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TEST TWO
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 40 MULTIPLE-CHOICE QUESTIONS. EACH QUESTION IS WORTH 2.5
POINTS. ANSWER THE EASY QUESTIONS FIRST. YOU HAVE 105 MINUTES TO
COMPLETE THE EXAM.
3. READ EACH QUESTION CAREFULLY.
4. SELECT THE ONE BEST ANSWER FOR EACH QUESTION AND MARK THE CORRESPONDING
CELL ON THE ANSWER SHEET.
5. USE THE TABLES PROVIDED IN ANSWERING QUESTIONS, THAT REQUIRE THE USE OF
TABLES, FROM CHAPTER 8.
6. GOOD LUCK!
7. YOU MAY KEEP THE EXAM.
8. SCRATCH PAPER IS ATTACHED.
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TEST QUESTIONS:
1. The primary purpose of internal transactions is to:
1. record the results of resource exchanges between the organization
and those entities with which it contracts.
2. maximize the amount of income reported in a given accounting
period.
3. recognize the economic consequences during the current period of
resource exchanges that have previously occurred (or will occur).
4. make sure that the accounting equation is in balance prior to the
books being closed and the preparation of period-end financial
statements.
2. On July 1, 19A, Williams Company purchased a two-year fire insurance
policy for $2,400. Regarding this event, what amounts should be
reported on the December 31, 19A balance sheet and income statement,
respectively?
Balance sheet Income statement
1. $ 600 $1,800
2. $1,200 $1,200
3. $1,800 $ 600
4. $2,400 -0-
3. If a careless bookkeeper fails to accrue wages payable at the end of
the accounting period, which of the following will be true of the
financial statements?
1. Net income will be understated.
2. Retained earnings will be overstated.
3. Liabilities will be overstated.
4. Assets will be overstated.
4. Which of the following situations results in a decrease in both assets
and owner's equity?
1. a revenue is accrued.
2. a liability is accrued.
3. depreciation expense is recorded.
4. a portion of rent received in advance is earned.
5. On July 1, 19B, Boatsman Co. borrowed $18,000 at 10% per year from a
local bank. The necessary entry to the accounting system at December
31, 19B, if interest is paid on the anniversary date of the note, is to
increase Interest Expense and
1. decrease Cash by $900.
2. decrease Cash by $1,800.
3. increase Cash by $1,800
4. increase Interest Payable by $900.
6. On December 31, 19A, Loretta Landlord collected $2,500 rent in advance
from her tenants. Which of the following should be reported on her
company's year-end financial statements?
1. Revenue
2. Expense
3. Liability
4. Equity
7. On September 1, 19A, the Donkey's Fly Airline paid eight months rent to
its landlord in advance. Donkey's bookkeeper recorded the transaction
by decreasing the Cash account and increasing the Rent Expense account.
On December 31 (end of Donkey's fiscal year), an entry will need to be
made by the airline that will increase:
1. rent expense.
2. prepaid rent.
3. cash.
4. owners' equity.
8. On April 1, Year 1, a two-year insurance policy was purchased and the
total premium of $2,160 was paid. At December 31, Year 1, the
financial statements should report:
1. Insurance Expense $1,080; Prepaid Insurance $1,080.
2. Insurance Expense $2,160; Prepaid Insurance $0.
3. Insurance Expense $1,350; Prepaid Insurance $810.
4. Insurance Expense $810; Prepaid Insurance $1,350.
9. Gentle Dentistry, Inc. subscribes to three magazines and pays $40, $39
and $45, respectively on July 1, 19A. The subscriptions are for one
year and are recorded in Prepaid Subscriptions when paid. At December
31, 19A, which of the following entries should be made?
Prepaid Subscriptions Magazine Expense
1. increase $62 decrease $62
2. decrease $62 increase $62
3. increase $124 decrease $124
4. decrease $124 increase $124
10. Which of the following is a true statement regarding the operating
activities section of the statement of cash flows when the indirect
format is used?
1. It explains the relationship between cash flows for a period and
the results of operations reported on the income statement.
2. It is designed to report to the reader what events caused cash to
increase during the period and what events caused cash to decrease
during the period.
3. It results in a slightly higher amount of cash from operations
being reported because depreciation expense is included.
4. It is easier to understand and interpret correctly than when it is
prepared using the direct method.
11. The area of accounting in which more accountants work than in any other
is:
1. public accounting.
2. management accounting.
3. governmental accounting.
4. education.
12. Match the areas of accounting shown below to the tasks performed.
Management Accounting Public Accounting
1. consulting internal auditing
2. financial planning & analysis cost management and review
3. information systems development independent audit
4. compilation and review financial accounting
management
13. Internal controls are designed to accomplish which of the following?
Safeguard assets Minimize taxes payable
1. Yes Yes
2. Yes No
3. No Yes
4. No No
14. Many states have passed legislation requiring that a person have 150
semester hours of education in order to be licensed as a(n):
1. internal auditor.
2. certified public accountant.
3. management accountant.
4. registered tax advisor.
15. The term "attestation" is most closely related to which of the
following services provided by public accountants?
1. Compilation and review.
2. Auditing.
3. Consulting.
4. Tax advising.
16. GAAP and GAAS are both important to the process of:
Preparing Auditing
financial statements financial statements
1. Yes Yes
2. Yes No
3. No Yes
4. No No
17. Rose S. Ahredd and Violet Sarbleu have completed their audit of the
Micro Computer Shoppe. In general, their audit has revealed that
management's financial statements are presented fairly. On one item,
however (accrued vacation pay), they believe that the accounting has
not been handled correctly. Management refuses to agree with their
suggested changes on the accrued liability. Which type of audit
opinion should be rendered?
1. Unqualified
2. Qualified
3. Disclaimer
4. Adverse
18. The primary purpose of an audit is to:
1. detect any fraudulent activity that has occurred.
2. examine every transaction that occurred during the period.
3. make sure the books balance.
4. lend credence to the financial statements.
19. The government agency that has had a significant impact on the
development of accounting standards and financial reporting is the:
1. Accounting Principles Board.
2. American Institute of Certified Public Accountants.
3. Financial Accounting Standards Board.
4. Securities and Exchange Commission.
20. When the Financial Accounting Standards Board (FASB) issues a new
Statement of Financial Accounting Standards, it:
1. immediately becomes part of GAAP.
2. must be sent to the U.S. Congress for ratification.
3. is submitted to the Securities and Exchange Commission for
regulatory approval.
4. is often initially ignored but usually comes into general
acceptance and usage over time.
21. Orange Tree, Inc. is about to sell some of its common stock to an
investor. The principles of valuation discussed in your text apply:
1. only to the buyer of the common stock.
2. only to the seller of the common stock.
3. to both the buyer and the seller of the common stock.
4. to neither the buyer nor the seller of the common stock.
22. When computing the future value of an investment that will return a
series of equal-sized annual cash flows, the value of the investment
grows by:
1. the same amount each year.
2. an increasing amount each year.
3. a decreasing amount each year.
4. an increasing number of dollars and at an increasing rate.
23. Van Halen Music Stores issued $1,000,000 face value of zero coupon
bonds having a life of 15 years. (Zero coupon bonds pay zero percent
interest.) If the market rate of interest is 8 percent, at what price
did these bonds sell?
1. $0
2. $292,000
3. $315,000
4. $340,000
24. Gudanov Company sold a $10,000, 10-year issue of bonds. The coupon
rate was 10% and the market rate was 8%. The selling price of these
bonds should be:
1. $ 8,771.
2. $ 9,548.
3. $10,000.
4. $11,340.
25. The Pie-R-Square Bakery is contemplating purchase of new equipment.
The machinery is expected to generate increased sales of $100,000 per
year over its 10 year life. Excluding the cost of the machinery,
additional costs are expected to be $35,000 per year. If the firm
requires a minimum 12% return on its investment, what is the maximum
price the company can pay for this equipment?
1. $197,758
2. $201,882
3. $367,250
4. $565,022
26. The Squeaky Wheel Company has just acquired new manufacturing
equipment. No down payment was made, but four year-end payments of
$1,200 will be required to pay for the machine. If 8% is the
appropriate rate, at what amount should Slow-Leak Tire record the new
equipment on its books? (Round to the nearest dollar.)
1. $3,528
2. $3,974
3. $5,407
4. $6,530
27. A business is for sale at $200,000. Discounting the expected cash
inflows and expected cash outflows (except purchase price) at 12%
yields an amount of $189,482. Based on this information:
1. the minimum price you should pay for the business is $189,482.
2. at a purchase price of $200,000, the business is projected to earn
just a little more than 12%.
3. a higher discount rate would make this business opportunity more
attractive.
4. the investment opportunity should be rejected if a 12% return is
required.
28. Goalby Company purchased the bonds of Indiana City on their issue date
at face value. Four years later, Goalby wishes to sell and finds it
can recover only 92% of its original investment. A possible reason for
this would be:
A decrease in Increased creditworthiness
market interest rates of Indiana City
1. Yes Yes
2. Yes No
3. No Yes
4. No No
29. Glisan Enterprises borrowed $75,000 from a bank at 10% and promised to
repay the loan in 3 equal year-end payments. How much total interest
expense will the company incur over the three year period? (Round to
the nearest dollar.)
1. $15,476
2. $18,651
3. $22,500
4. $56,348
30. Which of the following is a characteristic of a liability?
There is an obligation to The event causing
transfer resources to another the obligation has
entity in the future already occurred
1. Yes Yes
2. Yes No
3. No Yes
4. No No
31. Margin Trading Company issued 20-year bonds having a coupon rate of
15%. At any time after the third year, the company may notify up to
10% of the bondholders per year that their bonds must be returned to
the company and their investment will be returned. Which term below
best described the bonds issued by Margin Trading Company?
1. Serial
2. Debentures
3. Convertible
4. Callable
32. During the first week of September, Canyon Tours took in $34,700 in
cash from customers. Most was in exchange for tours that had already
been provided, but $7,000 was for tours that would be provided within
one year. In recording receipt of the $34,700, the cash account should
be increased as well as what other accounts?
1. Retained earnings and accounts payable.
2. Accounts receivable and retained earnings.
3. Sales revenue and unearned revenue.
4. Sales revenue only.
33. Shannon, Inc. reports a pension liability of $160 million on its most
recent balance sheet. This tells the user of the statement that:
Employees have earned The firm is
approximately $160 million overfunding its
of pension benefits to date pension obligations
1. Yes Yes
2. Yes No
3. No Yes
4. No No
34. Which of the following represent capital that has been earned by the
profitable operation of the firm?
Paid-In Capital Retained Earnings
1. Yes Yes
2. Yes No
3. No Yes
4. No No
35. The maximum number of shares of stock that can be sold and issued as
specified in the charter of the corporation is known as:
1. authorized shares.
2. issued shares.
3. outstanding shares.
4. subscribed shares.
36. Which of the following is most descriptive of treasury stock?
1. It is a special class of stock issued by the company's treasurer.
2. It receives higher dividends than other types of stock.
3. It has extra voting privileges.
4. It is stock repurchased by the firm that issued it.
37. During 19C, Baghdad Company had net income but paid no dividends.
Comparing the balance sheet at the end of 19C with the one at the
beginning of the year, which of the following would be true?
1. Current assets would be higher.
2. Fixed assets would be higher.
3. Stockholders' equity would be higher.
4. Both assets and stockholders' equity would be higher
38. The effect of a stock dividend is that it:
1. reduces owner's equity.
2. increases owner's equity.
3. reduces retained earnings.
4. reduces liabilities of the corporation.
39. Upon inspecting the balance sheet of a firm in which you own shares you
find the term Minority Interest reported on the balance sheet. From
this you know that the company:
1. has a strong commitment to affirmative action.
2. has set up a vested pension plan for its long-term employees.
3. owns a majority of the shares in one or more subsidiaries.
4. is not a corporation but is operated as a partnership.
40. On January 1, 19A, Delta Company issued 5-year bonds having a face
value of $50,000. The bonds pay 7% interest annually and were sold for
$47,353 to yield 8.34% interest. Delta's 19A income statement should
report what amount for interest expense on these bonds? (Round to the
nearest dollar.)
1. $3,315
2. $3,500
3. $3,949
4. $4,170
41. Financial leverage can:
Result in the return to Result in the return to
stockholders being more than stockholders being less than
the return to bondholders the return to bondholders
1. Yes Yes
2. Yes No
3. No Yes
4. No No
42. The Dalmatian Puppy Farm must raise $300,000 to finance expansion of
its Cruella DeVille line. Preferred stock with a par of $100 and a
dividend of $7 can be sold or 9% bonds payable can be sold. Assume the
firm will pay the required cash return each year as required and that
the firm has a 40% income tax rate. Which financing option will be
least costly for the firm and what will the after-tax cost of that
option?
Financing option After-tax cost
1. bonds payable $27,000
2. bonds payable $16,200
3. preferred stock $21,000
4. preferred stock $12,600
43. When preferred stock has a definite life and fixed dividend it is very,
very similar to bonds regarding:
The manner in which its Its after tax cost to the
market price is determined company that issues it
1. Yes Yes
2. Yes No
3. No Yes
4. No No
44. Bony-Maroney Enterprises has bonds payable, preferred stock, and common
stock outstanding. Which of the following can result in bankruptcy for
the firm?
Failure to make Failure to
interest payments pay dividends
1. Yes Yes
2. Yes No
3. No Yes
4. No No
45. Montvale Company reports the following information in its financial
statements at the end of its first year in business.
Net income $156,000
Net cash inflow from operations 233,000
Preferred dividends paid (all cash) 12,000
The amounts of net income and cash flow available to common
stockholders are as follows:
Net income Cash flow
1. $144,000 $233,000
2. $156,000 $221,000
3. $156,000 $233,000
4. $144,000 $221,000
46. The primary purpose of bond rating agencies such as Standard & Poor's
or Moody's is to:
1. give investors an indication of default risk.
2. provide current information regarding bond yields.
3. protect investors from fraudulent issuers of bonds.
4. prevent low-quality bonds from being issued.
47. On July 12, 19A, Toyota Corporation issued 1,000 new shares of its own
common stock to Omar Investment Company. On Thursday, October 22, 19D
Omar sold 400 of these shares to the Bradley National Bank. Which of
the following terms is related to which transaction?
July 12, 19A October 22, 19D
1. primary market primary market
2. primary market secondary market
3. secondary market primary market
4. secondary market secondary market
48. Johnson Company issued $100,000 of 8% bonds payable to Tylenol
Corporation at par value. Upon issue, Moody's assigned a rating of
Baa. Five years later Tylenol still owns the bonds but is considering
their sale. Upon checking Moody's current bond rating it is discovered
that the rating has changed to Ba. Based only on the information
contained in this question, which of the following is true?
1. Johnson Company has experienced interest rate risk.
2. Tylenol Company has experienced interest rate risk.
3. Default risk has increased.
4. Default risk has decreased.
49. You have computed a firm's dividend payout ratio for the past seven
years as follows (19G is the most recent year).
19G 19F 19E 19D 19C 19B 19A
--- --- --- --- --- --- ---
63.2% 65.1% 57.9% 48.2% 55.1% 37.4% 25.2%
One possible explanation for this situation is that the firm:
1. is in a high technology industry and is earning very high profits.
2. has few profitable opportunities in which to reinvest profits.
3. is using more and more of its capital to finance foreign
operations.
4. has resold all its treasury stock holdings over the period shown.
50. The dividend payout ratio indicates:
1. the degree of financial leverage used by the firm.
2. the return on investment earned by the investor this period.
3. whether more shares should be purchased in the future.
4. the portion of current earnings paid out in dividends.
ANSWER KEY
1. 3 2. 3 3. 2 4. 3 5. 4 6. 3 7. 2 8. 4 9. 2 10. 1 11. 2 12. 3 13. 2 14. 2 15. 2 16. 3 17. 2 18. 4 19. 4 20. 1 21. 3 22. 2 23. 3 24. 4 25. 3 |
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26. 2 27. 4 28. 4 29. 1 30. 1 31. 4 32. 3 or 4 33. 4 34. 3 35. 1 36. 4 37. 4 38. 3 39. 3 40. 3 41. 1 42. 2 43. 2 44. 2 45. 4 46. 1 47. 2 48. 3 49. 2 50. 4 |