Final Exam Fundamentals of Accounting

Final Exam: Chapters 1-15
Financial Accounting, Fifth Edition

Name ___________________________
Instructor ________________________
Section # _________ Date __________

Part

I

II

III

IV

V

VI

VII

VIII

Total

Points

90

25

14

15

12

15

14

15

200

Score

PART I — MULTIPLE CHOICE (90 points)
Instructions
Designate the best answer for each of the following questions.
Questions 1 and 2 are based on the following information:
Cain Company recently incurred the following costs:
(1)

Purchase price of land and dilapidated building

(2)

Real estate broker's commission

14,000

(3)

Net demolition costs of dilapidated building

39,000

(4)

Excavation costs for new building

44,000

(5)

Architect's fees and building permits

30,000

(6)

Costs associated with new building construction

950,000

(7)

Costs associated with new furniture and equipment

250,000

(8)

Actual interest costs during building construction

168,000

(9)

Actual interest cost after completion of building construction

120,000

(10)

Costs of walks, driveways, and parking lot

____ 1. The building should be recorded on Cain's books at
a. $980,000.
b. $1,024,000.
c. $1,063,000.
d. $1,192,000.
____ 2. Land should be recorded on Cain's books at
a. $250,000.
b. $264,000.
c. $303,000.
d. $333,000.

$250,000

55,000


Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition
FE-2
____ 3. Benson Supply bought equipment at a cost of $24,000 on January 2, 2000. It originally
had an estimated life of ten years and a salvage value of $4,000. Benson uses the
straight-line depreciation method. On December 31, 2003, Benson decided the useful
life likely would end on December 31, 2007, with a salvage value of $2,000. The
depreciation expense recorded on December 31, 2003, should be
a. $2,000.
b. $2,200.
c. $3,200.
d. $4,400.

____ 4. In order to be relevant, accounting information must
a. be neutral.
b. be verifiable.
c. help predict future events.
d. be a faithful representation.
____ 5. Riodan Company sold old equipment for $25,000. The equipment had a cost of
$50,000 and accumulated depreciation of $30,000. The entry to record the sale of the
equipment would include a
a. loss on disposal of $25,000.
b. gain on disposal of $25,000.
c. loss on disposal of $5,000.
d. gain on disposal of $5,000.
____ 6. The cost of intangible assets should be

a. amortized over the assets' estimated useful life, or 20 years, whichever is shorter.
b. amortized over a period not exceeding 5 years.
c. amortized over the assets' estimated useful life.
d. charged to an expense account at acquisition.
____ 7. In a period of rising prices, the inventory method that results in the lowest income tax
payment is
a. LIFO.
b. FIFO.
c. average cost.
d. specific identification.
____ 8. On November 30, Thatcher Company issued a $8,000, 6%, 4-month note to the
National Bank. The entry on Thatcher's books to record the payment of the note at
maturity will include a credit to Cash for
a. $8,000.
b. $8,480.
c. $8,160.
d. $8,320.
____ 9. The inventory methods that result in the most current costs in the income statement
and balance sheet are
Income Statement
Balance Sheet
a.
FIFO
FIFO
b.
LIFO
FIFO
c.
LIFO
LIFO

d.
FIFO
LIFO
____ 10. The following information is available for Lighten Company:


Final Exam
Sales
$130,000
Ending Merchandise Inventory 12,000
Purchases
90,000

Freight-in
Purchase Returns and Allowances
Beginning Merchandise Inventory

FE-3

$10,000
5,000
15,000

Lighten’s cost of goods sold is
a. $115,000.
b. $110,000.
c. $98,000.
d. $95,000.
____ 11. If ending inventory is understated, net income and assets will be
Net Income

Assets
a. Understated
Understated
b. Overstated
Overstated
c. Understated
Unaffected
d. None of the above.
____ 12. One of the two constraints in accounting is
a. comparability.
b. materiality.
c. reliability.
d. relevance.
____ 13. The assumption that assumes a company will continue in operation long enough to
carry out its existing objectives is the
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. time period assumption.
____ 14. All of the following are intangible assets except
a. patents.
b. land improvements.
c. goodwill.
d. franchises.
____ 15. A daily cash count of register receipts made by a cashier department supervisor
demonstrates an application of which of the following internal control principles?
a. Documentation procedures
b. Segregation of duties
c. Establishment of responsibility
d. Independent internal verification

____ 16. When the allowance method is used for bad debts, the entry to write off an individual
account known to be uncollectible involves a
a. debit to an expense account.
b. credit to an expense account.
c. credit to the Allowance account.
d. debit to the Allowance account.


Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition
FE-4
____ 17. Shipping terms of FOB destination mean that the
a. purchaser is responsible for the shipping charges.
b. shipping charges are debited to Freight-Out.
c. items should be in the purchaser's inventory account at year-end if the items are in
transit.
d. both (a) and (c) above.

____ 18. Helig Company has a $150,000 balance in Accounts Receivable and a $1,000 debit
balance in Allowance for Doubtful Accounts. Credit sales for the period totaled
$900,000. What is the amount of the bad debt adjusting entry if Helig uses a
percentage of receivables basis (at 10%)?
a. $15,000
b. $14,000
c. $16,000
d. $15,200
____ 19. The constraint of conservatism is best expressed as
a. the cost of applying an accounting principle should not exceed its benefit.
b. only material items should be recorded and reported.
c. when in doubt, choose the method that will least likely overstate assets and net
income.

d. the lower of cost or market method should be used for inventories.
____ 20. If merchandise is sold for $1,000 subject to credit terms of 2/10, n/30, the entry to
record collection in full within the discount period would include a
a. credit to Sales Discounts for $20.
b. credit to Cash for $980.
c. credit to Accounts Receivable for $20.
d. none of the above.
____ 21. Barker Company's records show the following for the month of January:
Total Retained Earnings at January 1 .......................................
$400,000
Total Retained Earnings at January 31 .....................................
500,000
Total Revenues .........................................................................
670,000
Total Dividends Declared ..........................................................
30,000
Total expenses for January were
a. $740,000.
b. $770,000.
c. $570,000.
d. $540,000.


Final Exam

FE-5

22. Jetson Company's financial information is presented below.
Sales
$ ????

Sales Returns and Allowances
30,000
Net Sales
250,000
Beginning Merchandise Inventory
????
Purchases
170,000

The missing amounts above are:
Sales
Beginning Inventory
a. $280,000
$45,000
b. $220,000
$45,000
c. $280,000
$60,000
d. $220,000
$60,000

Purchase Returns and Allowances $ 15,000
Ending Merchandise Inventory
35,000
Cost of Goods Sold
180,000
Gross Profit
????

Gross Profit

$70,000
$100,000
$70,000
$100,000

____ 23. The necessity of making adjusting entries relates mostly to the
a. economic entity assumption.
b. time period assumption.
c. going concern assumption.
d. monetary unit assumption.
____ 24. The preparation of closing entries
a. is an optional step in the accounting cycle.
b. results in zero balances in all accounts at the end of the period so that they are
ready for the following period's transactions.
c. is necessary before financial statements can be prepared.
d. results in transferring the balances in all temporary accounts to Retained Earnings.
____ 25. Allowance for Doubtful Accounts is reported in the
a. balance sheet as a contra asset.
b. balance sheet as a contra liability account.
c. income statement under other expenses and losses.
d. income statement under other revenues and gains.
____ 26. Current liabilities are obligations that are reasonably expected to be paid from
Existing
Creation of Other
Current Assets
Current Liabilities
a.
No
No
b.

Yes
Yes
c.
Yes
No
d.
No
Yes
____ 27. Which of the following errors will cause a trial balance to be out of balance? The entry
to record a payment on account was
a. not posted at all.
b. posted as a debit to Cash and a credit to Accounts Payable.
c. posted as a debit to Cash and a debit to Accounts Payable.
d. posted as a debit to Accounts Receivable and a credit to Cash.


Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition
FE-6
____ 28. The primary accounting standard-setting body in the United States is the
a. Securities and Exchange Commission.
b. Accounting Principles Board.
c. Financial Accounting Standards Board.
d. Internal Revenue Service.

____ 29. Lawford Company's equipment account increased $400,000 during the period; the
related accumulated depreciation increased $30,000. New equipment was purchased
at a cost of $700,000 and used equipment was sold at a loss of $20,000. Depreciation
expense was $100,000. Proceeds from the sale of the used equipment were
a. $210,000.
b. $250,000.

c. $280,000.
d. $320,000.
____ 30. Which of the following would not be included in the operating activities section of a
statement of cash flows?
a. Cash inflows from returns on loans (i.e., interest)
b. Cash inflows from returns on equity securities (i.e., dividends)
c. Cash outflows to governments for taxes
d. Cash outflows to reacquire treasury stock
____ 31. Which of the following combinations presents correct examples of liquidity, profitability,
and solvency ratios, respectively?
Liquidity
Profitability
Solvency
a. Inventory turnover
Inventory turnover
Times interest earned
b. Current ratio
Inventory turnover
Debt to total assets
c. Receivable turnover
Return on assets
Times interest earned
d. Average days collection
Payout ratio
Return on assets
____ 32. Nadine Manufacturing declared a 10% stock dividend when it had 150,000 shares of
$5 par value common stock outstanding. The market price per common share was
$12 per share when the dividend was declared. The entry to record this dividend
declaration includes a credit to
a. Retained Earnings of $75,000.

b. Paid-in Capital in Excess of Par for $105,000.
c. Common Stock for $75,000.
d. Retained Earnings for $180,000.
____ 33. Which of the following pairs of terms in the area of financial statement analysis are
synonymous?
a. Ratio — Trend
b. Horizontal — Trend
c. Vertical — Ratio
d. Horizontal — Ratio


Final Exam

FE-7

____ 34. Which of the following statements is true?
a. Trading securities are debt securities that the investor has the intent to hold to
maturity.
b. Trading securities are securities bought and held primarily for sale in the near
term.
c. Trading securities are securities that may be sold in the future.
d. Trading securities are reported at cost in the balance sheet.
____ 35. Dividends received are credited to what account under the equity method and cost
method, respectively?
Equity Method
Cost Method
a. Stock Investments
Dividend Revenue
b. Dividend Revenue
Dividend Revenue

c. Stock Investments
Stock Investments
d. Dividend Revenue
Stock Investments
____ 36. In accounting for available-for-sale securities, the Unrealized Loss—Equity account
should be classified as a
a. liability on the balance sheet.
b. loss on the income statement.
c. deduction in the stockholders' equity section of the balance sheet.
d. contra asset on the balance sheet.
____ 37. Boon Corporation has the following stock outstanding:
6% Preferred, $100 Par
Common Stock, $50 Par

$1,000,000
2,000,000

No dividends were paid the previous 2 years. If Boon declares $400,000 of dividends
in the current year, how much will preferred stockholders receive if the preferred stock
is cumulative?
a. $220,000
b. $120,000
c. $60,000
d. $180,000
____ 38. The statement of cash flows is a(n)
a. required supplemental financial statement.
b. required basic financial statement.
c. optional basic financial statement.
d. optional supplementary statement.
____ 39. The directors of Chandler Corp. are trying to decide whether they should issue par or

no par stock. They are considering two alternatives for their new stock, which they are
assuming will be issued at $8 per share. The alternatives are: (A) $5 par value and (B)
no par, no stated value. If 120,000 shares are issued, what amount will be credited to
the common stock account in each of these cases?
(A)
(B)
a. $120,000
$960,000
b. $120,000
$960,000
c. $960,000
$960,000
d. $600,000
$960,000


FE-8

Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

____ 40. Fison Corp. purchased 15,000 shares of its $2 par common stock at a cost of $13 per
share on April 30, 2003. The stock was originally issued at $11 per share. The entry to
record the purchase of the stock should include a debit to
a. Common Stock for $30,000.
b. Treasury Stock for $30,000.
c. Common Stock for $195,000.
d. Treasury Stock for $195,000.
____ 41. What is the effect on total paid-in capital of a stock dividend and a stock split,
respectively?
Stock Dividend

Stock Split
a.
Increase
No effect
b.
No effect
No effect
c.
Decrease
No effect
d.
Decrease
Decrease
____ 42. Which of the following should be classified as an extraordinary item?
a. Effects of major casualties not infrequent in the area
b. Write-off of a significant amount of receivables
c. Loss from the expropriation of facilities by a foreign government
d. Losses due to a bitter, lengthy labor strike
____ 43. A Discount on Bonds Payable account
a. is a contra account to Bonds Payable.
b. will cause interest expense to be less than cash interest payable.
c. is increased over the life of the bond until it equals the bond's face value.
d. is an adjunct account to Bonds Payable.
____ 44. In order to be considered extraordinary, an item must be
a. frequent and uninsured.
b. unusual and uninsured.
c. uninsured and infrequent.
d. infrequent and unusual.
____ 45. If the market rate of interest is lower than the stated rate, bonds will sell at an amount
a. equal to face value.

b. not determinable from the given information.
c. lower than face value.
d. higher than face value.


Final Exam

FE-9

PART II — MATCHING (25 points)
Instructions
Designate the terminology that best represents the definition or statement given below by placing
the identifying letter(s) in the space provided. No letter should be used more than once.
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.

R.
S.
T.
U.
V.
W.

Additions and improvements
Allowance method
Amortization
Available-for-sale securities
Average cost method
Book value
Capital expenditure
Cash debt coverage ratio
Consistency
Contra asset account
Cost method
Credit memorandum
Debit memorandum
Declining-balance method
Depreciable Cost
Depreciation
Direct write-off method
Discontinued operations
Earnings per share
Economic entity assumption
Equity method
Extraordinary items
First-in, first-out method

X.
Y.
Z.
AA.
AB.
AC.
AD.
AE.
AF.
AG.
AH.
AI.
AJ.
AK.
AL.
AM.
AN.
AO.
AP.
AQ.
AR.
AS.
AT.

Full disclosure principle
Going-concern assumption
Held-to-maturity securities
Internal control
Last-in, first-out method

LIFO reserve
Matching principle
Materiality
Monetary unit assumption
Net purchases
Periodic inventory system
Permanent accounts
Perpetual inventory system
Ratio analysis
Relevance
Reliability
Revenue expenditure
Revenue recognition principle
Stock dividend
Stock split
Temporary accounts
Time period assumption
Units-of-activity method

___

1. The periodic write-off of an intangible asset.

___

2. The total amount subject to depreciation.

___

3. The principle that efforts be matched with accomplishments.

___

4. An expenditure charged against revenues as an expense when incurred.

___

5. The inventory costing method that assumes that the costs of the earliest goods
purchased are the first to be recognized as cost of goods sold.

___

6. Use of the same accounting principles and methods from period to period by the same
business enterprise.

___

7. A measure of solvency calculated as cash provided by operating activities divided by
average total liabilities.

___

8. An inventory costing method that assumes that the latest units purchased are the first to
be allocated to cost of goods sold.

___

9. An assumption that economic events can be identified with a particular unit of
accountability.

FE-10 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition
PART II — MATCHING (cont.)
___ 10. A characteristic of information that means it is capable of making a difference in a
decision.
___ 11. An assumption that the economic life of a business can be divided into artificial time
periods.
___ 12. This method of accounting for uncollectible accounts is required when bad debts are
significant in size.
___ 13. An accounting method in which cash dividends received are credited to Dividend
Revenue.
___ 14. Used by a bank when a previously deposited customer’s check “bounces” because of
insufficient funds.
___ 15. The assumption that the enterprise will continue in operation long enough to carry out its
existing objectives and commitments.
___ 16. A system in which detailed records are not maintained and cost of goods sold is
determined only at the end of an accounting period.
___ 17. The difference between inventory reported using LIFO and inventory reported using
FIFO.
___ 18. The methods and measures adopted within a business to safeguard its assets and
enhance the accuracy and reliability of its accounting records.
___ 19. Revenue, expense, and dividends accounts whose balances are transferred to retained
earnings at the end of an accounting period.
___ 20. A technique for evaluating financial statements that expresses the relationship among
selected financial statement data.
___ 21. A depreciation method that applies a constant rate to the declining balance book value
of the asset and produces a decreasing annual depreciation expense over the useful life
of the asset.
___ 22. A pro rata distribution of a corporation’s own stock to its stockholders.
___ 23. Events and transactions that are unusual in nature and infrequent in occurrence.

___ 24. The disposal of a significant segment of a business.
___ 25. The net income earned by each share of outstanding common stock.


Final Exam

FE-11

PART III — ADJUSTING ENTRIES (14 points)
The trial balance of Diamond Company shows the following balances for selected accounts on
November 30, 2005:
Prepaid Insurance
Equipment
Accumulated Depreciation

$ 5,000
40,000
8,800

Unearned Revenue
Notes Payable
Interest Payable

$ 1,800
24,000
400

Instructions
Using the additional information given below, prepare the appropriate monthly adjusting entries at
November 30. Show computations.

A.

Revenue earned for services rendered to customers, but not yet billed, totaled $5,000 on
November 30.

B.

The note payable is a 6%, 1-year note issued October 1, 2005.

C.

The equipment was purchased on January 2, 2004, for $40,000. It has an estimated life of 6
years and an estimated salvage value of $4,000. Stone uses the straight-line depreciation
method.

D.

An insurance policy was acquired on June 30, 2005; the premium paid for 2 years was
$6,000.

E.

Quartz received $1,800 of revenue in advance from a customer on November 1, 2005. Twothirds of this amount was earned by November 30.

PART IV — BANK RECONCILIATION (15 points)


FE-12

Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition

A review of the November 30 bank statement and other data of Conan Company reveals the
following:
1.
2.
3.
4.
5.
6.
7.
8.

Balance per bank statement on November 30 ....................................................
Balance per books on November 30 ...................................................................
NSF Check from J. Smith in payment of account ................................................
Collection of $2,500, 4-month, 12% note with a $25 collection fee. No interest
had been accrued ...............................................................................................
Deposits in transit at November 30 .....................................................................
Outstanding checks at November 30 ..................................................................
A check written by Conan to Green for equipment on November 10 was
recorded at $463 but correctly cleared the bank at $436.
A check drawn on the account of Conehead Company for $200 was mistakenly
charged against Conan’s account by the bank.

$20,400
$14,488
$190
2,575
1,800
5,500

Instructions
Prepare the November 30 (a) bank reconciliation (omit heading) and (b) related journal entries.
(a)

(b)

BANK RECONCILIATION:
Balance per bank statement

Amount
$20,400

Balance per books

Amount
$14,488

Adjusted balance per bank

$

Adjusted balance per books

$

ENTRIES:
Account Titles

Debit

Credit

PART V — INVENTORY (12 points)
Potter Company had a beginning inventory of 200 units at a cost of $12 per unit on August 1.


Final Exam

FE-13

During the month, the following purchases and sales were made.
Purchases
August 4
250 units at $13
August 15
350 units at $15
August 28
200 units at $14

Sales
August 7
150 units
August 11
100 units
August 17
300 units
August 24
200 units

Griffin uses a periodic inventory system.
Instructions
Determine ending inventory and cost of goods sold under (a) average cost, (b) FIFO, and (c)
LIFO.
(a)

Average cost:
Ending inventory = $____________; cost of goods sold = $_____________.

(b)

FIFO:
Ending inventory = $_____________; cost of goods sold = $____________.

(c)

LIFO:
Ending inventory = $_____________; cost of goods sold = $____________.

PART VI — DEPRECIATION (15 points)
Drafter Company purchased equipment for $400,000 cash on January 1, 2006. The estimated life


FE-14 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition
is 5 years or 1,000,000 units; salvage value is estimated at $20,000. Actual activity was 180,000
units in 2006, and 200,000 units in 2007.
Instructions
Compute the annual depreciation expense for 2006 and 2007, and book value at December 31,
2007, under the following depreciation methods: (a) straight-line, (b) double-declining-balance,
and (c) units-of-activity.

(a) Straight-line
2006 depreciation =

$_______________.

2007 depreciation =

$_______________.

12/31/07 book value = $_______________.
(b) Double-declining-balance
2006 depreciation =

$_______________.

2007 depreciation =

$_______________.

12/31/07 book value = $_______________.

(c) Units-of-activity
2006 depreciation =

$_______________.

2007 depreciation =

$_______________.

12/31/07 book value = $_______________.


Final Exam

FE-15

PART VII — RATIO ANALYSIS (14 points)
The condensed financial statements of Eastward Corporation for 2005 are presented below.
Eastward Corporation
Balance Sheet
December 31, 2005
Assets
Current assets
Cash and temporary
investments
Accounts receivable
Inventories
Total current assets
Property, plant, and
equipment (net)
Total assets

Eastward Corporation
Income Statement
For the Year Ended December 31, 2005

$ 40,000
70,000
140,000

250,000
750,000
$1,000,000

Revenues
Expenses
Cost of goods sold
Selling and administrative
expenses
Interest expense
Total expenses
Income before income taxes
Income tax expense
Net income

$2,000,000
1,080,000
495,000
50,000
1,625,000
375,000
150,000
$ 225,000

Liabilities and Stockholders' Equity
Current liabilities
$ 100,000
Long-term liabilities
300,000
Common stockholders' equity

600,000
Total liabilities and
stockholders' equity
$1,000,000
Additional data as of December 31, 2004: Inventory = $100,000; Total assets = $800,000;
Common stockholders' equity = $400,000.
Instructions
Compute the following listed ratios for 2005 showing supporting calculations.
(a) Current ratio = ___________________________________________________________.
(b) Debt to total assets = _____________________________________________________.
(c) Times interest earned = ___________________________________________________.
(d) Inventory turnover = ______________________________________________________.
(e) Profit margin ratio = ______________________________________________________.
(f)

Return on common stockholders' equity = _____________________________________.

(g) Return on assets = _______________________________________________________.


FE-16 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition
PART VIII — STATEMENT OF CASH FLOWS (15 points)
Presented below is information related to the operations of Karlson Corporation.
December
2007
2006
2007
Cash
$ 58,000 $ 40,000
Sales

$408,000
Accounts receivable
55,000
48,000
Cost of goods sold
190,000
Inventory
35,000
22,000
Gross profit
218,000
Prepaid expenses
15,000
20,000
Depreciation expense
14,000
Land
36,000
20,000
Other operating expenses
141,000
Building
100,000
100,000
Income from operations
63,000
Accumulated depreciation—
Loss on equipment sale
2,000
building

(17,000)
(8,000)
Income before income taxes
61,000
Equipment
58,000
80,000
Income tax expense
19,000
Accumulated depreciation—
Net income
$ 42,000
equipment
(15,000)
(20,000)
Total
$325,000 $302,000
Accounts payable
Bonds payable
Common stock
Retained earnings
Total

$ 35,000
0
200,000
90,000
$325,000

$ 39,000

100,000
100,000
63,000
$302,000

Additional information:
(a) In 2007, Karlson declared and paid a cash dividend.
(b) The company converted $100,000 of bonds into common stock.
(c) Equipment with a cost of $22,000 and a book value of $12,000 was sold for $10,000. Land
was acquired for cash.
(d) Prepaid expenses pertain to operating expenses; accounts payable pertains to merchandise purchases.
Instructions
Solve either (a) or (b), but not both.
(a) Prepare a statement of cash flows in proper form for 2007, using the indirect method.
(b) Prepare a statement of cash flows in proper form for 2007, using the direct method.


Final Exam

FE-17

PART VIII — STATEMENT OF CASH FLOWS (cont.)
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FE-18 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition
Solutions — Final Exam: Chapters 1-14
PART I — MULTIPLE CHOICE (90 points)
1.
2.
3.
4.
5.

6.
7.
8.

d
c
c
c
d
a
a
c

9.
10.
11.
12.
13.
14.
15.
16.

b
c
a
b
b
b
d
d

17.
18.
19.
20.
21.
22.
23.
24.

b
c
c
c
d
c
b
d

25.
26.
27.
28.
29.
30.
31.
32.

a
b

c
c
a
d
c
b

33.
34.
35.
36.
37.
38.
39.
40.

b
b
a
c
d
b
d
d

16.
17.
18.
19.
20.

AH
AC
AA
AR
AK

21.
22.
23.
24.
25.

N
AP
V
R
S

41.
42.
43.
44.
45.

a
c
a
d
d

PART II — MATCHING (25 points)
1.
2.
3.
4.
5.

C
O
AD
AN
W

6.
7.
8.
9.
10.

I
H
AB
T
AL

11.
12.
13.
14.

15.

AS
B
K
M
Y

PART III — ADJUSTING ENTRIES (14 points)
A.
B.
C.
D.
E.

Accounts Receivable ...................................................................
Service Revenue ................................................................

5,000

Interest Expense ($24,000 × 6% × 1/12) .....................................
Interest Payable ..................................................................

120

Depreciation Expense [($40,000 - $4,000) ÷ 72] .........................
Accumulated Depreciation ..................................................

500

Insurance Expense ($6,000 ÷ 24) ................................................
Prepaid Insurance ...............................................................

250

Unearned Revenue ($1,800 × 2/3) ..............................................
Service Revenue ................................................................

1,200

5,000
120
500
250
1,200

PART IV — BANK RECONCILIATION (15 points)
(a) BANK RECONCILIATION:
Balance per bank statement
Add: Deposits in transit
Bank error
Less: Outstanding checks
Adjusted balance per bank

Amount
$20,400
1,800
200
$22,400
(5,500)

$16,900

Balance per books
Add: Error in recording check
Note collection
Less: NSF check
Adjusted balance per books

Amount
$14,488
$ 27
2,575

2,602
$17,090
(190)
$16,900


Final Exam

(b)

ENTRIES:
Account Titles
Cash ............................................................................................
Miscellaneous Expense ...............................................................
Notes Receivable ................................................................
Interest Revenue ................................................................

Debit
2,575
25

FE-19

Credit

2,500
100

Accounts Receivable ...................................................................
Cash ...................................................................................

190

Cash ............................................................................................
Equipment ..........................................................................

27

190
27

PART V — INVENTORY (12 points)
(a) Average cost ending inventory:
250 × $13.70 = $3,425

Average cost of goods sold:
Cost of goods available for sale

Less: Ending inventory
Cost of goods sold

$13,700
3,425
$10,275

(b) FIFO ending inventory:
200 × $14 = $2,800
50 × $15 =
750
$3,550

FIFO cost of goods sold:
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold

$13,700
3,550
$10,150

(c) LIFO ending inventory:
200 × $12 = $2,400
50 × $13 =
650
$3,050

LIFO cost of goods sold:
Cost of goods available for sale

Less: Ending inventory
Cost of goods sold

$13,700
3,050
$10,650

$13,700
Average cost = ————- = $13.70
1,000

PART VI — DEPRECIATION (15 points)
Depreciable cost: $400,000 - $20,000 = $380,000.
(a) Straight-line
2002 depreciation [($400,000 - $20,000) ÷ 5] ..........................................
2003 depreciation [($400,000 - $20,000) ÷ 5] ..........................................
12/31/03 book value [$400,000 - ($76,000 + $76,000)] ...........................

$76,000
$76,000
$248,000

(b) Double-declining-balance
2002 depreciation ($400,000 × .4) ..........................................................
2003 depreciation [($400,000 - $160,000) × .4] ......................................
12/31/03 book value [$400,000 - ($160,000 + $96,000)] .........................

$160,000
$96,000
$144,000

(c) Units-of-activity
2002 depreciation [180,000 × ($380,000 ÷ 1,000,000)] ...........................
2003 depreciation (200,000 × .38) ..........................................................
12/31/03 book value [$400,000 - ($68,400 + $76,000)] ...........................

$68,400
$76,000
$255,600


FE-20 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition
PART VII — RATIO ANALYSIS (14 points)
(a)

$250,000
Current ratio = ———— = 2.50:1.
$100,000

(b)

$400,000
Debt to total assets = ————— = 40%.
$1,000,000

(c)

$425,000
Times interest earned = ———— = 8.5 times.
$50,000

(d)

$1,080,000
Inventory turnover = ————— = 9 times.
$120,000

(e)

$225,000
Profit margin ratio = ————— = 11.25%.
$2,000,000

(f)

$225,000
Return on common stockholders' equity = ———— = 45%.
$500,000

(g)

$225,000
Return on assets = ———— = 25%.
$900,000


PART VIII — STATEMENT OF CASH FLOWS (15 points)
(a)

Indirect Method

SYERS CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2003

Cash flows from operating activities
Net income .........................................................................
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable ....................................
Increase in inventory .....................................................
Decrease in prepaid expenses ......................................
Decrease in accounts payable ......................................
Loss on sale of equipment ............................................
Depreciation expense ...................................................
Net cash provided by operating activities ......................
Cash flows from investing activities
Sale of equipment ...............................................................
Purchase of land .................................................................
Net cash used by investing activities .............................
Cash flows from financing activities
Declaration and payment of dividends ..........................
Net cash used by financing activities ............................
Net increase in cash .................................................................
Cash at beginning of period ......................................................
Cash at end of period ...............................................................
Noncash financing activity
Conversion of bonds payable into common stock ...............

$ 42,000
$ (7,000)

(13,000)
5,000
(4,000)
2,000
14,000

(3,000)
39,000

10,000
(16,000)
(6,000)
(15,000)
(15,000)
18,000
40,000
$ 58,000
$100,000


Test Bank for Financial Accounting: Tools for Business Decision Making
FE - 22
PART VIII — STATEMENT OF CASH FLOWS (cont.)
(b) Direct Method
SYERS CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2003
Cash flows from operating activities
Cash receipts from customers ($408,000 - $7,000) ..................
Cash payments

To suppliers ($190,000 + $13,000 + $4,000) .......................
For operating expenses ($141,000 - $5,000) ......................
For income taxes ................................................................
Net cash provided by operating activities ............................
Cash flows from investing activities
Sale of equipment .....................................................................
Purchase of land .......................................................................
Net cash used by investing activities ..................................
Cash flows from financing activities
Declaration and payment of dividends ......................................
Net cash used by financing activities ........................................
Net increase in cash .......................................................................
Cash at beginning of period ............................................................
Cash at end of period .....................................................................
Noncash financing activity
Conversion of bonds payable into common stock .....................

$401,000
$207,000
136,000
19,000

362,000
39,000

10,000
(16,000)
(6,000)
(15,000)
(15,000)

18,000
40,000
$ 58,000
$100,000