson Company's financial information is presented below.
           Sales                          $ ????      Purchase Returns and Allowances $ 15,000
           Sales Returns and Allowances     30,000    Ending Merchandise Inventory      35,000
           Net Sales                       250,000    Cost of Goods Sold               180,000
           Beginning Merchandise Inventory    ????    Gross Profit                        ????
           Purchases                       170,000

           The missing amounts above are:
                Sales        Beginning Inventory         Gross Profit
           a. $280,000            $45,000                 $70,000
           b. $220,000            $45,000                 $100,000
           c. $280,000            $60,000                 $70,000
           d. $220,000            $60,000                 $100,000

____ 23. The necessity of making adjusting entries relates mostly to the
         a. economic entity assumption.
         b. time period assumption.
         c. going concern assumption.
         d. monetary unit assumption.

____ 24. The preparation of closing entries
         a. is an optional step in the accounting cycle.
         b. results in zero balances in all accounts at the end of the period so that they are
            ready for the following period's transactions.
         c. is necessary before financial statements can be prepared.
         d. results in transferring the balances in all temporary accounts to Retained Earnings.

____ 25. Allowance for Doubtful Accounts is reported in the
         a. balance sheet as a contra asset.
         b. balance sheet as a contra liability account.
         c. income statement under other expenses and losses.
         d. income statement under other revenues and gains.

____ 26. Current liabilities are obligations that are reasonably expected to be paid from
              Existing              Creation of Other
            Current Assets          Current Liabilities
         a.     No                        No
         b.     Yes                       Yes
         c.     Yes                       No
         d.     No                        Yes

____ 27. Which of the following errors will cause a trial balance to be out of balance? The entry
         to record a payment on account was
         a. not posted at all.
         b. posted as a debit to Cash and a credit to Accounts Payable.
         c. posted as a debit to Cash and a debit to Accounts Payable.
         d. posted as a debit to Accounts Receivable and a credit to Cash.
FE-6     Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

____ 28. The primary accounting standard-setting body in the United States is the
         a. Securities and Exchange Commission.
         b. Accounting Principles Board.
         c. Financial Accounting Standards Board.
         d. Internal Revenue Service.

____ 29. Lawford Company's equipment account increased $400,000 during the period; the
         related accumulated depreciation increased $30,000. New equipment was purchased
         at a cost of $700,000 and used equipment was sold at a loss of $20,000. Depreciation
         expense was $100,000. Proceeds from the sale of the used equipment were
         a. $210,000.
         b. $250,000.
         c. $280,000.
         d. $320,000.

____ 30. Which of the following would not be included in the operating activities section of a
         statement of cash flows?
         a. Cash inflows from returns on loans (i.e., interest)
         b. Cash inflows from returns on equity securities (i.e., dividends)
         c. Cash outflows to governments for taxes
         d. Cash outflows to reacquire treasury stock

____ 31. Which of the following combinations presents correct examples of liquidity, profitability,
         and solvency ratios, respectively?
            Liquidity                      Profitability              Solvency
         a. Inventory turnover             Inventory turnover         Times interest earned
         b. Current ratio                  Inventory turnover         Debt to total assets
         c. Receivable turnover            Return on assets           Times interest earned
         d. Average days collection        Payout ratio               Return on assets

____ 32. Nadine Manufacturing declared a 10% stock dividend when it had 150,000 shares of
         $5 par value common stock outstanding. The market price per common share was
         $12 per share when the dividend was declared. The entry to record this dividend
         declaration includes a credit to
         a. Retained Earnings of $75,000.
         b. Paid-in Capital in Excess of Par for $105,000.
         c. Common Stock for $75,000.
         d. Retained Earnings for $180,000.

____ 33. Which of the following pairs of terms in the area of financial statement analysis are
         synonymous?
         a. Ratio — Trend
         b. Horizontal — Trend
         c. Vertical — Ratio
         d. Horizontal — Ratio
                                                                              Final Exam     FE-7

____ 34. Which of the following statements is true?
         a. Trading securities are debt securities that the investor has the intent to hold to
            maturity.
         b. Trading securities are securities bought and held primarily for sale in the near
            term.
         c. Trading securities are securities that may be sold in the future.
         d. Trading securities are reported at cost in the balance sheet.


____ 35. Dividends received are credited to what account under the equity method and cost
         method, respectively?
             Equity Method               Cost Method
         a. Stock Investments            Dividend Revenue
         b. Dividend Revenue             Dividend Revenue
         c. Stock Investments            Stock Investments
         d. Dividend Revenue             Stock Investments

____ 36. In accounting for available-for-sale securities, the Unrealized Loss—Equity account
         should be classified as a
         a. liability on the balance sheet.
         b. loss on the income statement.
         c. deduction in the stockholders' equity section of the balance sheet.
         d. contra asset on the balance sheet.

____ 37. Boon Corporation has the following stock outstanding:
              6% Preferred, $100 Par           $1,000,000
              Common Stock, $50 Par             2,000,000
          No dividends were paid the previous 2 years. If Boon declares $400,000 of dividends
          in the current year, how much will preferred stockholders receive if the preferred stock
          is cumulative?
          a. $220,000
          b. $120,000
          c. $60,000
          d. $180,000

____ 38. The statement of cash flows is a(n)
         a. required supplemental financial statement.
         b. required basic financial statement.
         c. optional basic financial statement.
         d. optional supplementary statement.

____ 39. The directors of Chandler Corp. are trying to decide whether they should issue par or
         no par stock. They are considering two alternatives for their new stock, which they are
         assuming will be issued at $8 per share. The alternatives are: (A) $5 par value and (B)
         no par, no stated value. If 120,000 shares are issued, what amount will be credited to
         the common stock account in each of these cases?
                (A)            (B)
         a. $120,000        $960,000
         b. $120,000        $960,000
         c. $960,000        $960,000
         d. $600,000        $960,000
FE-8     Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition


____ 40. Fison Corp. purchased 15,000 shares of its $2 par common stock at a cost of $13 per
         share on April 30, 2003. The stock was originally issued at $11 per share. The entry to
         record the purchase of the stock should include a debit to
         a. Common Stock for $30,000.
         b. Treasury Stock for $30,000.
         c. Common Stock for $195,000.
         d. Treasury Stock for $195,000.

____ 41. What is the effect on total paid-in capital of a stock dividend and a stock split,
         respectively?
            Stock Dividend      Stock Split
         a.    Increase          No effect
         b.    No effect         No effect
         c.    Decrease          No effect
         d.    Decrease          Decrease

____ 42. Which of the following should be classified as an extraordinary item?
         a. Effects of major casualties not infrequent in the area
         b. Write-off of a significant amount of receivables
         c. Loss from the expropriation of facilities by a foreign government
         d. Losses due to a bitter, lengthy labor strike

____ 43. A Discount on Bonds Payable account
         a. is a contra account to Bonds Payable.
         b. will cause interest expense to be less than cash interest payable.
         c. is increased over the life of the bond until it equals the bond's face value.
         d. is an adjunct account to Bonds Payable.

____ 44. In order to be considered extraordinary, an item must be
         a. frequent and uninsured.
         b. unusual and uninsured.
         c. uninsured and infrequent.
         d. infrequent and unusual.

____ 45. If the market rate of interest is lower than the stated rate, bonds will sell at an amount
         a. equal to face value.
         b. not determinable from the given information.
         c. lower than face value.
         d. higher than face value.
                                                                                   Final Exam    FE-9

PART II — MATCHING (25 points)
Instructions
Designate the terminology that best represents the definition or statement given below by placing
the identifying letter(s) in the space provided. No letter should be used more than once.

      A.    Additions and improvements                     X.    Full disclosure principle
      B.    Allowance method                               Y.    Going-concern assumption
      C.    Amortization                                    Z.   Held-to-maturity securities
      D.    Available-for-sale securities                 AA.    Internal control
      E.    Average cost method                           AB.    Last-in, first-out method
      F.    Book value                                    AC.    LIFO reserve
      G.    Capital expenditure                           AD.    Matching principle
      H.    Cash debt coverage ratio                      AE.    Materiality
       I.   Consistency                                   AF.    Monetary unit assumption
      J.    Contra asset account                          AG.    Net purchases
      K.    Cost method                                   AH.    Periodic inventory system
      L.    Credit memorandum                              AI.   Permanent accounts
      M.    Debit memorandum                              AJ.    Perpetual inventory system
      N.    Declining-balance method                      AK.    Ratio analysis
      O.    Depreciable Cost                              AL.    Relevance
      P.    Depreciation                                  AM.    Reliability
      Q.    Direct write-off method                       AN.    Revenue expenditure
      R.    Discontinued operations                       AO.    Revenue recognition principle
      S.    Earnings per share                            AP.    Stock dividend
      T.    Economic entity assumption                    AQ.    Stock split
      U.    Equity method                                 AR.    Temporary accounts
      V.    Extraordinary items                           AS.    Time period assumption
      W.    First-in, first-out method                    AT.    Units-of-activity method

___   1. The periodic write-off of an intangible asset.

___   2. The total amount subject to depreciation.

___   3. The principle that efforts be matched with accomplishments.

___   4. An expenditure charged against revenues as an expense when incurred.

___   5. The inventory costing method that assumes that the costs of the earliest goods
         purchased are the first to be recognized as cost of goods sold.

___   6. Use of the same accounting principles and methods from period to period by the same
         business enterprise.

___   7. A measure of solvency calculated as cash provided by operating activities divided by
         average total liabilities.

___   8. An inventory costing method that assumes that the latest units purchased are the first to
         be allocated to cost of goods sold.

___   9. An assumption that economic events can be identified with a particular unit of
         accountability.
FE-10    Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

PART II — MATCHING (cont.)

___ 10. A characteristic of information that means it is capable of making a difference in a
        decision.

___ 11. An assumption that the economic life of a business can be divided into artificial time
        periods.

___ 12. This method of accounting for uncollectible accounts is required when bad debts are
        significant in size.

___ 13. An accounting method in which cash dividends received are credited to Dividend
        Revenue.

___ 14. Used by a bank when a previously deposited customer’s check “bounces” because of
        insufficient funds.

___ 15. The assumption that the enterprise will continue in operation long enough to carry out its
        existing objectives and commitments.

___ 16. A system in which detailed records are not maintained and cost of goods sold is
        determined only at the end of an accounting period.

___ 17. The difference between inventory reported using LIFO and inventory reported using
        FIFO.

___ 18. The methods and measures adopted within a business to safeguard its assets and
        enhance the accuracy and reliability of its accounting records.

___ 19. Revenue, expense, and dividends accounts whose balances are transferred to retained
        earnings at the end of an accounting period.

___ 20. A technique for evaluating financial statements that expresses the relationship among
        selected financial statement data.

___ 21. A depreciation method that applies a constant rate to the declining balance book value
        of the asset and produces a decreasing annual depreciation expense over the useful life
        of the asset.

___ 22. A pro rata distribution of a corporation’s own stock to its stockholders.

___ 23. Events and transactions that are unusual in nature and infrequent in occurrence.

___ 24. The disposal of a significant segment of a business.

___ 25. The net income earned by each share of outstanding common stock.
                                                                              Final Exam   FE-11

PART III — ADJUSTING ENTRIES (14 points)
The trial balance of Diamond Company shows the following balances for selected accounts on
November 30, 2005:
Prepaid Insurance               $ 5,000             Unearned Revenue                $ 1,800
Equipment                        40,000             Notes Payable                    24,000
Accumulated Depreciation          8,800             Interest Payable                    400
Instructions
Using the additional information given below, prepare the appropriate monthly adjusting entries at
November 30. Show computations.

A.   Revenue earned for services rendered to customers, but not yet billed, totaled $5,000 on
     November 30.




B.   The note payable is a 6%, 1-year note issued October 1, 2005.




C.   The equipment was purchased on January 2, 2004, for $40,000. It has an estimated life of 6
     years and an estimated salvage value of $4,000. Stone uses the straight-line depreciation
     method.




D.   An insurance policy was acquired on June 30, 2005; the premium paid for 2 years was
     $6,000.




E.   Quartz received $1,800 of revenue in advance from a customer on November 1, 2005. Two-
     thirds of this amount was earned by November 30.
FE-12        Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

PART IV — BANK RECONCILIATION (15 points)
A review of the November 30 bank statement and other data of Conan Company reveals the
following:
1.    Balance per bank statement on November 30 ...................................................                         $20,400
2.    Balance per books on November 30 ..................................................................                   $14,488
3.    NSF Check from J. Smith in payment of account ...............................................                           $190
4.    Collection of $2,500, 4-month, 12% note with a $25 collection fee. No interest
      had been accrued ..............................................................................................         2,575
5.    Deposits in transit at November 30 ....................................................................                 1,800
6.    Outstanding checks at November 30 .................................................................                     5,500
7.    A check written by Conan to Green for equipment on November 10 was
      recorded at $463 but correctly cleared the bank at $436.
8.    A check drawn on the account of Conehead Company for $200 was mistakenly
      charged against Conan’s account by the bank.

Instructions
Prepare the November 30 (a) bank reconciliation (omit heading) and (b) related journal entries.

(a)     BANK RECONCILIATION:
                                                    Amount                                                              Amount
        Balance per bank statement                  $20,400              Balance per books                              $14,488




        Adjusted balance per bank                   $                    Adjusted balance per books                     $

(b)     ENTRIES:
                          Account Titles                                                                    Debit            Credit
                                                                         Final Exam   FE-13

PART V — INVENTORY (12 points)
Potter Company had a beginning inventory of 200 units at a cost of $12 per unit on August 1.
During the month, the following purchases and sales were made.

        Purchases                                   Sales
August 4    250 units at $13                August 7     150 units
August 15   350 units at $15                August 11    100 units
August 28   200 units at $14                August 17    300 units
                                            August 24    200 units

Griffin uses a periodic inventory system.

Instructions
Determine ending inventory and cost of goods sold under (a) average cost, (b) FIFO, and (c)
LIFO.

(a)   Average cost:
      Ending inventory = $____________; cost of goods sold = $_____________.




(b)   FIFO:
      Ending inventory = $_____________; cost of goods sold = $____________.




(c)   LIFO:
      Ending inventory = $_____________; cost of goods sold = $____________.
FE-14    Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

PART VI — DEPRECIATION (15 points)
Drafter Company purchased equipment for $400,000 cash on January 1, 2006. The estimated life
is 5 years or 1,000,000 units; salvage value is estimated at $20,000. Actual activity was 180,000
units in 2006, and 200,000 units in 2007.

Instructions
Compute the annual depreciation expense for 2006 and 2007, and book value at December 31,
2007, under the following depreciation methods: (a) straight-line, (b) double-declining-balance,
and (c) units-of-activity.

(a) Straight-line
    2006 depreciation =      $_______________.

    2007 depreciation =      $_______________.

    12/31/07 book value = $_______________.


(b) Double-declining-balance
    2006 depreciation =      $_______________.

    2007 depreciation =      $_______________.

    12/31/07 book value = $_______________.



(c) Units-of-activity
    2006 depreciation =      $_______________.

    2007 depreciation =      $_______________.

    12/31/07 book value = $_______________.
                                                                                  Final Exam   FE-15

PART VII — RATIO ANALYSIS (14 points)

The condensed financial statements of Eastward Corporation for 2005 are presented below.

          Eastward Corporation                               Eastward Corporation
             Balance Sheet                                    Income Statement
           December 31, 2005                        For the Year Ended December 31, 2005

              Assets                              Revenues                             $2,000,000
Current assets                                    Expenses
   Cash and temporary                                Cost of goods sold                 1,080,000
     investments                  $ 40,000           Selling and administrative
   Accounts receivable              70,000             expenses                           495,000
   Inventories                     140,000           Interest expense                      50,000
        Total current assets       250,000              Total expenses                  1,625,000
Property, plant, and                              Income before income taxes              375,000
   equipment (net)                  750,000       Income tax expense                      150,000
        Total assets             $1,000,000       Net income                           $ 225,000


       Liabilities and Stockholders' Equity
Current liabilities              $ 100,000
Long-term liabilities                300,000
Common stockholders' equity          600,000
   Total liabilities and
   stockholders' equity          $1,000,000

Additional data as of December 31, 2004: Inventory = $100,000; Total assets = $800,000;
Common stockholders' equity = $400,000.

Instructions
Compute the following listed ratios for 2005 showing supporting calculations.

(a) Current ratio = _________________________________________________________ .

(b) Debt to total assets = ____________________________________________________ .

(c) Times interest earned = __________________________________________________ .

(d) Inventory turnover = _____________________________________________________ .

(e) Profit margin ratio = _____________________________________________________ .

(f)   Return on common stockholders' equity = ___________________________________ .

(g) Return on assets = _____________________________________________________ .
FE-16    Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

PART VIII — STATEMENT OF CASH FLOWS (15 points)

Presented below is information related to the operations of Karlson Corporation.
                                   December
                                2007         2006                                     2007
Cash                         $ 58,000 $ 40,000           Sales                      $408,000
Accounts receivable             55,000       48,000      Cost of goods sold          190,000
Inventory                       35,000       22,000      Gross profit                218,000
Prepaid expenses                15,000       20,000      Depreciation expense         14,000
Land                            36,000       20,000      Other operating expenses    141,000
Building                      100,000      100,000       Income from operations       63,000
Accumulated depreciation—                                Loss on equipment sale        2,000
  building                     (17,000)       (8,000)    Income before income taxes   61,000
Equipment                       58,000       80,000      Income tax expense           19,000
Accumulated depreciation—                                Net income                 $ 42,000
  equipment                    (15,000)     (20,000)
    Total                    $325,000 $302,000

Accounts payable               $ 35,000     $ 39,000
Bonds payable                         0      100,000
Common stock                    200,000      100,000
Retained earnings                90,000       63,000
   Total                       $325,000     $302,000

Additional information:
(a) In 2007, Karlson declared and paid a cash dividend.
(b) The company converted $100,000 of bonds into common stock.
(c) Equipment with a cost of $22,000 and a book value of $12,000 was sold for $10,000. Land
     was acquired for cash.
(d) Prepaid expenses pertain to operating expenses; accounts payable pertains to merchan-
     dise purchases.

Instructions
Solve either (a) or (b), but not both.
(a) Prepare a statement of cash flows in proper form for 2007, using the indirect method.
(b) Prepare a statement of cash flows in proper form for 2007, using the direct method.
                                                              Final Exam   FE-17

PART VIII — STATEMENT OF CASH FLOWS (cont.)

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FE-18         Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

Solutions — Final Exam: Chapters 1-14

PART I — MULTIPLE CHOICE (90 points)

1.   d             9.    b            17.    b            25.    a            33.     b             41.   a
2.   c            10.    c            18.    c            26.    b            34.     b             42.   c
3.   c            11.    a            19.    c            27.    c            35.     a             43.   a
4.   c            12.    b            20.    c            28.    c            36.     c             44.   d
5.   d            13.    b            21.    d            29.    a            37.     d             45.   d
6.   a            14.    b            22.    c            30.    d            38.     b
7.   a            15.    d            23.    b            31.    c            39.     d
8.   c            16.    d            24.    d            32.    b            40.     d


PART II — MATCHING (25 points)

1.   C             6.    I            11.    AS           16.    AH           21.     N
2.   O             7.    H            12.    B            17.    AC           22.     AP
3.   AD            8.    AB           13.    K            18.    AA           23.     V
4.   AN            9.    T            14.    M            19.    AR           24.     R
5.   W            10.    AL           15.    Y            20.    AK           25.     S


PART III — ADJUSTING ENTRIES (14 points)

A.       Accounts Receivable ..................................................................           5,000
             Service Revenue ................................................................                             5,000

B.       Interest Expense ($24,000 × 6% × 1/12) .....................................                      120
               Interest Payable .................................................................                           120

C.       Depreciation Expense [($40,000 - $4,000) ÷ 72] .........................                          500
              Accumulated Depreciation .................................................                                    500

D.       Insurance Expense ($6,000 ÷ 24) ...............................................                   250
              Prepaid Insurance ..............................................................                              250

E.       Unearned Revenue ($1,800 × 2/3) .............................................                    1,200
             Service Revenue ................................................................                             1,200


PART IV — BANK RECONCILIATION (15 points)

(a) BANK RECONCILIATION:
                                                 Amount                                                                   Amount
     Balance per bank statement                  $20,400           Balance per books                                      $14,488
     Add: Deposits in transit                      1,800           Add: Error in recording check              $      27
          Bank error                                 200                Note collection                           2,575     2,602
                                                 $22,400                                                                  $17,090
     Less: Outstanding checks                     (5,500)          Less: NSF check                                           (190)
     Adjusted balance per bank                   $16,900           Adjusted balance per books                             $16,900
                                                                                                           Final Exam   FE-19

(b)   ENTRIES:
      Account Titles                                                                                     Debit      Credit
      Cash ...........................................................................................   2,575
      Miscellaneous Expense ..............................................................                  25
           Notes Receivable ...............................................................                         2,500
           Interest Revenue ...............................................................                           100

      Accounts Receivable ..................................................................              190
          Cash ..................................................................................                       190

      Cash ...........................................................................................     27
          Equipment .........................................................................                           27


PART V — INVENTORY (12 points)

(a) Average cost ending inventory:                              Average cost of goods sold:
          250 × $13.70 = $3,425                                      Cost of goods available for sale             $13,700
                                                                     Less: Ending inventory                         3,425
                     $13,700                                         Cost of goods sold                           $10,275
      Average cost = ————- = $13.70
                      1,000

(b) FIFO ending inventory:                                      FIFO cost of goods sold:
            200 × $14 = $2,800                                       Cost of goods available for sale             $13,700
             50 × $15 =       750                                    Less: Ending inventory                         3,550
                           $3,550                                    Cost of goods sold                           $10,150


(c) LIFO ending inventory:                                      LIFO cost of goods sold:
            200 × $12 = $2,400                                       Cost of goods available for sale             $13,700
             50 × $13 =       650                                    Less: Ending inventory                         3,050
                           $3,050                                    Cost of goods sold                           $10,650


PART VI — DEPRECIATION (15 points)

Depreciable cost: $400,000 - $20,000 = $380,000.
(a) Straight-line
         2002 depreciation [($400,000 - $20,000) ÷ 5] .........................................                    $76,000
         2003 depreciation [($400,000 - $20,000) ÷ 5] .........................................                    $76,000
         12/31/03 book value [$400,000 - ($76,000 + $76,000)] ...........................                         $248,000
(b) Double-declining-balance
       2002 depreciation ($400,000 × .4) ..........................................................               $160,000
       2003 depreciation [($400,000 - $160,000) × .4] ......................................                       $96,000
       12/31/03 book value [$400,000 - ($160,000 + $96,000)] .........................                            $144,000
(c) Units-of-activity
         2002 depreciation [180,000 × ($380,000 ÷ 1,000,000)] ...........................                          $68,400
         2003 depreciation (200,000 × .38) ..........................................................              $76,000
         12/31/03 book value [$400,000 - ($68,400 + $76,000)] ...........................                         $255,600
FE - 20   Test Bank for Financial Accounting: Tools for Business Decision Making

PART VII — RATIO ANALYSIS (14 points)

(a)                   $250,000
      Current ratio = ———— = 2.50:1.
                      $100,000

(b)                           $400,000
      Debt to total assets = ————— = 40%.
                             $1,000,000

(c)                           $425,000
      Times interest earned = ———— = 8.5 times.
                               $50,000

(d)                        $1,080,000
      Inventory turnover = ————— = 9 times.
                            $120,000

(e)                          $225,000
      Profit margin ratio = ————— = 11.25%.
                            $2,000,000

(f)                                           $225,000
      Return on common stockholders' equity = ———— = 45%.
                                              $500,000

(g)                      $225,000
      Return on assets = ———— = 25%.
                         $900,000
                                                                                               Final Exam     FE - 21

PART VIII — STATEMENT OF CASH FLOWS (15 points)

(a)       Indirect Method
                                               SYERS CORPORATION
                                              Statement of Cash Flows
                                       For the Year Ended December 31, 2003

Cash flows from operating activities
   Net income .........................................................................                 $ 42,000
   Adjustments to reconcile net income to net cash
   provided by operating activities:
       Increase in accounts receivable ....................................               $ (7,000)
       Increase in inventory ....................................................          (13,000)
       Decrease in prepaid expenses .....................................                     5,000
       Decrease in accounts payable ......................................                   (4,000)
       Loss on sale of equipment ............................................                 2,000
       Depreciation expense ...................................................             14,000           (3,000)
       Net cash provided by operating activities ......................                                     39,000
Cash flows from investing activities
   Sale of equipment ..............................................................         10,000
   Purchase of land ................................................................       (16,000)
       Net cash used by investing activities ............................                                   (6,000)
Cash flows from financing activities
       Declaration and payment of dividends ..........................                     (15,000)
       Net cash used by financing activities ............................                                 (15,000)
Net increase in cash .................................................................                     18,000
Cash at beginning of period .....................................................                          40,000
Cash at end of period ...............................................................                   $ 58,000

Noncash financing activity
   Conversion of bonds payable into common stock ...............                                        $100,000
FE - 22        Test Bank for Financial Accounting: Tools for Business Decision Making

PART VIII — STATEMENT OF CASH FLOWS (cont.)

(b) Direct Method
                                               SYERS CORPORATION
                                              Statement of Cash Flows
                                       For the Year Ended December 31, 2003

Cash flows from operating activities
   Cash receipts from customers ($408,000 - $7,000) .................                                     $401,000
   Cash payments
       To suppliers ($190,000 + $13,000 + $4,000) .....................                       $207,000
       For operating expenses ($141,000 - $5,000) .....................                        136,000
       For income taxes ...............................................................         19,000     362,000
       Net cash provided by operating activities ...........................                                39,000
Cash flows from investing activities
   Sale of equipment ....................................................................       10,000
   Purchase of land ......................................................................     (16,000)
       Net cash used by investing activities ..................................                              (6,000)
Cash flows from financing activities
   Declaration and payment of dividends .....................................                  (15,000)
   Net cash used by financing activities .......................................                            (15,000)
Net increase in cash ......................................................................                  18,000
Cash at beginning of period ...........................................................                      40,000
Cash at end of period ....................................................................                $ 58,000

Noncash financing activity
   Conversion of bonds payable into common stock ....................                                     $100,000

				
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