Acc 280 Principle of Accounting by fiq16743

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									                                                                               Karissa Altizer – ACC 280 FINAL 1

ACC 280 – Final Exam 70.75/100 points (Overall score:14.15/20) Karissa, you had some trouble with the
ratios problem. Aside from that, a satisfactory performance on the other areas.

PART I — MULTIPLE CHOICE (20 points) 16/20 points


Designate the best answer for each of the following questions.

1.      The accounting process is correctly sequenced as

        A)     identification, communication, recording.

        B)     recording, communication, identification.

        C)     identification, recording, communication.

        D) communication, recording, identification.

2.     Which of the following would not be considered an internal user of accounting data for

       A)      President of the company

       B)      Production manager

       C)      Merchandise inventory clerk

       D)      President of the employees' labor union

3.      Which of the following would not be considered an external user of accounting data for the
        Apple Inc.?

        A)     Internal Revenue Service Agent

        B)     Management

        C)     Creditors

        D) Customers
                                                                                   Karissa Altizer – ACC 280 FINAL 2

4.      The final step in solving an ethical dilemma is to

        A)    identify and analyze the principal elements in the situation.

        B)    recognize an ethical situation.

        C) identify the alternatives and weigh the impact of each alternative on

        D) recognize the ethical issues involved.

5.      In order to be relevant, accounting information must

        A)    Be neutral.

        B)    Be verifiable.

        C)    Help predict future events

        D) Be a faithful representation

6. Riodan Company sold old equipment for $35,000. The equipment had a cost of

$70,000 and accumulated depreciation of $42,000. The entry to record the sale of the

equipment would include a

             A)   loss on disposal of $35,000.
             B)   gain on disposal of $35,000.
             C)   loss on disposal of $7,000.
             D)   gain on disposal of $7,000.

7. The cost of intangible assets should be

        A) amortized over the assets' estimated useful life, or legal life, 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.
                                                                                   Karissa Altizer – ACC 280 FINAL 3

8. 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.

9. On November 30, Thatcher Company issued a $6,000, 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)   $6,000.
             B)   $6,360.
             C)   $6,120. (6%/(12/4)) X 6000 = ((.02) + 1) X 6000 = $6120
             D)   $6,240.

10. Logan Company debited Prepaid Insurance for $840 on July 1, 2008 for a one-year fire

insurance policy. If the company prepares monthly financial statements, failure to make an

adjusting entry on July 31 for the amount of insurance that has expired would cause

             A)   assets to be overstated by $840 and expenses to be understated by $840.
             B)   expenses to be overstated by $70 and assets to be understated by $70.
             C)   assets to be overstated by $70 and expenses to be understated by $70.
             D)   expenses to be overstated by $840 and assets to be understated by $840.
                                                                                        Karissa Altizer – ACC 280 FINAL 4

PART II — MATCHING (10 points) 7.5/10 points

Classify each of these items as an asset (A), liability (L), or stockholders' equity (SE).

__A__ 1. Accounts receivable              _L_      11. Wages payable

__L__ 2. Accounts payable                 _L_      12. Depreciation Expense

_SE__ 3. Bonds, Capital                   _A__     13. Prepaid Rent

__A__ 4. Office supplies                  __SE_ 14. Common Stock

__L__ 5. Utilities expense                __L_     15. Rent Expense

__A__ 6. Cash                             __A_     16. Cleaning Supplies

__L__ 7. Note payable                     _A__     17. Short-Term investments

_A__    8. Equipment                      __A__ 18. Equipment

_A__    9. Inventory                      __A__ 19. Land

_SE__ 10. Retained Earnings               __L_     20. Insurance Expense
                                                                                   Karissa Altizer – ACC 280 FINAL 5

PART III — SHORT ANSWER (20 points) 15/20 points

Answer each of the following questions in your own words. Please limit your response to no more than 300 words per

1. Define the matching principle and the revenue recognition principle. Explain how both principles are used in financial
statement preparation.

Ans: Expenses of one period should be deducted from the Revenue of the same period is matching principle and once
revenue transaction occur it should be recognized as the revenue of the same period whether cash collected against it
or not. So we get revenue by revenue recognition principle and deduct expenses from it. Both relates with adjusting

2. What is the basic accounting equation? What is double entry accounting? Explain how the two concepts are related,
and how they are different.

Ans: Accounting equation means the firm’s total assets are always equal to the sum of its total liabilities and equity.
Every business transaction affects at least two accounts that can be assets, liabilities, equity, and revenues of expenses.
One will be debit and other will be credit. These two concepts are related because assets have debit balances and
liabilities and equity have credit balances. And the difference is double entry accounting is used to record the
transaction and accounting equation is base of balance sheet.

3. Explain what the following important abbreviations stand for: CPA, IRS, FASB, GAAP, and SEC. In your answer, provide
a brief description of how each role impacts the accounting cycle inside large corporations.

Ans:    CPA = Certified Public Accountant
        IRS = Internal Revenue Service
        FASB = Financial Accounting Standard Board
        GAAP = Generally Accepted Accounting Principles
CPA= Certified Public Accountant, IRS=Internal Revenue Service, FASB=Financial Accounting Standards Board,
GAAP=Generally Accepting Accounting Principles, SEC= Securities and Exchange Commission
CPA’s are accountants that are certified and impacts large corporations by carrying out audits which tells the company
how sound and true their financial statements are. CPA’s also help large corporations with tax forms. The IRS is
responsible for collecting taxes from large corporations. CPA’s prepare and complete these forms for the IRS on the
behalf of the corporation.
Each firm is required to follow rules and regulations that are enforced by the FASB and the SEC. These rules that each
corporation must follow is called the GAAP. These rules and regulations are based on standards that have been put in
place to offer consistency in accounting methods. The FASB and the SEC monitor and watch financial statements of large
corporations for fraud and other misleading information. The SEC will charge these corporations for infractions.

4. Outline the two objectives of a system of internal controls. Briefly discuss the considerations and trade-offs
organizations need to balance when designing and implementing a system of internal controls.

Ans: There are various internal controls pertaining to how cash is handled and holds accountability. Depending on
the business and internal control may require each employee to handle an individual cash drawer so that if it is over or
short; accountability would be placed on the individual employee. Another internal control would be the issuance of
                                                                                Karissa Altizer – ACC 280 FINAL 6

background checks or having all cash double counted at the end of a shift. Segregation of duties is another
internal control that could be performed to ensure that no one person can alter accounting records without being
observed. Having these controls implemented can help in ensuring employees do not hide money or misappropriate the
cash. However, segregation of duties over cash has pros and cons. Segregation can consume an employee with so
many extra duties making if inconceivable to have only a manager. The negative aspect of segregating the duties is that
a business must ensure the precise organization of each employees duties and ensure that all employees are reliable
and capable of performing their assigned tasks and understands the consequences of poor performance.
                                                                         Karissa Altizer – ACC 280 FINAL 7

PART IV — Closing Entries (10 points)

The end of the period account balances after adjustments of Edson Cleaners and Laundry are as follows:

                                                            Account Balances
                                                           (After Adjustments)
            Cash                                      $                  9000
            Cleaning Supplies                                            3500
            Prepaid Rent                                                3,600
            Equipment                                                 128,000
            Accumulated Depreciation—Equipment                         20,000
            Accounts Payable                                             8500
            Common Stock                                               60,000
            Retained Earnings                                          46,400
            Dividends                                                   7,000
            Dry Cleaning Revenues                                      22,000
            Laundry Revenues                                            4,000
            Cleaning Supplies Expense                                   5,000
            Depreciation Expense                                        3,000
            Rent Expense                                                  900
            Salaries Expense                                            3,400
            Utilities Expense                                             500


Prepare the end of the period closing entries for Edson Cleaners and Laundry. You may omit
journal entry explanations.
                                                                        Karissa Altizer – ACC 280 FINAL 8

Closing Entry 9/10 points
    Date                          Detail                      Ref         Debit($)            Credit($)
31-Dec-xxxx    Dry Cleaning Revenues                                       22,000
               Laundry Revenues                                            4,000
                  Cleaning Supplies expenses                                                    5,000
                  Depreciation expenses                                                         3,000
                  Rent expenses                                                                     900
                  Salaries expense                                                              3,400
                  Utilities expense                                                                 500
                  Dividends                                                                     7,000
                  Retained Earnings                                                             7000

PART V — RATIO ANALYSIS (10 points) 1.25/10 points

The financial information below was taken from the annual financial statements of Costco Company.

                                                2008          2007
Current Assets                              $260,000      $130,000
Current liabilities                          130,000        50,000
Total assets                                 950,000       750,000
Sales                                      1,760,000     1,600,000
Cost of goods sold                           925,000       710,000
Inventory                                    239,000       109,900
Receivables                                  250,000       160,000
Net income                                   107,000        98,000
Common stockholders’ equity                  330,000       270,000
Total liabilities                            820,000       680,000

Calculate the following ratios for Costco Company for 2008.
1. Current ratio.
2. Average collection period of receivables in days.
3. Return on assets.
4. Debt to total assets ratio.
5. Inventory turnover.
6. Return on common stockholders’ equity.
7. Asset turnover.
8. Profit margin.
                                                                         Karissa Altizer – ACC 280 FINAL 9


Current Ratio = 260,000/130,000 = 2x

Average Collection period = 365 / (1,760,000/250,000) = 51.85 days Sales/((net Receivables yr1 + net
receivables yr2)/2)= (1760000)/((250000+160000)/2)= 8.5854 . 365/ 8.5854 = 42.51 days

Return on Assets = 107,000/950,000 * 100 = 11.26% Net Income/((total assets yr1 + total assets yr 2)/2) =
107000/((950000+750000)/2= 0.1259. 0.1259 X 100% = 12.59%

Debt to total assets ratio = 820,000/950,000 *100 = 86.32%

Inventory Turnover = 925,000/ 239,000 = 3.87x COGS / ((Inv. Yr 1 + Inv. Yr 2)/2) =
925000/((239000+109900)/2) = 5.3023

Return on common stockholders’ equity = 107,000/330,000 * 100 = 32.42% Net Income/((total SE yr1 + total
SE yr 2)/2) = 107000/((330000+270000)/2= 0.357 0.357 X 100% = 35.7%

Asset turnover= 1,760,000/950,000 = 1.85x SALES / ((Total Assets Yr 1 + Total Assets Yr 2)/2) =
1760000/((950000+750000)/2) = 2.07

Profit margin= 107,000/950,000*100 = 11.26% Net Income/Sales = 107000/1760000 = .060795 X 100 =
                                                                                  Karissa Altizer – ACC 280 FINAL 10

   The comparative balance sheet for Mott Company appears below:
                         MOTT COMPANY
                    Comparative Balance Sheet
                                              Dec. 31, 2008   Dec. 31, 2007
Cash                                          $     51,300    $     11,400
Accounts receivable                           $      5,700    $      7,600
Inventory                                     $     10,450    $      6,650
Prepaid expenses                              $      1,900    $      2,850
Building                                      $     19,000    $     19,000
Accumulated depreciation—building             $     (2,850)   $     (1,900)
                 Total assets                 $     85,500    $     45,600
   Liabilities and Stockholders' Equity
Accounts payable                                      $950          $3,800
Long-term note payable                               12,350          13,300
Common stock                                         31,350          17,100
Retained earnings                             $     40,850    $     11,400
 Total liabilities and stockholders' equity   $     85,500    $     45,600

The income statement for the year is as follows:
                          MOTT COMPANY
                         Income Statement
               For the Year Ended December 31, 2008

Sales (all on credit)                                                         $   280,000
Expenses and losses
   Cost of goods sold                                         $    184,000
   Operating expenses, exclusive of depreciation              $     42,300
   Depreciation expense                                       $      1,000
   Interest expense                                           $      1,200
   Loss on sale of land                                       $      2,500
   Income taxes                                               $      9,000
      Total expenses and loss                                                 $   240,000
Net income                                                                    $    40,000

Cash dividends of $11,000 were paid during the year. Land costing $13,000 was acquired by the
issuance of common stock. The property was subsequently sold for $10,000 cash.
Prepare a statement of cash flows for the year ended December 31, 2008 using the indirect
                                                                           Karissa Altizer – ACC 280 FINAL 11

                                             MOTTO COMPANY
                                             Cash Flow Statement
                                       For the year ended on 31-Dec-2008

Cash flows from operating activities                                                $

Net Income                                                  40,000
Depreciation expense                                                    1000
Decrease in accounts receivables                              1,900
Increase in Inventory                                        (3,800)
Decrease in Prepaid                                            950
Decrease in accounts payable                                 (2,850)
Loss on sale of land                                          3,000
Cash Flows from operating activities                                        40200

Cash flows from investment activities

Proceeds from sale of land                                  10,000
Cash flows from investment activities                                       (10,000)

Cash flows from financing activities

Decrease in long term debt                                   (950)
Dividend paid                                               (11,000)
Cash flows from financing activities                                        (11,950)

Net Increase in Cash                   38250

Cash at the beginning of the period                                                 11400

Cash at the end of the period                                                       49650

PART VII — TRUE/FALSE (20 points) 17/20 points

   1. Gross profit is calculated by subtracting cost of goods sold from net sales. True

   2. An increase in an expense decreases stockholders’equity. True

   3. A $3,000 understatement of the ending inventory of the current period will result in an overstatement of
      the cost of goods sold. True

   4. Posting is the process of recording entries in a journal. False

   5. Inventory turnover is computed by dividing the average inventories into Total Assets. False

   6. Ewing Company purchases 1,000 shares of its common stock for $20,000. The $20,000 should be
      recorded as a debit to Common Stock. False
                                                                        Karissa Altizer – ACC 280 FINAL 12

7. The purchase of office equipment for $15,000 cash increases the total assets on the balance sheet. False

8. A private organization which establishes broad accounting principles as well as specific accounting rules
   is the Corporate Board of Directors. False

9. The purpose of recording depreciation on productive assets is allocate the original cost of productive
   assets to expense over its useful life. True

10. Cash-basis financial statements provide more useful information than accrual-basis statements. FALSE

11. Revenue accounts are not closed at the end of an accounting period. False

12. A Write-off of an uncollectible accounts receivable account does not affect cash? True

13. Cost of the goods purchased, freight in, and cost of the beginning inventory are all inventoriable costs

14. The General ledger of a company contains all assets, liabilities, and stockholders’ equity accounts. True

15. The Statement of Earning from Operations is one of the four basic financial statements. False

16. Revenue Recognition Principle and the matching principle are two generally accepted accounting
    principles that relate to adjusting accounts. True

17. A prior period adjustment is a correction of an error, made directly to retained earnings TRUE

18. The right side of an account is always the debit side. FALSE (credits are always on the right)
19. Adjusting entries are an optional part of the Accounting cycle. False

20. During 2008, Cherokee Inc. had an asset turnover of 4 times with sales totaling $880,000. If net income
    was $48,400, Cherokee Company's return on assets in 2008 was 26%. False

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