What is the distinguishing characteristic between accounts receivable and notes receivable?

Sheet1
SECTION I: MULTIPLE-CHOICE (30 possible points)
Please complete the following statements or questions by placing the appropriate letter in the blank adjacent to the
item number. The value of each correct answer is 2 points.
____ 1. What is the name of the branch of accounting concerned with providing managers and administrators with
information to facilitate the planning and control of business operations?
A. Management accounting
B. Auditing
C. Financial Accounting
D. Bookkeeping
____ 2. Which of the following invests funds into a business and is considered an owner?
A. A stockholder
B. A creditor
C. A bank
D. A lender
____ 3. Which one of the following is not an external user of financial statements?
A. Suppliers
B. Creditors
C. Financial analysts
D. The controller
____ 4. Which financial statement would you refer to in order to determine whether a company owed funds to
creditors?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Both the balance sheet and the income statement
____ 5. If an investor can use accounting information for two different companies to evaluate the types and
amounts of expenses, the information is said to have the quality of
A. Consistency
B. Comparability
C. Neutrality
D. Understandability
____ 6. Walsh Company applies the consistency convention. What does this mean?
A. Walsh uses the same names for all its expenses as its competitors.
B. Walsh has selected particular accounting principles that can never be changed.
C. Walsh applies the same accounting principles each accounting period.
D. Walsh applies the same accounting principles as its competitors.
____ 7. Which one of the following items is reported as a current asset on a classified balance sheet?
A. Inventory
B. Accounts Payable
C. Common Stock
D. Land
BSC401 MIDTERM EXAM
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SECTION I: MULTIPLE-CHOICE (Cont.)
____ 8. Which one of the following is a correct expression of the accounting equation?
A. Assets + Liabilities = Owners’ Equity
B. Assets = Liabilities – Owners’ Equity
C. Assets + Owners’ Equity = Liabilities
D. Assets = Liabilities + Owners’ Equity
____ 9. Which of the following would not be considered to be an intangible asset?
A. Franchises
B. Copyrights
C. Investments
D. Goodwill
____10. A computer is purchased on credit by signing a 5-year note. Identify the effects on the accounting
equation.
A. Assets increase and liabilities increase
B. Assets increase and owners’ equity increases
C. Liabilities increase and owners’ equity decreases
D. Liabilities decrease and assets decrease
____11. The term credit refers to which of the following?
A. An entry to decrease an account.
B. An event is unfavorable
C. An entry to increase an account
D. The right hand side of an account
____12. Which of the following is an attribute used to measure many assets that are recognized on a balance sheet
because it is more objective and verifiable?
A. Market value
B. Historical cost
C. Liquidation value
D. Current replacement cost
____13. Effective cash management and control includes all of the following except
A. The use of a petty cash fund
B. Bank reconciliations
C. Short-term investments of excess cash
D. Purchase of stocks and bonds
____14. Among the assets listed below, which one is considered the most liquid?
A. Short-term investments
B. Accounts receivable
C. Merchandise inventory
D. Prepaid expenses
____15. What is the distinguishing characteristic between accounts receivable and notes receivable?
A. Accounts receivable are usually current assets while notes receivable are usually long-term assets
B. Accounts receivable require payment of interest if not paid within the usual credit terms
C. Notes receivable result from credit sale transactions for merchandising companies, while accounts
receivable result from credit sale transactions for service companies.
D. Notes receivable result from a written promise to pay within a specified amount of time
BSC401 MIDTERM EXAM
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SECTION II: MATCHING (10 possible points)
Please match the numbered terms with their definitions by placing the letter that identifies the best definition in the
blank space next to the term. The value of each correct answer is 1 point.
____ 1. Credit
____ 2. Debit
____ 3. Generally Accepted Accounting Principles (GAAP)
____ 4. General Ledger
____ 5. Internal Control System
____ 6. Journal
____ 7. Matching Principle
____ 8. Materiality
____ 9. Recognition
____10. Trial Balance
A. The various methods, rules, practices, and other procedures that have evolved over time in response to the need
to regulate the preparation of financial statements.
B. The magnitude of an omission or misstatement in accounting information that will affect the judgment of someone
relying on the information.
C. A book, file, hard drive, or other device containing all of a company’s accounts.
D. An entry on the left side of an account.
E. An entry on the right side of an account.
F. A chronological record of transactions, also known as the book of original entry.
G. A list of each account and its balance at a specific point in time; used to prove the equality of debits and credits.
H. The process of recording an item in the financial statements as an asset, liability, revenue, or the like.
I. The association of revenue of a period with all of the costs necessary to generate the revenue.
J. Policies and procedures necessary to ensure the safeguarding of an entity’s assets, the reliability of its accounting
records, and the accomplishment of overall company objectives.
BSC401 MIDTERM EXAM
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SECTION III. SHORT-ANSWER (20 possible points)
Please give a brief answer to each of the following questions. Each question is worth a possible 5 points.
1. Explain the difference between internal and external users of a corporation’s financial information.
Give two examples of internal users and two of external users
2. Briefly explain the purpose of a Trial Balance.
3. Explain briefly the Revenue Recognition Principle. When should a publisher of magazines recognize
revenue?
4. An effective system of internal control is critical to protecting a company’s investment in three of its
major assets: cash, accounts receivable, and inventory. For each of the three assets, describe briefly
how a company might protect that asset.
BSC401 MIDTERM EXAM
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SECTION IV: PROBLEMS (40 possible points)
Please show all of your work for each problem.
PROBLEM 1 (15 possible points)
The accountant for Farly Corporation prepared the following list from the company’s accounting records
for the year ended December 31, 2012:
Sales Revenue $165,000 Cash $30,000
Accounts receivable $14,000 Selling expenses $44,000
Equipment $42,000 Common stock $17,000
Accounts payable $12,000 Interest income $3,000
Salaries and wages expense $40,000 Cost of goods sold $51,000
Inventories $22,000 Prepaid expenses $2,000
Income taxes payable $5,000 Income taxes expense $18,000
Notes payable $20,000 Retained earnings ??
REQUIREMENTS:
A. Prepare an Income Statement for Farly Corporation for Year Ended December 31, 2012.
B. Prepare a Balance Sheet for Farly Corporation as of December 31, 2012.
C. What was the amount of Retained earnings for Farly Corporation at the end of 2012?
BSC401 MIDTERM EXAM
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SECTION IV: PROBLEMS (Cont.)
PROBLEM 2 (15 possible points)
Hana, Inc. reported $52,000 of net income for 2011. Hana’s balance sheet at December 31, 2012, includes the
following amounts:
Wages payable $1,000
Inventory $26,000
Prepaid rent $3,000
Land $40,000
Cash $15,000
Accounts receivable $22,000
Accounts payable $25,000
Capital stock $40,000
Retained earnings $29,000
Income taxes payable $11,000
REQUIREMENTS:
A. Determine the current ratio and working capital of Hana.
B. Beyond the information provided in your answer to part A, what does the composition of the current assets
tell you about Hana’s liquidity?
C. What other information do you need to fully assess Hana’s liquidity? Why is liquidity important?
BSC401 MIDTERM EXAM
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SECTION IV: PROBLEMS (Cont.)
PROBLEM 3: (10 possible points)
Several transactions are listed below. Use the identification codes below (I, D, NE) to indicate the effects of each
transaction on the accounting equation, Assets = Liabilities + Owners' Equity. Write your answers in
the space provided under the accounting equation. An example is given before the first transaction.
I - Increase D – Decrease NE – No Effect
Owners'
Transactions Assets = Liabilities + Equity
Example: Capital stock is issued to investors in
the company. I NE I
a. Cash sales are made
b. Equipment is purchased on credit
c. Payment is made for the equipment that
was purchased on credit.
d. Sales are made on account.
e. Cash is collected from customers for
accounts receivable balances.
f. Dividends are declared and paid to
stockholders.
g. A utility bill is received and recorded;
the payment will be made later.
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