Accounting and Finance Mock Midterm Exam PDF 2024

C OLUMBIA Accounting and Finance MOCK MIDTERM EXAM Prof. Saeidinezhad Friday 18th October, 2024 Student name:................................... Student ID...

C OLUMBIA Accounting and Finance MOCK MIDTERM EXAM Prof. Saeidinezhad Friday 18th October, 2024 Student name:................................... Student ID:.................................... EXAM-WIDE RULES: Negative value should be indicated by a minus sign. Round your answer to 2 decimal places. Students are allowed to use a calculator. They are not allowed to use Excel unless it is pre-approved by the instructor. Students should show all the work, including writing down the equations, on the bluebook. Students have 75 minutes to complete their work. This is a closed-book exam. This exam has 1o questions. Each question has 10 points. 1  1 QUESTIONS 1. A company provides services worth $5,000 in December and receives payment in Jan- uary. Under cash accounting, in which month is the revenue recognized? What about under accrual accounting? Answer: Cash Accounting: January (when cash is received) Accrual Accounting: December (when service is provided) 2. A company receives a utility bill for $600 in December but pays it in January. Under cash accounting, when will the company record the expense? What about under accrual accounting? Answer: Cash Accounting: January (when cash is paid) Accrual Accounting: December (when the expense is incurred) SCENARIO (Questions 3 & 4): A retail store buys inventory worth $20,000 in October and sells all of it for $30,000 in November. The store receives payment in December. 3. Using cash accounting, when would the store record the purchase and sales? 4. Question: Using accrual accounting, when would the store record the purchase, sales, and cost of goods sold (COGS)? Answer: Cash Accounting: Purchase recorded in October (when cash is paid) Sales recorded in December (when cash is received) Accrual Accounting: Purchase recorded in October as inventory (asset) COGS recorded in November when goods are sold ($20,000) Sales recorded in November when goods are sold ($30,000) SCENARIO (Questions 5 & 6): A software company sells an annual subscription for $1,200 on January 1st, with the customer paying the full amount upfront. 5. Using cash accounting, when will the company recognize the $1,200 in revenue? 2  6. Using accrual accounting, how much revenue will the company recognize each month, and how much will be recorded as deferred revenue in January? Answer: Cash Accounting: Revenue of $1,200 recognized in January (when cash is received). Accrual Accounting: $1,200 Revenue recognized monthly: 12 = $100 per month Deferred revenue for January: $1,100 (since only $100 is earned in January) 7. A consulting firm completes a $4,000 project in June and invoices the client, but the client doesn’t pay until July. Under cash accounting, in which month does the firm rec- ognize the $4,000 revenue? Under accrual accounting, when is the revenue recognized? Answer: Cash Accounting: July (when the payment is received) Accrual Accounting: June (when the service is provided) 8. A gym collects $10,000 in December for annual memberships starting in January. Us- ing accrual accounting, how much revenue will the gym recognize in December? How much will be recorded as deferred revenue? Answer: Revenue recognized in December: $0 (since the membership service starts in Jan- uary) Deferred revenue in December: $10,000 (the total amount paid upfront but not yet earned) 9. A company purchases equipment for $15,000 in January, which is expected to last 5 years. Under accrual accounting, how much depreciation expense should be recorded annually if the company uses straight-line depreciation? Answer: $15,000 Annual depreciation expense = 5 = $3, 000 per year 10. A company pays $8,000 in October for advertising that runs through November and December. Under cash accounting, how would the expense be recorded? Under ac- crual accounting, how would the company allocate the $8,000 across the months of November and December? Answer: Cash Accounting: Record $8,000 in October (when the payment is made). 3  Accrual Accounting: Allocate $4,000 to November and $4,000 to December to match the expense with the period in which the advertising service is used. 11. A law firm provides $12,000 worth of services in September but doesn’t receive pay- ment until October. Under accrual accounting, how much will be recorded as accounts receivable in September? When will the revenue be recognized under cash accounting and accrual accounting? Answer: Accounts Receivable in September: $12,000 Cash Accounting: Revenue recognized in October (when payment is received). Accrual Accounting: Revenue recognized in September (when the service is pro- vided). 12. A landscaping business buys a lawn mower for $10,000 in March. The equipment is expected to last 4 years. Under accrual accounting, how much depreciation expense should be recorded annually, and how much would be recorded as an expense in March under cash accounting? Answer: $10,000 Depreciation expense (accrual accounting): 4 = $2, 500 per year Cash Accounting: The entire $10,000 expense is recorded in March. Balance Sheet Calculation (Moderate Quantitative) 13. A company reports total assets of $500,000 and total liabilities of $300,000. Using the basic accounting equation (Assets = Liabilities + Stockholders’ Equity), calculate the company’s stockholders’ equity. Answer: Stockholders’ Equity = Assets - Liabilities Stockholders’ Equity = $500, 000 − $300, 000 = $200, 000 Income Statement: Net Income (Moderate Quantitative) 14. A company reports revenues of $150,000 and expenses of $90,000 for the year. Calcu- late the company’s net income using the income statement equation (Net Income = Revenues - Expenses). Answer: Net Income = Revenues - Expenses 4  Net Income = $150,000 - $90,000 = $60,000 Depreciation Expense (Moderate Quantitative) 15. A company buys equipment for $50,000, which is expected to last for 5 years. Using straight-line depreciation, calculate the annual depreciation expense. Answer: C ost o f E qui pment Annual Depreciation Expense = U se f ul Li f e $50,000 Annual Depreciation Expense = 5 = $10, 000 per year Statement of Stockholders’ Equity (Moderate Quantitative) 16. A company starts the year with $40,000 in retained earnings. During the year, it earns net income of $25,000 and pays dividends of $5,000. Calculate the ending retained earnings. Answer: Ending Retained Earnings = B eg i nni ng Ret ai ned E ar ni ng s+Net I ncome−Di vi d end s Ending Retained Earnings = $40, 000 + $25, 000 − $5, 000 = $60, 000 Cash Flow Classification (Easy Quantitative) 17. A company collects $12,000 from customers and pays $4,000 in wages. Classify these transactions into operating activities, investing activities, or financing activities in the cash flow statement. Answer: Cash collected from customers ($12,000) = Operating Activity Wages paid to employees ($4,000) = Operating Activity Cash Flow: Change in Cash (Moderate Quantitative) 18. A company has the following cash flow items: a) Cash flows from operating activities: +$10, 000 b) Cash flows from investing activities: −$7, 000 c) Cash flows from financing activities: +$2, 000 Calculate the net change in cash for the period. Answer: Net Change in Cash = Operating Cash Flow + Investing Cash Flow + Financing Cash Flow 5  Net Change in Cash = $10,000 + (- $7,000) + $2,000 = $5,000 GAAP and Financial Statements (Moderate Quantitative) 19. A publicly traded company is required to follow GAAP when preparing its financial statements. The company reports $200,000 in total revenues, $120,000 in total ex- penses, and $10,000 in taxes. Calculate the net income under GAAP rules. Answer: Net Income = Revenues - Expenses - Taxes Net Income = $200,000 - $120,000 - $10,000 = $70,000 Dividend Payment Impact (Moderate Quantitative) 20. A company has $100,000 in retained earnings at the beginning of the year. It earns $30,000 in net income and decides to pay $10,000 in dividends. How much will the company have in retained earnings at the end of the year? Answer: Ending Retained Earnings = Beginning Retained Earnings + Net Income - Divi- dends Ending Retained Earnings = $100,000 + $30,000 - $10,000 = $120,000 Revenue Recognition (Moderate Quantitative) 21. A company provides services in December worth $8,000 but does not receive payment until January. Using accrual accounting, in which month will the company recognize the revenue? Answer: The company will recognize the $8,000 in December (when the services were provided). Interest Expense Calculation (Moderate Quantitative) 22. A company takes out a $50,000 loan with an annual interest rate of 6%. Calculate the interest expense for the year. Answer: Interest Expense = Loan Amount × Interest Rate Interest Expense = $50,000 × 6% = $3,000 Basic Balance Sheet Calculation: 23. A company has total assets of $500,000, liabilities of $300,000, and stockholders’ equity of $200,000. After purchasing equipment worth $50,000 using cash, what is the updated balance sheet equation? Answer: 6  Before transaction: Assets = Liabilities + Stockholders’ Equity $500,000 = $300,000 + $200,000 Transaction: Purchase of $50,000 equipment using cash decreases cash by $50,000 but increases equipment by $50,000, leaving total assets unchanged. After transaction: Updated balance sheet: Assets = Liabilities + Stockholders’ Equity $500,000 = $300,000 + $200,000 Journal Entry and T-Accounts: 24. A company issues 10, 000i ncommonst ockand usest hepr oceed st opur chase10,000 of inventory. Record the journal entry and show the impact on the balance sheet using T-accounts. Answer: Journal Entry: Debit: Cash $10,000 Credit: Common Stock $10,000 Credit: Common Stock $10,000 Credit: Common Stock $10,000 T-Accounts: cash +$10,000 (issue) - $10,000 (inventory) Common Stock +$10,000 Inventory +$10,000 Impact on Balance Sheet: Assets: Cash (net $0), Inventory (+$10,000) Equity: Common Stock (+$10,000) Asset Classification: 25. A company has $100,000 in cash, $50,000 in accounts receivable, $30,000 in supplies, and $200,000 in equipment. How would these assets be classified on the balance sheet? Calculate the total current and non-current assets. Answer: Current Assets: Cash: $100,000 Accounts Receivable: $50,000 Supplies: $30,000 Total Current Assets: $100,000 + $50,000 + $30,000 = $180,000 7  Non-Current Assets: Equipment: $200,000 Total Non-Current Assets: $200,000 Impact of a Transaction on Current Ratio: 26. A company has current assets of $120,000 and current liabilities of $60,000. If the com- pany takes out a short-term loan of 20, 000, howd oest hi sa f f ec t t hecur r ent r at i o? Answer: Current Ratio Before Loan: Cur r ent Asset s Current Ratio = Cur r ent Li abi l i t i es = $120,000 $60,000 = 2.0 After taking out a $20,000 loan: New Current Assets: $120,000 + $20,000 = $140,000 New Current Liabilities: $60,000 + $20,000 = $80,000 New Current Ratio = $140,000 $80,000 = 1.75 Trial Balance Preparation: 27. A company has the following balances: Cash: $15,000, Accounts Payable: $5,000, Common Stock: $10,000, Equipment: $20,000. Prepare a trial balance for the company. Answer: Account Debit Credit Cash $15,000 Equipment $20,000 Accounts Payable $5,000 Common Stock $10,000 Total $35,000 $15,000 Liabilities and Stockholders’ Equity: 28. A business has $400,000 in assets, $250,000 in liabilities, and stockholders’ equity of $150,000. If the business pays off $50,000 of its debt, how will this affect the balance sheet? Recalculate the stockholders’ equity. Answer: Before payment: Assets = $400,000 Liabilities = $250,000 Stockholders’ Equity = $150,000 After paying off $50,000 of debt: Assets = $400,000 - $50,000 = $350,000 8  Liabilities = $250,000 - $50,000 = $200,000 Stockholders’ Equity remains at $150,000 Classified Balance Sheet Calculation: 29. A company has Accounts Receivable: $25,000, Cash: $15,000, Accounts Payable: $10,000, and Short-term Investments: $20,000. Calculate the company’s current assets and current liabilities. Answer: Current Assets: Cash: $15,000 Accounts Receivable: $25,000 Short-term Investments: $20,000 Total Current Assets: $15,000 + $25,000 + $20,000 = $60,000 Current Liabilities: Accounts Payable: $10,000 Evaluating a Business Transaction: 30. A business purchased land for $80,000 by paying $20,000 in cash and issuing a $60,000 note payable. How will this transaction affect the balance sheet equation? Answer: Assets: Cash decreases by $20,000, Land increases by $80,000. Net increase in assets = +$60,000 Liabilities: Note payable increases by $60,000. Stockholders’ Equity: No change. New Balance Sheet: Assets: +$60,000 Liabilities: +$60,000 Stockholders’ Equity: No change Equity Contribution Calculation: 31. A company issues 1,000 shares of common stock at $10 each. What will be the impact on the company’s stockholders’ equity, specifically contributed capital? Answer: Common Stock (Contributed Capital): = 1,000 shares × $10 = $10,000 Impact on Stockholders’ Equity: Stockholders’ Equity increases by $10,000. Investing and Financing Transactions: 9 32. A company issues bonds worth $100,000 and uses $60,000 of the proceeds to purchase equip- ment. How will this affect the company’s balance sheet? Answer: Assets: Equipment increases by $60,000. Cash increases by $40,000 (remaining proceeds). Liabilities: Bonds Payable increases by $100,000. Stockholders’ Equity: No change. 10