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AC 506

Fall 2013
Exam 1


Instructions: Select the one best answer to each of the following questions,
indicating your choice by marking the appropriate letter on the scan sheet provided.
If you change your mind about an answer, be sure to erase completely. Only marks
on the scan sheet will be considered when scores are determined.
Each correct answer is worth 2.5 points, and you can earn a maximum score
of 100 points on this exam.
You will be provided 75 minutes to take the exam. All work must stop when
time is called. The time limit provided includes the time needed to transfer
answers to your scan sheet AND to properly grid in your name and CWID on
the scan sheet. You will not be provided extra time at the end of the exam to
mark your scan sheet.
All UA and C&BA academic integrity policies apply.
The following information applies to Questions 1 3: In 2006, Dr. Brian Gray opened a
window treatment shop and named the business 50 Shades of Dr. Brian Gray, or Gray for
short. During 2006, Gray generated revenues of $60,000. Grays expenses were as follows:
cost of goods sold of $36,000, operating expenses of $10,000 and a gain on the sale of
equipment of $2,000.

Grays gross profit is

a. $60,000
b. $24,000
c. $16,000
d. $14,000


Grays operating income is

a. $60,000
b. $24,000
c. $16,000
d. $14,000


Grays net income is

a. $60,000
b. $30,000
c. $16,000
d. $14,000

4. Creditors use financial accounting information to

a. determine whether the company is following regulatory guidelines.
b. determine whether the company is complying with tax laws
c. evaluate the risks of lending money
d. make decisions to about buying, holding, or selling stock.
5. Generally accepted accounting principles are
a. income tax regulations of the Internal Revenue Service.
b. standards that indicate how to report economic events.
c. principles that have been proven correct by academic researchers.

6. Richey Company purchased equipment for $20 million in 1999. The fair market value
at the end of 2012 of the equipment is $25 million. The equipment will be reported
on the December 31, 2012 balance sheet at
a. $20 million, but a gain of $5 million must be recognized in the income statement.
b. $20 million less accumulated depreciation.
c. $25 million.
d. $25 million less accumulated depreciation.
7. King Company has total assets of $100,000 and total liabilities of $60,000.
companys stockholders equity is
a. $40,000.
b. $60,000.
c. $100,000.
d. $160,000.


8. Liabilities
a. are future economic benefits.
b. are existing debts and obligations.
c. possess service potential.
d. are things of value used by the business in its operation.
9. Common stock is
a. the stockholders permanent investment in the business.
b. equal to liabilities minus stockholders equity.
c. equal to assets minus stockholders equity.
d. equal to liabilities plus dividends.
10. A net loss will result during a time period when
a. liabilities exceed assets.
b. drawings exceed investments.
c. expenses exceed revenues.
d. revenues exceed expenses.
11. If Barrett Company purchases goods on account for $4,000, then
a. assets and liabilities both decrease by $4,000.
b. stockholders equity increases by $4,000.
c. assets increase by $4,000 and liabilities decrease by $4,000.
d. assets and liabilities both increase by $4,000.
12. Delta Company owes $500 on account. When Delta pays the debt, the transaction
a. increase an asset $500 and decreases an asset $500.
b. increase an asset $500 and decrease a liability $500.
c. decrease a liability $500 and increase Stockholders equity $500.
d. decrease an asset $500 and decrease a liability $500.
13. If services are rendered but payment is not to be received until later, then at the
time of the service
a. assets decrease.
b. liabilities increase.
c. stockholders equity increases.
d. liabilities decrease.


When expenses are paid in cash

assets increase.
liabilities decrease.
stockholders equity increases.
assets decrease.

When supplies that have been purchased are eventually used in the course of
business, then at the time of use
a. a liability increases.
b. an asset increases.
c. Stockholders equity decreases.
d. Stockholders equity increases.
White Companys stockholders equity at the beginning of August 2006 was
$300,000. During the month, the company earned net income of $60,000 and paid
dividends of $20,000.
At the end of August 2006, what is the balance in
stockholders equity?
a. $260,000
b. $300,000
c. $340,000
d. $380,000

A balance sheet shows

revenues, liabilities, and stockholders equity.
expenses, dividends, and stockholders equity.
revenues, expenses, sales of stock and dividends.
assets, liabilities, and stockholders equity.
An income statement
summarizes the changes in stockholders equity for a specific period of time.
reports the changes in assets, liabilities, and stockholders equity over a period of
reports the assets, liabilities, and stockholders equity at a specific date.
presents the revenues and expenses for a specific period of time.

19. On January 1, 2006, Kescu Company reported stockholders equity of $470,000.

During the year, the company paid dividends of $20,000. At December 31, 2006, the
balance in stockholders equity was $500,000. What amount of net income or net
loss would the company report for 2006?
a. net income of $30,000.
b. net loss of $50,000.
c. net income of $10,000.
d. net income of $50,000.
20. Auditing is
a. the examination of financial statements by a CPA in order to express an opinion
on their fairness.
b. a part of accounting that involves only recording of economic events.
c. a form of budgeting.
d. conducted by the Securities and Exchange Commission.
21. Chambers Tutoring performed services and collected $120 in cash. This transaction
will affect the


income statement only

balance sheet only
income statement and balance sheet
cash flow statement, but not the income statement or balance sheet

22. During the year, McCalpine Enterprises earned revenues of $45,000, had expenses of
$25,000, purchased assets with a cost of $5,000 and paid dividends to the
shareholders of $3,000. Net income for the year is:
a. $45,000
b. $20,000
c. $17,000
d. $15,000
23. The statement of cash flows
a. reports the changes in stockholders equity for the year.
b. reports the financial position of the company.
c. is another name for the income statement.
d. summarizes the operating, financing, and investing activities of an entity.
24. If a company reports a net loss, it
a. may still have a net increase in cash.
b. will not be able to pay cash dividends.
c. will not be able to get a loan.
d. will not be able to make capital expenditures.
25. The best measure of a company's ability to generate sufficient cash to continue in
business over the long term is net cash provided by
a. financing activities.
b. investing activities.
c. operating activities.
d. processing activities.
26. Financing activities include
a. the day-to-day operations of the company.
b. acquiring investments in the stocks and bonds of other companies.
c. selling common stock to investors.
d. acquiring long-lived assets.
27. If accounts receivable have increased during the period,
a. revenues on an accrual basis are less than revenues on a cash basis.
b. revenues on an accrual basis are greater than revenues on a cash basis.
c. revenues on an accrual basis are the same as revenues on a cash basis.
d. expenses on an accrual basis are greater than expenses on a cash basis.
28. In calculating cash flows from operating activities using the indirect method, a gain
on the sale of equipment is
a. added to net income.
b. deducted from net income.
c. ignored because it does not affect cash.
d. not reported on a statement of cash flows.
29. When presenting the cash flows from operating activities, most companies in the U.
a. use the direct method.
b. use the indirect method.

c. present both the indirect and direct methods in their financial reports.
d. prepare the operating activities section on the accrual basis.

On the statement of cash flows using the indirect method, patent amortization
expense will
a. be added to net income in the operating section.
b. be deducted from net income in the operating section.
c. appear as an inflow of cash in the investing section.
d. appear as an outflow of cash in the investing section.

Net cash provided (used) by investing activities focuses on

the current year's income statement.
the long-term asset accounts.
the long-term debt and stockholders equity accounts.
the current asset and liability accounts.

32. During the year, Salaries Payable decreased by $6,000. If Salary Expense amounted to
$160,000 for the year, the cash paid to employees (including deductions from gross
pay) is
a. $166,000.
b. $160,000.
c. $154,000.
d. $172,000.
Ward Company reports a $15,000 increase in inventory and a $5,000 increase in
accounts payable during the year. Cost of Goods Sold for the year was $150,000. The
cash payments made to suppliers were
a. $150,000.
b. $160,000.
c. $130,000.
d. $145,000.
Carroll Company had credit sales of $800,000. The beginning accounts receivable
balance was $40,000 and the ending accounts receivable balance was $140,000.
What were the cash collections from customers during the period?
a. $900,000.
b. $800,000.
c. $700,000.
d. $840,000.

A liquidity ratio measures the

income or operating success of an enterprise over a period of time.
ability of the enterprise to survive over a long period of time.
short-term ability of the enterprise to pay its maturing obligations and to meet
unexpected needs for cash.
d. number of times interest is earned.


Asset turnover measures

how often a company replaces its assets.
how efficiently a company uses its assets to generate sales.
the portion of the assets that have been financed by creditors.
the overall rate of return on assets.

37. Editllor Company reported the following on its income statement:

Income before income taxes
Income tax expense
Net income
An analysis of the income statement revealed that interest expense was $60,000.
Editllor Company's times interest earned was
a. 8 times.
b. 7 times.
c. 6 times.
d. 5 times.
38. The debt to total asset ratio measures
a. the company's profitability.
b. whether interest can be paid on debt in the current year.
c. the proportion of interest paid relative to dividends paid.
d. the percentage of the total assets provided by creditors.
The following information applies to Questions 39 and 40: Swolbtu Company had $250,000
of current assets and $90,000 of current liabilities before borrowing $60,000 from the bank
with a 3-month note payable.
39. What effect did the borrowing transaction have on the amount of Swolbtu
Company's working capital?
a. No effect
b. $60,000 increase
c. $90,000 increase
d. $60,000 decrease
What effect did the borrowing transaction have on Swolbtu Company's
current ratio?
a. The ratio remained unchanged.
b. The change in the current ratio cannot be determined.
c. The ratio decreased.
d. The ratio increased.
Cheech Enterprises earned net income of $105,000 on sales of $420,000.
The company has total assets of $4,200,000. What is the companys profit
a. 1%
c. 10%
42. During the month of March 2012, Chong, Inc., a tax-preparation service, had the
Billed $148,000 in revenues on credit
Received $82,000 from customers accounts receivable

Incurred expenses of $67,000 but only paid $38,850 cash for these
Prepaid $11,110 for computer services to be used next month
What was the companys accrual basis net income for the month?
a. $32,040
b. $81,000
c. $20,930
d. $98,040