Financial Accounting Exam 2

   

1)

The fundamental accounting equation is a reflection of the:

 

 

Money measurement concept

 

 

Conservatism concept

 

 

Dual-aspect concept

 

 

Historical cost concept

   

2)

   

The historical cost concept reflects the fact that financial accounting practice favors:

 

 

   Reliability over relevance

 

 

Management’s best guess over historical financial information

 

 

Relevance over reliability

 

 

Consensus market values over historical financial information

3)

   

Jon Sports’ inventory account increased from $25,000 on December 31, 2003 to $30,000 on December 31, 2004. Which one of the following items would be included in the operating section of its 2004 indirect method statement of cash flows?

 

 

Add increase in inventory $5,000

 

 

Subtract increase in inventory ($5,000)

 

 

Add inventory balance $20,000

 

 

Subtract inventory balance ($20,000)

   

4)

   

Turnkey Systems, Inc. began the month of June, 2004 with a prepaid expenses balance of $240,000. During the month, debits totaling $110,000 and credits totaling $80,000 were made to the prepaid expenses account. What was the June, 2004 ending balance of prepaid expenses?

 

 

A debit balance of $210,000

 

 

A credit balance of $210,000

 

 

A debit balance of $270,000

 

 

A credit balance of $270,000

5)

   

Pentex and Marbro, small companies in the stationery business, each had a dollar gross margin of $20,000 during September 2004. Pentex’s September sales were twice that of Marbro’s. If Pentex’s gross margin as a percentage of sales for September was 10%, Marbro’s gross margin as a percentage of sales for the same period was:

 

 

10%

 

 

5%

 

 

20%

 

 

Cannot be calculated

   

6)

   

When an entity recognizes revenue before it has received cash for the sale, it records an increase in a(n):

 

 

Liability such as ‘Advances from customers’

 

 

Accounts payable

 

 

Accounts receivable

 

 

Prepaid expense

   

7)

   

Juan Foods pays off a long-term debt in full. Which one of the following statements describes the effect of the sale on Juan Foods?

 

 

Current ratio increases; total debt to equity ratio decreases

 

 

Current ratio decreases; total debt to equity ratio decreases

 

 

Current ratio decreases; total debt to equity ratio increases

 

 

Current ratio increases; total debt to equity ratio increases

   

8)

On January 1, 2005, Mansfield Company has a retained earnings balance of $256,000. During 2005, its net income is $44,000 and it announces and pays $12,000 in dividends. There is no other dividend-related activity during the year. Its December 31, 2005 retained earnings balance is:

 

 

$2,12,000

 

 

$2,88,000

 

 

$3,00,000

 

 

$2,24,000

   

9)

   

Juan Foods makes a cash sale with a positive gross margin. Which one of the following statements describes the effect of the sale on Juan Foods?

 

 

Current ratio increases

 

 

Current ratio decreases

 

 

No change to Juan Foods’ current ratio

 

 

Insufficient information to judge effect on current ratio

   

10)

   

Juan Foods pays off a long-term debt in full. Which one of the following statements best describes the appropriate book-keeping for this transaction?

 

 

Debit cash; credit long-term debt

 

 

Debit long-term debt; credit owners’ equity

 

 

Debit owners’ equity; credit long-term debt

 

 

Debit long-term debt; credit cash

   

11)

   

On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. What is the effect of these April transactions on Preston’s balance sheet?

 

 

Cash increased by $12,000; accounts receivable decreased by $2,000; inventory decreased by $8,000; retained earnings increased by $2,000.

 

 

Accounts receivable increased by $2,000; inventory decreased by $8,000; cash increased by $12,000; retained earnings increased by $12,000.

 

 

Cash increased by $12,000; retained earnings decreased by $2,000; inventory decreased by $10,000; accounts receivable decreased by $12,000.

 

 

Cash increased by $2,000; accounts receivable decreased by $2,000; inventory decreased by $8,000; retained earnings decreased by $12,000.

   

12)

   

Consider the same scenario as in the previous question: On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. If Preston had no other sales and records no other collections from customers during the month of April, the operating section of Preston’s indirect method statement of cash flows for April will show the following de-accrual adjustments to net income:

 

 

Subtract change in accounts receivable; add change in inventory.

 

 

Add change in accounts receivable; subtract change in inventory

 

 

Add change in accounts receivable; add change in inventory.

 

 

Subtract change in accounts receivable; subtract change in inventory.

   

13)

   

Planet Music buys all of its inventory on credit. During 2005, Planet Music’s inventory account increased by $10,000. Which of the following statements must be true for Planet Music during 2005?

 

 

It made payments of less than $10,000 to suppliers.

 

 

It made cash payments of $10,000 to suppliers.

 

 

It made more cash payments to its suppliers than it recorded as cost of goods sold.

 

 

It paid less cash to suppliers than it recorded as cost of goods sold.

       

14)

On December 31, 2005, Juan Foods purchases a van for $12,000. How does the purchase of the van affect Juan Foods’ 2005 income statement?

 

 

Decreases sales by $12,000

 

 

Increases operating expenses by $12,000

 

 

No material effect

 

 

Increases cost of goods sold by $12,000

   

15)

   

To be recorded as a liability, an item must meet three specific conditions. Two of them are: it must involve probable future sacrifice of economic resources by the entity, and it must be a present obligation that arose as a result of a past transaction. Which one of the following is the third condition?

 

 

The item must reduce the market value of the recording entity

 

 

It must involve a transfer of resources to another entity

 

 

It must involve the expenditure of cash now or in the future

 

 

It must not cause total liabilities to exceed total assets

       

16)

The next 9 questions are based on Patnode Inc.’s balance sheets at year end 2004 and 2005.

     

During 2005, Patnode announced and paid dividends of $1,000, the only dividend-related activity during the year. What was its 2005 net income?

 

     

$5,600

 

 

$3,600

 

 

$4,600

 

 

Cannot be estimated

   

17)

   

During 2005, Patnode had a cash outflow of $15,000 for investing activities and a cash inflow of $7,000 from financing activities. Its 2005 cash flow from operations was:

     

     

Outflow of $15,000

 

 

Inflow of $15,000

 

 

Outflow of $8,000

 

 

Inflow of $8,000

       

18)

   

Patnode’s 2005 statement of cash flows contains four items in the financing section. Three of them are: Short-term debt issued, $15,000; Short-term debt paid, ($10,000) and Dividends paid, ($1,000). What is the fourth item in the financing section?

     

     

Retained earnings, $4,600

 

 

Common stock issued, $3,000

 

 

Long-term debt paid, ($3,000)

 

 

Cash from financing, $3,000

   

19)

   

How much total depreciation and amortization expense did Patnode record during 2005?

 

     

$10,000

 

 

$6,000

 

 

$3,000

 

 

$5,000

   

20)

   

During 2005, Patnode recorded sales of $17,000. How much cash did it collect from its customers?

 

     

$17,000

 

 

$14,000

 

 

$3,000

 

 

Cannot be estimated

   

21)

   

Which one of the following items will not appear in the operating section of Patnode’s 2005 indirect method cash flow statement?

 

     

Deduct: increase in accounts receivable $3,000

 

 

Add: decrease in accounts payable $1,000

 

 

Add: increase in taxes payable $2,400

 

 

Add: decrease inventories $6,000

   

22)

   

What is Patnode’s current ratio at the end of 2004?

     

 

2.46

 

 

0.41

 

 

1.12

 

 

0.89

   

23)

   

What is Patnode’s total debt to equity ratio at the end of 2004 (rounded to two decimal places)?

 

     

5.3

 

 

0.19

 

 

0.25

 

 

4.04

   

24)

   

Patnode recorded a 2005 tax expense of $3,000. What amount did it pay to the tax authorities during 2005?

 

     

$2,400

 

 

$7,000

 

 

$600

 

 

$5,400

   

25)

   

Kirby, Inc. records a sale with a gross margin of $1,400. Which one of the following statements correctly describes the effect of such a sale on its balance sheet?

 

 

Common stock increases by $1,400

 

 

The sales revenue account increases by $1,400

 

 

The gross margin account increases by $1,400

 

 

The retained earnings account increases by $1,400

   

26)

   

Sandy Robbins is the sole owner of a hair salon. He often takes small amounts of “lunch money” from the cash register, figuring that “it is my business anyway.” His accountant, however, insists that Sandy make a note of the cash he takes, and at the end of the each accounting period, she debits owners’ equity and credits the cash account for the total amount that Sandy has taken during the period.

     

In recording the cash withdrawals even though Sandy is sole proprietor, the accountant is correctly applying the:

     

 

Matching concept

 

 

Entity concept

 

 

Materiality concept

 

 

Conservatism concept

   

27)

   

Anderson Electronics’ 2005 return on sales percentage is 20%. Its 2005 net income is $40,000. What is its 2005 sales?

 

 

$4,00,000

 

 

$80,000

 

 

$2,00,000

 

 

$1,00,000

   

28)

   

Anderson Electronics’ 2005 return on sales percentage is 20%. Its 2005 net income is $40,000. What is its 2005 sales?

 

 

$4,00,000

 

 

$80,000

 

 

$2,00,000

 

 

$1,00,000

       

29)

   

During June 2005, Bextra Inc. recorded sales of $55,000 but only $20,000 was collected in cash from customers. Cost of goods sold of $38,000. What was the effect of these sales on Bextra’s current ratio?

 

 

Current ratio increases

 

 

Current ratio decreases

 

 

Current ratio remains unchanged

 

 

Insufficient information provided to judge effect on current ratio

       

30)

   

Which one of the following statements is not true about statements of cash flows prepared according to U.S. GAAP?

     

 

The operating section of the indirect method starts with the net income of the period

 

 

In the indirect method statement, the period’s depreciation is added to net income because it is a source of cash

 

 

Interest payments are included in the operating section of the direct method statement

 

 

The investing section of the direct method statement for a period is identical to the investing section of the indirect method statement for the same period

   

31)

   

A company raised $50,000 in cash by taking a one-year loan of $10,000 and a 5-year loan of $40,000. Which of the following is the correct journal entry to record this transaction?

 

 

Debit short-term debt $40,000; debit retained earnings $10,000; credit cash $50,000

 

 

Debit short-term debt $50,000; credit cash $50,000

 

 

Debit cash $50,000; credit long-term debt $50,000

 

 

Debit cash $50,000; credit short-term debt $10,000; credit long-term debt $40,000

   

32)

   

Which one of the following statements describes the rules about posting transactions into T-accounts in the ledger?

 

 

For assets, debits are entered on the left; for liabilities, credits are entered on the left

 

 

For assets, credits are entered on the left; for liabilities, debits are entered on the left

 

 

Debits on the left; credits on the right

 

 

Credits on the left; debits on the right

   

33)

   

Baxtra, Inc. pays $20,000 in cash as interest to its lenders during 2005. According to U.S. GAAP, in which section of the statement of cash flows would this payment be included?

 

 

The operating section

 

 

The financing section

 

 

The investing section

 

 

Depends on whether cash flow statement is direct or indirect method.

   

34)

   

Taylor Company had a salaries payable balance of $18,000 on December 31, 2004. During 2005, it paid $50,000 in cash as salaries, and recorded a salary expense of $50,000. Its December 31, 2005 salaries payable balance is:

 

 

$50,000

 

 

$18,000

 

 

$1,00,000

 

 

Cannot be determined from the information provided

   

35)

   

On April 30, 2005, Zono Electronics, Inc. made a payment of $3,500 to Imperial Distributors, a supplier. Choose the statement that best describes the recording of this financial transaction by Imperial Distributors.

 

 

Debit cash $3,500; credit accounts payable $3,500

 

 

Debit accounts receivable $3,500; credit cash $3,500

 

 

Debit accounts payable $3,500; credit cash $3,500

 

 

Debit cash $3,500; credit accounts receivable $3,50

   

36)

   

Sardi Company estimates its 2005 tax expense to be $80,000. It makes a cash payment of $20,000 to the tax authorities on December 31, 2005. How should this transaction be recorded by Sardi?

 

 

Debit tax expense $80,000; credit cash $60,000; credit taxes payable $20,000

 

 

Debit tax expense $80,000; credit cash $20,000; credit taxes payable $60,000

 

 

Debit tax expense $80,000; credit cash $20,000

 

 

Debit tax expense $80,000; credit cash $20,000; credit accounts payable $60,000

   

37)

   

On June 1, 2005, Planet Music has accounts payable of $45,000. During the month, debits of $3,000 and credits of $11,000 were made to the account. At the end of June 2005, what was the accounts payable balance?

 

 

A credit balance of $53,000

 

 

A debit balance of $42,000

 

 

A credit balance of $56,000

 

 

A debit balance of $53,000

   

38)

   

Barnaby & Sons receives a large shipment of goods from its supplier. It pays $58,000 at the time of delivery and promises to pay the remaining $42,000 within the next two months. What is appropriate journal entry for this transaction?

 

 

Debit cash $42,000; debit inventory $16,000; credit accounts payable $58,000;

 

 

Debit inventory $100,000; credit cash $58,000; credit accounts payable $42,000

 

 

Debit accounts payable $58,000; credit cash $42,000; credit inventory $16,000

 

 

Debit accounts payable $58,000; debit cash $42,000; credit inventory $100,000

   

39)

   

Annie’s Fitness sells a set of free weights to a customer for $1,000. The customer pays $600 in cash and puts the rest on her store credit account. Which one of the following statements describes the most appropriate accounting for the transaction?

 

 

Debit cash $600; debit accounts receivable $400; credit cost of good sold $1000

 

 

Debit cash $600; debit accounts receivable $400; credit revenues $1,000

 

 

Debit revenues $1,000; credit cash $600; credit accounts receivable $400

 

 

Debit cash $600; debit accounts receivable $400; credit inventory $1,000

   

40)

   

Annie’s Fitness sells a set of free weights to a customer for which Annie’s had paid $750. Which one of the following statements describes the most appropriate accounting for the transaction?

 

 

Debit cost of goods sold expense $750; credit cash $750

 

 

Debit inventory $750; credit cost of goods sold expense $750

 

 

Debit cost of goods sold expense $750; credit inventory $750

 

 

Debit inventory $750; credit accounts payable $750