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Final December 15 Autumn semester 2015, questions

Principles of Financial Accounting (New York University)

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Principle of Financial Accounting

Practice exam
Final Exam
Professor Xiaojing Meng

Name ____________________________

Section ___________________________

Person on your left _______________ Person on your right ____________________

(1 point)

General Instructions:
Please observe the Stern School’s Code of Conduct requirements. Do not
discuss the content of this exam with anyone until this evening. Failure to
comply with this condition will result in harsh consequences.

1. You have 2 hour and 30 minutes to complete the exam.

2. This exam is closed book. You may use calculators.
3. Please check that you have all the pages. Do not begin until instructed to do so.
4. Review the complete exam in order to allocate your time appropriately.
5. If a question is ambiguous, write your assumptions on the exam along with
your answer. You will receive credit provided your assumptions are necessary
and reasonable.
6. Write your answers neatly in the space provided.
7. You must turn in your exam packet before you leave, even if you don’t want to
have it graded.
8. Monitor your time and good luck!

Points Available Points Received

Question I
Question II
Question III
TOTAL

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Question I Indicate True or False

1. In an inflationary environment, LIFO inventory valuation will lead to a higher

gross profit than FIFO inventory valuation.

2. Kansas City Company has 2,000,000 shares issued and 100,000 treasury shares.
They report net income of $5,200,000 in 2009. Earnings per share equals $2.60.

3. Research and development costs are typically recorded as a debit to an

intangible asset and a credit to cash or a liability account.

4. A firm may have a significant amount of net income, as computed by

accountants on the accrual basis, and yet have a severe decline in cash.

5. Write-off of Accounts Receivables will directly decrease the company’s profit in

that period.

6. After the closing entry, the balance in accumulated depreciation will be reset to
zero.

7. Payment of Cash Dividends will show up in the Cash Flow from Operating
activity session under direct method.

8. GAAP requires public company to restate their previous financial statements

when accounting estimates change.

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Question II Multiple choice

1. Carter Co. disposed of an asset at the end of year 8 of the asset's life originally
estimated to be 10 years. The original cost was $50,000 with an estimated residual
value of $5,000 and it was being depreciated under the straight-line method. It was
sold for $10,000 cash. What was the gain or loss on the disposal at the end of year 8?
A. $1,000 gain
B. $4,000 loss
C. No gain or loss
D. $10,000 gain

2. If the company decides to capitalize an expenditure instead of expensing it in the

current period, which of the following statements is true?
A. The current year's net income will be lower and future depreciation expense will be
higher.
B. The current year's net income will be higher and future depreciation expense will
be lower.
C. The current year's net income will be higher and future depreciation expense will be
higher.
D. The current year's net income will be lower and future depreciation expense will be
lower.

3. Which of the following would not appear in the investing section of the statement of
cash flows?
a. Purchase of inventory.
b. Sale of obsolete equipment used in the factory.
c. Purchase of land for a new office building.
d. All of the above would appear.

4. An adjusting entry cannot include a debit to a(n):

A) asset and a credit to a liability
B) asset and a credit to a revenue
C) expense and a credit to an asset
D) liability and a credit to a revenue

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5. Which of the following statements is correct?

A. The journal entry to record bad debt expense requires a debit to bad debt expense
and a credit to accounts receivable.
B. The journal entry to record bad debt expense requires a debit to bad debt expense
and a credit to allowance for doubtful accounts.
C. The journal entry to record the write-off of an uncollectible account receivable
requires a debit to bad debt expense and a credit to accounts receivable.
D. The journal entry to record the write-off of an uncollectible account receivable
requires a debit to bad debt expense and a credit to allowance for doubtful accounts.

6. Which of the following statements does not correctly describe an adjustment

to net income when determining cash flows from operating activities when
using the indirect method?
A. An increase in wages payable will be added to net income.
B. A gain on the sale of a depreciable asset will be deducted from net income.
C. An increase in prepaid expenses will be deducted from net income.
D. An increase in income taxes payable will be deducted from net income.

7. Which of the following statements incorrectly describes the accounting for

bonds that were issued at a premium?
A. The market rate of interest is less than the coupon rate.
B. The interest expense over the life of the bonds will be less than the cash interest
payments.
C. The book value of the bond liability is less than the bonds' face value.
D. The book value of the bond liability decreases over the life of the bonds.

8. Lauer Corporation uses the periodic inventory system and the following
information about their laptop computer is available:

Date Transaction # of units Cost per unit

1/1 Beginning inventory 100 $800
5/5 Purchase 200 $900
8/10 Purchase 300 $1,000
10/15 Purchase 200 $1,050

During the year, 750 laptop computers were sold.

What was ending inventory and cost of goods sold on 12/31 under the LIFO cost flow
assumption?
A. $56,000 and $714,000.
B. $45,000 and $725,000.
C. $40,000 and $730,000.
D. None of the answers is correct.

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9. Which of the following transactions does not result in an increase in stockholders'

equity?

A. Sale of no-par common stock for cash.

B. Declaration and distribution of a common stock dividend.

C. Sale of preferred stock for cash at par value.

D. Sale of treasury stock for cash at a price less than its cost.

Question III Short questions

1. Below is a list of items and subtotals from the financial statements (balance sheet,
income statement, statement of shareholders’ equity and cash flow statement).

Balance sheet: current assets, investments, net PP&E, intangibles and other assets,
current liabilities, long-term liabilities, common stock, additional paid in capital, treasury
stock, retained earnings.

Income statement: revenues, expenses, gains, losses.

Retained earnings portion of the statement of shareholders’ equity: net income,

dividends.

Cash flow statement: cash flow from operating activities (direct method), cash flow from
investing activities, cash flow from financing activities

Describe all the effects of each of the following transactions on the above items, as
reported in the financial statements for the current fiscal year. Ignore the effect of
income taxes. For the cash flow statement part, you should only describe (and classify)
actual cash flows.

For example:
The firm incurred administration salaries of $200 and paid $150.

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Balance sheet: current assets (cash) down $150; current liabilities (salaries payable) up
$50; retained earnings down $200.
Income statement: expense (salaries) up $200.

Retained earnings portion of the statement of shareholders’ equity: net income down
$200.

Cash flow Statement: cash from operating activities down $150.

1. The firm recognized a bad debt expense of $20.

Balance sheet:

Income statement:

Retained earnings portion of the statement of shareholders’ equity:

Cash flow statement:

2. The firm purchased 20 of its issued shares for $50 cash.

Balance sheet:

Income statement:

Retained earnings portion of the statement of shareholders’ equity:

Cash flow statement:

3. The firm declared and paid a dividend of $100.

Balance sheet:

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Income statement:

Retained earnings portion of the statement of shareholders’ equity:

Cash flow statement:

2. MGM Mirage is an entertainment company that operates a large network of hotels

and casinos. The company uses the allowance method to account for doubtful
receivables. Consider the following information from its 2009 annual report (number
are in millions):

At Dec. 31, 2009 At Dec. 31, 2008

Accounts Receivable 465 403
Allowance for Doubtful Accounts 97 100

The company also reported a Bad Debt Expense of 54 million in its 2009 income
statement.
Question: How much bad debt did MGM Mirage write-off during 2009 (net of all
recoveries)?

3.

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You have the following informaion from the balance sheet and the income statement:

Year 1 Year 2
Accounts Receivable (gross) 9,000 26,000
Allowance for Bad Debts 1,000 2,000
Sales Revenue 60,000 80,000
Bad Debt Expense 4,000 3,000

If in Year 2 they used % of accounts receivable method, what percent did they esimate
to be uncollecible?

4. Fastbuck Company issued a 2-year, 10%, $1,000,000 bond on January 1, 2009. The
bond pays interest every June 30 and December 31, with the principal to be paid at the
end of 5 years. The annual market interest rate at the time of issuance (effective
interest rate) was 8%.

(1) What is the book value of the bonds payable on Dec 31, 2009? (4 points)

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(2) Record the journal entry about interest expense on Jun 30, 2010. (4 points)

5.
Wendell Company provided the following pertaining to its recent year of
operation: 
(1) Common stock with a $10,000 par value was sold for $50,000 cash. 
(2) Cash dividends totaling $20,000 were declared, of which $15,000 were
paid. 
(3) Net income was $70,000. 
(4) A 50% stock dividend resulted in a common stock distribution, which had a
$5,000 par value and a $23,000 market value. 
(5) Treasury stock costing $9,000 was sold for $7,000.

How much did Wendell's total stockholders' equity increase during the recent
year of operation?

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6. The following is a partial consolidated balance sheet for General Mills, Inc. and
subsidiaries for fiscal years ended May 28, 2006 and May 29, 2005.

Stockholders’ Equity: in millions 2006 2005

Cumulative preference stock, none issued – –
Common stock at par, 500 million shares issued. Shares $ 50 $ 50
authorized 1 billion
Additional paid-in capital 5,737 5,691
Retained earnings 5,107 4,501
Common stock in treasury, at cost, shares of 146 million in (5,163) (4,460)
2006 and 133 million in 2005
Unearned compensation (84) (114)
Accumulated other comprehensive income 125 8
Total Stockholders’ Equity 5,772 5,676
Total Liabilities and Equity $18,207 $18,066

Required

(1) State the maximum number of shares that General Mills can issue and
determine how many shares have been issued. What is the par value per share?
(3pts)

(2) How many shares does General Mills have outstanding as of May 28, 2006. (2 pts)

(3) What were General Mills total liabilities as of May 28, 2006. (2pts)

(4) The following statement appeared on page 18 of the notes to General Mills
financial statements for 2006:

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Our Board of Directors has authorized the repurchase from time to time of shares of
our common stock subject to a maximum of 170 million shares held in our treasury.
During fiscal 2006, we repurchased with cash (i.e., bought) 19 million shares of
common stock for an aggregate purchase cost of $892 million. We reissued (i.e., sold) 4
million shares of common stock held in treasury for $228 million in cash during fiscal
2006. The cost basis of the 4 million shares of treasury stock reissued as $52.00 per
share. A total of 146 million shares were held in treasury at May 28, 2006.

What journal entries did General Mills record in its treasury stock transactions in
2006? (5pts)

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