MGMT 600 Accounting for Managers

SAMPLE Midterm Exam 1

Note: This is an exam from a prior semester. It is provided to give you an example of the types of questions
that may be asked. Your exam will be similar in format to this. Due to schedule differences from year to
year, your exam may include topics not tested on this exam.

Extra Credit Question: In what city is the organization that creates US GAAP located? (2 pts)

Extra credit answer space ___________________________________________________

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1. Poppy Company operates retail stores. The following information is available from Poppys
2014 financial statements:

Cost of goods sold $120,000

Interest revenue 5,000
Income tax expense 12,000
Loss on sale of assets 17,000
Operating expenses 46,000
Sales revenue 200,000

Compute the following (3 points each):

a) Operating income/loss

b) Net income/loss

c) Gross profit/loss

d) What does the operating income figure tell us? What is the value of distinguishing between oper-
ating income and net income? (6 points)

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2. A perceived weakness of financial statements is that not all assets and liabilities of a company are
included on the financial statements. (10 points)

a) Give an example of an asset that may not be included on the financial statements and briefly explain
why.
b) Give an example of a liability that may not be included on the financial statements and briefly explain
why.

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3. Account classification.

Selected amounts from Babu Company's trial balance of 12/31/14 appear below:
1. Accounts Payable $ 160,000
2. Accounts Receivable 150,000
3. Accumulated DepreciationEquipment 200,000
4. Allowance for Doubtful Accounts 20,000
5. Bonds Payable (due in 2020) 500,000
6. Cash 150,000
7. Common Stock 60,000
8. Equipment 900,000
9. Insurance Expense 5,000
10. Interest Expense 10,000
11. Inventory 300,000
12. Notes Payable (due 6/1/15) 200,000
13. Prepaid Rent 180,000
14. Retained Earnings 818,000
15. Salaries and Wages Expense 328,000
(All of the above accounts have their standard or normal debit or credit balance.)

Part A. Indicate the proper balance sheet classification of each of the 15 numbered accounts in the
12/31/14 trial balance before adjustments by placing appropriate numbers after each of the fol-
lowing classifications. If the account title would appear on the income statement, do not put the
number in any of the classifications. 13 points)

a. Current assets ________________________________________________________________

b. Property, plant, and equipment __________________________________________________

c. Current liabilities _____________________________________________________________

d. Long-term liabilities ___________________________________________________________

e. Stockholders' equity ___________________________________________________________

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4. In each set of t-accounts below, a transaction is represented. Please describe the transaction. (20 points)
Example:

Cash Service Revenue

500 500

Description: The Company performed services for $500 and was paid in cash

a.
Cash Unearned Revenue

1,000 1,000

Description:

b.
Inventory Accounts Payable

1,000 1,000

Description:

c.
Wages Payable Wages Expense

17,000 17,000

Description:

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 d.
Cash Equipment Note Payable

4,000 34,000 30,000

Description:

e.
Common Stock Additional
Cash (Par value $1.00) Paid-in Capital

119,000 7,000 112,000

Description:

5. Using the general journal page on the next page, please record journal entries for the following transac-
tions. (12 points)

a. On July 1, 2014, the company paid $24,000 for a 12-month property insurance policy. The policy
expires on June 30, 2015.

b. On August 1, 2014, the company took out a $20,000 bank loan with an interest rate of 5%.

c. On November 30, 2014, the company paid off the bank loan from August 1 (including interest).

d. On December 31, the company made the required adjusting entry related to the insurance policy pur-
chased in July 1.

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 GENERAL JOURNAL

Date Description Debit Credit

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6. a. Explain how a company could report increasing net income on the income statement, but still run out of
cash. (5 points)

b. Why do accounting standards require companies to use accrual basis accounting? (5 points)

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7. Financial statements in the United States rely heavily on historical cost information, particularly in the
valuation of land, buildings, and equipment. However, international accounting standards allow for fixed
assets to be reported at their current values. As an example, Diageo (a British consumer products firm)
provides financial statements using a current value basis to measure fixed assets. In its 2008 annual report,
Diageo reported land and buildings with a current value of 2,122 billion. The historical cost of these assets
is 1,149.

a) Why do accountants in the United States focus primarily on historical cost figures? (5 points)

b) What are the risks of presenting current value information in the body of the financial statements to
investors, creditors, and auditors? (5 points)