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ACCT 2013H

Exam 1: Ch. 1-4


Spring 2015

Highlights: Green=Correct, Yellow=Unsure, Cyan=Notes


Correct Answers
Not Sure
Notes
Problems:
1. (1 pt each) For each of the following indicate whether the account would appear on an
income statement or on a balance sheet, and whether the account would normally have a
debit balance or a credit balance. Use the following letter key:
A. Income statement, debit balance.
B. Income statement, credit balance.
C. Balance sheet, debit balance.
D. Balance sheet, credit balance.
Cash: ___C____
Rent expense: ___A____
Notes payable: ___D____
Earned revenue: ___B____
Unearned revenue: __D_____
2. (4 pts) Allen started a new business on January 1, 2015. He contributed $35,000 of his
own money to the business. On the same day the business borrowed $250,000 from a
local bank and signed a promissory note in favor of the bank. The next day the business
purchased $25,000 of inventory to be used for sale to customers. The purchase was made
on open account with the understanding that the debt would be paid in 30 days. Based on
these facts, what would the business ACCOUNTING EQUATION be immediately after
the purchase of the inventory?
285,000= 250,000+35,000
310,000=275,000+35,000

3. (4 pts) Acme Companys total owners equity at the beginning of the year was $300,000.
During the course of the year revenues were $500,000 and expenses were $350,000.
Dividends (withdrawals) of $30,000 were paid out. What was owners equity at the END
of the year?
Answer: 300k+500k-350k-30k=420k
**** Add expenses-revenues-dividends****

4. (4 pts) Total assets and liabilities of Hog Company at the beginning and end of the year
are shown. Calculate Hog Companys net income for the year, assuming that during the
year the owner withdrew $10,000 to take his family on a vacation to Disney World
Beginning of year
End of year
Assets:
$400,000
$500,000
Liabilities
$250,000
$300,000
_______
________
Subtract--
150k
200k
Remember: Net income- add withdrawals + Subtract Contributions=Answer
200k-150k=50k
50k
+10k
------=60K
5. (5 pts) Use the following accounts to prepare a balance sheet for Buddys Pet Shop (a
sole proprietorship). The date is December 31, 2014. It is possible that not all accounts
will be used. Make sure that you use good form.
Accounts payable: $50,000
Liability
Accounts receivable: $70,000
Asset
Cash: $30,000
Asset
Land: $400,000
Asset
Office equipment: $50,000
Asset
Notes payable: $100,000
Liability
Total revenue for the year: $600,000
Total expenses for the year: $400,000
Balance in the owners equity account: unknown

BS

#5 Answer:
Buddys Pet Shop
Balance Sheet
December 31, 2014
_________________
Assets
Cash 30k
AR 70k
Equipment 50k
Land 400k
_________+
=550K
_________
_________

Liabilities
Accounts Payable 50k
Notes Payable 100k
__________________+
150k
_________+
Owners Equity
400k
_________
=550K
_________
_________

****Balance Sheet= 550,000$****


6. (4 pts) The owner of Frog Company has used a cash system of accounting for many
years, but in anticipation of obtaining a bank loan has decided to convert to an accrual
system. Net income under the cash system was $500,000. What was net income using
the accrual system, based on the facts below?
Balance on Jan. 1
Balance on Dec. 31
Accounts receivable $50,000
$70,000
Salaries payable
$20,000
$10,000
Converting Cash to Accrual
AR- 70k-50k=20k
10k-20k=+10k
______(+)
30k + 500k= 530k
NET INCOME= 530k
7. (4 pts) A business using the accrual system has properly accounted for $600,000 of
salaries expense. Salaries payable at the beginning of the year was $30,000 and at the
end of the year was $20,000. How much cash was paid out for salaries during the year?
600k=10k+600k

8. (2 pts each) Prepare in good form journal entries for each of the following:
A. Made a sale to a customer on credit. The amount of the sale was $10,000
D
Accounts Receivable 10k
Revenue

C
10k

B. Purchased office supplies for cash, paying $500


D
500$

Supplies
Cash

C
500$

C. Paid the rent. The amount was $1,000


Rent + Expense
Cash

D
1,000$

C
1,000$

D. Borrowed money from a bank, and signed a promissory note to repay the loan one
year from date. The amount of the loan was $100,000 and the annual interest rate
was 5%
D
C
Cash
100k
Unearned Revenue
95k?? I did .05x100K=5K 100k-5k=95k

E. Received $5,000 from a customer for professional services which we will be


performing over the next five months, starting immediately.
Cash

5,000$
Unearned Revenue

9. (3 pts each) It is now December 31, 2014, and time to make adjusting entries. Make the
necessary adjusting entries for each of the following independent cases:
A. At the beginning of the year office supplies had a balance of $10,000. During the
course of the year $42,000 of supplies were purchased. A physical count shows that
only $5,000 of office supplies are still on hand.
D
Supplies expense 47K
Supplies

C
47K

B. On November 1, 2014, your company prepaid a one year insurance policy, paying the
insurance company $24,000. The policy went into effect on November 1, 2014.
Formula
24,0000/12= 2,000 x 2= 4,000$
Insurance expense
Prepaid Insurance

D
4,000$

C
4,000$

C. A one year bank loan was made on October 1, 2014. The amount borrowed was
$100,000. Interest of $1,000 per month is called for by the terms of the contract.
Both interest and the face amount of the loan will be paid when the note falls due on
October 1, 2015.

Formula= 3 x 1,000= 3,000$


Insurance expense
Prepaid Insurance

D
3,000$

C
3,000$

D. On September 1, 2014 your company received $18,000 in advance for services to be


performed evenly over the next 12 months. At that time cash was debited and the
appropriate liability account was credited

Formula= 18,000/12 = 1,500$ x 4= 6,000$


Unearned Revenue

D
6,000$

Revenue

6,000$

E. Salaries earned by employees have not been recorded. Weekly salaries (Monday
through Friday work week) are $25,000 and were last paid on December 28, a Friday.
Make the adjusting entry to be made on Monday, December 31 (yes, this is a
workday!)
Note: Since its still December, Expense -- Payable.
After Dec. 31, Payable -- Expense
Salaries Expense
Salary Payable

D
5,000$

C
5,000$

10. (3 pts) Below is a partial listing of Acme Corporations accounts as of December 31,
2014.
Cash: $125,000
Accounts receivable: $30,000
Accounts payable: $25,000
Drawing: $15,000
Expenses: $70,000
Retained earnings: $270,000
Revenue: $135,000
Prepare the necessary closing entries for this corporation. It is possible that not all
accounts will be used.
There are 3 steps unless there are no drawings AKA dividends.
If there are no Dividends then only do the first 2 Steps.
1. Revenue
Retained Earnings
2. Retained Earnings
Expenses

D
135,000$

C
5,000$

70,000$

3. Retained Earnings
15,000
(Drawings) Dividends

70,000$
15,000$

11. (2 pts each) You are the accountant for Wonderful Company. It is now December 31,
2014, and time to make adjusting entries. Wonderful has an ongoing loan agreement with
a local bank wherein interest in the amount of $30,000 is paid to the bank every three
months. (The principal of the loan is not repaid at that time; it simply rolls over). The
last payment was made on October 31, 2014, and the next payment of interest is due on
January 31, 2015. Wonderful uses reversing entries.
A. Make the adjusting entry to be made on December 31, 2014
Note: STILL DECEMBER 31. Watch for that on test
D
Interest Expense
20,000
Interest Payable

C
20,000

B. Now make the reversing entry to be made on January 1, 2015


D
Interest Payable
20,000
Interest Expense

C
20,000

C. Now make the entry to be made on January 31, 2015 when Wonderful pays the bank
the $30,000 of interest that is due at that time.
D
Interest Payable
30,000
Interest Expense

C
30,000

12. (4 pts) Hog Company uses the indirect method to prepare the Statement of Cash
Flows. Use the following to calculate cash flows from operations:
Accrual net income: $800,000
Decrease in current assets: $40,000
Increase in current liabilities: $20,000
Depreciation expense: $30,000

Formula= 800k+40k+20k+30k=890K

13. (2 pts each) Your employer has asked you to prepare the necessary journal entries to
establish a petty cash fund. She would like the fund to be in the amount of $1,000.
A. Make the journal entry necessary to establish the petty cash fund.
Petty Cash
Cash

D
1,000

C
1,000

B. At the end of the month there is $50 left in the petty cash fund. There are receipts in
the fund totaling $900 (all of the receipts are categorized as miscellaneous expense.).
Make the journal entry necessary to fully replenish the fund.
Petty Cash
Cash Short
Cash

D
900$
50$

C
950$

14. (3 pts) Use the following information to prepare the BOOK side of a bank
reconciliation:
Balance per book: $30,000
Deposits in transit: $3,000
Outstanding checks: $2,000
Bank service charge: $50
Interest paid to us by the bank: $25
Error in recording a check for supplies purchased. The actual amount of the check was $900
but the amount the check was recorded for was $800

Note: (50) or (100) means MINUS

Bank
________
30K
(50)
(100)
________

29,875$

Do I double line 29,875?

Multiple choice: Mark your answer on your scantron sheet. (2 pts each)
1. Which of the following correctly describes GAAP?
I.
It is a product of statutes passed by Congress not long after the founding of the
republic
II.
It is a product of uniform statutes passed by the individual states
III.
It is a set of standards developed by the accounting profession which are generally
accepted and commonly practiced
A. I only. B. II only. C. III only. D. I and II only. E. I, II and III
2. Which of the following would NOT be considered an internal user of accounting
information?
A. Marketing managers
B. Investors
C. Production supervisors
D. Members of the Board of Directors
E. Company officers
3. Acme Company purchased land 5 years ago, with the intention of eventually building a
new office building on the land. Acme paid $400,000 for the land. A current appraisal
indicates that the current value of the land is $500,000. If Acmes balance sheet should
value the land at $500,000 (market value) this would:
A. Be completely consistent with GAAP, since the balance sheet must present all assets
at their current value
B. Violate the matching principal
C. Violate the going concern principal
D. Violate the accrual accounting principal
E. Violate the historical cost principal
---YOU MUST VALUE YOUR LAND ON YOUR BALANCE SHEET OR IT
VIOLATES GAAP
4. Which of the following entities has as its primary mission is to establish and improve the
standards of financial accounting?
A. SEC
B. IASB
C. AICPA
D. FASB
Financial Accounting Standards Board
E. GAAP
F. OMG

5. Which of the following would affect owners equity?


A. Purchase of new office equipment for cash
B. Purchase of new office equipment on credit
C. Borrowing money from a bank, signing a promissory note
D. Paying $500 which we owed to another business as a result of a purchase made on
open account
E. Paying $500 cash for repairs on a vehicle owned by the business
6. Acme Company purchased new office equipment. The equipment was purchased for
$100,000. Acme paid $25,000 cash and signed a contract agreeing to pay the balance
three months from date. What effect does this transaction have on the accounting
equation?
A. Assets increase and equity increases
B. Assets stay the same and equity increases
C. Assets increase and equity decreases
D. Assets increase and liabilities increase
E. Assets increase, liabilities increase, and equity decreases
7. Which of the following would NOT appear on a balance sheet?
A. Cash
B. Sales revenue
C. Accounts receivable
D. Common stock
E. Notes payable
8. Acme Company issues common stock to investors, receiving $1 million of cash. In
which section of the Statement of Cash Flows would this inflow of cash be reported?
A. Operating
B. Investing
C. Financing
D. Drawing
9. Ajax Company pays $400,000 for a new office building. In which section of the
Statement of Cash Flows would this outflow of cash be reported?
A. Operating
B. Investing
C. Financing
D. Drawing
10. Your company issued a check to a worker to reimburse him for a trip that he took. The
actual amount of the check was in the amount of $500, but was recorded in the books as
$450. In preparing a bank reconciliation, which of the following will be necessary?
A. Add $50 to the bank side
B. Deduct $50 from the bank side
C. Add $50 to the book side
D. Deduct $50 from the book side

E. Add $500 to the bank side


11. Your company has been using the direct method to prepare the statement of cash
flows, but has decided to switch to the indirect method. Which of the following is
correct?
A. Switching to the indirect method will save on taxes
B. Cash flows from investing and financing will be the same in both methods
C. Cash flows from operations will increase in a switch to the indirect method
D. Cash flows from operations will decrease in a switch to the indirect method
E. GAAP requires that the indirect method be used
12. The process of ____________________ involves transferring entries in the general
journal to an individual account?
A. Closing
B. Adjusting
C. Reversing
D. Rectifying
E. Posting
13. Which of the following correctly describes the purpose of the trial balance?
A. Ensure that entries have been made to the correct accounts
B. Ensure that the amount reported as net income is correct
C. Ensure that the dollar amount of debit entries and credit entries is the same
D. Ensure that assets are not overstated
E. Ensure that the balance in the owners equity account is correct
14. Acme Corporation has less than 10 employees. In the interest of time and efficiency, the
same person who writes the checks is also given the job of reconciling the bank
statement. This is generally considered to be a violation of which of the following forms
of internal control?
A. Proper authorization
B. Separation of duties
C. Physical controls
D. Employee management
E. Inadequate training
15. Your business makes most of its sales via credit cards of their customers. Assume that a
customer makes a purchase in the amount of $100, and charges it on her credit card. The
credit card company charges your business 2% of the amount of the sale. Assuming no
sales tax, a correct journal entry to record this sale to a customer would include which of
the following?
A. Debit to cash: $100
B. Debit to cash: $98
.02 x 100=2
100$-2$=98$
C. Credit to sales revenue: $98
D. Credit to service fee expense: $2

E. Debit to cash: $102

Go back over:
Separation of Duties
Trial Balance
Posting is transferring entries in the general journal to an individual account
When to Double Line

Adjusting entries are made on Dec. 31 and NEVER involve cash!

Account payable: We owe someone something


Account Receivable: Someone owes us

*****2 Ways to Account for cash: Bank Reconciliation & Petty Cash
Fund*****

1. Bank Reconciliation
Bank

Book (if we look at cash this is whats reveleavled

25,700

27,675

Deposits in transit, add 3,500

Outstand deposit and checks are all you will see


on bank side!
Bank

Book (if we look at cash this is what is revealed)

25,700

27,675

+ 3,500

(50) Deduct 50 dollars from booking!

-1,500

+25$
+50

____________
27,700

___________
27,700

^These have to be even thats why you add the 50 dollars


We want the book side to be the same as the bank
side

Example of Bank Reconciliation #2


Bank

Book

22,490

22,970

+1885

(55)

(1,460)

________

________
22,915

22,915

_________

_________

_________

_________

2. Petty cash fund


All you do is establish the fund, or replenish the petty cash
fund
What are vouchers?

Example of Petty cash format:


D
1. Petty Cash

C
500

Cash

500

2. Misc. Expense $ 350


Cash Short
an Expense
Cash

50

(Means we are short 50 dollars cash) This is

400

Example #12 on page 199 of Petty Cash


1. Petty Cash

400

Cash

2. Misc. Expense

400

370

Cash

370

Example for CC interest:


Merchant taking credit card for account example (P. 174)
D
Cash

4950

Service Fee

50

Service Revenue

2,000

On Test expect 2 or 3 multiple choice questions,


and you have to pick which of those 3 it is in a
normal operation or investment etc

Statement of Cash Flows


Have 3 components to it
1. Operations
2. Investing
3. Financing
Operations
Operations

How to calculate cash flow from operations indirect


method
--Remember, We have accrual, and cash
1. Start with accrual net income, income is taken directly from
income statement
2. Make necessary adjustments to turn to cash
Operations= Net income + Non Cash Expense
CA (Current Assets) Such as accounts receivable
CL (Current Liabilities) now we add instead of subtract
When current assets go up, we add them normally
--- but on operations we subtract. It all opposite for the indirect
method (operations)
CA Subtract
CL Add
2. Investing Examples
a.) Selling used equipment is Investing
b.) Buying equipment is Investing
3. Financing Examples
Associated with relationships with third parties
Signing a promissory note that you have to pay back
Paying dividends back to stockholders
Share new stock so new shareholders are on board
All 3 parts of the statement cash flow are the same result, it is
only the operation section thats prepared differently, but it still all
ends the same.

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