Sample Test I, Acct 728t, Fall 1997

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Exam #1
ACCT 728T - FINANCIAL ACCOUNTING
FALL 1996

INSTRUCTIONS/INFORMATION:

1. WRITE YOUR NAME ON THE ANSWER SHEET. WRITE YOUR 9-DIGIT SOCIAL
SECURITY NUMBER ON THE ANSWER SHEET AND MARK THE CORRESPONDING CELLS.

2. THERE ARE 50 MULTIPLE-CHOICE QUESTIONS. EACH QUESTION IS WORTH 2
POINTS. ANSWER THE EASY QUESTIONS FIRST. YOU HAVE 120 MINUTES TO
COMPLETE THE EXAM.

3. READ EACH QUESTION CAREFULLY.

4. SELECT THE ONE BEST ANSWER FOR EACH QUESTION AND MARK THE CORRESPOND
ING CELL ON THE ANSWER SHEET.

5. GOOD LUCK!

6. SCRATCH PAPER IS ATTACHED.

*********************************************

TEST QUESTIONS:

1. The primary purpose of accounting is to:

1. measure and report financial information of economic entities.
2. facilitate decision making.
3. certify the accuracy of records.
4. provide for internal control over financial transactions.

2. Financial statements are designed to meet the needs of:

1. investors.
2. managers.
3. employees.
4. a wide range of decision makers.

3. Which of the following activities is (are) related to the primary
purpose of accounting?

A department manager A teacher is preparing
is studying a list of a personal budget for
inventory items on hand the coming year
1. Yes Yes
2. Yes No
3. No Yes
4. No No

4. You are inspecting the income statement of a company. It reports
net income of $75,800. From this information you can conclude that:

1. the owners have a rather small investment in the firm.
2. the company is a merchandising firm.
3. there have been financing and investing activities during the period but no operating activities.
4. the value of resources produced exceeds the value of resources consumed.

5. A corporation can:

1. buy, own, or sell property.
2. enter into contracts.
3. sell stock in itself.
4. all of the above.

6. Limited liability is a feature of what form(s) of business organization?

1. Corporation.
2. Proprietorship.
3. Partnership.
4. Both a proprietorship and a partnership.

7. Which of the following is NOT an advantage of the corporate form of
business organization?

1. Limited liability.
2. Broad source of capital.
3. Moral hazard.
4. Ready transferability of shares.

8. Which type of activity is involved when goods are produced and
delivered to customers or when services are provided to customers?

1. Operating activities.
2. Investing activities.
3. Financing activities.
4. Accounting activities.

9. Which of the following events is properly classified as an
investing activity?

1. Purchase of equipment.
2. Borrowing money from creditors.
3. Selling goods to customers.
4. Running the factory.

10. Contracts facilitate financial relationships between:

Investors and Organizations Organizations and Managers

1. Yes Yes
2. Yes No
3. No Yes
4. No No

11. Accounting information is often used to:

Assess risk and return Evaluate contracts that
of a specific firm the firm has entered into
1. Yes Yes
2. Yes No
3. No Yes
4. No No

12. Profitability data for two firms are given below. Each firm had the same amount of resources invested during the five years shown. Parentheses are used to show losses.

19A 19B 19C 19D 19E
Firm A's profits $100 $120 $125 $130 $135
Firm B's profits 200 (100) 250 (125) 270

Which firm demonstrated the highest amount of risk and which firm
earned the highest return?

Highest Risk Highest Return
1. A A
2. A B
3. B A
4. B B

13. Deep Lake Lodging Company was established at the beginning of 19A
with the following capital.

Partners' cash contributions $23,000
Cash obtained from group creditors 15,000
Loan obtained from the local bank 5,000
Total $43,000

What is the amount of debt financing for this firm?

1. $ 5,000
2. $20,000
3. $23,000
4. $38,000

14. Accounting information is used:

By managers to assess By employees to assess the risk and
employee performance return of their employment contracts
1. Yes Yes
2. Yes No
3. No Yes
4. No No

15. The Cratchit Coal Company supplies coal to a variety of customers
including Dickens Incorporated. In fact, Dickens is Cratchit's
largest customer accounting for about 40% of sales via a long term
contract. If Cratchit were unable to supply coal to Dickens, it
would take months to make alternative coal purchase arrangements.
In this situation, it is likely that:

Cratchit monitors Dickens' Dickens monitors Cratchit's
external financial statements external financial statements
1. Yes Yes
2. Yes No
3. No Yes
4. No No

16. Which one of the following statements is TRUE regarding generally
accepted accounting principles (GAAP).

1. The primary purpose of GAAP is to show the highest amount of profit possible for a given year.
2. GAAP are developed by the U.S. Congress and signed into law by the President.
3. GAAP increase the comparability of financial information.
4. GAAP apply to information prepared for a firm's managers.

17. Decisions that require managers to identify goals and to develop strategies are usually referred to as:

Control Decisions Planning Decisions
1. Yes Yes
2. Yes No
3. No Yes
4. No No

18. What effect do revenues and expenses eventually have on Owners'
Investment?

Revenues Expenses
1. increase increase
2. increase decrease
3. decrease decrease
d. decrease increase

19. During an accounting period, total assets decreased by $5 while
owner's equity increased by $8. The change in total liabilities
during this period must have been a(n):

1. $ 3 increase.
2. $ 3 decrease.
3. $13 increase.
4. $13 decrease.

20. Revenues and expenses have what effect on the basic accounting
equation of Assets = Liabilities + Owners' Equity?

1. revenues and expenses are not related to the equation.
2. the difference between revenues and expenses increases liabilities.
3. revenues increase equity while expenses decrease it.
4. revenues increase equity while expenses increase liabilities.

21. Bettis Company sold goods on credit from its inventory at a price
greater than cost. Which of the following effects would occur as
part of this event?

An asset would An asset would
be decreased be increased
1. Yes Yes
2. Yes No
3. No Yes
4. Yes No

22. "Rag Time Ronda" mortgaged her supper club to obtain funds for the
business. A bank loaned the supper club $20,000. Concerning the
supper club, which of the following increased as a result of this
loan?

1. Revenues.
2. Expenses.
3. Owners' equity.
4. Liabilities.

23. Stancine started a business by contributing $9,000 cash and a truck
valued at $15,000. The company then purchased equipment by making
a $9,000 down payment (which accounted for half its purchase price)
and financed the other half by signing a note payable at the bank.
After the above transactions, Stancine's company balance sheet is
composed of:

Assets Liabilities Equity
1. $24,000 $ 0 $24,000
2. $24,000 $9,000 $15,000
3. $33,000 $ 0 $33,000
4. $33,000 $9,000 $24,000

24. The Baldor Corporation recently acquired a specialized piece of
machinery costing $175,000 and having an expected useful life to
the firm of six years. The company's bookkeeper recorded the
expenditure as an asset. Which of the following is the conceptual
basis for the manner in which the bookkeeper recorded the
transaction?

1. Operating activity.
2. Going concern.
3. Cash basis accounting.
4. Financing activity.

25. Net cash flow from operating activities is NOT generally used as a
measure of an organization's performance for a period because it:

1. violates the going concern concept.
2. causes the basic accounting equation (A=L+E) to be out of balance.
3. cannot be as objectively measured as net income.
4. excludes the effects of certain operating activities.

26. During the first month of operations, Dale's Window Service provided
services and billed customers in the amount of $3,000. By the end
of the first month, $1,800 had been collected and it was expected
that the other $1,200 would be collected during the following month.
On Dale's income statement for the first month, what amount of
revenue should be reported?

1. $0
2. $1,200
3. $1,800
4. $3,000

27. Accrual basis accounting:

1. is an attempt to report net income at the earliest
possible point in time.
2. has the effect of delaying the payment of taxes until the
latest point in time possible.
3. captures the expected cash flow effects of an event in the
period the event occurred.
4. leads to higher net income being reported than does cash
flow accounting.

28. Merchandise inventory costing $5,000 was sold to customers on
credit for $7,500. What amount of revenue and cash flow resulted
from this transaction?

Revenue Cash Flow
1. $ 2,500 $ 7,500
2. $ 5,000 $ 5,000
3. $ 7,500 $ -0-
4. $ 2,500 $ -0-

29. If a firm's depreciation expense doubles, which of the following
will increase?

Net Income Cash Flow
1. Yes Yes
2. Yes No
3. No Yes
4. No No

30. On September 23, 19B, the Parabolic Pharmacy had cash sales to
customers totaling $485 and credit sales total $1,693. Sales tax
of 6.2% was applied to every sale. When recording the day's sales,
by what amount will liabilities increase?

1. $-0-
2. $ 30.07
3. $104.97
4. $135.04

31. Which of the following sets of accounts NORMALLY has debit balances?

1. Assets, owner's equity, and revenues.
2. Expenses, liabilities, and assets.
3. Assets and expenses.
4. Liabilities and owner's equity.

32. A debit will increase which type of accounts below?

Assets Equities
1. Yes Yes
2. Yes No
3. No Yes
4. No No

33. Rusty Pipes performed plumbing services for $6,000. She received
cash of $2,000 and advanced credit for $4,000. After recording
this transaction in her accounting system, assets will have
increased by:

a. $0
2. $2,000
3. $4,000
4. $6,000

34. Hot-Air Balloon Company performed services at a profit and sent
the customer a bill for the amount. Which combination of effects
occurred regarding the firm's assets and equity?

Assets Equity
1. increased increased
2. increased no effect
3. no effect decreased
4. decreased no effect

35. Donaldson, Inc. collected $500 that had previously been recorded
as accounts receivable from services performed. Which of the
following effects occurred on assets and liabilities as a result
of this event?

Assets Liabilities
1. increased increased
2. increased no effect
3. no effect no effect
4. decreased decreased

36. Which of the following is a reason that source documents are
important to the accounting process?

1. Net income is usually derived directly from the source documents.
2. They verify that no fraudulent activity has occurred in the firm.
3. The information to generate entries in the journal is recorded on them.
4. Owners usually receive them at the end of the accounting period.

37. Which of the following is NOT a source document?

1. Receiving notice.
2. Financial statement.
3. Purchase invoice.
4. Sales receipt.

38. The advantages of a computerized accounting system over a manual
one include which of the following?

The computer can prepare Source documents no longer
the financial statements must be analyzed to obtain
from existing files data for input to the system

1. Yes Yes
2. Yes No
3. No Yes
4. No No

39. The Blowing-In-The-Wind Kite Store carries thousands of inventory
items obtained from dozens of suppliers in many states.
The store is located across the street from the beach in a busy
tourist area. Each day, hundreds of customers will pass through
the store. Sales are brisk. Although the company uses a
computerized accounting system, which of the following modules
is least likely to be used?

1. Sales.
2. Accounts receivable.
3. Accounts payable.
4. General ledger and financial statements.

40. Which of the following best describes the purpose of the balance
sheet?

1. Summarize revenues and expenses for the accounting period.
2. Report the inflows and outflows of cash.
3. Balance current period revenues with those of the previous
period.
4. Report assets, liabilities and owner's equity as of a
specific date.

41. Where, on a multiple-step income statement, would you expect to
find cost of goods sold listed?

1. Just after gross margin.
2. Grouped with the other operating expenses.
3. Immediately after net sales revenue.
4. It would not be shown on a multiple-step income statement.

42. Which of the following is a TRUE statement?

1. The amount of net income will differ depending upon
whether a firm chooses to use a single-step or multiple-step
income statement.
2. The amount of operating expense on the income statement
should be equal to the amount of cash outflow from operations
reported on the cash flow statement.
3. A primary difference between a single-step and multiple-step
income statement is that gross margin is not reported on the single-step version.
4. Income taxes are generally reported under operating expenses
on a multiple-step income statement.

43. Operating income:

1. shows the amount of income produced by the primary earning
activities of the company.
2. is computed by subtracting operating expenses from
administrative expenses.
3. is just another term for net income.
4. includes the effects of operating expenses but not cost of
goods sold.

44. A statement of stockholders' equity differs from a balance sheet
in that:

1. stockholders' equity is not reported on the balance sheet.
2. the statement of stockholders' equity reports on a period
of time while the balance sheet reports at a specific point
in time.
3. contributed capital is reported on the statement of
stockholders' equity but not on the balance sheet.
4. retained earnings are added to the balance sheet but
deducted from the statement of stockholders' equity.

45. A similarity between the balance sheet and the statement of
stockholders' equity is that both:

1. are less important than the income statement.
2. are prepared before the income statement is prepared.
3. are dated as of a specific point in time.
4. report retained earnings.

46. Which of the financial statements below would reveal the financing and investing activities that occurred during the year?

Statement of
Income Statement Stockholders' Equity
1. Yes Yes
2. Yes No
3. No Yes
4. No No

47. When discussing the balance sheet, liquidity refers to the

1. amount of equity a company has compared to liabilities.
2. ability of a firm to meet short-term obligations.
3. long-run financial health of the enterprise.
4. dividend paying capability of the company.

48. Current assets:

1. are defined as cash, accounts receivable, and inventory.
2. are limited to cash and other assets that will be used up
within one year.
3. sometimes include assets that will be used up and sold over a period that exceeds one year.
4. typically include certain intangible assets.

49. Which of the following is properly classified on a statement of cash flows as an operating activity?

Receipt of Payment of
dividends from dividends
an investment to shareholders
1. Yes Yes
2. Yes No
3. No Yes
4. No No

50. Moral hazard is most likely to create problems for the owners of:

1. proprietorships.
2. partnerships.
3. corporations.
4. both proprietorships and partnerships.

ANSWER KEY

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