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Part I Basic questions (80 points; 50 minutes; no credit if your answers are all the same)
Multiple choice: Please indicate the correct answer to each question on the answer sheet.
1. Which one of the following is the least likely to appear on the Statement of Stockholders’
Equity?
A. Treasury stock.
B. Accumulated other comprehensive income.
C. Cash dividends.
D. Cash.
E. Common stock.
2. Which one of the following is the least likely correct about accounting periods?
3. A company has revenues of $10,000 and expenses of $8,000 for the year of 2014. If it
decides to distribute $1,000 cash dividends, how would the dividends affect its income
statement?
4. Which one of the following is the least likely correct about revenue principles?
A. As soon as a company delivers goods, it can record revenues even if the customer
is unlikely to pay.
B. If a company sells products to a bankrupt customer, it should not record revenues
before the customer has enough money to pay.
C. If a company sells products to another company and agrees to buy back everything in
three months for the same price, it should not record revenues upon sales.
D. If a company allows customers to return goods for any reason in seven days, it would
be the most conservative for the company to wait until the end of the 7th day to record
revenues.
E. If a company has to negotiate the price with customers, it cannot record revenues
before the dispute on price is resolved.
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A. $3,000.
B. $11,000.
C. $9,000.
D. $5,000.
E. $4,000.
6. A public company in the US reports $11,000 assets and $6,000 liabilities on its balance
sheet. It also says that the numbers on the financial reports are in millions except per
share data. How much would be its stockholders’ equity?
A. HKD$5,000 million.
B. USD$17,000 million.
C. USD$5,000 million.
D. HKD$6,000.
E. USD$5,000.
7. Which one of the following statements about accounting principles and assumptions is the
most accurate?
A. We assume that cash and net income are always different due to the continuity
assumption.
B. If a company bought a machine for $100 last year but the machine price
increases to $130 this year, then according to the historical cost principle the
company should still report the machine value at $100, not $130.
C. If a band is going to hold a concert in 2016 but has already incurred relevant costs in
2015, then it should record revenues in 2016 but expenses in 2015 according to the
revenue principle.
D. If a company bought a machine for $100 last year and the inflation rate is 0.01% this
year, then it should ignore the inflation rate according to the matching principle.
E. When Facebook lends $100 to its owner Mark Zuckerberg, it should not record this
transaction due to the separate entity assumption.
9. A company borrowed $100 of cash from a bank and signed a note. Which one of the
following journal entries is the most likely correct?
10. Which one of the following transactions would be classified as cash inflows from
financing activities for American Eagle Outfitters, Inc.?
11. On December 1, 2014, Sigma Co. prepaid $12,000 for its office rents for 12 months
starting from December 1, 2014. Which one of the following about the accounting
treatment for this transaction is the least likely correct?
A. Sigma would record $1,000 rent expense in the adjusting entries at the end of 2014.
B. Sigma would report $11,000 prepaid expense as assets at the end of 2014.
C. Sigma would reduce prepaid expense by $11,000 at the end of 2014.
D. Sigma would record $11,000 rent expense at the end of 2015.
E. Sigma would report0 prepaid expense at the end of 2015.
12. Delta Air Lines, Inc.’s balance sheets on December 31, 2014 list the following items:
Current Assets:
Cash and cash equivalents .............................................................................. 2,088
Short-term investments ................................................................................... 1,217
Accounts receivable (net of an allowance for doubtful accounts of $3)......... 2,297
Hedge margin receivable ................................................................................... 925
Property and equipment (net of accumulated depreciation of $1) ...................... 21,929
13. Which one of the following statements best describes the accounting cycle?
A. A company would not make any journal entries until the end of an accounting period.
B. A company would not post any journal entry before closing the book.
C. A company would close the book before preparing financial statements.
D. A company would prepare financial statements before posting adjusting entries.
E. A company would prepare financial statements before posting the closing entries.
14. Which one of the following statements best describes how financial statements would
differ by the type of business?
A. It is not possible for a company to have both sales of goods and sales of services.
B. A manufacturer cannot have sales revenues from finished goods.
C. A merchandizer cannot have merchandizing inventory.
D. It is not common for a service company to list a manufacturing plant in its long-
term assets.
E. By definition, a service company’s revenues are mainly from selling goods, not
services.
15. Abercrombie & Fitch Company (A&F) is an US retail shop that sells fashion clothes. In
the year ended at January 31, 2015, it sold clothes for $3.7 billion and the direct costs of
those clothes sold were $1.4 billion. It also sold its corporate aircraft at a loss of $11.3
million. Which one of the following statements is the least likely correct about its
financial reports?
A. A&F would have recorded the $1.4 billion as expenses on the income statement
in the previous year (the year ended at January 31, 2014).
B. Before A&F posted any revenue to the general ledger for the year ended at January 31,
2015, the balance of revenues would be zero.
C. Before A&F closed its books, its revenue account had a credit balance of $3.7 billion.
D. A&F would not include the $11.3 million in its total costs and expenses from core
business.
E. A&F would have a net profit margin less than 62% (= (3.7-1.4)/3.7) for the year
ended at January 31, 2015.
16. United Continental Holdings Incorporation is an airline company. At the beginning of its
2014 fiscal year, it bought computer software for $9 million. Based on the revenue
principle and the matching principle, which one of the following is the best decision that
the company should make on this expenditure?
A. If the software can be used to generate less than one year of revenues, then the
company should record the $9 million as assets at the time of purchase.
B. The company should record the $9 million as expense for 2014 regardless of how
many years it would use the software.
C. The company should always record the $9 million as assets regardless of how many
years it would use the software.
D. The company would never record any expense related to the software.
E. If the software can be used to generate more than one year of revenues, then the
company should record the $9 million as long-term assets at the time of purchase.
(ACCT2010)_2015_(f)midterm-_i_8lkjdd^_38130.pdf downloaded by csunal from http://petergao.net/ustpastpaper/down.php?course=ACCT2010&id=23 at 2021-10-19 10:04:47. Academic use within HKUST only.
17. Which one of the following statements is the most likely correct about financial ratios?
A. We need the balance sheet at the end of 2015 and 2016 to calculate the asset turnover
ratio for 2015.
B. When a company issues common stock and receives cash from investors, its net
profit margin would not change.
C. Paying accounts payable would never affect current ratio.
D. Increase in net sales does not affect asset turnover ratio.
E. We only need the balance sheet at the end of one year to calculate the asset turnover
ratio.
18. Suppose that you were running a small cellphone shop. Your main business is buying and
reselling cellphones. Today ten customers came in; each bought a Samsung Galaxy S6
cellphone and paid by cash. You then counted your inventory and called the supplier to
order another ten Samsung Galaxy S6 cellphones; the supplier promised to deliver the
phones tomorrow. After you hung up the phone, you found that your accountant has made
the following journal entries for today’s transactions. Which one of them is the least
likely correct? (To simplify the question, we are ignoring the amounts.)
19. Which one of the following statements best describes the operating cycle?
Brothers Mike and Tim Hargen began operations of their tool and die shop (H&H Tool, Inc.)
on January 1, 2014. The annual reporting period ends December 31. The trial balance on
January 1, 2015, follows:
Account Titles Debit Credit
Cash $ 6,000
Accounts receivable 5,000
Supplies 13,000
Land
Equipment 78,000
Accumulated depreciation (on equipment) $ 8,000
Other assets (not detailed to simplify) 7,000
Accounts payable
Wages payable
Interest payable
Income taxes payable
Other accruedliabilities
Long-term notes payable
Common stock (8,000 shares at par of $0.50) 4,000
Additional paid-in capital 80,000
Retained earnings 17,000
Revenue
Cost of goods sold
Depreciation expense
Supplies expense
Wages expense
Interest expense
Income tax expense
Remaining expenses (not detailed to simplify)
Totals $109,000 $109,000
k. Supplies counted on December 31, 2015, $17,000 (debit cost of goods sold).
l. Depreciation for the year on the equipment, $10,000.
m. Interest accrued on notes payable (to be computed).
n. Wages earned by employees since December 24, 2015 payroll but not yet paid, $16,000.
o. Income tax expense, $11,000, payable in 2016.
Multiple choice: Please indicate the correct answer to each question in the answer sheet.
1. Which one of the following is the correct T-account for Accounts Payable after all journal
entries have been posted to T-accounts?
A. Accounts Payable
0 Beg.
h 26,000 27,000 g
1,000
B. Accounts Payable
0 Beg.
23,000 d
23,000
C. Accounts Payable
Beg. 0
d 23,000 26,000 h
g 27,000
24,000
D. Accounts Payable
0 Beg.
h 26,000 23,000 d
27,000 g
33,000 i
57,000
E. Accounts Payable
0 Beg.
h 26,000 23,000 d
27,000 g
24,000
2. Suppose that the company forgot to journalize and post one of the following transactions
and the error results in an overstatement of assets. Which transaction would that be?
(ACCT2010)_2015_(f)midterm-_i_8lkjdd^_38130.pdf downloaded by csunal from http://petergao.net/ustpastpaper/down.php?course=ACCT2010&id=23 at 2021-10-19 10:04:47. Academic use within HKUST only.
A. Transaction a.
B. Transaction c.
C. Transaction e.
D. Transaction g.
E. Transaction m.
Complete the following T-accounts(assume that you have correctly journalized transactions
(a) to (o) and posted all of them, including the closing entries, to the T-accounts). You should
include the beginning and the ending balance in each T-account. Use “CE” for closing entries.
Beginning supplies $13,000 + purchases (g) $27,000 – ending inventory (k) $17,000
= Cost of goods sold $23,000
B. Retained Earnings
17,000 Beg.
j 25,000 39,000 CE
31,000
Net revenues (revenues (b) $215,000 – (e) sales discount $680 – (f) sales returns
$320) – Expenses ( (d) $114,000 + (k) $23,000 + (l) $10,000 + (m) $1,000 + (n)
$16,000 + (o) $11,000) = Net income $39,000
(ACCT2010)_2015_(f)midterm-_i_8lkjdd^_38130.pdf downloaded by csunal from http://petergao.net/ustpastpaper/down.php?course=ACCT2010&id=23 at 2021-10-19 10:04:47. Academic use within HKUST only.
The Walt Disney Company describes its revenue recognition policy and its film production
costs as follows:
“Revenues from the theatrical distribution of motion pictures are recognized when
motion pictures are exhibited.”
“Film … production, participation and residual costs are expensed over the
applicable product life cycle based upon the ratio of the current period’s
revenues to estimated remaining total revenues (Ultimate Revenues) for each
production. For film productions, Ultimate Revenues include revenues from
all sources that will be earned within ten years from the date of the initial
theatrical release.”
Suppose that Walt Disney made two films during 2013 and released them in 2014. The first
movie was a blockbuster: the total sales revenue was $2.5 million over the year of 2014. The
second movie was a failure: the total sales revenue was $200 over the year of 2014. The
company estimated thatafter December 31, 2014 it would earn an additional $2.5 million
sales revenue from the first movie but no revenue from the second movie. The company also
reported that, by the end of 2013, it has incurred $1 million film production costs for the first
movie and $1.5 million for the second movie.
How much expense should the company record for the second movie for the year ended at
December 31, 2013 and for the year ended at December 31, 2014?