ACCT 2113 - Exam 2
Which inventory cost flow assumption generally results in the lowest reported amount for cost of goods sold when inventory costs are rising?
FIFO
Which inventory cost flow assumption generally results in the lowest reported amount for inventory when inventory costs are rising?
LIFO
The accumulated depreciation account is classified as a
Contra asset
Weighted Average Method
Total Cost of Units / Total Number of Units
A long-term asset is recorded at the:
Cost of the asset plus all costs necessary to the asset ready for use.
The shipping term FOB stands for
"Free on board"
Gross Profit ratio
(Gross profit / total revenue) X 100
The purchase price and all costs to bring an asset to its desired condition and location for use should be _____.
Capitalized
When a business provides services to a customer, and the customer promises to pay later, this is referred to as
Credit sales
Which of the following correctly describes the nature of depreciation?
Depreciation represents the allocation of the cost of property, plant, and equipment over its service life.
Accounts receivable are normally classified
In the balance sheet as assets
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?
LIFO
Receivables Turnover Ratio
Net sales / average accounts receivable
Glasser Corp. provided $20,000 of services on account. The account that should be credited is
Service revenue
Periodic Inventory system
Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.
Credit sales tend to increase profitability and sales in the long-run.
True
Net income is
all revenues - all expenses
Which of the following represents the balance of Cost of Goods Sold at the end of the year?
the cost of inventory sold during the year
Under the allowance method for uncollectible accounts, the balance of Allowance for Uncollectible Accounts increases when:
when future bad debts are estimated
accumulated depreciation is
a contra asset
The first step in determining whether an impairment loss should be recorded is to determine if the sum of estimated future cash flows from an asset is less than the asset's
Book value
For internal record keeping, most companies carry their inventory using the ____ basis.
FIFO
Which cost flow assumption generally results in the highest reported amount of net income in periods of rising inventory costs?
FIFO
Blake uses an activity-based depreciation method. Blake purchases equipment for $100,000 and expects to use the equipment for 40,000 machine hours. The machine has a residual value of $20,000. The depreciation rate is
$2.00 per machine hour ($100,000-$20,000)/40,000 hours
Schmidt Company's Accounts Receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4,000, and its bad debt expense is $3,800. The net realizable value of accounts receivable is:
$96,000
When a company determines that the net realizable value of its ending inventory is lower than its cost, what would be the effect(s) of the adjustment to write down inventory to net realizable value?
- Decrease total assets - Decrease Retained Earnings - Decrease Net Income
The allowance method for uncollectible accounts
- is required by GAAP - allows for the possibility that some accounts will not be collected - reports net accounts receivable for the amount of cash expected to be collected
A retirement or abandonment of an asset is different from the sale of an asset because
A loss must be recognized for the remaining book value No cash is received
Amend Inc. debited Accounts Receivable and credited Allowance for Doubtful Accounts to reestablish an account previously written off. Amend Inc. should also debit ____ and credit _____.
Cash; accounts receivable
A sales discount is recorded by the seller as a(n):
Contra revenue
Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods
Cost of goods sold Inventory
Using a periodic inventory system, the purchase of inventory on account would be recorded as
Debit Purchases; Credit Accounts Payable
On January 18, a company provides services to a customer for $500 and offers the customer terms 2/10, n/30. Which of the following would be recorded when the customer remits payment on January 25?
Debit Sales Discount for $10
On December 30, Rocket Corp disposed of equipment with a historical cost of $100,000 and an accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries?
Debit accumulated depreciation $70,000 Debit cash $80,000 Credit equipment $100,000 Credit gain on sale of equipment $50,000
When you sell inventory on account, the entry or entries to record this sale using a perpetual inventory system would include a:
Debit to Accounts Receivable Debit to Cost of Good Sold Credit to Sales Revenue
The entry to write down inventory from cost to net realizable value at the end of the year includes a:
Debit to Cost of Goods Sold
Norma Inc. uses a perpetual inventory system. When the company records a sale, it should make entries to:
Decrease an asset and increase an expense Increase an asset and increase revenue
At the end of the year, Marline Corporation determines that its ending inventory has a cost of $2,000 and a net realizable value of $1,900. What would be the effect of the adjustment to write down inventory to net realizable value?
Decrease in net income
The allocation of the cost of a tangible fixed asset is referred to as _____, whereas the allocation of the cost of an intangible asset is referred to as ______.
Depreciation; amortization
The accounts receivable account is reduced when the seller
Determines that a specific customer account will not be collectible
A trade discount is a reduction in list price, which is used to:
Disguise real prices from competitors Give quantity discounts to customers Change prices without publishing a new catalog
Which of the following depreciation methods typically results in the highest depreciation expense during the first year of an asset's life?
Double-declining method
Jones Corporation's long-term asset has a book value of $100,000 and an estimated fair value of $101,000. Jones estimates that the future cash flows associated with the asset are $95,000. To determine whether the asset may be impaired, Jones should compare the asset's book value to its
Estimated future cash flows
Assuming that prices rise over time, which cost flow assumption will result in the lowest cost of goods sold?
FIFO
Under the allowance method, companies estimate ____ uncollectible amounts and report those estimates in the ____ year.
Future; current
Operating income is
Gross profit - operating expenses
When an asset has a significant decline in value and is written down, this is called
Impairment
The types of expenditures that can occur subsequent to an asset's acquisition are
Improvements Additions Repairs and maintenance
An asset that has no physical substance is called a _____ asset.
Intangible
Long term assets are classified as:
Intangible Tangible
Which of the following expenditures should be recorded as an asset?
Interest costs during the construction period of a new building An addition which increases future benefits
Margot Inc., which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:
Inventory
Assuming that prices rise over time, which cost flow assumption will result in the lowest ending inventory?
LIFO
Which cost flow assumption must be used for financial reporting if it is also used for tax reporting?
LIFO
Which of the following methods are available for costing inventory?
LIFO FIFO Weighted Average Specific Identification
The disclosure that shows the difference in cost of inventory between FIFO and LIFO is referred to as the
LIFO Reserve
Which of the following are classified as receivables?
Loans by a company to other entities Interest due from loans to customers
The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a _____ income statement
Multiple-step
If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account:
Net accounts receivable do not change
Perpetual Inventory system
Neumann Company can determine the cost of inventory still on hand by referring to the inventory account
Income tax receivable is a ______
Nontrade receivable
Killian Company's inventory balance at the end of the year doesn't include $10,000 worth of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered, the effect of this error on financial statements in the following year would be:
Overstated net income
An exclusive 20-year right to manufacture a product or to use a process is a:
Patent
At the end of its first year of operations, a company estimates future uncollectible accounts to be $4,500. The company's year-end adjusting entry would include
a credit to Allowance for Uncollectible Accounts for $4,500
Using the allowance method, the entry to record a write-off of accounts receivable will include
a debit to Allowance for Uncollectible Accounts
Which of the following expenditures should be capitalized?
an improvement to a tangible asset
The asset's cost less accumulated depreciation is called:
book value
Inventory is defined as
items a company intends for sale to customers
A company's inventory turnover ratio measures:
The number of times the company sells its average inventory balance during the year.
The amount of the gain on the sale of equipment equals:
The selling price minus the book value of the equipment.
If a company uses the allowance method of accounting for uncollectible accounts and collects cash on an account receivable previously written off:
There is no change in total assets
Accounts receivable are typically classified as current assets because
They will be converted to cash within 1 year
What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?
Total assets increase Total stockholders' equity increase Net income increases
In a perpetual inventory system, when a company sells inventory on account, how many entries are required?
Two
What are the likely disadvantages of extending credit to customers?
Uncollectible accounts Delay in collecting accounts
On May 1, 2021, Nees Manufacturing lends $10,000 to Roberson Supply using a 9% note due in 12 months. Nees has a December 31 year-end. Calculate the amount of interest revenue Nees will report in its 2021 and 2022 income statements.
2021 = $600; 2022 = $300.
Which of following best describes a merchandising company?
A company that purchases products that are primarily in finished form for resale to customers.
The entry to record the estimate for uncollectible accounts includes:
A debit to Bad Debt Expense
The estimated expense for accounts that may not be collected is referred to as
Bad debt expense
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ____ value of the asset sold.
Book
Which of following companies record revenues when selling inventory?
Both manufacturing and merchandise companies
Under a perpetual inventory system:
Cost of goods sold is recorded with each sale
A trade discount is
A percentage reduction from list price
Which of the following is properly recorded as an intangible asset?
A purchased patent
The effect of writing off a specific account receivable is:
A reduction in Allowance for Uncollectible Accounts
A _____ _____ is the legal right to receive cash from a credit sale and represents an asset of the company.
Accounts receivable
Glasser Corp. provided $20,000 of services on account. When Glasser collects on the account, a credit is made to
Accounts receivable
Which account is credited in a journal entry to record depreciation on machinery?
Accumulated depreciation
The approach that considers the age of various accounts receivable to estimate uncollectible accounts is referred to as the ____ method of accounts receivable.
Aging
Over the entire service life of an asset, which depreciation method records the highest total depreciation?
All the methods result in the same total depreciation
A company that expects some of its customers will not pay the agreed upon sales price must utilize the
Allowance method
For a typical credit sale, the seller records revenue
At the point of delivery
The lower of cost and net realizable value method was developed to
Avoid reporting inventory at an amount that exceeds the benefits it provides
FIFO:
Most closely approximates the actual flow of physical inventory
Receivables not expected to be collected should
Not be counted in assets of the company
A formal credit arrangement between a creditor and debtor is called a
Notes receivable
Which of the following expenditures should be recorded as an expense?
Ordinary repairs and maintenance
When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset
Provides benefits to the company
LIFO:
Provides better matching of current revenues with current inventory costs
When an asset's fair value falls below its book value, the difference between fair value and book value is
Recognized as an impairment loss
The term used to describe the amount the company expects to receive for an asset at the end of its service life is
Residual value
Gross Profit is
Sales revenue - cost of goods sold
Killian Company's inventory balance at the end of the year doesn't include $10,000 worth of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered until the following year, the effect of this error on financial statements in the current year would be:
Understated assets, retained earnings, and net income
Impairment losses can be used to manipulate earnings by
Writing off impairments in the current year and taking losses to decrease future depreciation and increase future earnings
Which of the following refers to the seller reducing the customer's balance owed because of some deficiency in the company's product or service?
Sales Allowance
A multiple-step income statement provides the advantage of:
Separating revenues and expenses based on their different types of activities.
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the ______ life of the asset.
Service
FOB Shipping point:
Shipping costs are included in the inventory
FOB Destination:
Shipping costs are paid by the supplier
A company's gross profit ratio measures:
The amount by which the sale of inventory exceeds its cost per dollar of sales.
The gain or loss on disposal of an asset is calculated as:
The amount received less the book value of an asset