accounting exam 2

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet? The outcome is reasonably possible. The outcome is probable and can be reasonably estimated. The outcome is probable. The amount can be reasonably estimated.

The outcome is probable and can be reasonably estimated.

The year-end adjusting entry to recognize uncollectible accounts expense will: decrease liabilities and increase equity. increase assets and decrease equity. decrease assets and decrease equity. increase liabilities and increase equity.

decrease assets and decrease equity.

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be: $24,720 $24,000 $24,800 $25,920

$24,800 $24,000 × 8% × 5/12 = $800 interest payable; $24,000 notes payable + $800 interest payable = $24,800 total liabilities.

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000. Assume that Harding uses the units-of-production method when depreciating its equipment. Harding estimates that the purchased equipment will produce 1,000,000 units over its 5-year useful life and has salvage value of $34,000. Harding produced 265,000 units with the equipment by the end of the first year of purchase. Which amount below is closest to the amount Harding will record for depreciation expense for the equipment in the first year? $193,450 $157,145 $165,890 $125,200

$157,145 ($627,000 cost of equipment (33% of $1,900,000 purchase price) minus $34,000 salvage value) ÷ 1,000,000 units = $0.593 per unit; $0.593 × 265,000 units = $157,145

Chico Company paid $950,000 for a basket purchase that included office furniture, a building and land. An appraiser provided the following estimates of the market values of the assets if they had been purchased separately: Office furniture - $190,000; Building - $740,000, Land - $132,000. Based on this information, and rounding allocations to two decimal places, the amount of cost that would be allocated to the office furniture is closest to: $105,000. $171,000. $190,000. $316,667.

$171,000. $190,000 ÷ ($190,000 + $740,000 + $132,000) = 18% of total market value; $950,000 purchase price × 18% = $171,000 cost of furniture

On January 1, Year 2, Grande Company had a $16,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account. During Year 2, Grande provided $104,000 of service on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account. The amount of uncollectible accounts expense recognized on the Year 2 income statement is: $1,000. $320. $1,940. $2,080.

$2,080. $104,000 sales on account × 2% = $2,080 uncollectible accounts expense

Monroe Minerals Company purchased a copper mine for $120,000,000. The mine was expected to produce 50,000 tons of copper over its useful life. During Year 1, the company extracted 6,000 tons of copper. The copper was sold for $4,500 per ton. Assume that the company incurred $8,040,000 in operating expenses during Year 1. Based on this information, how much net income would Monroe report in Year 1? $12,600,000. $6,360,000. $14,400,000. $4,560,000.

$4,560,000. $120,000,000 ÷ 50,000 tons = $2,400 per ton; 6,000 tons × $4,500 = $27,000,000 revenue; 6,000 × $2,400 = $14,400,000 depletion expense; $27,000,000 revenue - $14,400,000 depletion - $8,040,000 operating expenses = $4,560,000 net income

Stubbs Company uses the perpetual inventory method. On January 1, Year 1, Stubbs purchased 400 units of inventory that cost $8.00 each. On January 10, Year 1, the company purchased an additional 600 units of inventory that cost $9.00 each. If Stubbs uses a weighted average cost flow method and sells 700 units of inventory for $16.00 each, the amount of gross margin reported on the income statement will be: $5,000. $6,020. $5,180. $5,250.

$5,180. [(400 × $8.00) + (600 × $9.00)] ÷ 1,000 = $8.60 per unit; 700 × $8.60 = $6,020 cost of goods sold; $11,200 sales - $6,020 cost of goods sold = $5,180 gross margin

Domino Company uses the aging of accounts receivable method to estimate uncollectible accounts expense. Domino began Year 2 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $76,500 and $5,800, respectively. During the year, the company wrote off $4,640 in uncollectible accounts. In preparation for the company's Year 2 estimate, Domino prepared the following aging schedule: Number of days Receivables % Likely to be past due amount uncollectible Current $ 104,000 1 % 0-30 45,000 5 % 31-60 9,920 10 % 61-90 4,440 25 % Over 90 3,800 50 % Total $ 167,160 What will Domino record as Uncollectible Accounts Expense for Year 2? $6,132 $4,640 $1,512 $7,292

$6,132 ($104,000 × 1%) + ($45,000 × 5%) + ($9,920 × 10%) + ($4,440 × 25%) + ($3,800 × 50%) = $7,292 estimated ending allowance balance; $5,800 beginning allowance balance + uncollectible accounts expense - $4,640 write-offs = $7,292 ending allowance balance; uncollectible accounts expense = $7,292 - $5,800 + $4,640 = $6,132

Farmer Company purchased equipment on January 1, Year 1 for $82,000. The equipment is estimated to have a 5-year life and a salvage value of $4,000. The company uses the straight-line depreciation method. At the beginning of Year 4, Farmer revised the expected life to eight years. The annual amount of depreciation expense for each of the remaining years would be: $4,400. $6,240. $7,040. $3,900.

$6,240. ($82,000 cost - $4,000 salvage value) ÷ 5 years = $15,600 original annual depreciation; $82,000 - ($15,600 × 3 years) = $35,200 book value at the time of revision; ($35,200 book value - $4,000 salvage value) ÷ 5 years of revised remaining useful life = $6,240 new annual depreciation

Anton Co. uses the perpetual inventory method. Anton purchased 400 units of inventory that cost $12.00 each. At a later date the company purchased an additional 600 units of inventory that cost $16.00 each. If Anton uses the FIFO cost flow method and sells 700 units of inventory, the amount of cost of goods sold will be: $8,400. $9,600. $10,400. $11,200.

$9,600 (400 × $12.00) + (300 × $16.00) = $9,600

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be: $770 inflow $1,400 inflow $38,520 outflow $1,120 outflow

1120 outflow $36,000 × 7% = $2,520 cash paid for interest on the note; $1,400 inflow from revenue − $2,520 outflow for interest = $1,120 outflow for operating activities. The repayment of principal is a financing activity.

Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% stated rate of interest that is payable in cash on December 31st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information: The total amount of liabilities shown on Jones's December 31, Year 2 balance sheet would be: $196,400. $191,600. $195,200. $194,000.

196400 $194,000 issue price + $1,200 amortization for Year 1 + $1,200 amortization for Year 2 = $196,400

Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31. Assuming Wayne issued the bond for 102½, the amount of interest expense appearing on the Year 1 income statement would be: $36,000. $15,000. $34,500. $37,500.

34500 $600,000 × 6% = $36,000 interest payment; $600,000 × 2½% = $15,000 premium/10 years = $1,500 amortization; $36,000 − $1,500 = $34,500 interest expense

Rainey Company's true cash balance at October 31 is $5,710. The following information is available for the bank reconciliation: Outstanding checks, $600 Deposits in transit, $450 Bank service charges, $90 The bank had collected an account receivable for Rainey Company, $1,000 The bank statement included an NSF check written by one of Ramsey's customers for $600. Based on this information Rainey's unadjusted book balance at October 31 is: $5,870. $5,400. $6,400. $5,490.

5,400- X unadjusted book balance - $90 bank service charges + $1,000 collection of account receivable - $600 NSF check = $5,710 true cash balance; x = $5,710 + $90 - $1,000 + $600; X = $5,400

Madison Company owned an asset that had cost $44,000. The company sold the asset on January 1, Year 4, for $16,000. Accumulated depreciation on the day of sale amounted to $32,000. Based on this information, the sale would result in: A $4,000 cash inflow in the financing activities section of the cash flow statement. A $16,000 cash inflow in the investing activities section of the cash flow statement. A $4,000 gain in the investing activities section of the statement of cash flows. A $16,000 increase in total assets.

A $16,000 cash inflow in the investing activities section of the cash flow statement. Cash flows are only affected by the $16,000 cash received on the sale. Cash flows are not affected by the book value of the asset. The $16,000 is reported as a cash inflow from investing activities. Total assets increased by $4,000, the difference between the $16,000 cash received and the $12,000 book value of the asset sold.

Which of the following would most likely not be expensed using the straight-line method? A patent. A timber reserve. A building. A copyright.

A timber reserve.

Which of the following is not a primary role of an independent auditor? Advise client on tax strategies All of these answer choices are correct. Determine whether a company's financial statements are materially correct Assume legal and professional responsibilities to the public

Advise client on tax strategies

How would accountants estimate the amount of a company's uncollectible accounts expense? Compute as a percentage of credit sales. Consult with trade association and business associates. Consider new circumstances that are anticipated to be experienced in the future. All of these answer choices are correct.

All of these answer choices are correct.

Which of the following is an internal control procedure used to safeguard a company's assets? Reconciliation of the bank statement Timely deposits of cash receipts into a checking account Separation of duties All of these answers choices are correct.

All of these answer choices are correct.

The amount of accumulated depreciation is shown on the: Balance sheet Statement of cash flows Income statement Statement of stockholder's equity

Balance sheet

Which of the following is not a principle of the AICPA Code of Professional Conduct? Integrity Objectivity and Independence Due Care Conservatism

Conservatism

Which of the following is not one of the purposes of an internal control system? Ensuring that the company is using the most effective marketing plan Safeguarding the company's assets The assessment of the degree of compliance with company policies and public laws The evaluation of performance

Ensuring that the company is using the most effective marketing plan

A trademark is a tangible asset with an indefinite useful life. TRUE or FALSE

FALSE

Depletion of a natural resource is usually calculated using the straight-line basis. TRUE or FALSE

FALSE

If a company uses the FIFO cost flow method for its income tax return it must also use FIFO for financial reporting. TRUE or FALSE

FALSE

The best estimate for the amount of cash a company expects to collect from its accounts receivable is the face value of the receivables. TRUE or FALSE

FALSE

Singleton Company's perpetual inventory records included the following information: Date Number of units and unit cost Total cost January 1 Beginning inventory 200 units @ $7.00 $ 1,400 March 4 Purchase 150 units @ $8.00 $ 1,200 September 28 Purchase 350 units @ $9.00 $3,150 Number of units sold during the year: 520 If Singleton uses the FIFO cost flow method, its cost of goods sold would be $4,490. TRUE or FALSE

FALSE (200 units × $7.00) + (150 × $8.00) + (170 × $9.00) = $4,130 cost of goods sold

Which of the following statements is correct regarding accounting treatment of goodwill? Goodwill is recorded as an asset and amortized over 40 years unless its value decreases. Goodwill is recorded as an asset and amortized over 5 years regardless of any change in value. Goodwill is recorded as an asset and is not written off as an expense unless its value decreases. Goodwill is expensed immediately in the year acquired.

Goodwill is recorded as an asset and is not written off as an expense unless its value decreases.

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should: Recognize a $5 million liability on its balance sheet for the contingency. Disclose the lawsuit in the notes to the financial statements. Ignore the lawsuit in its financial statements.Correct Settle with the customer immediately for $5 million to avoid harmful publicity.

Ignore the lawsuit in its financial statements.-Because the obligation is considered remote, it is neither recognized nor disclosed in Burger Barn's financial statements.

Houston Co. borrowed $20,000 from Dallas Co. on March 1, Year 1. Houston is to repay the principal and interest on March 1, Year 2. The interest rate is 8%. If the year-end adjustment is properly recorded, what will be the effects of the accrual on Houston's Year 1 financial statements? Increase liabilities and increase expenses No effect Increase assets and increase revenues Increase assets and increase liabilities

Increase liabilities and increase expenses Accruing interest on a note payable increases liabilities (interest payable) and increases interest expense.

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)? None of these; inventory methods cannot affect cash flows. FIFO. LIFO. Weighted average

LIFO.

Which of the following would be classified as a tangible asset? Land. Goodwill. Copyright. Trademark.

Land.

Which of the following items is not classified as a current asset? Merchandise inventory. Office supplies. Prepaid rent. Office equipment.

Office equipment.-Office equipment is a long term asset because it is used over more than one year or one operating cycle.

On January 1, Year 3, Ruiz Company spent $850 on a plant asset to improve its quality. The asset had been purchased on January 1, Year 1 for $8,400 and had an estimated salvage value of $1,200 and a useful life of five years. Ruiz uses the straight-line depreciation method. Which of the following correctly shows the effects of the Year 3 expenditure on the financial statements? Assets = Equity Rev. − Exp. = Net Inc. Cash Flow Cash + Equip. − Ac.Dep = − = A. (850 ) + 850 − NA = NA NA − NA = NA (850 ) IA B. (850 ) + 850 − NA = NA NA − NA = NA (850 ) OA C. (850 ) + NA − (850 ) = NA NA − NA = NA (850 ) IA D. (850 ) + NA − NA = (850 ) NA − 850 = (850 ) (850 ) OA Option B Option A Option D Option C

Option A A capital expenditure that improves an asset's quality increases the asset (equipment) account and is reported as a cash outflow for investing activities.

EFG Transportation Company uses straight-line depreciation to depreciate its delivery truck. Which of the following reflects how recognizing depreciation expense would affect EFG's financial statements? Assets = Liab. + Equity Rev. − Exp. = Net Inc. Cash Flow A. +/− = NA + NA NA − NA = NA NA B. +/− = NA + NA NA − + = − − OA C. − = NA + − NA − + = − NA D. + = + + NA NA − NA = NA − OA Option B Option D Option A Option C

Option C Depreciation expense is an asset use transaction that reduces assets and equity on the balance sheet. Recognizing depreciation expense increases expenses and decreases net income on the income statement. It does not affect the statement of cash flows.

Chubb Company paid cash to purchase equipment on January 1, Year 1. Select the answer that shows how the recognition of depreciation expense in Year 2 would affect assets, liabilities, equity, net income, and cash flow (+ means increase, - decrease, and NA not affected). Assets Liabilities Equity Net Income Cash Flow A. + NA + − NA B. − − NA + + C. − NA − − − D. − NA − − NA Option B Option C Option A Option D

Option D Depreciation expense decreases assets by increasing accumulated depreciation and decreases net income, which decreases equity. It does not affect the statement of cash flows.

Which internal control procedure addresses the idea that the likelihood of employee fraud or theft is reduced if collusion is required to accomplish it? Use of prenumbered documents Separation of duties Fidelity bonding Physical controls

Separation of duties- Separation of duties reduces the ability of a single employee to commit fraud without the assistance of other employees.

Which method of depreciation is used by most U. S. companies for financial reporting purposes? Double-declining-balance Units-of-production Straight-line None of these answer choices are correct

Straight-line

An expenditure that improves the quality of service provided by a plant asset is added to the historical cost of the asset. TRUE or FALSE

TRUE

In a period of rising prices, use of the FIFO cost flow method would cause a company to pay more income taxes than would use of LIFO. TRUE or FALSE

TRUE

Intangible assets include patents, copyrights, and franchises. TRUE or FALSE

TRUE

Land differs from other property because it is not subject to depreciation. TRUE or FALSE

TRUE

The longer an account receivable has been outstanding, the less likely it is to be collected. TRUE or FALSE

TRUE

The net realizable value of accounts receivable is the amount of receivables a company expects to collect. TRUE or FALSE

TRUE

The specific identification inventory method is not practical for companies that sell many low-priced, high turnover items. TRUE or FALSE

TRUE

Which one of the following is not an accurate description of the Allowance for Doubtful Accounts? The account is a contra account. The account is a temporary account. The account is increased by an estimate of uncollectible accounts expense. The amount of the Allowance for Doubtful Accounts decreases the net realizable value of a company's receivables.

The account is a temporary account.

Poole Company purchased two identical inventory items. One of the items, purchased in January, cost $4.50. The other, purchased in February, cost $4.75. One of the items was sold in March at a selling price of $7.50. Assuming that Poole uses a LIFO cost flow, which of the following statements is correct? The amount of cost of goods sold would be $4.50. The balance in ending inventory would be $4.75. The amount of ending inventory would be $4.625. The amount of gross margin would be $2.75.

The amount of gross margin would be $2.75. $7.50 sales - $4.75 cost of goods sold = $2.75 gross margin

Goodwill may be recorded in which of the following circumstances? When the property, plant and equipment of a business increase in value. When a business sells property for more than its book value. When a business earns a very high net income. When one business acquires another business.

When one business acquires another business.

When do the effects of product warranties appear on the statement of cash flows? When there is a settlement of a warranty claim made by a customer. one of these answer choices are correct. When the warranty obligation is recognized. When the sale of merchandise is made.

When there is a settlement of a warranty claim made by a customer. Cash is usually used to settle a warranty claim made by a customer, but is never used at the time the obligation is recognized as an expense. Although cash may be collected when the sale is made, that cash is not related to the warranty.

In the reconciliation of the June bank statement, a deposit made on June 30 did not appear on the June bank statement. In preparing the bank reconciliation, this deposit in transit should be: subtracted from the unadjusted bank balance. subtracted from the unadjusted book balance. added to the unadjusted bank balance. added to the unadjusted book balance.

added to the unadjusted bank balance.- Deposits in transit are added to the unadjusted bank balance because the bank has not yet received those deposits, but the company has already recorded them in its books.

If the financial statements cannot be relied upon because they contain one or more material departures from GAAP, the auditor will issue the following type of audit opinion: Qualified opinion. Disclaimer. Unqualified opinion. Adverse opinion.

adverse opinion- An adverse opinion indicates that the independent auditor found one or more material departures from GAAP.

Selling $130 of merchandise to a customer for $200 cash in a state where the sales tax rate is 4%: Increases equity by $70. Increases total assets by $78. All of these answer choices are correct.Correct Increases cash flow from operating activities by $208.

all are correct

Benitez Co. had sales of $800,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $13,000 of warranty obligations paid in cash during Year 1. Based on this information: Cash would decrease by $13,000 as a result of the accounting events associated with warranties in Year 1. Warranty expenses would decrease net earnings by $24,000 in Year 1. The warranties payable account would increase by $11,000 in Year 1. All of these answer choices are correct.

all are correct $800,000 × 3% = $24,000 warranty expense is recognized in Year 1. Cash decrease by $13,000 when the warranty obligations are paid. Warranties payable increases by $24,000 when warranty expense is recognized and decreases by $13,000 when warranty obligations are paid, for a net increase of $11,000.

Which of the following correctly describes an installment note? an installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note. An installment note requires equal payments of interest and principal in which the amount of interest increases over the life of the note. An installment note requires equal interest payments with the entire principal balance paid at maturity. The installment note requires decreasing payments of interest and principal in which the amount of interest remains constant over the life of the note.

an installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note. -As the principal balance of the note decreases over time the portion of the payment that is applied to interest expense decreases. However, the amount of the payment remains constant.

The year-end adjusting entry to recognize uncollectible accounts expense will: decrease assets and decrease equity. increase liabilities and increase equity. increase assets and decrease equity. decrease liabilities and increase equity.

decrease assets and decrease equity.

Which of the following is not considered a common control activity? Duplication of duties Bonding of employees Use of prenumbered documents Requiring employees to take vacations

duplication of duties-Duplication of duties is not an internal control. Requiring vacations, bonding employees, and using prenumbered documents help to safeguard assets and ensure reliable accounting records.

A well-designed system of internal controls will eliminate employee theft and fraud in a company. true or false

false

Preparing a bank reconciliation is a requirement to obtain an unqualified audit opinion, but is not an important internal control for a business. true or false

false

Sales tax is reported as revenue when it is collected, and reported as an expense when it is paid. true or false

false

Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. The amount of the payment for Year 1 that is reduction of principal is $3,587. true or false

false $50,000 × 9% = $4,500 interest expense; $7,791 − $4,500 = $3,291 applied toward principal

Companies that issue bonds are required to pay the face value of the bonds at maturity and to make fluctuating periodic interest payments based on the market rate of interest. true or false

false -Issuers of bonds pay the face value at maturity, and make fixed, not fluctuating, interest payments.

Interest charges on notes payable may be based on a(n): fixed or variable interest rate. variable interest rate. fixed interest rate. installment interest rate.

fixed or variable interest rate.-Interest charges may be based on a fixed interest rate that remains constant during the term of the loan or may be based on a variable interest rate that fluctuates up or down during the loan period.

When prices are falling, LIFO will result in: lower income and a higher inventory valuation than will FIFO. higher income and a lower inventory valuation than will FIFO. higher income and a higher inventory valuation than will FIFO. lower income and a lower inventory valuation than will FIFO.

higher income and a higher inventory valuation than will FIFO.

The primary reason for a business to allow customers to purchase goods or services on account is to: decrease cost of goods sold. increase sales. decrease the marketability of the company's inventory. increase cash flow from financing.

increase sales.

The bank statement for Tetra Company contained the following items: a bank service charge of $10; a credit memo for interest earned, $15; and a $50 NSF check from a customer. The company had outstanding checks of $100 and a deposit in transit of $300. The entry to record the customer's NSF check will: increase the Accounts Receivable balance. decrease the Cash account. decrease equity. increase the Accounts Receivable balance and decrease the Cash account balance.

increase the accounts receivable balance and decrease the cash account balance

Bonds payable are usually classified on the balance sheet as: long-term liabilities. current liabilities. investments and funds. other assets.

long-term liabilites Bonds will not be repaid until many accounting periods from the issue date. Therefore, they are classified as long-term liabilities.

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. Kincaid's entry to recognize the write-off of the uncollectible accounts will: increase total assets and decrease total equity. decrease total assets and total equity. not affect total assets or total equity. increase total assets and total equity.

not affect total assets or total equity. The write-off decreases both the allowance for doubtful accounts account (a contra-asset) and accounts receivable (an asset) equally. Therefore, there is no net effect on assets or equity

Depreciation expense appears in the: operating expenses section of the income statement. current assets section of the balance sheet. financing activities section of the statement of cash flows. long-term liabilities section of the statement of stockholder's equity.

operating expenses section of the income statement.

Chester Company has established internal control policies and procedures in order to achieve the following objectives: 1) Effective evaluation of management performance. 2) Assure that the accounting records contain reliable information. 3) Safeguard the company's assets. 4) Assure that employees comply with company policy. Which of these objectives are achieved by accounting controls?

option 2 and 3 -Accounting controls are designed to safeguard company assets and ensure reliable accounting records. Objectives 1 and 4 relate to administrative controls.

While preparing its bank reconciliation, Maynard Company determined that its bank had collected a $650 account receivable for the company and deducted a $25 collection fee. Which of the following shows the effect of this transaction on the financial statements? Assets = Liab. + Equity Rev. − Expenses = Net Inc. Cash Flow A. (25 ) = NA + (25 ) NA − 25 = (25 ) 625 OA B. 625 = NA + 625 650 − 25 = 625 650 OA C. (25 ) = NA + (25 ) NA − 25 = (25 ) 650 OA D. 625 = NA + 625 650 − 25 = 625 625 OA

option A- The entry to record receipt of the receivable, less the bank's collection fee, increases cash (an asset) by $625, decreases accounts receivable (an asset) by $650, and increases miscellaneous expenses by $25, which decreases net income and equity. It is reported as a cash inflow for operating activities.

While performing its monthly bank reconciliation, the bookkeeper for the Grace Corporation noted that a deposit of $990 (received from a customer on account) was recorded in the company books as $900. Which of the following shows the effect of the correcting entry on the financial statements? Assets = Liab. + Equity Rev. − Expenses = Net Inc. Cash Flow A. 90 = NA + 90 90 − NA = 90 90 OA B. 990 = NA + 990 990 − NA = 90 990 OA C. NA = NA + NA NA − NA = NA 90 OA D. NA = NA + NA NA − NA = NA (90 ) OA

option C- The error understated cash and overstated accounts receivable. Therefore, the entry to correct the error will increase cash (an asset) and decrease accounts receivable (an asset). It will also be reported as a cash inflow for operating activities.

Bruce Company experienced an accounting event that that increased interest expense, decreased the discount on bonds payable, and decreased cash. Which of the following choices accurately reflects how this event would affect Bruce's financial statements? Assets = Liab. + Equity Rev. − Exp. = Net Inc. Cash Flow A. − = − + NA NA − NA = NA − IA B. − = + + − NA − + = − − OA C. − = + + − NA − + = − − IA D. − = NA + − NA − + = − − OA

option b This transaction increases interest expense, which decreases net income an equity, decreases the contra-liability discount on bonds payable, which increases liabilities, and decreases assets (cash). It is reported as a cash outflow for operating activities.

An audit is useful to financial statement users because it: a. provides reasonable assurance that the financial statements do not have material misstatements. b. Guarantees that the financial statements are accurate and correct. c. Assures users that confidentiality is maintained. d. Guarantees that management has not been involved in misappropriation of assets.

provides reasonable assurance that the financial statements do not have material misstatements.

Which of the following is not a component of the fraud triangle? Reliance Rationalization Opportunity Pressure

reliance

Even a good system of internal controls can be overridden by collusion among employees. true or false

true

If the stated interest rate for bonds is the same as the market rate of interest, the bonds will be issued at their face value. true or false

true

The internal controls of a business are designed to reduce the probability of occurrence of fraud. true or false

true-Internal controls are policies and procedures that a company uses to reduce the probability of occurrence of fraud.

Certified public accountants are obligated to act in a way that serves the public interest. true or false

true-This is Article II of the AICPA Code of Professional Conduct.

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. The amount of cash flow from operating activities on the Year 1 statement of cash flows would be: $24,000. $1,920. $800. zero.

zero The $24,000 borrowed is classified as a financing activity, not an operating activity. No interest was paid in Year 1, so there is no cash flow related to the interest.