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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 Cost of Goods Sold Depreciation Expense Freight-Out Expense Income Tax Expense Insurance Expense Interest Expense Interest Income Loss on Sale of Equipment Rent Expense Salaries Expense Sales Sales Returns and Allowances Utilities Expense $ 12,000 363,400 9,000 7,600 9,750 4,500 3,600 2,500 5,000 24,000 56,000 536,800 6,700 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 Accounts Receivable Accumulated Depreciation, Building Accumulated Depreciation, Equipment Bonds Payable (due in 10 years) Building Cash Common Stock, $10 par value Equipment Franchise Income Taxes Payable Inventory Land Notes Receivable (due in 2 years) Paid in Capital in Excess of Par Value Prepaid Rent Retained Earnings Short-Term Investment Unearned Revenue Wages Payable $ 1,500 800 1,000 500 4,000 8,000 200 7,000 2,500 1,800 300 3,000 2,000 2,700 3,000 100 2,000 400 500 1,700

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KILPATRICK CORPORATION INCOME STATEMENT

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AMER CORPORATION BALANCE SHEET

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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.

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Cash Accounts Receivable, net Inventory Prepaid Expenses Long-Term Investments Land Buildings and Equipment Accumulated Depreciation Accounts Payable Accrued Liabilities Bonds Payable Long-Term Note Payable Common Stock, $2 par value Paid-in Capital in Excess of Par Value Retained Earnings

2005 $ 30,000 410,000 300,000 20,000 50,000 560,000 2,000,000 (800,000) $ 2,570,000 $ 300,000 40,000 500,000 150,000 200,000 710,000 670,000 $ 2,570,000

2004 $ 50,000 460,000 320,000 15,000 25,000 300,000 1,900,000 (770,000) $ 2,300,000 $ 120,000 50,000 800,000 0 160,000 550,000 620,000 $ 2,300,000

Additional information about 2005 transactions and events: (a) (b) (c) (d) (e) (f) (g) (h) (i) Net income was $110,000. Depreciation expense on buildings and equipment was $60,000. Sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 for cash of $17,000. Declared and paid cash dividends of $60,000. Issued a $150,000 long-term note payable for buildings and equipment. Purchased long-term investments for $25,000. Paid $300,000 on the bonds payable. Issued 20,000 shares of $2 par value common stock for $200,000. Purchased land for $260,000.

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SAVAGE CORPORATION STATEMENT OF CASH FLOWS

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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: 2005 Dec. 1 3 5 12 13 14 25 26 31 Received a 4-month, 12%, $8,000 note from customer in settlement of an account receivable. Purchased $800 of merchandise on credit. Returned $200 of the merchandise purchased on Dec. 3. Paid for the remaining merchandise purchased on Dec. 3. Sold merchandise on credit for $1,000 (cost = $600). The customer of Dec. 13 returned $100 of the merchandise (cost = $60). Received payment of $500 from the customer of Dec. 13. Purchased $250 of office supplies on credit. 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 companys 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. Received payment in full on the promissory note from the customer of Dec. 1. Wrote off the remaining balance due from the customer of Dec. 13 after all efforts to collect were unsuccessful. General Journal Date Description Debit Credit

2006 April May

1 13

2005

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General Journal Date Description Debit Credit

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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 T F T F T F T F T F T F 1. Natural resources, such as coal mines and oil wells, are classified as intangible assets. 2. When accounting information can affect the outcome of a decision, it is said to contain the qualitative characteristic of relevance. 3. Employing an acceptable accounting procedure primarily to produce favorable financial results is an example of fraudulent financial reporting. 4. Retained earnings will not appear on the balance sheet of a sole proprietorship. 5. Gross margin from sales would be disclosed in a single-step income statement. 6. In accounting, $5,000 represents the difference between a material item and an immaterial one. 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. 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. 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. The normal operating cycle includes all the following events except A. 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.

9.

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

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CHAPTER 14
True-False T F T F. T F T F T F T F 1. Cash flow yield measures net cash flows from operating activities in relation to net income. 2. A firms sale of its own common stock is a cash inflow that will appear in the investing activities category. 3. Cash equivalents are highly liquid investments with an original maturity of less than one year. 4. Interest and dividends received are considred financing activities. 5. Purchases and sales of investments are disclosed separately on the statement of cash flows. 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, except A. dividends paid. B. cash flows from operating activities. C. net income. D. net capital expenditures. The settlement of a debt by issuing stock is considered A. a financing activity. B. an investing activity. C. an operating activity. D. a noncash transaction.

8.

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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. Analysis of the investing activities section of the statement of cash flows will show A. any sales or repurchases of the companys 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. 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. Operating activities do not include A. 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. Investors and creditors would be least likely to use the statement of cash flows to assess a companys A. 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.

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CHAPTER 6
True-False T F T F T F T F 1. A physical inventory need not be taken periodically in a perpetual inventory system. 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. 3. The ending inventory of one period automatically becomes the beginning inventory of the following period. 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. $236,000 B. $244,000 C. $296,000 D. $304,000 E. $364,000 Ignoring income taxes, a net loss results when operating expenses exceed A. cost of goods sold. B. gross margin. C. purchases of inventory. D. sales.

6.

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7.

A company whose customers have returned goods that were previously sold on credit A. 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 T F T F T F T F 1. When a year-end adjustment is made regarding a note receivable, the company records Interest Expense. 2. Interest of 6% on $100 for 90 days is computed by multiplying $100 x 0.06 x 90. 3. The allowance method for uncollectible accounts follows the matching principle. 4. The maturity value of a note equals the face value of the note plus the interest. 5. When a customer overpays, the customers 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. 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. 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. Which of the following is not a short-term liquid asset? A. Cash. B. Accounts Receivable. C. Investments classified as Short-Term. D. Inventory. The receivable turnover is expressed in terms of A. 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 CORPORATION INCOME STATEMENT For the Year Ended December 31, 2005 NET SALES: Sales Less Sales Returns and Allowances Net Sales COST OF GOODS SOLD GROSS MARGIN OPERATING EXPENSES: Advertising Expense Depreciation Expense Freight-Out Expense Insurance Expense Rent Expense Salaries Expense Utilities Expense Total Operating Expenses INCOME FROM OPERATIONS OTHER REVENUES AND EXPENSES: Interest Expense Interest Income Loss on Sale of Equipment Net Other Revenues and Expenses INCOME BEFORE INCOME TAXES INCOME TAX EXPENSE NET INCOME EARNINGS PER SHARE EPS = $19,750 / 100,000 shares $ (3,600) 2,500 (5,000) (6,100) $29,500 9,750 $19,750 $ .20 $12,000 9,000 7,600 4,500 24,000 56,000 18,000 131,100 $35,600 $536,800 (6,700) $530,100 363,400 $166,700

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CHAPTER 5--Classified Balance Sheet

AMER CORPORATION BALANCE SHEET December 31, 2005 ASSETS Current Assets: Cash Short-term investment Accounts receivable Inventory Prepaid rent Total Current Assets Investments: Notes receivable Property, Plant, and Equipment: Land Building Less Accumulated depreciation Equipment Less Accumulated depreciation Total Property, Plant, & Equipment Intangibles: Franchise TOTAL ASSETS $2,000 $8,000 (1,000) $2,500 (500) 7,000 2,000 11,000 1,800 $20,000 $200 400 800 3,000 100 $4,500 2,700

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LIABILITIES Current Liabilities: Accounts payable Income taxes payable Unearned revenue Wages payable Total Current Liabilities Long-Term Liabilities: Bonds payable Total Liabilities STOCKHOLDERS EQUITY Contributed Capital: Common stock, $10 par value, 700 shares issued & outstanding Paid in capital in excess of par Total Contributed Capital Retained Earnings Total Stockholders Equity TOTAL LIABILITIES & STOCKHOLDERS EQUITY $1,500 300 500 1,700 $4,000 4,000 $8,000

$7,000 3,000 $10,000 2,000 12,000 $20,000

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CHAPTER 14--Statement of Cash Flows

Savage Corporation Statement of Cash Flows For the Year Ended December 31, 2005 Cash 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 Cash Flows from Investing Activities: Sold Equipment Purchased Long-Term Investments Purchased Land Net Cash Flows from Investing Activities Cash Flows from Financing Activities: Paid Dividends Paid Bonds Payable Issued Common Stock Net Cash Flows from Financing Activities Net Decrease in Cash Cash at Beginning of Year Cash at End of Year Noncash Investing & Financing Activities: Issued Notes Payable for Building & Equipment $(60,000) (300,000) 200,000 (160,000) $(20,000) 50,000 $30,000 $150,000 $17,000 (25,000) (260,000) (268,000) $408,000

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

General Journal Date 2005 Dec 1 3 5 12 13 Description Notes Receivable Accounts Receivable Merchandise Inventory Accounts Payable Accounts Payable Merchandise Inventory Accounts Payable ($800 - $200) Cash Accounts Receivable Sales Cost of Goods Sold Merchandise Inventory Sales Returns Accounts Receivable Merchandise Inventory Cost of Goods Sold Cash Accounts Receivable Office Supplies Accounts Payable Uncollectible Accounts Expense Allowance for Uncollectible Accounts ($250,000 x 3%) Interest Receivable Interest Income ($8,000 x 12% x 1/12) Interest Receivable Interest Income ($8,000 x 12% x 3/12) Cash Notes Receivable Interest Receivable Allowance for Uncollectible Accounts Accounts Receivable ($1,000 - $100 - $500) Debit 8,000 8,000 800 800 200 200 600 600 1,000 1,000 600 600 100 100 60 60 500 500 250 250 7,500 7,500 80 80 240 240 8,320 8,000 320 400 400 Credit

14

25 26 31

31 2006 April 1

May 13

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ANSWERS TO OBJECTIVE QUESTIONS

Chapter 5 1. F 2. T 3. F 4. T 5. F 6. F 7. T 8. C 9. A 10. E 11. D 12. A 13. C 14. B 15. D Chapter 14 1. T 2. F 3. F 4. F 5. T 6. T 7. C 8. D 9. B 10. B 11. C 12. A 13. D Chapter 6 1. F 2. F 3. T 4. F 5. C 6. B 7. A Chapter 7 1. F 2. F 3. T 4. T 5. F 6. C 7. A 8. D 9. D 10. D