Indian School of Business

Financial Accounting in Decision Making, DHM1: 2021-22

Midterm exam

The following information pertains to Questions 1-7.

MLM Imports, Inc. has a May 31 fiscal year end. All of the company’s inventory
purchases are on account. The company uses the accounts payable account exclusively
for inventory purchase transactions. MLM Imports, Inc. financial statements comprise
the following items.

in USD 31-May-21 31-May-20

Cash $ 6,500 $ 2,500
Accounts receivable 17,250 12,850
Prepaid advertising 1,400 1,000
Inventory 41,000 48,000
Building and equipment, net 91,000 94,000
Accounts payable 18,000 27,000
Income taxes payable 3,650 2,100
Interest payable 900 1,750
Long-term debt 45,000 45,000
Unearned revenue 9,000 7,200
Sales 210,000
Cost of goods sold 140,000
Salaries and wages expense 32,000
Depreciation expense 3,000
Interest expense 2,250
Income tax expense 6,000

1. What is the amount of stockholders’ equity on May 31, 2021?

A. $157,150
B. $108,100
C. $80,600
D. $76,550
E. None of the above

2. What amount did MLM Imports report as Income before interest and tax for the year
ended May 31, 2021?
A. $35,000
B. $44,000
C. $210,000
D. $32,750
E. None of the above

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3. What amount of cash did MLM Imports pay to suppliers for inventory purchases
during the fiscal year ended May 31, 2021?
A. $140,000
B. $9,000
C. $131,000
D. $142,000
E. None of the above

4. What amount of cash did MLM Imports collect from its customers during the fiscal
year ended May 31, 2021?
A. $212,600
B. $210,000
C. $207,400
D. $205,600
E. None of the above

5. Which of the following is true for the fiscal year ended May 31, 2021?
A. The company paid more cash for advertising than they expensed for
advertising on the income statement.
B. The company paid less cash for advertising than they expensed for advertising
on the income statement.
C. The company paid the same amount cash for advertising as they expensed for
advertising on the income statement.
D. We cannot determine the relation between cash paid for advertising and
advertising expense.
E. None of the above

6. What amount of cash did MLM Imports pay for income taxes during the fiscal year
ended May 31, 2020?
A. $4,450
B. $6,000
C. $7,550
D. $2,350
E. None of the above

7. What amount of cash did MLM Imports pay for depreciation expense during the fiscal
year ended May 31, 2020?
A. $3,000
B. $0
C. $1,000
D. $2,000
E. None of the above

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8. The best way to protect the personal assets of the owners of the business from the
creditors of the business is to organize as a:
A. Proprietorship
B. Partnership
C. Corporation
D. Foreign direct investment
E. None of the above

9. Which of the following accounts result when a company receives an advance cash
deposit from a customer?
A. Sales revenue
B. Deferred revenue
C. Refunds receivable
D. Accounts payable
E. None of the above

10. When a company repays the principal portion of a bank loan, the company:
A. Decreases assets and stockholders’ equity
B. Decreases assets and liabilities
C. Decreases liabilities and stockholders’ equity
D. Decreases liabilities and Increases expenses
E. None of the above

11. The accounting adjustment to amortize intangible assets has what effect on the
accounting equation?
A. None because intangible assets are not amortized.
B. Decrease in assets, decrease in liabilities
C. Decrease in assets, decrease in stockholders’ equity
D. Increase in assets, increase in stockholders’ equity
E. None of the above

12. SS Inc. bought Rs. 92,000 of goods from a supplier that extends credit. SS paid the
supplier Rs. 72,000 at delivery and promised to pay the remainder within 30 days.
Which of the following FSET entries captures this transaction?

A. Decrease Cash by 72,000; Increase Inventory by 92,000 and Increase Accounts

payable by 20,000
B. Decrease Cash by 72,000; Decrease COGS by 92,000; Increase Inventory by
92,000 and Increase Accounts payable by 20,000
C. Decrease cash by 72,000; Increase inventory by 72,000
D. Decrease cash by 72,000; Decrease COGS by 92,000 and Increase Accounts
payable by 20,000
E. None of the above

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13. The auditor for MLM Ltd. is preparing the company’s income statement for the year
ended 31 December 2020. The auditor determines that MLM received customer
deposits of $90,000 cash during 2020 and erroneously recorded this amount as
revenue. Of these deposits, $40,000 relate to services that were performed during the
year 2020. Which of the following FSET entries captures the required accounting
adjustment at December 31, 2020?
A. Decrease Unearned revenue by 40,000; Increase revenue by 40,000
B. Increase Unearned revenue by 50,000; Decrease revenue by 50,000
C. Increase Unearned revenue by 40,000; Increase revenue by 40,000
D. No accounting adjustment is needed as services will be provided in 2021
E. None of the above

14. The statement of cash flow reconciles a company’s opening and closing cash
balances. Which of the following transactions are excluded from that reconciliation?
A. Foreign currency translation amounts
B. Dividends paid to foreign institutional investors
C. Cash received from government assistance programs
D. Changes during the year in petty cash account
E. None of the above

15. Which of the following items would not appear on a statement of cash flows under the
INDIRECT method?
A. Subtract stock-based (i.e. non-cash) compensation expense from net income.
B. Add a loss from the sale of a fixed asset to net income.
C. Subtract an increase in accounts receivable
D. Subtract a decrease in accounts payable
E. None of the above

16. Which of the following will not be reported on a company’s Statement of Cash Flows
, including the supplementary disclosures?
A. Purchasing PPE in exchange for common shares of stock
B. Issuing common stock in exchange for a patent
C. Repurchasing common shares of stock
D. Both A and B
E. None of the above

17. In 2014 SVS Company had sales on account of $528,000, cash sales of $216,000, and
collections on account of $336,000. In addition, they collected $5,800 which had been
written off as uncollectible in 2013. As a result of these transactions the change in the
accounts receivable indicates which of the following?
A. $402,200 increase.
B. $192,000 increase.
C. $186,200 increase.
D. $408,000 increase.
E. None of the above

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18. If a company fails to record estimated bad debts expense
A. Cash realizable value is understated
B. Expenses are understated
C. Revenues are understated
D. Receivables are understated
E. None of the above

19. If the amount of allowance for uncollectible is overstated at year end

A. Net income will be overstated.
B. Stockholders’ equity will be overstated.
C. Gross Accounts receivable will be understated.
D. Net Accounts receivable will be understated.
E. None of the above

20. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt
Expense is debited
A. When a credit sale is past due.
B. At the end of each accounting period.
C. Whenever a pre-determined amount of credit sales have been made.
D. When an account is determined to be uncollectible
E. None of the above

21. SVS Company uses the percentage-of-receivables method for recording allowance for
bad debt. The Accounts Receivable balance is $200,000 and credit sales are
$1,000,000. Management estimates that 6% of accounts receivable will be
uncollectible. What adjusting entry will SVS Company make if the Allowance for
Doubtful Accounts has a credit balance of $2,000 before adjustment?
A. Debit Bad Debt Expense 14,000 and Credit Allowance for Doubtful Accounts
14,000
B. Debit Bad Debt Expense 12,000 and Credit Allowance for Doubtful Accounts
12,000
C. Debit Bad Debt Expense 10,000 and Credit Allowance for Doubtful
Accounts10,000
D. Debit Bad Debt Expense 8,000 and Credit Accounts Receivable 8,000
E. None of the above

22. SVS Company uses the percentage of sales method for recording bad debts expense.
The accounts receivable balance is $200,000 and credit sales are $1,000,000.
Management estimates that 0.4% of sales will be uncollectible. What adjusting entry
will SVS Company make if the Allowance for Doubtful Accounts has a credit balance
of $2,000 before adjustment?
A. Debit Bad debt expense 4,000 and Credit Allowance for bad debts 8,000
B. Debit Bad debt expense 6,000 and Credit Allowance for bad debts 6,000
C. Debit Bad debt expense 8,000 and Credit Allowance for bad debts 8,000
D. Debit Bad debt expense 8,000 and Credit Accounts Receivable 8,000
E. None of the above

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 23. Inventory costing methods place primary reliance on assumptions about the flow of
A. Goods
B. Costs
C. Resale prices
D. Market values
E. None of the above

The following information pertains to Questions 24-25

SVS Company has the following inventory data:

July 1 Beginning inventory 20 units at $20 $ 400
7 Purchases 70 units at $21 1,470
22 Purchases 10 units at $22 220

A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand.
24. Using LIFO inventory method, the amount allocated to cost of goods sold for July is
A. $1,585
B. $1,540
C. $1,555
D. $1,540
E. None of the above

25. Using FIFO inventory method, the amount allocated to ending inventory for July is
A. $1,585
B. $1,540
C. $1,555
D. $1,540
E. None of the above

26. Which of the following statements is correct with respect to inventories?

A. The FIFO method assumes that the costs of the earliest goods acquired are the last
to be sold.
B. It is always good inventory management to sell the most recently acquired goods
first.
C. Under FIFO, the ending inventory is based on the latest units purchased.
D. FIFO always coincides with the actual physical flow of inventory
E. None of the above

27. The managers of SVS Company receive performance bonuses based on the net
income of the firm. Which inventory costing method are they likely to favor in
periods of declining prices, all else equal?
A. LIFO
B. Average Cost
C. FIFO
D. Physical inventory method
E. None of the above

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28. Which statement concerning lower of cost or market (LCM) is incorrect?
A. LCM is an example of a company choosing the accounting method that will be
least likely to overstate assets and income.
B. Under the LCM basis, market values of inventory are irrelevant because assets are
always recorded and carried on the balance sheet at cost.
C. The LCM basis uses current replacement cost because a decline in this cost
usually leads to a decline in the selling price of the inventory item.
D. LCM is applied after one of the cost flow assumptions has been applied.
E. None of the above

29. SVS Company purchased equipment and incurred the following costs:
Cash price $70,000
Sales taxes 3,500
Insurance during transit 750
Installation and testing 1,500
Total costs $75,750

What amount should SVS record as the cost of the equipment?

A. $70,000.
B. $73,500.
C. $74,250.
D. $75,750
E. None of the above

30. On January 1, a machine with a useful life of four years and a residual value of
$12,000 was purchased for $60,000. What is the depreciation entry for year 2 under
straight-line depreciation?
A. Accumulated Depreciation Dr 12,000 and Depreciation Expense Cr 12,000
B. Cost of Goods Sold Dr 24,000 and Depreciation Expense Cr 24,000
C. Depreciation Expense Dr 12,000 and Accumulated Depreciation Cr 12,000
D. Depreciation Expense Dr 24,000 and Accumulated Depreciation Cr 24,000
E. None of the above

31. A plant asset was purchased on January 1 for $75,000 with an estimated salvage value
of $15,000 at the end of its useful life. The current year's Depreciation Expense is
$5,000 calculated on the straight-line basis and the balance of the Accumulated
Depreciation account at the end of the year is $25,000. The remaining useful life of the
plant asset is
A. 15 years.
B. 12 years.
C. 5 years.
D. 7 years.
E. None of the above

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32. A gain or loss on disposal of a plant asset is determined by comparing the
A. Replacement cost of the asset with the asset's original cost
B. Book value of the asset with the asset's original cost
C. Original cost of the asset with the proceeds received from its sale
D. Book value of the asset with the proceeds received from its sale
E. None of the above

33. All of the following statements regarding impairments are true except
A. An impairment is a permanent decline in an asset's market value.
B. After an impairment write-down, depreciation is generally lower in a
subsequent periods
C. Immediate recognition of impairment write-downs is now required.
D. Impairments are generally recorded when the company wants to claim certain
tax deductions
E. None of the above

34. SVS Company has decided to change the estimate of the useful life of an asset that has
been in service for 2 years. Which of the following statements describes the proper way
to revise a useful life estimate at the beginning of year 3?
A. Revisions in useful life are permitted if approved by the tax authorities
B. Retroactive changes must be made to correct previously recorded depreciation
for years 1 and 2
C. Both the third year and future years will be affected by the revision
D. No changes are needed as depreciation is a non-cash expense
E. None of the above

35. SVS company sells a plant asset that originally cost $240,000 for $80,000 on December
31, 2014. The accumulated depreciation account had a balance of $120,000 after the
current year's depreciation of $20,000 had been recorded. The company should
recognize a
A. $40,000 loss on disposal
B. $40,000 gain on disposal
C. $80,000 loss on disposal
D. $80,000 gain on disposal
E. None of the above

Questions 36 – 50 pertain to the AstraZeneca (AZ) financial statements for the year
ended December 31, 2020, provided with this exam as a PDF.

36. What proportion of AZ’s total assets was funded by owners in FY 2020?
A. 23%
B. 33%
C. 100%
D. 341%
E. None of the above

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37. What proportion of AZ’s current assets was funded by suppliers in FY 2020?
A. 21%
B. 23%
C. 33%
D. 81%
E. None of the above

38. What proportion of AZ’s liabilities at the end of FY 2020 need to be repaid within one
year?
A. 11%
B. 40%
C. 60%
D. 65%
E. None of the above

39. What line item will include wages paid to factory workers who are involved in the
pharmaceutical production ?
A. Sales
B. Distribution expenses
C. Cost of sales
D. Selling, general, and administration expenses
E. None of the above

40. What is the biggest contributor for the increase in operating profit margin in the year
2020?
A. Increase in Gross profit margin
B. Reduction in Selling, general, and administration expenses as a % of sales
C. Reduction in distribution costs as a % of sales
D. Reduction in taxes paid
E. None of the above

41. What is the approximate EBITDA for the FY 2020 ?

A. $4,799 million
B. $5,162 million
C. $7,065 million
D. $8,311 million
E. None of the above

42. Which investing activity consumes the most cash in FY 2020?

A. Purchase of intangibles
B. Purchase of PP&E
C. Business combinations
D. Purchase of financial investments
E. None of the above

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43. What cash dividends were paid during FY 2020?
A. $3,539 million
B. $3,572 million
C. $3,592 million
D. $4,761 million
E. None of the above

44. Share of after-tax losses of associates and joint ventures is added back to net income
while calculating cash flow from operations. Associates and Joint Ventures are
entities partly owned by AZ and other pharma companies in order to develop specific
therapies and medicines. Which of the following could be the most plausible
explanation.
A. This loss does not belong to AZ but to other companies in the joint venture
B. This amount represents the actual cash received by AZ from the associates and
joint ventures
C. This amount did not involve any actual cash outflow from AZ
D. This treatment is a standard practice while preparing the direct method statement
of cash flows
E. All of the above

45. For this question, assume that Product sales and Collaboration revenue are all on
credit (that is, Trade receivables). Approximately how many days did AZ take to
collect its trade receivables in FY 2020?
A. 51 days
B. 88 days
C. 90 days
D. 96 days
E. None of the above

46. For the FY 2020, what is the provision for doubtful debts as a percentage of gross
trade receivables?
A. 0.12%
B. 0.33%
C. 0.45%
D. 0.60%
E. None of the above

47. What is the amount of inventory write-offs during the year ended 31/12/2019?
A. $149 million
B. $231 million
C. $621 million
D. $3,130 million
E. None of the above

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48. On average each dollar invested in Property, Plant & Equipment (PP&E) generates
how much total revenue in FY 2020?
A. 2.98
B. 3.13
C. 3.22
D. 3.34
E. None of the above

49. What is the value of Gross Property, Plant & Equipment as on 31/12/2020?
A. $7,816 million
B. $8,251 million
C. $16,067 million
D. $47,185 million
E. None of the above

50. What is the approx. average age of AZ’s Property, Plant & Equipment (considered as
a block) ?
A. Somewhere in the 1-20 range, but no further estimation is possible
B. 7 years
C. 11 years
D. 12 years
E. 23 years
F. None of the above

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