exam 2 review problems

ACC 255 EXAM 2 REVIEW: PROBLEMS

Complete these sample exam problems and check your answers with solutions on my website at www.cba.nau.edu/facstaff/Wilburn-N (solutions are at the end of the review file), and identify where you need additional study before the exam.

CHAPTER 5--Multiple Step Income Statement

On the following page, prepare, in good form, a multiple step income statement for Kilpatrick Corporation using the accounts (listed in alphabetical order) from the December 31, 2005 year-end adjusted trial balance. There were 100,000 shares of common stock outstanding during 2005.

Advertising Expense $ 12,000Cost of Goods Sold 363,400Depreciation Expense 9,000Freight-Out Expense 7,600Income Tax Expense 9,750Insurance Expense 4,500Interest Expense 3,600Interest Income 2,500Loss on Sale of Equipment 5,000Rent Expense 24,000Salaries Expense 56,000Sales 536,800Sales Returns and Allowances 6,700Utilities Expense 18,000

CHAPTER 5--Classified Balance Sheet

On the two pages following the income statement, prepare, in good form, a classified balance sheet for Amer Corporation using the accounts (listed in alphabetical order) from the December 31, 2005 year-end post-closing trial balance.

Accounts Payable $ 1,500Accounts Receivable 800Accumulated Depreciation, Building 1,000Accumulated Depreciation, Equipment 500Bonds Payable (due in 10 years) 4,000Building 8,000Cash 200Common Stock, $10 par value 7,000Equipment 2,500Franchise 1,800Income Taxes Payable 300Inventory 3,000Land 2,000Notes Receivable (due in 2 years) 2,700Paid in Capital in Excess of Par Value 3,000Prepaid Rent 100Retained Earnings 2,000Short-Term Investment 400Unearned Revenue 500Wages Payable 1,700

KILPATRICK CORPORATIONINCOME STATEMENT

complete the date line

AMER CORPORATIONBALANCE SHEET

CHAPTER 14--Statement of Cash Flows

Using the information below, prepare in good form a Statement of Cash Flows for Savage Corporation on the following page. Information from the December 31, 2005 and 2004 balance sheets of Savage Corporation are presented below.

2005 2004Cash $ 30,000 $ 50,000Accounts Receivable, net 410,000 460,000Inventory 300,000 320,000Prepaid Expenses 20,000 15,000Long-Term Investments 50,000 25,000Land 560,000 300,000Buildings and Equipment 2,000,000 1,900,000Accumulated Depreciation (800,000) (770,000)

$ 2,570,000 $ 2,300,000

Accounts Payable $ 300,000 $ 120,000Accrued Liabilities 40,000 50,000Bonds Payable 500,000 800,000Long-Term Note Payable 150,000 0Common Stock, $2 par value 200,000 160,000Paid-in Capital in Excess of Par Value 710,000 550,000Retained Earnings 670,000 620,000

$ 2,570,000 $ 2,300,000

Additional information about 2005 transactions and events:

(a) Net income was $110,000.

(b) Depreciation expense on buildings and equipment was $60,000.

(c) Sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 for cash of $17,000.

(d) Declared and paid cash dividends of $60,000.

(e) Issued a $150,000 long-term note payable for buildings and equipment.

(f) Purchased long-term investments for $25,000.

(g) Paid $300,000 on the bonds payable.

(h) Issued 20,000 shares of $2 par value common stock for $200,000.

(i) Purchased land for $260,000.

SAVAGE CORPORATIONSTATEMENT OF CASH FLOWS


CHAPTERS 6 & 7--Recording Transactions of a Merchandising Company (including Promissory Notes)

P&L Products uses the perpetual inventory system. In the general journal below and on the following page, prepare the necessary journal entries for the following selected transactions:

2005Dec. 1 Received a 4-month, 12%, $8,000 note from customer in settlement of an account

receivable.3 Purchased $800 of merchandise on credit.5 Returned $200 of the merchandise purchased on Dec. 3.12 Paid for the remaining merchandise purchased on Dec. 3.13 Sold merchandise on credit for $1,000 (cost = $600).14 The customer of Dec. 13 returned $100 of the merchandise (cost = $60).25 Received payment of $500 from the customer of Dec. 13.26 Purchased $250 of office supplies on credit.31 Record the year-end adjusting entry for uncollectible accounts, using the percentage of net

sales method. Net sales for the year totaled $250,000. The company’s past history indicates that an estimated 3% of net sales will not be collected. The balance in the Allowance for Uncollectible Accounts prior to the adjustment is a $50 credit.

31 Record the year-end adjusting entry for accrued interest on the promissory note from the customer of Dec. 1.

2006April 1 Received payment in full on the promissory note from the customer of Dec. 1.May 13 Wrote off the remaining balance due from the customer of Dec. 13 after all efforts to collect

were unsuccessful.

General JournalDate Description Debit Credit

2005


ACC 255 EXAM 2 REVIEW: OBJECTIVE QUESTIONS

Complete these sample exam objective questions and check your answers with solutions on my website at www.cba.nau.edu/facstaff/Wilburn-N (solutions are at the end of the review file), and identify where you need additional study before the exam.

CHAPTER 5

True-False

T F 1. Natural resources, such as coal mines and oil wells, are classified as intangible assets.

T F 2. When accounting information can affect the outcome of a decision, it is said to contain the qualitative characteristic of relevance.

T F 3. Employing an acceptable accounting procedure primarily to produce favorable financial results is an example of fraudulent financial reporting.

T F 4. Retained earnings will not appear on the balance sheet of a sole proprietorship.

T F 5. Gross margin from sales would be disclosed in a single-step income statement.

T F 6. In accounting, $5,000 represents the difference between a material item and an immaterial one.

T F 7. Another term for cost of goods sold is cost of sales.

Multiple Choice

8. Which of the following items is classified as an intangible asset?A. Timberlands.B. Prepaid insurance.C. Goodwill.D. Land held for future use.E. Accounts receivable.

9. Which of the following is a measure of liquidity?A. Current ratio.B. Return on equity.C. Debt to equity.D. Return on assets.E. Profit margin.

10. Which of the following accounting conventions discourages the use of procedures that tend to overstate assets or income?A. Materiality.B. Consistency.C. Cost-benefit.D. Full disclosure.E. Conservatism.

11. The normal operating cycle includes all the following events exceptA. the collection on an account receivable.B. the purchase of merchandise.C. the sale of merchandise on credit.D. the recording of depreciation.E. the payment for purchases made on credit.

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12. Which of the following items is not classified as a current asset?A. Special fund to purchase land.B. Inventory.C. Office supplies.D. Prepaid rent.E. Short-term investments.

13. Presenting all important information to the users of financial statements most clearly follows the convention ofA. cost-benefit.B. conservatism.C. full disclosure.D. materiality.E. consistency.

14. Contributed capital can be found in which balance sheet section?A. Investments.B. Stockholders’ Equity.C. Current Assets.D. Long-Term Liabilities.E. Property, Plant, and Equipment.

15. Which of the following items appears in the Other Revenues and Expenses section of the income statement prepared using a multistep format?A. Sales.B. Office salaries expense.C. Cost of goods sold.D. Interest expense.E. Depreciation expense.

CHAPTER 14

True-False

T F 1. Cash flow yield measures net cash flows from operating activities in relation to net income.

T F. 2. A firm’s sale of its own common stock is a cash inflow that will appear in the investing activities category.

T F 3. Cash equivalents are highly liquid investments with an original maturity of less than one year.

T F 4. Interest and dividends received are considred financing activities.

T F 5. Purchases and sales of investments are disclosed separately on the statement of cash flows.

T F 6. The direct method differs from the indirect method in the operating activities section.

Multiple Choice

7. All of the following are components of free cash flow, exceptA. dividends paid.B. cash flows from operating activities.C. net income.D. net capital expenditures.

8. The settlement of a debt by issuing stock is consideredA. a financing activity.B. an investing activity.C. an operating activity.D. a noncash transaction.

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9. Which of the following is deducted from net income in converting net income to net cash flows from operating activities?A. Depreciation expense.B. Gains.C. Decrease in accounts receivable.D. Losses.E. Increase in accounts payable.

10. Analysis of the investing activities section of the statement of cash flows will showA. any sales or repurchases of the company’s stock.B. whether the company is shrinking or growing.C. how corporate growth is being funded.D. to what extent day-to-day operations are affecting cash flows.

11. Which of the following transactions produces a cash outflow?A. Issuance of debt for cash.B. Receipt of cash from interest and/or dividends from loans and investments.C. Purchase of buildings and equipment for cash.D. Issuance of preferred or common stock for cash.

12. Operating activities do not includeA. cash payments for dividends.B. cash payments to the government for income taxes.C. cash payments for inventory.D. cash collections from the sale of goods or services.

13. Investors and creditors would be least likely to use the statement of cash flows to assess a company’sA. ability to generate positive future cash flows.B. ability to pay interest and dividends.C. need for additional financing.D. profitability during the period reported upon.

CHAPTER 6

True-False

T F 1. A physical inventory need not be taken periodically in a perpetual inventory system.

T F 2. A company is more likely to know the amount of inventory on hand at any time if it uses the periodic system than if it uses the perpetual system.

T F 3. The ending inventory of one period automatically becomes the beginning inventory of the following period.

T F 4. Sales Discounts is shown on the income statement as an expense.

Multiple Choice

5. Assuming the net purchases were $300,000 during the year and that ending inventory was $4,000 more than the beginning inventory of $60,000, how much was cost of goods sold?A. $236,000B. $244,000C. $296,000D. $304,000E. $364,000

6. Ignoring income taxes, a net loss results when operating expenses exceedA. cost of goods sold.B. gross margin.C. purchases of inventory.D. sales.

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7. A company whose customers have returned goods that were previously sold on creditA. debits Sales Returns and credits Accounts Receivable.B. debits Accounts Payable and credits Purchases.C. debits Sales and credits Accounts Receivable.D. debits Accounts Receivable and credits Accounts Payable.E. debits Purchases Returns and credits Accounts Receivable.

CHAPTER 7

True-False

T F 1. When a year-end adjustment is made regarding a note receivable, the company records Interest Expense.

T F 2. Interest of 6% on $100 for 90 days is computed by multiplying $100 x 0.06 x 90.

T F 3. The allowance method for uncollectible accounts follows the matching principle.

T F 4. The maturity value of a note equals the face value of the note plus the interest.

T F 5. When a customer overpays, the customer’s account has a debit balance.

Multiple Choice

6. Which of the following is an example of a cash equivalent?A. Accounts receivable expected to be collected within 60 days.B. Currency.C. U.S. Treasury notes that mature next month.D. Coins.E. Equity securities expected to be sold in 120 days.

7. A company has net sales of $70,000 during the year. At year-end (before an adjustment is made), the account Allowance for Uncollectible Accounts has a credit balance of $3,000. If the company estimates that 2% of net sales will prove uncollectible, what will be the balance in the allowance account after the year-end adjustment has been made?A. $4,400 credit balance.B. $1,400 credit balance.C. $1,600 debit balance.D. $1,400 debit balance.E. $1,600 credit balance.

8. The account Allowance for Uncollectible Accounts is classified as a(n)A. liability account.B. contra account to Uncollectible Accounts Expense.C. expense account.D. contra account to Accounts Receivable.E. revenue account.

9. Which of the following is not a short-term liquid asset?A. Cash.B. Accounts Receivable.C. Investments classified as Short-Term.D. Inventory.

10. The receivable turnover is expressed in terms ofA. days.B. a percentage.C. dollars.D. times.E. years.

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EXAM 2 REVIEW: SOLUTIONS

CHAPTER 5--Multiple Step Income Statement

KILPATRICK CORPORATIONINCOME STATEMENT

For the Year Ended December 31, 2005NET SALES: Sales $536,800 Less Sales Returns and Allowances (6,700)

Net Sales $530,100

COST OF GOODS SOLD 363,400

GROSS MARGIN $166,700

OPERATING EXPENSES: Advertising Expense $12,000 Depreciation Expense 9,000 Freight-Out Expense 7,600 Insurance Expense 4,500 Rent Expense 24,000 Salaries Expense 56,000 Utilities Expense 18,000

Total Operating Expenses 131,100

INCOME FROM OPERATIONS $35,600

OTHER REVENUES AND EXPENSES: Interest Expense $ (3,600) Interest Income 2,500 Loss on Sale of Equipment (5,000)

Net Other Revenues and Expenses (6,100)

INCOME BEFORE INCOME TAXES $29,500INCOME TAX EXPENSE 9,750

NET INCOME $19,750

EARNINGS PER SHARE $ .20

EPS = $19,750 / 100,000 shares

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CHAPTER 5--Classified Balance Sheet

AMER CORPORATIONBALANCE SHEETDecember 31, 2005

ASSETS

Current Assets: Cash $200 Short-term investment 400 Accounts receivable 800 Inventory 3,000 Prepaid rent 100

Total Current Assets $4,500

Investments: Notes receivable 2,700

Property, Plant, and Equipment: Land $2,000 Building $8,000 Less Accumulated depreciation (1,000) 7,000 Equipment $2,500 Less Accumulated depreciation (500) 2,000

Total Property, Plant, & Equipment 11,000

Intangibles: Franchise 1,800

TOTAL ASSETS $20,000

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LIABILITIES

Current Liabilities: Accounts payable $1,500 Income taxes payable 300 Unearned revenue 500 Wages payable 1,700

Total Current Liabilities $4,000

Long-Term Liabilities: Bonds payable 4,000

Total Liabilities $8,000

STOCKHOLDERS’ EQUITY

Contributed Capital: Common stock, $10 par value, 700 shares issued & outstanding $7,000 Paid in capital in excess of par 3,000

Total Contributed Capital $10,000

Retained Earnings 2,000

Total Stockholders’ Equity 12,000

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $20,000

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CHAPTER 14--Statement of Cash Flows

Savage CorporationStatement of Cash Flows

For the Year Ended December 31, 2005Cash Flows from Operating Activities: Net Income $110,000 Adjustments to Reconcile Net Income to Cash Flows from Operating Activities: Depreciation Expense 60,000 Loss on Sale of Equipment 3,000 Decrease in Accounts Receivable 50,000 Decrease in Inventory 20,000 Increase in Prepaid Expenses (5,000) Increase in Accounts Payable 180,000 Decrease in Accrued Liabilities (10,000)

Net Cash Flows from Operating Activities $408,000

Cash Flows from Investing Activities: Sold Equipment $17,000 Purchased Long-Term Investments (25,000) Purchased Land (260,000)

Net Cash Flows from Investing Activities (268,000)

Cash Flows from Financing Activities: Paid Dividends $(60,000) Paid Bonds Payable (300,000) Issued Common Stock 200,000

Net Cash Flows from Financing Activities (160,000)

Net Decrease in Cash $(20,000)Cash at Beginning of Year 50,000

Cash at End of Year $30,000

Noncash Investing & Financing Activities: Issued Notes Payable for Building & Equipment $150,000

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CHAPTERS 6 & 7--Recording Transactions of a Merchandising Company (including Promissory Notes)


2005Dec 1 Notes Receivable 8,000

Accounts Receivable 8,000

3 Merchandise Inventory 800 Accounts Payable 800

5 Accounts Payable 200 Merchandise Inventory 200

12 Accounts Payable ($800 - $200) 600 Cash 600

13 Accounts Receivable 1,000 Sales 1,000Cost of Goods Sold 600 Merchandise Inventory 600

14 Sales Returns 100 Accounts Receivable 100Merchandise Inventory 60 Cost of Goods Sold 60

25 Cash 500 Accounts Receivable 500

26 Office Supplies 250 Accounts Payable 250

31 Uncollectible Accounts Expense 7,500 Allowance for Uncollectible Accounts 7,500 ($250,000 x 3%)

31 Interest Receivable 80 Interest Income 80 ($8,000 x 12% x 1/12)

2006April 1 Interest Receivable 240

Interest Income 240 ($8,000 x 12% x 3/12)

1 Cash 8,320 Notes Receivable 8,000 Interest Receivable 320

May 13 Allowance for Uncollectible Accounts 400 Accounts Receivable 400 ($1,000 - $100 - $500)

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ANSWERS TO OBJECTIVE QUESTIONS

Chapter 5 Chapter 14 Chapter 6 Chapter 71. F2. T3. F4. T5. F6. F7. T8. C9. A10. E11. D12. A13. C14. B15. D

1. T2. F3. F4. F5. T6. T7. C8. D9. B10. B11. C12. A13. D

1. F2. F3. T4. F5. C6. B7. A

1. F2. F3. T4. T5. F6. C7. A8. D9. D10. D

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exam 2 review problems

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