SungKyunKwan University, Business School

Introduction to Financial Accounting – Mid-Term Exam 1

1st Semester 2012

Name: Student ID:

Section A: Multiple-Choice Questions (2 marks each; Total 30 marks)

Choose the one best answer.
1. The accounting process involves all of the following except ( d )
a. identifying economic transactions that are relevant to the business.
b. communicating financial information to users by preparing financial reports.
c. recording economic events that change the financial position of the business.
d. reporting the predicted future performance of the business to users.
2. The common characteristic possessed by all assets is ( b )
a. long life.
b. future economic benefit.
c. tangible nature.
d. great monetary value.
3. Retained earnings at the end of the period is equal to ( b )
a. retained earnings at the beginning of the period plus net income minus liabilities.
b. retained earnings at the beginning of the period plus net income minus dividends.
c. net income.
d. assets plus liabilities.
4. The double-entry system requires that each transaction must be recorded ( a )
a. in at least two different accounts.
b. in two sets of books.
c. in a journal and in a ledger.
d. first as a revenue and then as an expense
5. A journal provides ( c )
a. the balances for each account.
b. information about a transaction in several different places.
c. a chronological record of transactions.
d. a list of all accounts used in the business.
6. Which of the following is false? ( a )
a. IAS 1 requires to follow the format of Assets – Liabilities = Equity for the
presentation of the balance sheet.
b. IAS 1 basically requires the presentation of assets and liabilities into separate
classification on the balance sheet as current and non-current.
c. Under IAS 1, companies can use either the function of expense method or the
function of nature method for the presentation of the income statement.
d. Under IAS 1, companies have a choice of presenting all items of income and
expense recognised in a period either in a single statement of comprehensive
income or in two statements comprising a separate income statement and a
statement displaying other comprehensive income.
7. A company must make adjusting entries ( d )
a. To ensure that the revenue recognition and expense recognition principles are
followed.
b. Each time it prepares an income statement and a statement of financial position.
c. To account for accruals or deferrals.
d. All of the above (a, b and c) are correct regarding adjusting entries.

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 SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1
1st Semester 2012

8. Which of the following reflect the balances of prepayment accounts prior to

adjustment? ( c )
a. Asset accounts are understated and expense accounts are understated.
b. Asset accounts are overstated and expense accounts are overstated.
c. Asset accounts are overstated and expense accounts are understated.
d. Asset accounts are understated and expense accounts are overstated.

9. Which of the following permanent account is changed during the closing process?
( b )
a. Share Capital-ordinary.
b. Retained Earnings.
c. Unearned Revenue.
d. None of the above.

10. Freight costs paid by a seller on merchandise sold to customers will cause an increase
( a )
a. in operating expenses for the seller.
b. in the selling expense of the buyer.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.

11. Cost of goods sold is determined only at the end of the accounting period in ( b )
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.

12. Which of the following expressions is incorrect? ( c )

a. Gross Profit – Operating Expenses = Operating Profit
b. Sales – Cost of Goods Sold – All Other Expenses = Net Income
c. Net income + Cost of Goods Sold = Gross Profit
d. Gross Profit + Cost of Goods Sold = Sales

13. A post-closing trial balance will show ( a )

a. only permanent account balances.
b. only temporary account balances.
c. zero balances for all accounts.
d. the amount of net income (or loss) for the period.

14. What is the approach of choosing an accounting method, when alternatives exist, that
will least likely overstate assets and net income? ( c )
a. Timeliness
b. Materiality
c. Prudence
d. Consistency
15. To be relevant, accounting information must: ( d )
a. improve the company’s internal control.
b. be presented on the balance sheet.
c. be recorded at historical cost.
d. be capable of making a difference in a decision.

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 SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1
1st Semester 2012

Section B: Short Answer Questions (Total 40 marks)

1. What are two fundamental qualitative characteristics according to the IASB’s

Conceptual Framework for Financial Reporting 2010?
(2 marks)
Relevance and Faithful Representation

2. One of the methods for the presentation of the income statement categorises all
operating costs into ‘cost of sales’, ‘distribution and selling costs’, ‘administrative
expenses’, and ‘other operating expenses’. What is the method called?
(2 marks)
The function of expense method OR Cost of sales method

3. IFRS standard is referred to as ( ) because it is more loosely framed and

allows for professional judgement. On the other hand, US GAAP is referred to as
( ) because it provides a rule for every situation.
(2 marks)
Principles-based, rules-based

4-7. On July 1, Mr. Young established a retail shop, SixTwelve. Prepare the journal entries
for the following transactions.
(10 marks)
On July 1, Mr. Old, a friend of Mr. Young invested €20,000 cash in the business in
exchange for ordinary shares.

July 1 Dr. Cash 20,000

Cr. Share capital - ordinary 20,000

On July 1, Mr. Young paid €100 cash for July rent for the shop.

July 1 Dr. Rent expense 100

Cr. Cash 100

On July 2, Mr. Young purchased merchandising inventory from JK Wholesaler Inc.

for €500 on account. SixTwelve uses a perpetual inventory system.

July 2 Dr. Merchandising inventory 500

Cr. Accounts payable 500

On July 3, Mr. Young sold merchandise for cash €200. The merchandise sold had a
cost of €130.

July 3 Dr. Cash 200

Cr. Sales 200
Dr. Cost of goods sold 130
Cr. Merchandise inventory 130

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 SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1
1st Semester 2012

8-9. Prepare the journal entries for the following transactions.

(10 marks)
On May 1, Hyehwa Supermarket purchased merchandise for $1,000 cash and $3,000
on credit (terms 1/10, n/30) from SungKyun Company, and Hyehwa also paid freight
costs $100 to Hyundai Delivery Co. Hyehwa Supermarket uses a periodic inventory
system.

May 1 Dr. Purchases 4,000

Freight-in 100
Cr. Cash 1,100
Accounts payable 3,000

On May 9, Hyehwa Supermarket paid SungKyun Company in full for May 1

transaction.

May 9 Dr. Accounts payable 3,000

Cr. Purchase discounts 30
Cash 2,970

10. 5M Co. has the following account balances at the end of fiscal year 2010. Compute
net sales, cost of goods sold and gross profit.
($)
Beginning inventory 400 Purchases 1,700
Ending inventory 600 Purchase returns and allowances 200
Sales 3,000 Purchase discounts 50
Sales returns and allowances 250 Freight-in 60
Sales discounts 100 Freight-out 40

(6 marks)

Net sales = 3,000 – 250 – 100 = 2,650

Net purchases = 1,700 – 200 – 50 = 1,450
Cost of goods sold = 400 + 1,450 + 60 – 600 = 1,310
Gross profit = 2,650 – 1,310 = 1,340

11. SKK Co. received $50,000 from customers in 2011. Of the amount received, $15,000
was from sales revenue earned on account in 2010. In addition, SKK Co. earned
$40,000 of sales revenue in 2011, which will not be collected until 2012. SKK Co.
paid $30,000 for expenses in 2011. Of the amount paid, $10,000 was for expenses
incurred on account in 2010. In addition, SKK Co. incurred $25,000 of expenses in
2011, which will not be paid until 2012. Compute 2011 cash-basis net income and
accrual-basis net income.
(8 marks)
Dr. Cash 50,000
Cr. Accounts receivable 15,000
Sales revenue 35,000
Dr. Accounts receivable 40,000
Cr. Sales revenue 40,000
Dr. Expenses 20,000
Accounts payable 10,000
Cr. Cash 30,000
Dr. Expenses 25,000
Cr. Accounts payable 25,000
Cash-basis net income = 50,000 – 30,000 = 20,000
Accrual-basis net income = (35,000 + 40,000) – (20,000 + 25,000) = 30,000
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 SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1
1st Semester 2012

Section C: Preparation of Income Statement and Balance Sheet (Total 30 marks)

An-Guk Company’s trial balance as at 31 March 2011 is as follows:
An-Guk Company
Trial Balance
March 31, 2011
(₩m)
Debit Credit
Cash 11,400
Accounts receivable 5,500
Supplies 1,000
Prepaid insurance 3,000
Merchandise inventory 9,500
Property, plant and equipment 22,000
Accumulated depreciation 4,000
Accounts payable 3,200
Unearned revenue 5,400
Mortgage payable 8,000
Share capital - ordinary 10,000
Retained earnings 4,500
Sales revenue 38,000
Cost of goods sold 17,700
Salaries expense 3,000
73,100 73,100

Additionally, you are informed as follows:

(a) A count shows ₩600m of supplies on hand at March 31.
(b) Depreciation on PPE for the period was ₩800m.
(c) The mortgage interest is 10% per year (The mortgage was taken out on January 1, 2011).
(d) The insurance expired during the period was ₩900m.
(e) Inventories costing $700m were sold and billed for $1,500m, but An-Guk has not yet received
cash from customers.
(f) Salaries of $1,200m incurred during March have not been paid yet.
(g) As of March 31, ₩600m of the previously recorded unearned revenue has been earned.

Prepare an income statement for the year ended 31 March 2011 and a balance sheet as at 31 March
2011 in forms that comply with IAS 1.

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 SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1
1st Semester 2012

(a) A count shows ₩600m of supplies on hand at March 31.

Mar 31 Dr. Supplies expense (1,000 – 600) 400
Cr. Supplies 400
(b) Depreciation on PPE for the period was ₩800m.
Mar 31 Dr. Depreciation expense 800
Cr. Accumulated depreciation 800
(c) The mortgage interest is 10% per year (The mortgage was taken out on January 1 2011).
Mar 31 Dr. Interest expense 200
Cr. Interest payable 200
(d) The insurance expired during the period was ₩900m.
Mar 31 Dr. Insurance expense 900
Cr. Prepaid insurance 900
(e) Inventories costing $700m were sold and billed for $1,500m, but An-Guk has not yet received
cash from customers
Mar 31 Dr. Accounts receivable 1,500
Cr. Sales revenue 1,500
Dr. Cost of goods sold 700
Cr. Merchandising inventory 700
(f) Salaries of $1,200m incurred during March have not been paid yet.
Mar 31 Dr. Salaries expense 1,200
Cr. Salaries payable 1,200
(g) As of March 31, ₩600m of the previously recorded unearned revenue has been earned.
Mar 31 Dr. Unearned revenue 600
Cr. Sales revenue 600

An-Guk Company
Adjusted Trial Balance
March 31, 2011
(₩m)
Debit Credit
Cash 11,400
Accounts receivable 5,500 + 1,500 =
7,000
Supplies 1,000 – 400 = 600
Prepaid insurance 3,000 – 900 = 2,100
Merchandise inventory 9,500 – 700 = 8,800
Property, plant and equipment 22,000
Accumulated depreciation 4,000 + 800 = 4,800
Accounts payable 3,200
Unearned revenue 5,400 – 600 = 4,800
Mortgage payable 8,000
Share capital - ordinary 10,000
Retained earnings 4,500
Sales revenue 38,000 + 1,500 + 600 =
40,100
Cost of goods sold 17,700 + 700 =
18,400
Salaries expense 3,000 + 1,200 =
4,200
Supplies expense 400
Depreciation expense 800
Interest expense 200
Interest payable 200
Insurance expense 900
Salaries payable 1,200
76,800 76,800

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 SungKyunKwan University, Business School
Introduction to Financial Accounting – Mid-Term Exam 1
1st Semester 2012

An-Guk Company
Income Statement
For the year ended March 31, 2011
(₩m)
Sales Revenue 40,100
Cost of goods Sold 18,400
Gross Profit 21,700
Other expenses
Salaries expense 4,200
Supplies expense 400
Depreciation expense 800
Interest expense 200
Insurance expense 900 6,500
Net Income 15,200

An-Guk Company
Balance Sheet (Statement of Financial Position)
March 31, 2011
(₩m)
Current assets
Cash 11,400
Accounts receivable 7,000
Supplies 600
Prepaid insurance 2,100
Merchandise inventory 8,800
29,900
Non-current assets
Property, plant and equipment 22,000
Less Accumulated depreciation 4,800 17,200
Total assets 47,100

Current liabilities
Accounts payable 3,200
Unearned revenue 4,800
Interest payable 200
Salaries payable 1,200
9,400
Non-current liabilities
Mortgage payable 8,000
Total liabilities 17,400

Equity
Share capital - Ordinary 10,000
Retained Earnings 19,700
29,700
Total liabilities and equity 47,100

Note:
Retained earnings (19,700) = Opening retained earnings (4,500) + Net Income (15,200) – Dividends (0)