Accounting - Unit 2
Under a perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue.
False
Under the FIFO method of inventory costing, the units in the ending inventory represent the oldest purchase(s).
False
Under the LIFO method of inventory costing, the units in the ending inventory represent the most recent purchase(s).
False
When reconciling a bank account, the company has to prepare an adjusting entry for outstanding checks.
False
When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.
False
When the shipping terms are F.O.B. destination, the buyer must record transportation costs as an additional cost of acquiring the inventory under the perpetual inventory system.
False
Which of the following is not a generally recognized internal control activity? a. internal review of business transactions by the board of directors b. separation of the custody and record-keeping responsibilities for any business activity c. internal review of business transactions by the internal auditors d. independent verification of the work of one employee by another employee
Internal review of business transactions by the board of directors.
According the the Sarbanes-Oxley Act of 2002, who is primarily responsible for establishing and maintaining a system of internal control over the company's financial reporting?
Management of the company
Which of the following types of inventory accounts would be used by a wholesaler or retailer?
Merchandise inventory
Which of the following would never appear on a bank statement for a checking account? a. service charges b. credit memos c. interest earned d. outstanding checks
Outstanding checks
While preparing a bank reconciliation, which of the following items would be subtracted from the balance per the bank statement? a. outstanding checks b. bank service charges c. interest earned on the bank account d. deposits in transit
Outstanding checks
Which of the following procedures is not part of the preparation of a bank reconciliation for a checking account? a. looking for a bank services charges and other items on the bank statement that have not yet been included in the cash account b. comparing cancelled checks returned with the bank statement to the cash account to identify outstanding checks c. reversing all the transactions recorded on the company's records that do not yet appear on the bank statement d. comparing deposits listed on the bank statement to the cash account to identify deposits in transit
Reversing all the transactions recorded on the company's records that do not yet appear on the bank statement
A company had sales of $40,000, sales discounts of $800, sales returns of $1,600, and commissions owed to salespeople of $600. Compute net sales.
$37,600
On December 15, the accounts receivable balance was $50,000 and the balance in the allowance for doubtful accounts was $5,000. That morning, a $1,000 uncollected account was written off. The net realizable value of accounts receivable immediately after the write-off is:
$45,000
A company receiving a payment of $20,000 accounts receivable within 10 days with terms of 2/10, n/30 would record a sales discount of:
2% of $20,000
Having the same employee prepare company checks and sign those checks relates to which internal control activity?
A violation of proper segregation of duties.
A customer returned damaged goods for credit. Under a perpetual system, which of the seller's accounts decreases?
Accounts receivable
A company uses the direct write-off method to account for bad debts. What are the effects on the accounting equation of the entry to record the write-off of a customer's account balance?
Assets and stockholders' equity decrease
If a company uses the allowance method to account for doubtful accounts, when will the company's stockholders' equity decrease?
At the end of the accounting period when an adjusting entry for bad debts is recorded
Checks presented for payment and paid by the bank are known as...
Cancelled checks
Which of the following items would not be a reconciling item on a bank reconciliation? a. NSF checks b. bounced checks c. outstanding checks d. cancelled checks
Cancelled checks
Which of the following statements best describes the act of collusion? a. collusion is one of the necessary outcomes of a system of internal control over financial reporting. b. collusion is an intentional act or two or more employees to accomplish theft of company assets. c. collusion is cause by an overstatement of ending inventory. d. collusion is enhanced by an effective system of independent reconciliations and other checks on recorded amounts.
Collusion is an intentional act of two or more employees to accomplish theft of company assets.
Which one of the following is an accurate description of the allowance for doubtful accounts? a. Revenue Account b. Expense Account c. Liability Account d. Contra Account
Contra Account
Which of the following best describes "cost of goods available for sale"? a. cost of goods available for sale is allocated into cost of ending inventory and cost of goods sold. b. cost of goods available for sale is added to beginning inventory to determine the cost of purchases during the period. c. cost of goods available for sale is subtracted from net sales to arrive at the gross margin. d. cost of goods available for sale is an expense account
Cost of goods available for sale is allocated into cost of ending inventory and cost of goods sold
Amounts collected and recorded by a company but not yet reflected in a bank statement are know as...
Deposits in transit
The weighted average cost is calculated by adding the units' costs from each purchase and then dividing by the number of purchases.
False
A balance sheet approach to estimating bad debt expense is not permitted under GAAP.
False
A check written by a company but not yet presented to the bank for payment is called a check in transit.
False
A company's internal control system must be designed and maintained by its external auditors.
False
An accounting system must be computerized in order to implement any internal control procedures.
False
During periods of stable purchase prices, FIFO produces the highest ending inventory relative to other inventory costing methods.
False
If a company estimates its bad debt expense on the basis of a receivables aging, the balance in the Allowance for Doubtful Accounts account will not affect the amount of the end-of-period adjusting entry for bad debts.
False
If a company has an internal audit function, it does not need to have external auditors.
False
If a company hires honest employees and its top management acts with integrity, no internal control procedures will be necessary.
False
If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must be made to correct the error.
False
If ending inventory is understated, then cost of goods sold is understated.
False
Sales discounts decrease the cost of inventory acquired.
False
Selling on credit protects a company from the risk that some of its receivables will never be collected.
False
The key to being classified as a cash equivalent is that the amount must be available to pay debts within a year's time or less.
False
The lender of a note recognizes a note payable on the balance sheet and interest expense on its income statement.
False
The longer a customer's account balance remains outstanding, the greater the likelihood that it will be collected in the near future.
False
The sole purpose of creating an internal control system is to deter embezzlement.
False
Which of the following statements is false regarding the reason that inventory costs are recorded as expenses when sold rather than when incurred? a. it helps the company achieve better matching of expenses with related revenues. b. it gives the company's accounting personnel more time to record inventory transactions. c. it gives the users' of the company's financial statements a clearer picture of profitability. d. inventory is an asset at the time it is acquired.
It gives the company's accounting personnel more time to record inventory transactions
All of the following would be considered internal control weaknesses except... a. the person who opens the mail also makes the journal entry to record any customer payments received in the mail b. the practice of shipping goods to customers right before year-end even though the customers had not ordered them c. it takes 2 days to get a check written because of the approvals required d. no physical inventory is ever taken to confirm the amount of inventory recorded in the accounting records
It takes 2 days to get a check written because of the approvals required.
Which internal control activity is violated when the cashier at a cash register in a retail store also records the daily receipts in a journal?
Segregation of duties
Which one of the approaches for the allowance procedure emphasizes the net realizable value of accounts receivable on the balance sheet?
The aging of accounts receivable method
Which one of the following statements is true if a company's collection period for accounts receivable is unacceptably long? a. the company should expand operations with its excess cash b. the company may offer sales discounts to shorten the collection period c. cash flows from operations may be higher than expected for company's sales d. the collection cost would be reduced
The company may offer sales discounts to shorten the collection period
Which allowance method approach is considered to be an income statement approach for estimating bad debts?
The percentage of credit sales method
Which of the following is not a provision of the Sarbanes-Oxley Act as to the responsibility of a company's top managers? a. they must establish formal procedures to receive, retain, and address any information that may affect the company's accounting b. they must certify that the company's financial statements are fairly presented c. they may deny responsibility for certain financial reporting matters if they are not knowledgeable about the proper accounting procedures for those transactions d. they must certify that they are primarily responsible for the company's internal controls over financial reporting
They must deny responsibility for certain financial reporting matters if they are not knowledgeable about the proper accounting procedures for those transaction
A primary advantage of the allowance method to account for bad debts is that is supports the matching principle.
True
A sale and its associated receivable are recorded only when the order, shipping, and billing documents are all present.
True
Cost of goods sold is the difference between the costs of goods available for sale and ending inventory.
True
Cost of goods sold represents an outflow of a resource, or inventory, which is caused by the sale of products.
True
Internal control over financial reporting is concerned with ensuring the reliability of the financial statements.
True
Money market accounts with original maturities of less than 90 days are cash equivalents.
True
On a bank reconciliation, interest earned for the month is added to the cash balance per the company records.
True
The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable.
True
The buyer must include goods purchased F.O.B. shipping point in its inventory account if the goods are still in transit.
True
The higher the accounts receivable turnover the better because it indicates that the company is more quickly collecting cash (through sales).
True
The inventory turnover ratio is a measure of how many times during a period a company sells off its inventory.
True
The inventory turnover ratio is defined as cost of goods sold divided by average inventory.
True
The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.
True
The lower of cost or net realizable value (LCNRV) rule violates the historical cost principle.
True
The weighted average cost per unit must be continually updated under the perpetual inventory system.
True
Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.
True
When a bank pays interest on a company's checking account balance, the bank will likely issue a credit memo.
True
When merchandise is sold F.O.B. destination, the seller is responsible for the shipping costs.
True
With the perpetual inventory system, the inventory account is updated after each sale or purchase.
True
Which of the following is not considered to be a cash equivalent? a. U.S. Treasure bills with an original maturity of 6 months b. a money market account with a bank c. a certificate of deposit with a term of 75 days when acquired d. corporate commercial paper due in 60 days after purchase
U.S. Treasury bills with an original maturity of 6 months
The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as...
cost of goods sold.
The inventory account a manufacturer uses to record the cost of products completed and available for sale is called...
finished goods inventory
If a company uses the direct write-off method of accounting for bad debts...
it will record bad debt expense only when an account is determined to be uncollected.
Items should be included as part of the company's inventory if they are...
purchased from a creditor, although not paid for by year end.
The cost of goods sold is equal to...
the cost of goods available for sale less the ending inventory.