Accounting Chapters 5-8 Exam

A company receives a 10%, 120-day note for $1,500. The total interest due on the maturity date is

$1,500 × 0.10 × 120/360 = $50.00

Granite Company purchased a machine costing $118,800. Granite paid freight charges of $2,000. The machine requires special mounting and wiring connections costing $10,000. When installing the machine, $1,300 in damages occurred. Compute the cost recorded for this machine

$130,800.

principles of internal control

1. Establish responsibilities. 2. Maintain adequate records. 3. Insure assets and bond key employees. 4. Separate recordkeeping from custody of assets. 5. Divide responsibility for related transactions. 6. Apply technological controls. 7. Perform regular and independent reviews.

units of production

1. cost - salvage value / total units of production 2. depreciation per unit * number of units produced in the period = depreciation expense

Depreciation Expense

= (Cost − Salvage Value)/Estimated Useful Life

Inventory Turnover

= Cost of Goods Sold/Average Inventory

notes receivable

A promissory note is a written promise to pay a specified amount of money, usually with interest, either on demand or at a stated future date.

control of cash

An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Handling cash is separate from record keeping for cash. Cash receipts are promptly deposited in a bank. Cash payments are made by check or EFT.

An understatement of ending inventory will cause

An understatement of assets and equity on the balance sheet.

inventory costing under a peridodic system

Balance sheet: ending inventory <> income statement: cost of goods sold, physical flow does not need to follow cost flow

disposal of receivables

Companies can convert receivables to cash before they are due.

petty cash

Company sets up a petty cash system to avoid writing checks for small payments for items such as: Shipping fees, Minor repairs, Low-cost supplies.

The understatement of the ending inventory balance causes

Cost of goods sold to be overstated and net income to be understated.

cash

Currency, coins, and deposits in bank accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders

At the end of the day, the cash register tape shows $1,000 in cash sales but the count of cash in the register is $1,010. The proper entry to account for this excess is

Debit Cash $1,010; credit Sales $1,000; credit Cash Over and Short $10.

Brinker accepts all major bank credit cards, including First Savings Bank's, which assesses a 2.5% charge on sales for using its card. On May 26, Brinker had $4,800 in First Savings Bank Card credit sales. What entry should Brinker make on May 26 to record the deposit?

Debit Cash $4,680; debit Credit Card Expense $120; credit Sales $4,800.

On July 9, Mifflin Company receives an $8,500, 90-day, 8% note from customer Payton Summers to replace an account receivable. What entry should be made by Mifflin on the maturity date assuming the maker pays in full, and no adjusting entries have been made related to the note

Debit Cash $8,670; credit Interest Revenue $170; credit Notes Receivable $8,500.

Victory Company purchases equipment at the beginning of the year at a cost of $15,000. The equipment is depreciated using the straight-line method and has a useful life estimated to be 7 years with a $1,000 salvage value. The journal entry to record the first year's depreciation is

Debit Depreciation Expense $2,000, credit Accumulated Depreciation $2,000.

On October 12 of the current year, a company determined that a customer's account receivable was uncollectible and that the account should be written off. Assuming the direct write-off method is used to account for bad debts, what effect will this write-off have on the company's net income and total assets

Decrease in net income; decrease in total assets.

Accounts receivable turnover is calculated by

Dividing net sales by average accounts receivable.

The number of days' sales uncollected is used to

Estimate how much time is likely to pass before the current amount of accounts receivable is received in cash.

Which of the following procedures would weaken control over cash receipts that arrive through the mail?

For safety, only one person should open the mail, and that person should deposit the cash received in the bank at the end of each month.

Owning a patent

Gives the owner exclusive rights to manufacture and sell a patented item or to use a process for 20 years

cash over and short

If petty cashier fails to obtain a receipt for payment or over pays an amount, ______ will result. Petty cash payments report plus cash left in account will not total to the fund balance.

The checklist of steps necessary for approving an invoice for recording and payment, also known as the check authorization, is the

Invoice approval.

Consignor

Owner of all goods, merchandise is included in the inventory of the consigner

land improvements

Parking lots, driveways, fences, walkways, and lighting systems, depreciate over useful life of improvements

internal controls

Prenumbered inventory tickets, Counters have no inventory responsibility, Counters confirm existence, amount, and condition of inventory, Second count is taken by a different counter, Manager confirms all items counted only once

capital expenditures

Provide benefits for longer than the current period Recorded as an addition to the asset account Reported on the balance sheet.

In applying the lower of cost or market method to LIFO inventory costing, market is defined as

Replacement cost.

Which of the following is an example of an extraordinary repair? An oil change for a truck. Replacement of all florescent light tubes in an office. Carpet cleaning and repair. Replacing the roof on a manufacturing warehouse. Routine machine maintenance.

Replacement of all florescent light tubes in an office.

days sales in inventory

Reveals how much inventory is available in terms of the number of days' sales

cash equivalents

Short-term, highly liquid investments that are: 1. Readily convertible to a known cash amount. 2. Close to maturity date and not sensitive to changes.

inventory turnover

Shows how many times a company turns over its inventory during a period. Indicator of how well management is controlling the amount of inventory available

Days' sales in inventory

Shows the buffer against out-of-stock inventory.

bad debts

Some customers may not pay their account. Uncollectible amounts are referred to as bad debts. There are two methods for accounting this: Direct Write-Off Method Allowance Method

inventory costing method

Specific Identification, FIFO, LIFO, Weighted Average

declining balance

Step 1. straight-line rate = 100% / useful life Step 2. double-declining-balance rate = 2 * straight-line rate Step 3. depreciation expense = double-declining-balance rate * beginning-period book value

tax effect on costing methods

The Internal Revenue Service (IRS) requires that when LIFO is used for tax reporting, it must also be used for financial reporting. This is called the LIFO conformity rule

recording a dishonored note

The act of dishonoring a note does not relieve the maker of the obligation to repay the principal and interest due.

Which of the following events would cause a bank to reduce a depositor's account The depositor orders new checks through the bank at a cost of $50. The bank collects a note receivable and related interest on the depositor's behalf. The bank pays interest to the depositor on their account balance. There are deposits in transit on the account at month-end. The bank corrects an error from previous month by adding $75 to the depositor account.

The depositor orders new checks through the bank at a cost of $50.

cash managment

The goals of cash management are twofold: 1. Plan cash receipts to meet cash payments when due. 2. Keep a minimum level of cash necessary to operate.

computing maturity date

The maturity date of a note is the day the note (principal and interest) must be repaid.

recording a honored note

The principal and interest of a note are due on its maturity date.

lump-sum purchase

The total cost of a combined purchase of land and building is allocated based of their relative market values.

what is not a benefit to factoring receivables

There are no fees for factoring.

accounts receivable turnover

This ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. Net sales / average accounts receivable, net =

check

Used to withdraw money from the bank. Includes maker, signor of check; payee; and payer.

voucher system of control

Voucher is complete after invoice has been checked and approved Used to authorize recording obligation Certain information is required on the inside of a voucher Certain information is also required on the outside of a voucher.

accounts receivable

amount due from another party, most common is accounts and notes, others include interest, rent, and tax refund, A company must also maintain a separate account for customer that tracks how much that customer purchases, has already paid, and still owes

goods damaged or obsolete

are not reported in inventory if they cannot be sold, can be sold are included in inventory at net realize value, loss is recorded when damage or obsolescence occurs

banking activities

banks safeguard cash and provide detailed records of cash transactions. They provide services and documents that help control cash.

straight-line depreciation

cost - salvage value / useful life in periods =

financial statement effects of inventory costing methods: LIFO

cost of goods sold on income statement approximates its current costs

buildings

cost of purchase or construction, title fees, brokerage fees, attorney fees, taxes

weighted average

costs flow at an average of costs available, when a unit is sold the average cost of each unit in inventory is assigned to the cost of goods sold

fifo

costs flow in the order incurred, oldest cost = cost of goods sold, recent costs = ending inventory

lifo

costs flow in the reverse order incurred, recent costs = cost of goods sold, oldest costs = ending inventory

cash over and short overage

difference is credited to Cash Over and Short

cash over and short shortage

difference is debited to Cash Over and Short

revenue expenditures

do not materially increase the plant asset's life or capabilities Recorded as an expense in the current period Reported on the income statement

financial statement effects of inventory costing methods: FIFO

ending inventory approximates current cost

extraordinary repair

extensive repairs or improvements made to a company's long-term assets or fixed assets (like property, plant, and equipment) that extend the asset's useful life, increase its productivity, or enhance its capacity or efficiency.

fob shipping point

goods included in buyer's inventory when shipped

limitations of internal control

human error: carelessness misjudgement confusion, human fraud:intentionally defeating internal controls for personal gain, fraud triangle:opportunity pressure & rationolization, cost-benefit constraint: costs of internal controls must not exceed their benefits

disgarding plant assets

if cash > BV, record gain (credit) if cash < BV, record a loss (debit) if cash = BV, no gain or loss

determining inventory cost

includes all expenditures necessary to bring an item to a salable condition and location, other costs: shipping, storage, insurance, import duties

lower of cost or market

inventory must be reported at market value when market is lower than cost, defined as current replacement cost, can be applied: separately to each individual item, to major categories of assets, the whole inventory

inventory cost formula

invoice cost - discounts + other costs

Control of cash payments

is important as most large thefts are from payment of fictitious invoices Require all payments to be made by check. Limit access to accounting records except for those who have the authority to sign checks. Includes projected cash receipts and cash payments

internal control system

is used to monitor and control business activities. It includes the policies and procedures used to: protect assets, ensure reliable accounting, uphold company policies, promote efficient operations

physical count

most companies take this count of inventory at least once each year, is used to adjust the inventory account balance to the actual inventory available

interest computation

principle of the note * annual interest rate * time expressed in fraction of year =

cost determination

purchase price, all expenditures needed to prepare the asset for its intended use, acquisition cost includes all expenditures necessary to get the asset in place and ready for use = acquisition cost

machinery and equipment

purchase price, taxes, transportation charges, installing & assembling & testing, insurance while in transit =

Sarbanes-Oxley Act (SOX)

requires managers and auditors of public companies to document and certify the system of internal controls. The company must have effective internal controls, Auditors must evaluate internal controls, Violators receive harsh penalties of up to 25 years in prison with fines, Auditors' work is overseen by the Public Company Accounting Oversight Board(PCAOB)

net realizeable value

sales price minus selling costs

consignee

sells goods for owner, never reports consigned goods in inventory

financial statement effects of inventory costing methods: Weighted average

smooths out price changes

land

title insurance premiums, property taxes surveying fees, legal fees, real estate commissions, purchase price, this is not depreciable