Exam 1 sample.docx

1.  Examples of internal transactions include all of the following except:  \ A.  Writing off an uncollectible account.\ B.  Recording the expiration of prepaid insurance.\ C.  An adjusting entry to the supplies account.\ D.  Paying the CEO salary.\ E.  Recording accrued interest expense owed to a n...

1.  Examples of internal transactions include all of the following except:  \ A.  Writing off an uncollectible account.\ B.  Recording the expiration of prepaid insurance.\ C.  An adjusting entry to the supplies account.\ D.  Paying the CEO salary.\ E.  Recording accrued interest expense owed to a national bank.   2.  ABC Inc. uses a perpetual inventory system. The company sold inventory for \$880 which cost \$500. The COGS will be increased by \_\_; Inventory will be decreased by \_\_.  \ A.  500; 880\ B.  500; 500\ C.  380; 880\ D.  500; 380\ E.  There would be no COGS or inventory entry under this inventory system.   3.  Permanent accounts would not include:  \ A.  Cost of goods sold.\ B.  Inventory.\ C.  Current liabilities.\ D.  Accumulated depreciation.   4.  Green Energy Inc. gets most of its revenues from Federal subsidies. If a conservative president is elected, the firm is uncertain it could survive without government handouts. What should they do about this?  \ A.  Record all assets at liquidation rates.\ B.  An independent valuation firm should be hired to estimate the expected life of the firm and value firm assets in accordance with that estimate.\ C.  Ignore the problem and assume the firm will live forever.\ D.  The firm should make its own estimate of expected life and value firm assets in accordance with that estimate.\ E.  A political scientist should be hired to estimate the likelihood of a conservative presidency, and the firm assets should be valued in accordance with that estimate.   5.  The Management Discussion and Analysis section of the annual report:  \ A.  Is generally used as a tool by management to manipulate the stock price.\ B.  Is an opportunity for management to overcome information asymmetry in a way the accounting system cannot.\ C.  Is carefully audited, and is thus unbiased.\ D.  The MD&A is not part of the annual report; it is part of a letter sent every year to shareholders.   6.  A company buys inventory with cash.  Which of the following is correct?  \ A.  Its quick ratio increases\ B.  Its quick ratio decreases\ C.  Its current ratio increases\ D.  Its current ratio decreases\ E.  None of the above.   7.  Of the following, the most important objective for financial reporting is to provide information useful for:  \ A.  Making decisions.\ B.  Determining taxable income.\ C.  Providing accountability.\ D.  Increasing future profits.   8.  When a company purchases 7-month US T-bills for cash,  \ A.  Its acid-test ratio increases.\ B.  Its current ratio decreases.\ C.  Its debt to equity ratio decreases.\ D.  Its current ratio increases.\ E.  None of the above.   9.  Which of the following is the same as a balance sheet?  \ A.  Unadjusted trial balance\ B.  Adjusted trial balance\ C.  Post-closing trial balance\ D.  None of the above   10.  Most accounts that appear in the income statement are \_\_ which will be closed into \_\_ at the end of accounting cycle.  \ A.  Temporary accounts; Retained earnings\ B.  Permanent accounts; Retained earnings\ C.  Profit accounts; Net income\ D.  Permanent accounts; Net income   11.  The conceptual framework\'s qualitative characteristic of faithful representation includes:  \ A.  Predictive value.\ B.  Neutrality.\ C.  Confirmatory value.\ D.  Timeliness.   12.  In the conceptual framework, relevance includes:  \ A.  Confirmatory value.\ B.  Cost effectiveness.\ C.  Completeness.\ D.  Neutrality.\ E.  Accuracy.   13.  An example of an asset that is not expected to be converted to cash or consumed within one year or the operating cycle is:  \ A.  Inventory.\ B.  Copyright.\ C.  Commercial paper.\ D.  Supplies.   14.  Which of the following would not be an adjusting entry?  \ A.  Prepaid rent\      Rent expense\ B.  Cash\      Unearned revenue\ C.  Interest expense\      Interest payable\ D.  Bad debt expense\      Allowance for doubtful accounts\ E.  Unearned revenue\      Sales revenue   15.  Constraints on qualitative characteristics of accounting information include:  \ A.  Timeliness.\ B.  Going concern.\ C.  Neutrality.\ D.  Cost effectiveness.\ E.  Decision usefulness   16.  Rent collected in advance is:  \ A.  An asset account in the balance sheet.\ B.  A liability account in the balance sheet.\ C.  A shareholders\' equity account in the balance sheet.\ D.  A temporary account, not in the balance sheet at all.   17.  New Shoes paid \$12,000 on September 30^th^ for two years of flood and fire insurance on its office building.  The amount paid was debited to prepaid insurance.  What is the required adjusting entry three months later on December 31th?  \ A.  Insurance expense                          \$3,000 -------------------------------------------------------------------------                   Prepaid insurance                            \$3,000  B.  Insurance expense                          \$1,500 -------------------------------------------------------------------------                   Prepaid insurance                            \$1,500  C.  Prepaid insurance                          \$12,000 -----------------------------------------------------------------------                   Accounts payable                          \$12,000  D.  Insurance expense                          \$2,000 -------------------------------------------------------------------------                   Prepaid insurance                            \$2,000    18.  The last 20 years have seen enormous changes in the accounting profession. Which of the following did NOT happen in the last 20 years?  \ A.  Movement toward more principals-based accounting and use of fair value.\ B.  The SEC handed its authority to write GAAP to the private sector.\ C.  Audit changes due to Sarbanes-Oxley.\ D.  The codification of US GAAP.   19.  Gains are:  \ A.  Inflows from selling a product or service to a customer.\ B.  Increases in equity resulting from transfers of assets to the company from owners.\ C.  Increases in equity from peripheral transactions of an entity.\ D.  Always good.\ E.  None of the above.   20.  New Shoes Inc. has the following balances in its adjusted trial balance at the end of the year: Accounts payable \$2,000 ----------------------- ---------- Salaries payable \$1,000 Warranty liability  \$5,000 Income taxes payable  \$1,500 Note payable \$10,000 Common stock  \$10,000 Retained earnings \$5,000 Warranty liabilities relate to warranties on its products that New Shoes expects to be claimed evenly over the next two years.   The note payable is an installment loan; \$1,000 of the principal is due each year on July 1 for the next 10 years. What amount will New Shoes report in its ending balance sheet as long-term liabilities?  \ A.  \$11,500\ B.  \$30,000\ C.  \$15,000\ D.  \$19,500\ E.  None of the above.   21.  Disclosure notes to a company\'s financial statements:  \ A.  Are relatively unimportant facts that don\'t belong in the basic financial statements.\ B.  Are informative, but not required by GAAP.\ C.  Are an integral part of a company\'s financial statements.\ D.  Are irrelevant facts that are immaterial in amount.\ E.  Were added as part of the new regulations under Sarbanes-Oaxly.   22.  Comprehensive income:  \ A.  Is another term for net income.\ B.  Includes only revenues, expenses, gains, and losses.\ C.  Is the net change in all equity accounts.\ D.  Is the change in equity from non-owner transactions.\ E.  Is the change in equity from owner-related transactions.   23.  When a company receives a purchase order, but does not immediately fill it, this is recorded with:  \ A.  A debit to cash.\ B.  A credit to COGS.\ C.  A debit to sales.\ D.  A credit to deferred revenue.\ E.  None of the above.   24.  Trek NV opened business on January 1, and paid for two insurance policies effective that date. The stolen policy was \$18,000 for eighteen months, and the earthquake policy was \$48,000 for a two-year term. What was the balance in Trek NV\'s prepaid insurance at the end of their first year of business?  \ A.  \$30,000\ B.  \$36,000\ C.  \$66,000\ D.  \$33,000   25.  Dakota Inc. is fixing up its office and purchased furniture on account for \$4,000.  The journal entry to record this transaction should include a \$4,000 debit to what type of account?\  \ A.  Purchases\ B.  PP&E\ C.  Expense\ D.  Accounts Payable\ E.  Inventory   26.  When a company issues common stock,  \ A.  Its debt to equity ratio increases.\ B.  Its acid-test ratio remains unchanged.\ C.  Its current ratio decreases.\ D.  Its debt to equity ratio decreases.\ E.  None of the above.   27.  Pizza City started the year with 12,000 of wages payable, and ended the year with 18,000 of wages payable. During the year, they paid cash wages of 150,000. What is the wage expense for the year?  \ A.  \$150,000.\ B.  \$156,000.\ C.  \$162,000.\ D.  \$144,000.\ E.  None of the above.   28.  Why are adjusting entries necessary?  \ A.  To make debits equal credits.\ B.  To make sure assets =  liabilities + owners equity.\ C.  To bring all account balances up to date before preparing financial statements.\ D.  They are not necessary. They are only used by accountants to \'cook the books\'. The following is the unadjusted trial balance for Mark's Tax Prep at December 31, the fiscal year-end. Mark prepares adjusting entries only at the end of each fiscal year. ------------------------------------ --------- --------- Cash 3,000   Accounts Receivable 10,000   Merchandise Inventory 40,000   Supplies 0   Prepaid phone 20,000   Equipment 50,000   Accumulated Depreciation-Equipment   18,000 Accounts Payable   37,000 Wages Payable   0 Litigation liability 6,000 Deferred Revenue   19,000 Common Stock   30,000 Retained Earnings   80,000 Sales   81,000 Cost of Goods Sold 76,000   Wages Expense 48,000   Insurance Expense 12,000   Phone Expense 0   Depreciation Expense 0   Supplies Expense 12,000   Litigation Expense 0   Totals 275,000 275,000 ------------------------------------ --------- --------- **[Required (10 points):]** On the written response sheet, prepare the necessary entries for items **a through e, or state that no entry is needed.** a\. Mark has a VoIP phone system, and gets a better deal by prepaying two full years in advance. The amount recorded as prepaid was purchased on January 1 of this year. b\. At the beginning of December, Mark received a \$10,000 payment in advance to go through a shoebox of receipts and prepare the taxes. He debited Cash and credited unearned revenue. By the end of December, half of the job was done, but no journal entry has been recorded yet. c\. At December 31, Mark owed an employee \$500 for work performed during December. This amount, **plus** the \$1000 earned during the first week of January, was paid on January 10. What is the journal entry on January 10? d\. On December 31, Mark counted supplies on hand and determined that \$4,000 was still on hand at year-end. Earlier in the year \$12,000 of supplies were purchased and recorded as supplies expense. e\. Mark messed up a return a few years ago and was sued by the client. Mark had recorded a liability for the amount he expected to lose in this litigation. As the case has progressed, Mark can now reliably estimate he will lose \$20,000 on the case. Key  1. D   2. B   3. A   4. C   5. B   6. B   7. A   8. E   9. D   10. A   11. B   12. A   13. B   14. B   15. D   16. B   17. B   18. B   19. C   20. A   21. C   22. D   23. E   24. A   25. B   26. D   27. B   28. C Adjusting entries, 2 points each, all or nothing a. ------- --------------- -------- -------- Date Account Debit Credit 12/31 Phone expense 10,000 Prepaid phone 10,000 ------- --------------- -------- -------- b ------- ------------------ ------- -------- Date Account Debit Credit 12/31 Deferred Revenue 5,000 Service Revenue 5,000 ------- ------------------ ------- -------- c. ------ --------------- ------- -------- Date Account Debit Credit 1/10 Wage expense 1000 Wages payable 500 Cash 1500 ------ --------------- ------- -------- d. ------- ------------------ ------- -------- Date Account Debit Credit 12/31 Supplies 4000 Supplies expense 4000 ------- ------------------ ------- -------- e. ------- ---------------------- -------- -------- Date Account Debit Credit 12/31 Litigation expense 14,000 Litigation liability 14,000 ------- ---------------------- -------- --------