PRINCIPLES OF ACCOUNTING 1 – FALL 2004 EXAM 1: Chapters 1-3
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Multiple Choice Questions – 3 points each Mark the most appropriate answer on your answer sheet. Also make sure that you “bubble” your last name and your social security number on the answer sheet.
1. Which of the following groups is primarily interested in using accounting information to determine whether the company can pay its obligations? a. Investors in common stock b. Marketing managers c. Creditors d. Internal Revenue Service
2.
Borrowing money is an example of a(n) a. delivering activity. b. financing activity. c. investing activity. d. operating activity.
3.
Which financial statement would best indicate whether the company relies on debt or stockholders’ equity to finance its assets? a. Statement of Cash Flows b. Retained Earnings Statement c. Income Statement d. Balance Sheet
4.
Resources owned by a business are referred to as a. stockholders’ equity. b. liabilities. c. assets. d. revenues.
5.
An income statement a. summarizes the changes in retained earnings for a specific period of time. b. reports the changes in cash over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time. If total liabilities decreased by $15,000 and stockholders’ equity increased by $5,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $20,000 increase b. $10,000 decrease c. $10,000 increase d. $15,000 decrease
6.
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7.
Retained earnings is a. the stockholders’ claim on total assets. b. equal to cash. c. equal to revenues. d. the amount of net income kept in the corporation for future use.
8.
A current asset is a. the last asset purchased by a business. b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement. d. expected to be converted to cash or used in the business within one year or operating cycle.
9.
A liquidity ratio measures the a. income or operating success of a company over a period of time. b. ability of a company to pay its obligations over a long period of time. c. short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. d. percentage of total financing provided by creditors.
10.
On a classified balance sheet, current assets are customarily listed a. in alphabetical order. b. with the largest dollar amounts first. c. in the order in which they are expected to be converted into cash. d. in the order of acquisition.
11.
For accounting information to be relevant, it must be a. Verifiable b. Timely c. Neutral d. Representationally faithful
12.
A debit is the normal balance for which account listed below? a. Common Stock account b. Service Revenue account c. Long-term Debt account d. Inventory account
13.
When a company performs a service but has not yet received payment, it a. debits service revenues and credits accounts receivable. b. debits accounts receivable and credits service revenue. c. debits service revenues and credits accounts payable. d. makes no entry until cash is received.
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14.
XYZ, Inc. borrowed $1,000 from the bank and debited its cash account for $1,000. What should be done to complete the recording of the transaction? a. Nothing further must be done. b. Debit a stockholders’ equity account for $1,000. c. Credit another asset account for $1,000. d. Credit a liability account for $1,000.
15.
XYZ, Inc. paid its supplier $1,000 to satisfy an accounts payable balance. How should XYZ record this transaction? a. Debit accounts payable and credit cash for $1,000. b. Debit supplies expense and credit cash for $1,000. c. Credit accounts payable and debit cash for $1,000. d. Only credit a cash for $1,000.
16.
The usual sequence of steps in the transaction recording process is: a. journalize analyze post to the ledger (T-accounts). b. analyze journalize post to the ledger (T-accounts). c. journalize post to the ledger (T-accounts) analyze. d. post to the ledger (T-accounts) journalize analyze.
17.
A credit to the accounts receivable account a. indicates a sale to customers on account has occurred. b. indicates a payment from customers on their account has been received. c. is an error. d. indicates that a liability has been incurred.
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PROBLEM A - 9 POINTS (SHOW RELEVANT WORK!!)
Use the following information to calculate (a) net income for the year ended December 31, 2004, (b) ending retained earnings as of December 31, 2004, and (c) total assets as of December 31, 2004. Prepaid Supplies $ 1,000 Operating Expenses 10,000 Accounts payable 9,000 Accounts receivable 3,000 Common stock 9,000 Retained earnings (beginning) 5,000 a) 2004 Net income = _______________ b) 12/31/04 retained earnings = ________________ c) 12/31/04 total assets = _______________ Revenues Cash Dividends Notes payable Equipment $14,000 15,000 3,000 1,000 6,000
PROBLEM B - 9 POINTS (SHOW RELEVANT WORK!!)
One item is omitted in each of the following summaries of balance sheet and income statement data for three years for Corporation X. Determine the amounts of the missing items. 2001 End of the Year: Assets Liabilities Common stock Retained earnings During the Year: Dividends Revenue Expenses 450,000 280,000 A 95,000 70,000 195,000 135,000 Corporation 2002 495,000 295,000 90,000 105,000 83,000 B 143,000 2003 500,000 C 90,000 112,000 75,000 267,000 185,000
A (12/31/01 Common stock) = _________________ B (2002 Revenue) = ___________________ C (12/31/03 Liabilities) = ________________
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PROBLEM C - 19 POINTS (SHOW RELEVANT WORK!!)
The following items are taken from the financial statements of Marsh Company for 2004: Accounts Payable Accounts Receivable Cash Common Stock Long-term Debt Prepaid Insurance Operating Expenses Retained Earnings (beginning) Salaries Payable Service Revenue Video Equipment, net Instructions a) Prepare a classified balance sheet for Marsh Company at December 31, 2004. (This part is worth 13 of the 19 points.) $ 15,000 11,000 20,000 90,000 70,000 6,000 106,000 12,000 3,000 135,000 182,000
b)
Compute the current ratio and the debt to total assets ratio. What is a decision-maker trying to assess if he/she uses these ratios?
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PROBLEM D - 12 POINTS
Several September 2003 transactions of the Make it Quick Delivery Service are recorded in the general journal below. You are to provide an explanation of the economic transaction represented by each journal entry. Your explanation should describe what happened, not what accounts were debited and credited. The Sept. 1 transaction is given as an example. General Journal ____________________________________________________________________________ Date Account Titles Debit Credit ____________________________________________________________________________ 2003 Sept. 1 Cash 25,000 Common Stock 25,000 4 Delivery Trucks Cash Notes Payable Rent Expense Cash Cash Service Revenue 30 Cash Notes payable 7,500 7,500 40,000 15,000 25,000 1,000 1,000 2,500 2,500
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Sept. 1 transaction: Received $25,000 cash from stockholders in exchange for issuing common stock. Sept. 4 transaction: ___________________________________________________________ Sept. 8 transaction: ___________________________________________________________ Sept. 18 transaction: __________________________________________________________ Sept. 30 transaction: __________________________________________________________
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Multiple Choice Answer Key
Multiple choice – 3 points each (total of 51 points) A# Version A 1. C 2. B 3. D 4. C 5. D 6. B 7. D 8. D 9. C 10. C 11. B 12. D 13. B 14. D 15. A 16. B 17. B PROBLEM A - 9 POINTS
Use the following information to calculate (a) net income for the year ended December 31, 2004, (b) ending retained earnings as of December 31, 2004, and (c) total assets as of December 31, 2004. Prepaid Supplies $ 1,000 Operating Expenses 10,000 Accounts payable 9,000 Accounts receivable 3,000 Common stock 9,000 Retained earnings (beginning) 5,000 Revenues Cash Dividends Notes payable Equipment $14,000 15,000 3,000 1,000 6,000
a) 2004 Net income = ___$4,000____ ($14K revenue minus $10K expenses) b) 12/31/04 retained earnings = __$6,000__ (Beg. RE of $5K plus $4K NI minus $3K dividends) c) 12/31/04 total assets = ___$25,000___ (Prepaid supplies of $1K plus Accounts receivable of $3K plus Cash of $15K plus Equipment of $6K)
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PROBLEM B - 9 POINTS
One item is omitted in each of the following summaries of balance sheet and income statement data for three years for Corporation X. Determine the amounts of the missing items. 2001 End of the Year: Assets Liabilities Common stock Retained earnings During the Year: Dividends Revenue Expenses 450,000 280,000 A 95,000 70,000 195,000 135,000 Corporation 2002 495,000 295,000 90,000 105,000 83,000 B 143,000 2003 500,000 C 90,000 112,000 75,000 267,000 185,000
A (12/31/01 Common stock) = ___$75,000__ (Assets of $450K minus Liabs of $280K minus Ret. Egs. of $95,000) B (2002 Revenue) = ___$236,000____ (1st solve for NI using the RE equation. Beg. RE of $95K plus NI minus Dividends of $83K = End. RE of $105K, so NI = $93K. NI of $93K equals Rev. minus expenses of $143K, so Rev. = $236K.) C (12/31/03 Liabilities) = ___$298,000___ (Assets of $500K minus SE of $202K)
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PROBLEM C - 19 POINTS
The following items are taken from the financial statements of Marsh Company for 2004: Accounts Payable Accounts Receivable Cash Common Stock Long-term Debt Prepaid Insurance Operating Expenses Retained Earnings (beginning) Salaries Payable Service Revenue Video Equipment, net Instructions a) Prepare a classified balance sheet for Marsh Company at December 31, 2004. (This part is worth 13 of the 19 points.) Marsh Company, Inc. Balance Sheet December 31, 2004 Assets Current assets Cash Accounts receivable Prepaid insurance Total Current Assets Video Equipment, net Total Assets Liabilities Current Liabilities Accounts payable Salaries payable Total Current Liabilities Long-term debt Total Liabilities Stockholders’ Equity Common stock Retained earnings Total Stockholders’ Equity Total Liabilities & SE $ 15,000 11,000 20,000 90,000 70,000 6,000 106,000 12,000 3,000 135,000 182,000
$20,000 11,000 6,000 37,000 182,000 $219,000
$15,000 3,000 18,000 70,000 88,000 90,000 41,000 131,000 $219,000
b)
Compute the current ratio and the debt to total assets ratio. What is a decision-maker trying to assess if he/she uses these ratios? Used to assess liquidity Used to assess solvency
Current ratio = CA/CL = $37K/$18K = 2.06 Debt-to-assets ratio = TL/TA = $88K/$219K = 40%
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PROBLEM D - 12 POINTS
Several September 2003 transactions of the Make it Quick Delivery Service are recorded in the general journal below. You are to provide an explanation of the economic transaction represented by each journal entry. Your explanation should describe what happened, not what accounts were debited and credited. The Sept. 1 transaction is given as an example. General Journal ____________________________________________________________________________ Date Account Titles Debit Credit ____________________________________________________________________________ 2003 Sept. 1 Cash 25,000 Common Stock 25,000 4 Delivery Trucks Cash Notes Payable Rent Expense Cash Cash Service Revenue 30 Cash Notes payable 7,500 7,500 40,000 15,000 25,000 1,000 1,000 2,500 2,500
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Sept. 1 transaction: Received $25,000 cash from stockholders in exchange for issuing common stock. Sept. 4 transaction: _Purchased trucks using $15K cash and a note payable for $25K__ Sept. 8 transaction: _Paid $1,000 cash for this month’s rent__ Sept. 18 transaction: _Provided services to customers and received $2,500 cash__ Sept. 30 transaction: _Borrowed $7,500 cash__
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