Accounting For Service Businesses: The Islamic University, Gaza Faculty of Commerce Accounting Department

The Islamic University, Gaza
Faculty of Commerce
Accounting Department
Accounting for Service Businesses

Mid Term - First Semester 2015/2016
Time Allowed: One hour
Student Name………………………………………… Student No……………………………
Ramadan Al-Omari, FCCA

28 November 2015
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Question No. 1 (10 marks)
Answer this Question on the blank sheet No. 6 at the end of this examination paper
Walid started to operate a small motel on July 1, 2014. It is now December 31, 2014. Walid has
no accounting training but has kept the following record of his cash receipts and payments:
Cash Receipts Cash Payments
Walid investment $100,000
Land and Buildings $160,000
Office equipment 10,000
5-year Bank Loan 100,000
Insurance 6,000
Wages 5,000
Maintenance 500
Office supplies 800
Utilities 900
Walid, salary 8,000
Rental sales revenue 50,000
Bank Loan interest (July – Sept) 1,000
Loan repayment 5,000
As Walid’s accountant, you discover the following additional information:

a. The office equipment has a five-year life with a trade-in value of $1,000.
b. The insurance was prepaid on July 1 for the entire year.
c. The wages are for the maintenance worker who has not yet been paid for five days during
the above period. The wage is $10.00 per hour and the work day is eight hours.
d. There are $200 in office supplies remaining in inventory.
e. Included in the $30,000 received for rental income to date is the amount for a tenant who
has prepaid for the entire year. The rent is $300 per month.
f. A rental tenant whose rent is $500 has not yet paid for December 2014.
g. The Bank Loan carries an annual interest of 4% payable on a quarterly basis in arrears.
Using accrual based accounting, prepare an income statement for the six months ending
December 31, 2014 and a balance sheet as at that date.
Question No. 2 Mark the correct answer (20 marks)
1. According to the business entity principle,

a. Only the effects to assets, liabilities, ownership equity, and other transactions of the
business entity are entered to the organization’s accounting records.
b. The ownership’s personal assets, debts, and expenses are also considered as part of the
business entity.
c. The primary national monetary unit is used for recording numerical values of business
exchanges and operating transactions.
d. A business entity will remain in operation indefinitely.
2. The accounting concept that allows small dollar amount items to be treated in an expedient
although incorrect manner is known as the
a. Prudence concept.
b. Materiality concept.
c. Monetary unit concept.
d. Business entity concept.
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3. The going concern principle requires that
a. The balance sheet values for long-lived assets such as land, building, and equipment are
shown at their market value.
b. The balance sheet values for long-lived assets such as land, building, and equipment are
shown at their actual acquisition cost.
c. A business entity operating as a proprietorship, partnership, or corporation is considered
to be separate and distinct from all personal transactions of its owners.
d. A business entity should report financial condition and profitability of its business
operation over a specific operating time period.
4. According to the time period principle

a. An accounting year is a fiscal year consisting of 12 months that begins on January 1 and
ends on December 31 of the same year.
b. The value of business transactions be recorded at the actual or equivalent cash cost.
c. A business entity should report financial condition and profitability of business
operations over a specific operating time period.
d. The cost of business assets will be recovered by way of profits that are generated by
successful operations over a period of 12 consecutive months.
5. According to the conservatism principle the inventory valuation should be

a. Higher rather than lower. Conservatism in this situation increases the cost of sales and
decreases the gross profit.
b. Lower rather than higher. Conservatism in this situation decreases the cost of sales and
c. Higher rather than lower. Conservatism in this situation decreases the cost of sales and
increases the gross profit.
d. Lower rather than higher. Conservatism in this situation increases the cost of sales and
6. “A business should never prepare financial statements that will cause balance sheet items
such as assets to be overstated or liabilities to be understated, sales revenues to be overstated, or
expenses to be understated”. This statement explains the
a. Matching principle.
b. Going Concern principle.
c. Materiality principle.
d. Conservatism principle.
7. The accounting principle that was established to ensure comparability and similarity of the
procedures and techniques used in the preparation of financial statements from one accounting
period to the next is known as the
a. Comparability principle.
b. Matching principle.
c. Consistency principle.
d. Materiality principle.
8. Revenue is defined as
a. The excess of current assets over current liabilities.
b. An inflow of cash received as a result of the disposal of fixed assets.
c. An inflow of assets received in exchange for goods or services provided.
d. The inflow of cash resulting from the collection of accounts receivable.
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9. According to the materiality concept, a material item relates to
a. Items that may affect the decision of a user of financial information are considered
important and must be reported in a correct way.
b. Purchase of fixed assets regardless of their acquisition cost.
c. Items of minor expenses that should be written off in the accounting period in which they
are incurred.
d. Market value of the inventory in the balance sheet.
10. The full disclosure principle states that

a. Any future event that may or will occur, and that will have a material economic impact
on the financial position of the business, should be disclosed to probable and potential
readers of the statements.
b. Situations might exist where estimates are necessary to determine the inventory values or
to decide an appropriate depreciation rate.
c. A business entity should complete an analysis to report financial condition and
profitability of its business operation over a specific operating time period.
d. The value of business transactions should be recorded at the actual cash cost.
11. The accounting principle that requires that for each accounting period all sales revenues
earned must be recognized, whether payment is received or not, and the recognition of all
operating expenses incurred, whether paid or not paid during the period, is known as the
a. Going concern principle.
b. Matching principle.
c. Materiality concept.
d. Consistency principle.
12. Expenses are defined as

a. An outflow of cash paid to settle accounts payable.
b. An outflow of cash paid to acquire fixed assets.
c. An outflow of assets consumed to generate revenue.
d. All of the above.
13. The accrual method requires

a. That expenses are recorded when payment is made, not necessarily when incurred.
b. That expenses are recorded when incurred and payment is actually made.
c. That expenses be recorded when incurred, not necessarily when payment is made.
d. None of the above.
14. The term departmental contributory income is defined as

a. The departmental revenue minus its direct costs and share of other indirect expenses.
b. The departmental revenue minus its direct costs.
c. The departmental revenue minus its direct costs plus its share of other departmental
income.
d. The departmental direct costs minus indirect expenses.
15. The departmental income statement provides the basis for

a. An effective evaluation of the entity’s general management.
b. An effective evaluation of the department’s performance over an operating period.
c. Preparing the entity’s balance sheet for an operating period.
d. The calculation of the corporation tax for the operating period.
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Student Name………………………………………. Student No……………………………….
16. The term net food cost implies that

a. All necessary adjustments to cost of food sales have been made, and represent the actual
cost incurred to produce the sales revenue.
b. Employee meals have been added to sales revenue to produce the total sales revenue.
c. No action has been made to adjust the cost of food sales for employee meals.
d. Cost of employee meals has been deducted from sales revenue.
17. Income before fixed charges is an important line on a hotel’s income statement because it
a. Measures the overall efficiency of the operation’s management.
b. Measures the efficiency of the departmental management.
c. Produces the net taxable income.
d. Shows the gross profit realized by the entity.
18. In a hospitality business, the fixed charges are not considered in the evaluation of the
operation’s management because
a. They are used in the evaluation of the individual departmental management.
b. They represent costs not controllable by the establishment’s operating management.
c. It is not acceptable accounting practice to include them in the entity’s income statement.
d. Their exclusion is in line with the generally accepted accounting principles.
19. A profit center is one that

a. Generates no direct revenue but incurs costs.
b. Receives sales revenue, but have little or no direct costs associated with their operation.
c. Has costs but also generates revenue that is directly related to that department.
d. Generates profits from sale of services only.
20. Responsibility accounting is based on the principle that

a. Each department has the responsibility for controlling its own costs and with its
department head accountable for the departmental profit achieved.
b. Allows top-level management to delegate responsibility and authority to department
heads so they can achieve departmental operating goals compatible with the overall
establishment’s goals.
c. Department heads or managers should be held accountable for their performance and the
performance of the employees in their department.
d. All of the above.
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Student Name………………………………………. Student No……………………………….
Answer Sheet for Question No. 1

Accounting For Service Businesses: The Islamic University, Gaza Faculty of Commerce Accounting Department

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The Islamic University, Gaza

Accounting for Service Businesses

Time Allowed: One hour

Student Name………………………………………… Student No……………………………

Ramadan Al-Omari, FCCA

As Walid’s accountant, you discover the following additional information:

Question No. 2 Mark the correct answer (20 marks)

1. According to the business entity principle,

4. According to the time period principle

5. According to the conservatism principle the inventory valuation should be

10. The full disclosure principle states that

12. Expenses are defined as

13. The accrual method requires

14. The term departmental contributory income is defined as

15. The departmental income statement provides the basis for

16. The term net food cost implies that

19. A profit center is one that

20. Responsibility accounting is based on the principle that

Answer Sheet for Question No. 1

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