Simon Fraser University
SAMPLE FINAL EXAM
TIME: 180 MINUTES = 150 MARKS
SECTION MARKS TIME (min.)
READING TIME 30
1. Technical questions 50 50
(3 questions A, B, C)
2. Financial statement analysis 30 30
3. Theory/written questions 30 30
4. Multiple choice 40 40
A FORMULA SHEET FOR FINANCIAL STATEMENT RATIOS IS
PROVIDED AT THE BACK OF THE EXAM.
SECTION 1. TECHNICAL ACCOUNTING QUESTIONS
(50 MARKS = 50 MINUTES)
ANSWER EACH OF QUESTIONS A, B AND C BELOW. WATCH YOUR
TIME, 1 MARK = 1 MINUTE.
A. (20 marks) PREPARATION OF INCOME STATEMENT and STATEMENT
OF RETAINED EARNINGS
The followinstis a trial balance for Zane Ltd. as at the recent fiscal year-end
(December 31 , 2009):
Account Title Debit . Credit .
Accounts payable $ 2,400
Accounts receivable $ 3,100
Accumulated depreciation 26,500
Bank loan 56,000
Cost of goods sold expense 14,100
Depreciation expense 2,000
Dividends declared 4,100
Gain on sale of surplus machinery 1,000
Heat, light and utility expenses 400
Income tax expense 860
Interest expense 570 Inventory 11,500
Loss on prefabrication business (discontinued) 2,650
Other expenses 955
Other liabilities 4,300
Retained earnings 39,900
Salaries and wages 9,300
Sales revenue 29,700
Share capital 20,535
Tax savings due to prefabrication business 600
(a) (15 marks) Based on the trial balance above, prepare (in good format)
the Income Statement and the Statement of Retained Earnings, for the
year ended December 31 , 2009. The prefabrication business was
discontinued in the last few months of fiscal 2009. If you feel that any
other assumptions are necessary, state your assumptions.
(b) (5 marks) The financial statements you prepared above are based on
„accrual accounting‟. Explain what that means, using one example from
the Zane Ltd. income statement to illustrate your answer.
B. (20 marks) PREPARATION OF A CASH FLOW STATEMENT
Ross Enterprises Inc.
Comparative Balance Sheets for December 31 2009 and 2008
2009 2008 2009 2008
Current assets: Current liabilities:
Cash $ 500 $ 800 Demand loan $ 500 $ 100
Accounts receivable 2,100 1,200 Accounts payable 2,300 1,500
Inventories 2,900 1,800 $ 2,800 $ 1,600
Prepaid rent - 400 Non-current liabilities:
$ 5,500 $ 4,200 Mortgage payable 7,400 8,000
Total liabilitie$ 10,200 $9,600
Cost of assets $ 18,900 $ 16,600 Shareholders‟ equity:
Accumulated Share capital $ 1,400 $ 1,000
depreciation ( 3,600) ( 2,100) Retained earnings 9,200 8,100
$ 15,300 $ 14,500 $ 10,600 $ 9,100
$ 20,800 $ 18,700 $ 20,800 $ 18,700 Other information for 2009
Net income was $1,300. This consisted of sales revenues of $100,000, cost of
goods sold expense of $60,000 and all other expenses (including depreciation)
There were no sales of any non-current assets during the year.
Dividends were declared and paid in the year.
(20 marks) Prepare a good format Statement of Cash Flows for 2009. State
any assumptions that you feel are necessary.
C. (10 marks) AMORTIZATION POLICIES
Comfy Garments Inc. just purchased a new pattern-cutting machine for
$40,000. Useful life is expected to be 8 years, with $5,000 salvage value at
that point. Management is unsure what depreciation method to use.
(10 marks) Calculate the depreciation expense for each of the next two years
using: a) Straight-line method,
b) 25% declining balance method
c) Which results in the higher after-tax net income in the second
year, and by how much? The company‟s tax rate is 30%.
SECTION 2. FINANCIAL STATEMENT ANALYSIS (30 MARKS = 30
On the next two pages you will find the 1998 balance sheet for MetroRichelieu
(with comparative results for 1996 and 1997).
SEE THE FORMULA SHEET ON THE LAST PAGE OF THIS EXAM FOR
FINANCIAL STATEMENT RATIOS.
a) (5 marks) Briefly comment on the company‟s liquidity between 1996 and
1998. Calculate one relevant financial statement ratio to support your
b) (5 marks) What proportion of the company‟s total assets are financed by
debt in 1998? In 1996? Do you think shareholders would be happy or
unhappy with the change – and why? c) (20 marks) From the financial statements, please answer the following
(show any calculations required):
i) (2 marks) What is total long-term debt at September 26 , 1998?
ii) (4 maths) If net income is $65.4 million for the year ended September
26 , 1998, what amount of dividends were declared in the year?
iii) (2 marks) Provide a journal entry to explain the increase in capital
stock from 1997 to 1998.
iv) (6 marks) „Capital assets‟ has increased on the balance sheet from
$379.2 to 420.0 million in the year ended September 26 , 1998.
Does this mean that exactly $40.8 million of capital assets were
purchased in the year? Explain.
v) (6 marks) The company has zero cash balance in 1998. Provide a
brief explanation of how you think the company can continue to
function in such a situation.
Consolidated Balance Sheets
As at September 26, 1998, 1997 and 1996
1998 1997 1996
Cash $ - $ - $ 3.1
Accounts receivable 160.0 147.1 144.2
Income taxes 10.7 3.5 -
Inventories 166.9 164.8 145.0
Prepaid expenses 11.3 10.3 10.0
Current portion of investments 0.7 2.4 2.5
350.5 328.1 304.8
Investments 17.0 18.2 17.4
Capital assets 420.0 379.2 340.9
$787.5 $725.5 $663.1 Liabilities & Shareholders’ equity
Bank loan $ 0.5 $ 7.5 $ -
Outstanding cheques 33.1 11.6 5.9
Accounts payable 329.3 301.7 285.4
Income taxes - - 6.0
Current portion of long-term debt 3.5 2.7 6.5
366.4 323.5 303.8
Long-term debt 48.6 94.6 106.2
Future income taxes 29.9 11.2 12.6
444.9 429.3 422.6
Capital stock 159.0 157.7 155.3
Retained earnings 183.6 138.5 85.2
342.6 296.2 240.5
$787.5 $725.5 $663.1
SECTION 3. THEORY/PRESENTATION QUESTIONS (30 MARKS = 30
Write a brief answer to each of the following, using clear and grammatical
sentences. Each question is worth 10 marks.
A. ACCURACY OF FINANCIAL STATEMENTS
Recent „scandals‟ in the business press have criticized the accuracy of
accounting information provided in financial statements. Using the generally
accepted accounting principles you have learned in this course, discuss how
accurate the dollar amount in the balance sheet is for each of the following
items: i) accounts receivable, ii) equipment (capital assets), iii) bank loan
B. ACCOUNTING FOR INVENTORY
The valuation of inventory affects both the income statement and balance
sheet. Explain how each of these accounting principles: i) historical cost, ii)
matching principle and iii) prudence, is related to the accounting for inventory.
C. CASH FLOW STATEMENTS
Comment on the following statement, “A statement of cash flows is
unnecessary because the increase or decrease in cash for the period can
easily be seen by looking at the cash account on two successive balance
sheets”. Your answer should include any benefits provided by a cash flow
statement. SECTION 4. MULTIPLE CHOICE (20 QUESTIONS = 40 MARKS = 40
Using the General Purpose Answer Sheet: for each question fill in the
ONE circle which is the BEST answer. You must use an HB pencil and fill
in the circle completely. Make sure that you also fill in your name and
student number on the General Purpose Answer Sheet.
1. In Canada, treasury shares are normally:
(a) Considered to be a special class of shares with rights
(b) Purchased and sold by the corporation to earn revenues
(c) Cancelled immediately upon purchase
(d) An investment by a company in the shares of a bank
2. Which of the following statements is true?
(a) Dividends must be accrued on common shares
(b) Dividends must be paid to both common and preferred shares at the
(c) The declaration of a dividend is made by company management
(d) None of the above (all the statements are false)
3. For which form(s) of organization is income tax directly paid by the
organization, on the organization‟s profits?
(d) All of the above
4. A company had the following inventory activity during the month.
Beginning inventory was 300 units with a unit cost of $10 each.
Purchases during the month were: on the 5 of the month, 1,200 units
at a unit cost of $11, and on the 16 of the month, 700 units at a unit
cost of $10.50. During the month 1,400 units were sold. Using
perpetual, FIFO costing, the ending inventory was:
5. What is/are the main reason(s) why management would decide to
declare a stock split?
(a) To increase the number of shares outstanding
(b) To decrease the earnings per share
(c) To reduce the shares‟ market price
(d) All of the above The following information is for questions 6 and 7
Vienna Company borrowed $20,000 on October 1 , 2010. The company
signed a 6 month note payable, bearing interest of 10% astually, promising to
pay the interest and principal on maturity, March 31 , 2011.
6. The entry to record the transaction on October 1 , 2010 would include a:
(a) Credit to cash of $20,000
(b) Debit to interest expense of $1,000
(c) Debit to interest expense of $2,000
(d) Credit to note payable of $20,000
7. The total liability reflected on the December 31 , 2010 balance sheet
related to this note would be:
8. If a company needs cash, it can do which of the following:
I. Factor accounts receivable
II. Issue a bond
III. Issue common shares
(a) II only
(b) III only
(c) II and III only
(d) I, II and III
9. A leased asset appears on a company‟s balance sheet:
(a) If the lease results in the company having the rights and
responsibilities of ownership of the asset
(b) Once the lease is signed, as the company now controls the asset
(c) If the lease payments are material
(d) None of the above, leased assets never appear on the balance
10. The auditor‟s report confirms that:
(a) The financial statements are error free
(b) The financial statement present fairly the financial condition of a
(c) The company is a good investment
(d) All of the above 11. A company hires an employee with an annual salary of $45,000. Salary
tax at 30% is withheld from the employee‟s pay cheques, and a further
5.2% withholding is made for payroll taxes CPP and EI. In addition, the
company must make a further 6.2% contribution for CPP and EI. How
much cash does the employee receive in the year from the company?
12. Which of the following ratios would be of most interest to the
shareholders of a company in evaluating the performance of their
(a) Return on equity
(b) Return on assets
(c) Inventory turnover ratio
(d) Debt-equity ratio
13. A company should not borrow money for an investment, when:
(a) The loan‟s interest rate exceeds the expected return on investment
(b) The loan‟s interest rate exceeds the shareholders‟ return on equity
(c) Both of the above
(d) None of the above
14. Equipment was purchased on January 1 , 2010 at an original cost of
$500,000. The estimated residual value is $50,000, and the equipment
has an estimated life of 10 years. If the company uses a 20% declining
balance method (use the 20%, no need to double this rate) of
determining amortization, what would be the amortization expense in
the 2011 year?
(d) None of the above
15. Which of the following would be recorded in a company‟s balance
(a) A mutually unexecuted contract
(b) A signed agreement to purchase goods in the future
(c) Both of the above
(d) None of the above 16. The following amounts are always known under which inventory costing
Current Cost of Goods Inventory
Inventory Sold Expense Shrinkage
(a) Periodic Periodic Perpetual
(b) Perpetual Perpetual Periodic
(c) Perpetual Perpetual Perpetual
(d) Periodic Periodic Periodic
17. Which of the following costs would be capitalized for a building being
constructed for a company‟s own use?
(a) Amortization on the building during construction
(b) Annual property taxes incurred after completion of construction
(c) Legal costs incurred in obtaining building permits
(d) All of the above
18. A piece of equipment was purchased on April 1 . The agreed upon
price was $25,000, and a 7% sales tax was also paid (not included in
the $25,000 price). The company paid $250 for delivery and $500 for
installation. The equipment should be valued on the balance sheet at a
19. A company sells a product and offers a 2 year warranty to customers.
In 2010, the company sold 2,500 units at a selling price of $400/unit.
Based on prior year data, 2% of units sold require repair in the year of
sale, and 4% require repair in the following year (while still under
warranty). The average cost for each repair is estimated at $25. During
2010, $975 was paid in repair costs. What is the 2010 warranty
(d) None of the above
20. A repayment during the year of a bond liability would be reported in the
statement of cash flows as a/an:
(a) Operating outflow
(b) Investing outflow
(c) Financing inflow
(d) None of the above