Management 1A

Spring 2014
Danny S. Litt
EXAM 1
Solutions
Section No: 1
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PROBLEM
1-50
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100

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MANAGEMENT 1A

EXAM 1

For each of the following, choose true or false or the choice that best answers the question or statement.
Mark your answers on your SCANTRON. Write your name and section number on this test paper as well
as on your SCANTRON. (You may use this test paper as scratch paper and write on it as much as your
wish.) Turn in this exam and turn in the SCANTRON when finished.
Chapter 1
1. Accounting is an information and measurement system that identifies, records, and communicates
relevant, reliable, and comparable information about an organization's business activities.
Answer: True
2. Bookkeeping is the recording of transactions and events and is only part of accounting.
Answer: True
3. An accounting information system communicates data to help businesses make better decisions.
Answer: True
4. Managerial accounting is the area of accounting that provides internal reports to assist the decision
making needs of internal users.
Answer: True
5. Internal operating activities include research and development, distribution, and human resources.
Answer: True
6. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is
assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000,
and is sold for $137,000. What is the effect of the sale on the accounting equation for the seller?
A. Assets increase $52,000; owner's equity increases $52,000.
B. Assets increase $85,000; owner's equity increases $85,000.
C. Assets increase $137,000; owner's equity increases $137,000.
D. Assets increase $140,000; owner's equity increases $140,000.
E. Assets decrease $85,000; owner's equity decreases $85,000.
Answer: A
Feedback: Assets = Liabilities + Owners Equity
Assets would increase by $137,000 in Cash since that is the sales price.
Assets would also decrease by $85,000 in the Land account as that is the amount recorded
the books for the asset. Therefore, the net increase in Assets is $52,000.
There is no effect to Liabilities for this problem.
Owners Equity will also increase by $52,000 for the Gain on Sale of the Land.

on

7. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is
assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000,
and is sold for $137,000. At the time of the sale, assume that the seller still owed $30,000 to TrustOne
Bank on the land that was purchased for $85,000. Immediately after the sale, the seller paid off the
loan to TrustOne Bank. What is the effect of the sale and the payoff of the loan on the accounting
equation?
A. Assets increase $52,000; owner's equity increases $22,000; liabilities decrease $30,000
B. Assets increase $52,000; owner's equity increases $30,000; liabilities decrease $30,000
C. Assets increase $22,000; owner's equity increases $52,000; liabilities decrease $30,000
D. Assets decrease $30,000; owner's equity decreases $30,000; liabilities decrease $30,000
E. Assets decrease $55,000; owner's equity decreases $55,000; liabilities decrease $30,000
Answer: C
Feedback: Assets = Liabilities + Owners Equity
Assets would increase by $137,000 in Cash since that is the sales price.
Assets would also decrease by $85,000 in the Land account as that is the amount recorded on
the books for the asset.
Assets would also decrease by $30,000 in Cash for the amount paid to TrustOne Bank.
Therefore, the net increase in Assets is $22,000.
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EXAM 1

Liabilities will decrease by $30,000 for the payment of the loan to TrustOne Bank.
Owners Equity will then need to increase by $52,000 for the Gain on Sale of the Land.
8. An example of a financing activity is:
A. Buying office supplies.
B. Obtaining a long-term loan.
C. Buying office equipment.
D. Selling inventory.
E. Buying land.
Answer: B
9. An example of an operating activity is:
A. Paying wages.
B. Purchasing office equipment.
C. Borrowing money from a bank.
D. Selling stock.
E. Paying off a loan.
Answer: A
10. The assets of a company total $700,000; the liabilities, $200,000. What are the claims of the owners?
A. $900,000.
B. $700,000.
C. $500,000.
D. $200,000.
E. It is impossible to determine unless the amount of this owners' investment is known.
Answer: C $700,000 - $200,000 = $500,000
11. How would the accounting equation of Boston Company be affected by the billing of a client for
$10,000 of consulting work completed?
A. +$10,000 accounts receivable, -$10,000 accounts payable.
B. +$10,000 accounts receivable, +$10,000 accounts payable.
C. +$10,000 accounts receivable, +$10,000 cash.
D. +$10,000 accounts receivable, +$10,000 revenue.
E. +$10,000 accounts receivable, -$10,000 revenue.
Answer: D
12. Photometer Company paid off $30,000 of its accounts payable in cash. What would be the effects of
this transaction on the accounting equation?
A. Assets, $30,000 increase; liabilities, no effect; equity, $30,000 increase.
B. Assets, $30,000 decrease; liabilities, $30,000 decrease; equity, no effect.
C. Assets, $30,000 decrease; liabilities, $30,000 increase; equity, no effect.
D. Assets, no effect; liabilities, $30,000 decrease; equity, $30,000 increase.
E. Assets, $30,000 decrease; liabilities, no effect; equity $30,000 decrease.
Answer: B
13. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is
assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000,
and is sold for $137,000. At the time of the sale, assume that the seller still owed $30,000 to TrustOne
Bank on the land that was purchased for $85,000. Immediately after the sale, the seller paid off the
loan to TrustOne Bank. What is the effect of the sale and the payoff of the loan on the accounting
equation?
A. Assets increase $52,000; owner's equity increases $22,000; liabilities decrease $30,000
B. Assets increase $52,000; owner's equity increases $30,000; liabilities decrease $30,000
C. Assets increase $22,000; owner's equity increases $52,000; liabilities decrease $30,000
D. Assets decrease $30,000; owner's equity decreases $30,000; liabilities decrease $30,000
E. Assets decrease $55,000; owner's equity decreases $55,000; liabilities decrease $30,000
Answer: C $137,000 - $85,000 - 30,000 = 22,000
14. Quick Computer Service had revenues of $80,000 and expenses of $50,000 for the year. Its assets at
the beginning of the year were $400,000. At the end of the year assets were worth $450,000.
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MANAGEMENT 1A

EXAM 1

Calculate its return on assets.

A. 7.1%
B. 7.5%
C. 6.7%
D. 20.0%
E. 18.8%
Answer: A $30,000/[($400,000 + $450,000)/2] = $30,000/$425,000 = 7.1%
Chapter 2
15. The first step in the processing of a transaction is to analyze the transaction and source documents.
Answer: True
16. Preparation of a trial balance is the first step in the analyzing and recording process.
Answer: False
17. Source documents provide evidence of business transactions and are the basis for accounting entries.
Answer: True
18. Items such as sales tickets, bank statements, checks, and purchase orders are source documents.
Answer: True
19. Unearned revenues are liabilities.
Answer: True
20. Robert Haddon contributed $70,000 in cash and land worth $130,000 to open a new business, RH
Consulting. Which of the following general journal entries will RH Consulting make to record this
transaction?
A. Debit Assets $200,000; credit Haddon, Capital, $200,000.
B. Debit Cash and Land, $200,000; credit Haddon, Capital, $200,000.
C. Debit Cash $70,000; debit Land $130,000; credit Haddon, Capital, $200,000.
D. Debit Haddon, Capital, $200,000; credit Cash $70,000, credit Land, $130,000.
E. Debit Haddon, Capital, $200,000; credit Assets, $200,000.
Answer: C
21. On September 30, the Cash account of Value Company had a normal balance of $5,000. During
September, the account was debited for a total of $12,200 and credited for a total of $11,500. What
was the balance in the Cash account at the beginning of September?
A. A $0 balance.
B. A $4,300 debit balance.
C. A $4,300 credit balance.
D. A $5,700 debit balance.
E. A $5,700 credit balance.
Answer: B
22. On April 30, Holden Company had an Accounts Receivable balance of $18,000. During the month of
May, total credits to Accounts Receivable were $52,000 from customer payments. The May 31
Accounts Receivable balance was $13,000. What was the amount of credit sales during May?
A. $ 5,000.
B. $47,000.
C. $52,000.
D. $57,000.
E. $32,000.
Answer: B
Feedback: Beginning Accounts Receivable Balance + Credit Sales (Debits) Customer
Payments
(Credits) = Ending Accounts Receivable Balance
$18,000 + Credit Sales (Debits) - $52,000 = $13,000
Credit Sales (Debits) - $34,000 = $13,000
Credit Sales (Debits) = $47,000

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MANAGEMENT 1A

EXAM 1

23. During the month of February, Hoffer Company had cash receipts of $7,500 and cash disbursements
of $8,600. The February 28 cash balance was $1,800. What was the January 31 beginning cash
balance?
A. $700.
B. $1,100.
C. $2,900.
D. $0.
E. $4,300.
Answer: C
Beginning Cash Balance + Cash Receipts Cash Disbursements = Ending Cash Balance
Beginning Cash Balance + $7,500 - $8,600 = $1,800
Beginning Cash Balance = $2,900
24. The following transactions occurred during July:
Received $900 cash for services provided to a customer during July.
Received $2,200 cash investment from Barbara Hanson, the owner of the business.
Received $750 from a customer in partial payment of his account receivable which arose from sales
in June.
Provided services to a customer on credit, $375.
Borrowed $6,000 from the bank by signing a promissory note.
Received $1,250 cash from a customer for services to be rendered next year.
What was the amount of revenue for July?
A. $ 900.
B. $ 1,275.
C. $ 2,525.
D. $ 3,275.
E. $11,100.
Answer: B
25. Zed Bennett opened an art gallery and as a dealer completed these transactions:
Started the gallery, Artery, by investing $40,000 cash and equipment valued at $18,000.
Purchased $70 of office supplies on credit.
Paid $1,200 cash for the receptionist's salary.
Sold a painting for an artist and collected a $4,500 cash commission on the sale.
Completed an art appraisal and billed the client $200.
What was the balance of the cash account after these transactions were posted?
A. $12,230.
B. $12,430.
C. $43,300.
D. $43,430.
E. $61,430.
Answer: C $40,000 - $1,200 + $4,500 = $43,300
26. On January 1 of the current year, Bob's Lawn Care Service reported owner's capital totaling
$122,500. During the current year, total revenues were $96,000 while total expenses were $85,500.
Also, during the current year Bob withdrew $20,000 from the company. No other changes in equity
occurred during the year. If, on December 31 of the current year, total assets are $196,000, the change
in owner's capital during the year was:
A. A decrease of $9,500.
B. An increase of $9,500.
C. An increase of $30,500.
D. A decrease of $30,500.
E. Impossible to determine from the information provided.

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EXAM 1

Answer: A During the year, revenues were $96,000 while expenses were $85,500 and
withdrawals were $20,000. Since there were no other changes in equity, equity must have
decreased by $9,500.
27. Hal Smith opened Smith's Repairs on March 1 of the current year. During March, the following
transactions occurred and were recorded in the company's books:
Smith invested $25,000 cash in the business.
Smith contributed $100,000 of equipment to the business.
The company paid $2,000 cash to rent office space for the month.
The company received $16,000 cash for repair services provided during March.
The company paid $6,200 for salaries for the month.
The company provided $3,000 of services to customers on account.
The company paid cash of $500 for monthly utilities.
The company received $3,100 cash in advance of providing repair services to a customer.
Smith withdrew $5,000 for his personal use from the company.
Based on this information, net income for March would be:
A. $10,300.
B. $13,400.
C. $5,300.
D. $8,400.
E. $13,500.
Answer: A $16,000 + 3,000 - $2,000 - 6,200 - $500 = $10,300
Chapter 3
28. A company's fiscal year must correspond with the calendar year.
Answer: False
29. The time period assumption assumes that an organization's activities can be divided into specific time
periods.
Answer: True
30. Interim statements report a company's business activities for a one-year period.
Answer: False
31. A fiscal year refers to an organization's accounting period that spans twelve consecutive months or 52
weeks.
Answer: True
32. Adjusting entries are made after the preparation of financial statements.
Answer: False
33. A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on
December 31. This oversight would:
A. Understate net income by $28,000.
B. Overstate net income by $28,000.
C. Have no effect on net income.
D. Overstate assets by $28,000.
E. Understate assets by $28,000.
Answer: B
34. If a company mistakenly forgot to record depreciation on office equipment at the end of an
accounting period, the financial statements prepared at that time would show:
A. Assets overstated and equity understated.
B. Assets and equity both understated.
C. Assets overstated, net income understated, and equity overstated.
D. Assets, net income, and equity understated.
E. Assets, net income, and equity overstated.

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MANAGEMENT 1A

EXAM 1

Answer: E
35. If a company failed to make the end-of-period adjustment to remove from the Unearned Management
Fees account the amount of management fees that were earned, this omission would cause:
A. An overstatement of net income.
B. An overstatement of assets.
C. An overstatement of liabilities.
D. An overstatement of equity.
E. An understatement of liabilities.
Answer: C
36. Profit margin is defined as:
A. Revenues divided by net sales.
B. Net sales divided by assets.
C. Net income divided by net sales.
D. Net income divided by assets.
E. Net sales divided by net income.
Answer: C
37. A company had $9,000,000 in net income for the year. Its net sales were $13,200,000 for the same
period. Calculate its profit margin
A. 17.5%.
B. 28.0%.
C. 62.5%.
D. 160.0%.
E. 68.2%
Answer: E $9,000,000/$13,200,000 = 68.2%
38. Accrued revenues:
A. At the end of one accounting period often result in cash receipts from customers in the next period.
B. At the end of one accounting period often result in cash payments in the next period.
C. Are also called unearned revenues.
D. Are listed on the balance sheet as liabilities.
E. Are recorded at the end of an accounting period because cash has already been received for
revenues earned.
Answer: A
39. An account linked with another account that has an opposite normal balance and that is subtracted
from the balance of the related account is a(n):
A. Accrued expense.
B. Contra account.
C. Accrued revenue.
D. Intangible asset.
E. Adjunct account.
Answer: B
40. Alex Company has 10 employees, who earn a total of $1,800 in salaries each working day. They are
paid on Monday for the five-day workweek ending on the previous Friday. Assume that year ended
December 31, is a Wednesday and all employees will be paid salaries for five full days on the
following Monday. The adjusting entry needed on December 31 is:
A. Debit Salaries Expense, $5,400; credit Salaries Payable, $5,400.
B. Debit Salaries Expense, $3,600; credit Salaries Payable, $3,600.
C. Debit Salaries Expense, $9,000; credit Salaries Payable, $9,000.
D. Debit Salaries Payable, $5,400; credit Salaries Expense, $5,400.
E. Debit Salaries Expense, $5,400; credit Cash, $5,400.
Answer: A $1,800 x 3 = $5,400
Chapter 4
41. Accounts that appear in the balance sheet are often called temporary (nominal) accounts.
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MANAGEMENT 1A
42.
43.
44.

45.
46.

47.

48.

49.

50.

EXAM 1

Answer: False
Income Summary is a temporary account only used for the closing process.
Answer: True
Revenue accounts should begin each accounting period with zero balances.
Answer: True
Closing revenue and expense accounts at the end of the accounting period serves to make the revenue
and expense accounts ready for use in the next period.
Answer: True
The closing process takes place after financial statements have been prepared.
Answer: True
At the beginning of the year, Beta Company's balance sheet reported Total Assets of $195,000 and
Total Liabilities of $75,000. During the year, the company reported total revenues of $226,000 and
expenses of $175,000. Also, owner withdrawals during the year totaled $48,000. Assuming no other
changes to owner's capital, the balance in the owner's capital account at the end of the year would be:
A. $174,000.
B. $78,000.
C. cannot be determined from the information provided.
D. $120,000.
E. $123,000.
Answer: E
Feedback: Owner's Capital at the beginning of the year is $120,000 (Total Assets of $195,000 Total Liabilities of $75,000). Add revenues of $226,000, subtract expenses of $175,000 and
subtract owner withdrawals of $48,000 and owner's capital at the end of the year would be
$123,000.
After preparing and posting the closing entries to close revenues (and gains) and expenses (and
losses), the income summary account has a debit balance of $33,000. The entry to close the income
summary account will include:
A. a debit of $33,000 to owner withdrawals.
B. a credit of $33,000 to owner withdrawals.
C. a debit of $33,000 to income summary.
D. a debit of $33,000 to owner capital.
E. a credit of $33,000 to owner capital.
Answer: D
A trial balance prepared after the closing entries have been journalized and posted is the:
A. Unadjusted trial balance.
B. Post-closing trial balance.
C. General ledger.
D. Adjusted trial balance.
E. Work sheet.
Answer: B
An error is indicated if the following account has a balance appearing on the post-closing trial
balance:
A. Office Equipment.
B. Accumulated Depreciation-Office Equipment.
C. Depreciation Expense-Office Equipment.
D. Ted Nash, Capital.
E. Salaries Payable.
Answer: C
Bentley records adjusting entries at its December 31 year end. At December 31, employees had
earned $12,000 of unpaid and unrecorded salaries. The next payday is January 3, at which time
$30,000 will be paid. Prepare the January 1 journal entry to reverse the effect of the December 31
salary expense accrual.
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MANAGEMENT 1A

EXAM 1

A. Debit Salaries expense $12,000; credit Salaries payable $12,000.

B. Debit Salaries expense $18,000; debit Salaries payable $12,000; credit Cash $30,000.
C. Debit Salaries payable $18,000; credit Cash $18,000.
D. Debit Salaries payable $12,000, credit Salaries expense $12,000.
E. Debit Salaries expense $18,000; credit Salaries payable $18,000.
Answer: D

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