FIRST PART: FINANCIAL ACCOUNTING

This part contains TWO independent exercises.

BOTH exercises must be attempted.

E1. MCQs

1. The following information was extracted from Alpha’s 2018 financial statements (all
amounts in EUR): cashed-in sales 2,000; paid purchases 1,000; depreciation expense
100; interest expense 50; decrease in trade receivables (between 31/12/2017 and
31/12/2018) 30; increase in trade payables (between 31/12/2017 and 31/12/2018) 60.
Interest paid is not classified as an operating cash flow. The cash flow generated by
operating activities in 2018 amounts to::
a) 1,240
b) 1,090
c) 1,010
d) 1,060

2. The increase in trade payables has what impact on an entity’s cash flow?
a) negative
b) no impact
c) positive
d) negative or positive

3. Which of the following is not a principle or convention used in accounting?

a) matching
b) incurring
c) accruals
d) prudence

4. Which of the following items is recognized as an asset?

a) Internally generated goodwill
b) An amount spent on research activities
c) Advertising costs that are expected to triple sales
d) A patent

5. The equity of Distribute SA comprises at the end of year 2015 (all amounts in EUR):
share capital 10,000, share premium 5,000, reserves 3,000, profit 1,200. During 2016
the company generates a profit of 600, distributes 500 as dividends and receives a
land from the owners as a contribution to capital with a value of 800. Distribute’s equity
and profit at the end of 2016 are:
a) 20,100 and 600, respectively
b) 20,100 and 100, respectively
c) 19,300 and 600, respectively
d) 19,300 and 1400, respectively
6. An entity purchased an equipment at the beginning of 2015 for 1,000 in cash and
200 to be paid later. Depreciation recorded for this equipment in 2015 is 150, and 175
for 2016. Additionally, an impairment of 50 was recognized for the same asset in 2016.
The carrying amount of the equipment at the end of 2016 is:
a) 625
b) 875
c) 825
d) 775

7. Share Co. has 1,000 shares in equity at a par value of 10 EUR. Share Co. receives
a building with a value of 3,000 EUR and 1,000 EUR in cash from its owners, for which
it issues shares at the market value of 25 EUR per share. Which of the following
statements is false, after all the above transactions?
a) Share’s equity increases by 4,000
b) After all these transactions, Share’s share capital is 10,000
c) Share’s premium share increases by 2,400
d) 160 shares are issued during this capital increase

8. Which of the following situations cannot generate the recognition of a provision:

a) A restructuring of the business
b) Selling goods with warranty
c) Being sued by a customer for a faulty product
d) An accrued liability

9. A company purchases merchandise for 2,000 EUR, half paid when purchased and
half to be paid later. It sells half of this merchandise for 1,800 EUR, half for cash and
half to be collected later. It also pays 300 EUR for the rent for next year. The profit or
loss generated by these operations is:
a) 500
b) 100
c) 800
d) 300

10. Purchasing cars by a car dealer represents an activity considered a part of the
company’s:
a) Investing cycle
b) Operating cycle
c) Financing cycle
d) Extraordinary activity
Use the following information for MCQs #11 and 12

11. Beta purchases at the beginning of 2016 a machine for 10,000 EUR, which it
intends to use for 5 years. The entity believes that it may sell the machine for 1,000
EUR at the end of its useful life. How much depreciation will the entity recognize for
the first year of use, by using the straight-line depreciation method?
a) 2,000 EUR
b) 1,800 EUR
c) 2,200 EUR
d) None of the above

12. How much depreciation will the entity recognize for the first year of use, by using
the double-declining balance depreciation method?
a) 4,000 EUR
b) 3,600 EUR
c) 3,000 EUR
d) 2,000 EUR

E2. From transactions to financial statements

The beginning balance sheet of Exam Corp. at the beginning of 2016 includes (all
amounts in EUR): accounts payable 300; equipment 600, short term bank loans 300;
finished goods 500, dividends payable 200, cash 300, share capital 400, accounts
receivable 200, retained earnings 400.
The following transactions occurred during 2016:
1. Wages expenses were recorded (but not paid) for 50;
2. Finished goods that had cost 250 were sold for 500: 250 on cash, the remaining
part on credit;
3. Suppliers are paid for 50;
4. Depreciation for the year was recorded for 100;
5. Dividends were paid for 100 (assume this payment is not classified as an
operating cash flow);
6. Shares in another company were bought and paid for 100 (to be resold within
12 months);
7. Part of the bank loan was repaid (100).
Required:
1) Prepare Exam’s income statement for 2016 (ignore any fiscal implications) (1
point).
2) Prepare Exam’s classified balance sheet at the end of 2016 (2 points).
3) Prepare Exam’s statement of cash flows for 2016 (3 points).
Solution
1) Prepare Exam’s income statement for 2016 (ignore any fiscal implications) (1
point).

Exam’s Income statement for

2016

Item Amount

Sales 500

Cost of goods sold -250

Wages expense -50

Depreciation -100
expense

Profit for the year 100

2) Prepare Exam’s classified balance sheet at the end of 2016 (2 points).

Balance sheet

Assets Amounts Equity and liabilities Amounts

Non-current assets 500 Shareholders’ equity 900

Equipment 500 Share capital 400

Retained earnings 400

Profit 100

Current assets 1.000 Current liabilities 600

Accounts receivable 450 Short-term bank loans 200

Finished goods 250 Accounts payable 250

Short term investments 100 Dividends payable 100

Cash 200 Wages payable 50

Total assets 1.500 Total OE & L 1.500

 3) Prepare Exam’s statement of cash flows for 2016, by the direct (3 points).

Statement of cash-flows Direct method

Type of CF (O,I,F) Inflow/outflow Heading of the flow Amount

Operating cash flows Inflows Collections from customers 250

Total inflows 250

Outflows Suppliers paid 50

Total outflows 50

Total OCF +200

Investing cash flow Inflows

Total inflows

Outflows Short term investments 100

Total outflows 100

Total FCF -100

Financing cash flow Inflows

Total inflows

Outflows Short term bank loans 100

Dividends paid 100

Total outflows 200

Total FCF -200

Overall cash change -100

Beginning cash balance 300

Ending cash balance 200