Part A- (25 X 1.

4 = 35 marks)
Multiple Choices – Budget your time wisely. Suggested time: (40 minutes)
1.4 points for each correct answer

1. Important uses for accounting information include _______________.

a) score-keeping
b) attention directing
c) decision support
d) (a) & (b), but not (c)
e) (a), (b) & (c)

Answer is- e

2. Because investors entrust their resources to professional managers, they need accounting for
purposes of _______________.
a) scorekeeping
b) attention directing
c) decision support
d) (a) & (b), but not (c)
e) (a), (b) & (c)

Answer is a

3. The objectives of financial statements include ____________.

a) to measure the efficiency of the organization
b) to demonstrate compliance with environmental protection laws
c) to assist investors and creditors in investing and lending decisions
d) to prevent managerial fraud
e) none of the above

Answer is c

4. A list of the company’s assets, liabilities and equity, at a point in time, is called
____________.
a) the income statement
b) the statement of retained earnings
c) the cash flow statement
d) the balance sheet
e) none of the above

Answer is d

5. Recognizing revenues in the period when they are earned, rather than the period when the
cash is received, is an example of which accounting concept?
a) Business entity
b) Accrual basis
c) Conservatism
d) Historic cost
e) None of the above

Answer is b

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6. Investors buy shares in Quietus Ltd. for $5 million. $3 million is spent on assets on Day One
of the company’s operations. At that point in time the equity is ____________.
a) $8 million
b) $5 million
c) $3 million
d) $2 million
e) none of the above

Answer is b

7. Investors buy shares in Quietus Ltd. for $5 million. On Day One of the company’s
operations, $3 million is spent on assets and $4 million is borrowed from the Bank. The
accounting equation at that point in time is ____________.
a) assets: $6 million; liabilities: $4 million; equity: 2 million
b) assets: $9 million; liabilities: $4 million; equity: 5 million
c) assets: $6 million; liabilities: $1 million; equity: 5 million
d) assets: $9 million; liabilities: $9 million; equity: 0 million
e) none of the above

Answer is b

8. After a year of operation, Blackfly Ltd. has $1,000,000 in assets and $300,000 in liabilities.
The owners decide to withdraw $100,000 from the company for their own use. After the
withdrawal, the accounting equation is ____________.
a) assets: $600,000; liabilities: $0; equity: $600,000
b) assets: $900,000; liabilities: $300,000; equity: $600,000
c) assets: $1,000,000; liabilities: $400,000; equity: $600,000
d) assets: $900,000; liabilities: $400,000; equity: $500,000
e) none of the above

Answer is b

9. In measuring revenues, the income statement includes _______________.

a) all sales received in cash
b) all sales realized, whether received or not yet received in cash
c) all sales realized, plus the expected value of future orders
d) all sales, less expected expenses
e) none of the above

Answer is b

10. Expenses _______________.

a) decrease equity
b) are the opposite of revenues
c) are recognized on the basis of accrual and matching
d) all of the above
e) none of the above
Answer is d

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11. A company purchases inventory of goods for resale and then sells it. This expense is referred
to as _______________.
a) organizational expense
b) cost of goods sold
c) gross profit
d) gross profit percentage
e) none of the above

Answer is b

12. Equity is _______________.

a) increased by revenues
b) decreased by expenses
c) decreased by payments
d) (a) & (b), but not always (c)
e) (a), (b) & (c)

Answer is d

13. Digman Co. had retained earnings of $400,000 on January 1st. It made a net income of
$300,000 in the year. It paid a dividend of $200,000. The balance of retained earnings at
December 31st vwould be __________.
a) $100,000
b) $400,000
c) $500,000
d) $700,000
e) none of the above

Answer is c

14. The assets are listed on the balance sheet __________.

a) in a random order
b) in order of size/importance
c) in order of liquidity
d) in order of variability
e) none of the above

Answer is c

15. A long-term asset is one that __________.

a) the company intends to own forever
b) the company intends to own for as long as it is useful to them
c) the company intends to sell within one year
d) the company is renting, not owning
e) none of the above

Answer is b

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16. How should a vehicle that was bought new and that is expected to be used for 5 years be
amortized?
a) The vehicle should be amortized at 20% per year.
b) The vehicle should be amortized at 50% in the first year, then at 10% per year through
Year 2 to Year 5
c) The vehicle should be appraised each year, and the amortization should be based on loss
in value.
d) The vehicle should not be amortized, as it is being used in the business to earn money.
e) None of the above.

Answer is a

17. A current asset is one that __________.

a) will be settled within one year
b) appears in the income statement as a current expense
c) you get for paying your hydro bill
d) you get with a cash payment
e) none of the above

Answer is a

18. Pearl’s Pizza has a delivery truck. It cost $30,000 on January 1, 2007. Pearl’s Pizza expects
to use it for four years and then sell it for $10,000. Annual straight-line amortization will be
__________.
a) $7,500
b) $5,000
c) $4,000
d) $4,500
e) none of the above

Answer is b

19. A long-term liability is one that __________.

a) the company will not pay unless it is forced to by a court order
b) the company will pay at some time more than one year into the future
c) the company will pay within two to three months
d) the company regards as equity capital, so it does not have to repay it ever
e) none of the above

Answer is b

20. A current liability is one that the company __________.

a) will pay within one year
b) will receive within one year
c) intends to use indefinitely to earn money
d) is disputing
e) none of the above

Answer is a

21. Pearl’s Pizza has cash of $5,000, inventory of $100,000, and accounts receivable of $45,000.
Current liabilities are $50,000 and long-term liabilities are $25,000. Pearl’s Pizza’s quick
ratio is __________.
a) 3:1
b) 2:1
c) 1.25
d) 1:1
e) none of the above

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 Answer is d

22. Profilo Co. has the following assets and liabilities:

Assets: cash, $100; accounts receivable, $150; Inventory, $240; land, $200; plant,
net of accumulated depreciation: 300.
Liabilities: short-term bank loan, 60; accounts payable, $160; long-term mortgage
loan, $160.
Profilo Co.’s total liabilities were __________.
a) $220
b) $160
c) $ 60
d) $380
e) none of the above

Answer is d

23. A company that has issued new common shares for $50 million and repaid debt of $20
million out of the proceeds will have __________.
a) a positive flow of cash from investing activities
b) a negative flow of cash from investing activities
c) no net change in cash position
d) a positive flow of cash from financing activities
e) none of the above

Answer is d

24. The cash from the sale of plant assets would be reported in which of the following parts of
the cash flow statement?
a) Cash from operations
b) Cash from financing activities
c) Cash from investing activities
d) Change in cash balances
e) None of the above

Answer is c

25. An amount of $150,000 of funds from investing activities would mean __________.
a) the company is issuing additional capital
b) the company is borrowing money
c) the company is a net purchaser of long-term assets
d) the company is a net seller of long-term assets
e) none of the above

Answer is d

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Part B - Written Answer – (5 + 5 + 5 = 15 marks) – Suggested time: 20
minutes
Define the following three accounting concepts. You may use bullets, but ensure that you are
using full sentences. (5 marks)

Going Concern-

Accrual principle-

Business Entity-

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2. What is the primary objective of preparing financial statements? Are shareholders the most
important users of company annual statements? Justify your opinion. (5 marks)

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3a. What are the main components of a cash flow statement? Briefly explain. (3 marks)

3b. What are the rationales for preparing cash flow statements? (2 marks)

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 Part C-50 Marks: Answer all the question –Suggested time: 90 minutes
Question 1: Financial Statements Preparation (20 marks)

Question # 1: You decide to set up a business in collaboration with a friend in Dominica. Your
friend agrees to buy 500ml bottles of pure tropical water from a local bottler and ship them to you
in Toronto. Your friend will receive a commission from the bottling company. The water is
credited with giving Dominicans an exceptionally long life and there is an anticipated demand in
the Toronto Caribbean community and from health food stores. On January 1, 2018 you plan to
rent industrial space for two years at $1,000 a month including utilities, with a $1,000 advance
payment of the last month’s rent. The same day you will receive an initial shipment of 10,000
bottles of water for which you will pay your friend $2,000 by giving a money order to the delivery
company. You reckon that you will be able to sell all these in the first month. You will also install
used furniture and fixtures costing $2,400 which will be worthless at the end of the second year
and computing equipment costing $1,800 which will last about two years. Then you will print
flyers using your computing equipment and have a local copy shop print for $500 a supply which
you will distribute during the first two weeks to local stores and restaurants. You expect to sell all
that you receive for $0.75 a bottle. Your customers must collect the water from you. You will order
more water after two weeks by which time you will have confirmed demand and thus will replenish
your stock by the beginning of February.

In order to get your business started you will borrow $10,000 at 6% on January 1st. The loan must
be repaid after one year and interest is payable immediately after the end of each month. You
arrange for a bookkeeping service to keep accounting records for $100 per month. Miscellaneous
other expenses are anticipated to be $100 per month.

Prepare a projected income statement for January 2018. Marks will be awarded for headings and
organization. Make any necessary assumptions

Name of the Company: xxx Company

Income Statement
For the month ended: January 1, 2018
$ $
Sales revenue (10,000x.75) 7,500
Cost of good sold 2,000
Gross profit 5,500
Operating expenses:
Rent 1,000
Amortization exp* 175
Printing 500
Bookkeeping 100
Other expense 100
Total operating expense 1,875
Operating income 3,625
Less: Interest Expense 50
Net income 3,575
Workings
*Calculation of Amortization Exp:
Useful
Cost life(months) Dep. Per month
Furniture & Fixture 2400 24 100
Computer equipment 1800 24 75
Total depreciation 175

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 **Calculation of Interest Exp:
Loan 10,000
Interest rate 6%
600
Interest per month 50

Question 2: Cash flow statements (15 marks)

Question # 2 Mississauga Mining Co. made a net income of $35 million in 2016, after the
deduction of amortization expense of $8 million, interest of $5 million and taxes of $12 million.
During the year accounts receivable has increased by $1.8 million, Inventory decreased by $0.8
million, and trade payable increase by $1.0 million. During 2016, it sold mining equipment for
$2 million and bought a new computer system for $3 million. During 2016, it issued new shares
for $13 million and used the proceeds to repay loans of $10 million, the remainder went into the
bank’s current account.

Required: Calculate the cash from/used in operation

Cash flows from operation
a. Million $ Million $ Marks
Net income 35 2
Add: Amortization 8 43 1
Increase/decrease in Non-cash
WC:
Increase in A/R -1.8 2
Decrease in inventory 0.8 2
Increase in A/P 1 0 2
Net cash net flow from
operation 43

Required: Based on the information above, calculate the cash from or cash used in financing
activities.
b. Million $ Million $ Marks
Issue of common share 13 1
Repayment of loans -10 1
Net cash from financing 3

Required: Based on the information above, calculate the cash from or cash used in

investing activities.
c. Million $ Million $ Marks
Mining equipment 2 1
Computing System -3 1
Net cash flow used in investing -1

Required: Assuming that, Mississauga Mining Co stared the year 2016 with cash balance $ 5
million. Find out the year end cash balance.

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 Finding the closing balance:
d. Million $ Marks
Net cash net flow from
operation 43
Net cash from financing 3
Net cash flow used investing -1
Change in the cash flow 45 1
Beg balance of cash 5 1
Ending balance of cash 50 15

Question 3: Financial Statement Analysis (15 marks)

The balance sheet of Steel Traders Inc. as at December 31, 2016, was as follows:
Current assets Current liabilities
Cash $ Trade payables $
125,000 235,000
Receivables 300,000 Bank loan 185,000
Inventory 425,000 Income tax due 30,000
Total $ Total $
850,000 450,000
Long-term assets 500,000 Long-term liabilities 450,000
Total liabilities $900,000
Shareholders’ equity
Share capital
250,000
Retained earnings 200,000
Total $
450,000
$1,350,00 $1,350,00
Total 0 Total 0

You are told that the sales revenue for 2016 was $1,800,000 and that the company made a net
income of $ 150,000 in 2016.

Required:
(a) Calculate the following ratios:
(i) Current ratio

Current Ratio: 850,000/450,000 1.89 : 1 2

(ii) Quick ratio

(850,000-
Quick ratio 425,000)/450,000 .94 : 1 3

(iii) Receivables turnover ratio

Receivables turnover 1,800,000/300,000 6 times 2

(iv) Receivables collection period

Receivable collection 60.83

period 365/6 days 2

(v) Inventory turnover ratio

4.25
Inventory turnover 1,800,000/425,000 times 2

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 (vi) Inventory holding period

Inventory holding 85.88

period 365/4.25 Days 2

(b) Is the company liquid? Briefly explain your answer.

See ch. 7’s discussion.

Extra space for working

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