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Sample Midterm Questions

BBUS 361 Intermediate Accounting Valerie Li

Selected from Winter 2007 Midterm

I understand that this is a closed book, closed note exam. I pledge that I have not received any information regarding the contents of this exam and that all work shown on this exam is my own. If I am aware or become aware of any persons who have used work other than their own to complete the exam and/or have improperly used their own notes during the exam, I will immediately notify Professor Matsumoto. I understand that failure to comply with these rules will result in failure of the course and possible expulsion from the University of Washington Business School.

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_____________________________ date

QUESTION 1 Miscellaneous Part A Multiple Choice: For each of the following questions, write the letter of the statement that you believe best answers the question in the space provided 1) Which of the following is not stated as a characteristic of future cash flows that good financial reporting should provide to users in the Statement of Financial Accounting Concepts No. 1: ______ a) b) c) d) e) uncertainty. operating. timing. amount. all of the above.

2) ABC Company uses an accelerated method (double-declining balance) to compute depreciation expense while most companies in their industry use the straight-line method. This decision results in: _______ a) b) c) d) a lack of comparability. a lack of consistency. an immaterial difference that is of no consequence. both a and b.

3) In the current debate over reporting assets and liabilities at their fair values, opponents might argue that: _______ a) reporting assets and liabilities at their fair values is cost-efficient. b) reporting assets and liabilities at their historical costs provides more relevant information to users. c) reporting assets and liabilities at their historical costs is not reliable. d) allowing managers to revalue assets and liabilities to their fair values will result in more earnings management. 4) Accounting standard setting is based on: a) b) c) d) Deductive reasoning. Inductive reasoning. A political process. The scientific method. _______

5) Which of the following is true with respect to Statement of Financial Accounting Concept No. 6, Elements of the Financial Statements: ______ a) b) c) d) e) Assets and Liabilities are defined in terms of changes in revenues and expenses. Revenues and Expenses are defined in terms of changes in assets and liabilities. Comprehensive Income is not an element of financial statements. Both b and c. None of the above.

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

6). HHF's debt-to-equity ratio is (rounded): A. 0.75. B. 1.13. C. 0.53. D. 1.80.

7). HHF's times interest earned ratio is (rounded): A. 3.47. B. 1.73. C. 2.47. D. 10.0. 8) HHF's long term debt-to-equity ratio equity is: A. 133.3%. B. 75%. C. 180%. D. 0%.

QUESTION 1 Accounting Cycle and Inferring Journal Entries Following is the unadjusted trial balance of Oahu Industries for the year ended December 31, 2006. The prior years (12/31/2005) adjusted trial balance is also shown (before closing entries). A column of differences between the two years adjusted trial balances is shown at the far right 12/31/2005 Adjusted Trial Balance Debit Credit Cash Accounts Receivable Interest Receivable Prepaid Rent Inventory Long-Term Notes Receivable Property, Plant, & Equipment Accumulated Depreciation Accounts Payable Gift Card Liability Wages Payable Common Stock Additional Paid-in-Capital Retained Earnings Sales Cost of Goods Sold Wages Expense Depreciation Expense Rent Expense Interest Revenue 4,600 9,300 600 900 14,300 15,000 105,000 28,000 16,200 3,200 600 6,000 42,000 46,700 105,000 79,000 9,600 7,000 3,600 1,200 248,900 248,900 90,100 11,100 5,200 273,900 12/31/2006 Unadjusted Trial Balance Debit Credit 3,000 11,000 400 1,080 17,500 10,000 126,000 28,000 19,400 8,600 7,000 46,000 53,700 110,600 9,900 6,600 700 12/31/2006 Adjusted Trial Balance Debit Credit 3,000 11,000 400 1,080 17,500 10,000 126,000 37,900 19,400 2,000 700 7,000 46,000 53,700 117,200 90,100 11,800 9,900 4,120 1,000 284,900 284,900

Adjustments Debit Credit

Year-toYear Difference (1,600) 1,700 (200) 180 3,200 (5,000) 21,000 9,900 3,200 (1,200) 100 1,000 4,000 7,000 12,200 11,100 2,200 2,900 520 (200)

700 9,900 -


600 273,900 18,680

1,080 400 18,680

Write out the necessary journal on 12/31/2006. a) The company has accrued interest earned $400 on the LT Note Receivable that was not paid by the end of the year.

b) The company sells pre-paid gift cards and recorded the sale as gift card liability. When cards are redeemed, gift card liabilities are reduced. On 12/31/2006, the company determined that a total of $2,000 of gift cards have yet to be redeemed. (3 pts).

c) The company incurred $11,800 wage expenses during 2006. $700 wage expenses has not been paid.

d) In 2006, the company paid $5,200 rent for an office space and recorded the entire amount as rent expense. At the end of the year, the company discovered that $1,080 is rent for 2007.

e) Depreciation on the companys property, plant and equipment totaled $9,900.

f) Prepare the closing entries for 12/31/2006. Sales Interest Revenue COGS and expenses Income summary RE

g) Evaluate the companys profitability in 2006. How well did the company perform? Profit margin NI in 2005? Return on assets in 2005 and in 2006? COGS as a % of sales in 2005 and in 2006? Operating expense as % of sales in 2005 and 2006?

g) Prepare the operating section of the statement of cash flows for the year ended 12/31/2006 using the indirect method. (14 pts) look at from year to year changes as the amounts Net income Add depreciation Adjustments for changes in current assets and liabs: . . Net cash flows from operations if assets were increased, then subtract them if assets were decreased, then add them

if liabs were increased, then add them if liabs were decreased, then subtract them

QUESTION 2 Income Statement Classification & Other Maui Company is the manufacturer of high-end surfboards and surf apparel. The company also owns and operates stores selling their product line. During the year ended December 31, 2004, the company had the following events occur (all $s in 000s): The company had a plant located in a foreign country. The building and equipment were expropriated by the government following an unexpected military coup. The plant and equipment were recorded on Mauis books at $800. The company received no compensation for the plant from the government and the company has no other foreign operations. The company also decided to reorganize one of their business segments consolidating a number of offices and plants and reducing their workforce by 800. The total estimated cost of the reorganization was $1,800, of which $1,600 was paid for in 2004. Several years earlier the company began manufacturing and marketing a line of sports beverages. The business venture was considered by management to be a failure and the company has decided to exit this line of business. In late 2004, the company sold the business to a third-party. Through the date of the sale, the segment had a net loss of $1000. The business was sold for a gain of $400. The company had sales of $23,000, cost of goods sold of $14,000, selling, general and administrative expenses of $6,800, and a gain on the sale of equipment of $400. The companys income tax rate is 35%. The company has 1,000,000 shares of common stock outstanding on December 31, 2004.

a) How do you think the events related to the disposal of the companys sporting drink line should be reported on the companys income statement? Justify your answer.

b) Prepare a multi-step income statement for Maui Company for the year-ended December 31, 2004 in good form.

QUESTION 3 Real World Financial Statements, Qualities of Information, & Other In the mid-1990s, Microsoft (the worlds largest software developer), adopted a new policy for recognizing revenue related to the sale of the companys Windows operating system and their Office software product. Under their new policy, a portion of the sales related to these products were deferred and recognized over a period of time. Following is a description of the companys policy as stated in the companys 1997 10-K: In fiscal 1996, Microsoft committed to integrating its Internet technologies, such as the Company's Internet browser, Microsoft Internet Explorer, into existing products at no additional cost to its customers. Given this strategy and other support commitments such as telephone support, Internet-based technical support, and unspecified product enhancements, Microsoft recognizes approximately 20% of Windows operating systems revenue over the product life cycles, currently estimated at two years. The unearned portion of revenue from Windows operating systems was $425 million and $860 million at June 30, 1996 and 1997. Since Office 97 is also tightly integrated with the rapidly evolving Internet, and subsequent delivery of new Internet technologies, enhancements, and other support is likely to be more than minimal, a ratable revenue recognition policy became effective for Office 97 licenses beginning in 1997. Approximately 20% of Office 97 revenue is recognized ratably over the estimated 18-month product life cycle. Unearned revenue associated with Office 97 totaled $300 million at June 30, 1997. The companys balance sheet, income statement and statement of cash flows for the years 1998 and 1999 are provided at the end of the exam (NOTE: these are years subsequent to the year from which the previous note was taken). a) Evaluate the companys new policy in terms of the two primary qualities of good financial reporting information. Do you agree with the companys choice of accounting policy? Why or why not?


b) Describe the effect the companys policy has on the companys income statement, balance sheet, and statement of cash flows relative to what it would be if the company were to record all revenues when the sale occurs.


Microsoft Corp., Consolidated Statement of Income ($s in millions) 1998 Revenue Operating Expenses: Cost of revenue Research and development Acquired in-process technology Sales and marketing General and administrative Other expenses Total Operating Expenses Operating income Investment income Noncontinuing items Income before income taxes Provision for taxes Net income $15,262 2,460 2,601 296 2,828 433 230 $8,848 $6,414 703 0 7,117 2,627 $4,490 1999 $19,747 2,814 2,970 3,231 689 115 $9,819 $9,928 1,803 160 11,891 4,106 $7,785


Microsoft Corp., Consolidated Balance Sheets ($s in millions) 1998 Current Assets: Cash and short-term investments Accounts receivable Other Total Current Assets Property and equipment Equity investments Other assets Total Assets Liabilities and Stockholders Equity Current Liabilities: Accounts payable Accrued compensation Income taxes payable Unearned revenue Other Total Current Liabilities Commitments and Contingencies Stockholders Equity: Convertible preferred stockshares authorized 100; shares issued and outstanding 13 Common stock and paid-in capitalshares authorized 8,000; shares issued and outstanding 2,408 and 2,470 Retained earnings Total Stockholders Equity Total Liabilities and Stockholders Equity 1999

13,927 1,460 502 15,889 1,505 4,703 260 22,357

17,236 2,245 752 20,233 1,611 14,372 940 37,156

759 359 915 2,888 809 5,730

874 396 1,607 4,239 1,602 8,718



8,025 7,622 16,627 22,357

13,844 13,614 28,438 37,156


Microsoft Corp., Consolidated Statements of Cash Flows ($s in millions) 1998 Operations: Net Income Depreciation and amortization Write-off of acquired in-process technology Gain on sale of Softimage, Inc. Unearned revenue Recognition of unearned revenue from prior periods Other current liabilities Accounts receivable Other current assets Net cash from operations Financing: Common stock issued Common stock repurchased Put warrant proceeds Preferred stock issued Preferred stock dividends Stock option income tax benefits Net cash from (used for) financing Investments: Additions to property and equipment Cash portion of WebTV purchase price Cash proceeds from sale of Softimage, Inc. Purchase of investments Maturities of investments Sales of investments Net cash used for investment Net change in cash and equivalents Effect of exchange rates on cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year Short-term investments Cash and short-term investments 1999

4,490 1,024 296 -3,268 (1,798) 208 (520) (88) 6,880

7,785 1,010 -(160) 5,877 (4,526) 966 (687) (235) 10,030

959 (2,468) 538 -(28) 1,553 554

1,350 (2,950) 766 -(28) 3,107 2,245

(656) (190) -(19,114) 1,890 10,798 (7,272) 162 (29) 3,706 3,839 10,088 13,927

(583) -79 (36,441) 4,674 21,080 (11,191) 1,084 52 3,839 4,975 12,261 17,236