ACCT Quiz 2

True

(T/F) the inventory turnover ratio is defined as cost of goods sold divided by average inventory

deposits in transit

Deposits recorded by the depositor but not yet recorded by the bank.

Sales returns and allowances

Purchase returns and allowances from the seller's perspective.

Cost of goods sold

The amount recognized on the balance sheet as the cost on inventory will ultimately be recognized as:

Fraud triangle

the three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization.

False

(T/F) A purchases account is not needed under periodic inventory system.

True

(T/F) The weighted average cost per unit must be continually updated under the perpetual inventory system.

Increasing

Madlock company, which started business at the beginning of 2013, selected the FIFO method for its inventory costing. In order to maximize profits for 2013 under this method, purchase prices must be:

perpetual or periodic inventory system

Merchandising entities may use either of the following 2 inventory systems:

Cash equivalents

Short-term, highly liquid investments that can be converted to a specific amount of cash.

Part of the net cost of purchases

Transportation-in is:

Inventory; Debited

When merchandise is purchased for resale to customers, the account, ______ is _____ for the cost of goods sold.

False

(T/F) Under the perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue

False

(T/F) When the shipping terms are FOB destination, they buyer must record transportation costs as an additional cost of acquiring the inventory under the perpetual inventory system.

LIFO

Which inventory cost flow method assigns the cost of the most recent items purchased to cost of good sold?

Merchandise inventory

Which of the following types of inventory accounts would be used by a wholesaler or retailer?

Average-cost method

Inventory costing method that uses the weighted-average unit cost to allocate to ending inventory and cost of goods sold the cost of goods available for sale

Bonding

obtaining insurance protection against theft by employees.

Days in Inventory

Measure of the average number of days inventory is held; calculated as 365/inventory turn over

45.625 (365/8=)

Parlato corp has an inventory turnover rate of 8 times. Calculate the company's average days to sell inventory.

Gross profit

The excess of net sales over the cost of goods sold

Cost of goods available for sale is allocated into cost of ending inventory and cost of goods sold.

Which of the following best describes "cost of goods available for sale?"

True

(T/F) A LIFO liquidation occurs when a company sells more units than it buys during the period.

Purchased from a creditor, although not paid for by year end

Items should be included as part of the company's inventory if they are...

Comprehensive Income

An income measure that includes gains and losses that are excluded from the determination of net income

The periodic inventory system

In order to determine inventory for its balance sheet, a company must count the inventory at the end of its accounting period according to:

False

(T/F) A LIFO reserve represents the amount by which costs of goods sold on a FIFO basis exceeds the cost of goods sold on a LIFO basis for the current year

False

(T/F) A company using a periodic inventory system must total the selling prices of the units on hand at the end of the period in order to value the ending inventory.

False

(T/F) A loss in inventory value caused by application of the lower of cost or market (LCM) rule is recorded in a "Loss from impairment" account.

True

(T/F) Costs of goods sold is the difference between costs of goods available for sale and ending inventory.

True

(T/F) Costs of goods sold represents an outflow of resource, inventory, which is caused by the sale of products.

False

(T/F) During periods of declining purchases prices, LIFO produces the lowest amount of ending inventory relative to the other inventory costing methods

True

(T/F) For a merchandising company, the cost of goods sold is subtracted from net sales to arrive at gross profit

False

(T/F) 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

(T/F) Net Sales + Total Credit sales - Sales Discounts - Sales Returns and allowances

False

(T/F) Sales discounts decrease the cost of inventory acquired.

True

(T/F) Under a periodic inventory system, the Purchases account accumulates the cost of the inventory acquired during the period.

sells more merchandise during the accounting period than it purchased.

A LIFO inventory liquidation occurs when a company that uses the LIFO inventory costing method:

False

A balance sheet approach to estimating bad debt expense is not permitted under GAAP (Generally Accepted Accounting Principles).

Accounts receivable

A customer returned damaged goods for credit. Under a perpetual system, which of the seller's accounts decreases?

Sales

A merchandiser's primary source of revenue is ....

Retail Inventory Method

A method for estimating the cost of the ending inventory by applying a cost-to-retail ratio to the ending inventory at retail.

Sales discount

A reduction given by a seller for prompt payment of a credit sales.

Retail Cost

All of the following are acceptable for financial accounting purpose EXCEPT:

The seller

At the year end inventory count, if goods in transit are shipped FOB destination, they should be included in the inventory count of:

The Buyer

At the year-end inventory count, if goods in transit are shipped FOB shipping point, they should be included in the inventory count of:

Restricted cash

Cash that must be used for special purpose.

Costs of goods sold & Operating Expenses

Expenses for a merchandising company are divided into 2 categories.....

operating expenses

Expenses incurred in the process of earning sales revenue.

FOB (free on board) Shipping point

Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller.

They buyers should record a liability for the purchase on January 3, 2013

Harris corp sold merchandise to Ichay Company on December 28, 2012, with shipping terms of FOB destination. The buyer received the merchandise on January 3, 2013. Which of the following is true?

both the balance sheet and the income statement are affected

If the amount assigned to ending inventory is incorrect,

An integral part of the calculation of costs of goods sold.

In a periodic inventory system, the cost of purchases is recognized as:

$2,250 - $1,500 + $750 $9750 - $750 = $9,000

Jack Macabee's Company has a beginning balance in its inventory account of $2,250 and an ending balance of $1,500. Cost of goods sold is $9,750. According to the cost of goods sold model, what was the amount of inventory purchased during the year?

Will have average inventory of $18750 (150000/8)

Parlato corp has an inventory turnover rate of 8 times. If its cost of goods sold is 150000 then the company:

A debit to various expense accounts

Replenishing the petty cash fund requires

Cash

Resources that consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank or similar depository.

No net effect

What effects on a retail store's accounting equation occur when it records merchandise purchased for cash, assuming the use of a perpetual inventory system?

Assets and stockholders' equity decrease

What effects on a retail store's accounting equation occur when merchandise returned by customers is recorded?

Cost of goods sold

When inventories are written down due to the application of the lower of cost or market (LCM) rule, which of the following is usually increased?

LIFO

Which Inventory costing method might allow a company to manipulate income by making significant inventory purchases at year end?

FIFO

Which inventory cost flow method assigns the cost of the most recent items purchased to ending inventory?

Changing inventory costing methods violates consistency

Which of the following statements regarding changing inventory costing methods is true?

The lower of cost or market method is an exception to the historical cost principle.

Which of the following statements regarding the application of the lower of cost or market method is true>

Service Firm

Which of the following would NOT be considered a merchandising company?

False

(T/F) During periods of stable purchase prices, FIFO produces the highest ending inventory relative to the other inventory costing methods.

True

(T/F) If ending inventory is overstated, then net income is overstated as well.

No net effect

Echols company sells merchandise on credit. If a customer pays its balance due after the discount period has passed, what is the effect of the payment on seller's accounting equation?

Merchandise in transit sold to customers with terms FOB destination.

Ending inventory is equal to the cost of items on hand plus:

Custom-made boats

For which type of merchandise would a company most likely use the specific identification method of inventory costing?

Transportation-in is included in the total cost of purchases used to determine cost of goods sold in a periodic system.

Goos Inc buys designer clothing to sell in its retail stores. Since much of the merchandise comes from Europe, the company must pay freight charges. which of the following statements must be true?

Finished goods inventory

Manufactured items that are completed and ready for sale.

Reported earnings for the current year will be higher.

Noland, Inc. uses the LIFO method of inventory costing and is facing the possibility of a LIFO liquidation for the current year. Merchandise purchase prices have increased since the LIFO method was adopted. If the company does not purchase additional merchandise before year-end, which one of the following effects will occur as a result of a LIFO liquidation?

The ending inventory amount reported on the balance sheet may be significantly lower than its current value

Oliver & Co. has been in business for fifteen years. During that time, the company has consistently used the LIFO inventory costing method. Because of inflation, purchase prices for merchandise have increased consistently over the fifteen years. The company has maintained the same inventory quantities over the fifteen years. Which of the following statements is true for the company?

Work in process

That portion of manufactured inventory that has been placed into the production process but is not yet complete.

Electronic fund transfer (EFT)

a disbursement system that uses wire, telephone, or computers to transfer funds from one location to another.

False

(T/F) If ending inventory is understated, the cost of goods sold in understated.

True

(T/F) The difference between the FIFO, LIFO, and average cost methods is that each of these methods of inventory costing makes a specific assumption about the flow of costs.

True

(T/F) The inventory turnover ration is measure of how many times during a period a company sells off its inventory.

True

(T/F) The lower of cost or market (LCM) rule violates the historical cost principle.

False

(T/F) The weighted average cost is calculated by adding the units' costs from each purchase and then dividing by the number of purchases.

False

(T/F) Under the FIFO method of inventory closing, the units in the ending inventory represent the oldest purchases.

False

(T/F) Under the LIFO method of inventory closing, the units in the ending inventory represent the most recent purchase.

True

(T/F) Under the Periodic method, the information on sales can be combined within any period because all purchases are assumed to occur before any sales transactions.

True

(T/F) Under the periodic inventory system, a physical inventory must be taken to determine cost of goods sold.

True

(T/F) the buyer must include goods purchased in FOB shipping point in its inventory account if the goods are still in transit.

Gross Profit Method

A method for estimating the cost of ending inventory by applying a gross profit rate to net sales and subtracting estimated cost of goods sold from cost of goods available for sale

Bank statement

A monthly statement from the bank that shows the depositor's bank transactions and balances.

Comprehensive Income Statement

A statement that presents items that are not included in the determination of net income, referred to as other comprehensive income.

Check

A written order signed by a bank depositor, directing the bank to pay a specified sum of money to a designated recipient.

Specific Identification method

An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.

Multiple-step income statement

An income statement that shows several steps in determining net income.

The customer should pay $1000 if the invoice is paid on July 9

Coffski, Inc. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date was June 10th; credit terms were 1/10, n/30. Which of the following statements is true?

Asses and stockholders' equity decrease

Dietz, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is the effect of the payment on Dietz' accounting equation?

FIFO

During a period of increasing purchase prices, which inventory costing method will yield the lowest cost of goods sold?

net realizable value

Net amount that a company expects to realize (receive) from the sale of inventory. Specifically, it is the estimated selling price in the normal course of business, less estimated costs to complete and sell.

The cost of goods available for sale less ending inventory

The cost of goods sold is equal to:

Paid for inventory purchased on credit, and took advantage of a 1% purchase discount

The following journal entry was included in the accounting records of Jentzen Corp.: Oct. 15 Accounts Payable 4,000 Merchandise Inventory 40 Cash 3,960 Based on this information, it is likely that the company:

Cost of merchandise returned by a customer.

The following journal entry was included in the accounting records of Jumani Company: Feb. 11 Merchandise Inventory 7,000 Cost of Goods Sold 7000 This entry is needed to record the:

33.44%

The following selected financial information is available for Pham Enterprises for the year ended December 31, 2013: Net sales $450,000 Inventory, 1/1/10 $48,400 Cost of goods sold $299,500 Inventory, 12/31/10 $49,670 Refer to the information provided for Pham Enterprises. What is the company's gross profit ratio for 2013?

Finished goods inventory

The inventory account a manufacturer uses to record cost of products completed and available for sale is called.....

Providing management with more complete information from which to control inventories

The journal entries required for purchase and sales transaction using the perpetual system are more complex than under the periodic system but offer the advantage of:

Writing up inventory to market value would be inconsisitent with the conservatism principles.

The lower of cost or market rule applies to the write-down of inventory values when market value exceeds cost. Why does this rule not allow for write-ups in inventory value?

Sales Revenue (Sales)

The primary source of revenue in a merchandising company.

Cost of goods sold

The total cost of merchandise sold during a period

Lower of cost or market

When the market value of inventory has declined below their cost, which method would be the most appropriate in complying with GAAP?

Weighted Average cost

Which inventory cost flow method assigns the same cost to all units whether sold or left in ending inventory?

FIFO

Which inventory costing method results in the highest inventory balance during a period of rising purchase prices?

FIFO

Which inventory costing method results in the lowest income tax expense during a period of decreasing purchase prices?

Costs of Goods Sold

Which of the following accounts would most likely appear on the income statement of a merchandise company, but not on the income statement of a service company.

Deposit in transit

Which of the following is an appropriate reconciling item to the balance per bank in reconciliation?

Inventory data can be identified and controlled better under the perpetual system

Which of the following statement is true?

Companies sometimes choose FIFO because it presents a more realistic income statement in terms of current market value.

Which of the following statements is FALSE regarding the choice between alternative inventory costing methods?

It gives the company's accounting personnel more time to record inventory transactions

Which of the following statements is false regarding the reason that inventory costs are recorded as expenses when sold rather than when incurred?

A cost of goods sold account is updated after each sale of merchandise under the periodic inventory system

Which of the following statements is false.

It requires detailed information about order-to-delivery times, receiving-to-sales times, and inventory quantities.

Which of the following statements is true regarding just-in-time inventory management?

Accountants have developed methods which make assumptions concerning how costs should be assigned to inventory and costs of goods sold

Which of the following statements is true?

Voucher system

a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper

Purchase return

A return of goods from the buyer to the seller for a cash or credit refund.

Net Sales

Sales Revenue - sales returns and allowances - sales discounts = ________.

Last-In, First-Out (LIFO)

Inventory costing method that assumes the costs of the latest units purchased are the first to be allocated to cost of goods sold.

just in time inventory

Inventory system in which companies manufacture or purchase goods only when needed for use.

Petty Cash Fund

A cash fund used to pay relatively small amounts.

NSF check

A check that is not paid by a bank because of insufficient funds in a customer's bank account.

Sales Invoice

A document that supports each credit sale.

True

(T/F) The amount of interest paid is a function of three variables, the amount borrowed, the interest rate, and the length of the loan period.

True

(T/F) A primary advantage of the allowance method to account for bad debts is that it supports the matching principle

True

(T/F) Accounts receivable are shown on the balance sheet at their net realizable value

True

(T/F) Because the allowance method results in better matching, accounting standards require its use rather than the direct write-off method, unless bad debts are immaterial.

False

(T/F) If a company accepts a major credit card such as VISA from a customer, then the company is responsible for the amount of the sale in a case of nonpayment from a cardholder.

False

(T/F) 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

(T/F) Selling on credit protects a company from the risk that some of its receivables will never be collected.

False

(T/F) The account. "allowance for Doubtful Accounts" is an expense account (the cost of making bad credit sales) that is reported on the income statement.

True

(T/F) The accounts receivable turnover ratio is used to evaluate how well a company does in collecting it accounts receivable.

Consigned goods

Goods held for sale by one party although ownership of the goods is retained by another party.

Moving Average Method

A new average is computed after each purchase, by dividing the cost of goods available for sale by the units on hand.

other expenses and losses

A nonoperating-activities section of the income statement that shows expenses and losses unrelated to the company's main line of operations.

Other revenues and gains

A nonoperating-activities section of the income statement that shows revenues and gains unrelated to the company's main line of operations.

Internal Control

A process designed to provide reasonable assurance regarding the achievement of company objectives related to operations, reporting, and compliance.

Inventory Turnover

A ration that measures the number of times on average the inventory sold during the period; computed by diving cost of goods sold by the average inventory during the period.

True

(T/F) Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.

True

(T/F) With the perpetual inventory system, the inventory account is updated after each sale or purchase.

lower-of-cost-or-net realizable value (LCNRV)

A basis whereby inventory is stated at the lower or either its cost or its net realizable value.

Purchase discount

A cash discount claimed by a buyer to prompt payment of a balance due

True

(T/F) The higher the accounts receivable turnover the better because it indicates that the company is more quickly collecting cash (through sales.)

False

(T/F) The lender (issuer) of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

True

(T/F) The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

False

(T/F) The longer a customer's account balance remains outstanding, the greater the likelihood that it will be collected in the near future.

True

(T/F) The terms "realized" and "realizable" mean that the selling price is fixed and determinable and collectibility is reasonably assured.

True

(T/F) The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes places.

False

(T/F) Trade receivables represent a stronger legal claim against the debtor than do non-trade receivables.

apply both the NSF check ($160) and bank service charge ($50) 160+50 = 210 Reduce the cash account by $210

Meems Company assembled the following information in completing its March bank reconciliation: balance per bank $7,640; outstanding checks $1,550; deposits in transit $2,500; NSF check $160; bank service charge $50; cash balance per books $8,800. As a result of this reconciliation, Meems will

$3,600 - $200 = $3,400 $3400 - 2% = $3,332

On June 15 a credit sale of $3,600 is made, terms 2/10, n/30, on which a return of $200 is granted on June 18. What amount is received as payment in full on June 24?

Sarbanes-Oxley Act (SOX)

Regulations passed by Congress to try to reduce unethical corporate behavior.

$3960 - $1300 =2660 $40000 + 2660 = $42660

The cash account shows a balance of $40,000 before reconciliation. The bank statement does not include a deposit of $9,200 made on the last day of the month. The bank statement shows a collection by the bank of $3,960 and a customer's check for $1,300 was returned because it was NSF. The correct balance in the cash account was

Bank reconciliation

The process of comparing the bank's balance of an account with the company's balance and explaining any differences to make them agree.

Revenues - Cost of goods sold - sales discounts - Sales Returns and allowances = Gross profit $116000

Use the following financial information: Operating Expenses $ 90,000 Sales Returns and Allowances 18,000 Sales Discounts 12,000 Sales Revenue 320,000 Cost of Goods Sold 174,000 Given the above information, gross profit is

Nonoperating activities

Various revenues, expenses, gains, and losses that are unrelated to a company's main line of operations.

Fraud

a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Perpetual inventory system

an inventory system under which the company keeps detailed records of the cost of each inventory purchase and sale, and the records continuously show the inventory that should be on hand.

Consistency Concept

Dictates that a company use the same accounting principles and methods from year to year.

Purchase Allowance

A deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise.

Purchase Invoice

A document that supports each credit purchase

True

A sale and its associated receivable are recorded only when the order, shipping, and billing documents are all present.

FOB shipping point

Freight terms indicating that the seller places foods free on board the carrier, and the buyer pays the freight costs

Outstanding Checks

Checks issued and recorded by a company but not yet paid by the bank.

Contra Revenue account

An account that is offset against a revenue account on the income statement

Voucher

An authorization form prepared for each payment in a voucher system.

Single-step income statement

An income statement that shows only one step in determining net income.

Periodic Inventory system

An inventory system under which the company does not keep detailed inventory records throughout the accounting period but determines the cost of goods sold only at the end of an accounting period.

FOB destination

Freight terms indicating that the seller places the foods free on board to the buyer's place of business, and the seller pays the freight

FOB (free on board) destination

Freight terms indicating the ownership of the goods remains with the seller until the goods reach the buyer.

Gross profit rate

Gross profit expressed as a percentage, by dividing the amount of gross profit by net sales.

sales revenue - cost of goods sold

Gross profit is equal to ....

Income from Operations

Income from a company's principal operating activity; determined by subtracting cost of goods sold and operating expenses from net sales.

First-In, First-Out (FIFO)

Inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold

raw materials

Basic goods that will be used in production but have not yet been placed into production.

Weighted-average unit cost

Average cost that is weighted by the number of units purchased at each unit cost.

internal auditors

Company employees who continuously evaluate the effectiveness of the company's internal control system.

THe cost of merchandise + plus transportation costs + beginning inventory - purchase returns and allowances and purchased discounts - ending inventory

Cost of goods sold is equal to..

Revenues - Cost of Goods Sold $45,000

During 2016, Alexander Corporation generated revenues of $90,000. The Company had the following expenses: cost of goods sold of $45,000, operating expenses of $8,000 and a loss on the sale of equipment of $3,000. Alexander's Gross Profit is.....