Note that, this is a practice midterm1 exam.

The structure of the actual midterm1

exam is slightly different from this version. For information on the exact structure
of the midterm1 exam, follow the table at the tip of the review checklist for the
midterm1.

PART A – MULTIPLE CHOICE – Suggested time 40 minutes (1.4 marks for each)

1) Because investors entrust their resources to professional managers, they need

accounting for purposes of _______________.
a) scorekeeping
b) attention directing
c) decision support
d) (a) & (b), but not (c)
e) (a), (b) & (c)
Answer is (a)

2) Financial accounting is concerned with _______________.

a) reporting to external users, such as shareholders
b) reporting to internal users, such as managers
c) reporting to the Statistics Office of the Federal Government
d) personal financial planning
e) none of the above
Answer is (a)

3) Issuing shares and borrowing money is part of the ______________ function.

a) financial accounting
b) management accounting
c) personal financial planning
d) finance
e) none of the above
Answer is (d)

4) The income statement reports the _______________.

a) change in wealth over a period of time
b) assets and liabilities of the organization
c) cash inflows, outflows and balances over a year
d) owners’ investment in the organization
e) none of the above
Answer is (a)

5) Goods purchased for resale but not sold at the end of an accounting period are referred
to as _______________.
a) cost of goods sold
b) gross profit percentage
c) inventory
d) operating expense
e) none of the above
Answer is (c)

6) The balance sheet records __________.

a) the assets, liabilities and owners’ equity of the company
b) the wealth of the shareholders
c) the profitability of the company
d) the liquidity of the company
e) none of the above
Answer is (a)
7) Profits made by the company but not distributed to shareholders appear on the balance
sheet as __________.
a) they do not appear on the balance sheet
b) cash
c) accounts payable
d) retained earnings
e) none of the above
Answer is (d)

8) In accounting, a credit could be:

a) something owed
b) a revenue
c) a contra-asset
d) all of the above
e) none of the above.
Answer is (d)

9) To be useful, financial statements should be ____________.

a) reliable
b) relevant
c) both relevant and reliable
d) neither relevant nor reliable
e) none of the above
Answer is (c)

10) Recognizing revenues in the period when they are earned, rather than the period
when the cash is received, is an example of which accounting concept?
a) Business entity
b) Accruals
c) Conservatism
d) Historic cost
e) None of the above
Answer is (b)

11) The detailed rules for preparing financial statements are found in ____________.
a) Provincial company law
b) The company’s bye-laws
c) The company’s in-laws
d) The CICA handbook
e) None of the above
Answer is (d)

12) Jugo Juice Inc. had share capital of $750,000 and retained earnings of $500,000. It
then paid a dividend of $100,000. Total owners’ equity after the dividend payment
was:
a) $1,250,000
b) $1,150,000
c) $ 650,000
d) $ 400,000
e) none of the above
Answer is (b)
13) Investors buy shares in Freshly Squeezed Inc. for $6 million. On Day One of the
company’s operations, $3 million is spent on assets and $3 million is borrowed from
the Bank. By the end of the first month they have also bought $10 million of goods
for resale on credit and made sales of $25 million on credit. There is no inventory
left. Ignore all other transactions and expenses. The accounting equation at that
point in time is __________.
a) assets: $34 million; liabilities: $13 million; equity: $21 million
b) assets: $9 million; liabilities: $15 million; equity: $6 million
c) assets: $19 million; liabilities: $3 million; equity: $16 million
d) assets: $34 million; liabilities: $28 million; equity: $6 million
e) none of the above
Answer is a

14) Sharpie Ltd’s income statement at the end of the year shows that sales revenue for the
company was $900,000. Its operating expenses were $750,000. Interest expense on debt
was $20,000. Taxes were $30,000. Sharpie Ltd.’s operating income was _______.
a) $100,000
b) $150,000
c) $200,000
d) $850,000
e) none of the above

Answer is b

15) Sharpie Ltd. is a company that specializes in reforestation. The company has cash
assets of $80,000 and liabilities of $30,000. Sharpie Ltd. pays off the $30,000 of
debt. Sharpie Ltd. borrows another $30,000 and uses the money to buy baby trees.
The baby trees are used to recover an area of northern Alberta, for which a forestry
company pays Sharpie Ltd. $50,000. The accounting equation at that point in time is
____________.
a) assets: $70,000; liabilities: $0; equity: $70,000
b) assets: $100,000; liabilities: $30,000; equity: $70,000
c) assets: $130,000; liabilities: $30,000; equity: $100,000
d) assets: $100,000l liabilities: $0; equity: $100,000
e) none of the above

Answer is b

16) The entrepreneur who started the company and members of his immediate family
own all the common shares of Varal Co. They have decided that an outside auditor
should check the company financial statements. The audit will ____________.
a) increase the relevance of the financial statements
b) increase the reliability of the financial statements
c) increase the relevance and reliability of the financial statements
d) leave both relevance and reliability unchanged
e) none of the above
Answer is (b)

Use the following information to answer questions 17 to 21:

Price Plus Dollar Store opened on January 1st. The initial investment was $10,000. The
rent for the store is $2,000 per month, but on January 1st Price Plus Dollar Store paid the
first and last month’s rent. The shelves and other facilities were purchased for $5,000 in
cash. Goods for resale were also purchased at a cost of $10,000, on credit, payable on
February 15. Other expenses were $1,400 in January, all of which were paid for in cash.
The sales were $13,000 in cash and $2,000 on credit, which it is expected to be collect by
the end of February. At the end of January the inventory had a cost of $7,000.
Amortization on the shelves and other store facilities is estimated at $100 for the month.
17) The sales revenue recognized in January was _______________.
a) $ 2,000
b) $10,000
c) $15,000
d) $17,000
e) none of the above
Answer is (c)
$13,000 for cash + $2,000 on credit = $15,000

18) The cost of goods sold in January was _______________.

a) $13,000
b) $10,000
c) $ 7,000
d) $ 3,000
e) none of the above
Answer is d

19) The gross profit for January was _______________.

a) $10,000
b) $ 7,000
c) $ 5,000
d) $ 3,000
e) none of the above
answer is e
Gross profit is = 15,000 – 3,000 = 12000

20) The total of all operating expenses excluding cost of goods sold for January was
_______________.
a) $3,500
b) $3,100
c) $1,100
d) $1,000
e) none of the above
Answer is a
(Rent 2,000 + Other expenses 1,400 + Amortization 100)

21) The operating profit for January was _______________.

a) $8,500
b) $6,900
c) $4,900
d) $4,000
e) none of the above

Answer is a
Gross profit ($12000)- operating expenses ($3,500) = $ 8,500
Answer is (a)

22).Tom&Dick sells computer software. All credit transactions are done through credit
cards, so there is a 100% probability of receiving the money, but there is a wait of up
to 10 days while the transaction is being processed. When Tom&Dick prepares
financial statements at the end of its first business year, it should ____________.
a) exclude accounts receivable, because customers may not pay
b) include accounts receivable as an asset because of the matching principle
c) exclude accounts receivable as the amount is variable with interest rates
d) include accounts receivable as an asset because of the cost principle
e) none of the above
Answer is (b)
23) Cost of goods sold is _______________.
a) an expense that is deducted from revenue
b) the input value of the goods that were sold to earn revenue
c) an example or application of the matching principle
d) (a) & (b), but not (c)
e) (a), (b) & (c)
Answer is (e)

24) Roumaisa’s Modes is a retail outlet for ladies fashion goods. At the year-end
inventory on 31/12/2013, Roumaisa’s Modes found that it had goods on hand that had
cost $50,000. Roumaisa’s Modes expects to sell half the inventory in 2014 for
approximately $75,000, but the remainder of the goods is no longer fashionable and
would have to be sold at clearance sale prices, realizing no more than $10,000. The
inventory in the balance sheet as at 31/12/2013 would be valued at __________.
a) $25,000
b) $35,000
c) $50,000
d) $60,000
e) none of the above
Answer is (b)
[($50,000/2 = $25,000) + $10,000 = $35,000]

25) Roumaisa’s Modes is a retail outlet for ladies fashion goods. At the end of December
2014, customers owed Roumaisa’s Modes a total of $2,000. $1,500 would be
successfully collected during January 2015, but the remaining $500 would prove to
be a problem, as the customer had left town. In the balance sheet as at 31/12/2014,
accounts receivable should be shown as __________.
a) $2,000
b) $2,000, but with a “note” in the accounts that $500 was uncollectible
c) $2,000; less provision for doubtful debts: $500, net $1,500
d) $nil
e) none of the above
Answer is (c)

Suggested time 20 MINUTES TO ANSWER THIS PART

Part B - Written Answer – 15 marks

1. Professional accountants find themselves interacting with human resources

managers in a number of different capacities either personally or as an employee
of their company. List three of these capacities (2 marks) and indicate why a
knowledge of accounting would be useful to a career in human resources
management (6 marks – 14 minutes)

2. Define and provide an example to explain any FOUR accounting concepts. (1.5
marks or 2 minutes each – total 6 marks or 14 minutes):

3. Who are the most important users who should be taken account of in setting
accounting standards, and why? (3 marks- 7 minutes)

Note: Find the answers of part B from the relevant chapter(s) of the John Parkinson’s text
book.
 YOU HAVE 35 MINUTES TO ANSWER THIS PART

Part C - Written Answer – 15 marks

Saini Fashions started in business last year and but did not commence operations
until January 1, 2015. On January 1, Saini fashions Inc. had dresses inventory of
$75,000 and jackets inventory of $50,000 which were purchased the previous month.
Additional jackets and dresses were purchased for $150,000 during the month. Sales
for January totaled $280,000, of which cash sales collected by the end of the month
were $200,000 and the remainder were on account. Due to water damage in January,
Saini Fashions Inc. had damaged jackets and dresses in inventory of $10,000 which
are worthless. Inventory in the accounting records at January 31, 2015 was $120,000.
Salaries paid to all employees were $28,000 for the month along with unpaid
bonuses for the month, which were an additional $2,000. Based on industry
standards, 2% of credit sales are typically uncollectible. A new cash register and
Point for Sale (POS) system was ordered and received on January 1 for $12,000.
This POS system is expected to be in working condition for two years. After which it
will have no value and have to be replaced. Saini Fashion’s purchased equipment at
the beginning of January with a cost of $36,000, which would last for three years.
Rent expense for the month was $10,000. Utilities paid during January for the
previous month were $5,000 and the current month’s bill was expected to be about
the same.
Prepare an income statement for the month ended January 31, 2015 (10 marks – 20
minutes)

Use this area for rough working – write on following separate sheet.

a)_Prepare an income statement for the month ended January 31, 2015 (10 marks –
20 minutes)
Answer of a_PART C
Saini Fashions
Income Statement
for the month ended January 31, 2015
Revenue $280,000
Less: Cost of goods sold * 165,000
Gross margin 115,000
Less: operating expenses:
Salaries (28000 + 2000) $30,000
Rent ($10,000x1) $10,000
Utilities 5,000
Amortization on Equipment (($36000)/36months)1,000
Amortization on POS ($12000/24 months) 500
Provision for bad debt ($80,000x2%) 1600
Net income $66,900

* Calculation of cost of goods sold:

Opening inventory ($75000 +$50,000) $125,000
Add: Purchase during the year 150,000
Less: Closing inventory ($120,000 - $10,000) 110,000
165,000
Marking Key:
Proper format 1mark
Revenue recognition 1 mark
Cost of goods sold 2 marks
Gross margin 1 mark
Correct matching of rent expenses .5 marks
Correct matching of utility expenses .5 marks
Amortization of POS 1mark
Amortization of equipment 1 mark
Provision for bad debt 1 mark
Net income 1 mark
N.B: Award partial mark for partially correct calculation.

b) Calculate the following balance sheet amounts 1) Total Inventory, 2) Accounts

Receivable and 3) Fixed Assets (I mark each –3 minutes each).
 Answer of b_PART C

Total inventory on January 31, 2015($120,000 - $10,000) 110,000

Accounts receivable ($ 80,000 -$1600) $78,400

Total fixed assets :

POS net of amortization ($12,000 - $500) $11,500
Equipment net of amortization ($ 36,000 - $1000)$35,000
Total fixed assets $46,500
Marking key:
Award 1 mark for each correct answer. Award partial mark for partially correct
answer.

c) Calculate the following cash flow amounts: 1) Net cash flow from operation, 2) Net
cash flow from investing activities (1 mark each – 3 minutes each)

Answer of c_PART C
Net Cash flow from Operation:
Net income $66,900
Add: Amortization ($1,000 + $ 500) 1,500
Add: Provision from bad debt 1,600
Add: Decrease in Inventory 5,000
Less: Increase in Accounts Receivable (80,000)

Net cash used in operation $(5,000)

Net cash flow from investing activities:

Purchase of POS ($12,000)
Purchase of Equipment ($36,000)
Net cash outflow from investing activities ($48,000)

Marking key:
Award 1 mark for each calculation. Award partial mark for partially correct answer.