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Accounting and Audit – Comprehensive Exam 1

BASIC RULES AND INSTRUCTIONS TO THE EXAM

Exam is OPEN-BOOK and OPEN-NOTES format.

Exam length is 100 minutes total + 5 minutes for packing and submission. Maximum possible score – 100
points + 10 points extra bonus.

Exam consists of two sections: Theoretical part – 40 points maximum, problem solving part – 70 points
maximum.

Start time: 9:10 AM, 20/02/23

Latest submission time: 10:50 AM, 20/02/22

Zero tolerance to cheating and plagiarism! Violation of this rule will result in a penalty: from minus 10%
to the score of your exam paper up to full cancellation of the result, depending on the degree of plagiarism
detected and upon discretion of the Instructor.

In case of any arising questions during the exam raise your hand and Instructor will approach to you.

Basic recommendations:

- read instructions of the exercises and problems carefully, make sure you clearly understood the question;

- write (type) clearly, so that Instructor could understand what you’ve written/chosen;

- start new exercise/problem on a new sheet, do not separate financial statement/journal entry into two
pages/sheets of paper, specify the number of a problem, on which you are working on, in answer sheets;

- if you are unsure on the answer do not waste time and get stuck on the question, since you are limited on
time! Go to the next question/exercise and return to that question later.

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 Part 1. Multiple choice questions (24 points total; each worth 2 points):

Indicate the best (correct) answer for each question in the space provided.
1 The best definition of an accounting system is:
a Journals, ledgers, and worksheets.
b Manual or computer-based records used in developing information about an
entity for use by managers and also persons outside the organization.
c The personnel, procedures, devices, and records used by an entity to develop
accounting information and communicate this information to decision makers.
d The concepts, principles, and standards specifying the information which should
be included in financial statements, and how that information should be
presented.

2 Which of the following is generally not considered one of the general purpose financial
statements issued by a corporation?
a Income statement forecast for the coming year.
b Balance sheet.
c Statement of financial position.
d Statement of cash flows.

3 All of the following are characteristics of management accounting, except:

a Reports are used primarily by insiders rather than by persons outside of the
business entity.
b Its purpose is to assist managers in planning and controlling business operations.
c Information must be developed in conformity with generally accepted accounting
principles or with income tax regulations.
d Information may be tailored to assist in specific management decisions.

4 Of the following objectives of financial reporting, which is the most specific?

a Provide information useful in assessing amount, timing, and uncertainty of future
cash flows.
b Provide information useful in making investment and credit decisions.
c Provide information about economic resources, claims to resources, and changes
in resources and claims.
d Provide information useful to help the enterprise achieve its goals, objectives,
and mission.

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5 The financial statements of a business entity:
a Include the balance sheet, income statement, and income tax return.
b Provide information about the profitability and financial position of the company.
c Are the first step in the accounting process.
d Are prepared for a fee by the Financial Accounting Standards Board.

6 A balance sheet is designed to show the financial position of an entity:

a At a single point in time.
b Over a period of time such as a year or quarter.
c At December 31 of the current year.
d At January 1 of the coming year.

7 Accounts payable and notes payable are:

a Always less than the amount of cash a business owns.
b Creditors.
c Written promises to pay a certain amount, plus interest, at a definite future date.
d Liabilities.

8 The balance sheet of Aurora Designs includes the following items:

Accounts Receivable Cash
Capital Stock Accounts Payable
Equipment Supplies
Notes Payable Notes Receivable

This list includes:

a Four assets and three liabilities.
b Five assets and three liabilities.
c Five assets and two liabilities.
d Six assets and two liabilities.

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9 An accounting entity may best be described as:
a An individual.
b A particular economic unit.
c A publicly owned corporation.
d Any corporation, regardless of size.

10 Recognizing revenues and expenses over the same business transaction can be
attributed to the following accounting principle:
a Matching principle.
b Realization principle.
c Double-entry accounting.
d Accrual basis of accounting.

11 Recognizing revenues and expenses whenever business transaction has occurred, i.e.
services were rendered or provided, rather than when cash is being paid/received for
such transaction, illustrates the principle of:
a Matching principle.
b Cash basis of accounting.
c Double-entry accounting.
d Accrual basis of accounting.

12 Conservatism principle of accounting advises that accountants should never do the

following regarding balance items of the company:
a Understate assets and overstate liabilities.
b Understate assets and understate liabilities.
c Overstate assets and overstate liabilities.
d Overstate assets and understate liabilities.

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Part 2. True or False (16 points total; each worth 2 points):

Read each statement. If you agree with a statement, choose “True”. If you disagree with a
statement, choose “False”.

1. Keeping the value of fixed assets at historical cost rather than adjusting to current market value
is adherent to the cost principle of accounting.

True False

2. Ignoring the value of fixed assets estimated by independent appraisal companies is in

compliance with the objectivity principle of accounting.

True False

3. If assets total $480,000 and liabilities total $340,000, the owners' equity is $820,000
(=$480,000 + $340,000).

True False

4. There are two sources for increasing owners’ equity.

True False

5. Retained earnings as of the year-end are being adjusted to net income earned over the financial
year and amount of dividends paid, attributed to the performance of the company for the same
financial year.
True False

6. Purchasing an asset for cash will increase owners' equity.

True False

7. One of the basic rules of double-entry accounting is that the total of all debits and the total of
all credits must be equal.

True False

8. A credit is an amount entered on the right-hand side of a ledger account.

True False

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Part 3. Quick Exercise on Balance Sheet (worth 16 points total):

Presented below is the balance sheet for Eurodent Dentistry on January 1 of the current year.

EURODENT DENTISTRY
Balance Sheet
As of January 1, 2019
Assets Liabilities & Stockholders’ Equity
Cash .................................. $ 15,000 Liabilities:
Accounts receivable............ 23,250 Accounts payable ................................... $ 33,750
Land .................................. 142,500 Total liabilities..................................... $ 33,750
Building.............................. 168,750 Owners’ equity:
Equipment........................... 26,250 Capital stock........................................ 342,000
Total liabilities and
Total assets.......................... $375,750 owners’ equity........................................... $375,750

During the first five days of January, the following transactions occurred:
Jan 2 The business borrowed $55,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $22,500 cash.
4 Equipment was purchased for $48,500 on credit.
5 The business collected $17,000 of its accounts receivable and paid off $12,250 of its accounts
payable.

1. Indicate your answer to each of the following questions in the space provided (10 points total).
1 On January 6, total assets of the business amount to:
_____________________
2 On January 6, owners’ equity amounts to:
_____________________
3 On January 6, the liability for accounts payable is:
_____________________
4 On January 6, accounts receivable amount to:
_____________________
5 On January 6, the amount of cash owned by the business is:
_____________________

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2. Refer to the above data. In the table below indicate the effects of each mentioned above transactions to
company’s assets, liabilities and owner’s equity. Put I – for Increase, D – for Decrease and NE – for No
Effect (6 points total):
COPY THE TABLE BELOW TO THE ANSWER SHEET AND FILL IT IN THE ANSWER SHEET.

Date of transaction Assets Liabilities Owner’s Equity

Jan 2

Jan 3

Jan 4

Jan 5

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 Part 4. Problem solving on Balance Sheet (worth 14 points total):
Presented below is the balance sheet for Smart Kids Academy on January 1 of the current year.

SMART KIDS ACADEMY

Balance Sheet
As of January 1, 2020
Assets Liabilities & Stockholders’ Equity
Cash .................................. $ 20,000 Liabilities:
Accounts receivable............ 51,000 Accounts payable ................................... $ 65,000
Land .................................. 190,000 Total liabilities..................................... $ 65,000
Building.............................. 225,000 Owners’ equity:
Equipment........................... 35,000 Capital stock........................................ 456,000
Total liabilities and
Total assets.......................... $521,000 owners’ equity........................................... $521,000

During the first few days of January, the following transactions occurred:
Jan 2 Equipment was purchased for $48,000 on credit.
2 The Academy collected $36,000 of its accounts receivable and paid off $43,000 of its
accounts payable.
3 The Academy borrowed $100,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $87,000 cash.
Instructions:
Based on the above data, prepare the balance sheet for Smart Kids Academy on January 4 of the
year 2020. Hint: care about overall presentation of the balance sheet.

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ANSWER SHEET
Part 5. Problem solving on the Accounting Cycle and Revenue/Expense Recognition (worth 30 points
total +10 points extra bonus):

Rich-Art Financial Advisors, Inc. had the following transactions during January 2019, its first month of
operations:
a On January 3 issued to Leslie Rich 9,000 shares of capital stock for $50 per share in exchange
for her investment in cash.
b On January 4 purchased office supplies for the amount of $400. Paid whole amount with cash;
c On January 10 borrowed $30,000 from a bank and signed a note payable due in three months.
d On January 15 earned revenue for advisory services provided to clients for the amount of $5000.
The whole amount is billed to clients and is expected to be paid by the end of January.
e On January 17 purchased office furniture costing $19,750; paid $6,000 cash and charged the
remaining balance on account in two equal payments. First payment is to be made by the end of
January and second payment is to be made by the end of February;
f On January 26 office manager realized that previously purchased on January 4 office supplies
now have run out (finished);
g On January 28 paid first half of the amount owed for office furniture.
h On January 29 received due payment from clients in full amount for the services provided in
January 15;
i On January 30 issued an additional 2,000 shares of capital stock to an individual who invests
$10,000 in the business.

Instructions:
1. Prepare general journal for the listed above transactions (include proper heading and provide
proper overall presentation) (20 points). Hint: You may use provided template in the answer
sheet for your convenience to solve this section;
2. Prepare general ledger for every balance sheet item based on your performed general journal
(include proper overall presentation; you may omit preparation of general ledger for revenue
and expense accounts) (10 points). Hint: You may use provided template in the answer
sheet for your convenience to solve this section;
3. For Bonus: Prepare trial balance for the month of January based on your performed general
ledger (include proper heading and provide proper overall presentation) (10 points);

END OF THE EXAM

ANSWER SHEET
ANSWER SHEET