MIDTERM EXAM

VERSION - A
Financial Accounting in Decision Making
Term 1, 2018

Instructions

1 There should be 13 different numbered pages in the exam booklet (excluding

Instructions Sheet). Check your copy and request for a new exam booklet if you do not
have all the pages.

2 There are 50 questions in exam. Each question carries 2 points. There is no negative
marking. Your grade will be based on the number of correct answers you provide. The
maximum score for the exam is 100 points.

3 Mark answers to the multiple choice questions in the separate bubble sheet provided
which would be scored by an OMR Scanner. Use pencil to mark answers in OMR.

4 Choose the best answer by marking one item on the answer form. If you mark two
items your answer will be incorrect. Marks made on the exam itself will not be
counted.

5 Any scratch work on the exam will NOT be graded — only the OMR shaded bubbles
count.

6 You are allowed to use a calculator. Laptops are not allowed.

7 This exam is a closed book exam. However, you are allowed ONE A4 paper as Cheat
Sheet for the exam with notes allowed on BOTH sides, which can be hand written or
printed. The cheat sheet will not be returned. So if you want to save it for your future
use, make a copy of it before getting it to the exam.

8 The exam is completely self-explanatory. The academic associates or faculty will not
answer any questions during the exam.

9 Since the exam in printed single-sided, use the blank side for any rough work. No
additional blank sheets for rough work will be provided.

10 You have three hours for the exam.

12 You must observe the honor code at all times.

Q1. Which of the following group uses accounting information to primarily determine whether
the company can pay its obligations?
A. Tax authorities
B. Marketing managers
C. Creditors
D. The competitors of the company
E. None of the above

Q2. Which of the following is NOT a liability?

A. Salaries payable
B. Unearned revenue
C. Accounts receivable
D. Accounts payable
E. None of the above

Q3. Which item will NOT appear on the income statement?

A. Selling and General &Administrative expense
B. Dividends payable
C. Pre-tax income
D. Gross profit
E. None of the above

Q4. Which of the following transactions does NOT violate the balance sheet equation?
A. Increase retained earnings and increase a liability
B. Increase an expense and reduce a liability
C. Increase cash and reduce contributed capital
D. Reduce cash and increase an expense
E. None of the above

Q5. The Retained Earnings account comprises of:

A. Cash retained in the business

B. Employees retained in the business
C. The cumulative earnings less dividends since the inception of the corporation
D. The earnings of the corporation for the current year
E. None of the above

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Q6.On March 26, 2017 HM Corp sends 1000 scooters to an institutional client making a fleet
purchase. The selling price of the scooter is Rs. 50,000 each and the cost of each scooter is Rs.
25,000 each. The payment is due within 60 days. What are items on the balance sheet and
income statement that are affected directly by this transaction and by how much? The annual
financial statements are prepared on March 31, 2017.
A. Increase revenues and cash by Rs. 5 crores, Increase cost of goods sold by 2.5 crores and
reduce inventory by 2.5 crores.
B. Increase revenues and receivables by Rs. 5 crores, Increase cost of goods sold by 2.5
crores and reduce inventory by 2.5 crores.
C. Increase revenues Rs. 5 crores, Reduce payables by Rs. 5 crores, Increase cost of goods
sold by 2.5 crores and reduce inventory by 2.5 crores.
D. No impact because cash has not yet been received
E. None of the above

Q7.Assume HM Corp borrowed Rs. 100 lakhs on Jan 1, 2017 from a bank. On Jan 1, 2018, HM
must pay the bank Rs.110 lakhs that includes the amount borrowed and interest. What
adjustment is needed (if any) to accrue interest expense for the year ended March 31, 2017?
A. Do nothing because interest is paid only on January 1, 2018
B. Record interest expense of Rs. 10 lakhs and create a liability for accrued interest for the
amount of Rs. 10 lakhs
C. Record interest expense of Rs. 2.5 lakhs and create a liability for accrued interest for the
amount of Rs. 2.5 lakhs
D. Record interest expense of Rs. 2.5 lakh and make an intermediate payment of Rs.2.5 lakh
by March 31st, 2017.
E. None of the above

Q8. On March 1, 2017, HM Corp signed Sachin Tendulkar to endorse its products for the next
financial year starting April 1, 2017. A brand endorsement fee of Rs. 12 crores has been agreed.
How will the financial statements prepared at the end of March 31, 2017 be affected?
A. Decrease in assets by Rs 12 crore and increase in liability by Rs 12 crore
B. Decrease in assets by Rs 1 crore and increase in liability by Rs 1 crore
C. Decrease in assets by Rs 12 crore and increase in shareholders’ equity by Rs 12 crore
D. Decrease in assets by Rs 1 crore and decrease in shareholders equity by Rs 1 crore
E. None of the above Commented [HM1]: Just an agreement is reached and nothing
else has happened in fiscal year 2017. No services were provided by
Sachin so no expense needs to be recognized in 2011. Also, there is
Q9. KR Corp signs a consulting contract with HM Corp on September 11, 2016, and pays a cash no cash movement in the fiscal year 2011
deposit of $150,000 to HM Corp as a retainer. Work will begin next month. Excluding the
decrease in cash, which of the following is true on September 30, 2016?
A. KR Corp records expense of $150,000
B. KR Corp records revenue of $150,000
C. KR Corp records an asset of $150,000
D. KR Corp records a liability of $150,000
E. None of the above

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Q10. On December 1, 2015, HM Corp entered into a software maintenance contract with KR
Bank, in which KR Bank immediately paid Rs. 30 Crores to HM Corp, which was the total
amount to maintain its accounting software for a three year period starting January 1, 2016. What
would be the entry that HM Corp would record in regard to this contract on 31/12/2016?
A. DEBIT Revenue Rs. 10 Crore CREDIT Unearned Revenue Rs. 10 Crore
B. DEBIT Cost of Goods Sold Rs. 30 Crore CREDIT Inventory Rs. 30 Crore
C. DEBIT Unearned revenue Rs. 10 Crore CREDIT Revenue Rs. 10 Crore
D. DEBIT Cash Rs. 30 Crore CREDIT Unearned Revenue Rs. 20 Crore And Revenue Rs.
10 Crore
E. None of the above

Q11. HM Corp has the following cash flows:

Cash from operations 10

Cash from investing activities (1)
Cash from financing activities (9)
Which growth stage best describes this pattern of cash flows?
A. Start up
B. Early growth
C. Close to bankruptcy
D. Mature
E. None of the above

Q12. Legal fees paid by HM Corp to fight a patent infringement lawsuit will be recorded as

A. Cash flow from operations

B. Cash flow from investing
C. Cash flow from financing
D. It will only be recorded on the income statement
E. None of the above

Q13. Which of the following would be a cash flow from investing activities?

A. Proceeds from issuing stock

B. Purchases of inventory
C. Depreciation on a building
D. Payments to acquire another company
E. Collections from customers

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Q14. HM Corp sold PP&E for $200 cash. Prior to the sale, the net book value of the PP&E on
the financial statements was $240. Thus, the company recorded a Loss on Sale of Equipment of
$40 in Net Income. What is the operating cash flow from this transaction?

A. $0 Commented [HM2]:
Cash flow from operations is 0. 200 will be recorded as cash flow
B. $40 from investing
C. $(40)
D. $200
E. $240

Q15. In calculating cash flow from operations using indirect method, depreciation expense is
added back to net income because

A. It should not have been deducted while arriving at net income, so it is added back
B. It is a non-cash expense included in net income
C. It is a source of future cash
D. It is a one-time transaction so it can be ignored
E. None of the above

Q16. Rs. 20,000 of merchandise sold by a retailer during a month was through VISA card. VISA
charges a transaction fee of 1% on the sale amount and credits the requisite cash to the retailer’s
bank accounts on the same day. How would the retailer account for this transaction? You can
treat bank account and cash as the same.
A. DEBIT Cash 20,000 CREDIT Sales Rs, 19,800 CREDIT VISA Rs. 200
B. DEBIT Accounts Receivable19, 800 CREDIT Sales Rs. 19,800
C. DEBIT Cash 20,000 CREDIT VISA Rs. 20,000
D. DEBIT Cash Rs. 19,800 DEBIT Credit Card Processing Fee Rs. 200 CREDIT Sales Rs.
20,000
E. None of the above.

Q17. In general, revenue is recognized as earned when there is reasonable certainty as to the
collectability of the asset to be received and:
A. A purchase order has been received
B. The earnings process is complete
C. Cash is collected from the customer
D. End of the fiscal year
E. None of the above

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Q18. ABC Company sold goods on credit to a customer. Subsequently the customer returned the
goods because it was defective and the company accepted the returned goods and credited the
customer for the goods. What would the journal entry for this transaction be?

DEBIT CREDIT
A. Sales Accounts Receivable
B. Sales Accounts Payable
C. Sales Returns Accounts Payable
D. Sales Returns Accounts Receivable
E. Sales Returns Cash

Q19. HM Corp’s Balance Sheet had the following line item:

12/31/2012 12/31/2011
Accounts Receivable, net of allowances of $500 and $450, respectively $9,200 $8,400

What percentage of gross accounts receivable does HM expect to be bad debt as of 12/31/2012?
A. 5.15% Commented [HM3]: 500 / (500+9200) = 5.15%
B. 4.43%
C. 5.08%
D. 5.36%
E. None of the above
Q20. Two companies are in the same industries and are similar in almost all aspects. However,
company A has lower allowance for bad debts than company B as % of its receivables. A
possible reason for this could be
A. Company A has lenient credit policies, compared to Company B
B. Company A has less creditworthy customer base, compared to Company B
C. Company A has more credit worthy customer base, compared to Company B
D. Company A has more conservative accounting policies, compared to Company B
E. None of the above

Q21. Inadequate provision for bad debts will lead to which of the following effects in the current
period:
A. Lower net income and lower total assets
B. Higher net income and higher total assets
C. Higher net income and lower total assets
D. Lower net income and higher total assets
E. None of the above

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Q22. Which of the following best describes the financial statement effects if a company writes
off certain accounts receivable at the end of the fiscal year, when it does not use the direct write-
off method?
A. Decrease accounts receivables and decrease allowance for doubtful accounts.
B. Decrease total assets and decrease net income.
C. Decrease accounts receivable and increase bad debt expense
D. Decrease total assets and increase net income.
E. None of the above

Q23. During 2013, HM Corp. wrote off $4,000 in receivables. HM’s December 31, 2012,
allowance for bad debts was $6,000. The following information pertains to the age of HM
Corp.'s accounts receivable at December 31, 2013.

Days outstanding Amount Estimated % uncollectible

0-60 $120,000 2%
61-120 $90,000 4%
Over 120 $10,000 10%
Under the aging method, what amount of allowance for bad debts should HM report on the
Balance Sheet at December 31, 2013?
A. $7,000 Commented [HM4]: 120000*2% + 90000*4% + 10000*10% =
7000
B. $4,000
C. $6,000
D. $5,000
E. $10,000
Q24. Based on the information provided on the previous question, under the aging method, what
amount of bad debt expense will HM report on the 2013 income statement?
A. $7,000
B. $4,000
C. $6,000
D. $5,000 Commented [HM5]:
Beginning bal + new provision – write off = ending bal. 6000 + x –
E. $10,000 4000 = 7000
X = 5,000

Q25. Which of the following is NOT a part of inventory for a manufacturing firm?
A. Work in progress
B. Raw material
C. Finished goods
D. Accumulated depreciation
E. None of the above

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Q26. Which of the following items would not be included in firm’s Cost of Goods Sold? Commented [HM6]:
Sale commissions on goods sold would be a part of selling expense
(SG&A).
A. Inbound freight costs on inventory purchases
B. Sale commissions on goods sold
C. Tariffs and import duties on inventory purchases
D. Cost of raw materials purchased
E. Storage costs for inventory

Q27. HM Corp provides you with the following information about their inventory purchases and
sales:

Date Units Unit Cost Total

January 1, 2011 Beginning Inventory 6 $14.00 $84.00
January 10, 2011 Purchase #1 20 $14.25 $285.00
January 20, 2011 Purchase #2 10 $14.50 $145.00
January 15, 2011 Sale #1 12 $32.00 $384.00
January 25, 2011 Sale #2 15 $32.50 $487.50
Using the FIFO method, the company’s cost of goods sold for January 2011 will be

A. 126.75
B. 130.5
C. 383.5 Commented [HM7]: FIFO COGS =
6units*$14/unit+6units*$14.25/unit + 14units*$14.25/unit +
D. 387.25 1unit*$14.5/unit = $383.5
E. 514
Q28. HM Corp. incurred the following costs during the quarter:
Raw materials used in production $32,000
Marketing materials used by sales staff $14,000
Wages of factory workers $91,000
Salaries of sales staff $291,000
Depreciation on factory and production equipment $52,000
Depreciation on administrative building $32,000
Manufacturing overhead $72,000
What is the total amount of costs recorded in HM's Work in Process (WIP) Inventory account
during the quarter?
A. 188,000
B. 195,000
C. 247,000 Commented [HM8]:
32,000 + 91,000 +52,000+72,000 = 247,000
D. 279,000
E. 552,000

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Q29. Which of the following is true? [Assume that there is no LIFO layer liquidation]

A. LIFO Cost of Goods Sold is greater than FIFO Cost of Goods Sold when input prices are
rising
B. LIFO Cost of Goods Sold is greater than FIFO Cost of Goods Sold when input prices are
falling
C. Companies with perishable inventory (e.g., food products) must use the FIFO method
D. Ending inventory balance under LIFO will be higher when input prices are rising
E. If the market value of inventory is higher than the historical cost, companies must use
market value on the balance sheet

Q30. Which of the following assets would be depreciated over its useful life?
A. Land
B. Buildings
C. Goodwill
D. Brand equity
E. All of the above

Q31. At the end of the quarter, a HM Corp did an adjusting entry to record $5,000 of
depreciation on the fleet of automobiles used by the sales force. Which of the following items
would be CREDITED by this depreciation adjusting entry?

A. Cost of Goods Sold

B. SG&A Expense
C. Accumulated depreciation
D. Total assets
E. Fixed Asset-Automobiles

Q32 If the receivables days increases compared to historic figures and industry averages, what
might the reason be? [ Assume all sales are credit sales]

A) Deterioration of collectability of receivables

B) A change in sales mix to longer paying customers
C) A decrease in the amount of sales generated
D) A and B
E) All of the above

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Q33. HM Corp. has a building that it originally bought for $100,000. As of 9/9/2011, there is
$40,000 of Accumulated Depreciation on the building. On 9/9/2011, the company sells the
building for $50,000.How will this transaction show up on the income statement?

A. Gain on sale of Building of $10,000

B. It will not affect the income statement
C. Loss on sale of Building of $10,000 Commented [HM9]:
Gain = sale price – book value
D. Loss on sale of Building of $50,000 = 50000 – (100000 – 40000)
E. Gain on sale of Building of $50,000

Q34. Which of the following is not necessary in calculating the depreciation expense for the first
year for a newly purchased factory forklift?

A. Estimated useful life

B. Market value of the forklift during its useful life
C. Estimated salvage value
D. Depreciation rate
E. Total cost of the forklift at acquisition

Using the above information, answer questions 35-49.

KR Enterprises is a retailer of cement. Its balance sheet as of 31.12.2015 is given below:

Balance Sheet as on 31.12.2015 (all figures in Rupees)

Cash and bank balance 235 Accounts Payable 1450

Account Receivable 1250 Interest Payable 150
Inventory 3200 Accrued Expenses 125
Prepaid Rent 375 Long Term Debt 6000
Land and Building Share Capital 3000
(net accumulated depreciation) 8345 Retained Earnings 2680
13405 13405

The following occurred during 2016:

1. Sales for 2016 was Rs. 47,300 of which Rs. 22,000 was credit sales. Cash collected from
receivables was Rs. 21,500.
2. Purchases of cement during the year amounted to Rs. 38,000. Closing accounts payable
was Rs. 1300.
3. Closing inventory of cement was Rs. 4000. The rest of the inventory and purchased
cement was sold during the year.

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 4. Rent for office premises was Rs. 375 per month. One month of rent was paid in advance.
5. Other office expenses amounted to Rs. 3000 for the year. The unpaid (accrued) expenses
at the end of the year was Rs. 150.
6. Interest rate on long term debt was 10%. Interest was paid quarterly on the first day of
each quarter, i.e., January 1st, April 1st and so on.
7. Opening Land and Building (i.e., as of 31-12.2015) comprised of Rs. 12,000 gross
amount less accumulated depreciation of Rs. 3,655. Depreciation during the year was Rs.
1000.
8. KR Enterprises purchased building worth Rs. 800 during the year, which was paid for in
cash. This cash came from a capital contribution made by KR’s owner.

Q35. What is the cash collected from customers during the FY 2016?

A. 21,500
B. 22,000
C. 22,500
D. 46,800
E. None of the above

Q36. What is the cash paid to suppliers during the FY 2016?

A. 37,850
B. 38,000
C. 38,150
D. 39,300
E. None of the above

Q37. What is the cash paid to other office expenses during the FY 2016?

A. 2,975
B. 3,000
C. 3,025
D. 3,150
E. None of the above

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Q38. What is the cash flow from operations for the FY 2016? [Hint – consider interest expense
as an operating activity]

A. 235
B. 575
C. 1,175
D. 3,025
E. (24,275)

Q39. What is the cash flow from financing activities for the FY 2016? [Hint – consider interest
expense as an operating activity]

A. 0
B. (800)
C. 800
D. 3,000
E. None of the above

Q40. What is the cash flow from investing activities for the FY 2016?

A. 0
B. (800)
C. 1,000
D. 8,375
E. None of the above

Q41. What is the cash balance at the end of FY 2016?

A. 235
B. 340
C. 575
D. 810
E. None of the above

Q42. What is the cost of goods sold for the FY 2016?

A. 37,200
B. 38,000
C. 38,150
D. 38,800
E. None of the above

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Q43. What is the net income sold for the FY 2016?

A. 1,000
B. 1,600
C. 2,000
D. 4,000
E. None of the above

Q44. What are the retained earnings at the end of FY 2016?

A. 1,000
B. 2,680
C. 3,680
D. 5,680
E. None of the above

Q45. What is the long term debt at the end of FY 2016?

A. 1,000
B. 3,000
C. 6,000
D. 6,600
E. None of the above

Q46. What is the net Land and building balance at the end of FY 2016?

A. 8,145
B. 8,345
C. 9,145
D. 12,000
E. None of the above

Q47. What are the total assets at the end of FY 2016?

A. 13,405
B. 14,080
C. 14,705
D. 15,080
E. None of the above

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Q48. For the FY 2015, what proportion of total assets are funded by funds contributed by
shareholder? [Hint – use balance sheet provided as on 31/12/2015]

A. 20%
B. 22%
C. 38%
D. 42%
E. None of the above

Q49. For the FY 2015, what is the ratio of current assets to current liabilities? [Hint – use
balance sheet provided as on 31/12/2015]

A. 0.37 : 1
B. 0.65 : 1
C. 2.93 : 1
D. 7.77 : 1
E. None of the above

Q50.The Govt of Lala-Land hires HM Corp. to build a massive bridge to Moon. HM Corp. uses
the percentage-of-completion method of accounting for such long-term construction contracts.
The contract is worth $210 million and the company is expected to complete it in 3 years. The
accounting records disclosed the following data at year-end:

Year Contract cost incurred Cash received from Govt

during the year ($ million) ($ million)
1 50 40
2 70 70
3 30 100

HM Corp.’ can record a revenue of $210 million at the end of the first year?

A. TRUE
B. FALSE

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SOLUTION

Statement of cash flows

Cash flow statement for 2014

Cash Flow from operations

Cash from sales 25,300
Cash collections 21,500
Cash payment to suppliers (38,150)
Cash for rent expense (4,500)
Cash for accrued expense (2,975)
Cash for interest expense (600)
Net CFO 575

Cash flow from investing activities

Cash for purchase of building (800)
Net CFI (800)

Cash flow from financing activities

Cash from capital contribution 800
Net CFF 800

Total change in cash during the year 575

Cash Balance, Dec 31, 2013 235

Cash balance, Dec 31, 2014 810

Notes

Cash collected from customers = cash sales +collections from AR = 25300 + 21500 = 46,800

1. Cash collected from customers

A/R
Open 1250 Cash 21500
Credit sales 22000
Close 1750

2. Cash paid to suppliers

A/P
Payment 38150 Open 1450
Purchases 38000
Close 1300

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 3. Cash paid for expenses
Accrued Expenses
Payment 2975 Open 125
Expenses 3000
Close 150

4. Rent paid during the year = 375*12 = 4500

5. Interest paid during the year = 150 (opening balance of 2013) + 450 (3 quarters interest) = 600

Income statement

Sales 47300
Deduct expense:
COGS 37200
Rent expense 4500
Depreciation expense 1000
Other expense 3000
Interest expense 600
46300
Net Income 1000

Notes
1. Sales = 47,300 (include both cash and credit)

2. COGS is derived from the inventory T account, where opening inventory, closing inventory and purchases
are given
Open 3200 COSG 37200
Purchase 38000
Close 4000

3. Rent for the year = 375*12 = 4500

4. Depreciation = 1000, given

5. Other expenses = 3000, given

6. Interest expense = 6000 * 10% = 600

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Balance sheet

Balance sheet as at 31.12.2014

Assets
Cash and bank balance 810
A/c receivable 1,750
Inventory 4,000
Prepaid rent 375
Land and building net depreciation 8,145
Total assets 15,080

Liabilities & SE
A/c payable 1,300
Interest payable 150
Accrued expense 150
Long term debt 6,000
Share capital 3,800
Retained earnings 3,680
15,080

Notes

1. Ending cash balance is from statement of cash flows (SCF)

2. Closing AR is calculated in notes for SCF
3. Closing inventory is given
4. PP&E

Net PP&E
Open 8345 Depreciation 1000
Additions 800
Close 8145

5. Closing AP is given
6. Interest is payable on first day of each quarter, hence 150 will be recorded as payable at the end of previous
quarter
7. Closing accrued expenses is given.
8. No changes in long term debt are mentioned
9. Capital contribution of 800 was made during the year. Hence the ending balance is 300 + 800 = 3800
10. Ending retained earnings = 2680 + 1000 = 3680

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