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Practice Final Exam.doc

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York University
Administrative Studies
ADMS 2500

York University Ak/Adms 2500.03 Introductory Financial Accounting Practice Final Examination Name: _________________________________________ Student Number: _________________________________ Time: 3.0 hours Questions: 50 Instructions: 1. Record your name and student number and answer all questions on the computer mark sense sheet provided. The exam questions and booklets will be collected - - you may NOT keep this final examination paper. 2. Record your name and student number and answer all questions on the computer mark sense sheet provided. a) Use an HB pencil b) Fill in the bubbles for your name and student number (your phone number is not required). c) Test Form is as shown at the top of this examination paper d) Code is your Section e) Leave the last column of the student number blank. f) Calculators are the only aid allowed. g) The exam is three hours in length. Budget your time wisely. h) It is prudent practice to transfer your answers to the grading sheet after each question, and to proof your transfers. i) The proctors will announce when there are 10 minutes remaining and any answers not transferred should be recorded at this time. j) No one is to leave their seats in the last 10 minutes. k) When time is called, the proctors will direct collection of your answer sheet AND this exam paper. Failure to comply promptly with the proctors directions for collection will result in a zero grade being recorded for this examination. l) You are reminded that cheating is a serious offense which can result in expulsion from university. Choose the best answer to each of the following: 1. Which of the following accounts would be increased by a credit? a) Accounts Receivable b) Premium on Bonds Payable c) Loss on Disposition of Equipment d) Sales Returns and Allowances e) None of the above 2. Which of the following are contra accounts? a) Allowance for Uncollectible Accounts b) Accumulated Depreciation c) Discount on Bonds Payable d) All of the above 3. When ABC Corporation received cash from a supplier to pay for an account payable related to a defective merchandise purchase ABC corporation had returned; the bookkeeper debited Cash and credited Sales. As a result of this error a) Assets and Liabilities would be understated b) Cash and Sales would be overstated c) Sales and Liabilities would be overstated d) Assets and Sales would be understated e) None of the above Use the following information to answer questions 4 and 5: Toasters Only Company (TO) began business on March 1st. It sells toasters for a great price. On March 5th, TO recorded the receipt of 500 toasters, the second shipment it received from its supplier, by debiting Inventory and crediting Accounts Payable $5,000. This second shipment brought the total Inventory of toasters to 1000 units with a weighted average cost of $9 each. On March 8 , TO made its very first sale, shipped 400 toasters to a customer (a restaurant chain) and recorded the sale with a journal entry that included a debit to Accounts Receivable of $9,000 (ignore sales taxes). 4. Based on the above information for TO, TO records inventory transactions using the a) perpetual bookkeeping method b) periodic bookkeeping method c) just in time inventory method d) the cash basis method e) none of the above 5. Based on the above information for TO, the Cost of Goods Sold recorded on March 8 th under the FIFO cost flow assumption would be a) $0 b) $3,200 c) $3,600 d) $4,000 e) none of the above ----------------------------------------- end of TO questions ------------------------------------------- Questions 6 – 10 use financial information extracted from Transat A.T.’s 2006 financial statements attached at the end of this exam and information in the following article by Fabrice Taylor published in The Globe and Mail newspaper early this semester. [You may detach Transat A.T.’s financial statement information attached as the last three pages of this exam. This information will be used again for questions 41 – 50.] Attention, investors, cash-flow machine Transat is now boarding - Fabrice Taylor The tour package industry… [is] a nasty business that brooks no compassion. But it can be a very rewarding investment, as shareholders of Transat A.T. Inc. know. The shares are up more than 50 per cent in the last year…. The company operates a fleet of airlines offering tour packages. Business is good right now. First-quarter revenue, released last week, showed a 23-per-cent increase year over year, mostly from organic growth (this is, not on the back of acquisitions, although Transat is a serial acquirer). On paper, the earnings didn’t look as impressive as the top line. Before interest, taxes and amortization they were up a feeble 7 per cent to $15-million. But scratch beneath the surface and you learn that a change in the way the company accounts for its fuel hedges is largely to blame. Adjusting for that, EBITDA rose 64 per cent. Profit, meanwhile, was also lower because of higher amortization and foreign exchange matters. In this case, EBITDA is a better signal of how the first is doing: very well. And there seems to be an accelerating trend in the numbers. Neither sales nor earnings were up as sharply in fiscal 2006 (the year-end is October 31), which is encouraging. The long-term outlook is also bright based on the demographic profile of the markets Transat serves (North America and Europe). We’re getting older, wealthier and we want to travel more, farther and for longer. So what about the valuation? … [T]here is a good case to be made for buying Transat despite its strong run, and it’s all in the numbers. Transat’s earnings, at $1,80 a share in the past 12 months, put the trailing price-to-earnings multiple at 19 times…. But the numbers look even better when you use free cash flow instead of accounting earnings. Transat has generated almost $3 a share in free cash flow over the past 12 months (a little more or less depending on how you calculate it.) The stock, then, is quoted at about 9 times free cash flow. You’d be right to ask how free cash can differ from earnings. In this case it’s because amortization expense is higher than cash spent on new planes. That, in turn, is partly because of acquisitions. There are also other accounting quirks (such as the treatment of derivatives). Eventually, of course, free cash flow and earnings converge. What’s interesting here is that the divergence is relatively new: in 2005, by my math, they were almost identical. If the earnings trend toward cash flow over time, the stock will start to look cheap to the computerized screening models so many big investors use (and with a market cap now above $1-billion, Transat will start to attract the attention of big investors). Get in early and you’ll gain attitude on their bids. In the meantime, management can make excellent use of excess cash: reduce debt, pay dividends and buy back stock (worth a total of $335-million in the past couple of years). That helps earnings catch up to free cash. It can also make more acquisitions in this fragmented market. Plenty can go wrong with this thesis, of course. Air travel is cyclical. Fuel costs, which consume a tenth of Transat’s revenue, are volatile. Terrorist attacks, or even threats, can ground air travel stocks in a hurry. Management could make a bad acquisition (generally they’re good at it, but they’ve made mistakes). And did we mention competition is brutal and that Transat plans to gain market share with aggressive pricing? That said, the thesis has another leg to stand on: private equity firms have started to take a shining to travel businesses. They tend to like companies whose earnings are lower than cash flow. Transat might be just the ticket. 6. Given the information in the newspaper article and what you have studied in adms2500, a) Earnings is a better estimate of free cash than EBITDA b) EBITDA is a better estimate of free cash than earnings c) Net Income is the same as EBITDA d) EBITDA is the top line e) None of the above 7. Given the information in the newspaper article the first quarter results revenue that showed a 23-per-cent increase year over year was earned a) Jan 1 – March 31, 2007 b) Jan 1 – March 31, 2006 c) Nov 1 – December 31, 2006 d) None of the above 8. According to the information in the newspaper article, volatility in fuel costs could have a significant impact on Transat A.T.’s earnings. Given the information in Transat A.T.’s financial statement information attached at the end of this exam, if fuel costs had been 10% higher in fiscal 2006 (and there were no other changes in earnings), income before taxes would have been a) $74,310-thousand b) $123,848-thousand c) $272,466-thousand d) $41,001-thousand e) None of the above 9. Given the information in Transat A.T.s financial statement information attached at the end of this exam, if all Accounts Receivable are amounts due from customers, there were no Uncollectible Accounts and one half of Transat A.T.’s Sales were paid in Cash, cash collections from customers in 2006 was a) $2,622,131 - thousand b) $2,585,361 - thousand c) $1,283,488 - thousand d) $18,385 – thousand e) none of the above 10. The following information is extracted from Jean-Marc Eustache’s (Chairman of the Board, President and Chief Executive Officer) “message to the shareholders” in Transat A.T.’s 2006 annual report: In accordance with our three-year strategic plan, we have significantly strengthened our presence on the Canadian market with the acquisition of 191 Marlin Travel and Thomas cook travel agencies, primarily in Ontario and Western Canada, at a total cost of $8.3 million. We have thus become the largest network of travel agencies in Canada…. Given the information in the Transat A.T. financial information attached, any excess of the $8.3 million paid over the fair values of the net assets of Marlin Travel and Thomas Cook travel agencies described in the paragraph above would be reported in the 2006 financial statements in the line item a) Gain on disposal of investment b) Premium paid on share purchase c) Goodwill and other intangible assets d) Non-controlling interest in subsidiaries’ results e) none of the above ------------------------ end of Transat A.T. newspaper article questions ---------------------- Use the following information for Questions 11 - 13 TTS Company’s account balances at December 31, 2005 of the Accounts Receivable and Allowance for Uncollectible Accounts were $184,000 and $6,000 respectively. In January, 2006, credit sales totaled $140,000 and customer payments on account totaled $118,000. Other information about customer payments/indebtedness is as follows: o January 9: an account receivable of $11,000 was deemed uncollectible and written off o January 15: a $750 cheque received from a customer as a payment on account (and included in the $118,000) was returned by the bank an NSF. Ignore any service charges. o January 31: 10% of the $118,000 received from customers as payment on account, was received January 31 and did not clear the bank until February o It was estimated at January 31 , that $7,500 of the outstanding accounts receivable were uncollectible. 11. Given the information for TTS Company, TTS’s Account Receivable account balance st at January 31 is a) $11,000 b) $195,750 c) $66,000 d) $91,800 e) None of the above 12. Given the information for TTS Company, TTS’s Uncollectible Account Expense for January is a) $7,500 b) $12,500 c) $750 d) $1,500 e) none of the above 13. Given the information for TTS Company, TTS’s bank reconciliation for January would include a) an addition of $11,800 to the ‘balance per bank’ b) an addition of $11,800 to the ‘balance per the general ledger’ c) an addition of $750 to the ‘balance per bank’ d) both (a) and (c) above e) none of the above -------------------------------- end of TTS Company questions ----------------------------------------- 14. Which of the following statements is true? a) The FIFO cost flow assumption best matches current expense with current revenue b) For a product with an inventory-turn-over ratio of 7 any errors in Cost of Goods Sold, due to problems in counting ending inventory, will be reversed within one fiscal year of the inventory count c) Application of the lower-of-cost-or-market rule most frequently results in an adjustment to increase inventory values at year-end d) None of the above are true 15. Big Sale Ltd. had a $48,000 beginning inventory and a $57,000 ending inventory. Sales were $370,000; sales returns and allowances $10,000; purchases $267,000; and freight-in $12,000. Gross profit percentage (rounded to the nearest percent) for the period is a) 72% b) 73% c) 75% d) 78% e) none of the above 16. A company purchases land with a building on it and immediately tears down the building. The entry for the cost of the tearing down of the building should include a a) Debit to Tearing Down Expense b) Debit to Land c) Debit to Building d) Debit to Other Expenses e) None of the above 17. The issue price of $2,000,000 (face) ten-year bonds that pay $100,000 every six months when the market rate is 8% compounded semi-annually, given the time value of money factors in the table below, is Number of Rate Future value of Future value of Present value of periods $1 an annuity of an ordinary $1 annuity of $1 10 8% 2.159 14.487 6.710 20 4% 2.191 29.778 13.590 10 10% 2.594 15.549 6.145 20 5% 2.653 33.066 12.462 a) $2,000,000 b) $2,271,825 c) $6,833,000 d) $2,268354 e) none of the above is within $1,000 of the issue price 18. To compute depreciation expense on a building, you must know all of the following except a) Cost b) Estimated useful life c) Estimated residual value d) Estimated market value e) You must know all of the above 19. Information that, if known, would alter the decision of a decision maker is called a) relevant b) reliable c) comparable d) not timely e) none of the above 20. The body responsible for appointing the members of the Accounting Standards Board (ASB) and providing input to the AcSB, primarily in terms of its strategic direction and priorities is the a) Accounting Standards Oversight Council (ASOC) b) Emerging Issues Committee (EIC) c) International Standards Accounting Board (ISAB) d) Ontario Securities Commission (OSC) e) None of the above 21. A building cost $120,000 and has a residual value of $16,000 and an expected useful life of ten years. The depreciation expense in Year 2, if the company computes depreciation using the declining-balance method at the straight-line rate, is a) $12,000 b) $10,400 c) $10,800 d) $10,960 e) none of the above 22. A copy machine cost $65,000 and has an estimated residual value of $5,000. It was expected to last about ten years and to make a total of 3,000,000 copies. 200,000 copies were made in year 1 and 300,000 copies were made in year 2. Units-of- activity depreciation is used. The copier was sold at the beginning of year 3 for $53,000. The entry to record the disposition would include a) A credit to the Copy Machine account of $55,000 b) A debit to Loss on Disposition of Copy Machine account of $5,000 c) A debit to Gain on Disposition of Copy Machine a
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