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Accounting 221 Exam 1 -- Fall 2003 Multiple Choices (10 points).

Select the correct answer for each of the following multiple choice questions. 1. Assets may best be defined as: a. Economic resources invested by the owners of a business. b. Tangible economic resources of value. c. Economic resources invested by the creditors of a business. d. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. e. Probable future economic benefits obtained or controlled by a particular entity as the result of future transactions or events. 2. Which of the following equations is NOT true? a. Assets - Liabilities - Owners' Equity = Zero b. Assets = Liabilities + Owners' Equity c. Assets - Liabilities = Owners' Equity d. Assets - Owners' Equity = Liabilities e. Assets + Liabilities = Owners' Equity 3. Which of the following accounts is a liability? a. Unearned rent revenue. b. Accounts receivable. c. Sales. d. Treasury stock. e. Retained earnings. 4. The two components of stockholders' equity on a balance sheet for a corporation are: a. Liabilities and Capital Stock. b. Assets and Retained Earnings. c. Assets and Liabilities. d. Capital Stock and Retained Earnings. e. Liabilities and Retained Earnings. 5. Which of the following statements is FALSE? a. Asset accounts are increased with debits. b. Liability accounts are increased with credits. c. Asset accounts are decreased with credits. d. Owners' equity accounts are increased with credits. e. Liability accounts are increased with debits.

Matching terms (8 points). Presented below are a number of events and practices that have developed over time. Select the letter that identifies the term best describing the item. (A particular term will only be used once.) Terms:

a. Conservatism b. Cost-benefit c. Economic entity assumption d. Full disclosure e. Going concern assumption f. Historical cost

g. Materiality h. Matching i. Monetary unit assumption j. Relevance k. Reliability l. Revenue recognition

Events and Practices: _____ 6. A building purchased for $40,000 is recorded at that amount even though its tax appraisal is $35,000. _____ 7. At Pizza King, knowing which employee assembles each pizza might provide useful information to management. However, keeping track of this information is considered time consuming so it is not done. _____ 8. The cost of manufacturing a product is reported as the expense "Cost of Goods Sold" in the period that the product is sold, not in the period when the cash was paid. _____ 9. Even though the company has not collected the cash from customers, it shows revenue on its financial statements because it has delivered the goods to those customers. _____ 10. Prediction of next month's cash needs calls for information such as last period's sales and the rate of sales growth. _____ 11. Accountants have a guideline to use whenever multiple allowable procedures exist. This guideline says, "When in doubt choose the procedure that will be least likely to overstate assets and income." _____ 12. Financial accountants prepare the statements assuming that the company will continue to operate in the future. _____ 13. Following this principle has lead to voluminous footnotes in annual reports.

14. (15 points). For each of the transactions below, indicate whether the event would change total assets, total liabilities, or total owners' equity and in what direction. Use these abbreviations: I - Increase D - Decrease U - Unchanged

TOTAL ASSETS - TOTAL LIABILITIES - TOTAL OWNERS' EQUITY Example: Issued stock for cash ------- I- U -I a. Borrowed money from the bank. b. Purchased supplies on account. c. Purchased equipment with cash. d. Paid cash for items purchased last month. e. Received cash for items sold last month. 15. (5 points). For each of the accounts listed below, indicate whether the account is an asset (A), liability (L), owners' equity (OE), revenue (R), or expense (E). ________ a. Prepaid advertising ________ b. Retained earnings ________ c. Accounts payable ________ d. Cost of good sold ________ e. Equipment

16. Setting: (10 points). You are reviewing the annual report for General Electric, Inc. and want answers to the questions listed below. Use the following key to indicate the most likely place to find answers to your questions. Key: A - Independent Auditor's Report B - Balance Sheet C - Statement of Cash Flows I - Income Statement N - Notes to the financial statements R - Statement of Retained Earnings O - Some other place in the Annual Report X - Not found in the Annual Report Some of the above categories may be used more than once and some may not be used at all. Occasionally, the answer to your question may be found in more than one place. In that case either answer would be acceptable. Questions: 1. What is the total owners' equity of General Electric Inc.? 2. What amount of dividends were declared during the year? 3. What was General Electric's income from operations for the year? 4. How have the retained earnings changed during the year? 5. The report that expresses whether the company's financial statements are in conformity with GAAP. 17. Stock (8 points). Investors who purchase common stock in a company expect to receive a return from that investment. a. List and briefly describe the two components of that expected return.

b. What is "secondary market" trading? Does the company receive money from these trades? 18. (8 points) a. A particular set of financial statements does not provide adequate disclosure about a lawsuit pending against the company. The most likely audit opinion would be: b. The most favorable audit opinion is: c. The audit firm believes the financial statements are not fairly presented. The type of opinion that it should issue is a(n): d. The auditor is unable to gather enough evidence to form an opinion. The auditor would issue a(n): 19. (4 points). Who was the person who wrote about double-entry accounting (and is considered the "father of accounting")? 20. (6 points). Name the three forms of business organizations. 21. (6 points). Name 3 advantages that the computer lends to the accounting system. 22. (10 points). The Rose Company has the following account balances as of September 30, 2003:

ACCOUNT Accounts payable Accounts receivable Bonds payable Buildings Capital stock Cash Cost of goods sold Inventory Land Retained earnings Sales Wage expense $ 8,000 $ 6,000


$ 30,000 $ 50,000 $ 50,000 $ 12,000 $ 20,000 $ 7,500 $ 25,000 ? $ 45,000 $ 10,000

REQUIRED: Prepare the classified balance sheet for the Rose Company (in good form).

Accounting 221 Exam 1 -- Answers Multiple Choice. 1. D 2. E 3. A 4. D 5. E Matching terms. 6. F 7. B 8. H 9. L 10. J 11. A 12. E 13. D 14. a. I-I-U b. I-I-U c. U-U-U d. D-D-U e. U-U-U 15. a. A b. OE c. L d. E e. A 16. 1. B 2. C, R 3. I 4. R 5. A

17. a. (1) Dividends - distribution of earnings and (2) Capital appreciation which is the increase in the value of the stock held by the investor b. Secondary market trading occurs when an owner of stock sells the stock to another investor 18. a. Qualified b. Unqualified c. Adverse d. Disclaimer 19. Luca Pacioli 20. Sole proprietorship, partnership, corporation 21. (1) accuracy of processing, (2) speed of processing, (3) flexibility of processing 22. The Rose Company Balance Sheet September 30, 2003

Curent Assets: Cash Accts Receivable Inventory Total Current Assets Long-term assets Buildings Land Total Assets 50,000 25,000 75,000 $100,500 $12,000 6,000 7,500 $25,500

Current Liabilities Acct Payable Long-term Liab Bonds Payble Total Liab Owner's Equity Capital stock Retained earnings Total Liab & O/E 50,000 12,500 62,500 $100,500 30,000 38,000 8,000