Last Name: First Name
Last Name: _________________________ First Name: _________________________ STUDENT ID #: _____________________
COMM 2AA3 Midterm1, Version 1 Duration of Examination: 2 hours
Emad Mohammad
McMaster University Final Examination
October 5, 2007
Question
Marks
Points Earned
1
10
_________
2
8
_________
3
5
_________
4
15
_________
38
_________
INSTRUCTIONS: 1.
This examination paper comprises 17 pages (including cover page), 45 multiple-choice questions, each worth 1.40 points totalling 63 points, and 4 problems totalling 38 points. You are responsible for ensuring that your copy of the question paper is complete. Bring any discrepancy to the attention of the invigilator.
2.
The multiple-choice questions are to be answered on the computer answer sheet provided, and the problem questions are to be answered on the examination paper and in the designated spaces.
3.
Each question has only one correct answer. No correction factor will be applied to incorrect answers.
4.
On the question paper remember to fill in your name, student number and section number.
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5.
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. i. 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. ii.
Mark your student number in the space provided on sheet Side 1 and fill in the corresponding bubbles underneath.
iii.
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.
iv.
Pay particular attention to the Marking Directions on the form
v.
Begin answering questions using the first set of bubbles, marked “1”.
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Part I: Multiple Choice 1. Expenses are incurred A) to produce liabilities. B) only on rare occasions. C) to generate revenues. D) to produce assets. 2. Recognizing expected losses immediately but deferring expected gains is an example of: A) Reliability. B) Timeliness C) Conservatism. D) Materiality. 3. The accounting definition of an asset does not include which of the following? A) Things that had value in the past B) Things that a firm owns C) Things that have future value D) Things that a firm has the right to use 4. A high P/E ratio suggests that A) Investors cannot make a judgment about the riskiness of firm. B) Investors are pleased with current year's earnings. C) The first has failed to meet market's expectations of current earnings. D) The market has high growth expectation for future earnings. 5. GAAP is an abbreviation for: A) Generally accepted auditing practices. B) Generally accepted accounting principles. C) Generally applied accounting procedures. D) Generally authorized accounting procedures. 6. Which of the following is not a monetary asset A) Inventory B) Accounts receivable C) Notes receivable D) Investment in bonds
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7. Financial accounting information should help users evaluate: A) Future cash flows. B) Various opportunities to purchase equipment. C) Decisions made by the Human Resources Department. D) Make versus buy decisions. 8. The purchase of an asset for cash A) decreases assets and increases liabilities. B) increases assets and shareholders' equity. C) leaves total assets unchanged. D) increases assets and liabilities. 9. Which of the financial statements does not cover a period of time? A) Balance sheet B) Statement of cash flows C) Statement of retained earnings D) Income statement 10. Generally accepted accounting principles A) are accounting rules that are recognized as a general guide for financial reporting. B) have eliminated all errors in accounting. C) are sound in theory but rarely used in real life. D) are accounting rules formulated by the Canada Revenue Agency. 11. When a company has performed a service but has not yet received payment, it A) debits revenue from services and credits accounts payable. B) debits accounts receivable and credits revenue from services. C) makes no entry until the cash is received. D) debits revenue from services and credits accounts receivable. 12. Which of the following is the proper order to list current assets on the balance sheet? A) Cash, inventory, accounts receivable, temporary investments B) Cash, accounts receivable, inventory, prepaid expenses C) Cash, accounts receivable, temporary investments, inventory D) Cash, temporary investments, prepaid expenses, accounts receivable
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13. Retained earnings at the end of the year is determined by retained earnings at the beginning of the year: A) Plus net income minus dividends. B) Plus assets minus liabilities. C) Plus accruals minus deferrals. D) Plus revenues minus liabilities. 14. Reliability includes all of the following except: A) Representational faithfulness B) Consistency C) Neutrality D) Verifiability 15. An accountant has debited an asset account for $1,000 and credited a liability account for $500. Which of the following would be an incorrect way to complete the recording of the transaction? A) Debit a shareholders’ equity account for $500. B) Credit a shareholders’ equity account for $500. C) Credit an asset account for $500 D) Credit another liability account for $500. 16. Which one of the following is not a part of an account? A) Title B) Credit side C) Trial balance D) Debit side 17. If total liabilities decreased by $5,000, then A) assets must have decreased by $5,000, or shareholders' equity must have increased by $5,000. B) assets and shareholders' equity must have each increased by $3000. C) shareholders' equity must have increased by $5,000. D) assets must have decreased by $5,000. 18. All of the following are investing activities except: A) Purchasing other companies' shares B) Selling property, plant, and equipment C) Purchasing property, plant, and equipment D) Paying dividends
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19. Financial reporting objectives do not include providing information: A) To determine market values, assess profit potential, and evaluate management. B) To make rational investment, credit, and similar decisions. C) About resources, obligations, and changes. D) To assess the amounts and timing of prospective cash receipts. 20. An advantage of the corporate form of business is that A) its shareholders' personal resources are at stake. B) it is simple to establish. C) it has limited life. D) its ownership is easily transferable via the sale of shares. 21. The usual ordering of accounts in the general ledger is A) liabilities, assets, shareholders' equity, revenues, and expenses. B) assets, liabilities, shareholders' equity, revenues, and expenses. C) shareholders' equity, assets, liabilities, expenses, and revenues. D) assets, liabilities, shareholders' equity, expenses, and revenues. 22. Recognition and measurement criteria include assumptions of: A) Historical Cost B) Matching C) Going Concern D) Full Disclosure 23. What does the CICA use to justify new accounting standards? A) The conceptual framework B) The CICA Handbook C) The audit report D) The notes to the financial statements. 24. Relevant information may have the following kinds of value: A) Comparability and consistency B) Predictive value and feedback value C) Timeliness and materiality D) Verifiability and neutrality
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25. The accounting equation can be stated as: A) -A + L - OE = 0. B) A + L - OE = 0. C) A - L - OE = 0. D) A - L + OE = 0. 26. Which of the following is not a qualitative characteristic of accounting information? A) Understandability B) Liquidity C) Comparability D) Relevance 27. Financial reporting objectives state that financial statements should be comprehensible to: A) The informed investor. B) The average investor with average communication skills and average training and experience. C) Those with a reasonable understanding of business and a diligence to study the information. D) Financial analysts with requisite training and experience. 28. During a recent week, Alma and Associates performed services valued at $15,000; received from clients $5,000 and the balance is to be received within 30 days. The effect on the balance sheet equation for this transaction would be: A) + $5,000 cash + $10,000 accounts receivable = + $15,000 retained earnings B) + $5,000 cash = + $5,000 retained earnings C) + $5,000 cash – $15,000 accounts receivable = $10,000 retained earnings D) + $5,000 cash = – $10,000 accounts payable + $15,000 retained earnings 29. Bountiful Loan Company has very stringent credit requirements and, accordingly, has negligible losses from uncollectible accounts. The company's independent accountants did not protest when, contrary to GAAP, the company recorded bad debts expense only when specific accounts were determined to be uncollectible, rather than use an allowance for uncollectible accounts (which is consistent with the conceptual framework). The concept demonstrated is: A) Relevance. B) Materiality. C) Comparability. D) Representational faithfulness.
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Use the following to answer questions 30-31: Tam's Car Repair Shop Ltd. started the year with total assets of $70,000 and total liabilities of $40,000. During the year, the business recorded $100,000 in car repair revenues, $65,000 in expenses, and dividends of $5,000. 30. The net earnings reported by Tam's Car Repair Shop Ltd. for the year were A) $20,000. B) $100,000. C) $35,000. D) $30,000. 31. Shareholders' equity at the end of the year was A) $75,000. B) $60,000. C) $65,000. D) $70,000. 32. Altec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by ten days the time to get information to investors and creditors. The qualitative concept improved is: A) Relevance. B) Comparability. C) Reliability. D) Consistency. 33. The following are all professional accounting organizations in Canada except: A) Federal Accounting Standards Board B) Chartered Accountants C) Certified Managerial Accountants D) Certified General Accountants 34. Which of the following statements is true when a company has zero liabilities: A) Return on equity is less than the return on assets. B) The answer cannot be determined given the above the information. C) Return on equity is equal to the return on assets. D) Return on equity is greater than the return on assets.
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35. Verifiability implies: A) Consensus. B) Proof. C) Logic. D) Legal evidence. 36. Shareholders' equity may include all of the following except: A) Dividends Payable B) Retained Earnings C) Common Shares D) Contributed Capital 37. Liabilities that will be paid within twelve months of the annual report, or the normal operating cycle, whichever is longer, are classified as: A) Long-term liabilities B) Accrued liabilities C) Noncurrent liabilities D) Current liabilities 38. If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates A) that all accounts reflect correct balances. B) no errors have been made. C) the mathematical equality of the accounting equation. D) no errors can be discovered. 39. Shareholders' equity can be described as claims of A) debtors on total assets. B) customers on total assets. C) creditors on total assets. D) owners on total assets. 40. Which of the following is the most appropriate definition of accounting? A) The interconnected network of subsystems necessary to operate a business B) The information system that identifies, records, and communicates the economic events of an organization to interested users C) Electronic collection, organization, and communication of vast amounts of information D) A means of collecting information
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41. An income statement consists of all of the following except: A) Other income B) Interest expense C) Amortization expense D) Retained earnings 42. The purpose of the ledger is to A) keep in one place all information about changes in specific account balances. B) make sure that all assets, liabilities, etc., have normal balances at all times. C) keep a record of documentation to support each transaction. D) record chronologically the day's transactions. 43. If the totals of a trial balance are not equal, it could be due to A) recording the transaction more than once. B) an error in calculating the account balances. C) a failure to record a transaction or to post a transaction. D) recording the same erroneous amount for both the debit and the credit parts of a transaction. 44. Which of the following journal entries is recorded correctly and in the basic format?
A) B) C) D)
b d a c
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45. Chan's Repair Shop Ltd. services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Chan on August 5. Chan receives the check in the mail on August 6. If the accounting period ends July 31, when should Chan show that the revenue was earned? A) August 5 B) August 6 C) August 1 D) July 31
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Part II: Problems Problem 1 (10 Points) Analyze the effect of the following transactions using the basic accounting equation: a. Bought land for 10,000 shares by issuing common shares for the seller. Each share has a market value of $20. b. Purchased a 2-year insurance policy for $4,400. c. Bought a building for $100,000. Paid one-fourth in cash and the balance on a 10-year, 10% interest note payable. d. Purchased $9,000 of merchandise inventory on credit. e. Paid utilities bill for utilities used in the current period for $250. f. Provided services customer for $16,000 cash. g. Issued 10,000 common shares for $25,000 cash h. Paid $2,500 on merchandise inventory previously purchased. i. Received $7,500 from customers on account. j. Declared and paid a $5,000 dividend. ASSETS =
LIABILITIES +
Trans. a. b. c. d. e. f. g. h. i. j.
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SHAREHOLDERS' EQUITY
Problem 2 (8 Points) The following balance sheet contains TEN errors. Identify at least EIGHT of these errors.
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Problem 3 (5 Points) Classify each of the following items as investing, financing, or operating activity. Item Activity Amortization expense Repayment of note payable Purchase of inventory Sale of equipment at a gain Payment of commission to a salesperson Payment of dividends Receipt of interest on accounts receivable Payment for insurance for the current year Purchase of shares in another company as a long-term investment Issue of debt
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Problem 4 (15 Points) Shown below is the adjusted trial balance of Cole Inc. as of December 31, 2007 Account Debit Credit Accounts Payable $37,500 Accounts Receivable $100,000 Accumulated Amortization- Buildings 200,000 Amortization Expense 50,000 Bonds Payable 287,500 Buildings 312,500 Cash 62,500 Common Shares 150,000 Cost of Goods Sold 337,500 Debt Investments 50,000 Dividend Revenue 40,000 Dividends Declared 10,000 Equity Investments 187,500 Income Taxes Payable 162,500 Insurance Expense 25,000 Inventory 162,500 Land 425,000 Marketable Securities 37,500 Mortgage Payable 162,500 Notes Payable: Due 15-07-2008 150,000 Notes Payable: Due 15-07-2009 75,000 Notes Receivable- Due 5-31-2008 45,000 Patents 12,500 Prepaid Insurance 30,000 Rent Expense 37,500 Retained Earnings 175,000 Salaries Expense 100,000 Sales 562,500 Trademarks 17,500 Total $2,002,500 $2,002,500 Other Information Number of common shares outstanding is 25,000 The share of Cole Inc. closed at $63 on December 31, 2007 Required: Calculate the current ratio, the debt-to-assets ratio, EPS, P/E ratio, ROA, and ROE
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Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.
C C A A B A A C A A B B A B A C A D A D B C A B C B C A B C B A A C A A D C D B D A B D
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45. D
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COMM 2AA3 Midterm1, Version 1 Duration of Examination: 2 hours
Emad Mohammad
McMaster University Final Examination
October 5, 2007
Question
Marks
Points Earned
1
10
_________
2
8
_________
3
5
_________
4
15
_________
38
_________
INSTRUCTIONS: 1.
This examination paper comprises 17 pages (including cover page), 45 multiple-choice questions, each worth 1.40 points totalling 63 points, and 4 problems totalling 38 points. You are responsible for ensuring that your copy of the question paper is complete. Bring any discrepancy to the attention of the invigilator.
2.
The multiple-choice questions are to be answered on the computer answer sheet provided, and the problem questions are to be answered on the examination paper and in the designated spaces.
3.
Each question has only one correct answer. No correction factor will be applied to incorrect answers.
4.
On the question paper remember to fill in your name, student number and section number.
Version 1 Page 1
5.
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. i. 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. ii.
Mark your student number in the space provided on sheet Side 1 and fill in the corresponding bubbles underneath.
iii.
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.
iv.
Pay particular attention to the Marking Directions on the form
v.
Begin answering questions using the first set of bubbles, marked “1”.
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Part I: Multiple Choice 1. Expenses are incurred A) to produce liabilities. B) only on rare occasions. C) to generate revenues. D) to produce assets. 2. Recognizing expected losses immediately but deferring expected gains is an example of: A) Reliability. B) Timeliness C) Conservatism. D) Materiality. 3. The accounting definition of an asset does not include which of the following? A) Things that had value in the past B) Things that a firm owns C) Things that have future value D) Things that a firm has the right to use 4. A high P/E ratio suggests that A) Investors cannot make a judgment about the riskiness of firm. B) Investors are pleased with current year's earnings. C) The first has failed to meet market's expectations of current earnings. D) The market has high growth expectation for future earnings. 5. GAAP is an abbreviation for: A) Generally accepted auditing practices. B) Generally accepted accounting principles. C) Generally applied accounting procedures. D) Generally authorized accounting procedures. 6. Which of the following is not a monetary asset A) Inventory B) Accounts receivable C) Notes receivable D) Investment in bonds
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7. Financial accounting information should help users evaluate: A) Future cash flows. B) Various opportunities to purchase equipment. C) Decisions made by the Human Resources Department. D) Make versus buy decisions. 8. The purchase of an asset for cash A) decreases assets and increases liabilities. B) increases assets and shareholders' equity. C) leaves total assets unchanged. D) increases assets and liabilities. 9. Which of the financial statements does not cover a period of time? A) Balance sheet B) Statement of cash flows C) Statement of retained earnings D) Income statement 10. Generally accepted accounting principles A) are accounting rules that are recognized as a general guide for financial reporting. B) have eliminated all errors in accounting. C) are sound in theory but rarely used in real life. D) are accounting rules formulated by the Canada Revenue Agency. 11. When a company has performed a service but has not yet received payment, it A) debits revenue from services and credits accounts payable. B) debits accounts receivable and credits revenue from services. C) makes no entry until the cash is received. D) debits revenue from services and credits accounts receivable. 12. Which of the following is the proper order to list current assets on the balance sheet? A) Cash, inventory, accounts receivable, temporary investments B) Cash, accounts receivable, inventory, prepaid expenses C) Cash, accounts receivable, temporary investments, inventory D) Cash, temporary investments, prepaid expenses, accounts receivable
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13. Retained earnings at the end of the year is determined by retained earnings at the beginning of the year: A) Plus net income minus dividends. B) Plus assets minus liabilities. C) Plus accruals minus deferrals. D) Plus revenues minus liabilities. 14. Reliability includes all of the following except: A) Representational faithfulness B) Consistency C) Neutrality D) Verifiability 15. An accountant has debited an asset account for $1,000 and credited a liability account for $500. Which of the following would be an incorrect way to complete the recording of the transaction? A) Debit a shareholders’ equity account for $500. B) Credit a shareholders’ equity account for $500. C) Credit an asset account for $500 D) Credit another liability account for $500. 16. Which one of the following is not a part of an account? A) Title B) Credit side C) Trial balance D) Debit side 17. If total liabilities decreased by $5,000, then A) assets must have decreased by $5,000, or shareholders' equity must have increased by $5,000. B) assets and shareholders' equity must have each increased by $3000. C) shareholders' equity must have increased by $5,000. D) assets must have decreased by $5,000. 18. All of the following are investing activities except: A) Purchasing other companies' shares B) Selling property, plant, and equipment C) Purchasing property, plant, and equipment D) Paying dividends
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19. Financial reporting objectives do not include providing information: A) To determine market values, assess profit potential, and evaluate management. B) To make rational investment, credit, and similar decisions. C) About resources, obligations, and changes. D) To assess the amounts and timing of prospective cash receipts. 20. An advantage of the corporate form of business is that A) its shareholders' personal resources are at stake. B) it is simple to establish. C) it has limited life. D) its ownership is easily transferable via the sale of shares. 21. The usual ordering of accounts in the general ledger is A) liabilities, assets, shareholders' equity, revenues, and expenses. B) assets, liabilities, shareholders' equity, revenues, and expenses. C) shareholders' equity, assets, liabilities, expenses, and revenues. D) assets, liabilities, shareholders' equity, expenses, and revenues. 22. Recognition and measurement criteria include assumptions of: A) Historical Cost B) Matching C) Going Concern D) Full Disclosure 23. What does the CICA use to justify new accounting standards? A) The conceptual framework B) The CICA Handbook C) The audit report D) The notes to the financial statements. 24. Relevant information may have the following kinds of value: A) Comparability and consistency B) Predictive value and feedback value C) Timeliness and materiality D) Verifiability and neutrality
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25. The accounting equation can be stated as: A) -A + L - OE = 0. B) A + L - OE = 0. C) A - L - OE = 0. D) A - L + OE = 0. 26. Which of the following is not a qualitative characteristic of accounting information? A) Understandability B) Liquidity C) Comparability D) Relevance 27. Financial reporting objectives state that financial statements should be comprehensible to: A) The informed investor. B) The average investor with average communication skills and average training and experience. C) Those with a reasonable understanding of business and a diligence to study the information. D) Financial analysts with requisite training and experience. 28. During a recent week, Alma and Associates performed services valued at $15,000; received from clients $5,000 and the balance is to be received within 30 days. The effect on the balance sheet equation for this transaction would be: A) + $5,000 cash + $10,000 accounts receivable = + $15,000 retained earnings B) + $5,000 cash = + $5,000 retained earnings C) + $5,000 cash – $15,000 accounts receivable = $10,000 retained earnings D) + $5,000 cash = – $10,000 accounts payable + $15,000 retained earnings 29. Bountiful Loan Company has very stringent credit requirements and, accordingly, has negligible losses from uncollectible accounts. The company's independent accountants did not protest when, contrary to GAAP, the company recorded bad debts expense only when specific accounts were determined to be uncollectible, rather than use an allowance for uncollectible accounts (which is consistent with the conceptual framework). The concept demonstrated is: A) Relevance. B) Materiality. C) Comparability. D) Representational faithfulness.
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Use the following to answer questions 30-31: Tam's Car Repair Shop Ltd. started the year with total assets of $70,000 and total liabilities of $40,000. During the year, the business recorded $100,000 in car repair revenues, $65,000 in expenses, and dividends of $5,000. 30. The net earnings reported by Tam's Car Repair Shop Ltd. for the year were A) $20,000. B) $100,000. C) $35,000. D) $30,000. 31. Shareholders' equity at the end of the year was A) $75,000. B) $60,000. C) $65,000. D) $70,000. 32. Altec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by ten days the time to get information to investors and creditors. The qualitative concept improved is: A) Relevance. B) Comparability. C) Reliability. D) Consistency. 33. The following are all professional accounting organizations in Canada except: A) Federal Accounting Standards Board B) Chartered Accountants C) Certified Managerial Accountants D) Certified General Accountants 34. Which of the following statements is true when a company has zero liabilities: A) Return on equity is less than the return on assets. B) The answer cannot be determined given the above the information. C) Return on equity is equal to the return on assets. D) Return on equity is greater than the return on assets.
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35. Verifiability implies: A) Consensus. B) Proof. C) Logic. D) Legal evidence. 36. Shareholders' equity may include all of the following except: A) Dividends Payable B) Retained Earnings C) Common Shares D) Contributed Capital 37. Liabilities that will be paid within twelve months of the annual report, or the normal operating cycle, whichever is longer, are classified as: A) Long-term liabilities B) Accrued liabilities C) Noncurrent liabilities D) Current liabilities 38. If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates A) that all accounts reflect correct balances. B) no errors have been made. C) the mathematical equality of the accounting equation. D) no errors can be discovered. 39. Shareholders' equity can be described as claims of A) debtors on total assets. B) customers on total assets. C) creditors on total assets. D) owners on total assets. 40. Which of the following is the most appropriate definition of accounting? A) The interconnected network of subsystems necessary to operate a business B) The information system that identifies, records, and communicates the economic events of an organization to interested users C) Electronic collection, organization, and communication of vast amounts of information D) A means of collecting information
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41. An income statement consists of all of the following except: A) Other income B) Interest expense C) Amortization expense D) Retained earnings 42. The purpose of the ledger is to A) keep in one place all information about changes in specific account balances. B) make sure that all assets, liabilities, etc., have normal balances at all times. C) keep a record of documentation to support each transaction. D) record chronologically the day's transactions. 43. If the totals of a trial balance are not equal, it could be due to A) recording the transaction more than once. B) an error in calculating the account balances. C) a failure to record a transaction or to post a transaction. D) recording the same erroneous amount for both the debit and the credit parts of a transaction. 44. Which of the following journal entries is recorded correctly and in the basic format?
A) B) C) D)
b d a c
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45. Chan's Repair Shop Ltd. services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Chan on August 5. Chan receives the check in the mail on August 6. If the accounting period ends July 31, when should Chan show that the revenue was earned? A) August 5 B) August 6 C) August 1 D) July 31
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Part II: Problems Problem 1 (10 Points) Analyze the effect of the following transactions using the basic accounting equation: a. Bought land for 10,000 shares by issuing common shares for the seller. Each share has a market value of $20. b. Purchased a 2-year insurance policy for $4,400. c. Bought a building for $100,000. Paid one-fourth in cash and the balance on a 10-year, 10% interest note payable. d. Purchased $9,000 of merchandise inventory on credit. e. Paid utilities bill for utilities used in the current period for $250. f. Provided services customer for $16,000 cash. g. Issued 10,000 common shares for $25,000 cash h. Paid $2,500 on merchandise inventory previously purchased. i. Received $7,500 from customers on account. j. Declared and paid a $5,000 dividend. ASSETS =
LIABILITIES +
Trans. a. b. c. d. e. f. g. h. i. j.
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SHAREHOLDERS' EQUITY
Problem 2 (8 Points) The following balance sheet contains TEN errors. Identify at least EIGHT of these errors.
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Problem 3 (5 Points) Classify each of the following items as investing, financing, or operating activity. Item Activity Amortization expense Repayment of note payable Purchase of inventory Sale of equipment at a gain Payment of commission to a salesperson Payment of dividends Receipt of interest on accounts receivable Payment for insurance for the current year Purchase of shares in another company as a long-term investment Issue of debt
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Problem 4 (15 Points) Shown below is the adjusted trial balance of Cole Inc. as of December 31, 2007 Account Debit Credit Accounts Payable $37,500 Accounts Receivable $100,000 Accumulated Amortization- Buildings 200,000 Amortization Expense 50,000 Bonds Payable 287,500 Buildings 312,500 Cash 62,500 Common Shares 150,000 Cost of Goods Sold 337,500 Debt Investments 50,000 Dividend Revenue 40,000 Dividends Declared 10,000 Equity Investments 187,500 Income Taxes Payable 162,500 Insurance Expense 25,000 Inventory 162,500 Land 425,000 Marketable Securities 37,500 Mortgage Payable 162,500 Notes Payable: Due 15-07-2008 150,000 Notes Payable: Due 15-07-2009 75,000 Notes Receivable- Due 5-31-2008 45,000 Patents 12,500 Prepaid Insurance 30,000 Rent Expense 37,500 Retained Earnings 175,000 Salaries Expense 100,000 Sales 562,500 Trademarks 17,500 Total $2,002,500 $2,002,500 Other Information Number of common shares outstanding is 25,000 The share of Cole Inc. closed at $63 on December 31, 2007 Required: Calculate the current ratio, the debt-to-assets ratio, EPS, P/E ratio, ROA, and ROE
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Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.
C C A A B A A C A A B B A B A C A D A D B C A B C B C A B C B A A C A A D C D B D A B D
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45. D
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