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# Mid-Term

1. Sam Smith is the sole stockholder and operator of Smiths Catering Company.
At the end of the accounting period, December 31, 2000, Sams Catering has
assets of \$135,000 and liabilities of \$72,000.

Required: Using the accounting equation and considering each case
independently, determine the following amounts:

## a. Stockholders equity on 12/31/2000.

b. The amount and direction (increase or decrease) of the periods
change in stockholders equity if, during 2001, assets decreased by
\$22,000 and liabilities decreased by \$7,000.
c. Net income (or net loss) during 2001, assuming that as of December
31, 2001, assets were \$148,000, liabilities were \$75,000, capital stock
of \$25,000 was issued and dividends of \$12,000 were paid.

Solution # 1:

Net income (or net loss) during 2001, assuming that as of December 31, 2001, assets
were \$148,000, liabilities were \$75,000, capital stock of \$25,000 was issued, and
dividends of \$12,000 were paid
a) Assets = Liabilities + Owners Equity
\$135,000 = \$72,000 + ?
135,000 = 72,000 + 63,000

b) Change in 2001 -22,000 = -7,000 + ?
-22,000 = -7,000 + -15,000

c) Step 1: solve for 12/31/2001 equity
12/31/2001 \$148,000 = \$75,000 + ?
148,000 = 75,000 + 73,000
12/31/2000 135,000 = 72,000 + 63,000
Change in 2001 \$13,000 = \$3,000 + \$10,000

Step 2: solve for net income
Capital stock - Dividends + Net Income = Change in Equity
\$25,000 - -12,000 + ? \$10,000
Net Loss = \$3,000 = 10,000 - 25,000 +12,000

## 2. For each of the following transactions, indicate which elements of the

accounting equation are affected (minimum of 2 per transaction) and whether the
element has increased or decreased as a result.

a) Paid rent for August \$3,000
b) Received cash from cash customers \$7,500
c) Received cash for capital stock \$15,000
d) Paid creditors on account \$800
e) Received cash from customers on account \$1,200

Solution #2:

a) Asset decrease Owners equity decrease
b) Asset increase Owners equity increase
c) Asset increase Owners equity increase
d) Asset decrease Liabilities decrease
e) Asset increase Asset decrease

3. For each of the following transactions, indicate which elements of the accounting
equation are affected (minimum of 2 per transaction) and whether the affected
elements have increased or decreased as a result.
a. Purchased supplies for cash, \$1,200
b. Paid cash dividends, \$1,000
c. Billed customers for services rendered on account, \$2,800
d. Paid utilities for September, \$85
e. Purchased equipment on account, \$3,200
f. Received cash for services rendered, \$900
g. Determined that the cost of supplies on hand was \$30; therefore, \$90
h. Paid \$1,000 equipment purchased in (e) above

Solution # 3:

a) Asset increase Asset decrease
b) Asset decrease Owners equity - decrease
c) Asset increase Owners equity - increase
d) Asset decrease Owners equity - decrease
e) Asset increase Liabilities increase
f) Asset increase Owners equity - increase
g) Asset decrease Owners equity - decrease
h) Asset decrease Liabilities decrease

## 4. Indicate the financial statement on which each of the following accounts

would appear.

a) Prepaid rent
b) Cash
c) Capital stock
d) Rent expense
e) Dividends
f) Fees earned
g) Accounts payable
h) Retained earnings

Solution #4:

a) Prepaid rent balance sheet - asset
b) Cash balance sheet - asset
c) Capital stock balance sheet owners equity
d) Rent expense income statement - expense
e) Dividends retained earnings
f) Fees earned income statement - revenue
g) Accounts payable balance sheet - liabilities
h) Retained earnings statement of retained earnings

## Mid-Term ACC1011 Answer Key Name:__________________________________________

5. The following table shows financial data for Sweet Cupcakes, Inc. as of June 30,
2014. Prepare a balance sheet using this data.

Accounts receivable \$419,200
Accounts payable 349,200
Inventory 58,400
Capital stock 662,100
Other assets 69,400
Notes payable 268,900
Cash 732,600
Equipment 118,500
Retained earnings 117,900

Solution #5:

Assets
Cash
AR
Inventory
Equipment
Other Assets
TOTAL ASSETS

## Sweet Cupcakes, Inc.

Balance Sheet
As of June 30, 2014

Liabilities
\$732,600
AP
419,200
Notes Payable
58,400
TOTAL LIABILITIES
118,500

69,400
Stockholders
Equity
\$1,398,100
Capital Stock

Retained Earnings

TOTAL
STOCKHOLDERS
EQUITY

TOTAL L & SE

\$349,200
268,900
\$618,100

\$662,100
117,900
\$780,000
\$1,398,100

## Mid-Term ACC1011 Answer Key Name:__________________________________________

6. Determine the net income (or net loss) for the year, assuming that additional
capital stock of \$35,000 was issued, and that no dividends were paid.

Total Assets
Total Liabilities

Beginning of the year
\$625,000
\$428,000

End of the year
\$782,000
250,000

Solution #6:

Assets -
Liabilities =
OE
Beginning of the
625,000
428,000
197,000
year
End of the year
782,000
250,000
532,000
Increase OE

335,000

Increase in OE
335,000

Stock issued
35,000

Dividends
0

Net Income
300,000

7. Fill in the blank:
a. The Income Statement summarizes all revenue and expenses for a
period. If the revenues exceeds expenses, the result is a net income. If
the expenses exceed the revenues, the result is a net loss.

8. Accountants communicate with users through four financial statements.
What are they? List them in the order that they should be prepared.

a. Income Statement
b. OE Statement
c. Balance Sheet
d. Statement of Cash Flows

9. Fill in the blank:
a. The Balance Sheet is a position statement that shows the position of
the business at a point of time. It MUST balance, where the A = L + OE

10. Fill in the blank:
a. The Statement of Cash Flows reports three different activities, these
are Operating, Investing and Financing.

## Mid-Term ACC1011 Answer Key Name:__________________________________________

11. Resources owned by a business and used in carrying out its operating
activities are:
a. liabilities
b. stockholders' equity
c. revenues.
d. assets.

## 12. GAAP is an abbreviation for:

a. Generally authorized accounting procedures.
b. Generally applied accounting procedures.
c. Generally accepted auditing practices.
d. Generally accepted accounting principles
13. The amounts of the assets and liabilities of Wilderness Travel Service at April
30, 2014, the end of the current year, and its revenue and expenses for the
year are listed below. The capital of Harper Borg, owner, was \$180,000 at
May 1, 2013, the beginning of the current year, and the owner withdrew
\$40,000 during the current year.

Accounts payable

\$ 25,000

Accounts receivable

210,000

Cash

146,000

Fees earned

875,000

Miscellaneous expense

1 5,000

Rent expense

75,000

Supplies

\$ 9,000

Supplies expense

12,000

Taxes expense

10,000

Utilities expense

38,000

Wages expense

525,000

Instructions
1. Prepare an income statement for the current year ended April 30, 2014.
2. Prepare a statement of owner's equity for the current year ended April 30,
2014.
3. Prepare a balance sheet as of April 30, 2014.
4. What item appears on both the income statement and statement of owner's
equity?

## Mid-Term ACC1011 Answer Key Name:__________________________________________

14. The following errors took place in journalizing and posting transactions:
a. Rent of \$13,550 paid for the current month was recorded as a debit to Rent
Expense and a credit to Prepaid Rent.
b. A withdrawal of \$14,000 by Ron Sutin, owner of the business, was recorded as
a debit to Wages Expense and a credit to Cash.
Journalize the entries to correct the errors.
a. Prepaid Rent
13,550
Cash

13,550
b. Dividends
14,000
Wages Expense
14,000

15. Indicate which of the following errors, each considered individually, would
cause the trial balance totals to be unequal:
a. A fee of \$21,000 earned and due from a client was not debited to
Accounts Receivable or credited to a revenue account, because the
b. A receipt of \$11,300 from an account receivable was journalized and
posted as a debit of \$11,300 to Cash and a credit of \$11,300 to Fees
Earned.
c. A payment of \$4,950 to a creditor was posted as a debit of \$4,950 to
Accounts Payable and a debit of \$4,950 to Cash.
d. A payment of \$5,000 for equipment purchased was posted as a debit
of \$500 to Equipment and a credit of \$500 to Cash.
e. Payment of a cash withdrawal of \$19,000 was journalized and posted
as a debit of \$1,900 to Salary Expense and a credit of \$19,000 to Cash.
Indicate which of the preceding errors would require a correcting entry.
Inequality of trial balance totals would be caused by errors described in (c)
and
(e). For (c), the debit total would exceed the credit total by \$9,900 (\$4,950 +
\$4,950). For (e), the credit total would exceed the debit total by \$17,100
(\$19,000
\$1,900).
Errors (b), (d), and (e) would require correcting entries. Although it is not a
correcting entry, the entry that was not made in (a) should also be entered in
the journal.

## Mid-Term ACC1011 Answer Key Name:__________________________________________

16. (5 pts) Why is the debt to equity ratio important? What does it mean if a
business has a ratio of 3.5 and -3.5?

Debt to equity measures how much debt a company has compared to its
equity. That means it looks at how much the company owes and divides it by
the firm's equity. (Equity is just the opposite of debt -- it is ownership,
including shares of stock in a corporation.)

To state it another way, the ratio compares long-term funds provided by
creditors with funds provided by owners -- what a company owes versus the
amount of money it has invested in it. It indicates what portion or percentage
of equity and what portion or percentage of debt the company is using to

The formula for the debt to equity ratio is total liabilities divided by total
equity. The debt to equity ratio is a financial leverage ratio. Financial
leverage ratios are used to measure a company's ability to handle its long
term and short term obligations. Considering that a company's assets or
value is comprised of liabilities plus equity, the debt to equity ratio contrasts
these two variables to show a company's leverage position. As a company
increases their leverage or debt, they are considered a higher risk. This
higher risk and debt to equity ratio is discussed in the following section.

A high debt/equity ratio (3.5) means that the company has been "aggressive"
in financing its growth with debt and that it is carrying a sizable amount of
interest expense.

A ratio greater than 1 means assets are mainly financed with debt; a ratio
less than one (-3.5) means equity provides the majority of the financing.

Ideally, you want to invest in a company where the total debt to equity figure
is low -- below .50. However, there are many well-run companies that have a
ratio of 1 or even higher. But if the debt-equity ratio surpasses 2, be
extremely cautious. Make certain the company can handle its interest
payments, and that it has a strong cash flow.

## Mid-Term ACC1011 Answer Key Name:__________________________________________

17. (5 pts) When completing a horizontal analysis how do you determine the
amount and the percentage?

Horizontal analysis uses two financial statements (for example, two year-end
statements) to determine percentage changes based on dollar
changes.

a.
First the dollar change (increase or decrease) from the earlier
(base) period to the later period is calculated going
horizontally across the chart.

b.
Then the percentage change is calculated by dividing the
dollar change by the earlier (base) period amount.

18. (5 pts) Which of the following applications of the rules of debit and credit is
true?
a. Increase rent expense with debits and the normal balance is a debit.
b. Decrease accounts receivable with credits and the normal balance is a
credit.
c. Increase accounts payable with credits and the normal balance is a
debit.
d. Decrease cash with debits and the normal balance is a credit.

19. (5 pts) The process of initially recording a business transaction is called:
a. Charting
b. Posting
c. Journalizing
d. Transposing

20. (5 pts) Accounts with normal debit balances include:
a. Assets and liabilities
b. Liabilities and expenses
c. Expenses and assets
d. Stockholders equity and revenues

21. (5 pts) Borrowing cash from the bank causes assets to decrease and
liabilities to increase.
a. True
b. False Borrowing cash from the bank causes assets to increase and

would be true.