ACCT5312 - Ch5
Cash managers are interested in minimizing investment risks and thus would normally consider making investments in which of these? More than one answer may be correct. A. Money Market Mutual Funds B. US Treasury Securities C. Precious Metals D. Mortgage Backed Securities
A & B A. Money Market Mutual Funds B. US Treasury Securities
Bad debt expenses can be estimated using a percentage of credit sales method and ______. A. an aging of receivables method B. a weighted-average method C. a straight-line method D. a double-declining-balance method
A. an aging of receivables method
Inventory is reported on the balance sheet at: A. Current market value B. Lower of cost or market value C. Original (historical) cost D. Current replacement cost
B. Lower of cost or market value
In times of rising prices, inventory profits (or phantom profits) occur under which cost flow assumption? A. Weighted Average B. Specific Identification C. LIFO D. FIFO
D. FIFO
Cash managers are interested in minimizing investment risks and thus would normally consider making investments in which of these? More than one answer may be correct. A. Bank certificates of deposit B. Commercial Paper C. Hedge Funds D. Initial Public Offerings
A & B A. Bank certificates of deposit B. Commercial Paper
In the bank reconciliation process, how are errors handled? More than one answer may be correct. A. Either added to or subtracted from the bank balance, if the error was made by the bank B. Either added to or subtracted from the company's book balance, if the error was made by the company C. Either added to or subtracted from the company's book balance, if the error was made by the bank D. Either added to or subtracted from the bank balance, if the error was made by the company
A & B A. Either added to or subtracted from the bank balance, if the error was made by the bank B. Either added to or subtracted from the company's book balance, if the error was made by the company
Identify the correct entries to record a sales transaction under the perpetual inventory system. More than one answer may be correct A. Dr. Cost of Goods Sold Cr. Inventory B. Dr. Sales Cr. Accounts Receivable (or Cash) C. Dr. Accounts Receivable (or Cash) Cr. Sales D. Dr. Inventory Cr. Cost of Goods Sold
A & C A. Dr. Cost of Goods Sold Cr. Inventory C. Dr. Accounts Receivable (or Cash) Cr. Sales
How does a write-off of an account receivable affect the financial statements? More than one answer may be correct. A. a decrease to an asset account B. an increase to expenses C. a decrease to a contra asset account D. an increase to total liabilities
A & C A. a decrease to an asset account C. a decrease to a contra asset account
Which of these are acceptable approaches in estimating bad debts? More than one answer may be correct. A. Percentage of credit sales method B. Straight-line method C. Declining balance method D. Aging of receivables method E. FIFO method
A & D A. Percentage of credit sales method D. Aging of receivables method
How does the year-end adjustment for bad debts normally affect the financial statements? More than one answer may be correct. A. an increase to a contra asset account B. an increase to net income C. a decrease to the accounts payable account D. a decrease to total assets
A & D A. an increase to a contra asset account D. a decrease to total assets
Which of these statements regarding a bank reconciliation are true? More than one answer may be correct. A. Interest earned is added to the company's book balance B. Outstanding checks are added to the bank's balance C. Service charges are added to the company's book balance D. NSF checks are added to the company's book balance E. Deposits in transit are added to the bank's balance
A & E A. Interest earned is added to the company's book balance E. Deposits in transit are added to the bank's balance
Select all that apply: A note receivable: A. often includes covenants made by the borrower. B. often identifies collateral pledged by the borrower to support the loan C. normally includes a maturity date D. does not have any collection risk E. is much less formal
A, B & C A. often includes covenants made by the borrower. B. often identifies collateral pledged by the borrower to support the loan C. normally includes a maturity date
A note receivable: (select all) A. represents a formal, legal contract. B. usually bears interest C. involves penalties if not paid on the maturity date D. are notes that are only offered to the most creditworthy customers E. is easier to account for
A, B & C A. represents a formal, legal contract. B. usually bears interest C. involves penalties if not paid on the maturity date
What technological advances have helped make perpetual inventory systems feasible for small to medium-sized retail organizations? (Select all) A. Product barcoding B. Radio frequency identification tags C. Closed-circuit security cameras D. Scanning devices at cash registers
A, B, & D A. Product barcoding B. Radio frequency identification tags D. Scanning devices at cash registers
Which accounts on financial statements will increase when interest is accrued on short-term marketable debt securities? More than one answer may be correct. A. Revenues B. Net income C. Liabilities D. Assets E. Expenses
A, B, & D A. Revenues B. Net income D. Assets
Which of these would be included in the Cash account, which is reported as an asset on the balance sheet? More than one answer may be correct. A. Money on hand in petty cash funds B. Undeposited receipts, including checks C. Checking account balances D. Supplies on hand E. Savings account balances G. IOUs from credit-worthy customers
A, B, D & E A. Money on hand in petty cash funds B. Undeposited receipts, including checks C. Checking account balances E. Savings account balances
Which of these are true of the weighted-average inventory accounting alternative? More than one answer may be correct. A. It uses the average cost per unit of inventory to determine the cost of goods sold. B. It is the most appropriate alternative for a firm that sells automobiles, for example. C. It involves calculating the average cost of the items in the beginning inventory plus purchases made during the year. D. It is applied to individual items of inventory.
A, C & D A. It uses the average cost per unit of inventory to determine the cost of goods sold. C. It involves calculating the average cost of the items in the beginning inventory plus purchases made during the year. D. It is applied to individual items of inventory.
Select all that apply: The cost of an inventory item is released to the income statement as an: A. expense when the product becomes worthless B. asset when the product is purchased C. expense when the product is purchased D. expense when the product is sold E. expense when the product is lost or stolen F. revenue when the product is sold
A, D & E A. expense when the product becomes worthless D. expense when the product is sold E. expense when the product is lost or stolen
Assume that the balances in Accounts Receivable and the Allowance for Bad Debts accounts were $50,000 and $3,000, respectively, before a write-off entry for $1,000 was recorded. How much would have been reported on the balance sheet as "Net accounts receivable" before the write-off entry was recorded? A. 47,000 B. 50,000 C. 48,000 D. 46,000
A. 47,000 50,000 - 3,000 = 47,000
If appropriate allowance for bad debts is not provided, what will happen? A. Accounts Receivable and net income will be overstated B. Accounts Receivable and Accounts Payable will be understated C. The classification of assets into current and noncurrent will be incorrect. D. The classification of liabilities into current and noncurrent will be incorrect.
A. Accounts Receivable and net income will be overstated
Identify a true statement about cash equivalents. A. Cash equivalents are short-term investments readily convertible into cash with minimal risk of price change. B. Cash equivalents are used for making small payments for which writing a check will be inconvenient. C. Cash equivalents are issued by very creditworthy corporations to raise short-term funds. D. Cash equivalents are investments that are made for more than a year but less than five years.
A. Cash equivalents are short-term investments readily convertible into cash with minimal risk of price change.
An operating cycle is the average time it takes to: A. Convert an investment in inventory back to cash B. To sell an inventory item, thus creating an account receivable C. To collect an account receivable, thus receiving cash D. To collect an account receivable so that the company can pay its accounts payable
A. Convert an investment in inventory back to cash
What are short-term marketable securities? A. Investments made with cash that is not required for day-to-day operations B. Debt investments that mature beyond one year from the balance sheet date C. Cash and other assets that are likely to be converted into cash within one year of the balance sheet date D. Equity securities that management intends to hold for more than one year from the balance sheet date
A. Investments made with cash that is not required for day-to-day operations
The internal control process is designed to provide reasonable assurance that each of the following objectives are achieved, except: A. The promotion of a positive organizational image B. The reliability of the organization's financial reporting C. The effectiveness and efficiency of the operations of the organization D. The organization's compliance with applicable laws and regulations
A. The promotion of a positive organizational image
Short-term marketable debt securities that fall in the held-to-maturity category are reported on the balance sheet at the entity's cost, which is usually about the same as market value, because ______. A. of their high quality and the short time until maturity B. the underlying assets in these securities are equities of small-cap companies C. of their high risk and the short time until maturity D. the underlying assets in these securities are equities of banking companies
A. of their high quality and the short time until maturity
If appropriate allowance for bad debts is not provided, then ______. A. the ROI, ROE and liquidity measures will be distorted B. the valuation of inventory will be overstated C. the Accounts Payable and Notes Payable will be understated D. the estimation of depreciation will be inaccurate
A. the ROI, ROE and liquidity measures will be distorted
Under the FIFO method, the amount reported as cost of goods sold: A. will always be the same whether a periodic or perpetual system is used B. will always be lower under a periodic system as compared to a perpetual system C. will always be higher under a periodic system as compared to a perpetual system D. will vary under periodic and perpetual systems because the first-in item is redefined every time an inventory item is purchased
A. will always be the same whether a periodic or perpetual system is used
Under the LIFO method, the amount reported as ending inventory: A. will vary under periodic and perpetual systems because the last-in cost is redefined each time a purchase transaction occurs. B. will always be lower under a periodic system as compared to a perpetual system. C. will vary under periodic and perpetual systems because the last-in cost is redefined each time a sales transaction occurs. D. will always be higher under a periodic system as compared to a perpetual system.
A. will vary under periodic and perpetual systems because the last-in cost is redefined each time a purchase transaction occurs.
Prepaid expenses such as insurance premiums and lease (rental) payments that have been paid in advance should be treated as _______ (assets/liabilities) until the benefits associated with the prepayment are received and thus the _______ (revenue/expense) has been _______ (earned/incurred)
Assets Expense Incurred
Which of the following are alternative cost flow assumptions? (Select all) A. Replacement Cost B. Specific identification C. Next-in, First Out (NIFO) D. Last-in, First out (LIFO)
B & D B. Specific identification D. Last-in, First out (LIFO)
Identify the true statements regarding debt and equity securities that fall in the trading and available-for-sale categories. A. They are reported on the balance sheet at the entity's cost, which is usually about the same as market value B. Their accounting treatment shows the application of matching concept C. Their accounting treatment shows the application of historical cost concept D. They are reported on the balance sheet at the market value of the securities and any unrealized fains or losses are recognized
B & D B. Their accounting treatment shows the application of matching concept D. They are reported on the balance sheet at the market value of the securities and any unrealized fains or losses are recognized
The internal control process is designed to provide reasonable assurance that objectives are achieved with respect to which of the following? More than one answer may be correct. A. The organization's ability to avoid taxes B. The organization's compliance with applicable laws and regulation C. The effectiveness and efficiency of the operations of the organization D. The reliability of the organization's financial reporting E. The organizations' effort in minimizing the prevailing inflation rate
B, C & D B. The organization's compliance with applicable laws and regulation C. The effectiveness and efficiency of the operations of the organization D. The reliability of the organization's financial reporting
Identify the true statements regarding a bank reconciliation. More than one answer may be correct. A. Deposits in transit are subtracted from the bank's balance B. Outstanding checks are subtracted from the bank's balance C. Interest earned is subtracted from the company's book balance D. NSF checks are subtracted from the company's book balance E. Service charges are subtracted from the company's book balance
B, D & E B. Outstanding checks are subtracted from the bank's balance D. NSF checks are subtracted from the company's book balance E. Service charges are subtracted from the company's book balance
If ending inventory was overstated at the end of Year 1 but counted correctly at the end of Year 2 and this error was not discovered until sometime in Year 3, then: A. Cost of goods sold was overstated in Year 1 and overstated in Year 2 and the error would have doubled in total. B. Cost of goods sold was understated in Year 1 and overstated in Year 2 but the error would have self-corrected in total. C. Cost of goods sold was understated in Year 1 and understated in Year 2 and the error would have doubled in total. D. Cost of goods sold was overstated in Year 1 and understated in Year 2 but the error would have self-corrected in total.
B. Cost of goods sold was understated in Year 1 and overstated in Year 2 but the error would have self-corrected in total.
An agreement by the borrower to supply financial statements to the lender and an agreement by the borrower to refrain from paying dividends until the note is paid are both examples of provisions known as _______. A. Collateral B. Covenants C. Interest D. Default
B. Covenants
The entry to record the transfer of cost of the inventory sold to the income statement is: A. Dr. Accounts payable (or cash) Cr. Inventory B. Dr. COGS Cr. Inventory C. Dr. Sales Cr. Inventory D. Dr. Inventory Cr. COGS
B. Dr. COGS Cr. Inventory
What entry is made to accrue interest on short-term marketable debt securities? A. Dr. Interest Receivable. Cr. Interest Expense B. Dr. Interest Receivable. Cr. Interest Revenue C. Dr. Cash. Cr. Interest Receivable D. Dr. Cash. Cr. Interest Revenue
B. Dr. Interest Receivable. Cr. Interest Revenue
The amount in the Cash account, which is reported as an asset on the balance sheet, includes all of the following except: A. Petty Cash Fund Balances B. Expected litigation settlements C. Undeposited receipts D. Demand deposit balances
B. Expected litigation settlements
Cash equivalents are short-term investments readily convertible into cash with minimal risk of price change due to: A. Credit worthiness of the issuer B. Interest rate movements C. Stock market movements D. Inflation adjustments
B. Interest rate movements
In accounts receivable, what is net realizable value? A. The original amount that customers owe, before any cash discounts are applied B. The amount that is expected to be received from customers in settlement of their obligations C. The amount of profit the company generated by offering credit to customers D. The amount that customers owe before interest is compounded
B. The amount that is expected to be received from customers in settlement of their obligations
Current assets include cash and other assets that are expected to be converted to cash or used up ______. A. Within a year, or an operating cycle, whichever is shorter B. Within a year, or an operating cycle, whichever is longer C. Within an operating cycle D. Within a year
B. Within a year, or an operating cycle, whichever is longer
A firm paying its suppliers within the discount period ______. A. shows that the firm cannot borrow money at the lower interest rate to earn the higher rate from cash discounts B. gives a positive signal to the credit-rating agencies and credit grantors regarding the firm's creditworthiness and liquidity C. gives a positive signal to the shareholders that the firm will be declaring higher dividends in the current financial year D. shows that the firm has zero bad debt expenses in the current year
B. gives a positive signal to the credit-rating agencies and credit grantors regarding the firm's creditworthiness and liquidity
Most firms will almost always pay within the discount period to take advantage of the cash discounts (such as 2/10, n30) offered by their suppliers because: A. not making payments within the cash discount period is an ultra vires act and thus a violation of corporate law. B. most credit terms represent a significant financing cost if the discounts are not taken. C. the time value of money states that it's always better to pay off liabilities sooner rather than later. D. most firms can earn a much higher ROI on their principal activities than that offered by the cash discounts.
B. most credit terms represent a significant financing cost if the discounts are not taken.
Cash that is not necessary for a firm's day-to-day operations can be invested. This is known as ______. A. forecasting of cash receipts B. short-term marketable securities C. current assets D. long-term marketable securities
B. short-term marketable securities
Under the LIFO method, the amounts reported as ending inventory and cost of goods sold will differ depending on whether a periodic or perpetual system is used because: A. once last-in, always last-in; under LIFO, costs flow in the chronological order of purchase transactions. B. the last-in cost is redefined as each purchase transaction takes place, so the timing of the application of LIFO rules will influence the results. C. the timing of the question "What was the last-in cost?" will impact the average price per unit that is calculated to determine cost of goods sold. D. once last-in, always last-in; under LIFO, the timing of purchase transactions will not impact which costs are identified with sales transactions.
B. the last-in cost is redefined as each purchase transaction takes place, so the timing of the application of LIFO rules will influence the results.
The "market" in the lower of cost of market valuation is generally: A. the current selling price of the inventory less the company's normal profit margin. B. the replacement cost of the inventory C. the historical cost of the inventory less depreciation D. the current selling price of the inventory
B. the replacement cost of the inventory
How does the year-end adjustment for bad debts normally affect financial statements? More than one answer may be correct. A. An increase to total liabilities B. A decrease to paid-in capital C. An increase to expenses D. A decrease in the carrying value (the net realizable value) of accounts receivable
C & D C. An increase to expenses D. A decrease in the carrying value (the net realizable value) of accounts receivable
Identify the true statements regarding the balance sheet presentation of accounts receivable. A. In the balance sheet, the Allowance for Bad Debts account that is added to the accounts receivable represents accounts written off during the year. B. The allowance for bad debts is added to accounts receivable while presenting the accounts receivable in the balance sheet. C. The allowance for bad debts is subtracted from accounts receivable while presenting the accounts receivable in the balance sheet. D. "Net accounts receivable" represents the balance of an asset account less the balance of a contra asset account. E. "Net accounts receivable" is the net realizable value reported on the balance sheet.
C, D & E C. The allowance for bad debts is subtracted from accounts receivable while presenting the accounts receivable in the balance sheet. D. "Net accounts receivable" represents the balance of an asset account less the balance of a contra asset account. E. "Net accounts receivable" is the net realizable value reported on the balance sheet.
The effects on the financial statements of accruing interest on Notes Receivable include: (select all) A. an increase to expenses B. an increase to liabilities C. an increase to revenues D. an increase to assets E. an increase to net income
C, D & E C. an increase to revenues D. an increase to assets E. an increase to net income
Select all expenses that could be treated as prepaid and included in current assets include... A. Salaries B. Research & Development C. Insurance D. Rent E. Postage F. Office Supplies G. Advertising
C, D, E & F C. Insurance D. Rent E. Postage F. Office Supplies
What accounting system involves making a record of every purchase and every sale, and maintaining a continuous record of the quantity and cost of each item of inventory? A. Periodic Inventory System B. Weighted Average cost flow alternative C. Perpetual Inventory system D. Specific Identification Cost Flow Alternative
C. Perpetual Inventory system
The amounts reported for ending inventory and cost of goods sold will differ depending on whether the weighted-average, FIFO, or LIFO cost flow assumption is used by the reporting company. Which of the following is the primary reason for such differences in reported amounts? A. The average size of a purchase order changes over time B. The sales volume changes over time C. The purchase price per unit of inventory items changes over time D. The selling price per unit of inventory items changes over time
C. The purchase price per unit of inventory items changes over time
How does a write-off of an account receivable affect the financial statements? A. a increase to an expense account B. a decrease to an expense account C. a decrease to an asset account D. a decrease to a liability account
C. a decrease to an asset account
The net realizable value of accounts receivable is not affected by: A. an adjustment to record the estimated bad debts for the year B. an entry to record the collection of an account receivable C. an entry to the write-off of an account receivable D. an entry to record a credit sales transaction
C. an entry to the write-off of an account receivable
A bank reconciliation is performed to: A. bring the cash account balance and the checkbook balance into agreement B. bring the bank account balance into agreement with the balance reported on the bank statement C. bring the bank's reported balance and the cash account balance into agreement D. make sure that the bank has journalized the company's deposits in transit and outstanding checks
C. bring the bank's reported balance and the cash account balance into agreement
Accounts receivable from customers are reported at ______. A. face value B. projected net value C. net realizable value D. adjusted current value
C. net realizable value
Alternative cost flow assumptions include FIFO, LIFO, ______. A. weighted-average and NIFO B. weighted-average and replacement cost C. weighted-average and specific identification D. replacement cost and specific identification
C. weighted-average and specific identification
Identify a true statement about cash equivalents. A. Cash Equivalents are used for making small payments for which writing a check will be inconvenient B. Cash equivalents are investments that are made for more than a year but less than 5 years C. Cash Equivalents are issued by very creditworthy corporations to raise short-term funds D. Cash Equivalents are short-term investments readily convertible into cash with minimal risk of price change
D. Cash Equivalents are short-term investments readily convertible into cash with minimal risk of price change
In times of rising prices, inventory profits (or phantom profits) occur under the FIFO cost flow assumption. This occurs because under FIFO, the release of older, lower costs to the income statement results in higher profits than if current costs were to be recognized. How does this create a problem for the reporting company? A. Lower cost means higher net income and higher retained earnings B. Lower cost means lower net income and lower retained earnings C. Lower cost means lower taxable income and lower taxes payable D. Lower cost means higher taxable income and higher taxes payable
D. Lower cost means higher taxable income and higher taxes payable
When a firm's account balance reported by its bank and the bank account balance in its ledger do not agree, then the firm needs to ______. A. Prepare a trial balance B. Prepare a statement of cash flows C. Revisit cash budget D. Perform a Bank Reconciliation
D. Perform a Bank Reconciliation
What inventory accounting alternative would be appropriate for a firm that sells products such as automobiles, which have individual serial numbers and are purchased and sold by particular units? A. FIFO B. Weighted-average C. LIFO D. Specific Identification
D. Specific Identification
The entry that reflects the transfer of cost of goods sold to the income statement involves a ______. A. debit to Inventory and credit to COGS B. debit to Inventory and credit to Accounts Payable C. debit to Accounts Payable and credit to Inventory D. debit to COGS and credit to Inventory
D. debit to COGS and credit to Inventory
In the bank reconciliation process, errors are: A. always subtracted from the bank balance or the company's book balance B. always either added to or subtracted from the bank balance C. always either added to or subtracted from the company's book balance D. either added to or subtracted from the bank balance or the company's book balance
D. either added to or subtracted from the bank balance or the company's book balance
Under the FIFO method, the amounts reported as ending inventory and cost of goods sold will always be the same, whether a periodic or perpetual system is used because: A. the timing of the question "What was the first-in cost?" will vary depending on whether the periodic or perpetual system is used. B. once first-in, always first-in; under FIFO, the timing of purchase transactions will impact which costs are identified with sales transactions. C. the timing of the question "What was the first-in cost?" will vary depending on price level changes that occur over time. D. once first-in, always first-in; under FIFO, costs flow in the chronological order of purchase transactions.
D. once first-in, always first-in; under FIFO, costs flow in the chronological order of purchase transactions.
The net realizable value of accounts receivable is not affected by the write-off of an account receivable because: A. the decrease to an asset account is offset by a decrease to an expense account B. both accounts affected by the write-off entry are income statement accounts C. the increase to an asset account is offset by an increase to a contra asset account D. the decrease to an asset account is offset by a decrease to a contra asset account
D. the decrease to an asset account is offset by a decrease to a contra asset account
Short-term marketable debt securities that are in the held-to-maturity category are reported on the balance sheet at: A. the market value of the securities B. the entity's cost of the securities less accumulated depreciation C. the lower of the entity's cost of the securities or the market value of the securities D. the entity's cost of the securities
D. the entity's cost of the securities
Debt and equity securities that fall in the trading and available-for-sale categories are reported on the balance sheet at: A. the entity's cost of the securities and any unrealized gains or losses that are not recognized B. the entity's cost of the securities less accumulated depreciation C. the lower of the entity's cost of the securities or the market value of the securities D. the market value of the securities and any unrealized gains or losses are recognized
D. the market value of the securities and any unrealized gains or losses are recognized
In times of rising prices, LIFO results in _______ (higher/lower) ending inventory value and _______ (higher/lower) cost of goods sold value than FIFO
LOWER, HIGHER LIFO results in LOWER ending inventory value and HIGHER cost of goods sold value than FIFO
The cost of an inventory item is released to the income statement as an _____ (asset/expense) when the product is ______ (sold/purchased) or becomes worthless or is lost or stolen
expense sold
