MGMT 200 (Purdue) Exam 1| 150
QUESTIONS| WITH COMPLETE SOLUTION
Course
MGMT 200 (MGMT200)
1. Question: What are the four basic financial statements, and what is the primary purpose
of each?
Solution:
o Balance Sheet: Provides a snapshot of a company's financial position at a
specific point in time, detailing assets, liabilities, and shareholders' equity.
o Income Statement: Shows the company's financial performance over a period,
including revenues, expenses, and net income or loss.
o Statement of Changes in Equity: Illustrates changes in owners' equity over a
period, including investments, distributions, and retained earnings.
o Statement of Cash Flows: Reports cash inflows and outflows from operating,
investing, and financing activities over a period.
2. Question: Define accrual accounting and explain how it differs from cash-basis
accounting.
Solution:
o Accrual Accounting: Recognizes revenues when earned and expenses when
incurred, regardless of when cash transactions occur.
o Cash-Basis Accounting: Recognizes revenues and expenses only when cash is
received or paid.
o Difference: Accrual accounting provides a more accurate picture of a company's
financial position by matching revenues with related expenses in the period they
occur, while cash-basis accounting may not reflect all obligations and resources.
3. Question: A company purchased equipment for $50,000 on January 1. The equipment
has a useful life of 10 years and a residual value of $5,000. Using the straight-line
depreciation method, calculate the annual depreciation expense.
Solution:
o Depreciable Amount: $50,000 (cost) - $5,000 (residual value) = $45,000
o Useful Life: 10 years
o Annual Depreciation Expense: $45, = $4,500
4. Question: Explain the difference between accounts payable and notes payable.
Solution:
o Accounts Payable: Short-term liabilities arising from purchasing goods or
services on credit, typically due within 30 to 60 days.
, o Notes Payable: Written promises to pay a certain amount of money at a future
date, which can be short-term or long-term and often involve interest.
5. Question: What is the accounting equation, and why is it fundamental to financial
accounting?
Solution:
o Accounting Equation: Assets = Liabilities + Shareholders' Equity
o Importance: This equation forms the foundation of the double-entry
bookkeeping system, ensuring that the balance sheet remains balanced and
accurately reflects a company's financial position.
6. Question: A company has current assets of $150,000 and current liabilities of $100,000.
Calculate the current ratio and interpret its meaning.
Solution:
o Current Ratio: Current Assets / Current Liabilities = $150,000 / $100,000 = 1.5
o Interpretation: A current ratio of 1.5 indicates that the company has $1.50 in
current assets for every $1.00 of current liabilities, suggesting a reasonable level
of liquidity.
7. Question: Define the matching principle in accounting.
Solution: The matching principle states that expenses should be recognized in the same
period as the revenues they help to generate, ensuring that income statements reflect the
true profitability of a company during a specific period.
8. Question: What is the purpose of a trial balance in the accounting cycle?
Solution: A trial balance is prepared to ensure that total debits equal total credits after
posting all transactions to the ledger. It serves as a preliminary check for any recording
errors before preparing financial statements.
9. Question: A company issues 1,000 shares of $1 par value common stock at $15 per
share. Record the journal entry for this transaction.
Solution:
o Cash (Debit): 1,000 shares × $15 = $15,000
o Common Stock (Credit): 1,000 shares × $1 = $1,000
o Additional Paid-In Capital (Credit): $15,000 - $1,000 = $14,000
Journal Entry:
o Debit: Cash $15,000
o Credit: Common Stock $1,000
o Credit: Additional Paid-In Capital $14,000
, 10. Question: Explain the difference between a perpetual and a periodic inventory system.
Solution:
o Perpetual Inventory System: Continuously updates inventory records for each
purchase and sale, providing real-time inventory levels.
o Periodic Inventory System: Updates inventory records at specific intervals, such
as monthly or annually, requiring a physical count to determine inventory levels
and cost of goods sold.
11. Question: What are the key differences between FIFO and LIFO inventory valuation
methods?
Solution:
FIFO (First-In, First-Out): Assumes the oldest inventory items are sold first. Results in
lower cost of goods sold (COGS) and higher net income when prices are rising.
LIFO (Last-In, First-Out): Assumes the newest inventory items are sold first. Results in
higher COGS and lower net income when prices are rising, leading to tax benefits.
12. Question: A company reported net income of $50,000 and declared dividends of $10,000.
If the beginning retained earnings were $20,000, calculate the ending retained earnings.
Solution:
Formula: Beginning Retained Earnings + Net Income - Dividends = Ending Retained
Earnings
$20,000 + $50,000 - $10,000 = $60,000
13. Question: What is goodwill, and how is it recorded in accounting?
Solution:
Goodwill is an intangible asset that arises when a company acquires another company
for more than the fair value of its net assets.
It is recorded as an asset on the balance sheet but is not amortized; instead, it is tested
annually for impairment.
, 14. Question: If a company has total assets of $500,000 and total liabilities of $200,000,
calculate shareholders’ equity.
Solution:
Formula: Shareholders' Equity = Total Assets - Total Liabilities
$500,000 - $200,000 = $300,000
15. Question: Define operating, investing, and financing activities in the context of the
statement of cash flows.
Solution:
Operating Activities: Cash flows from core business operations (e.g., sales, expenses,
taxes).
Investing Activities: Cash flows from buying or selling assets (e.g., equipment, property).
Financing Activities: Cash flows from transactions with creditors and shareholders (e.g.,
issuing stock, repaying debt).
16. Question: A company borrowed $100,000 at an annual interest rate of 6%. Calculate the
interest expense for one year.
Solution:
Formula: Interest Expense = Principal × Interest Rate
$100,000 × 6% = $6,000
17. Question: What is the difference between tangible and intangible assets? Provide
examples.
Solution:
Tangible Assets: Physical assets (e.g., buildings, machinery, inventory).
Intangible Assets: Non-physical assets (e.g., patents, trademarks, goodwill).
18. Question: Define revenue recognition principle.
QUESTIONS| WITH COMPLETE SOLUTION
Course
MGMT 200 (MGMT200)
1. Question: What are the four basic financial statements, and what is the primary purpose
of each?
Solution:
o Balance Sheet: Provides a snapshot of a company's financial position at a
specific point in time, detailing assets, liabilities, and shareholders' equity.
o Income Statement: Shows the company's financial performance over a period,
including revenues, expenses, and net income or loss.
o Statement of Changes in Equity: Illustrates changes in owners' equity over a
period, including investments, distributions, and retained earnings.
o Statement of Cash Flows: Reports cash inflows and outflows from operating,
investing, and financing activities over a period.
2. Question: Define accrual accounting and explain how it differs from cash-basis
accounting.
Solution:
o Accrual Accounting: Recognizes revenues when earned and expenses when
incurred, regardless of when cash transactions occur.
o Cash-Basis Accounting: Recognizes revenues and expenses only when cash is
received or paid.
o Difference: Accrual accounting provides a more accurate picture of a company's
financial position by matching revenues with related expenses in the period they
occur, while cash-basis accounting may not reflect all obligations and resources.
3. Question: A company purchased equipment for $50,000 on January 1. The equipment
has a useful life of 10 years and a residual value of $5,000. Using the straight-line
depreciation method, calculate the annual depreciation expense.
Solution:
o Depreciable Amount: $50,000 (cost) - $5,000 (residual value) = $45,000
o Useful Life: 10 years
o Annual Depreciation Expense: $45, = $4,500
4. Question: Explain the difference between accounts payable and notes payable.
Solution:
o Accounts Payable: Short-term liabilities arising from purchasing goods or
services on credit, typically due within 30 to 60 days.
, o Notes Payable: Written promises to pay a certain amount of money at a future
date, which can be short-term or long-term and often involve interest.
5. Question: What is the accounting equation, and why is it fundamental to financial
accounting?
Solution:
o Accounting Equation: Assets = Liabilities + Shareholders' Equity
o Importance: This equation forms the foundation of the double-entry
bookkeeping system, ensuring that the balance sheet remains balanced and
accurately reflects a company's financial position.
6. Question: A company has current assets of $150,000 and current liabilities of $100,000.
Calculate the current ratio and interpret its meaning.
Solution:
o Current Ratio: Current Assets / Current Liabilities = $150,000 / $100,000 = 1.5
o Interpretation: A current ratio of 1.5 indicates that the company has $1.50 in
current assets for every $1.00 of current liabilities, suggesting a reasonable level
of liquidity.
7. Question: Define the matching principle in accounting.
Solution: The matching principle states that expenses should be recognized in the same
period as the revenues they help to generate, ensuring that income statements reflect the
true profitability of a company during a specific period.
8. Question: What is the purpose of a trial balance in the accounting cycle?
Solution: A trial balance is prepared to ensure that total debits equal total credits after
posting all transactions to the ledger. It serves as a preliminary check for any recording
errors before preparing financial statements.
9. Question: A company issues 1,000 shares of $1 par value common stock at $15 per
share. Record the journal entry for this transaction.
Solution:
o Cash (Debit): 1,000 shares × $15 = $15,000
o Common Stock (Credit): 1,000 shares × $1 = $1,000
o Additional Paid-In Capital (Credit): $15,000 - $1,000 = $14,000
Journal Entry:
o Debit: Cash $15,000
o Credit: Common Stock $1,000
o Credit: Additional Paid-In Capital $14,000
, 10. Question: Explain the difference between a perpetual and a periodic inventory system.
Solution:
o Perpetual Inventory System: Continuously updates inventory records for each
purchase and sale, providing real-time inventory levels.
o Periodic Inventory System: Updates inventory records at specific intervals, such
as monthly or annually, requiring a physical count to determine inventory levels
and cost of goods sold.
11. Question: What are the key differences between FIFO and LIFO inventory valuation
methods?
Solution:
FIFO (First-In, First-Out): Assumes the oldest inventory items are sold first. Results in
lower cost of goods sold (COGS) and higher net income when prices are rising.
LIFO (Last-In, First-Out): Assumes the newest inventory items are sold first. Results in
higher COGS and lower net income when prices are rising, leading to tax benefits.
12. Question: A company reported net income of $50,000 and declared dividends of $10,000.
If the beginning retained earnings were $20,000, calculate the ending retained earnings.
Solution:
Formula: Beginning Retained Earnings + Net Income - Dividends = Ending Retained
Earnings
$20,000 + $50,000 - $10,000 = $60,000
13. Question: What is goodwill, and how is it recorded in accounting?
Solution:
Goodwill is an intangible asset that arises when a company acquires another company
for more than the fair value of its net assets.
It is recorded as an asset on the balance sheet but is not amortized; instead, it is tested
annually for impairment.
, 14. Question: If a company has total assets of $500,000 and total liabilities of $200,000,
calculate shareholders’ equity.
Solution:
Formula: Shareholders' Equity = Total Assets - Total Liabilities
$500,000 - $200,000 = $300,000
15. Question: Define operating, investing, and financing activities in the context of the
statement of cash flows.
Solution:
Operating Activities: Cash flows from core business operations (e.g., sales, expenses,
taxes).
Investing Activities: Cash flows from buying or selling assets (e.g., equipment, property).
Financing Activities: Cash flows from transactions with creditors and shareholders (e.g.,
issuing stock, repaying debt).
16. Question: A company borrowed $100,000 at an annual interest rate of 6%. Calculate the
interest expense for one year.
Solution:
Formula: Interest Expense = Principal × Interest Rate
$100,000 × 6% = $6,000
17. Question: What is the difference between tangible and intangible assets? Provide
examples.
Solution:
Tangible Assets: Physical assets (e.g., buildings, machinery, inventory).
Intangible Assets: Non-physical assets (e.g., patents, trademarks, goodwill).
18. Question: Define revenue recognition principle.
