Principles of Financial Accounting

Midterm Exam I
Professor Aleksander A. Aleszczyk

Name ________________________________________
Section ________________________________________

General instructions:
Please observe the Stern School’s Code of Conduct requirements. Do not discuss the
content of this exam with anyone until this evening. Failure to comply with this condition
will result in harsh consequences.

1. You have 1 hour and 10 minutes to complete the exam.

2. This exam is closed book. You may use nonprogrammable calculators.
3. This exam packet should have 13 pages.
4. Please check that you have all the pages. Do not begin until instructed to do so.
5. If a question is ambiguous, write your assumptions on the exam along with your answer.
You will receive credit provided your assumptions are necessary and reasonable.
6. Circle your answer in multiple choice questions and write your answers neatly in the space
provided.
7. Please use a pen – do not write in pencil.
8. You must turn in your exam packet before you leave.
9. Allocate your time appropriately, monitor your time and good luck!

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Part I: Shorter questions (43 points = about 30 minutes)
1. Footnotes are (3 points):
A) explanatory information in the statement of management's responsibility for preparation of
financial statements.
B) included in the audit report.
C) an appendix to the letter from corporate management.
D) an integral part of financial statement information.

2. Deferred expenses are initially recorded as assets and when they are later used, expenses will
increase and assets will decrease. (3 points)
A) True
B) False

3. Provide the full name of the US institution overseeing the auditors of public firms. (2 points)

Answer:

4. Which of the following is an example of an accrual? (3 points)

A) Wages incurred but not yet paid.
B) Revenue collected in advance from customer.
C) Purchase of equipment for use in the business.
D) All of the above.

5. The Goaling Company declared a $3,500 cash dividend on March 1, 2012 payable on April 2,
2012. The effect of the March 1st transaction on the Goaling Company would be to (3 points):
A) increase the balance in the dividend expense account and increase the balance in the dividend
payable account by $3,500.
B) decrease the balance in the cash account and decrease the balance in the retained earnings
account by $3,500.
C) Increase the balance in the dividend expense account and increase the balance in the retained
earnings account by $3,500.
D) increase the balance in the dividend payable account and decrease the balance in the retained
earnings account by $3,500.

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Name _____________________________
NYU email _____________________

6. On January 1, $10,500 of machinery was purchased. $500 cash was paid down and a 3-month,
12% note payable was signed for the balance. The January 1 transaction was properly recorded.
The appropriate adjusting Journal Entry for the interest as of January 31 is (4 points):
A) Dr Accrued interest payable 105
Cr Interest expense 105
B) Dr Interest expense 1200
Cr Accrued interest payable 1200
C) Dr Accrued interest payable 100
Cr Interest expense 100
D) Dr Interest expense 100
Cr Accrued interest payable 100

Calculations:

7. Which of the following direct effects on the accounting equation is not possible as a result of a
single business transaction which impacts only two accounts? (3 points)
A) An increase in an asset and a decrease in another asset.
B) An increase in an asset and an increase in stockholders' equity.
C) A decrease in stockholders' equity and an increase in an asset.
D) An increase in a liability and an increase in an asset.

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8. Which of the following describes the primary objective of financial accounting? (3 points)
A) To provide useful financial information only to stockholders.
B) To provide information about a business' future business strategies.
C) To provide useful financial information about a business to help external parties make
informed decisions.
D) To provide useful financial information about a business to help internal parties make
informed decisions.

9. Given the following transactions, what is the ending balance in the Cash account? Show your
calculations clearly for partial credit (4 points):
i. The owner started the company by investing $6,000 cash.
ii. The company paid $1,200 for 6 months' rent in advance.
iii. The company acquired $2,400 in merchandise inventory with one-half of the purchase
on account.
iv. The company sold merchandise inventory costing $1,500 for $3,100 on account.

A) $3,600 debit balance

B) $3,600 credit balance
C) $4,800 debit balance
D) $4,800 credit balance

Calculations:

10. Revenue may be recognized (3 points):

A) Before goods are delivered
B) After goods are delivered
C) When goods are delivered
D) Either before goods are delivered, after goods are delivered, or when goods are delivered.

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11. Which of the following transactions affects both the income statement and the statement of
cash flows? (3 points)
A) Selling stock in exchange for cash.
B) Declaring and paying a cash dividend.
C) Selling a product to a customer which creates an account receivable.
D) Paying employee wages as they are earned.

12. With regard to relationships among financial statements, which of the following is true?
(3 points)
A) The results of the statement of stockholders' equity affect the income statement.
B) The income statement affects the results of the statement of stockholders' equity.
C) The statement of cash flows affects the income statement.
D) The results of the statement of cash flows affect the statement of stockholders' equity.

13. Which of the following liability accounts is likely to be satisfied without a future cash payment?
(3 points)
A) Wages payable.
B) Unearned subscriptions revenue.
C) Accounts payable.
D) Taxes payable.

14. A calendar-year reporting company preparing its annual financial statements should use the
phrase "At December 31, 2015" in the heading of which of the following? (3 points)
A) On all of the required financial statements.
B) On only the income statement.
C) On the income statement and balance sheet, but not the statement of cash flows.
D) On the balance sheet only.

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Part II: Longer questions (27 points = about 20 minutes)
15. A company's January 1, 2018 balance sheet reported total assets of $150,000 and total
liabilities of $60,000. During January 2018, the company completed the following transactions:
i. paid a note payable using $10,000 cash (no interest was paid);
ii. collected a $9,000 accounts receivable;
iii. paid a $5,000 accounts payable; and
iv. purchased a truck for $5,000 cash and by signing a $20,000 note payable from a
bank.
The company's January 31, 2018 balance sheet would report which of the following? (5 points)
A) Assets Liabilities Stockholders' Equity
$150,000 $60,000 $90,000
B) Assets Liabilities Stockholders' Equity
$155,000 $65,000 $90,000
C) Assets Liabilities Stockholders' Equity
$160,000 $75,000 $85,000
D) Assets Liabilities Stockholders' Equity
$170,000 $100,000 $70,000

Calculations:

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16. On December 31, 2018, the manager of Jordan Creek Apartments noticed that four tenants
had not paid their December rent amounting to $500 each. What is the adjusting entry required
on December 31, 2018? (4 points)

Answer:

17. Give an example of an economic transaction that would result in an increase in revenue, and
provide a sample journal entry. (4 points)

Answer:

18. An accountant wrongly recognized revenue of $500 for services that had been prepaid, but
not yet delivered. Provide a correcting journal entry, labelling all affected accounts. (4 points)

Answer:

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19. Give an example of an economic transaction that would result in a decrease in accounts
payable, and provide a sample journal entry. (4 points)

Answer:

20. The following data pertains to Greenwold Manufacturing. Total assets at January 1, 20X7,
were $290,000; at December 31, 20X7, total assets were $334,000. During 20X7, sales were
$995,000; cash dividends declared were $10,000; and operating expenses (exclusive of cost of
goods sold) were $545,000. Total liabilities at January 1, 20X7, total liabilities were $105,000; at
December 31, 20X7, were $128,000. There was no additional paid-in capital during 20X7.
What was cost of goods sold for 20X7? Show your calculations clearly for credit. (6 points)

Answer:

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Part III: Business application (30 points = about 20 minutes)
21. Use Microsoft’s income statement to answer the following questions. Show calculations for
full marks. (8 points)
21a. What is the net income margin in 2019? (3 points)

Answer:

21b. Did the 2019’s net income margin improve relative to the prior year? (2 points)

Answer:

21c. Assuming that analysts predicted the Microsoft’s top line in 2019 to increase by 8% from
2018, would you expect a positive or negative stock market reaction at earnings announcement
(1 pt), and why (2 pt)? Ignore other considerations. (total 3 points)

Answer:

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22. Use Microsoft’s balance sheet to answer the following questions. Show calculations for full
marks. (22 points)
22a. What is the largest asset (2 pts) and its value (1 pt) on Microsoft’s balance sheet
at June 30, 2019? (total 3 points)

Answer:

22b. Demonstrate that this asset meets its definition. (3 points)

Answer:

22c. What is the current ratio in 2018? (3 points)

Answer:

22d. Examine retained earnings balances on Microsoft’s books. Assuming that Microsoft declared
and paid $5,332m in dividends in 2019, what would be the net income for 2019 (ignore the actual
amount in the income statement)? (4 points)

Answer:

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22e. Examine common stock and paid-in-capital balances on Microsoft’s books. Provide a full
journal entry for this change in the common stock account in 2019. (5 points)

Answer:

22f. Ignoring the current portion of long-term debt, examine Microsoft’s long-term debt balances
in 2018 and 2019. Answer the following three subparts (total 4 points)
Did Microsoft overall issue or repay more long-term debt during the year ending June 2019?
(2 pts)

Answer:

Would the net cash flow be positive or negative from this issuance/repayment? (1 pt)

Answer:

Would this information be in the operating, financing or investing section of the cash flow
statement? (1 pt)

Answer:

End of exam, well done!

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 Excerpts from Microsoft 2019’s 10-K

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