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Posts Tagged ‘VU .FIN621- .Financial. Statement Analysis. (Session – 3). MIDTERM .EXAMINATION .Spring.2010’

VU FIN621- Financial Statement Analysis (Session – 3) MIDTERM EXAMINATION Spring 2010

.

MIDTERM EXAMINATION

Spring 2010

FIN621- Financial Statement Analysis (Session – 3)

Time: 60 min

Marks: 44

Question No: 1 ( Marks: 1 ) – Please choose one

How much duration does an accounting period usually have?

► Three months

► Two years

► One year Correct

► Five years

Question No: 2 ( Marks: 1 ) – Please choose one

Balance Sheet and Accounting Cycle are based on which of the following?

► Adjusting entries

► Closing entries

► Financial position

.

► Accounting EquationCorrect

Question No: 3 ( Marks: 1 ) – Please choose one

Which of the following is the next step after the preparation of trial balance?

► Adjusted trial balance

► Financial statements

► Adjusting entriesCorrect

► Closing entries

Question No: 4 ( Marks: 1 ) – Please choose one

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 entryCorrect

► Recording the wrong amount for a transaction to both the accounts

Question No: 5 ( Marks: 1 ) – Please choose one

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 omittedCorrect

Question No: 6 ( Marks: 1 ) – Please choose one

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. 250Correct

.

► Rs. 300

► Rs. 500

Ref:

90000/30 = 3000

3000/12 = 250

Question No: 7 ( Marks: 1 ) – Please choose one

Retained earnings change over time because of several factors. Which of the following

factors would explain an INCREASE in retained earnings?

► Net IncomeCorrect

► Dividends payment

► Investment by the stockholders

► Net Loss

Question No: 8 ( Marks: 1 ) – Please choose one

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. 93,000Correct

► Rs. 100,000

► Rs. 107,000

Ref:

A/C receivable =

Less allowance doubtful

100000

7000

______________

net realizable value a/c receivable 93000

Question No: 9 ( Marks: 1 ) – Please choose one

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 sheetCorrect

Question No: 10 ( Marks: 1 ) – Please choose one

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 stockCorrect

► A cash outflow to lenders as interest

► A cash outflow to purchase bonds issued by another company

Question No: 11 ( Marks: 1 ) – Please choose one

‘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 yearCorrect

► 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 ( Marks: 1 ) – Please choose one

Which of the following activities convert the income statement items from the accrual

basis of accounting to cash?

► Operating activitiesCorrect

► Investing activities

► Financing activities

► Non cash activities

Question No: 13 ( Marks: 1 ) – Please choose one

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. 205,000Correct

► Rs. 215,000

► Rs. 195,000

► Rs. 200,000

.

sales

beginning balance

200000

20000

__________

total 220000

less ending 15000

_____________

cash received from customer = 205000

Question No: 14 ( Marks: 1 ) – Please choose one

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 equipmentCorrect

► Payments to suppliers

► Receipts from sale of goods or services

CASH FLOW FROM INVESTING ACTIVITIES

Principle repayment by borrowers (note the interest receipt on the loans cash

includes in operating activities )

The sale of loan (receivable) made by the firm

The sales of assets such as debt of equity securities of other firms (other than cash

equivalent), and property, plant, and equipment

Question No: 15 ( Marks: 1 ) – Please choose one

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 activitiesCorrect

► All parts are same in both methods

Question No: 16 ( Marks: 1 ) – Please choose one

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 equityCorrect

► Long term liability and long term assets

.

Question No: 17 ( Marks: 1 ) – Please choose one

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 policiesCorrect

Question No: 18 ( Marks: 1 ) – Please choose one

Which one of the following is NOT an inventory costing method?

► FIFO cost method

► Weighted-average cost method

► Specific unit cost method Correct

► LIFO cost method

Question No: 19 ( Marks: 1 ) – Please choose one

In a perpetual inventory system, which of the following would be debited when inventory

is sold on account?

► Cost of goods soldCorrect

► Merchandise inventory

► Sales

Both Accounts receivable & cost of goods sold

(Correct)

Question No: 20 ( Marks: 1 ) – Please choose one

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

(Correct)

► A decrease in insurance expense

Question No: 21 ( Marks: 1 ) – Please choose one

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 ( Marks: 1 ) – Please choose one

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(Correct)

► A decrease in income tax rates

► A decrease in accounts receivable over the period

Question No: 23 ( Marks: 1 ) – Please choose one

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(Correct)

Question No: 24 ( Marks: 1 ) – Please choose one

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(Correct)

► Debit Supplies on Hand Rs. 400; Credit Supplies Expense Rs. 400

Question No: 25 ( Marks: 1 ) – Please choose one

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(Correct)

► Liabilities understated by Rs.600; net income understated by Rs.600

► Liabilities overstated by Rs.600; net income overstated by Rs.600

Question No: 26 ( Marks: 1 ) – Please choose one

A business has purchased machinery on credit, what will be its journal entry?

► Cash – (Debit); Machinery – (Credit)

► Machinery – (Debit) ; Accounts payable – (Credit) (Correct)

► Accounts payable – (Debit) ; Machinery – (Credit)

► Machinery – (Debit) ;Cash – (Credit)

Question No: 27 ( Marks: 1 ) – Please choose one

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 (Correct)

Question No: 28 ( Marks: 1 ) – Please choose one

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 (Correct)

► Rs. 280,000

► Rs. 254,000

► Rs. 246,000

Question No: 29 ( Marks: 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.

Net income

Added back

Deprecation

Increase in account receivable

200,000

10,000

(15,000)

.

Increase in Account payable

net cash flow from OP activity

5000

____________

200,000

Same Question solved by Hira:

Cash flow from operating activities= Net income- Depreciation- Increase in

A/Cs receivable- Increase in A/Cs payable

Cash flow from operating activities= 200,000-10,000-15,000-5,000

Cash flow from operating activities= =170,000 =Answer Correct

Question No: 30 ( Marks: 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.

Answer

During the period of inflation, prices increase. Under the FIFO method, valuation of

closing inventory is made at most recent prices or at increased prices and closing

inventory is shown at the credit side of trading & P&L account (income statement) with

increased value, as a result of which net income of the company increases because of

increase in the value of closing inventory ultimately company’s earnings increases.

Where as under the LIFO method company’s earnings decreases because of decrease in

the value of closing inventory

Question No: 31 ( Marks: 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.

Answer

Accelerated deprecation method will increase the earnings of stockholders

and defer the tax liability to far future years and current tax liability will be

minimum in near future.

Question No: 32 ( Marks: 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.

Net income

Accounts receivable increased

666,000

(50,000)

.

Inventory decreased

Pre-paid expenses increased

Accounts payable decreased

Accrued expenses payable increased

net cash from OP activities

23,000

(35,000)

(55,000)

14,000

_____________

563,000

Same Question Solved BY Hira:

Cash flow from operating activities= Net income – Increase in A/Cs

receivable – Decrease in inventory + decrease in A/Cs payable + Increase in

per-paid expenses- Increase in accrued expenses

Cash flow from operating activities=666,000-50,000-23,000+55,000+35,000-

14,000

Cash flow from operating activities=669,000= Answer Correct

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