UGBA 102 MIDTERM EXAM

Exam Guidelines:
• You have 90 minutes to complete the exam. Please use your time
efficiently and read the questions carefully.
Good luck!
 1. Multiple Choice (40 pts, 2 pts each)

1) In what order would the following assets be listed on a balance sheet?

A) Cash, Short-term Investments, Accounts Receivable, Inventory.
B) Cash, Intangible Assets, Accounts Receivable, Property and Equipment.
C) Cash, Accounts Receivable, Property and Equipment, Inventory.
D) Cash, Inventory, Intangible Assets, Accounts Receivable.

2) Which of the following correctly describes retained earnings?

A) It is the cumulative earnings of a company.
B) It represents the investments by stockholders in a company.
C) It equals total assets minus total liabilities.
D) It is the cumulative earnings of a company less dividends declared.

3) Which of the following liability accounts does not usually require a future cash
payment?
A) Accounts payable.
B) Unearned revenues.
C) Taxes payable.
D) Notes payable.

4) A corporation purchased factory equipment using cash. Which of the following

statements regarding this purchase is correct?
A) The cost of the factory equipment is an expense at the time of purchase.
B) The total assets will not change.
C) The total liabilities will increase.
D) The current stockholders' equity will decrease.

5) Which of the following describes the impact on the balance sheet of paying a
current liability using cash?
A) Current assets will decrease.
B) Current liabilities will increase.
C) Stockholders' equity will decrease.
D) Total assets will remain the same.
6) Which of the following journal entries is correct when a business entity pays cash
for advertising to be used next year?
A)
Cash xxx
Advertising expense xxx

B)
Advertising expense xxx
Cash xxx

C)
Cash xxx
Prepaid advertising expense xxx

D)
Prepaid advertising expense xxx
Cash xxx

7) Which of the following statements does not properly describe the current ratio?
A) It measures the ability of a firm to pay its debts in the short-run.
B) It is current assets divided by current liabilities.
C) It is a measure of a firm's short-run liquidity.
D) It measures a firm's ability to pay its long-term debts as they mature.

8) Which of the following businesses would most likely not report cost of goods sold
on its income statement?
A) A law firm.
B) An automobile dealership.
C) A pizza restaurant.
D) A computer chip manufacturer.
9) Which of the following statements is false?
A) An expense is a cost incurred to generate revenues.
B) Selling assets at a gain does not result in earning revenue.
C) Revenues are reported on the income statement as they are earned.
D) Revenues result in an increase in net income and additional paid-in capital.

10) Which of the following statements is false?

A) A liability is created when cash is received prior to delivery of the goods or services
to a customer.
B) Revenue is recognized at the time of delivery of the goods or services to customers
if cash is received.
C) Revenue is not recognized at the time of delivery of goods and services to
customers if cash is received after delivery of the goods and services.
D) Collecting cash after delivery of a good or service to a customer does not create
revenue on the income statement at the date of collection.

11) Yelena Company received cash from a customer in advance of providing the
service to the customer. Which of the following does not accurately describe the
impact on the financial statements when Yelena later provides the service?
A) Liabilities are decreased.
B) Operating income increases.
C) Retained earnings increases.
D) Assets are increased.

12) A company purchased supplies for cash, which will be consumed during future
months. Which of the following does not correctly describe the impact on the
financial statements when the supplies are used during future months?
A) Total assets will remain unchanged.
B) Total assets will decrease.
C) Operating expenses will increase.
D) Operating income will decrease.

13) Which of the following journal entries is correct when a company has incurred an
expense for work performed but has not yet paid for theses wages to employees?
A)
Wages expense xxx
Operating income xxx

B)
Wages expense xxx
Wages payable xxx

C)
Wages payable xxx
Cash xxx

D)
Retained earnings xxx
Wages expense xxx

14) Which of the following is an example of revenue or expense to be recognized in

the current period's income statement?
A) Cash received from a client before the service is provided.
B) Inventory purchased for sale to customers.
C) Wages owed to employees who worked during the period.
D) Cash collected from an account receivable.

15) Which of the following accounts normally have a credit balance?

A) Unearned revenue; Prepaid rent; Sales revenue.
B) Sales revenue; Expenses; Retained earnings.
C) Sales revenue; Cash; Unearned revenue.
D) Accounts payable; Retained earnings; Sales revenue.

16) On December 31, 2019, Avery Corporation paid $10,000 for next year's insurance
policy. This transaction should be recorded as follows by Avery:
A)
Insurance expense 10,000
Insurance payable 10,000

B)
Prepaid insurance 10,000
Insurance payable 10,000

C)
Prepaid insurance 10,000
Cash 10,000

D)
Insurance expense 10,000
Cash 10,000

17) On July 1, 2019, Allen Company signed a $100,000, one-year, 6 percent note
payable. The principal and interest will be paid on June 30, 2020. How much interest
expense should be reported on the income statement for the year ended December
31, 2019?
A) $6,000.
B) $3,000.
C) $1,500.
D) $0.

18) Which of the following does not correctly describe the following adjusting journal
entry?

Interest receivable xxx

Interest revenue xxx

A) Total assets increase.

B) The transaction is an example of an accrual.
C) Stockholders' equity decreases.
D) Net income increases.

19) Which of the following does not correctly describe the following adjusting journal
entry?

Rent expense xxx

Prepaid rent xxx

A) Total assets decrease.

B) Retained earnings are not affected.
C) Stockholders' equity decreases.
D) Net income decreases.

20) Which of the following transactions would not create a cash flow from operating
activities?
A) Collecting cash from a customer.
B) Paying cash to a supplier.
C) Paying cash to stockholders for dividends.
D) Paying cash for a utility bill.
2. Short Answers (18pts)

a) (4 pts) What does current ratio capture? Please provide at least two of its
limitations

b) (3 pts) Rank the following current assets based on liquidity: cash, inventory,
accounts receivable, and prepaid expenses (from the most liquid to the least
liquid).

c) (4 pts) What should be the beginning balance of Company A’s interest expense
account in a quarter? Please 1) briefly explain the intuition and 2) list another
account that will have the same beginning balance.

d) (3 pts) Does FedEx report cost of goods sold on its income statement? If yes,
please briefly explain what its cost of goods sold will include. If no, please
briefly explain why.

e) (4 pts) At which stage of a firm’s life cycle, will the firm’s cash flows from
investing activities likely to be positive? Please briefly explain.
 3. Problems (42 pts)

3.1 (10 pts) Sagaworth Inc. reported the following information:

2019 Income Statement:

Net loss $380,000
Depreciation expense 150,000
Amortization expense 25,000

Balance Sheet:
2019 2018
Accounts receivable $200,000 $230,000
Inventory 140,000 160,000
Prepaid expenses 40,000 30,000
Accounts payable 190,000 180,000
Accrued liabilities 50,000 45,000
Taxes payable 10,000 20,000

Answer the following questions using the indirect method (for the first four
questions).

a) (2 pts) What effect does the accounts Receivable account have on cash flow
from operating activities for 2019?

b) (2 pts) What effect does the inventory account have on cash flow from
operating activities for 2019?

c) (2 pts) What effect does the prepaid expenses account have on cash flow from
operating activities for 2019?

d) (2 pts) What effect does the accounts payable account have on cash flow from
operating activities for 2019?
e) (2 pts) If the firm has declared and paid dividends in the amount of $1,000
during 2019, what effect will this transaction have on cash flow from
operating activities?
 3.2 (18 pts) The ABC Corporation was formed on January 1, 2019. Below are
selected transactions that were completed during January, 2019.
1. The three initial owners each invested $100,000 cash and each received
10,000 shares of $1 par value common stock.
2. Borrowed $80,000 on a one-year note payable.
3. Purchased land by signing a $70,000 note payable (Hint: Just one journal
entry)
4. Paid $10,000 of accounts payable.
5. Purchased two service vehicles for cash at a cost of $24,000 each.
6. Purchased $2,000 of supplies on credit.

Prepare the journal entry on ABC's books for each transaction. (3 pts for each)
 3.3 (14 pts, 2 pts for each transaction) Complete the chart below for Monticello
Corporation by placing an X in the appropriate boxes to indicate how the
transaction should be recorded.

Liabiliti Stockholders’
Transaction Assets es Equity
Dr. Cr. Dr. Cr. Dr. Cr.
Paid employees who worked this
A. month.
Employees worked this month
B. but have not yet been paid.
Paid rent in advance for next
C. month.
Used supplies that were
purchased and paid for last
D. month.
Declared a dividend to be paid
E. next month.
Received cash in advance of
F. providing service to a customer.
Provided services but will collect
G. the money next month.