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Midterm

ADMS 2500 midterm.docx

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Department
Administrative Studies
Course Code
ADMS 2500
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all

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York University AP/Adms 2500.03 Introduction to FinancialAccounting Midterm Examination – Test FormA Time: 3.0 hours Winter 2010 Questions: 50 Instructions: 1. Only the mark sense sheet will be collected - - you may keep this midterm examination paper. Mark your answers on it for later reference. 2. Record your name and student number and answer all questions on the computer mark sense sheet provided with an HB (soft lead) pencil. • Test Form is 'A' and Code is your Section (in the left column) • Fill in the bubbles for your name and student number in pencil (your phone number is not required). Leave the last column of the student number BLANK 3. Calculators without alphanumeric programmable memories are the only aid allowed. The exam is three hours in length. Check that your exam contains 50 questions. Budget your time carefully. You should not spend more than 3.5 minutes per question, otherwise you will not finish the exam. 4. It is essential to transfer your answers to the grading sheet after each question in case the exam is interrupted by fire alarm and to double check your transfers. It is always a good idea to attempt the questions you deem easiest first as an interrupted exam may just mark your score based on questions attempted. • The proctors will announce when there are 15 minutes remaining and any answers not transferred should be recorded at this time. No one is to leave their seats in the last 15 minutes. • When time is called, the proctors will go down the rows collecting your answer sheets and this exam paper. They will not wait and they will not accept your sheet once they have passed. Any violation of this protocol will result in a grade of zero recorded for the exam. 5. In the event of a fire alarm, you are to leave your exam and answer sheet face down on your desk and immediately proceed outside with coats and all personal belongings. Print your surname on the back of the exam so you know which seat to return to. An invigilator will lead the group outside to a place of safety. There is to be no talking during the evacuation or outside. Most rooms are cleared within 30 minutes of the alarm. You will be told after this time whether to reenter the room and recommence the exam or to go home. You are reminded that cheating is a serious offense which can result in expulsion from university. Question 1 Under the Cash Paradigm revenue is recognized when: a) it is earned b) the sale is invoiced c) cash is received d) the posting is made to the ledger account e) none of the above Question 2 Under the double entry bookkeeping system: a) debits must equal credits b) at least two ledger accounts are affected by every transaction c) the balance sheet equation always stays in balance d) none of the above (choices a, b and c) are correct e) all of the above (choices a, b and c) are correct Question 3 The balance in the Prepaid RentAccount is $1,000 less at the end of the month than at the beginning of the month. This implies that: a) $1,000 must have been charged to an asset account during the month b) $1,000 must have been charged to a liability account during the month c) $1,000 must have been charged to an expense account during the month d) $1,000 must have been charged to a revenue account during the month e) None of the above are correct statements Question 4 Liabilities increase by $1 during the period andAssets decrease by $1 during the same period. This implies that: a) Equity decreases by $1 during this period b) Equity decreases by $2 during this period c) Equity increases by $1 during this period d) Equity remains unchanged during this period e) The impact on Equity cannot be predicted from the limited information provided Question 5 Ace Company uses the Aging Method (a variant of the allowance method) to estimate its losses from uncollectible receivables.At period end, prior to preparation of its financial statements and before it makes adjusting entries, it does an aging analysis of its accounts and concludes that an allowance of $50,000 is appropriate. The unadjusted ledger balance in theAllowance account is a credit balance of $50,000.Ace should: a) Make no adjusting entry to record bad debt expense b) Make an entry charging expense for $50,000 c) Make an entry charging expense for $100,000 d) Make an entry reducing expense by $50,000 e) None of the above actions are appropriate under GAAP Question 6 If a company uses the FIFO Method of valuing its inventory, this requires that: a) It actually sells its oldest inventory first b) It actually sells its most recently acquired inventory first c) It charges the costs associated with its oldest inventory to Cost of Sales first d) It charges the costs associated with its most recently acquired inventory to Cost of Sales first e) None of the above are correct statements Question 7 Bag Company buys on account $1,000 of merchandise from Cart Company subject to terms 2/10 n/30 on Feb 1. On Feb 2 it returns $200 worth of merchandise for full credit. Bag pays its balance in full on Feb 5. Bag would write a cheque on Feb 5 for: a) $1,000 b) $780 c) $784 d) $800 e) none of the above Question 8 The Petty Cash Box has 3 vouchers in it (one for taxi fare in the amount of $25, one for courier charges of $18 and one for office treats bought at Tim Hortons for $35. The accountant forgets to make a replenishment entry prior to generating the financial statements for the period. The financial statement implications of this are that: a) no implications as the replenishment can occur anytime and is independent of financial statement generation b) Net income is overstated by $78 c) Net income is understated by $78 d) Income is correctly stated but assets are understated by $78 e) There is not enough information provided to assess financial statement impact Question 9 Western Company normally makes the journal entry for a purchase of inventory and recognition of the payable on receipt of a vendor invoice. On December 31 (year end) it receives an invoice for $1,000 from Far East Ltd. and records the purchase. However, the incoming shipment is actually still in transit (in mid Pacific) at year end and the sales terms were FOB destination. Western takes a physical count of inventory at the end of year as standard procedure. Western: a) should catch the error when it compares the count to the records (the book to physical adjustment) b) does not legally own the goods on December 31 c) should reverse the purchase entry to correct the error d) Choices a, b and c all represent incorrect statements e) Choices a, b and c all represent correct statements Questions 10 to 25 inclusive are based on the following data for Narmin’s Art Shoppe ===================================================================== ==================== Narmin’s Art Shoppe Narmin Dreamboat had always wanted to operate her own business and with an inheritance received from recently deceased Aunt Gertrude, she was able to realize her dream. She had a love of native art and decided to open a boutique selling Eskimo soapstone carvings and also paintings done on caribou hides in whalebone frames. The first step was to open an account for the business and to get a business license from the city. On May 1 she deposited $50,000 in a commercial account in a bank on the Toronto waterfront, since that was to be the location of her business. The account charged a service fee of $400/month. This was a new type of account called the “Prestige Plan” and the fee seemed really steep, but it provided free personalized cheques and a corporate credit card with a limit equal to her current bank balance. More importantly any credit card sales made by the store would not be charged a commission by the bank. They would remit the entire proceeds into her account. She next went down to city hall and paid $600 for a business license in the name “Narmin’s Art Shoppe”. This license fee would have to be paid annually. Next job was to find a location. She found a vacant shop right on the waterfront (Queen’s Quay) and on May 1 signed a two year lease. She had to pay May’s rent of $2,000 in advance and also the last month’s rent so the cheque was for $4,000. Next task was to buy fixtures, shelves, display cabinets, desk, cash register, computer etc. She was able to get everything she needed on May 2 from Grind & Toy Office Supply for $12,000 and put the purchase on her new company VISAcredit card. From what G&T told her, it looked like this equipment would last 4 years before having to be replaced. There was immediate delivery and she spent the rest of the day with paint brush and bucket and spent the rest of the day setting up the store. Next task was to acquire inventory. From her previous volunteer work at the Toronto Museum of Art, Narmin knew a distributor of EskimoArt , Sammy Spear, and she gave him a call. He recommended she stock her store using a dual strategy. For $20,000 he would deliver a selection of art work (mostly small soapstone carvings). She only had to pay $10,000 up front and the balance due at month end. However, he would also deliver a selection of larger pieces that the artists agreed to display on consignment. This meant the original artist still owned the item and when she sold a piece she would retain a 30% sales commission and remit the remainder back to the artist. This would be done monthly. Fortunately, she had to write only one cheque for these commission sales to Sammy and he collected his own commission from the artists for acting as clearing agent. Atruck pulled up on May 2 and by the end of the day her shop was ready to roll. Narmin spent some time that day setting up her accounting system. She decided because of the high dollar value of each item to set up a perpetual inventory system for the art she had purchased. Each item was marked up 100% to set selling price. For the consignment inventory, these items were not entered into her accounting system. Narmin just kept a folder of the shipping notices received from Sammy which included suggested selling prices. When she sold an item she would retain 30% as commission and send the other 70% on to Sammy. Now she needed just one more thing…. Customers! Narmin knew from her business studies at York the power of advertising and had arranged for a grand opening on May 3 with banners, ribbon free snacks and refreshments for customers . These supplies came to $600. Most importantly she had arranged for the leading radio station in Toronto to broadcast remotely from her store that day with of course on air interviews with herself and countless references to come down and join the party. The icing on the cake was that Canada’s most famous Innuit artist, Naomi Greywolf, volunteered to appear and sign autographs at the event. It went swell! She made numerous sales and people thronged the event. Narmin decided to wait until after the beginning of next month to reorder any stock from Sammy. The initial shipment had been so large that she still had ample stock to fill the store shelves at the end of May. Since she was using a perpetual inventory system and a specific identification valuation approach, she knew that Cost of Sales for the month totaled $9,000. It appeared Narmin’s dream had come true.All she had to do now was wait until month end when she could generate her first set of financials and see whether she would be eating Kraft Dinner or caviar next month. Narmin had a whole cupboard full of macaroni at home and prudently decided to wait at least a couple of months before paying herself a salary or taking any drawings from the business. Even though she had no external reporting obligations, Narmin decided that she would be better off is she used strict rules of GAAP right from day one. She decided to reserveAccounts Payable just for inventory transactions and set up other payables in an account called Miscellaneous Payables. Narmin had decided not to record consignment inventory in her ledger. She realized that consignment sales would have to pass through her system and decided she would record the gross sale in a separate revenue account called Consignment Sales and for the amount remitted back to the distributor charge the debit to Cost of Sales. This way her net revenue on the transaction would show on her income as the appropriate 30% In addition to the information above, on May 31 (prior to any adjustments) Narmin’s records showed the following: Cash Sales (including credit card sales) of items from inventory $18,000 Cash Sales (including credit card sales) of consignment inventory $21,000 Bill received for store utilities (hydro, water etc) - unpaid $400 Bill received from the radio station for advertising – unpaid $2,200 Bill received for catering the food at the grand opening – paid $600 Bill received for an ad placed in CanadianArt Life Magazine – unpaid $300 Narmin decided to not pay any unpaid bills others than those already paid until the first of June. This page is left blank to use for your calculations Narmin Trial Balance Cash 46,700 Owners Equity 50,000 Bank Service Charges 400 Business Licenses 600 Prepaid Rent 2,000 Rent Expense 2,000 Furniture & Fixtures 12,000 Inventory 11,000 Accounts Payable 10,000 Promotion Expense 3,100 Sales 18,000 Consignment Sales 21,000 Utility Expense 400 Miscellaneous Payables 2,900 Depreciation Expense 250 Accumulated Depreciation 250 Cost of Sales 23,700 TOTALS 102,150 102,150 This page is left blank to use for your calculations CASH ACCOUNT 50,000 18,000 21,000 400 600 4,000 12,000 10,000 600 14,700 Balance = 46,700 This page is left blank to use for your calculations NARMIN INCOME STATEMENT Revenue $39,000 Cost of Sales (23,700) Gross Profit 15,300 Expenses Bus Licenses 600 Rent 2,000 Promotion 3,100 Utilities 400 Depreciation 250 Bank Charges 400 (6,750) Net Income $8,550 NARMIN BALANCE SHEET Cash $46,700 Inventory 1
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