Acctg 301 � Examination 1 by ACvqJL

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									                      Acctg 301 – Widdison, Summer 2007. Examination 1

Chapters Covered: One through three.

Focus:        Class notes and discussions. All assigned homework questions, exercises, and
problems. It will be expected that you have completed and understand all assigned text
readings and the main points of supplemental readings provided.

Chapter 1. Topics.

   Standard-setting process. (Actual process implications of political impact – special-interest
    groups, independence of FASB, economic consequences of standards on particular
    industries, etc.)
   Sources of GAAP – this means all the different kinds of pronouncements as well as the
    organizations where they originate. (Includes the role of the SEC.)
   Issues relating to internationalization of accounting standards
   Ethics and the accounting environment.

Chapter 2. Topics

   CON 1        Objectives of Financial Reporting
   CON 2        Characteristics of Useful Information. (Primary characteristics of relevance and
    reliability and their attributes as well as the secondary characteristics of consistency and
    comparability.)
   CON 5        Recognition Criteria in Financial Reporting
   CON 6        Elements of Financial Statements
   Accounting Constraints, Principles, and Assumptions (CON 2 and CON 5

Chapter 3. Topics

   The basic accounting equation – analysis of events, circumstances, and transactions within
    the debit and credit framework.
   The accounting cycle.
   Adjusting entries – prepayments (original transactions both capitalized and not), accruals,
    and valuations. Also, consideration of critical nature of these entries.
   Cash basis vs. accrual basis reporting.

Format: Total Points 100

Part 1. Multiple-choice on topics from all three chapters. 15 questions each worth 3 points.
Total of 45 points.
Part 2. Questions – both mechanical and essay type. Various point values – total of 55 points.




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Questions:

A.      Multiple-choice questions will examine basic factual information relating to the topics
        listed on the previous page. Some will be conceptual; some mechanical. The following
        are examples of questions. Please note that these are NOT the questions you will
        receive on the exam – they are only examples.

1.      Financial reporting objectives do not include providing information:

        a.      About resources, obligations, and changes therein.
        b.      To determine market values, assess profit potential, and evaluate management.
        c.      To assess the amounts and timing of prospective cash receipts.
        d.      To make rational investment, credit, and similar decisions.

2.      Accounting standard setting is essentially based on

        a.      the scientific method.
        b.      a political process.
        c.      deductive reasoning.
        d.      inductive reasoning.

3.      The role of the Securities and Exchange Commission in the formulation of accounting
        principles can be best described as
        a. consistently primary.
        b. consistently secondary.
        c. sometimes primary and sometimes secondary.
        d. non-existent.

4.      The Financial Accounting Standards Board
        a. has issued a series of pronouncements entitled Statements on Auditing Standards.
        b. was the forerunner of the current Accounting Principles Board.
        c. is the arm of the Securities and Exchange Commission responsible for setting
           financial accounting standards.
        d. is appointed by the Financial Accounting Foundation.

5.      Which of the following is not a publication of the FASB?
        a. Statements of Financial Accounting Concepts
        b. Accounting Research Bulletins
        c. Interpretations
        e. Staff Positions

6.      The purpose of the International Accounting Standards Board is to
        a. issue enforceable standards which regulate the financial accounting and reporting of
           multinational corporations.
        b. develop a uniform currency in which the financial transactions of companies
           throughout the world would be measured.
        c. promote uniform accounting standards among countries of the world.
        d. arbitrate accounting disputes between auditors and international companies.

7.      A soundly developed conceptual framework of concepts and objectives should



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        a. increase financial statement users' understanding of and confidence in financial
           reporting.
        b. enhance comparability among companies' financial statements.
        c. allow new and emerging practical problems to be more quickly soluble.
        d. all of these.

8.      The two primary qualities that make accounting information useful for decision making
        are
        a. comparability and consistency.
        b. materiality and timeliness.
        c. relevance and reliability.
        e. reliability and comparability

9.      The characteristic that is demonstrated when a high degree of consensus can be
        secured among independent measurers using the same measurement methods is
        a. relevance.
        b. reliability.
        c. verifiability.
        d. neutrality.

10.     In classifying the elements of financial statements, the primary distinction between
        revenues and gains is
        a. the materiality of the amounts involved.
        b. the likelihood that the transactions involved will recur in the future.
        c. the nature of the activities that gave rise to the transactions involved.
        d. the costs versus the benefits of the alternative methods of disclosing the transactions
           involved.

11.     Which of the following elements of financial statements is not a component of
        comprehensive income?
        a. Revenues
        b. Distributions to owners
        c. Losses
        d. Expenses

12.     What accounting concept justifies the usage of accruals and deferrals (prepayments)?
        a. Going concern assumption
        b. Materiality constraint
        c. Consistency characteristic
        d. Monetary unit assumption

13.     Revenue generally should be recognized
        a. at the end of production.
        b. at the time of cash collection.
        c. when realized.
        d. when realized or realizable and earned.

14.     The allowance for doubtful accounts, which appears as a deduction from accounts
        receivable on a balance sheet and which is based on an estimate of bad debts, is an
        application of the
        a. consistency characteristic.


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        b. matching principle.
        c. materiality constraint.
        d. revenue recognition principle.

15.     The basic accounting concept that refers to the tendency of accountants to resolve
        uncertainty in favor of understating assets and revenues and overstating liabilities and
        expenses is known as the
        a. conservatism constraint.
        b. materiality constraint.
        c. substance over form principle.
        d. industry practices constraint.

16.     Which of the following is a recordable event or item?
        a. Changes in managerial policy
        b. The value of human resources
        c. Changes in personnel
        d. None of these

17.     A trial balance
        a. proves that debits and credits are equal in the ledger.
        b. supplies a listing of open accounts and their balances that are used in preparing
            financial statements.
        c. is normally prepared three times in the accounting cycle.
        d. all of these.

18.     When an item of expense is paid and recorded in advance, it is normally called a(n)
        a. prepaid expense.
        b. accrued expense.
        c. estimated expense.
        d. cash expense.

19.     Which of the following would not be a correct form for an adjusting entry?
        a. A debit to a revenue and a credit to a liability
        b. A debit to an expense and a credit to a liability
        c. A debit to a liability and a credit to a revenue
        d. A debit to an asset and a credit to a liability

20.     Which of the following is a nominal (temporary) account?
        a. Unearned Revenue
        b. Salary Expense
        c. Inventory
        d. Retained Earnings




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21.     Lane Company purchased equipment on November 1, 2005 and gave a 3-month, 9%
        note with a face value of $50,000. The December 31, 2005 adjusting entry is
        a. debit Interest Expense and credit Interest Payable, $4,500.
        b. debit Interest Expense and credit Interest Payable, $1,125.
        c. debit Interest Expense and credit Cash, $750.
        d. debit Interest Expense and credit Interest Payable, $750.

22.     Perez Corporation received cash of $9,000 on August 1, 2005 for one year's rent in
        advance and recorded the transaction with a credit to Rent Revenue. The December 31,
        2005 adjusting entry is
        a. debit Rent Revenue and credit Unearned Rent, $3,750.
        b. debit Rent Revenue and credit Unearned Rent, $5,250.
        c. debit Unearned Rent and credit Rent Revenue, $3,750.
        d. debit Cash and credit Unearned Rent, $5,250.

Use the following information for questions 23 through 25:
Poole Company paid or collected during 2004 the following items:
         Insurance premiums paid                                              $ 15,400
         Interest collected                                                     30,900
         Salaries paid                                                         135,200

The following balances have been excerpted from Poole's balance sheets:
                                               December 31, 2005        December31, 2004
           Prepaid insurance                       $ 1,200                  $ 1,500
           Interest receivable                        3,700                   2,900
           Salaries payable                          12,300                  10,600

 23.    The insurance expense on the income statement for 2005 was
        a. $12,700.
        b. $15,100.
        c. $15,700.
        d. $18,100.

 24.    The interest revenue on the income statement for 2005 was
        a. $24,300.
        b. $30,100.
        c. $31,700.
        d. $37,500.

 25.    The salary expense on the income statement for 2005 was
        a. $112,300.
        b. $133,500.
        c. $136,900.
        d. $158,100.




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26. Dolan Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid
       in the next biweekly period. Dolan accrues salaries expense only at its December 31
       year end. Data relating to salaries earned in December 2005 are as follows:
        Last payroll was paid on 12/26/05, for the 2-week period ended 12/26/05.
        Overtime pay earned in the 2-week period ended 12/26/05 was $5,000.
        Remaining work days in 2005 were December 29, 30, 31, on which days there was no overtime.
        The recurring biweekly salaries total $90,000.
        Assuming a five-day work week, Dolan should record a liability at December 31, 2005 for
        accrued salaries of
        a. $27,000.
        b. $32,000.
        c. $54,000.
        d. $59,000.




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B.      Short-answer Mechanical Questions:

Short-answer mechanical questions can require that you analyze data provided and show how
the information would be recorded or reported on the financial statements of an enterprise. An
example follows:

The following trial balance was taken from the books of Fisk Corporation on December 31,
2005.
       Account                                                                  Debit    Credit
Cash                                                                          $ 12,000
Accounts Receivable                                                             40,000
Note Receivable                                                                  7,000
Allowance for Doubtful Accounts                                                            $ 1,800
Merchandise Inventory                                                           54,000
Unexpired Insurance                                                              4,800
Furniture and Equipment                                                        125,000
Accumulated Depreciation of F. & E.                                                          15,000
Accounts Payable                                                                             10,800
Common Stock                                                                                 44,000
Retained Earnings                                                                            55,000
Sales                                                                                       310,000
Cost of Goods Sold                                                             131,000
Salaries Expense                                                                50,000
Rent Expense                                                                    12,800

      Totals                                                                  $436,600     $436,600

At year end, the following items have not yet been recorded.
a. Insurance expired during the year, $2,000.
b. Estimated bad debts, 1% of gross sales.
c. Depreciation on furniture and equipment, 12% per year.
d. Interest at 8% is receivable on the note for one full year.
e. Rent paid in advance at December 31, $5,400 (originally charged to expense).
f. Accrued salaries at December 31, $5,800.
Instructions
(a) Prepare the necessary adjusting entries.
(b) Prepare the necessary closing entries.

You should also review all the homework items assigned for this chapter so that you understand
and can work all the techniques and procedures they involved.




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C.      Short-answer Essay Questions:

You will be asked to write two short, analytical essays. These should not be bullet point
answers; appropriate business writing is expected. Two of the following essays WILL be
on the exam, so be prepared to answer any of them. Each will be worth 15 points.

a.      In light of the recent exposure of accounting fraud at corporations such as Enron,
WorldCom, Rite Aid, and Xerox, there is much discussion about the role of the Financial
Accounting Standards Board and its ability to develop appropriate and timely accounting
guidance. Reference has been made in class and in your readings to the “political process” of
standard setting. Ideally, however, accounting standards should be established by determining
the approach which best conceptually reflects the economics of the underlying event or
transaction without regard for the economic impact on a particular industry. Write two
paragraphs in which you present each of the following: 1. an explanation of how “politics”
enters into the standard-setting process; and (2) a discussion of whether or not you feel it is
feasible for the FASB to act independently of possible economic consequences of the guidance
it issues. (i.e. discuss the pros and cons of the due-process nature of the standard-setting
process.)

b.      We have discussed the possibility of and need for harmonization of accounting
standards so that there is one globally accepted set of international accounting standards.
Identify and describe (a) two advantages of harmonization, and (b) two difficulties that can be
anticipated in developing such a set of standards.

c.       CEOs of successful companies often state that their most valuable asset is their
employees and the collective skills and knowledge that these employees develop “in-house.” It
could be argued these are components of intellectual capital and, as such, are intangible
beneficial resources for the company. The balance sheets of these corporations do include
intangible assets; however, none of these reported values is due to the recognition value of
intellectual capital generated “in-house.” Do you believe that an asset related to this
“component” of intellectual capital should be recognized on these companies’ balance sheets?
Why or why not? Your response should be a careful analysis based on the specific criteria set
forth in Concept Statement No. 5 with respect to criteria for recognition. (See also class
activity at the end of Concept Statement 2 lecture for guide on a framework for your analysis of
this situation.)

d.      We have discussed the importance of neutrality in the preparation of financial
statements. Of which primary characteristic of useful information is neutrality an attribute?
What is specifically meant by presenting neutral financial information? Why is it such an
important attribute? (Include in your response a discussion of considerations of aspects of this
issue that are discussed in the article “The Critical Nature of Neutral Financial Reporting.”)




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Answers to Questions.

A.       Multiple-Choice

1.       b
2.       b
3.       c
4.       d
5.       b
6.       c
7.       d
8.       c
9.       c
10.      c
11.      b
12.      a
13.      d
14.      b
15.      a
16.      d
17.      d
18.      a
19.      d
20.      b
21.      d
22.      b
23.      c
24.      c
25.      c
26.      b

B.       Short Answer Mechanical

(a) Adjusting Entries
    a. Insurance Expense ..................................................................       2,000
               Unexpired Insurance ....................................................                    2,000
    b. Bad Debt Expense ...................................................................       3,100
               Allowance for Doubtful Accounts ..................................                          3,100
    c. Depreciation Expense .............................................................        15,000
               Accumulated Depreciation of F. & E. ............................                           15,000
    d. Interest Receivable ..................................................................      560
               Interest Revenue ..........................................................                    560
    e. Prepaid Rent ..........................................................................    5,400
               Rent Expense ..............................................................                 5,400
    f. Salaries Expense ....................................................................      5,800
               Salaries Payable ..........................................................                 5,800




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(b) Closing Entries
    Sales ...........................................................................................   310,000
    Interest Revenue .........................................................................              560
           Income Summary ...............................................................                         310,560

      Income Summary .........................................................................          214,300
           Salaries Expense ...............................................................                        55,800
           Rent Expense ....................................................................                        7,400
           Depreciation Expense ........................................................                           15,000
           Bad Debt Expense .............................................................                           3,100
           Insurance Expense ............................................................                           2,000
           Cost of Goods Sold ............................................................                        131,000

      Income Summary .........................................................................           96,260
           Retained Earnings .............................................................                         96,260

(Consider. If a dividends account were included in the problem, how would it be closed?)


C.        Short-answer Analysis Essays

Responses not provided. Self-prepare for exam.




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