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Accounting Final Exam 2

Harvard Financial Accounting Final Exam 2

Q1. Which one of the following

statements is not true about statements of cash flows prepared according to
U.S. GAAP?

 The operating section of the indirect method starts with the net income
of the period.
 In the indirect method statement, the period’s depreciation is added to
net income because it is a source of cash.
 Interest payments are included in the operating section of the direct
method statement.
 The investing section of the direct method statement for a period is
identical to the investing section of the indirect method statement for the
same period.

Q2. Juan Foods pays off a long-term debt in full. Which one of the following
statements describes the effect of the transaction on Juan Foods?

 Current ratio increases; total debt to equity ratio decreases

 Current ratio decreases; total debt to equity ratio decreases
 Current ratio decreases; total debt to equity ratio increases
 Current ratio increases; total debt to equity ratio increases

Q3. Jon Sports’ inventory account increased from $25,000 on December 31,
2013, to $30,000 on December 31, 2014. Which one of the following items
would be included in the operating section of its 2014 indirect method
statement of cash flows?

 Add increase in inventory $5,000

 Subtract increase in inventory ($5,000)
 Add inventory balance $20,000
 Subtract inventory balance ($20,000)
Q4. The historical cost concept reflects the fact that financial accounting
practice favors

 reliability over relevance.

 management’s best guess over historical financial information.
 relevance over reliability.
 consensus market values over historical financial information.

Q5. Consider the same scenario as in the previous question: On March 31,
2015, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for
previous purchases. During April 2015, Preston sells Cars devices with a sales
price of $10,000 and a cost to Preston of $8,000. During April, Cars pays
Preston $12,000 against the amount owed to Preston. If Preston had no other
sales and records no other collections from customers during the month of
April, the operating section of Preston’s indirect method statement of cash
flows for April will show the following de-accrual adjustments to net income:

 Subtract change in accounts receivable; add change in inventory

 Add change in accounts receivable; subtract change in inventory
 Add change in accounts receivable; add change in inventory
 Subtract change in accounts receivable; subtract change in inventory

Q6. To be recorded as a liability, an item must meet three specific conditions.

Two of them are: it must involve probable future sacrifice of economic
resources by the entity, and it must be a present obligation that arose as a
result of a past transaction. Which one of the following is the third condition?

 The item must reduce the market value of the recording entity.
 It must involve a transfer of resources to another entity.
 It must involve the expenditure of cash now or in the future.
 It must not cause total liabilities to exceed total assets.

Q7. Juan Foods pays off a long-term debt in full. Which one of the following
statements best describes the appropriate book-keeping for this transaction?

 Debit cash; credit long-term debt

 Debit long-term debt; credit owners’ equity
 Debit owners’ equity; credit long-term debt
 Debit long-term debt; credit cash

Q8. Baxtra, Inc. pays $20,000 in cash as interest to its lenders during 2015.
According to U.S. GAAP, in which section of the statement of cash flows would
this payment be included?
 The operating section
 The financing section
 The investing section
 Depends on whether cash flow statement is direct or indirect method.

Q9. How much total depreciation and amortization expense did Patnode
record during 2015?

 $10,000
 $6,000
 $3,000
 $5,000

Q10. Taylor Company had a salaries payable balance of $18,000 on December

31, 2014. During 2015, it paid $50,000 in cash as salaries, and recorded a
salary expense of $50,000. What is its December 31, 2015, salaries payable
balance?

 $50,000
 $18,000
 $100,000
 Cannot be determined from the information provided

Q11. On December 31, 2015, Juan Foods purchases a van for $12,000. How
does the purchase of the van affect Juan Foods’ 2015 income statement?

 Decreases sales by $12,000

 Increases operating expenses by $12,000
 No material effect
 Increases cost of goods sold by $12,000
Q12. Sandy Robbins is the sole owner of a hair salon. He often takes small
amounts of “lunch money” from the cash register, figuring that “it is my
business anyway.” His accountant, however, insists that Sandy make a note of
the cash he takes, and at the end of the each accounting period, she debits
owners’ equity and credits the cash account for the total amount that Sandy
has taken during the period. In recording the cash withdrawals even though
Sandy is sole proprietor, the accountant is correctly applying the _______
concept.

 matching
 entity
 materiality
 conservatism

Q13. On March 31, 2015, Cars, Inc. owes Preston Devices, one of its suppliers,
$25,000 for previous purchases. During April 2015, Preston sells Cars devices
with a sales price of $10,000 and a cost to Preston of $8,000. During April,
Cars pays Preston $12,000 against the amount owed to Preston. What is the
effect of these April transactions on Preston’s balance sheet?

 Cash increased by $12,000; accounts receivable decreased by $2,000;

inventory decreased by $8,000; retained earnings increased by $2,000
 Accounts receivable increased by $2,000; inventory decreased by
$8,000; cash increased by $12,000; retained earnings increased by
$12,000
 Cash increased by $12,000; retained earnings decreased by $2,000;
inventory decreased by $10,000; accounts receivable decreased by
$12,000
 Cash increased by $2,000; accounts receivable decreased by $2,000;
inventory decreased by $8,000; retained earnings decreased by $12,000

Q14. When an entity recognizes revenue before it has received cash for the
sale, it records an increase in a(n) _______.

 liability such as ‘Advances from customers’

 accounts payable
 accounts receivable
 prepaid expense

Q15. What is Patnode’s total debt to equity ratio at the end of 2014 (rounded
to two decimal places)?

 5.30
 0.19
 0.25
 4.04

Q16. A company raised $50,000 in cash by taking a one-year loan of $10,000

and a 5-year loan of $40,000. Which of the following is the correct journal
entry to record this transaction?

 Debit short-term debt $40,000; debit retained earnings $10,000; credit

cash $50,000
 Debit short-term debt $50,000; credit cash $50,000
 Debit cash $50,000; credit long-term debt $50,000
 Debit cash $50,000; credit short-term debt $10,000; credit long-term
debt $40,000

Q17. Patnode’s 2015 statement of cash flows contains four items in the
financing section. Three of them are Short-term debt issued, $15,000; Short-
term debt paid, ($10,000); and Dividends paid, ($1,000). What is the fourth
item in the financing section?

 Retained earnings, $4,600

 Common stock issued, $3,000
 Long-term debt paid, ($3,000)
 Cash from financing, $3,000

Q18. Planet Music buys all of its inventory on credit. During 2015, Planet
Music’s inventory account increased by $10,000. Which of the following
statements must be true for Planet Music during 2015?

 It made payments of less than $10,000 to suppliers.

 It made cash payments of $10,000 to suppliers.
 It made more cash payments to its suppliers than it recorded as cost of
goods sold.
 It paid less cash to suppliers than it recorded as cost of goods sold.

Q19. During 2015, Sunrise Foods, Inc. records an interest expense of $5,000,
and pays $2,000 of it in cash. How should this accounting transaction be
recorded?

 Debit interest expense $5,000; credit cash $2,000; credit taxes payable
$3,000
 Debit interest expense $5,000; credit cash $2,000; credit interest
payable $3,000
 Debit various debt accounts $5,000; credit cash $2,000; credit interest
payable $3,000
 Debit interest expense $5,000; credit cash $2,000; credit various debt
accounts $3,000

Q20. What is Patnode’s current ratio at the end of 2014?

 2.46
 0.41
 1.12
 0.89

Q21. The fundamental accounting equation is a reflection of the _______

concept.

 money measurement
 conservatism
 dual-aspect
 historical cost

Q22. Which one of the following items will not appear in the operating section
of Patnode’s 2015 indirect method cash flow statement?

 Deduct: increase in accounts receivable $3,000

 Add: decrease in accounts payable $1,000
 Add: increase in taxes payable $2,400
 Add: decrease inventories $6,000

Q23. During 2015, Patnode recorded sales of $17,000. How much cash did it
collect from its customers?

 $17,000
 $14,000
 $3,000
 Cannot be estimated

Q24. Annie’s Fitness sells a set of free weights to a customer for $1,000. The
customer pays $600 in cash and puts the rest on her store credit account.
Which one of the following statements describes the most appropriate
accounting for the transaction?

 Debit cash $600; debit accounts receivable $400; credit cost of good
sold $1000
 Debit cash $600; debit accounts receivable $400; credit revenues
$1,000
 Debit revenues $1,000; credit cash $600; credit accounts receivable
$400
 Debit cash $600; debit accounts receivable $400; credit inventory
$1,000

Q25. Turnkey Systems, Inc. began the month of June, 2014 with a prepaid
expenses balance of $240,000. During the month, debits totaling $110,000 and
credits totaling $80,000 were made to the prepaid expenses account. What
was the June, 2014 ending balance of prepaid expenses?

 A debit balance of $210,000

 A credit balance of $210,000
 A debit balance of $270,000
 A credit balance of $270,000

Q26. On January 1, 2015, Mansfield Company has a retained earnings balance

of $256,000. During 2015, its net income is $44,000 and it announces and
pays $12,000 in dividends. There is no other dividend-related activity during
the year. Its December 31, 2015, retained earnings balance is _______.

 $212,000
 $288,000
 $300,000
 $224,000

Q27. Anderson Electronics’ 2015 return on sales percentage is 20%. Its 2015
net income is $40,000. What is its 2015 sales?

 $400,000
 $80,000
 $200,000
 $100,000

Q28. Which one of the following statements describes the rules about posting
transactions into T-accounts in the ledger?

 For assets, debits are entered on the left; for liabilities, credits are
entered on the left
 For assets, credits are entered on the left; for liabilities, debits are
entered on the left
 Debits on the left; credits on the right
 Credits on the left; debits on the right
Q29. Barnaby & Sons receives a large shipment of goods from its supplier. It
pays $58,000 at the time of delivery and promises to pay the remaining
$42,000 within the next two months. What is appropriate journal entry for
this transaction?

 Debit cash $42,000; debit inventory $16,000; credit accounts payable

$58,000
 Debit inventory $100,000; credit cash $58,000; credit accounts payable
$42,000
 Debit accounts payable $58,000; credit cash $42,000; credit inventory
$16,000
 Debit accounts payable $58,000; debit cash $42,000; credit inventory
$100,000

Q30. This question is based on Patnode Inc.’s balance sheets at year end 2014
and 2015. During 2015, Patnode announced and paid dividends of $1,000, the
only dividend-related activity during the year. What was its 2015 net income?

 $5,600
 $3,600
 $4,600
 Cannot be estimated

Q31. During June 2015, Bextra Inc. recorded sales of $55,000 but only $20,000
was collected in cash from customers. Cost of goods sold was $38,000. What
was the effect of these sales on Bextra’s current ratio?

 Current ratio increases

 Current ratio decreases
 Current ratio remains unchanged
 Insufficient information provided to judge effect on current ratio

Q32. On June 1, 2015, Planet Music has accounts payable of $45,000. During
the month, debits of $3,000 and credits of $11,000 were made to the account.
At the end of June 2015, what was the accounts payable balance?

 A credit balance of $53,000

 A debit balance of $42,000
 A credit balance of $56,000
 A debit balance of $53,000

Q33. Sardi Company estimates its 2015 tax expense to be $80,000. It makes a
cash payment of $20,000 to the tax authorities on December 31, 2015. How
should this transaction be recorded by Sardi?
 Debit tax expense $80,000; credit cash $60,000; credit taxes payable
$20,000
 Debit tax expense $80,000; credit cash $20,000; credit taxes payable
$60,000
 Debit tax expense $80,000; credit cash $20,000
 Debit tax expense $80,000; credit cash $20,000; credit accounts payable
$60,000

Q34. Pentex and Marbro, small companies in the stationery business, each had
a dollar gross margin of $20,000 during September 2014. Pentex’s September
sales were twice that of Marbro’s. If Pentex’s gross margin as a percentage of
sales for September was 10%, what was Marbro’s gross margin as a
percentage of sales for the same period?

 10%
 5%
 20%
 Cannot be calculated

Q35. Kirby, Inc. records a sale with a gross margin of $1,400. Which one of the
following statements correctly describes the effect of such a sale on its balance
sheet?

 Common stock increases by $1,400

 The sales revenue account increases by $1,400
 The gross margin account increases by $1,400
 The retained earnings account increases by $1,400

Q36. On April 30, 2015, Zono Electronics, Inc. made a payment of $3,500 to
Imperial Distributors, a supplier. Choose the statement that best describes the
recording of this financial transaction by Imperial Distributors.

 Debit cash $3,500; credit accounts payable $3,500

 Debit accounts receivable $3,500; credit cash $3,500
 Debit accounts payable $3,500; credit cash $3,500
 Debit cash $3,500; credit accounts receivable $3,500

Q37. Annie’s Fitness sells a set of free weights to a customer for which Annie’s
had paid $750. Which one of the following statements describes the most
appropriate accounting for the transaction?

 Debit cost of goods sold expense $750; credit cash $750

 Debit inventory $750; credit cost of goods sold expense $750
 Debit cost of goods sold expense $750; credit inventory $750
 Debit inventory $750; credit accounts payable $750

Q38. During 2015, Patnode had a cash outflow of $15,000 for investing
activities and a cash inflow of $7,000 from financing activities. Its 2015 cash
flow from operations was an _______.

 outflow of $15,000
 inflow of $15,000
 outflow of $8,000
 inflow of $8,000

Q39. Juan Foods makes a cash sale with a positive gross margin. Which one of
the following statements describes the effect of the sale on Juan Foods?

 Current ratio increases

 Current ratio decreases
 No change to Juan Foods’ current ratio
 Insufficient information to judge effect on current ratio

Q40. Patnode recorded a 2015 tax expense of $3,000. What amount did it pay
to the tax authorities during 2015?

 $2,400
 $7,000
 $600
 $5,400

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