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ACCOUNTING 1

FINALS EXAM

NAME: _____________________________________

Instructions: Encircle the letter of your choice. Avoid erasures. Correct answer(s) with erasures will not be credited
any points.

1. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.

2. The net assets of a business are equal to


a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders' equity.
d. none of these.

3. Preparing the statement of cash flows involves all of the following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. changes in cash during the period.
d. cash collections from customers during the period.

4. In preparing a statement of cash flows, which of the following transactions would be considered an investing
activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount
5. In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive
assets should generally be classified as cash inflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.

6. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash
outflows for
a. operating activities.
b. borrowing activities.
c. lending activities.
d. financing activities.

7. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows
from
a. lending activities.
b. operating activities.
c. investing activities.
d. financing activities.

8. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash
equivalents) should be classified as cash outflows for
a. operating activities.
b. investing activities.
c. financing activities.
d. lending activities.

9. Reese Corp.'s trial balance reflected the following account balances at December 31, 2007:
Accounts receivable (net) P24,000
Trading securities 6,000
Accumulated depreciation on equipment and furniture 15,000
Cash 11,000
Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held for future business site 18,000
In Reese's December 31, 2007 balance sheet, the current assets total is
a. P90,000.
b. P82,000.
c. P77,000.
d. P73,000.

10. Gordman Corporation reports:


Cash provided by operating activities P200,000
Cash used by investing activities 110,000
Cash provided by financing activities 140,000
Beginning cash balance 70,000
What is Gordman’s ending cash balance?
a. P230,000.
b. P300,000.
c. P450,000.
d. P520,000.

11. Making and collecting loans and disposing of property, plant, and equipment are
a. operating activities.
b. investing activities.
c. financing activities.
d. liquidity activities.

12. When using a perpetual inventory system,


a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. all of these.

13. Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

14. Goods in transit which are shipped f.o.b. destination should be


a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

15. Which of the following items should be included in a company's inventory at the balance sheet date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her convenience.
d. None of these.

16. The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance
sheet at December 31, 2007. Orion uses the periodic inventory system. The January 1, 2007 merchandise
inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the
balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a current asset on the
balance sheet.

17. The failure to record a purchase of merchandise on account even though the goods are properly included in
the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of assets.
d. an understatement of liabilities and an overstatement of owners' equity.

18. A statement of cash flows typically would not disclose the effects of
a. capital stock issued at an amount greater than par value.
b. stock dividends declared.
c. cash dividends paid.
d. a purchase and immediate retirement of treasury stock.
19. Lange Co. provided the following information on selected transactions during 2008:
Purchase of land by issuing bonds P250,000
Proceeds from issuing bonds 500,000
Purchases of inventory 950,000
Purchases of treasury stock 150,000
Loans made to affiliated corporations 350,000
Dividends paid to preferred stockholders 100,000
Proceeds from issuing preferred stock 400,000
Proceeds from sale of equipment 50,000

The net cash provided (used) by investing activities during 2008 is


a. P50,000.
b. P(300,000).
c. P(550,000).
d. P(1,250,000).

20. Lange Co. provided the following information on selected transactions during 2008:
Purchase of land by issuing bonds P250,000
Proceeds from issuing bonds 500,000
Purchases of inventory 950,000
Purchases of treasury stock 150,000
Loans made to affiliated corporations 350,000
Dividends paid to preferred stockholders 100,000
Proceeds from issuing preferred stock 400,000
Proceeds from sale of equipment 50,000

The net cash provided by financing activities during 2008 is


a. P550,000.
b. P650,000.
c. P800,000.
d. P900,000.

For numbers 21-22. A company acquired a building, paying a portion of the purchase price in cash and issuing
a mortgage note payable to the seller for the balance.

21. In a statement of cash flows, what amount is included in investing activities for the above transaction?
a. Cash payment
b. Acquisition price
c. Zero
d. Mortgage amount

22. In a statement of cash flows, what amount is included in financing activities for the above transaction?
a. Cash payment
b. Acquisition price
c. Zero
d. Mortgage amount

23. How are financial ratios used in decision making?


a. They can help identify the reasons for success and failure in business, but decision making
requires information beyond the ratios.
b. They remove the uncertainty of the business environment.
c. They aren’t useful because decision making is too complex.
d. They give clear signals about the appropriate action to take.

24. If a transaction causes total liabilities to decrease but does not affect the owners’ equity, what change if
any, will occur in total assets?
a. Assets will be increased.
b. Assets will be decreased.
c. No change in total assets.
d. None of the above.

25. In a set of comparative financial statements, you observed a gradual decline in the net of gross ratio, i.e.,
between net sales and gross sales. This indicates that:
a. There is a stiffening in the grant of discounts to the customers.
b. The discount period is being lengthened.
c. There is adherence to the collection policies of the company.
d. Sales volume is decreasing.
26. Which one of the following ratios would provide a best measure of liquidity?
A. Sales minus returns to total debt.
B. Total assets minus goodwill to total equity.
C. Current assets minus inventories to current liabilities.
D. Net profit minus dividends to interest expense.

27. Selected information from the accounting records of the Blackwood Co. is as follows:
Net A/R at December 31, 2000 P 900,000
Net A/R at December 31, 2001 P1,000,000
Accounts receivable turnover 5 to 1
Inventories at December 31, 2000 P1,100,000
Inventories at December 31, 2001 P1,200,000
Inventory turnover 4 to 1

What was the gross margin for 2001?


a. P150,000 b. P200,000 c. P300,000 d. P400,000

28. OTW Corporation has current assets totaling P15 million and a current ratio of 2.5 to 1. What is OTW’s current
ratio immediately after it has paid P2million of its accounts payable?
a. 3.75 to 1 b. 2.75 to 1 c. 3.25 to 1 d. 4.75 to 1

29. Perry Technologies Inc. had the following financial information for the past year:
Sales P860,000 Inventory turnover 8x
Quick ratio 1.5 Current ratio 1.75
What were Perry’s current liabilities?
a. P430,000 b. P500,000 c. P107,500 d. P 61,429

30. Landry Retailers has annual sales of P365 million. The company’s days sales outstanding (calculated on a 365-
day basis) is 50, which is well above the industry average of 35. The company has P200 million in current
assets, P150 million in current liabilities, and P75 million in inventories. The company’s goal is to reduce its
DSO to the industry average without reducing sales. Cash freed up would be used to repurchase common
stock. What will be the current ratio if the company accomplishes its goal?
a. 1.23 b. 1.33 c. 1.43 d. 0.73

31. The following information is available for Carr Company:


Payment for goods during 2007 P92,000
Accounts payable, January 1, 2007 9,000
Inventory, January 1, 2007 10,400
Accounts payable, December 31, 2007 7,200
Inventory, December 31, 2007 9,700

Cost of goods sold for 2007 is


a. P89,500.
b. P90,900.
c. P97,100.
d. P98,500.

32. Starr Corporation loaned P90,000 to another corporation on December 1, 2007 and received a 3-month, 8%
interest-bearing note with a face value of P90,000. What adjusting entry should Starr make on December 31,
2007?
a. Debit Interest Receivable and credit Interest Revenue, P1,800.
b. Debit Cash and credit Interest Revenue, P600.
c. Debit Interest Receivable and credit Interest Revenue, P600.
d. Debit Cash and credit Interest Receivable, P1,800.

33. Lopez Company received P6,400 on April 1, 2007 for one year's rent in advance and recorded the transaction
with a credit to a nominal account. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, P1,600.
b. debit Rent Revenue and credit Unearned Rent, P4,800.
c. debit Unearned Rent and credit Rent Revenue, P1,600.
d. debit Unearned Rent and credit Rent Revenue, P4,800.

34. Gibson Company paid P3,600 on June 1, 2007 for a two-year insurance policy and recorded the entire amount
as Insurance Expense. The December 31, 2007 adjusting entry is
a. debit Insurance Expense and credit Prepaid Insurance, P1,050.
b. debit Insurance Expense and credit Prepaid Insurance, P2,550.
c. debit Prepaid Insurance and credit Insurance Expense, P1,050
d. debit Prepaid Insurance and credit Insurance Expense, P2,550.
35. Tate Company purchased equipment on November 1, 2007 and gave a 3-month, 9% note with a face value
of P20,000. The December 31, 2007 adjusting entry is
a. debit Interest Expense and credit Interest Payable, P1,800.
b. debit Interest Expense and credit Interest Payable, P450.
c. debit Interest Expense and credit Cash, P300.
d. debit Interest Expense and credit Interest Payable, P300.

36. Brown Company's account balances at December 31, 2007 for Accounts Receivable and the related Allowance
for Doubtful Accounts are P460,000 debit and P700 credit, respectively. From an aging of accounts receivable,
it is estimated that P12,500 of the December 31 receivables will be uncollectible. The necessary adjusting
entry would include a credit to the allowance account for
a. P12,500.
b. P13,200.
c. P11,800.
d. P700.

37. Chen Company's account balances at December 31, 2007 for Accounts Receivable and the Allowance for
Doubtful Accounts are P320,000 debit and P600 credit. Sales during 2007 were P900,000. It is estimated that
1% of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for
a. P9,600.
b. P9,000.
c. P8,400.
d. P3,200.

38. Garcia Corporation received cash of P18,000 on August 1, 2007 for one year's rent in advance and recorded
the transaction with a credit to Rent Revenue. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, P7,500.
b. debit Rent Revenue and credit Unearned Rent, P10,500.
c. debit Unearned Rent and credit Rent Revenue, P7,500.
d. debit Cash and credit Unearned Rent, P10,500.

39. Pappy Corporation received cash of P13,500 on September 1, 2007 for one year’s rent in advance and recorded
the transaction with a credit to Unearned Rent. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, P4,500.
b. debit Rent Revenue and credit Unearned Rent, P9,000.
c. debit Unearned Rent and credit Rent Revenue, P4,500.
d. debit Cash and credit Unearned Rent, P9,000.

40. Panda Corporation paid cash of P18,000 on June 1, 2007 for one year’s rent in advance and recorded the
transaction with a debit to Prepaid Rent. The December 31, 2007 adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, P7,500.
b. debit Prepaid Rent and credit Rent Expense, P10,500.
c. debit Rent Expense and credit Prepaid Rent, P10,500.
d. debit Prepaid Rent and credit Cash, P7,500.

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