ACCT 102-15S1 test 1 questions PDF

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ACCT 102-15S1 Term Test One Friday 27 March 2015, 7.00-8.00pm ACCOUNTING AND FINANCIAL INFORMATION

This test counts for 20 per cent of the final grade for the course as a whole.     

The test question paper comprises 8 (eight) pages including this page. You have 60 minutes to complete the test. This paper comprises five (5) questions, totalling 100 marks. You should attempt all questions. The number of marks each question carries is printed next to each question.

Further instructions  This is a closed book test. No materials are allowed except normal writing materials and an approved calculator. Dictionaries, electronic or otherwise, are not allowed. Cell phones must be switched off and left in your bag at the front of the room.  Write all your answers (including your workings) in the Candidate’s answer book provided.  Please put your name, ID number and Course particulars where indicated on the Candidate’s answer book. At the end of the test, fill in the information asked for about the numbers of the questions you have answered and the number of pages you have used.  Write your answers legibly using blue or black pen. Do not use pencil or red ink.  Your answers must be entirely your work. You may face severe penalties if you violate this rule. ANALYSIS OF PAPER Minutes

% of Test

1.

Multiple choice

12

20%

2.

Financial reporting concepts

12

20%

3.

Financial statements

21

35%

4.

Entity

5

8%

5.

Fixed assets

10

17%

TOTAL

60

100%

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Question 1: Multiple Choice Ten multiple choice questions are set out below. Each question is identified by the capital letters A to J, and each question has a choice of five answers, a. to e. REQUIRED: In your answer book, write on separate lines the letters A to J to represent the ten multiple choice questions. Then, adjacent to each letter, write the letter (i.e. a., b., c., d., or e.) of the answer that you believe best fits the question. Each correct answer is worth 2 marks. Note that:  Only one answer should be given for each multiple choice question. If you indicate more than one answer for a question, no marks will be awarded for that question. 

An incorrect answer will be scored zero, the same as for offering no answer at all. There is no penalty for giving an incorrect answer. A.

For accounting information to be useful, the information must be: a. relevant and reliable only. b. relevant, understandable and able to be compared from year to year only. c. reliable and understandable only. d. relevant but not reliable. e. relevant, reliable, understandable and able to be compared from year to year.

B.

Which of the following statements about users of accounting information is incorrect? a. management is an internal user. b. tax authorities are external users. c. present creditors are external users. d. regulatory authorities are internal users. e. all of the above are correct.

C.

Profit will result during a time period when: a. assets exceed liabilities. b. assets exceed income. c. expenses exceed cash inflows. d. cash receipts exceed expenses. e. none of the above is correct.

D.

Performing services on account will have the following effects on the components of the basic accounting equation: a. increase income and decrease equity. b. increase assets and increase equity. c. increase income and increase liabilities. d. increase liabilities and increase equity. e. none of the above is correct. Question 1 continues on Page 3

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E.

M. Lamb withdrew cash for personal use on 30 June 2013. The effect on the basic accounting equation is: a. a decrease in assets and a decrease in equity. b. a decrease in assets and an increase in equity. c. a decrease in assets and a decrease in liabilities. d. a decrease in assets and an increase in liabilities. e. none of the above is correct.

F.

As at 30 June 2013, A. King has liabilities of $3,000 and equity of $2,500. What are the assets for A. King as at 30 June 2013? a. $500 b. $2,500 c. $3,000 d. $5,500 e. none of the above is correct.

G.

On the last day of the period, Jim Smith Ltd buys a $900 machine on credit. This transaction will affect the: a. income statement only. b. statement of financial position only. c. income statement and statement of cash flows. d. income statement, statement of changes in equity and statement of financial position. e. none of the above is correct.

H.

Current assets are listed: a. by liquidity. b. by importance. c. by longevity. d. alphabetically. e. all of the above.

I.

The twelve month accounting period for Ayseeseetee Limited ends on 30 June 2013. Which of the following would not be classified as a current asset? a. cash b. accounts receivable due 3 July 2014 c. inventories d. prepaid insurance e. all of the above would be classified as current assets.

J.

The financial statement that reports assets, liabilities and equity is the: a. income statement. b. statement of changes in equity. c. statement of financial position. d. statement of cash flows. e. both the income statement and balance sheet. TOTAL: 20 MARKS

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Question 2: Characteristics of Financial Information Below is a list of accounting-related terms, followed by ten statements labelled from (a) to (j). REQUIRED: In your answer book, write on separate lines the letters (a) to (j). For each of statements record one term from the list below that best matches the statement. (Note: since there are more terms than statements, some terms will not be used). Asset Audit Comparability Equity Expense Faithful representation Going concern Income

Intangible asset Recognition criteria Relevance Reliability Sustainability Timeliness Understandability Verifiability

a. Information that is capable of making a difference to the decisions made by users. b. Information available to decision-makers in time to be capable of influencing their decisions. c. Information in financial statements enables users to identify and understand similarities in, and differences among, items and/or entities. d. Information that is complete, neutral and free from error. e. The entity will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to cease its operations, or materially reduce the scale of its operations. f. A systematic examination of the financial statements of an organisation to ascertain how far the financial statements present a true and fair view of the concern. g. The residual interest in the assets of the entity after deducting all its liabilities. h. Revenue and gains. i. A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. j. An asset lacking physical substance, such as goodwill.

TOTAL: 20 MARKS

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Question 3: Financial Statements Jill has always wanted to own her own business. As she cycled home in July 2014 she noticed a cycle sales and repair business for sale. She went in and spoke to Bill, the business’s owner, who gave her some extracts from the business’s most recent draft financial statements which were for the year ended 31 March 2014. The extracts are reproduced in Appendix A at the end of this exam paper. Regrettably the page containing the cashflow statement was torn, so only part of the cashflow statement is available. Also, the notes to the accounts (including the statement of accounting policies) are missing.

REQUIRED: In your answer book, answer the following questions. a. Since the balance sheet reports that the business has total equity of $85,000, Jill is thinking of offering $85,000 for the business. Is this a reasonable suggestion? Why or why not? Illustrate your answer by selecting and discussing three balances in the balance sheet where the fair value may differ from what is reported in the financial statements. (12 marks) b. Why is the net profit after tax different from the net cashflow from operating activities? Provide two reasons why these amounts may differ. (5 marks) c. Name the key sections that are missing from the cashflow statement. (6 marks) d. Provide and discuss one reason why the income statement may not provide information that is useful for Jill in making decisions concerning the business. (4 marks) e. Briefly explain why closing inventory is deducted from purchases in calculating the cost of sales. (4 marks) f. Briefly explain how GST is treated in the financial statements. (4 marks) TOTAL: 35 MARKS

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Question 4: Entity Kim Baya loves collecting beads. In the past she occasionally traded beads on TradeMe, and was surprised at the prices she was able to get for her surplus beads. Recognising a gap in the market, she set up an on-line bead trading shop. This has been very successful and profitable. Kim operates as a sole trader. However, she is thinking of expanding the business and will need to raise additional funds to finance this expansion. REQUIRED: List and explain two possible benefits and two possible disadvantages to Kim of adopting a company structure for her business. TOTAL: 8 MARKS

Question 5: Fixed Assets Ma Sheen Limited (MSL) purchases a polishing machine costing $1,000 on 1 April 2013 for use in in its business. The directors of MSL estimate that the machine will have a useful life of five years, and will have a $nil value at the end of the five years. REQUIRED: a. Explain how the cost of this machine would be reflected in the balance sheet as at 31 March 2014 and in the income statement for the year ended on that date. (4 marks) b. Using MSL’s polishing machine as an example, explain the difference between straight line and accelerated depreciation. (6 marks) c. Provide an example of how MSL’s choice of depreciation policy might affect the decision made by a reader of MSL’s financial statements. (4 marks) d. In what circumstance might this machine have been recorded as a current asset by MSL, rather than as a non-current asset? (3 marks) TOTAL: 17 MARKS

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APPENDIX A

Bill's Bikes Income Statement Year ended 31 March 2014 2014

2013

199,000

196,000

97,000

16,000 95,000 111,000 15,000 96,000

102,000

100,000

52,000

19,000 26,000 5,500 50,500

Net profit before tax

50,000

49,500

Tax expense

14,000

13,860

$ 36,000

$ 35,640

Sales less cost of sales Opening inventory Purchases Closing inventory Total cost of sales

15,000 100,000 115,000 18,000

Gross profit less: Expenses Selling expenses Administration expenses Depreciation Total expenses

Net profit after tax

22,000 25,000 5,000

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APPENDIX A (cont’d)

Bill's Bikes Balance sheet As at 31 March 2014 2014

2013

21,000 5,000 45,000 71,000

1,500 6,000 25,000 32,500

Non-current assets Fixed assets

25,000

27,000

Total assets

96,000

59,500

11,000

7,500 1,200 1,800 10,500

$ 85,000

$ 49,000

10,000

10,000

75,000

3,360 35,640 39,000

$ 85,000

$ 49,000

Current assets Bank Accounts receivable Inventory

Current liabilities Accounts payable GST Payable Taxation payable

5,000 1,500 4,500

Net assets Equity Share capital Retained earnings Opening retained earnings Surplus for the year Closing retained earnings Total equity

Bill's Bikes Cashflow statement Year ended 31 March 2014 Cash from operating activities Cash received from customers:

39,000 36,000...