SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1 st
1 Semester 2012
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Section A: Multiple-Choice Questions (2 marks each; Total 30 marks)
Choose the one best answer. 1.
The accounting process involves all of the following except ( d ) a. identifying economic transactions that are relevant to the business. business. b. communicating financial information to users by preparing preparing financial reports. c. recording economic events events that change the financial position of the business. d. reporting the predicted future performance performance of of the business to users.
2.
The common characteristic possessed by all assets is ( b ) a. long life. b. future economic benefit. c. tangible nature. d. great monetary value.
3.
Retained earnings at the end of the period is equal to ( b ) a. retained earnings at the beginning of the the period plus net income minus liabilities. b. retained earnings at the beginning of the period plus plus net income minus dividends. c. net income. d. assets plus liabilities.
4.
The double-entry system requires that each transaction must be recorded ( a ) a. in at least two different accounts. b. in two sets of books. c. in a journal and in a ledger. d. first as a revenue revenue and then as an expense
5.
A journal provides ( c ) a. the balances for each account. b. information about a transaction in several different places. places. c. a chronological record of transactions. d. a list of all accounts accounts used in the the business.
6.
Which of the following is false? ( a ) a. IAS 1 requires requires to follow follow the format format of Assets – Liabilities = Equity for the presentation of the balance sheet. b. IAS 1 basically requires the presentation of assets and liabilities into separate classification on the balance sheet as current and non-current. c. Under IAS 1, 1, companies can use either the function of expense method or the function of nature method for the presentation of the income statement. d. Under IAS 1, companies have a choice of presenting all items of income and expense recognised in a period either in a single statement of comprehensive income or in two statements comprising a separate income statement and a statement displaying other comprehensive income.
7.
A company must make adjusting entries ( d ) a. To ensure that the revenue revenue recognition and expense recognition principles are followed. b. Each time it prepares an income statement and a statement of financial position. c. To account for accruals or deferrals. d. All of the above (a, b and c) are correct regarding adjusting entries.
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SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1 st
1 Semester 2012
8.
Which of the following reflect the balances of prepayment accounts prior to adjustment? ( c ) a. Asset accounts are understated and expense accounts are understated. b. Asset accounts are overstated and expense accounts are overstated. c. Asset accounts are overstated and expense accounts are understated. d. Asset accounts are understated and expense accounts are overstated.
9.
Which of the following permanent account is changed during the closing process? ( b ) a. Share Capital-ordinary. b. Retained Earnings. c. Unearned Revenue. d. None of the above.
10.
Freight costs paid by a seller on merchandise sold to customers will cause an increase ( a ) a. in operating expenses for the seller. b. in the selling expense of the buyer. c. to the cost of goods sold of the seller. d. to a contra-revenue account of the seller.
11.
Cost of goods sold is determined only at the end of the accounting period in ( b ) a. a perpetual inventory system. b. a periodic inventory system. c. both a perpetual and a periodic inventory system. d. neither a perpetual nor a periodic inventory system.
12.
Which of the following expressions is incorrect ? ( c ) a. Gross Profit – Operating Expenses = Operating Profit b. Sales – Cost of Goods Sold – All Other Expenses = Net Income c. Net income + Cost of Goods Sold = Gross Profit d. Gross Profit + Cost of Goods Sold = Sales
13.
A post-closing trial balance will show ( a ) a. only permanent account balances. b. only temporary account balances. c. zero balances for all accounts. d. the amount of net income (or loss) for the period.
14.
What is the approach of choosing an accounting method, when alternatives exist, that will least likely overstate assets and net income? ( c ) a. Timeliness b. Materiality c. Prudence d. Consistency
15.
To be relevant, accounting information must: ( d ) a. improve the company’s internal control. b. be presented on the balance sheet. c. be recorded at historical cost. d. be capable of making a difference in a decision.
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SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1 st
1 Semester 2012
Section B: Short Answer Questions (Total 40 marks) 1.
What are two fundamental qualitative characteristics according to the IASB’s Conceptual Framework for Financial Reporting 2010? (2 marks) Relevance and Faithful Representation
2.
One of the methods for the presentation of the income statement categorises all operating costs into ‘cost of sales’, ‘distribution and selling costs’, ‘administrative expenses’, and ‘other operating expenses’. What is the method called? (2 marks) The function of expense method OR Cost of sales method
3.
IFRS standard is referred to as ( ) because it is more loosely framed and allows for professional judgement. On the other hand, US GAAP is referred to as ( ) because it provides a rule for every situation. (2 marks) Principles-based, rules-based
4-7. On July 1, Mr. Young established a retail shop, SixTwelve. Prepare the journal entries for the following transactions. (10 marks) On July 1, Mr. Old, a friend of Mr. Young invested €20,000 cash in the business in exchange for ordinary shares.
July 1 Dr. Cash Cr. Share capital - ordinary
20,000 20,000
On July 1, Mr. Young paid €100 cash for July rent for the shop.
July 1 Dr. Rent expense Cr. Cash
100 100
On July 2, Mr. Young purchased merchandising inventory from JK Wholesaler Inc. for €500 on account. SixTwelve uses a perpetual inventory system.
July 2 Dr. Merchandising inventory Cr. Accounts payable
500 500
On July 3, Mr. Young sold merchandise for cash €200. The merchandise sold had a cost of €130.
July 3 Dr. Cash Cr. Sales Dr. Cost of goods sold Cr. Merchandise inventory 3
200 200 130 130
SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1 st
1 Semester 2012
8-9. Prepare the journal entries for the following transactions. (10 marks) On May 1, Hyehwa Supermarket purchased merchandise for $1,000 cash and $3,000 on credit (terms 1/10, n/30) from SungKyun Company, and Hyehwa also paid freight costs $100 to Hyundai Delivery Co. Hyehwa Supermarket uses a periodic inventory system. May 1 Dr. Purchases Freight-in Cr. Cash Accounts payable
4,000 100 1,100 3,000
On May 9, Hyehwa Supermarket paid SungKyun Company in full for May 1 transaction. May 9 Dr. Accounts payable Cr. Purchase discounts Cash
3,000 30 2,970
10. 5M Co. has the following account balances at the end of fiscal year 2010. Compute net sales, cost of goods sold and gross profit. ($) Beginning inventory 400 Purchases 1,700 Ending inventory 600 Purchase returns and allowances 200 Sales 3,000 Purchase discounts 50 Sales returns and allowances 250 Freight-in 60 Sales discounts 100 Freight-out 40 (6 marks) Net sales = 3,000 – 250 – 100 = 2,650 Net purchases = 1,700 – 200 – 50 = 1,450 Cost of goods sold = 400 + 1,450 + 60 – 600 = 1,310 Gross profit = 2,650 – 1,310 = 1,340
11. SKK Co. received $50,000 from customers in 2011. Of the amount received, $15,000 was from sales revenue earned on account in 2010. In addition, SKK Co. earned $40,000 of sales revenue in 2011, which will not be collected until 2012. SKK Co. paid $30,000 for expenses in 2011. Of the amount paid, $10,000 was for expenses incurred on account in 2010. In addition, SKK Co. incurred $25,000 of expenses in 2011, which will not be paid until 2012. Compute 2011 cash-basis net income and accrual-basis net income. (8 marks) Dr. Cash Cr. Accounts receivable Sales revenue Dr. Accounts receivable Cr. Sales revenue Dr. Expenses Accounts payable Cr. Cash Dr. Expenses Cr. Accounts payable
50,000 15,000 35,000 40,000 40,000 20,000 10,000 30,000 25,000 25,000
Cash-basis net income = 50,000 – 30,000 = 20,000 Accrual-basis net income = (35,000 + 40,000) – (20,000 + 25,000) = 30,000 4
SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1 st
1 Semester 2012
Section C: Preparation of Income Statement and Balance Sheet (Total 30 marks)
An-Guk Company’s trial balance as at 31 March 2011 is as follows: An-Guk Company Trial Balance March 31, 2011 Debit 11,400 5,500 1,000 3,000 9,500 22,000
Cash Accounts receivable Supplies Prepaid insurance Merchandise inventory Property, plant and equipment Accumulated depreciation Accounts payable Unearned revenue Mortgage payable Share capital - ordinary Retained earnings Sales revenue Cost of goods sold Salaries expense
(₩m) Credit
4,000 3,200 5,400 8,000 10,000 4,500 38,000 17,700 3,000 73,100
73,100
Additionally, you are informed as follows: (a) A count shows ₩600m of supplies on hand at March 31. (b) Depreciation on PPE for the period was ₩800m. (c) The mortgage interest is 10% per year (The mortgage was taken out on January 1, 2011). (d) The insurance expired during the period was ₩900m. (e) Inventories costing $700m were sold and billed for $1,500m, but An-Guk has not yet received cash from customers. (f) Salaries of $1,200m incurred during March have not been paid yet. (g) As of March 31, ₩600m of the previously recorded unearned revenue has been earned. Prepare an income statement for the year ended 31 March 2011 and a balance sheet as at 31 March 2011 in forms that comply with IAS 1.
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SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1 st
1 Semester 2012
(a) A count shows ₩600m of supplies on hand at March 31. Mar 31 Dr. Supplies expense (1,000 – 600) 400 Cr. Supplies 400 (b) Depreciation on PPE for the period was ₩800m. Mar 31 Dr. Depreciation expense 800 Cr. Accumulated depreciation 800 (c) The mortgage interest is 10% per year (The mortgage was taken out on January 1 2011). Mar 31 Dr. Interest expense 200 Cr. Interest payable 200 (d) The insurance expired during the period was ₩900m. Mar 31 Dr. Insurance expense 900 Cr. Prepaid insurance 900 (e) Inventories costing $700m were sold and billed for $1,500m, but An-Guk has not yet received cash from customers Mar 31 Dr. Accounts receivable 1,500 Cr. Sales revenue 1,500 Dr. Cost of goods sold 700 Cr. Merchandising inventory 700 (f) Salaries of $1,200m incurred during March have not been paid yet. Mar 31 Dr. Salaries expense 1,200 Cr. Salaries payable 1,200 (g) As of March 31, ₩600m of the previously recorded unearned revenue has been earned. Mar 31 Dr. Unearned revenue 600 Cr. Sales revenue 600 An-Guk Company Adjusted Trial Balance March 31, 2011
Cash Accounts receivable Supplies Prepaid insurance Merchandise inventory Property, plant and equipment Accumulated depreciation Accounts payable Unearned revenue Mortgage payable Share capital - ordinary Retained earnings Sales revenue
Debit 11,400 5,500 + 1,500 = 7,000 1,000 – 400 = 600 3,000 – 900 = 2,100 9,500 – 700 = 8,800 22,000
(₩m) Credit
4,000 + 800 = 4,800 3,200 5,400 – 600 = 4,800 8,000 10,000 4,500 38,000 + 1,500 + 600 = 40,100
Cost of goods sold
17,700 + 700 = 18,400 3,000 + 1,200 = 4,200 400 800 200
Salaries expense Supplies expense Depreciation expense Interest expense Interest payable Insurance expense Salaries payable
200 900 76,800
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1,200 76,800
SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1 st
1 Semester 2012
An-Guk Company Income Statement For the year ended March 31, 2011 (₩m) 40,100 18,400 21,700
Sales Revenue Cost of goods Sold Gross Profit Other expenses Salaries expense Supplies expense Depreciation expense Interest expense Insurance expense Net Income
4,200 400 800 200 900
6,500 15,200
An-Guk Company Balance Sheet (Statement of Financial Position) March 31, 2011 (₩m) Current assets Cash Accounts receivable Supplies Prepaid insurance Merchandise inventory
11,400 7,000 600 2,100 8,800 29,900
Non-current assets Property, plant and equipment Less Accumulated depreciation Total assets
22,000 4,800
Current liabilities Accounts payable Unearned revenue Interest payable Salaries payable
17,200 47,100
3,200 4,800 200 1,200 9,400
Non-current liabilities Mortgage payable Total liabilities
8,000 17,400
Equity Share capital - Ordinary Retained Earnings
10,000 19,700 29,700 47,100
Total liabilities and equity
Note: Retained earnings (19,700) = Opening retained earnings (4,500) + Net Income (15,200) – Dividends (0)
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