Financial Statement Analysis - FIN621 Mid Term Paper Session-1

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MIDTERM EXAMINATION
FIN621- Financial Statement Analysis (Session - 1)
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following is the acronym for GAAP?
Generally Adopted Accounting Principles
Generally Accepted Auditing Principles
Generally Accepted Accounting Principles
Generally Adapted American Principles
A business has purchased machinery on credit, what will be its effect on
cash?
Increase in cash
Decrease in cash
No effect on cash
Cannot be determined from the given information
Which of the following steps of accounting cycle keep on occurring
throughout the period?
Journalizing and posting the entries
Making adjusting entries for the relevent accounts
Analyzing and journalizing transactions as they occur
Preparing financial statements
Balance Sheet and Accounting Cycle are based on which of the following?
Adjusting entries
Closing entries
Financial position
Accounting Equation
Transactions are entered in the ledger account after recording in which of the
following?
Trial Balance
Balance Sheet
Journal
Financial Statements
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The process of recording the economic effects of business transactions in a

book of original entry is knows as which of the following?
Double entry system
Debit
Journalizing
Posting
A business has purchased a building on credit, how it would be recorded in
the journal?
Building - Credit; Accounts payable - Debit
Building - Debit; Notes payable -Credit
Building - Debit; Owner’s equity- Credit
Building - Debit; Accounts payable - Credit
Which of the following is an example of an accrual?
Equipment purchased for use in the business
Book-keeping fees collected but not yet earned
Six months’ rent paid in advance
Interest earned but not yet received
Which of the following is TRUE regarding the entry to recognize the
depreciation expenses?
It is an application of matching principle
It is a closing entry
Usually includes an offsetting credit either to cash or accounts payable
It is done only at the end of financial year
Which of the following expenses would normally be classified as Other or
Non-operating Expense on a Multiple-step Income Statement?
Depreciation expense
Interest expense
Insurance expense
Salaries expense
Which one of the following would lead to the decrease in the owner’s
equity?
Purchasing a piece of land
Paying dividends to shareholders
Purchasing equipment on account

Paying back the principal of a loan

Which one the following is the purpose of closing entries?
To transfer the results of operations to owner's equity
To reduce the Capital account balance to zero
To adjust the ledger account balances for providing complete and accurate
figures
To close all accounts in order to make the ledger ready for next
accounting period
Which of the following is the largest single expense of most merchandising
firms?
Cost of goods sold
Rent Expense
Amortization Expense
Salaries Expense
http://wps.prenhall.com/ca_ph_horngren_accounting_7/59/15164/3882016.c
w/content/index.html

The components of stockholders' equity on a balance sheet for a corporation
are:
Liabilities and Capital Stock
Assets and Retained Earnings
Assets and Liabilities
Capital Stock and Retained Earnings
When preparing a statement of cash flows under the indirect method,
supplemental disclosure should be made for which of the following?
Net cash consumed by operating activities
Cash dividend distributions
Cash paid for interest and taxes
Cash paid for wages
http://www.principlesofaccounting.com/questions%20-
%20%20multiple%20choice/chapter%2016%20-
%20multiple%20choice.htm

'Equity dividends' shown in the cash flow statement will comprise:

All company dividends paid during the year

All dividends paid to voting shares in the year
All dividends paid and proposed in the year relating to voting shares
All proposed dividends in the year relating to voting shares
The balance sheet reported a beginning balance of Rs. 20,000 in Accounts
Receivable and an ending balance of Rs. 15,000. The income statement
reported Sales Revenue of Rs. 200,000. Using this information, compute
cash collected from customers.
Rs. 215,000
Rs. 195,000
Rs. 200,000
Rs. 205,000
Which of the following is NOT true about the specific identification
method?
It requires a very detailed physical count
This method allows management to easily manipulate ending inventory
cost
This method is very hard to use on interchangeable goods
This results in an overstated inventory account during the period of
inflation
In a period of rising prices, all of the following statements regarding FIFO
are true EXCEPT:
The units purchased earlier in the accounting period are allocated to cost
of goods sold
Reported net income is generally higher
The lower-priced unit costs are allocated to ending inventory
Assumptions are used to allocate inventory costs between cost of goods
sold and ending inventory
What will be the gross margin if sales price of merchandise sold to
customers is Rs. 10,000, beginning inventory is Rs. 1,000, inventory
purchases are Rs. 4,000, and cost of inventory sold is Rs. 3,000?
Rs. 2,000
Rs. 7,000
Rs. 5,000
Rs. 3000


In which of the following inventory pricing procedure, the oldest costs
incurred rarely have an effect on the ending inventory valuation?
FIFO
LIFO
Retail
Weighted-average
http://www.principlesofaccounting.com/questions%20-
%20%20multiple%20choice/chapter%208%20-%20multiple%20choice.htm

Which of the following is NOT an example of accelerated depreciation
method?
Straight-line method
Sum-of-the-years digit method
Double-declining balance method
Modified Accelerated Cost Recovery System
Which of the following is an example of the contra-asset account?
Depreciation expense
Accumulated depreciation
Unearned revenue
Unrecorded revenue
An adjusting entry would NOT be required for which of the following
account?
Salaries
Past due expense
Income tax expense
Accounts receivable
Which of the following is NOT an example of deferred item?
Depreciation
Accounts payable
Unearned revenue
Prepaid insurance
Some deferred items for which adjusting entries would be made include:
 Prepaid insurance

 Prepaid rent
 Office supplies
 Depreciation
 Unearned revenue

Which of the following account will be credited, if land is purchased on
credit?
Cash
Account Receivables
Accounts Payable
Notes Payable
Which of the following provides the basis for the trial balance?
Income statement
Statement of cash flow
Ledger
Adjusting entries
Which of the following would represent an increase in Owner's Equity?
Increase in net income
Increase in assets
Increase in accounts receivable
Increase in cash
If the supplies in hand at the end of January are totaled Rs. 200 and the
supplies on hand account before adjustment is Rs. 450, what would be the
adjustment at month-end?
Reduce supplies on hand by Rs. 200; increase supplies expense by Rs.
200
Increase supplies on hand by Rs. 200; reduce supplies expense by Rs. 200
Increase supplies on hand by Rs. 250; reduce supplies expense by Rs. 250
Reduce supplies on hand by Rs. 250; increase supplies expense by Rs.
250
Which of the following account would NOT be closed to the income
summary account at the end of a period?
Rent expense
Revenue earned

Wages expense
Accumulated depreciation
Question No: 31 ( Marks: 5 )
The following cases relate to the valuation of assets. Consider each case
independently
a. World Wide Travel Agency has office supplies costing Rs. 1,700 on hand
at the balance sheet date. These supplies were purchased from a supplier that
does not give cash refunds. World Wide’s management believes that the
company could sell these suppliers for no more than Rs. 500 if it were to
advertise them for sale. However, the company expects to use these supplies
and to purchase more when they are gone. In its balance sheet, the supplies
were valued at Rs. 500.
Answer
Cost or net realizable value which ever is less. Office supplies are current
asset which should be shown at cost or market price/ net realizable value
which ever is less.
b. Nofford Corporation purchased land in 1995 for Rs. 20,000. In 2001, it
purchased a similar parcel of land for Rs. 30,000. In its 2001 balance sheet,
the company presented these two parcels of land at a combined amount of
Rs. 320,000.
ANSWER
Historical cost principle has been violated by the company which
depicts that all fixed assets must be shown at purchase price/cost price
less deprecation in the balance sheet.
c. At December 30, 2001, Lenier, Inc., purchased a computer system from a
mailorder supplier for Rs. 14,000. The retail value of the system according
to the mailorder supplier was Rs. 20,000. On January 7, however, the system
was stolen during a burglary. In its December 31, 2001, balance sheet, Lineir
showed this computer system at Rs. 14,000 and made no r eference to its
retail value or to the burglary. The December balance sheet was issued in
February of 2002.
Answer
The computer system was purchased on Dec 30, 2001 and balance sheet
was prepared on DEC 31, 2001 which shows the financial position as at
Dec 31, 2001. The system was stolen on January 7, 2002 which will not
be reflected in the balance sheet as on Dec 31, 2001. System will be
shown at cost price i.e. Rs.14000 because this is the purchase price of the
computer system.

Requirement:
In each case, indicate the appropriate balance sheet amount of the asset
under generally accepted accounting principles. If the amount assigned by
the company is incorrect, briefly explain the accounting principles that have
been violated.
Question No: 32 ( Marks: 10 )
The following information was obtained from the accounts of Airlines
international dated
December 31, 1997. It is presented in scrambled o rder.
Accounts Payable Rs 77,916
Accounts Receivables 67,551
Accrued interest 23,952
Accumulated Depreciation 220,541
Allowance for doubtful accounts 248
Capital in excess of par 72,913
Cash 28,837
Common stock (par Rs .50, authorized 20,000 shares, issued 7,152
14,304 shares
Current installments of long-term debt 36,875
Deferred income tax liability (long term) 42,070
Inventory 16,643
Investments and special funds 11,901
Long-term debt, less current portion 393,808
Marketable securities 10,042
Other assets 727
Prepaid expenses 3,963
Property, plant, and equipment at cost 809,980
Retained earnings 67,361
Unearned transportation revenue (airline tickets expiring 6,808
within one year)
Requirement:
Prepare a classified Balance Sheet in Report Form.

Airlines international dated

Balance sheet
As at December 31, 1997
ASSETS
Current assets
Cash 28,837
Inventory 16,643
Bill receivable 67,551
Accrued interest 23,952
Prepaid expenses 3,963
Marketable securities 10,042
Investments and special funds 11,901
Fixed assets
Property, plant, and equipment at cost 809,980
Other assets 727
Total assets 973596
Liabilities
Owner’s equity
Common stock 47,904
Capital in excess of par 72,913
Retained earnings 67,361
Long term liabilities
Long-term debt, less current portion 393,808
Deferred income tax liability (long term) 42,070
Accumulated Depreciation 220,541
Allowance for doubtful accounts 248
Current liabilities
Accounts Payable Rs 77,916
Current installments of long-term debt 36,875
Unearned transportation revenue 6,808
Total liabilities 925,692



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The process of recording the economic effects of business transactions in a

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Paying back the principal of a loan

Question No: 14 ( Marks: 1 ) - Please choose one

Question No: 16 ( Marks: 1 ) - Please choose one

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All company dividends paid during the year

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Question No: 26 ( Marks: 1 ) - Please choose one

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Airlines international dated

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