York University AP/Adms 2500.03Introduction to Financial AccountingMidterm Examination – Test Form A

Time: 3.0 hours Winter 2010 Questions: 50 Instructions:1. Only the mark sense sheet will be collected - - you may keep this midterm examination paper. Mark

your answers on it for later reference.2. Record your name and student number and answer all questions on the computer mark sense sheet

provided with an HB (soft lead) pencil.• Test Form is 'A' and Code is your Section (in the left column)

• Fill in the bubbles for your name and student number in pencil (your phone number is not required). Leave the last column of the student number BLANK

3. Calculators without alphanumeric programmable memories are the only aid allowed. The exam is three hours in length. Check that your exam contains 50 questions. Budget your time carefully. You should not spend more than 3.5 minutes per question, otherwise you will not finish the exam.4. It is essential to transfer your answers to the grading sheet after each question in case the exam is

interrupted by fire alarm and to double check your transfers. It is always a good idea to attempt the questions you deem easiest first as an interrupted exam may just mark your score based on questions attempted.

• The proctors will announce when there are 15 minutes remaining and any answers not transferred should be recorded at this time. No one is to leave their seats in the last 15 minutes.

• When time is called, the proctors will go down the rows collecting your answer sheets and this exam paper. They will not wait and they will not accept your sheet once they have passed. Any violation of this protocol will result in a grade of zero recorded for the exam.

5. In the event of a fire alarm, you are to leave your exam and answer sheet face down on your desk and immediately proceed outside with coats and all personal belongings. Print your surname on the back of the exam so you know which seat to return to. An invigilator will lead the group outside to a place of safety. There is to be no talking during the evacuation or outside. Most rooms are cleared within 30 minutes of the alarm. You will be told after this time whether to reenter the room and recommence the exam or to go home. You are reminded that cheating is a serious offense which can result in expulsion from university.

Question 1Under the Cash Paradigm revenue is recognized when:

a) it is earnedb) the sale is invoicedc) cash is received

d) the posting is made to the ledger accounte) none of the above

Question 2Under the double entry bookkeeping system:

a) debits must equal creditsb) at least two ledger accounts are affected by every transactionc) the balance sheet equation always stays in balanced) none of the above (choices a, b and c) are correcte) all of the above (choices a, b and c) are correct

Question 3The balance in the Prepaid Rent Account is $1,000 less at the end of the month than at the beginning of the month. This implies that:

a) $1,000 must have been charged to an asset account during the monthb) $1,000 must have been charged to a liability account during the monthc) $1,000 must have been charged to an expense account during the monthd) $1,000 must have been charged to a revenue account during the monthe) None of the above are correct statements

Question 4Liabilities increase by $1 during the period and Assets decrease by $1 during the same period. This implies that:

a) Equity decreases by $1 during this periodb) Equity decreases by $2 during this periodc) Equity increases by $1 during this periodd) Equity remains unchanged during this periode) The impact on Equity cannot be predicted from the limited information provided

Question 5Ace Company uses the Aging Method (a variant of the allowance method) to estimate its losses from uncollectible receivables. At period end, prior to preparation of its financial statements and before it makes adjusting entries, it does an aging analysis of its accounts and concludes that an allowance of $50,000 is appropriate. The unadjusted ledger balance in the Allowance account is a credit balance of $50,000. Ace should:

a) Make no adjusting entry to record bad debt expenseb) Make an entry charging expense for $50,000c) Make an entry charging expense for $100,000

d) Make an entry reducing expense by $50,000e) None of the above actions are appropriate under GAAP

Question 6If a company uses the FIFO Method of valuing its inventory, this requires that:

a) It actually sells its oldest inventory firstb) It actually sells its most recently acquired inventory firstc) It charges the costs associated with its oldest inventory to Cost of Sales firstd) It charges the costs associated with its most recently acquired inventory to Cost of Sales firste) None of the above are correct statements

Question 7Bag Company buys on account $1,000 of merchandise from Cart Company subject to terms 2/10 n/30 on Feb 1. On Feb 2 it returns $200 worth of merchandise for full credit. Bag pays its balance in full on Feb 5. Bag would write a cheque on Feb 5 for:

a) $1,000b) $780c) $784d) $800e) none of the above

Question 8The Petty Cash Box has 3 vouchers in it (one for taxi fare in the amount of $25, one for courier charges of $18 and one for office treats bought at Tim Hortons for $35. The accountant forgets to make a replenishment entry prior to generating the financial statements for the period. The financial statement implications of this are that:

a) no implications as the replenishment can occur anytime and is independent of financial statement generation

b) Net income is overstated by $78c) Net income is understated by $78d) Income is correctly stated but assets are understated by $78e) There is not enough information provided to assess financial statement impact

Question 9

Western Company normally makes the journal entry for a purchase of inventory and recognition of the payable on receipt of a vendor invoice. On December 31 (year end) it receives an invoice for $1,000 from Far East Ltd. and records the purchase. However, the incoming shipment is actually still in transit (in mid Pacific) at year end and the sales terms were FOB destination. Western takes a physical count of inventory at the end of year as standard procedure. Western:

a) should catch the error when it compares the count to the records (the book to physical adjustment)

b) does not legally own the goods on December 31c) should reverse the purchase entry to correct the errord) Choices a, b and c all represent incorrect statementse) Choices a, b and c all represent correct statements

Questions 10 to 25 inclusive are based on the following data for Narmin’s Art Shoppe=========================================================================================

Narmin’s Art ShoppeNarmin Dreamboat had always wanted to operate her own business and with an inheritance received from recently deceased Aunt Gertrude, she was able to realize her dream. She had a love of native art and decided to open a boutique selling Eskimo soapstone carvings and also paintings done on caribou hides in whalebone frames. The first step was to open an account for the business and to get a business license from the city. On May 1 she deposited $50,000 in a commercial account in a bank on the Toronto waterfront, since that was to be the location of her business. The account charged a service fee of $400/month. This was a new type of account called the “Prestige Plan” and the fee seemed really steep, but it provided free personalized cheques and a corporate credit card with a limit equal to her current bank balance. More importantly any credit card sales made by the store would not be charged a commission by the bank. They would remit the entire proceeds into her account. She next went down to city hall and paid $600 for a business license in the name “Narmin’s Art Shoppe”. This license fee would have to be paid annually. Next job was to find a location. She found a vacant shop right on the waterfront (Queen’s Quay) and on May 1 signed a two year lease. She had to pay May’s rent of $2,000 in advance and also the last month’s rent so the cheque was for $4,000. Next task was to buy fixtures, shelves, display cabinets, desk, cash register, computer etc. She was able to get everything she needed on May 2 from Grind & Toy Office Supply for $12,000 and put the purchase on her new company VISA credit card. From what G&T told her, it looked like this equipment would last 4 years before having to be replaced. There was immediate delivery and she spent the rest of the day with paint brush and bucket and spent the rest of the day setting up the store. Next task was to acquire inventory. From her previous volunteer work at the Toronto Museum of Art, Narmin knew a distributor of Eskimo Art , Sammy Spear, and she gave him a call. He recommended she stock her store using a dual strategy. For $20,000 he would deliver a selection of art work (mostly small soapstone carvings). She only had to pay $10,000 up front and the balance due at month end. However, he would also deliver a selection of larger pieces

that the artists agreed to display on consignment. This meant the original artist still owned the item and when she sold a piece she would retain a 30% sales commission and remit the remainder back to the artist. This would be done monthly. Fortunately, she had to write only one cheque for these commission sales to Sammy and he collected his own commission from the artists for acting as clearing agent. A truck pulled up on May 2 and by the end of the day her shop was ready to roll. Narmin spent some time that day setting up her accounting system. She decided because of the high dollar value of each item to set up a perpetual inventory system for the art she had purchased. Each item was marked up 100% to set selling price. For the consignment inventory, these items were not entered into her accounting system. Narmin just kept a folder of the shipping notices received from Sammy which included suggested selling prices. When she sold an item she would retain 30% as commission and send the other 70% on to Sammy. Now she needed just one more thing…. Customers! Narmin knew from her business studies at York the power of advertising and had arranged for a grand opening on May 3 with banners, ribbon free snacks and refreshments for customers . These supplies came to $600. Most importantly she had arranged for the leading radio station in Toronto to broadcast remotely from her store that day with of course on air interviews with herself and countless references to come down and join the party. The icing on the cake was that Canada’s most famous Innuit artist, Naomi Greywolf, volunteered to appear and sign autographs at the event. It went swell! She made numerous sales and people thronged the event. Narmin decided to wait until after the beginning of next month to reorder any stock from Sammy. The initial shipment had been so large that she still had ample stock to fill the store shelves at the end of May. Since she was using a perpetual inventory system and a specific identification valuation approach, she knew that Cost of Sales for the month totaled $9,000. It appeared Narmin’s dream had come true. All she had to do now was wait until month end when she could generate her first set of financials and see whether she would be eating Kraft Dinner or caviar next month. Narmin had a whole cupboard full of macaroni at home and prudently decided to wait at least a couple of months before paying herself a salary or taking any drawings from the business. Even though she had no external reporting obligations, Narmin decided that she would be better off is she used strict rules of GAAP right from day one. She decided to reserve Accounts Payable just for inventory transactions and set up other payables in an account called Miscellaneous Payables. Narmin had decided not to record consignment inventory in her ledger. She realized that consignment sales would have to pass through her system and decided she would record the gross sale in a separate revenue account called Consignment Sales and for the amount remitted back to the distributor charge the debit to Cost of Sales. This way her net revenue on the transaction would show on her income as the appropriate 30% In addition to the information above, on May 31 (prior to any adjustments) Narmin’s records showed the following:Cash Sales (including credit card sales) of items from inventory $18,000Cash Sales (including credit card sales) of consignment inventory $21,000

Bill received for store utilities (hydro, water etc) - unpaid $400Bill received from the radio station for advertising – unpaid $2,200Bill received for catering the food at the grand opening – paid $600Bill received for an ad placed in Canadian Art Life Magazine – unpaid $300Narmin decided to not pay any unpaid bills others than those already paid until the first of June.

This page is left blank to use for your calculations

Narmin Trial Balance Cash 46,700Owners Equity 50,000Bank Service Charges 400Business Licenses 600Prepaid Rent 2,000Rent Expense 2,000Furniture & Fixtures 12,000Inventory 11,000Accounts Payable 10,000Promotion Expense 3,100Sales 18,000Consignment Sales 21,000Utility Expense 400Miscellaneous Payables 2,900Depreciation Expense 250Accumulated Depreciation 250Cost of Sales 23,700 TOTALS 102,150 102,150

This page is left blank to use for your calculations

CASH ACCOUNT

50,000

18,000

21,000

400

600

4,000

12,000

10,000

600

14,700Balance = 46,700

This page is left blank to use for your calculations NARMIN INCOME STATEMENTRevenue $39,000Cost of Sales (23,700)

Gross Profit 15,300Expenses Bus Licenses 600 Rent 2,000 Promotion 3,100 Utilities 400 Depreciation 250 Bank Charges 400 (6,750)Net Income $8,550 NARMIN BALANCE SHEETCash $46,700Inventory 11,000Prepaids 2,000Furniture & Fixtures 12,000Accumulated Depn (250)Total Assets $71,450 Accounts Payable 10,000Miscellaneous Payables 2,900Owners equity 58,550Total Liabilities & Equity $71,450

Question 10Narmin’s Art Shoppe  5/31 Balance Sheet shows Cash as: a) $8,400 b) $15,350 c) $46,700 d) 59,300 e) none of the above Question 11Narmin’s Art Shoppe  5/31 Balance Sheet shows Receivables as:

a) $0b) $10,200

c) 14,400d) $21,000e) none of the above

Question 12Narmin’s Art Shoppe 5/31 Balance Sheet shows Prepaids as:

a) $0b) $1,000c) $2,000d) $3,000e) none of the above

Question 13Narmin’s Art Shoppe 5/31 Balance Sheet shows Inventory as:

a) $0b) $4.500c) $9,000d) $11,000e) none of the above

Question 14Narmin’s Art Shoppe 5/31 Balance Sheet shows the net book value of Capital assets as

a) $7,500b) $11,500c) $12, 800d) $14,100e) none of the above

Question 15Narmin’s Art Shoppe  5/31 Balance Sheet heading would contain the following wording:

a) For the month ended May 31b) As at May 31

c) For the year ended May 31d) Month End Balance Sheete) None of the above

Question 16Narmin’s Art Shoppe 5/31 Balance Sheet shows Accounts Payable as:

a) $0b) $7,000c) $10,000d) $12,000e) None of the above

Question 17Narmin’s Art Shoppe  5/31 Income Statement shows Gross Profit as:

a) $0b) $15,300c) $18,600d) $20,100e) None of the above

Question 18Narmin’s Art Shoppe  5/31 Income Statement shows Total Expenses (other than inventory related) as:

a) $6,750b) $7,650c) $8,450d) $9,900e) None of the above

Question 19Narmin’s Art Shoppe’s 5/31 Income Statement shows Net Income as:

a) $3,200 net lossb) $500c) $5,500d) $8,550e) None of the above

Question 20From the information provided, Narmin’s Art Shoppe appears to be operating as:

a) a sole proprietorshipb) a partnershipc) a corporationd) a not for profit entitye) some other form of business entity

Question 21From the information provided, Narmin’s Art Shoppe appears to be using the:

a) cash paradigmb) income paradigmc) accrual paradigmd) profit and loss paradigme) the hokey pokey paradigm

Question 22Narmin’s niece Natasha who was currently taking ADMS 2500 suggested that Narmin could have improved her bottom line (net income) by expensing the furniture and fixtures immediately instead of depreciating these assets over 3 years. Natasha:

a) is quite clearly an A studentb) looks destined for a big fat Fc) has blonde hair and green eyesd) wears size 12 shoese) likes pickles on chocolate ice cream

Question 23Narmin’s banker dropped around for a cup of green tea one day and mentioned that she thought she owed it to mention to Narmin that most businesses seem to find the regular Green Plan more to their liking than the Prestige Plan. Instead of a monthly fee of $400, the monthly fee would be only $50 but there would be a 3% fee on each credit card transaction by her customers. Total credit card sales of regular and consignment inventory were 90% of all sales. When Narmin ran the numbers herself she found that:

a) Net Income with the Green Plan increasedb) Net Income with the Green Plan decreasedc) Net Income with the Green Plan stayed the samed) there was not enough information to come to a definitive conclusione) she liked green tea better than black tea

Question 24If Narmin had decided to use the Periodic Inventory system instead of a perpetual system of inventory and did not take a physical count of inventory in May:

a) Net Income would be higherb) Net Income would be lowerc) Net Income would not be impacted by the change in accounting methodd) Net Income cannot be computed e) None of the above

Question 25If May is completely representative of all 12 months upcoming ( a similar pattern of expenses and revenues each month) and solvency is defined as the ability to pay upcoming bills, then Narmin’s Art Shoppe appears to be:

a) profitableb) unprofitablec) profitable and solvent d) unprofitable but solvente) neither profitable nor solvent

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end of questions for Narmin’s Art Shoppe=================================================

Question 26

Jet Corporation’s Retained Earnings decreased by $800,000 during the year. Also during the year, dividends were paid to shareholders. The opening balance of Retained Earnings for the period was $1,900,000. Top Corporation’s net income for the year was:

a) a positive amountb) a negative amount ( a loss)c) smaller than the amount of dividends paidd) not determinable from the information providede) exactly equal to the amount of dividends

Question 27Using the following information:

Non Current Assets $100,000Current Assets $100,000Long-term Liabilities $100,000Current Liabilities ?Shareholder’s Equity ?

a) the balance of current liabilities must be zerob) the balance of shareholder’s equity must be less than total assetsc) total liabilities must equal $200,000d) shareholder’s equity must be $100,000e) none of the above

Question 28Choose the phrase that is most correct within the framework of Canadian GAAP:

a) the cash paradigm always produces a lower net income than the accrual paradigmb) the cash paradigm always produces a higher net income than the accrual paradigmc) the cash paradigm will always yield an identical reported net income to the accrual

paradigmd) Canadian companies can freely choose under Canadian GAAP which of the two

paradigms they adopte) It is situation specific (cannot be determined from the information provided here) which

paradigm produces the highest reported income Question 29

The balance of Total Assets for Q Co. is $600,000 on November 30. During December, the following took place:

Purchased $50,000 of inventory for cashPurchased a $100,000 Machine on accountPaid accounts payable of $100,000 with cashRecorded depreciation expense of $50,000Made sales on account of $100,000Made collections on account of $50,000 from November sales. No collections were made from December sales

Total Assets for Q Co. on December 31 are:a) $650,000b) $700,000c) $550,000d) $500,000e) none of the above

Question 30In the Cost of Goods Sold Equation:

a) Purchases are a deduction from C of Sb) Purchase discounts are a deduction from C of Sc) Transportation In is a deduction from C of Sd) Opening Inventory is a deduction from C of Se) None of the above

===========================================================Use the following information for Deluxe to answer questions 31 to 35:

The Deluxe Company sells toothbrushes. The following information has been extracted from the records of Deluxe.

January 1 Beginning Inventory 10,000 units @ $2.00 each

January 10 Bought 10,000 units @ $3.00 each

January 15 Sold 5,000 units @ $5.00 each

January 30 Bought 5,000 units @ $4.00 each

===============================================================Question 31If Deluxe uses the FIFO cost flow assumption and the perpetual method for inventory, the cost of

goods sold for January, isa) $10,000b) $15,000c) $20,000d) $25,000e) none of the above

Question 32If Deluxe uses the LIFO cost flow assumption and the periodic method for inventory, the cost of

goods sold for January isa) $10,000b) $15,000c) $20,000d) $25,000e) none of the above

Question 33If Deluxe uses a perpetual bookkeeping system, the inventory was counted on January 31, the stock count revealed there were 15,000 units on hand but no adjustment is made to the accounting records, the financial statements will

a) overstate inventory and net incomeb) understate inventory and net incomec) overstate inventory and understate net incomed) understate inventory and overstate net incomee) none of the above

Question 34 If Deluxe bought on account a purchase of 10,000 units on January 28, terms FOB Destination,

which was not received by the time of the January 31 physical inventory count and was excluded from both inventory and payables, it:a) would be understating both inventory and payablesb) would be overstating both inventory and payablesc) would be understating payables and overstating inventoryd) would be overstating payables and understating inventorye) is correctly following GAAP

Question 35If Deluxe uses the weighted average method of costing inventory and the periodic inventory

method and the market value of inventory on hand January 31 (where market is defined as NRV) is zero:

a) ending inventory will be valued at $2.05 per unit in the January financial statementsb) ending inventory will be valued at $4.00 per unit in the January financial statementsc) the financial statements for January will reflect the market value onlyd) the financial statements for January will reflect the cost onlye) Deluxe can ignore the market value because the weighted average method already

incorporates market information Question 36NSF cheques (not sufficient funds) shown on a bank reconciliation:

a) are shown as increases to the bank balance in the bank reconciliationb) are shown as increases to the general ledger cash account in the bank reconciliationc) should be reclassified as Accounts Payable in the monthly financial statementsd) both (b) and (c) are correcte) None of the above are correct

Question 37Deposits in transit shown on a company’s bank reconciliation :

a) are shown as decreases to the balance per bank statementb) are shown as increases to the balance per bank statementc) are shown as decreases to the balance per general ledgerd) are shown as increases to the balance per general ledgere) None of the above

Question 38When Q Co. prepares its bank reconciliation, which of the following will not necessitate making adjusting entries?

a) an outstanding chequeb) A deposit in transitc) A bank service charge that has not yet been recorded by the businessd) A charge by the bank for an NSF cheque e) Two of the above items will not require adjusting entries to be recorded.

Question 39If a company makes an error in recording its opening inventory such that it is understated from its true value by $10,000 then:

a) Net Income for the period will also be understated for this period by the amount of the error

b) Net income will be overstated this period by the amount of the errorc) The error has no effect on income since inventory is a balance sheet accountd) Net income will be understated by twice the amount of the errore) Net income will be overstated by half the amount of the error

Question 40In preparing its 2007 adjusting entries, Dumdum Ltd. incorrectly set up Customer Advances

Received in Advance on the last day of the period as a debit to Cash and a credit to Accounts Receivable. As a result:a) 2007 net income is understated, the balance in Retained Earnings is understated and

assets are understatedb) 2007 net income is overstated, the balance in Retained Earnings is overstated and assets

are correctly statedc) 2007 net income is overstated, the balance in Retrained Earnings is overstated and assets

are overstated d) 2007 net income is correctly statede) 2007 net income is understated, the balance in Retained Earnings is understated and

assets are correctly stated Question 41The Unsafe Company had a fire which destroyed its warehouse the last day of the year and needs to estimate its inventory to make an insurance claim. The accounting records show that the cost of merchandise on the first day of the year was $45,000. Records also show that Purchases were made during the year of $125,000. Sales for year to date are $180,000. Average markup on inventory is 50%. Estimate the cost of the inventory destroyed: a) $45,000 b) $50,000 c) $80,000 d) $62,500 e) some other amount

Question 42Using the same data for Unsafe as in the previous question and again assuming the company is insured against fire: a) it should record a loss due to fire , reduce its inventory and set up a receivable from the insurance company b) it should only set up a receivable and record the reduction in inventory c) it should record a loss due to fire and record the reduction in inventory d) it should continue to show the destroyed inventory on the balance sheet at its original cost since the insurance company will be replacing it e) none of the above Question 43Which of these statements is incorrect?

a) The debit credit equality of the ledger accounts cannot be demonstrated in the trial balance until after the adjustments are posted.

b) Debits are always recorded on the left side of revenue T accounts

c) Debits are always recorded on the left side of contra-revenue T accountsd) Accounts that have normal credit balances can have debit balancese) None of the above are incorrect

Question 44The name of the website where the annual reports of Canadian public companies can be found is called:

a) CIGARb) TITANc) CICAd) ROLLEe) None of the above

Question 45 The fiscal year end of Sloppy Company is December 31 and it uses the periodic inventory system. If an error is made in counting Ending Inventory at 12/31/08 such that $100,000 in

goods, which are properly owned by the company, are omitted from the count because they were sitting on the shipping dock then Net Income for the year ended December 31, 2009 is:

a) Understated by $100,000b) Overstated by $100,000c) Correctly statedd) Understated by $200,000e) None of the above

Question 46Blake Company is allowed to use the Direct Write Off method for bad debts because in twenty years they have never had any bad debts. This year for the first time a customer went bankrupt and Blake was forced to write off a $30,000 receivable. In making the write off entry Blake should credit:

a) the allowance for doubtful accountsb) bad debts expensec) accounts receivabled) loss on receivablese) some other account

Question 47Rico Company orders 25 weed whackers for its inventory from a supplier in Asia. Invoice cost is $625. GST is on the purchase is $50 and import duty charged is $25. Rico packages each unit in its own custom logo cartons for $2 a unit. Rico will carry the weed whackers in its inventory at:

a) $625b) $675c) $700d) $725e) some other amount

Question 48The use of the allowance method for estimating bad debts can best be described as an illustration of:

a) the conservatism principleb) the allowance principlec) the matching principled) the materiality principlee) some other principle

Question 49The main headings in the Cash Flow Statement are:

a) Cash, Financing and Investingb) Operating, Financing and Dividendsc) Income, Asset Acquisition, Financing

d) Operations, Financing, Investinge) None of the above

Question 50The Annual Report normally consists of:

a) 2 financial statements which articulateb) 3 financial statements which articulatec) 4 financial statements which articulated) 5 financial statements which articulatee) a set of financial statements which do not articulate