Review Exam 1 by ashrafp


									ACCOUNTING 209 Fall, 2004
Review for exam 1

This is a collection of problems and questions taken from old exams. Remember, our exam will
be all in an objective format (multiple choice, matching, etc.), but will include problems similar to
ones shown here. Also, this is longer than our exam will be – I decided to include plenty of
problems for you to practice.

Solutions are provided at the end of the exam. I have tried very hard to check for accuracy, but
am a bad typist and worse proofreader. If you think there is an error, please let me know so that I
can either explain or make a correction. Thanks!

1.      Indicate the effect each of the following transactions will have on the Income Statement,
        Assets, Liabilities, and Stockholders’ Equity. Mark a “+” for an increase, a “–“ for a
        decrease, and “0” for no effect. The first one is shown as an example.

        a.       Issuance of common stock in exchange for cash received from investors.
        b.       Cash purchase of equipment.
        c.       Receipt of utility bill to be paid next month.
        d.       Cash receipt from customers billed previously for services performed.
        e.       Cash receipt customers for work to be performed next month.

                 Income Statement          Assets           Liabilities      Stockholders’ equity

        a.       ____0_____                ____+____        ____0____        ____+____

        b.       __________                __________       __________       __________

        c.       __________                __________       __________       __________

        d.       __________                __________       __________       __________

        e.       __________                __________       __________       __________

2.      Show how each of the following is entered in the ledger by writing “debit” or
        “credit” to indicate the increase or decrease in the account.

        an increase in Salary Expense               ____________________

        a decrease in Accounts Payable              ____________________

        an increase in Prepaid insurance            ____________________

        an increase in Common Stock                 ____________________

        an increase in Service Revenue              ____________________
3.    Given below are the ledger accounts for Seymour Heine Fashion Design, Inc. as of April
      15. The following transactions also occurred during April:

      April 18         Received $300 cash from customers billed previously
            25         Paid $75 on account
            27         Completed a custom design and billed the client $550
            28         Received and paid a bill for advertising, $120
            30         Paid a dividend of $600

      Prepare the April 30 trial balance for Seymour Heine, Inc

                             Seymour Heine Fashion Design, Inc
                                     General Ledger

    Cash                 Accounts Payable             Dividends                  Salary Exp
 5500                              1250                                       1800

 Accounts Rec             Common Stock              Design revenue             MiscellaneousEx
2750                             5950                         4200            250

  Equipment              RetainedEarnings           Advertising Exp
10000                               8900

4.    On September 1, Kleberg Dairy Co was started with the issuance of common stock in
      exchange for $28,000 cash invested in the company. The assets and liabilities of the
      company as of September 30, and the revenues and expenses for the month of
      September, are given below.

                Accounts payable                       $ 1,200
                Accounts receivable                      4,000
                Advertising expense                        500
                Cash                                    12,800
                Dairy supplies                           2,400
                Equipment                               25,000
                Gas and oil expense                        800
                Notes payable                           13,000
                Service revenue                          6,500
                Supplies expense                         1,200
                Utilities expense                          300
        The corporation issued no additional stock during September, but paid dividends of
        $1,700 during the month.

Required : Calculate the
       a.      net income for September
       b.      the balance of retained earnings at September 30
       c.      total assets at September 30

5.      Compute the missing amounts for the following two unrelated companies.

                                                    Company A                  Company B
January 1, 19X1
       Assets                                       $ 60,000                   $ 120,000
       Liabilities                                    30,000                      50,000

December 31, 19X1
      Assets                                           90,000                      160,000
      Liabilities                                      55,000                       70,000

Stockholders’ Equity
       Dividends paid during 19X1                      40,000                         ???

Income Statement
       Revenues for 19X1                              240,000                      400,000
       Expenses for 19X1                                 ???                       320,000

6.      A good friend of yours just inherited a family business, a grocery store, that had been owned by
        his uncle. Your friend just received the company’s financial statements, which were prepared by
        the accountant who has done the company’s accounting for years. Your friend has questions –
        shown below – about information reported in the statements, and has come to you for help.
        Answer each question by naming and then briefly explaining the underlying generally accepted
        accounting principle.

        a.        My uncle bought a variety of stocks with the money he earned from the store, yet none of
        those investments show up on this balance sheet. What happened to those investments? Why
        aren’t they included as part of assets?

        b.        The store is located on very valuable property. The land was appraised at over $500,000
        just six months ago. Yet according to this balance sheet, the land is only worth $60,000.

        c.      The same accountant has been doing these books for years, and I don’t think he’s
                changed a thing in all that time. Surely there are new ways of accounting, but he just
                keeps sticking with the same old stuff. Should I try to convince him to do things
                differently, or should I just change accountants?
7.      State the effect on net income, total assets, total liabilities, and stockholders’
equity if the following adjustments are omitted by completing the chart below. For each
item, indicate both the dollar amount of the error and whether it is overstated (O) or
understated (U). For items not affected, leave blank. The first item is completed as an

                                                                Total           Total        Stockholder
                                              Net income
                                                                Assets        Liabilities     s’ Equity
         a. Utility exp incurred but not
                                                O $350                          U $350           O $350
                  yet paid, $350
          b. Supplies used during the
                period total $650
         c. Service revenue earned but
            not yet collected, $4,500
          d. Unearned revenue earned
             during the period, $900

Multiple choice questions

1.      Information regarding a company’s operations for the current period may be found by
        looking at the
        a.      income statement.
        b.      balance sheet.
        c.      statement of cash flows.
        d.      statement of retained earnings.
        e.      none of the above

2.      Increases in retained earnings arise from
        a.      investments by the owner(s).
        b.      payment of dividends.
        c.      net income earned during the period.
        d.      both a and c
        e.      all of the above

3.      A company has $12 billion in total assets, and combines $1 million of these into a single
        “Other Assets” category for presentation on the balance sheet. Which accounting
        principle provides the basis for this procedure?
        a.       periodicity
        b.       objectivity
        c.       conservatism
        d.       materiality
        e.       none of the above

        Use the following terms to answer the next 4 questions. For each definition, mark your
        scantron with the letter(s) corresponding to the given term. You may use a term once,
        more than once, or not at all.

        a.      acid test (quick) ratio
        b.      adjusting entries
        c.      closing entries
      d.      consistency
      e.      current ratio
      ab.     debt to equity ratio
      ac.     entity concept
      ad.     GAAP
      ae.     journal
      bc.     ledger
      bd.     trial balance

4.    omit

5.    the accounting principle that does not allow companies to change inventory cost methods
      each year

6.    the book of original entry; the entire transaction is recorded in this book before being
      posted to the ledger

7.    general rules or guides which have evolved over time and gained acceptance by the
      consensus of the accounting profession and financial community

8.    Which of the following transactions would increase an expense account?
      a.     payment for inventory purchased earlier
      b.     cash purchase of equipment
      c.     cash payment of salaries payable
      d.     completion of services for which cash has already been received
      e.     none of the above

9.    In recording a transaction in the journal, an increase in an expense account could be
      offset by:
      a.       a decrease in a revenue account.
      b.       a decrease in a stockholders’ equity account.
      c.       a decrease in a liability account.
      d.       a decrease in an asset account.
      e.       none of the above

10.   During the current year, the assets of Clinton, Inc. increased from $78,000 to $86,000,
      and liabilities decreased from $38,000 to $35,000. If no additional stock was issued
      during the year, expenses totaled $30,000, and the corporation paid dividends of $5,000,
      what was Clinton’s revenue for the year?
      a.      $16,000
      b.      $36,000
      c.      $41,000
      d.      $46,000
      e.      none of the above

11.   A firm’s January 1 balance sheet showed assets of $150,000, liabilities of $40,000, and
      stockholders’ equity of $110,000. During January, the firm:
      a. bought equipment which cost $30,000, paying $10,000 in cash and signing a note
      payable for the balance, and
      b. received $4,000 in cash for a job which will be performed in February.
      The January 31 balance sheet will show assets, liabilities, and stockholders’ equity,
      respectively, of
      a.       $184,000, $60,000, $124,000
      b.       $174,000, $64,000, $110,000
      c.       $166,000, $56,000, $110,000
      d.       $126,000, $16,000, $110,000
12.    During its first year of operations, Staz Company billed its credit customers $180,000 for
       services provided. During the year, Staz received a total of $150,000 cash from
       customers, $30,000 of which came from cash customers. What amount of revenue
       should Staz show on the income statement for the year.
       a.       $360,000
       b.       $330,000
       c.       $210,000
       d.       $150,000
       e.       none of the above

13.    Travis Company has an outstanding note receivable at the end of its fiscal year. No payment will
       be received on the note until the next fiscal year. If Travis fails to make an adjusting entry for the
       interest earned on the note, how will assets, liabilities, and net income be affected in the year-end
       financial statements?

                Assets            Liabilities        Net income
       a.       not affected      not affected       overstated
       b.       understated       not affected       understated
       c.       understated       not affected       overstated
       d.       not affected      understated        overstated
       e.       none of the above


1.              Income Stmt          Assets         Liabilities       Stockholders’ Equity

       a.         0               +           0                  +
       b.         0               0           0                   0    see note
       c.        ---              0           +                  ----
       d.         0                0          0                   0    see note
       e.         0               +           +                   0
Note: For transactions b and d, total assets do not change. In “b” the asset equipment
       increases but the asset cash decreases by the same amount, so total assets
       remain unchanged. In “d” cash increases but A/R decreases.

2.     debit, debit, debit, credit, credit

3.                                 Seymour Heine Fashion Design
                                          Trial Balance
                                           April 30, XX

                                                      Debit               Credit
Cash                                                 $ 5005
A/R                                                    3000
Equip                                                 10000
A/P                                                                     $ 1175
Common stock                                                              5950
Retained earnings                                                         8900
Dividends                                                 600
Design rev                                                                 4750
Adv exp                                                  120
Salary exp                                              1800
Misc exp                                                 250
       Total                                       $20775           $20775

4.     a. Net income = Rev – Exp = 6500 – (500 + 800 + 1200 + 300 ) = 3700
       b. RE Sept 1 + Net income – Div = RE Sept 30
            0 + 3700 – 1700 = 2000
       c. Total assets = 4000 + 12800 + 2400 + 25000 = 44,200

5.           COMPANY A                                             COMPANY B
      Assets = Liabilities + Stk Equity                     Assets = Liabilities + Stk Equity
 1/1 60,000 = 30,000 + 30,000                               120,000 = 50,000 + 70,000
12/31 90,000 = 55,000 + 35,000                              160,000 = 70,000 + 90,000

       Beg RE + NI – Div = End RE                           Beg RE + NI – Div = End RE
       30,000,+ NI – 40,000 = 35,000                        70,000 + 80,000 – Div = 90,000
       NI = 45,000                                          Div = 60,000

       Rev – Exp = NI
       240,000 – Exp = 45,000
       Exp = 195,000

6.     a.       Entity principle: a business organization or unit; accounting principles
       require that the activities of the entity be kept separate and distinct from the
       activities of its owners
       Your uncle used his personal earnings from the store to buy investments; the
       investments then are his personal assets, and should not be included in the assets
       of the business.

       b.      Cost principle: assets are recorded at their historical or acquisition cost
       The balance sheet does not usually show the “worth” of assets, or their current
       value, but the cost of the asset at the time it was acquired, less any accumulated
       depreciation that has been taken. (The asset “Land” does not depreciate.)

       c.         Consistency principle: treatment of like transactions in the same way in
                  consecutive periods so that financial statement users can compare info
                  from one period to the next

                                                                                   Total        Stockholders’
                                                  Net income     Total Assets
                                                                                 Liabilities       Equity
            a. Utility exp incurred but not yet
                        paid, $350                 O $350                         U $350          O $350

            b. Supplies used during the period
                        total $650                  O 650           O 650                          O 650

       c. Service revenue earned but not yet
                 collected, $4,500                 U 4500          U 4500                          U 4500

        d. Unearned revenue earned during
                the period, $900                    U 900                          O 900           U 900

1. A                          2. C                           3. D                       4. omit

5. D                          6. AE                          7. AD                      8. E

9. D                          10. D                          11. B                      12. C              13. B

Monday, September 20, 2004
In class review problems

As of December 31, 20X4, the Southern Corporation has assets of $3,500 and stockholders’ equity of $2,000. What are
the liabilities of Southern Corporation?
a.          $1,500
b.          $1,000
c.          $2,500
d.          $5,500
e.          none of the above

          Answer: a

Which financial statement reports assets, liabilities, and owners’ equity?
a.       income statement
b.       statement of retained earnings
c.       balance sheet
d.       statement of cash flows
e.       trial balance

          Answer: c

Geneva Company buys a machine for $900 on account. This transaction will affect the
a.      income statement only.
b.      balance sheet only.
c.      income statement and stockholders’ equity statements only.
d.      income statement, stockholders’ equity statement, and balance sheet.
e.      none of the above

          Answer: b

A firm’s bookkeeper mistakenly recorded the payment of a dividend as salary expense. What effect will this error have
on the net income, assets, and stockholders’ equity of a corporation?

          Net income                    Assets              Stockholders’ equity
a.        overstated                    understated         overstated
b.        understated                   no effect understated
c.        understated                   no effect no effect
d.        overstated                    overstated          no effect
e.        none of the above

          Answer: c
(Expenses are too high, so net income is too low. However, there are “off-setting” errors to stockholders’ equity. NI is
too low, which makes RE too low. But dividends are also too low, so not enough is subtracted from RE. The two
errors “cancel out” and SE ends up being not affected.)

At the end of 20X4, its first year of operations, a firm showed a balance of $5,000 in Accounts Receivable. On the
income statement, the firm reported revenue of $26,000. How much cash was collected by the firm from its customers?
a.        $31,000
b.        $26,000
c.        $21,000
d.        cannot be determined without more information
e.        none of the above

         Answer: c
Revenue was $26,000, but of this amount, $5,000 is still due from customers. So only $21,000 was actually collected
in cash.
Reliable Cleaning Company began operating in December,        Additional information at Dec 31:
2004. The following transactions occurred during the second   a.         The cleaning equipment was expected to last for 4
half of December:                                                        years, and then be scrapped.
                                                              b.         Supplies on hand Dec 31 totaled $45
1         Owner invested cash in the business and received
          stock, $5,000                                       Required:
1         Purchased cleaning equipment for cash, $960         1. Record the transactions of Dec 1 – 31 in the general
1         Prepaid office rent for the 6 month period,         journal, and then post to the ledger. (Note: The first 4
          December 1 – May 30, $1,800                         transactions have already been recorded.)
5         Provided cleaning services for cash customers,      2. Prepare a trial balance as of December 31.
          $300                                                3. Using the additional information provided and your
6         Purchased cleaning supplies on account, $150        understanding of the adjusting process, record three
14        Prepaid insurance for 2005, $600                    adjusting entries in the general journal and post the adjusting
21        Provided cleaning services for customers on         entries to the ledger.
          account, $475                                       4. Prepare an adjusted trial balance as of December 31.
31        Paid salaries for December, $100                    5. Prepare an income statement and statement of retained
                                                              earnings for the month of December, and a balance sheet as
                                                              of December 31.

GENERAL JOURNAL                                               GENERAL LEDGER

1         Cash                  5000                            CASH                   A/R                   PPD RENT
             Common stock                  5000
                                                              5000     960          475                     1800    300 (adj)
1         Equipment              960
             Cash                           960               300      1800
1         Prepaid rent          1800                                    100
             Cash                          1800

5         Cash                   300                                                  SUPP                   EQUIPMENT
             Revenue                        300
                                                                                     150        105 (adj)    960
6         Cleaning supplies   150
             Accounts payable               150

14        Prepaid insurance      600
             Cash                          600                 ACC DEPR                   A/P                   UN REV

21        Accounts receivable    475                                   20 (adj)                 150
             Revenue                        475

31        Salary expense         100
              Cash                          100               COM. STOCK              REVENUE                EXPENSES

ADJUSTMENTS                                                             5000                    300         100
31     Depreciation exp     20                                          5001                                 20 (adj)
          Accumulated depre                  20                                                             105 (adj)
                                                                                                            300 (adj)
31        Supplies expense       105
             Supplies                       105
                                                                 PPD INSURANCE
31        Rent expense           300
             Prepaid rent                   300                  600
RELIABLE CLEANING SERVICE                                              RELIABLE CLEANING SERVICE
      TRIAL BALANCE                                                    ADJUSTED TRIAL BALANCE
    DECEMBER 31, 2004                                                    DECEMBER 31, 2004

                        Debit     Credit                                                Debit   Credit
Cash                    1840                                 Cash                       1840
Accts receivable         475                                 Accounts receivable         475
Prepaid rent            1800                                 Prepaid rent               1500
Supplies                 150                                 Supplies                     45
Equipment                960                                 Equipment                   960
Accts payable                      150                       Accumulated depreciation             20
Unearned revenue                                             Accounts payable                    150
Common stock                      5000                       Unearned revenue
Revenues                           775                       Common stock                       5000
Expenses                 100                                 Revenues                            775
Prepaid Insurance        600                                 Expenses                    525
                        5925      5925                       Prepaid insurance           600
                                                                                        5945    5945

                                  RELIABLE CLEANING SERVICE
                                      INCOME STATEMENT
                                FOR THE MONTH ENDED DEC 31, 2004

                                     Revenue                    775
                                     Expenses                   525
                                     Net income                 250

                                  RELIABLE CLEANING SERVICE
                                STATEMENT of RETAINED EARNINGS
                                FOR THE MONTH ENDED DEC 31, 2004

                        Retained earnings, Dec 1               0
                        Net income                           250
                        Less Dividends                         0
                        Retained earnings, Dec 31            250

                                  RELIABLE CLEANING SERVICE
                                        BALANCE SHEET
                                       DECEMBER 31, 2004

ASSETS                                              LIABILITIES
Cash                    1840                        Accts payable                        150
Accts Receivable         475
Prepaid rent            1500
Prepaid insurance        600                        STOCKHOLDERS’ EQUITY
Supplies                  45                        Common stock                        5000
Equipment         960                               Retained earnings                    250
Less Accum depr 20       940
Total assets            5400                        Total liabilities and stk equity    5400

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