ACCT1115 Review Package - Quiz 1 Fall 2013 SOLUTION Page 1 of 16
Review EAM Part I Multiple Choice Circle the best answer. 1) Which of the following will cause a decrease in net worth? a) Buying assets b) Paying bank loan interest c) Depositing salary d) Repaying the principal portion of your loan 2) Your monthly payment to the bank is $1,000, interest being $950 and principal $50. After each payment is made, which of the following is true? a) Net worth decreases by $950 b) Decrease cash by $1000, decrease net worth by $1000 c) Decrease cash by $950, increase debt by $50 d) Decrease cash by $1000, increase net worth by $50 3) Your current net worth is $10,000. The following transactions occur: pay expenses of $1,000 and reduce a student loan principal of $3,000. How much will you be worth after the transactions? a) $6,000 b) $9,000 c) $12,000 d) $7,000 4) Accrual accounting means: a) expenses and revenues are recorded in the same period as they are incurred and earned b) an increase in cash equals an increase in net worth c) assets are equal to liabilities d) assets and liabilities are recorded in the same period 5) The role of the income statement is: a) to record what we own versus what we owe b) to record revenue and expenses c) to record only cash sales and expenses d) to record assets and liabilities 6) Depreciation results in: a) a decrease to expenses b) a decrease to net worth c) a decrease to cash d) a decrease to liability Page 2 of 16
Part I Continued 7) Paying cash for entertainment: a) involves two entries to the income statement b) involves an entry to the balance sheet and an entry to the income statement c) involves two entries to the balance sheet d) involves two entries to the balance sheet and one entry to the income statement 8) Which of the following terms can refer to the Net Worth of a business? a) Owner's Equity b) Owner's Equality c) Bondholder's Account d) Capital Asset 9) A company has consistently earned profits over a number of years. Which of the following statements concerning the relationship between cash and profits is true? a) Earning profits means that a company will always have a positive cash balance b) A profit does not guarantee that there is cash in the bank c) The balance of cash increases and decreases with profits d) Consistent profits means that the company will have a large cash balance 10) Which of the following is not a form of business organization? a) Corporation b) Creditorship c) Proprietorship d) Partnership 11) External stakeholders of a business include all the following, ECEPT: a) banks b) tax authorities c) those that own and work in the business d) auditors 12) The convention, rules, and procedures that provide a framework for the fair presentation of financial statements is known as: a) GAAP b) letter patent c) code of ethics d) CA Page 3 of 16
Part I Continued 13) The concept of depreciation is best explained by which accounting principle? a) Cost principle b) Continuing concern principle c) Matching principle d) Business entity concept 14) The bookkeeper of Company ABC receives advanced membership payments from customers and records it as revenue. Which of the following GAAP principles did the bookkeeper violate? a) The objectivity principle b) The cost principle c) The full disclosure principle d) The revenue recognition principle 15) Which of the following is an expected advantage of implementing IFRS? a) Increased jurisdictional control b) Increased costs in the short term c) Increased comparability d) Increased GAAP 16) One of the key purposes of internal controls is to: a) reduce salaries expense b) delete all errors c) ensure compliance with applicable laws and regulators d) guarantee the profitability of the company Page 4 of 16
Part II GAAP Characteristics: Matching Match each GAAP characteristic (Generally Accepted Accounting Principles) to the appropriate practice/concept. A B C D E F G H I J Comparability Conservatism principle Cost principle Matching principle Objectivity principle Relevance Reliability Revenue recognition principle Time period principle Understandability F It means that all information that is useful for decision making is presented in the financial statements without misstatements or omission. G It means that the information in the statements must be free of material error and bias. The information must also be verifiable. J It means that the financial information must be understood by a user with a reasonable knowledge of the business and basic accounting knowledge. A I E H C D It means that the financial statements must be presented in a similar way from year to year so a comparison can be made to past year's performance. It means accounting takes place over specific fiscal periods. It means accounting transactions should be recorded on the basis of verifiable evidence. It means sales must be recorded (recognized) at the time the duties are performed. It means accounting for purchases must be recorded at their values on the date of purchase. It means an expense must be recorded in the same accounting period in which it was used to produce revenue. Page 5 of 16
Part III Bank Balance and Net Worth Complete the following transactions by marking an in the appropriate columns (an example has been provided) Bank Balance Transaction Increase Decrease No Change Increase Net Worth Decrease No Change Pay miscellaneous expenses 1) Sell jewellery for cash (sold at book value) 2) Secure a student loan 3) Receive cash from a part-time job 4) Purchase a state-of-the-art computer using a credit card 5) Received an expensive stereo as a gift from your family 6) Depreciated the value of the computer 7) Pay for gas and food with cash 8) Provided pet sitting services. Customer will pay next month. 9) Collect money that you lent to your brother (no interest charged) 10) Use your debit card to pay for movie tickets Page 6 of 16
Part IV Business Financial Statements World s Computer Service Centre needs to update the transactions for the month of April. You have been provided with the company's most recent set of financial statements. World's Computer Service Balance Sheet As at March 31, 2009 Assets Liabilities Cash $23,000 Accounts Payable $12,000 Accounts Receivable $10,000 Unearned Service Revenue $10,000 Prepaid Rent $0 Bank Loan $0 Property, Plant & Equipment $40,000 Total Liabilities $22,000 Owners' Equity 51,000 Total Assets $73,000 Total Liabilities & Owners' Equity $73,000 During April, the business engaged in the following transactions: 1) Prepaid rent for three months $900 2) Provided services for cash $12,000 3) Received cash from the bank as a loan to purchase an automobile $30,000 4) Incurred travel expenses to be paid later $450 5) Purchased an automobile for cash $25,000 6) Paid for maintenance expense with cash $1,000 7) Telephone expenses due for payment next month $250 8) Paid salaries with cash $2,500 9) Owner withdrew cash for personal use $2,000 10) Paid portion of bank loan principal $5,000 11) Recognized one month of prepaid rent (from transaction 1 ) as an expense $300 Required: 1. Record the opening balances in the T-accounts 2. Record the transactions from above in the T-accounts (reference by number) 3. Determine the closing balances 4. Fill in the tables at the bottom of the Balance Sheet and Income Statement T-account pages 5. Complete the financial statements Page 7 of 16
Assets Balance Sheet Liabilities Increase (DR) Decrease (CR) Decrease (DR) Increase (CR) Bal. $23,000 Cash 1. $900 Accounts Payable Bal. $12,000 2. $12,000 5. $25,000 4. $450 3. $30,000 6. $1,000 7. $250 Total: $28,600 8. $2,500 9. $2,000 10. $5,000 Total: $12,700 Decrease (DR) Increase (CR) Increase (DR) Decrease (CR) Unearned Service Revenue Accounts Receivable Bal. $10,000 Bal. $10,000 Total: $10,000 Total: $10,000 Increase (DR) Decrease (CR) Decrease (DR) Increase (CR) Bal. $0 Prepaid Rent Bank Loan Bal. $0 1. $900 3. $30,000 11. $300 10. $5,000 Total: $600 Total: $25,000 Owner's Equity Increase (DR) Decrease (CR) Decrease (DR) Increase (CR) Property, Plant & Equipment Bal. $40,000 5. $25,000 Capital Account Bal. $51,000 Total: $65,000 Total: $51,000 Page 8 of 16
DO NOT USE Increase (DR) Decrease (CR) Owner's Drawings 9. $2,000 Total: $2,000 Owners' Equity Owners' Equity $51,000 ADD: Net Income (Loss) 7,500 LESS: Owner's Drawings 2,000 Ending Owners' Equity $56,500 Total Assets $104,200 = Total Liabilities 47,700 + Owners' Equity 56,500 Page 9 of 16
Income Statement Decrease (DR) - Revenue Increase (CR) + 2. $12,000 minus Expenses Increase (DR) Decrease (CR) Increase (DR) Decrease (CR) + Telephone Expense - + Insurance Expense - 7. $250 Increase (DR) Decrease (CR) Increase (DR) Decrease (CR) + Travel Expense - + Interest Expense - 4. $450 Increase (DR) Decrease (CR) Increase (DR) Decrease (CR) + Salaries Expense - + Maintenance Expense - 8. $2,500 6. $1,000 Increase (DR) Decrease (CR) Increase (DR) Decrease (CR) Depreciation + Expense - + Rent Expense - 11. $300 Total Revenue $12,000 Total Expenses ($4,500) Net Income (Loss) $7,500 Page 10 of 16
World Computer Service World Computer Service Income Statement Balance Sheet For the Month Ended April 30, 2009 As at April 30, 2009 Revenue $12,000 Assets Cash $28,600 Less Expenses Accounts Receivable 10,000 Telephone Expense $250 Prepaid Rent 600 Travel Expense 450 Property, Plant & Equipment 65,000 Salaries Expense 2,500 Depreciation Expense 0 Total Assets $104,200 Insurance Expense 0 Interest Expense 0 Liabilities Maintenance Expense 1,000 Accounts Payable $12,700 Rent Expense 300 Unearned Service Revenue 10,000 Bank Loan 25,000 Total Expenses $4,500 Net Income (Loss) $7,500 Total Liabilities $47,700 Owner's Equity 56,500 Liabilities + Owner's Equity $104,200 Page 11 of 16
Part V Personal Financial Statements i) The balances on November 1, 2013 for personal financial records for Jack Corbett are provided below: Cash $2,000 Prepaid Expenses $0 Automobile $0 Contents of Home $4,000 Unpaid Accounts $0 Student Loan $4,000 Auto Loan $0 Net Worth $2,000 ii) Transactions for the month of August : 1) Sell your couch for cash (sold at book value) $200 2) Buy a new couch and charge to your credit card (contents of home) $1,000 3) Prepay maintenance for three months $1,200 4) Deposit your first month's salary $4,000 5) Record interest received on daily banking account $100 5) Pay cash for food $600 7) Earn and deposit extra money from a part-time job $2,000 8) Pay interest on your student loan $400 9) Pay back some of your student loan principal $800 10) Charge the purchase of new clothes to your credit card $300 Required 1. Record the opening balances in part (i) above in the T-accounts 2. Record the transactions in part (ii) above in the T-accounts 3. Using the final balances from the balance sheet and income statement T-accounts, complete the personal balance sheet and income statement that follow Page 12 of 16
Assets (what we OWN) Personal Balance Sheet Liabilities (what we OWE) Increase (DR) Decrease (CR) Decrease (DR) Increase (CR) + Cash - - Unpaid Accounts + Bal. $2,000 Bal. $0 1. $200 2. $1,200 3. $1,000 4. $4,000 12. $300 6. $100 7. $600 8. $2,000 9. $400 10. $800 Total: $1,300 Total: $5,300 Increase (DR) Decrease (CR) Decrease (DR) + Prepaid Expenses - 10. $800 Bal. $0 2. $1,200 Increase (CR) - Student Loan + Bal. $4,000 Total: $3,200 Total: $1,200 Decrease (DR) Increase (CR) Increase (DR) Decrease (CR) + Automobile - Bal. $0 - Auto Loan + Bal. $0 Total: $0 Total: $0 Increase (DR) Decrease (CR) + Contents of Home - Bal. $4,000 3. $1,000 1. $200 Total: $4,800 Page 13 of 16
Total Assets $11,300 = Total Liabilities $4,500 + Net Worth $6,800 $11,300 Net Worth PLUS Capital Injection Net Worth $2,000 PLUS Surplus $4,800 (Deficit) = Equals New Net Worth $6,800 + 0 + Page 14 of 16
Personal Income Statement Decrease (DR) - Revenue Increase (CR) + 4. $4,000 6. $100 8. $2,000 minus EPENSES Increase (DR) Decrease (CR) Increase (DR) Decrease (CR) + Clothing Expense - + Insurance Expense - 12. $300 Increase (DR) Decrease (CR) Increase (DR) Decrease (CR) Depreciation + Expense - + Interest Expense - 9. $400 Increase (DR) Decrease (CR) Increase (DR) Decrease (CR) + Entertainment - + Maint. (Home & Auto) - Increase (DR) Decrease (CR) Increase (DR) Decrease (CR) + Food Expense - + Miscellaneous Expense - 7. $600 ADD up all Revenue $6,100 SUBTRACT all Expenses 1,300 Equals Surplus (Deficit) $4,800 Page 15 of 16
Jack Corbett Personal Balance Sheet As at November 30, 2013 Jack Corbett Income Statement For the month ended November 30, 2013 Assets Revenue $6,100 Cash $5,300 Prepaid Expenses 1,200 Automobile 0 Less Expenses Contents of Home 4,800 Clothing Expense $300 Entertainment Expense 0 Total Assets $11,300 Food Expense 600 Insurance Expense 0 Liabilities Interest Expense 400 Unpaid Accounts $1,300 Maint. (Home & Auto) Expense 0 Student Loan 3,200 Auto Loan 0 Total Expenses $1,300 Total Liabilities $4,500 Surplus (Deficit) $4,800 Net Worth $2,000 Plus Capital 0 Plus Surplus (Deficit) 4,800 Closing Net Worth $6,800 Liabilities + Net Worth $11,300 Page 16 of 16