COLLEGE OF ADMINISTRATION AND FINANCE

Student's Name:___________________ Student ID NO:_______________

Date of exam: ____________________ Branch: ____________________
Time: ONE Hour Max, Marks: 25

Mid – Term exam

October - 2015

FINANCIAL ACCOUNTING (ACCT-201)

Marks Details

SECTION MARKS YOUR MARKS

I (15 x 1) = 15

II (2 x 2.5) = 5

III ( 1 x 5) = 5

TOTAL 25

INSTRUCTOR:______________________ SIGNATURE___________

Page 1 of 9
 (Section-I)
Multiple choice type Questions. 15 questions each question carries 1 mark.
From the following chose the correct Answer

Q1. How does accounting help the capital allocation process attract investment
capital?

a. Provides timely, relevant information.

b. Encourages innovation.
c. Promotes productivity.
d. a and b above.

Q2. Accrual accounting is used because

a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash
basis.
c. it recognizes revenues when cash is received and expenses when cash is
paid.
d. none of the above.

Q3. What is a purpose of having a conceptual framework?

a. To enable the profession to more quickly solve emerging practical problems.

b. To provide a foundation from which to build more useful standards.
c. Neither a nor b.
d. Both a and b.

Q4. The trial balance

a. Proves that debits are greater than credits when the company has net
income.
b. Uncovers any errors in journalizing and posting prior to preparation of the
statement of financial position.
c. Is useful in preparing the statement of financial position.
d. None of the above

Q5. Which of the following is a real (permanent) account?

a. Goodwill
b. Sales
c. Accounts Receivable
d. Both Goodwill and Accounts Receivable

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Q6. A cash equivalent is a short-term, highly liquid investment that is readily convertible
into known amounts of cash and

a. is acceptable as a means to pay current liabilities.

b. has a current market value that is greater than its original cost
c. bears an interest rate that is at least equal to the prime rate of interest at the
date of liquidation.
d. is so near its maturity that it presents insignificant risk of changes in interest
rates.

Q 7. When an item of revenue is collected and recorded in advance, it is normally

called a (n) ___________ revenue.

a. accrued
b. prepaid
c. unearned
d. cash

Q 8 . What is the normal journal entry for recording bad debt expense under the
allowance method?

a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.

b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

Q9. Dividend paid belongs to which of the following activities while preparing Cash Flow
Statement.
a. Operating
b. Investing
c. Financing
d. All the above
Q 10. Which of the following ratios measures the company’s short-term ability to pay its
maturing obligations.
a. Liquidity Ratio
b. Activity Ratio
c. Profitability Ratio
d. Coverage Ratio
Q11. which of the following is the most liquid asset?
a. Stock
b. Account Receivable

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 c. Cash
d. Short Term Investment

Q12. Additional Information of Financial Reporting may include

a) Statement of Financial Position

b) Statement of Cash Flows
c) President’s Letter
d) Note Disclosure

Q13. Which of the following enhances fundamental qualities of financial reporting?

a) Comparability
b) Verifiability
c) Timeliness
d) All the above
Q14. A company is assumed to last long enough to fulfil objectives and commitments is
one the following assumption.
a) Economic Entity
b) Going Concern
c) Monetary Unit
d) Periodicity

Q15. “The amount for which an asset could be exchanged, a liability settled, or an
equity instrument granted could be exchanged, between knowledgeable, willing parties
in an arm’s length transaction.” Is
a) Cost Value
b) Fair Value
c) Original Cost
d) None of the above

Page 4 of 9
 (Section-II)

Short Essay type Questions. Each Question carries 2.5 marks (2 X 2.5 = 5)

Short answers:

1- 1- The following information is related to Roman Consultancy Services Company:

a) On August 1, 2011 the company purchased a 10-months insurance policy from
Slide Company for $45,000.
b) On December 31, $95,000 is the month's due fees from customers for services
provided.
c) On November 1, 2011 the company borrowed $90,000 loan from bank for 12
months. The annual interest rate is 5%.
d) Accrued wages at December 31, 2011 $5,000.

Required;
Prepare the necessary adjusting entries, knowing that the fiscal year for Roman
Consultancy Services Company ends in December 31, 2011.

Answer :

Date Description Debit Credit

Dec. 31 Insurance expense 22,500

Prepaid insurance 22,500

Dec.31 Accounts Receivable 95,000

Fees earned 95,000

Dec. 31 Interest Expense 750

Interest payable 750

Dec. 31 Wages Expense 5,000

Wages payable 5,000

90000 * 5 = 450000/100 = 4500

4500 / 12 = 375 * 2 = 750

Page 5 of 9
45,000 / 10 = 4,500 * 5 = 22,500

Q1. Explain the two methods that are used in accounting for Bad debts (uncollectible
accounts).
ANS: Two methods are used in accounting for uncollectible accounts: 

(1) The Direct Write-off Method 

(2) The Allowance Method.

Direct Write-off Method 

The direct write-off method requires the identification of specific balances that are

deemed to be uncollectible before any bad debt expense is recognized. At the time a

specific account is deemed uncollectible, the account is removed from accounts

receivable and a corresponding amount of bad debt expense is recognized.

Allowance Method.

The allowance method requires an estimate of bad debt expense for a period of time by

reference to the composition of the accounts receivable balance at a specific point in

time (aging) or to the overall experience with credit sales over a period of time. Thus,

total bad debt expense expected to arise as a result of operations for a specific period is

estimated, the valuation account (allowance for doubtful accounts) is appropriately

adjusted, and a corresponding amount of bad debt expense is recognized. As specific

accounts are identified as uncollectible, the account is written off. It is removed from

accounts receivable and a corresponding amount is removed from the valuation

account (allowance for doubtful accounts). Net accounts receivable do not change, and

there is no charge to bad debt expense when specific accounts are identified as

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uncollectible and written off using the allowance method.

(Section-III)

Essay type Questions. Question carries 5 marks (1 x 5 = 5)

Q1 Based on the following trial balance for Sal's Beauty Shop, prepare an income
statement, statement of retained earnings and a balance sheet.
 

Sal’s Beauty Shop

Trial Balance
December 31
Cash $ 6,500
Accounts receivable 475
Beauty supplies 2,500
Beauty shop equipment 17,000
Accounts payable $ 745
Common stock 10,000
Retained earnings (1 st January) 11,155

Dividends 36,000
Revenue earned 72,000
Beauty supplies expense 3,425
Rent expense 6,000
Wages expense 22,000
Totals $93,900 $93,900

  

 Answer:

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 Sal’s Beauty Shop
Income Statement
For the year ended December 31
Revenue earned $72,000
Expenses:
Beauty supplies expense $ 3,425
Rent expense 6,000
Wages expense 22,000
Total expenses 31,425
Net Income $40,575
 

Sal’s Beauty Shop

Statement of Retained Earnings
For the year ended December 31
Retained earnings, January 1 $11,155
Add: Net income 40,575
Less: Dividends (36,000)
Retained earnings, December 31 $15,730
 

Sal’s Beauty Shop

Balance Sheet
At December 31
Assets Liabilities
Cash $ 6,500 Accounts payable $ 745
Accounts receivable 475
Beauty supplies 2,500 Equity
Beauty shop equipment 17,000 Common stock $10,000
Retained earnings 15,730
Total equity 25,730
Total assets $26,475 Total liabilities and equity $26,475

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