Income Statement & Balance Sheet – Finance Exam

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Income Statement & Balance Sheet – Finance Exam

These intermediate accounting chapters discuss Income Statement & Balance Sheet – Final Finance Exam is based on these chapters.


On 12-31-15, Shannon entered into an agreement that required Shannon to pay a supplier $5,000 every year on 12-31 until 2040. The agreement required Shannon to make the first annual payment on 12-31-20. Assume the market rate of interest for Shannon is 15%. As of 12-31-15 what was the present value of Shannon’s obligation?

$31,562

$31,297

$18,046 Correct

$17,895

$15,560


The following information was taken from the D Company’s income statement for the year ended 12-31-19:

Sales revenues of $950,000
A gain on the sale of a fixed asset of $30,000
Cost of goods sold of $320,000
Operating expenses of $200,000

What was D’s gross profit for the year ended 12-31-19?

$660,000

$600,000

$720,000

$430,000

$630,000 Correct


The financial statement that summarizes the operating, investing, and financing activities of a company for a period of time is the

balance sheet.

statement of cash flows. Correct

income statement.

statement of stockholders’ equity.

earnings statement.


Which of the following terms is used to describe the financial-related report that a publicly traded firm files annually with the Securities and Exchange Commission?

Balance Sheet

Form 10-A

Income Statement

Form 10-K Correct

Form 10-Q


On 12-31-15, Shannon entered into an agreement that required Shannon to pay a supplier $5,000 every year on 12-31 until 2040. The agreement required Shannon to make the first annual payment on 12-31-20. Assume the market rate of interest for Shannon is 15%. As of 12-31-15 what was the present value of Shannon’s obligation?

$31,562

$31,297

$18,046 Correct

$17,895

$15,560


The following information was taken from the D Company’s income statement for the year ended 12-31-19:

Sales revenues of $950,000
A gain on the sale of a fixed asset of $30,000
Cost of goods sold of $320,000
Operating expenses of $200,000

What was D’s gross profit for the year ended 12-31-19?

$660,000

$600,000

$720,000

$430,000

$630,000 Correct

The financial statement that summarizes the operating, investing, and financing activities of a company for a period of time is the

balance sheet.

statement of cash flows. Correct

income statement.

statement of stockholders’ equity.

earnings statement.


Depreciation and amortization policies are justifiable and appropriate only if we assume some permanence to the company because of the

full disclosure principle

periodicity assumption

monetary unit assumption

going concern assumption Correct

economic entity assumption


Which of the following least resembles a typical adjusting journal entry (AJE)?

A debit to prepaid expenses and a credit to expense.

Debit to unearned revenues and a credit to revenue.

A debit to revenue and a credit to unearned revenues.

A debit to assets and a credit to liabilities. Correct

A debit to expense and a credit to prepaid expenses.


Which inventory costing method most closely approximates recent costs for ending inventory and cost of goods sold, respectively?

FIFO, FIFO

HIFO

LIFO, FIFO

LIFO, LIFO

FIFO, LIFO Correct

On 12-31-18, M Company accepted a three-year, zero-interest-bearing $50,000 trade note receivable from R Inc. in exchange for some inventory that M sold to R on 12-31-18. M will collect the $50,000 note on 12-31-21. On 12-31-18, the market interest rate for similar notes was 10%. What amount of interest income should M report for the year ending 12-31-19?

$1,243

$1,879

$1,667

$3,757 Correct

$5,000


Assume Farb values the inventory reported on its balance sheet and the amount recorded as cost of goods sold on its income statement solely on the basis of its physical inventory count that took place on December 31, 2019. When performing its physical inventory count, Farb counts whatever is on the premises. Information relating to one of Farb’s inventory purchases follows:

Goods shipped to Farb by a vendor f.o.b. shipping point on December 29, 2019 were in transit on December 31, 2019. The goods cost Farb $15,000. Farb recorded a credit purchase of $15,000 on January 4, 2020, the day Farb received the goods.

What impact did Farb’s accounting for the aforementioned inventory purchase have on Farb’s ending inventory, accounts payable, cost of good sold, and retained earnings, respectively?

under $15,000, under $15,000, $0 impact, $0 impact Correct

$0 impact, under $15,000, under $15,000, over $15,000

under $15,000, under $15,000, under $15,000, $0 impact

$0 impact, under $15,000, over $15,000, $0 impact

over $15,000, $0 impact, under $15,000, over $15,000


On May 1, Rex factored $100,000 of accounts receivable with Steady Finance on a with recourse basis. Steady assessed a finance charge of $4,000 of the total accounts receivable and retained $2,000 for possible sales returns. Rex estimated a $5,000 recourse provision. Between May 1 and July 31, Rex’s customers returned merchandise on $2,500 of credit sales within the pool of receivables factored. Steady collected $90,000 of the $100,000 of accounts receivable factored. On August 1, Rex and Steady settled up what Rex owes Steady OR what Steady owes Rex. As a result of both factoring its ARs and settling up with Steady, Rex increased its cash account by:

$90,000

$88,500

$91,500

$86,000 Correct

$89,000


Oslo Corporation costs its inventory using the LIFO method. Oslo has two products in its ending inventory and each is accounted for at the lower of cost or market. A profit margin of 25% on selling price is considered normal for each product. The historical cost, replacement cost, estimated disposal costs and estimated selling price, respectively, for each product follows:

Product 1: $15, $11, $2, $20
Product 2: $18, $25, $7, $40

In costing its ending inventory using the lower-of-cost-or-market, what unit values, rounded to the nearest dollar, should Oslo use for products 1 and 2, respectively?

$13 and $18. Correct

$11 and $18.

$13 and $23.

$15 and $23.

$15 and $18.


As of 12-31-19, Dot’s allowance for doubtful accounts had a balance of $75,000. During 2020, Dot wrote off uncollectible accounts receivable of $87,000 and collected $1,000 of accounts receivable Dot had written off during 2019. The aging schedule of Dot’s accounts receivable indicated that as of 12-31-20, Dot needed $93,000 in its allowance for doubtful accounts. What amount of bad debts expense did Dot record for the year ended 12-31-20?

$104,000 Correct

$103,000

$82,000

$81,000

$105,000


On 12-31-18, M Company accepted a three-year, zero-interest-bearing $50,000 trade note receivable from R Inc. in exchange for some inventory that M sold to R on 12-31-18. M will collect the $50,000 note on 12-31-21. On 12-31-18, the market interest rate for similar notes was 10%. What amount of interest income should M report for the year ending 12-31-19?

$1,243

$1,879

$1,667

$3,757 Correct

$5,000


Assume Farb values the inventory reported on its balance sheet and the amount recorded as cost of goods sold on its income statement solely on the basis of its physical inventory count that took place on December 31, 2019. When performing its physical inventory count, Farb counts whatever is on the premises. Information relating to one of Farb’s inventory purchases follows:

Goods shipped to Farb by a vendor f.o.b. shipping point on December 29, 2019 were in transit on December 31, 2019. The goods cost Farb $15,000. Farb recorded a credit purchase of $15,000 on January 4, 2020, the day Farb received the goods.

What impact did Farb’s accounting for the aforementioned inventory purchase have on Farb’s ending inventory, accounts payable, cost of good sold, and retained earnings, respectively?

under $15,000, under $15,000, $0 impact, $0 impact Correct

$0 impact, under $15,000, under $15,000, over $15,000

under $15,000, under $15,000, under $15,000, $0 impact

$0 impact, under $15,000, over $15,000, $0 impact

over $15,000, $0 impact, under $15,000, over $15,000


Joe completed a physical inventory on 12-31-18. On the basis of his count, Joe determined his ending inventory at retail selling prices was $36,000. In recent years, Joe’s gross profit equaled 60% of Joe’s selling price. Additional information from Joe’s accounting records identified the following:

Inventory cost at 12-31-17 was $20,000
Net purchases during 2018 were $100,000
Net sales revenue during 2018 were $186,000

Joe suspects some inventory is missing. Joe used the gross profit method to estimate what his ending inventory should be based on historical facts and trends. What estimated loss, if any, should Joe record for the missing inventory.

$0

$6,000

$24,000

$9,600

$31,200 Correct

Meow self-constructed a machine to be used in Meow’s factory. Construction began on January 1 and was completed on December 31. Meow’s weighted-average accumulated construction expenditures were $660,000. During the entire year Meow had the following outstanding notes payable: a 3%, 6-year $600,000 note and a 5%, 6-year $400,000 note. Meow rounds any interest rate calculation as follows: 4.873% = 4.9% while 3.314% = 3.3%. What was Meow’s avoidable interest for interest capitalization purposes?

$11,600

$38,000

$26,400

$12,920

$25,080 Correct


Howard purchased a machine on July 1, 2018 for $200,000. Howard intends to use the machine for five years. And Howard uses a straight-line depreciation method and assumes no salvage value. On January 1, 2020, Howard realizes the machine has been impaired. Howard estimates the machine will generate future net cash inflows of $105,000. The machine has a fair value of $100,000. Howard should recognize an impairment loss of

$20,000.

$0.

$40,000. Correct

$35,000.

$100,000.


The premium on a 3-year insurance policy expiring on December 31, year 3, was paid in total on January 1, year 1. Assuming that the original payment was recorded as a prepaid asset, how would total assets and stockholders’ equity be affected during year 3?

Both total assets and stockholders’ equity would decrease. Correct

Both total assets and stockholders’ equity would increase.

Neither total assets nor stockholders’ equity would change.

Total assets would decrease and stockholders’ equity would increase.


Mirr, Inc. was incorporated on January 1, year 1, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, year 2. No additional activities affected owners’ equity in year 1. Mirr’s liabilities increased to $120,000 by December 31, year 1. On Mirr’s December 31, year 1 balance sheet, total assets should be reported at

$885,000 Correct

$875,000

$878,000

$882,000

Explanation

Mirr began operations on 1/1/Y1 with the following balance sheet elements:

Assets=Liabilities+Owners’ equity
$860,000=$110,000+$750,000


During year 1, liabilities increased to $120,000, and owners’ equity increased to $765,000 [$750,000 beginning balance + $18,000 net income ($82,000 revenues − $64,000 expenses) − $3,000 dividends declared]. Therefore, 12/31/Y1 assets must be $885,000.

Assets=Liabilities+Owners’ equity
Assets=$120,000+$765,000
Assets=$885,000

Income Statement & Balance Sheet


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