SOLUTIONS Introductory Financial Accounting Midterm Exam Professor Yanfeng Xue
Note: 1. You have 90 minutes to finish this exam. The total score for this exam is 100 points. Please use your time wisely. 2. Please show your work because I do give partial credit. 3. If you cannot remember the name of a particular account, do your best at guessing and at least indicate the type of the account (asset, retained earnings, etc.) 4. Good luck!
Problem 1. Fill in the blanks (5 Points).
a. The three sections of statement of cash flows are (3 Points):
Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities
b. The name of the organization that writes the U.S. GAAP is (2 Points): FASB (Financial Accounting Standard Board)
Bright Horizon Corporation reported the current ratio and debt ratio as following as of October 31st 2012 (current ratio is current assets divided by current liabilities and debt ratio is total liabilities divided by total assets): (6 Points) Current ratio = $5000/$4000 = 1.25 Debt ratio = $6000/$12000 = 0.5
Will the following transactions improve or hurt the company’s current and debt ratios? Answer: Note that a higher current ratio and a lower debt ratio are more desirable for the firm because they indicate lower risk. 1) Issued new common stock of $1000 for cash. Cash goes up and shareholders’ equity goes up. Current ratio is improved and debt ratio is improved. 2) Received customer payments in advance for $500. The transaction increases both the current assets (cash) and current liabilities (unearned revenue) by the same amount. When the denominator is smaller than the numerator (current ratio), such impact will lower the ratio and therefore hurt the current ratio. When the denominator is greater than the numerator (debt ratio), such impact should increase the ratio and therefore hurt the debt ratio. 3) Accrue rent expenses of $600. The transaction reduces the retained earnings (expense) and increases the current liabilities (rent payable). The current ratio is hurt and the debt ratio is also hurt.
Problem 2. (10 Points)
Greenbelt Company started operation on January 1st 2009 with Total Assets valued at $80,000 and Liabilities of $25,000. In November 2009, the company also issued new common stock in the amount of $10,000 and received cash. The company made net income of $6,000 in 2009 and declared no dividend during the year. In 2010, the company’s net income is $10,000. The company also declared and paid dividend of $5,000. The company did not issue any new stock, nor has it bought back any of its outstanding shares during 2010. What’s the owner’s equity balance at the end of 2010? Answer: Total Assets 1/1/2009: $80,000 Nov. 2009: Net income in 2009: Net income in 2010: Dividend in 2010: = Liabilities $25,000
+ Common Stock $55,000 +$10,000
+ Retained Earnings 0
+$6,000 +$10,000 -$5,000
The total owner’s equity at the end of 2010 should be: $55,000 + 10,000 + 6,000 + 10,000 – 5,000 = $76,000
Problem 4. Transaction analysis (42 points)
Pumpkin Auto Service Company had the following transactions in the month of October 2010:
3) 10/1 4) 10/15 5) 10/20
6) 10/31 7) 10/31
Made cash sales of $4,000. The product sold (auto parts) costs the company $2,000. Signed...
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