ACG 201

TEST IA
Fall 2007

NAME _______________MASTER_____________

Class Time
Circle one: 8:00 9:00

MULTIPLE CHOICE: There is only one BEST answer. 2 points each.

1. _______B_______ 11. ______D________

2. _______A_______ 12. ______C________ Multiple Choice 40

3. _______C_______ 13. ______C________ Problem I 30

4. _______D_______ 14. ______D________ Problem II 20

5. _______B_______ 15. ______C________ Problem III 10

______
6. _______C_______ 16. ______C________
100
7. _______C_______ 17. ______B________

8. _______A_______ 18. ______A________

9. _______A_______ 19. ______A________

10. _______C_______ 20. ______B________

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Multiple Choice – (2 points each) select the ONE best answer

1. Which of the following is true

a. Corporate shareholders are personally liable for the liabilities of the corporation if the
company is unable to pay them.
b. Partners are personally liable for the liabilities of the partnership if the
partnership is unable to pay.
c. Normally, corporate shareholders can collect in cash from the corporation an amount
equal to their ownership interest whenever they wish..
d. Partners can normally transfer their partnership interests with ease.

2. When comparing football to the world of business, the functions of a Board of Directors
of a corporation is most like that of which of the following:
a. Coach
b. Quarterback
c. Scorekeeper
d. Owner

3. Which of the following regarding retained earnings is false?

a. Retained earnings is an indication of total possible dividends.
b. Retained earnings is a component of stockholders’ equity on the balance sheet.
c. Retained earnings is a liability on the balance sheet.
d. Retained earnings represents earnings not distributed to stockholders in the form of
dividends.

4. If total assets increased by $14,000 during a period of time and stockholders’ equity
increased by $6,000 during the same period, then the amount and direction (increase or
decrease) of the period’s change in total liabilities is a(n)
a. $14,000 increase.
b. $20,000 increase.
c. $8,000 decrease.
d. $8,000 increase.

5. All of the following are qualitative characteristics of accounting information EXCEPT:

a. Relevance.
b. Predictability.
c. Reliability.
d. Comparability.

6. Which of the following describes how assets are listed on the balance sheet?
a. in alphabetical order.
b. in order of magnitude, lowest value to highest value.
c. from most current to least current.
d. from least current to most current.

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 7. Which of the following is false regarding the balance sheet?
a. The accounts shown on a balance sheet represent the basic accounting equation for
a particular business.
b. The retained earnings balance shown on the balance sheet must agree to the ending
retained earnings balance shown on the statement of retained earnings.
c. The balance sheet summarizes the net changes in specific account
balances over a period of time.
d. The balance sheet reports the amount of assets, liabilities, and stockholders’ equity
of a business at a point in time.

8. Which of the following results in a total dollar measure of liquidity?

a. Working capital
b. Current ratio
c. Debt ratio.
d. Price/earnings ratio.

9. If a company decides to record an expenditure as an asset rather than as an expense,

how will this decision affect net income in the current period?
a. Net income will be higher.
b. Net income will be lower.
c. Net income will not be affected by this decision.
d. It’s a mystery; nobody really knows.

10. Which of the following events is a transaction to be recorded in the general journal of R.
B. Corporation, owned by R. Barker?
a. Mr. Barker buys a sofa for his living room at home.
b. Mr. Barker, an employee of R. B. Corporation, fires the accountant who had been
earning $20,000 a year.
c. Mr. Barker collects a retainer of $3,000 for a job that R. B. Corporation will
do next month.
d. all of the above.

11. Which of the following is true?

a. FASB creates SEC.
b. GAAP creates FASB.
c. SEC creates CPA.
d. FASB creates GAAP.

12. An accountant is uncertain about the best estimate of an amount for a business
transaction. If two amounts are about equally likely, the amount least likely to overstate
the assets and income is selected. This is an example of applying the constraint of
a. comparability.
b. neutrality.
c. conservatism.
d. materiality.

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13. A classified balance sheet is most useful in assessing
a. cash flow
b. profitability
c. liquidity
d. conservatism

14. A $1,500 debit item is accidentally posted as a $1,050 debit. The trial balance totals will
therefore differ by
a. $900.
b. $550.
c. $950.
d. $450.

15. A high price earnings ratio indicates

a. high net income and optimism by management .
b. high debt and pessimism by the bank.
c. net income and optimism by Wall Street.
d. high liquidity for paying bills.

16. Which of the following is not an activity of accounting as included in the definition of
accounting?
a. interpreting.
b. classifying.
c. auditing.
d. reporting.

17. A businesses balance sheet cannot be used to predict accurately what the business
might be sold for because
a. it does not identify all the assets and liabilities of the business.
b. assets are listed on the balance sheet at their historical cost, not their
current value.
c. it gives the results of operations for the current period .
d. some of the assets and liabilities on the balance sheet may actually be those of
another entity.

18. Which of the following is most useful in preparation of financial statements and catching
mistakes in accounting:
a. trial balance.
b. general journal.
c. general ledger.
d. chart of accounts.

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19. Cash has a normal balance of $9,000 on August 1, collections of $14,000 and payments
of $7,000 during the month. The ending balance is
a. $16,000 DR
b. $4,000 CR
c. $14,000 DR
d. $28,000 CR

20. The best absolute measure of a company’s ability to pay obligations due within the next
year is the
a. current ratio
b. working capital amount
c. Total cash balance
d. total current asset balance

Problem I – Financial Statements (30 points)

Use the following accounts and information to prepare, in good form, an income statement, a
retained earning statement, and a classified balance sheet for Minor Industries for the month
ended September 30, 2007 on pages which follow. Average shares outstanding are 1,000.

Accumulated depreciation $ 3,000 Dividends $ 3,000

Accounts payable 2,100 Prepaid insurance 1,200
Accounts receivable 1,500 Supplies expense 1,400
Cash 20,400 Bonds payable due in 2010 6,000
Equipment 19,600 Rent expense 3,400
Sales revenue 34,300 Salaries expense 10,000
Common stock 10,000 Short term investments 3,000
Retained earnings (beginning) 22,900 Patents 2,300
Cost of sales 10,000 Current maturities of bonds 1,000
Inventory 3,500

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 Financial Statements
Minor Industries
Income Statement
For the Month Ended September 30, 2007

Sales revenue 34,300

Less: Supplies expense (1,400)

Cost of sales (10,000)
Rent expense (3,400)
Salary expense (10,000)
(24,800)

Net Income ___9,500

Earnings per share $___9.50

9,500
1,000

Retained Earnings Statement

For the Month Ended September 30, 2007

__Beginning RE_______ 22,900

__Net Income________ 9,500

__Less: Dividends_____ (3,000)

__________________

Retained earnings __________29,400

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 Minor Industries
Classified Balance Sheet
As of September 30, 2007

ASSETS

Current Assets
Cash 20,400
Short term investments 3,000
Accounts receivable 1,500
Inventory 3,500
Prepaid insurance 1,200
Total Current Assets 29,600

Equipment 19,600
Less: Accumulated depreciation (3,000)
16,600

Patents 2,300

Total Assets 48,500

LIABILITIES & EQUITY

Current Liabilities
Accounts payable 2,100
Current maturities of bonds 1,000
Total Current Liabilities 3,100

Long Term Liabilities

Bonds payable due in 2010 6,000
Total Liabilities 9,100

Stockholder’s Equity
Common stock 10,000
Retained earnings 29,400
Total Stockholder’s Equity 39,400

Total Liabilities and Equity 48,500

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Problem II (20 points)

Hiroshi Tanaka began an upholstery-cleaning business on October 1 and engaged in the

following transactions during the month:

Oct. 1. Began business by depositing $6,000 in a bank account in the name of the
corporation in exchange for 6,000 shares of $1 par value common stock.
2. Paid for cleaning supplies received of $500.
3. Purchased cleaning equipment on account, $1,400.
4. Leased a van by making a payment for October of $300 and two months’ lease
payments in advance(November and December), $600.
7. Paid half the balance owed for the cleaning equipment purchased on October 3.
9. Paid for repairs on the van with cash, $40.
12. Received cash for cleaning upholstery, $980.
21. Billed customers for cleaning upholstery, $650.
23 Received a deposit of $3000 for an upholstery job to be performed in November.
27 Received $300 from the customers billed on October 21.
31 Declared and paid a dividend of $350.

Required:

The following is the chart of accounts:

Cash
Accounts receivable
Cleaning supplies
Prepaid lease
Cleaning equipment
Accounts payable
Common stock
Dividends
Cleaning revenue
Unearned cleaning revenue
Repair expense
Lease expense

Record the above transactions directly in the general journal on following page.

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 General Journal

Entry Description Debit Credit

Oct. 1 Cash 6,000

Common stock 6,000

2. cleaning supplies 500

Cash 500
3.
Cleaning equipment 1,400
Accounts payable 1,400

4. Lease expense 300

Prepaid lease 600 900
Cash

7. Accounts payable 700

Cash 700

9. Repair expense 40
Cash 40

Cash 980
12.
Cleaning revenue 980

21. Accounts receivable 650

Cleaning revenue 650

23. Cash 3,000

Unearned cleaning revenue 3,000

27. Cash 300

Accounts receivable 300

28. Dividends 360

Cash 360

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Problem III – Short Answer (10 points)

The following information is determined from the annual reports of Lucky Company and Broke
Company.

Lucky Broke
2006 2005 2006 2005
1. Current ratio 1.85:1 1.65:1 1.55:1 1.60:1
2. Debt to total assets ratio 40% 45% 95% 86%
3. Earnings per share $4.52 $3.52 $4.30 $5.30
4. Cash balance $800,000 $900,000 $2,000,000 $1,000,000
5. Price Earnings ratio 18:1 11:1 9:1 15:1

Required: Indicate which company has greatest solvency and why.

Lucky because it only has a debt of 40%.

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