COMM 2010- Exam 1 February 23, 2012

Name (print)______________________________________________________________ Email (UVA) User-ID__________________________________________________________________ Instructions: 1) Please make sure that you have an entire exam and that your exam has a handwritten number in the top right corner of the first page. There are 30 questions worth eight points each and the last question (#31) is worth ten points. Thus, there are a total of 250 points available on the exam. 2) Make sure that you have correctly bubbled in both your UVA computing ID and Exam Number in the spaces provided on the scantron. (Left justify your ID.) 3) This exam is a closed-book, closed-note examination. You have a total of 75 minutes to complete the exam and must stop writing when time is called. 4) For each question, choose the best answer and then darken the circle for that answer on the Scantron answer sheet. Use a pencil to mark the scantron. It is your responsibility to properly mark the Scantron sheet. If you change your answer to a question and cannot completely erase the previous circle, ask for a new Scantron sheet. Please note that the Scantron machine will give you zero credit if it detects that two or more circles have been filled-in for a question. 5) Write out and sign the honor pledge in the space provided below and return both the examination and the scantron to the professor or proctor.

Use the information below to answer questions 1 through 5: Bailey, Inc. pays no dividends on common stock and has a fiscal year ending on December 31, 2011. After all the proper 2011 adjusting entries are made, the adjusted trial balance for Bailey, Inc. shows the following balances ($ in millions): Accounts Payable Accounts Receivable Accumulated Depreciation Cash Common Stock and Additional Paid in Capital Cost of Goods Sold Depreciation Expense Income tax Expense Income tax Payable Insurance Expense Interest Expense Interest Payable Inventory Notes Payable Prepaid Rent Property, plant, and equipment Rent Expense Retained Earnings Revenue Treasury Stock Wage and Salary Expense Wages and Salaries Payable $ 69 122 79 8 59 219 28 7 2 24 8 3 132 100 7 267 94 215 481 15 85 8

1. After the proper closing entries for 2011 are made, the ending balance in retained earnings will be: A. *$231 million. B. $259 million. C. $275 million.

2. After the proper closing entries for 2011 are made, the total assets of the company on the 2011 balance sheet will be: A. *$457 million. B. $472 million. C. $521 million.

3. The 2011 gross profit margin for the company was closest to: A. 45.5%. B. *54.5%. C. 59.2%.

4. The account that was most likely to have the same balance before and after Baileys 2011 adjusting entries is: A. *cash. B. wage and salary expense. C. accumulated depreciation.

5. Based on the 2011 income statement and balance sheet, which of the following statements is accurate? A. Bailey, Inc. has more contributed capital than earned capital. B. Bailey, Inc. has a total asset turnover ratio of approximately 2.3. C. *Bailey, Inc. has a net profit margin of approximately 3.3 percent. Use the information below to answer questions 6 and 7: A companys 2010 balance sheet showed inventory of $42.8 million. For 2011, the ending balance in the inventory account was 44.2 million. The company purchases all inventory on credit and records all inventory purchases in accounts payable. Accounts payable includes transactions related to inventory only. During 2011, the company made purchases of inventory from suppliers totaling $630 million. The 2011 ending balance in accounts payable was $2.8 million less than the balance in that account at the beginning of the year. 6. The companys cost of goods sold for 2011 was: A. $627.2 million. B. *$628.6 million. C. $631.4 million. 7. The total amount of cash paid to suppliers of inventory during 2011 was: A. $627.2 million. B. $629.7 million. C. *$632.8 million.

Use the information below to answer questions 8 through 12: On September 1, 2011, CCC, Inc. paid the annual rent of $300,000 on its home office building. The rental agreement covered the period from September 1, 2011 to August 31, 2012. On September 1, 2011, CCC, Inc. debited rent expense and credited cash for $300,000. The real estate company that received the payment on September 1, 2011 debited cash and credited unearned revenue for $300,000. The fiscal year for both companies ends on December 31. 8. The accounting entries made on September 1, 2011 were incorrect with respect to: A. *CCC, Inc. only. B. the real estate company only. C. both CCC, Inc. and the real estate company. 9. If no additional accounting entries related to the transaction are made before end-of-year closing entries, the 2011 balance sheet for the real estate company will report an overstatement of: A. assets. B. *liabilities. C. shareholders equity. 10. If no additional accounting entries related to the transaction are made before end-of-year closing entries for 2011 are made, CCC, Inc. will report: A. *assets that are understated by $200,000. B. net income that is understated by $100,000. C. contributed capital that is understated by $100,000. 11. Assume that both companies recorded the transaction on September 1, 2011 correctly. The proper adjusting entry on December 31, 2011 would affect the 2011 net income for: A. CCC, Inc. only. B. the real estate company only. C. *both of the companies. 12. Assume that both companies recorded the transaction on September 1, 2011 correctly. The proper adjusting entry on December 31, 2011 would affect the 2011 ending balance in cash for: A. CCC, Inc. only. B. the real estate company only. C. *neither of the companies.

13. Both U.S.GAAP and IFRS require that corporations: A. report assets at an amount that does not exceed acquisition cost of the asset. B. *present balance sheets and income statements prepared using accrual accounting. C. record internally-developed intangible assets on the balance sheet at the present value of their expected future benefit.

14. Which of the following is most likely to result in an expense reported on the income statement? A. Dividends paid to shareholders. B. *Estimates of the obligation resulting from warranties on the companys products. C. An unsettled lawsuit when the company assumes the eventual loss to be less than probable.

15. A company with a large investment in a class of long-term nonfinancial assets that have appreciated over time reports under U.S.GAAP. If that same company reported under IFRS, the company would most likely have an increase in: A. its market-to-book value ratio. B. *the amount of equity reported on the balance sheet. C. the amount of net income reported on the income statement.

16. The matching convention is best illustrated by matching, in the same fiscal period, a companys: A. *expenses incurred with revenues earned. B. cash outflows with the companys cash inflows. C. dollar amount of debit entries with dollar amount of credit entries.

17. Colby Corporation is a pharmaceutical company that reports under U.S.GAAP. Colby Corporation may recognize (record) as an asset the: A. *cost of purchasing a patent from an unrelated company. B. costs incurred by Colbys scientists in the development of patents. C. goodwill generated from the expertise of the scientists who are employed by Colby.

Use the information below to answer questions 18 through 21: MKE Corporation--Selected Financial Information (millions of $) 2011 2010 Revenue (sales) 560 530 Cost of goods sold 440 420 Net income 28 23 Total assets 315 295 Retained earnings 91 80 Total equity 183 180 Industry Average for 2011 Gross profit margin Net profit margin Total asset turnover (based on yearend balances) 20.0% 5.7% 2.0

The industry average for each ratio represents several companies that are MKE Corporations major competitors. All companies, including MKE, report under U.S.GAAP. 18. During 2011, MKE Corporation paid dividends of: A. $11 million. B. *$17 million. C. $25 million. 19. During 2011, MKE Corporation most likely: A. issued additional shares of common stock. B. *issued long-term debt to purchase of treasury stock. C. experienced an increase in accumulated other comprehensive income. 20. Based solely on the information in the tables above, which of the following best describes MKE Corporation performance in 2011 relative to the industry? MKEs competitors did a better job of controlling: A. inventory costs only. B. *selling, general, and administrative costs only. C. both inventory and selling, general, and administrative costs. 21. Based solely on the information in the tables above, MKE Corporations market-tobook value ratio is most likely: Look at total asset turnover, 1.7 for this company versus 2 for the industry; this company is less efficient than competitors, thus it is likely to be lower than competitors.

A. *lower than its competitors. B. higher than its competitors. C. the same as its competitors. 22. On November 3, 2011, an IFRS company sold a product to a customer for $150. The customer paid with a credit card issued by the company. The company had purchased the product that was sold from their supplier three weeks earlier at a cost of $83. The replacement cost of the product has since risen to $90. Which of the following should be part of the journal entries made by the company to record the November 3, 2011 sale? A. A debit entry to loss on sale equal to $7. B. A credit entry to cost of goods sold equal to $83. C. *A credit entry to revenue (sales) equal to $150. 23. In 2011, a company reporting under IFRS revalued (remeasured) several parcels of unimproved land to reflect an increase in fair value. After the proper accounting entry is made to record the revaluation, the company will have a(n): A. decrease in book value. B. *decrease in total asset turnover. C. increase in the net profit margin. 24. Relative to economic value, which of the following items is most likely to result in an understatement of a U.S.GAAP companys 2011 book value? A. Intangible assets purchased by that company in 2011. B. *Intangible assets developed internally by that company in 2011. C. Property, plant and equipment purchased by that company in 2011. Use the information below to answer questions 25 and 26: Assume that you are an independent auditor. You have three clients operating in three different industries. Your clients operate in the utility, grocery, and retail clothing industries. 25. Which client would you expect to have the highest proportion of long-term debt in their common-size balance sheet? A. *Utility B. Grocery C. Retail clothing 26. Which client would you expect to have the lowest total asset turnover ratio? A. *Utility

B. Grocery C. Retail clothing 27. In 2011, a company retained 3.5 cents for every dollar of sales, and generated $2.25 in sales for every dollar of assets on the 2011 year-end balance sheet. The companys 2011 return on assets (ROA) was closest to: A. 5.8%. B. *7.9%. C. 9.2%. 28. Assume that the executives of Wal-Mart have a fleet of small jets available for business travel. All else being equal, the sale of one of the jets at the end of the fiscal year to another retailer would most likely result in a change in Wal-Marts: A. *book value. B. gross profit margin. C. operating profit margin.

29. A company had sales of $170 million and a net profit margin of 2 percent for 2011. The companys 2010 ending balance in retained earnings was $15 million. If the company paid dividends during 2011 of $1.2 million, the 2011 ending balance in retained earnings was: A. *$17.2 million. B. $18.4 million. C. $19.6 million.

30. Which of the following is a contra asset account? A. Treasury stock B. Prepaid insurance C. *Accumulated depreciation

31. An adjusting entry most likely consists of a debit entry and a credit entry made to: A. two different balance sheet accounts. B. two different income statement accounts. C. *one balance sheet account and one income statement account.