MIDTERM EXAMINATION
Spring 2010
FIN621- Financial Statement Analysis
Time: 60 min
M a r k s: 44
Question No: 1 ( M a r k s: 1 ) http://vuzs.net
How much duration does an accounting period usually have?
۩ Three months
۩ Two years
۩ One year
۩ Five years
Question No: 2 ( M a r k s: 1 ) http://vuzs.net
Balance Sheet and Accounting Cycle are based on which of the following?
۩ Adjusting entries
۩ Closing entries
۩ Financial position
۩ Accounting Equation
Question No: 3 ( M a r k s: 1 ) http://vuzs.net
Which of the following is the next step after the preparation of trial balance?
۩ Adjusted trial balance
۩ Financial statements
۩ Adjusting entries
۩ Closing entries
Question No: 4 ( M a r k s: 1 ) http://vuzs.net
Which of the following errors are identified during the preparation of trial balance?
۩ Recording transactions in the wrong account
۩ Duplication of a transaction in the accounting records
۩ Posting only the debit portion of a particular journal entry
۩ Recording the wrong amount for a transaction to both the accounts
Ref: Posting only the debit portion of a particular entry will cause debits to exceed credits -- an error that will be revealed by a trial balance. The other errors do not cause out-of-balance conditions.
Question No: 5 ( M a r k s: 1 ) http://vuzs.net
Which of the following is NOT an advantage of the Trial Balance?
۩ It ensures that the all accounts have identical debits and credits
۩ It ensures that the balance of each ledger account has been computed correctly
۩ The debit and the credit columns of trial balance have been added up correctly
۩ All the transactions have been recorded and nothing has been omitted
Question No: 6 ( M a r k s: 1 ) http://vuzs.net
Cost of a building is Rs. 90,000 and its estimated useful life is 30 years. What will be the depreciation expense of this building for one month by using straight line depreciation method?
۩ Rs. 600
۩ Rs. 250
۩ Rs. 300
۩ Rs. 500
Calculation:
90000/30*1/12 = 250
Question No: 7 ( M a r k s: 1 ) http://vuzs.net
Retained earnings change over time because of several factors. Which of the following factors would explain an INCREASE in retained earnings?
۩ Net Income
۩ Dividends payment
۩ Investment by the stockholders
۩ Net Loss
Question No: 8 ( M a r k s: 1 ) http://vuzs.net
At the end of the fiscal year, Accounts Receivable has a balance of Rs. 100,000 and Allowance for
Doubtful Accounts has a balance of Rs. 7,000. The expected net realizable value of the accounts
receivable is:
۩ Rs. 7,000
۩ Rs. 93,000
۩ Rs. 100,000
۩ Rs. 107,000
Calculations: Opening accounts receivable - Allowances for doubtful debts
100,000 - 7000 = 93,000
Question No: 9 ( M a r k s: 1 ) http://vuzs.net
Which of the following regarding retained earnings is FALSE?
۩ Retained earnings represent earnings not distributed to stockholders
۩ Retained earnings is increased by net income and decreased by a net loss
۩ Retained earnings are a component of stockholders’ equity on the balance sheet
۩ Retained earnings are an asset on the balance sheet
Question No: 10 ( M a r k s: 1 ) http://vuzs.net
Which of the following would be considered a cash-flow item from a "financing" activity?
۩ A cash outflow to the government for taxes
۩ A cash outflow to repurchase the firm's own common stock
۩ A cash outflow to lenders as interest
۩ A cash outflow to purchase bonds issued by another company
Question No: 11 ( M a r k s: 1 ) http://vuzs.net
'Equity dividends' shown in the cash flow statement will comprise:
۩ All company dividends paid during the year
۩ All dividends paid to voting shares in the year
۩ All dividends paid and proposed in the year relating to voting shares
۩ All proposed dividends in the year relating to voting shares
Question No: 12 ( M a r k s: 1 ) http://vuzs.net
Which of the following activities convert the income statement items from the accrual basis of accounting to cash?
۩ Operating activities
۩ Investing activities
۩ Financing activities
۩ Non cash activities
Question No: 13 ( M a r k s: 1 ) http://vuzs.net
The balance sheet reported a beginning balance of Rs. 20,000 in Accounts Receivable and an ending balance of Rs. 15,000. The income statement reported Sales Revenue of Rs. 200,000. Using this information, compute cash collected from customers.
۩ Rs. 205,000
۩ Rs. 215,000
۩ Rs. 195,000
۩ Rs. 200,000
Question No: 14 ( M a r k s: 1 ) http://vuzs.net
Which of the following would be considered as cash flow from investing activities?
۩ Proceeds from issuance of long-term debt
۩ Expenditure for sale of plant and equipment
۩ Payments to suppliers
۩ Receipts from sale of goods or services
Question No: 15 ( M a r k s: 1 ) http://vuzs.net
When cash flow statement is prepared by using indirect method, which part of it is different from the direct method?
۩ Cash flow from investing activities
۩ Cash flow from financing activities
۩ Cash flow from operating activities
۩ All parts are same in both methods
Question No: 16 ( M a r k s: 1 ) http://vuzs.net
The cash flow from financing activities shows the cash effects of which of the following?
۩ Income statement items
۩ Long term assets items
۩ Long term liability & stockholder’s equity
۩ Long term liability and long term assets
Question No: 17 ( M a r k s: 1 ) http://vuzs.net
Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements?
۩ Description of current year equity transactions
۩ Summary of long-term debt outstanding
۩ Schedule of fixed assets
۩ Revenue recognition policies
Question No: 18 ( M a r k s: 1 ) http://vuzs.net
Which one of the following is NOT an inventory costing method?
۩ FIFO cost method
۩ Weighted-average cost method
۩ Specific unit cost method
۩ LIFO cost method
Question No: 19 ( M a r k s: 1 ) http://vuzs.net
In a perpetual inventory system, which of the following would be debited when inventory is sold on account?
۩ Cost of goods sold
۩ Merchandise inventory
۩ Sales
۩ Both Accounts receivable & cost of goods sold
On May 6, 2010: Sold 200 units of merchandise at $50 per unit on credit.
Under Perpetual inventory system
| 5/1/2010 | | | Debit | | Credit | |
| | | Accounts Receivable | | 10,000 | | |
| | | | | | | | | |
| | | | | | Sales | | | | 10,000 | |
| | | | | | | | | | | |
| | | | Debit | | Credit | |
| | | Cost of goods sold | | 6,000 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | Merchandise inventory | | | | 6,000 | |
| | | | | | | | | | | |
Under perpetual inventory system, changes in merchandise inventory account are recorded after each transaction.
Question No: 20 ( M a r k s: 1 ) http://vuzs.net
Which of the following would affect the gross profit rate if sales remain constant?
۩ An increase in advertising expense
۩ A decrease in depreciation expense
۩ An increase in cost of goods sold
۩ A decrease in insurance expense
Question No: 21 ( M a r k s: 1 ) http://vuzs.net
Which of the following statements best describes the nature of depreciation?
۩ Regular reduction of asset value to correspond to the decline in market value as the asset ages
۩ A process of correlating the book value of an asset with its gradual decline in physical efficiency
۩ Allocation of the cost in a manner that will ensure that plant and equipment items are not carried on the balance sheet at amounts in excess of net realizable value
۩ Allocation of the cost of a plant asset to the periods in which benefits are received
Question No: 22 ( M a r k s: 1 ) http://vuzs.net
Warner Corporation reported net income in excess of its net cash flow from operations. A possible explanation of this difference is:
۩ Depreciation expense
۩ Non operating gains
۩ A decrease in income tax rates
۩ A decrease in accounts receivable over the period
Question No: 23 ( M a r k s: 1 ) http://vuzs.net
Which of the following transaction have an effect on expense account?
۩ Purchase of office equipment on credit
۩ Payment on accounts payable
۩ Repayment of principle of bank loan
۩ Payment of wages
Question No: 24 ( M a r k s: 1 ) http://vuzs.net
The supplies account has a balance of Rs. 1,500 at year end. The actual amount of supplies in hand at the end of period is Rs. 400. The necessary adjusting entry is:
۩ Debit Supplies on Hand Rs. 1100; Credit Supplies Expense Rs. 1100
۩ Debit Supplies Expense Rs. 400; Credit Supplies on Hand Rs. 400
۩ Debit Supplies Expense Rs. 1100; Credit Supplies on Hand Rs. 1100
۩ Debit Supplies on Hand Rs. 400; Credit Supplies Expense Rs. 400
Unused supplies are our asset and used supplies become our expense. If account balance is showing amount Rs.1500 at end of the year whereas actual amount of supplies in hand is 400. It means 1100 amount of supplies has been used during year(which is not recorded yet) and used supplies are our expense. so supplies expense will be debited (increased) by 1100 and our asset is decreased so, supplies account will be credited by 1100.
Question No: 25 ( M a r k s: 1 ) http://vuzs.net
The balance of the Unearned Rent Account for Jones Co. as on Dec 31 is Rs.1, 200. If Jones Co. failed to record the adjusting entry for Rs.600 of rent earned during December, the effect on the Balance Sheet and Income Statement for December will be:
۩ Assets understated by Rs.600; net income overstated by Rs.600
۩ Liabilities overstated by Rs.600; net income understated by Rs.600
۩ Liabilities understated by Rs.600; net income understated by Rs.600
۩ Liabilities overstated by Rs.600; net income overstated by Rs.600
Unearned revenue is our liability. If we failed to record that this unearned revenue has been earned during the year it means in balance sheet our liabilities will be overstated and earned revenue which is our income will be understated.
"Unearned revenue" accounts represent the amount of cash received before services are provided. Since services have not been provided yet, it is not revenue.
Question No: 26 ( M a r k s: 1 ) http://vuzs.net
A business has purchased machinery on credit, what will be its journal entry?
۩ Cash - (Debit); Machinery - (Credit)
۩ Machinery - (Debit) ; Accounts payable - (Credit)
۩ Accounts payable - (Debit) ; Machinery - (Credit)
۩ Machinery - (Debit) ;Cash - (Credit)
Question No: 27 ( M a r k s: 1 ) http://vuzs.net
Closing entries result in net income being calculated in the income summary account and then transferred to which of the following account?
۩ Revenue account
۩ Common Stock account
۩ Dividends account
۩ Owner's Capital account
Question No: 28 ( M a r k s: 1 ) http://vuzs.net
Assuming that net purchases cost Rs 250,000 during the year. The closing inventory was of Rs 4,000, and opening inventory was of Rs 30,000, how much was the cost of goods sold?
۩ Rs. 276, 000
۩ Rs. 280,000
۩ Rs. 254,000
۩ Rs. 246,000
Calculation: Opening inventory = 30,000
Add: Purchases = 250,000
Less: Closing inventory = 4,000
Cost of goods sold = 276,000
Question No: 29 ( M a r k s: 3 )
Assume that net income was Rs. 200,000, depreciation expense was Rs. 10,000, accounts receivable increased by Rs. 15,000, and accounts payable increased by Rs. 5,000. Calculate the cash flow from operating activities.
A. Net Cash Flow from Operating Activities 200000Rs.
Question No: 30 ( M a r k s: 3 )
Explain how the adoptions of FIFO method rather than LIFO will tend to raise or lower the quality of a company’s earnings? Assume the continuance of the inflation.
A. During Inflation, FIFO shows less expense on income statement and higher inventory valuation on balance sheet and values ending inventory at current cost, whereas LIFO shows higher expenses on income statement and lower inventory valuation on balance sheet.
Question No: 31 ( M a r k s: 5 )
Nestle Pakistan has two conflicting objectives. Management wants to report the highest possible earnings to stockholders in the near future yet also wants to minimize the taxable income. Indicate the depreciation method that the company will probably use in its financial statements and its federal income tax return. Explain your answer with the reasons.
A. We will use fixed depreciation Method
Question No: 32 ( M a r k s: 5 )
Patterson Company reported net income for the current year of Rs. 666,000. During the year the company’s accounts receivable increased by Rs. 50,000, inventory decreased by Rs. 23,000, accounts payable decreased by Rs. 55,000, pre-paid expenses increased by Rs. 35,000, and accrued expenses payable increased by Rs. 14,000. Determine the amount of cash provided by or used for operating activities by the indirect method.
A. Net Cash Flow from Operating Activities 663000Rs.
