AAFACF1.A trial exam.

(Sample exercises) Answer key

EXERCISE 1
1) The primary purpose of financial accounting is to
A) supply information for external users' decision making.
B) provide data for internal users' decision making.
C) produce data for income taxes.
D) organize the data for management.

2) Notes Payable are classified as

A) equity.
B) assets.
C) liabilities.
D) expenses.

3) Which of the following statements is false?

A) If you increase an asset account, you may increase a liability account.
B) If you increase an asset account, you may decrease an asset account.
C) If you decrease an asset account, you may increase an owners' equity account.
D) If you decrease an asset account, you may decrease an owners' equity account.

4) Expenses are
A) increases in net assets as a result of consuming resources in the process of providing
services to a customer.
B) decreases in net assets as a result of consuming resources in the process of providing
services to a customer.
C) increases in liabilities resulting from purchasing assets.
D) increases in retained earnings resulting from operations.

5) Activities or transactions that affect the income statement are primarily included in which section of
the statement of cash flows?
A) Operating
B) Investing
C) Financing
D) Net income

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AAFACF1.A trial exam. (Sample exercises) Answer key

EXERCISE 2
Analyze the following transactions in the balance sheet equation using the following worksheet.
1. Initial investment of $300,000 by the owner
2. Acquire equipment for $25,000 cash
3. Acquire inventory for $6,000 on credit
4. Obtain loan of $15,000 from the bank by signing a note payable
5. Cash sales of $2,000 and credit sales of $7,000. The cost of the merchandise was $5,000.
6. Returned $600 of inventory to supplier
7. Payment to creditor for amount of inventory purchase less amount returned
8. $1,200 of prepaid rent expired.
Accounts Prepaid Note Accounts retained
Cash receivable Inventory Rent Equipment Payable Payable PIC earnings
1
2
3
4
5
5
6
7
8

Answer:
Accounts Prepaid Note Accounts retained
Cash receivable Inventory Rent Equipment Payable Payable PIC earnings
1 +300,000 +300,000
2 -25,000 +25,000
3 +6,000 +6,000
4 +15,000 +15,000
5 +2,000 +7,000 +9,000
5 -5,000 -5,000
6 -600 -600
7 -5,400 -5,400
8 -1,200 -1,200

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AAFACF1.A trial exam. (Sample exercises) Answer key

Exercise 3

Cartell Paper Products

Balance Sheet
December 31, 2012 and 2011

12/31/12 12/31/11
Current Assets:
Cash $ 4,600 $ 3,100
Accounts Receivable 9,600 7,900
Inventory 17,500 18,600
Supplies 1,200 2,100
Prepaid Insurance 1,400 1,000
Total Current Assets 34,300 32,700
Long-term Assets:
Fixed Assets 71,000 58,000
Accumulated Depreciation (30,400) (26,500)
Patent 6,000 7,100
Total Long-term Assets 46,600 38,600
Total Assets $ 80,900 $ 71,300

Current Liabilities:
Accounts Payable $ 6,100 $ 4,900
Wages Payable 2,200 2,600
Interest Payable 800 1,000
Taxes Payable 2,300 1,600
Total Current Liabilities 11,400 10,100
Long-term Liabilities: Bonds Payable 20,300 24,000
Total Liabilities 31,700 34,100
Stockholders' Equity:
Common Stock 22,700 20,000
Retained Earnings 26,500 17,200
Total Stockholders' Equity 49,200 37,200
Total Liabilities and Stockholders' Equity $ 80,900 $ 71,300

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AAFACF1.A trial exam. (Sample exercises) Answer key

Cartell Paper Products

Income Statement
For the Year Ended December 31, 2012

Sales $147,600
Cost of Goods Sold 63,800
Gross Profit 83,800
Less Operating Expenses:
Wage Expense $ 40,100
Supply Expense 3,600
Insurance Expense 3,000
Depreciation Expense 3,900
Amortization Expense 1,100
Rent Expense 5,400 57,100
Operating Income 26,700
Interest Expense 2,600
Income before Taxes 24,100
Income Tax Expense 10,800
Net Income $ 13,300

Required

1) What was the cash collected from customers by Cartell Paper Products in 2012? 7,900+147,600-9,600
= $145,900
2) How much inventory did Cartell Paper Products purchase in 2012? 63,800+17,500-18,600 = $62,700
3) What was the cash paid to suppliers of inventory by Cartell Paper Products in 2012? 4,900+62,700-
6,100 = $61,500
4) What was the cash paid to employees by Cartell Paper Products in 2012? 2,600 +40,100-2,200 =
$40,500
5) What was the cash paid for supplies by Cartell Paper Products in 2012? (Assume all purchases of
supplies were for cash.) 1,200+3,600-2,100 = $2,700
6) What was the cash paid for income taxes by Cartell Paper Products in 2012? 1,600+10,800-2,300 =
$10,100
7) What was the net cash flow from operations for Cartell Paper Products in 2012?
Cash collections from customers 145,900
Cash paid to suppliers (61,500)
Cash paid to employees (40,500)
Cash paid for supplies (2,700)
Cash paid for income taxes (10,100)
Cash paid for insurance (3,400) (1,400+3,000-1,000)
Cash paid for rent (5,400)
Cash paid for interest (2,800) (1,000+2,600-800)
Total cash flow from operations $19,500

8) What was the cash paid from the purchase of fixed assets by Cartell Paper Products in 2012?
Assume no fixed assets were sold in 2012. 71,000-58,000 = $(13,000)
9) What was the net cash flow from investing activities for Cartell Paper Products in 2012? 71,000-
58,000 = $(13,000)
10) What were the dividends paid by Cartell Paper Products in 2012? 13,300 +17,200-26,500 = $4,000

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AAFACF1.A trial exam. (Sample exercises) Answer key

EXERCISE 4
The following data pertains to Joss Decorating for the year of 2017:

a. Salaries and wages: accrued, $175,000; paid in cash $200,000.

b. Depreciation, $50,000.
c. Interest expense, all paid in cash, $12,500.
d. Other expenses, all paid in cash, $112,000.
e. Income taxes accrued, $35,000; income taxes paid in cash, $33,000.
f. Bought plant and facilities for $365,000 cash.
g. Sales of $1,500,000, all on credit. Cash collections from customers, $1,250,000.
h. The cost of items sold was $750,000. Purchases of inventory totaled $825,000; inventory and
accounts payable were affected accordingly.
i. Cash payments on trade accounts payable were $700,000.
j. Issued long-term debt for $110,000 cash.
k. Paid cash dividends of $45,000.

Required

1. Prepare a statement of cash flows using the direct method for the year 2017
2. Prepare an income statement for the year 2017

Answer:

Joss Decorating
Statement of Cash Flows
For the Year Ended December 31, 2017

Cash from Operating Activities:

Cash received from customers $ 1,250,000
Cash paid to suppliers (700,000)
Cash paid to employees (200,000)
Cash paid for interest (12,500)
Cash paid for other expenses (112,000)
Cash paid for income taxes (33,000)
Net cash provided by operating activities 192,500

Cash from Investing Activities:

Purchased plant and facilities (365,000)
Net cash used by investing activities (365,000)

Cash from Financing Activities:

Issued long-term debt 110,000
Paid cash dividends (45,000)
Net cash provided by financing activities 65,000
Net decrease in cash $(107,500)
(as the beginning cash balance is unknown this cash flow statement ends here)

Joss Decorating

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AAFACF1.A trial exam. (Sample exercises) Answer key

Income statement
For the Year Ended December 31, 2017

Sales $ 1,500,000
COGS 750,000
Gross Margin 750,000

Expenses
Salaries & wages 175,000
Depreciation 50,000
Other expenses 112,000
Interest expense 12,500
Taxes 35,000

Net Income 365,500

EXERCISE 5
Below the financial statements for Roadrunner Tyres Co., a tyre retailing company, are shown:

Income statement 2016 (in €)

Net Sales 922,000

Cost of Goods Sold -580,900
Gross Profit 341,100
Selling Expenses -135,000
General Expenses -96,800
Income from operations 109,300
Interest Expenses -20,400
Income before taxes 88,900
Income taxes -31,100
Net income 57,800

Balance sheet, December 31 2016 - 2015 (in €)

2016 2015 2016 2015
Cash 26,000 31,000 Notes Payable 39,000 26,000
Accounts Receivable 103,000 85,000 Accounts Payable 65,000 101,000
Inventories 121,000 111,000 Long term debt 275,000 235,000
Prepaid Expenses 4,500 6,000 Common Stock 205,000 205,000
Longterm 15,000 10,700 Retained Earnings 171,500 113,700
investments
Property, land 486,000 437,000

Total Assets 755,500 680,700 Total liabilities and 755,500 680,700

equity

REQUIRED:

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AAFACF1.A trial exam. (Sample exercises) Answer key

A. Calculate the ROE for Roadrunner Tyres.

Average stockholders’ equity : (205,000+205,000+171,500+113,700) / 2 = 347,600
57,800 / 347,600 = 0.1662 = 16.62%
B. The market average ROE is 11.35%. Comment on Roadrunner’s ROE! Roadrunner’s ROE is
better than the market average, meaning they have a higher profitability
C. Calculate the Gross Profit Percentage for Roadrunner Tyres. 341,100 / 922,000 =0.3699 = 36.99%
D. Would an accounting firm have a higher or a lower Gross Profit Percentage than a retailing
company like Roadrunner’s? Why or why not: explain your answer! Higher, no or barely
COGS, so a GP % close to 100%
𝟐𝟔,𝟎𝟎𝟎+𝟏𝟎𝟑,𝟎𝟎𝟎+𝟒,𝟓𝟎𝟎
E. Calculate the quick ratio as per December 31, 2016. = 1.28
𝟑𝟗,𝟎𝟎𝟎+𝟔𝟓,𝟎𝟎𝟎
F. How did liquidity develop during 2016? Use an applicable ratio!
𝟑𝟏,𝟎𝟎𝟎+𝟖𝟓,𝟎𝟎𝟎+𝟔,𝟎𝟎𝟎
Quick ratio December 31, 2015: = 0.96
𝟐𝟔,𝟎𝟎𝟎+𝟏𝟎𝟏,𝟎𝟎𝟎
1.28 > 0.96 so liquidity improved.
(or use the current ratio)