Practice Midterm MC Questions - Solutions PDF

Last Name: _________________________ First Name: _________________________ STUDENT ID #: __________________ MIDTERM EXAM – MULTIPLE CHOICE SAMPLE QUESTIONS Duration of Examination:...

Last Name: _________________________ First Name: _________________________ STUDENT ID #: __________________ MIDTERM EXAM – MULTIPLE CHOICE SAMPLE QUESTIONS Duration of Examination: 2 ½ hours Karim Karim McMaster University Midterm Examination INSTRUCTIONS: This examination paper comprises 8 pages (including cover page) and 35 multiple-choice questions, 2 points each. You are responsible for ensuring that your copy of the question paper is complete. Bring any discrepancy to the attention of the invigilator. The multiple-choice questions are to be answered on the computer answer sheet provided. Each question has only one correct answer. No correction factor will be applied to incorrect answers. On the question paper remember to fill in your name, student number and section number. Only the McMaster Standard Calculator (Casio FX 991) may be used. The special scanner, which scans the sheets, senses the shaded areas by their non-reflection of light. A heavy mark must be made, completely filling the circular bubble, with an HB pencil. Marks made with a pen or felt-tip marker will NOT be sensed. Erasures must be thorough or the scanner may still sense a mark. Do NOT use correction fluid on sheets. DO NOT PUT ANY OTHER MARKS OR WRITING ON THE SHEET, INCLUDING THE MARGINS. Print your name, student number, course name, section number, and the date in the space provided at the top of side 1 of the form. Then the sheet must be signed in the space marked SIGNATURE. Mark your student number in the space provided on sheet Side 1 and fill in the corresponding bubbles underneath. Mark only ONE choice from the alternatives (A, B, C, and D) provided for each question. The question number is to the left of the bubbles. Make sure that the number of the question on the scan sheet is the same as the question number on the test paper. Pay particular attention to the Marking Directions on the form. Begin answering questions using the first set of bubbles, marked “1”. For each of the following questions, choose the best answer then darken the identifying letter to the corresponding number in the answer sheet. 1. The economic entity assumption states that economic events: a. of different entities can be combined if all the entities are corporations b. must be reported to the Office of the Superintendent of Financial Institutions c. of every entity can be separately identified and accounted for d. of a proprietorship cannot be distinguished from the personal economic events of its owners C. Economic entity assumption does not combine different entities. It keeps business transactions separate from owner’s personal transactions. 2. If the current ratio of a corporation is 5 and current assets are used to settle current liabilities, then then the new current ratio is likely to be: a. Less than 5 b. More than 5 c. Between 1 and 5 d. Between 0 and 1 B. Since “current assets are used to settle current liabilities”, new current ratio is greater than 5. Company has a greater ability to use its current assets to meet short term obligations. 3. Which one of the following is not a required characteristic of an asset: a. Future economic benefit b. Tangible c. Measurable d. Control over the benefits B. Assets can be intangible (eg. patents, trademarks, copyrights). 4. The ability to meet its long term obligations is measured by a corporations: a. Liquidity b. Profitability c. Solvency d. Bankruptcy C. Solvency is the ability to meet long term obligations, whereas liquidity is the ability to meet short term obligations. 5. Which one of the following are investing activities: a. Issue of common shares b. Payment of principal amounts of debt c. Purchase of equipment d. Payment of interest on debt C. Investing cash activities include any cash received or spent on non-current assets (ie. property, plant, equipment). 6. Shareholders’ equity is calculated as: a. Net assets (Assets minus Liabilities) b. Share capital plus retained earnings c. Retained earnings plus net income d. Both a. and b. above are correct D. Shareholders’ equity = Assets – Liabilities Shareholders’ Equity = Share Capital + Retained Earnings. 7. Paying accounts payable with cash will: a. Decrease an asset and a liability b. Increase an asset and a liability c. Decrease an asset and equity d. Decrease an asset and net income A. DR. Accounts Payable CR. Cash Cash (asset) decreases, and A/P (liability) decreases. 8. Purchasing supplies on account will: a. Increase assets b. Increase liabilities c. Increase equity d. Both a. and b. above are correct D. DR. Supplies CR. Accounts Payable Supplies (asset) increase, and A/P (liability) decreases. 9. The difference between losses and expenses are: a. Losses are persistent whereas expenses are not b. Expenses are persistent whereas losses are not c. Losses have predictive value d. Expenses are from peripheral activities B. Expenses are incurred more frequently to generate revenues. 10. Liquidity is measured by: a. Current ratio b. Debt to asset ratio c. Return on Assets d. Return on Equity A. Current ratio is the ability to pay short term obligations with current assets 11. Which one of the following is an example of a current liability: a. Prepaying an insurance policy b. Paying for rent in advance at beginning of month c. Income tax owed to the government d. Dividends declared to shareholders C. A current liability is something a person or company owes (within an operating cycle). 12. The following are the conditions to recognize revenue under accrual accounting: a. Earnings process is complete b. An exchange transaction has taken place c. Collection is reasonably assured d. All of the above D. Accrual accounting records revenues when they are earned or when expenses are incurred, the exchange is completed, and accounts receivables will be collected. 13. Under IFRS, the following statements are prepared under accrual accounting: a. Statement of Earnings b. Statement of Retained Earnings c. Statement of Financial Position d. All of the above D. These financial statements are prepared according to the International Financial Reporting Standards. 14. TMax Theatre sold a movie ticket in January for a movie to be released in March. For TMax, the sale is: a. Revenue b. Accounts Receivable c. Unearned Revenue d. Accounts Payable C. Unearned revenue is the money received for a service that has not yet been performed. The service (movie) is performed in March. Use the following information to answer the next two questions: Transactions for S-Target Corp. for the month of September are given below: Sept 1 Prepaid rent for September through to December $ 1,200 Sept 5 Paid insurance for September and October $ 800 Sept 12 Performed services and got paid $ 5,200 Sept 29 Paid for advertising during Sept $ 700 15. Cash basis income is: a. $3,800 b. $4,100 c. $2,500 d. $3,700 C. Cash basis records revenue when cash is received and when expenses are paid. Net income = – 1200 – 800 + 5200 – 700 = 2500 16. Accrual basis income is: a. $3,800 b. $4,100 c. $2,500 d. $3,700 A. Accrual basis records revenues when earned and when expenses incurred. Net income = – 300 – 400 + 5200 – 700 = 3800 17. Equipment was purchased for $13,000 on October 1, 2014. The useful life is 5 years with a salvage value of $1,000. The entry to recognize depreciation on December 31, 2014 will: a. Debit depreciation expense $600; credit accumulated amortization $600 b. Debit accumulated amortization $600; credit depreciation expense $600 c. Debit depreciation expense $400; credit accumulated amortization $400 d. Debit accumulated amortization $400; credit depreciation expense $400 A. Annual Depreciation Expense = (Cost – Salvage Value) / Useful Life Oct 1, 2014 → Dec 31, 2014 = 3 months used out of 12 in a year. Depreciation expense for Dec 31, 2014 = (13000 – 1000) / 5 x (3/12) = 600 Expense has debit balances. So, DR Depreciation Expense, CR Accumulated Depreciation. 18. If Surveillance Co.’s accounts receivable decrease by $10,000 and inventory increases by $15,000 and salaries payable increases by $15,000 and rent payable decrease by $20,000 and common shares increase by $25,000, then cash flow from operating activities for the company is: a. $10,000 decrease b. $15,000 increase c. $10,000 increase d. $35,000 increase A. Cash flow from operating activities = Decrease in A/R – Increase in Inventory + Increase in Salaries Payable – Decrease in Rent Payable = 10000 – 15000 + 15000 – 20000 = –10000 Issuing common shares is a financing activity. 19. If Satellite Co. purchased equipment for $80,000 by paying $50,000 in cash and by issuing a note payable for the balance, then: a. The cash portion of the purchase would show as a cash outflow from investing activities for $50,000 b. The liability portion would be recorded in the cash flow statement under the non-cash activity schedule c. The entire purchase would show as a cash outflow from investing activities for $80,000 d. Both a. and b. above are correct D. Investing activities include cash received or paid from noncurrent assets (ie. plant, property, equipment). The $50000 paid in cash is a cash outflow. Remaining $30000 is non-cash activity as it is paid by a note payable. 20. TrackMe Company’s cash increased by $10,000 during 2014. If the net cash flow from operating activities was $100,000 and the net cash flow from investing activities was an outflow of $80,000 during the year, then the net cash flow from financing activities is: a. $30,000 outflow b. $10,000 inflow c. $10,000 outflow d. $30,000 inflow C. Net cash flow = CF from operating activities + CF from investing activities + CF from financing activities Net cash flow = 10000 10000 = 100000 – 80000 + CF from financing activities CF from financing activities = – 10000 21. To evaluate a company’s liquidity in the industry, a stakeholder would compare: a. Current ratio b. Return on asset c. Return on equity d. Debt to Equity A. Current ratio is the ability to pay short term obligations with current assets. 22. Radar Co.’s total liabilities exceed total assets. This means that the company: a. Is likely to file for bankruptcy b. Has low return on equity c. Has low profitability d. Has low debt to asset to ratio A. Cannot be B and C since Profitability ratios (including ROE) concern net income (not assets and liabilities). Cannot be D since there is a high debt to asset ratio if there is a greater amount of liabilities than assets. 23. On September 1, 2014, Virtual Intelligence (VI) borrowed $15,000 for one year at 7% to finance purchase of intelligence software. The loan (note payable) and the interest are due on the maturity date. On December 31, 2014, VI will: a. Credit cash for $350 b. Debit interest expense for $350 c. Credit interest payable for $350 d. Both b. and c. above are correct D. Sept 1, 2014 → Dec 31, 2014 = 4 months used out of 12 in a year. Interest expense = Principal x Interest Rate x Period = 15000 x 0.07 x (4/12) = 350 Dec 31 Interest Expense 350 Interest Payable 350 24. The following would cause a cash inflow under the financing activities section of cash flow: a. Purchasing a building for cash b. Selling or issuing shares for cash c. Selling machinery for cash d. Selling inventory for cash B. Financing activities include selling or issuing shares, stock and paying dividends. Involves cash transactions related to debt, equity, dividends. 25. On December 1, 2014, BlueMan Co. received $12,000 from RadMan Co. for insurance covering a one year period effective immediately. On December 31, 2014, BlueMan will: a. Debit unearned revenue for $11,000 b. Debit unearned revenue for $1,000 c. Credit insurance revenue for $11,000 d. Debit insurance revenue for $1,000 B. 1 month of insurance is used (Dec 1 → Dec 31). Since it is a 1-year policy, $12000/12 = $1000 per month. DR unearned revenue $1000 as 1 month is now earned. Use the following information to answer the next four questions: Shown below is the adjusted trial balance of Kisumu Inc. as of December 31, 2013 Account Debit Credit Cash 25,000 Accounts Receivable 40,000 Marketable Securities 15,000 Notes Receivable- Due 5-31-2014 18,000 Prepaid Insurance 12,000 Equity Investments 75,000 Debt Investments 20,000 Inventory 65,000 Accounts Payable 15,000 Notes Payable: Due 15-07-2014 60,000 Notes Payable: Due 15-07-2015 30,000 Common Shares 60,000 Mortgage Payable 65,000 Bonds Payable 115,000 Income Taxes Payable 65,000 Sales 225,000 Cost of Goods Sold 135,000 Salaries Expense 40,000 Rent Expense 15,000 Insurance Expense 10,000 Dividends Declared 4,000 Amortization Expense 20,000 Retained Earnings 70,000 Land 170,000 Buildings 125,000 Dividend Revenue 16,000 Accumulated Amortization- Buildings 80,000 Patents 5,000 Trademarks 7,000 Total 801,000 801,000 26. Net income is: a. $1,000 b. $21,000 c. $5,000 d. $9,000 B. Must calculate Revenues and Expenses before calculating Net Income. Revenues = Sales + Dividend Revenues = 225000 + 16000 = 241000 Expenses = COGS + Salaries Expense + Rent Expense + Insurance Expense + Amortization Expense = 135000 + 40000 + 15000 + 10000 + 20000 = 220000 Net income = Revenues – Expenses = 241000 – 220000 = 21000 27. Ending retained earnings is: a. $83,000 b. $87,000 c. $17,000 d. $21,000 B. Ending Retained Earnings = Beginning RE + Net Income – Dividends = 70000 + 21000 – 4000 = 87000 28.Current assets is: a. $95,000 b. $175,000 c. $160,000 d. $148,000 B. Current Assets = Cash + Marketable Securities + A/R + Notes Receivable + Inventory + Prepaid Insurance = 25000 + 15000 + 40000 + 18000 + 65000 + 12000 = 175000 29. Current liabilities is: a. $140,000 b. $80,000 c. $15,000 d. $75,000 A. Current liabilities = A/P + Notes Payable + Income Tax Payable = 15000 + 60000 + 65000 = 140000 30. On December 1, 2014, RadMan Co. paid $12,000 to BlueMan Co. for insurance covering a one year period effective immediately. On December 31, 2014, RadMan will: a. Credit prepaid insurance for $11,000 b. Credit prepaid insurance for $1,000 c. Debit insurance expense for $11,000 d. Credit insurance expense for $1,000 B. 1 month of insurance is used (Dec 1 → Dec 31). Since it is a 1-year policy, $12000/12 = $1000 per month. CR prepaid insurance $1000 as it used up. 31. Under accrual accounting, if a service has been performed but cash has not yet been received, then the entry to record the transaction will include: a. Increase in accounts receivable b. Decrease in an expense c. Decrease in owners’ equity d. Decrease in liabilities A. Accrual basis recognizes revenues when they are earned (does not matter if cash is received). DR A/R CR Service Revenue 32. If the adjusting entry to record depreciation is forgotten, then: a. Only net income will be understated b. Only assets will be understated c. Only shareholders’ equity will be understated d. Net income, assets, and shareholders’ equity will all be overstated D. Net income is overstated since expenses are understated. Assets will be overstated since accumulated depreciation (contra asset account) did not offset the balance of Total Assets. If assets are overstated, equity is overstated. 33. Investors will usually prefer the following ratios to be low: a. Current ratio b. Acid test ratio c. Debt ratio d. Quick ratio C. Ideal to have a lesser amount of liabilities than assets. A high debt ratio makes it more difficult for the company to borrow money. Use the following information to answer the next two questions: Auto-Bio-Pro Co. purchased a building on June 30, 2014 for $150,000 by paying $50,000 cash and borrowing the balance on a 3-year term from the bank at 12% interest payable monthly on first day of each month starting August 1, 2014. The building is expected to last 15 years with no salvage value at the end of its life. Auto-Bio-Pro eventually sells the building on December 31, 2017 for $145,000. 34. Which of the following statements are true: a. On purchase date, both assets and liabilities will increase by $100,000 b. Depreciation expense for 2015 is $10,000 c. Depreciation expense for 2014 is $5,000 d. All of the above are true D. June 30 Building 150000 Cash 50000 Loan payable 100000 Annual Depreciation Expense = (Cost – Salvage Value) / Useful Life June 30, 2014 → Dec 31, 2014 = 6 months used out of 12 in a year. Depreciation expense for Dec 31, 2014 = (150000 – 0) / 15 x (6/12) = 5000 Jan 1, 2015 → Dec 31, 2015 – 12 months used out of 12 in a year. Depreciation expense for Dec 31, 2015 = (150000 – 0) / 15 x (12/12) = 10000 35. Which of the following statements are true: a. Gain on sale of building is $30,000 b. Interest payable on December 31, 2014 is $1,000 c. Interest expense on December 31, 2014 is $1,000 d. All of the above are true Depreciation expense for Dec 31, 2014 = (150000 – 0) / 15 x (6/12) = 5000 Depreciation expense for Dec 31, 2015 = (150000 – 0) / 15 x (12/12) = 10000 Depreciation expense for Dec 31, 2016 = (150000 – 0) / 15 x (12/12) = 10000 Depreciation expense for Dec 31, 2017 = (150000 – 0) / 15 x (12/12) = 10000 Accumulated Depreciation = 5000 + 10000 + 10000 + 10000 = 35000 Book Value = Original Cost of Asset – Accumulated Depreciation = 150000 – 35000 = 115000 Gain (Loss) = Proceeds – Book Value = 145000 – 115000 = 30000 Therefore, A is true Interest payable monthly on the first day of each month. Record adjusting entry for accrued interest on Dec 31st, 2014: DR Interest Expense 1000 CR Interest Payable 1000 The above entry would make statements B and C True. Therefore, the answer is D, all of the above are true. Answers: 1. C 2. B 3. B 4. C 5. C 6. D 7. A 8. D 9. B 10. A 11. C 12. D 13. D 14. C 15. C 16. A 17. A 18. A 19. D 20. C 21. A 22. A 23. D 24. B 25. B 26. B 27. B 28. B 29. A 30. B 31. A 32. D 33. C 34. D 35. D