ACG Test 2 Questions

4 Methods of Computing the Cost of Inventory

(1) specific identification (2) first-in, first-out (3) last-in, first-out (4) average cost methods.

In a perpetual inventory system, which accounts will the seller credit when a customer returns merchandise after purchasing it on account?

(i) Accounts Receivable and (ii) Cost of Goods Sold

Net credit sales are $900,000, average inventory totals $60,000, average net receivables total $50,000, and the allowance for doubtful accounts totals $5,000. How much is the average collection period (also known as the days in receivable ratio)?

20.277 days Accounts receivable turnover = net credit sales / average net accounts receivable $900,000/$50,000 = 18 times Average collection period = 365 / accounts receivable turnover ratio 365/18 = 20.277 days.

Helix Company purchased merchandise with an invoice price of $3,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

36% The company buying merchandise can wait 10 days and still receive a 2% discount. Otherwise, it can wait an additional 20 days and pay the full invoice amount without being overdue. In other words, a 20-day difference produces 2% interest. An interest rate of 2% in 20 days is equivalent to an interest rate of 36% in 360 days (i.e., 2% x 360/20).

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is cost of goods sold?

40,000 75000 - (15000+20000) = 40000

Arbor Corporation reports the following: Sales revenue $184,000; ending inventory $16,600; beginning inventory $17,200; purchases $60,400; purchases discounts $3,000; purchase returns and allowances $1,100; freight-in $600; freight-out $900. Calculate the company's cost of goods sold.

57500 Cost of goods sold = 17,200 + 60,400 - 3,000 - 1,100 + 600 - 16,600 = 57,500.

The following information relates to the beginning of the year: Accounts receivable, $245,000 Allowance for doubtful accounts (credit balance), $12,250 During the current year, sales on account were $1,100,000 and collections on account were $990,000. Also during the current year, the company wrote off $14,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have a $17,000 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year?

91,250 increase Ending accounts receivable, $245,000 + 1,100,000 - 990,000 - 14,000 = 341,000 Ending allowance for doubtful accounts, $17,000 (given) Ending cash realizable value, $341,000 - 17,000 = 324,000 Beginning cash realizable value, $245,000 - 12,250 = $232,750 Increase (decrease) in cash realizable value, $324,000 - 232,750 = $91,250

Which of the following statements is correct about the periodic inventory system?

A company which uses a periodic inventory system needs only one journal entry when it sells merchandise

What type of receivable is evidenced by a formal instrument and normally requires the payment of interest?

A note receivable

Which of these statements about national credit card (e.g., Visa) sales is correct?

A retailer's acceptance of a national credit card is a form of factoring the receivable by the retailer.

Which one of the following account pairs are both permanent accounts?

Accounts Receivable; Allowance for Doubtful Accounts

If the ending inventory is overstated, what occurs?

Assets are overstated and stockholders' equity is overstated.

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1: 5,000 $ 8 Purchase, April 2 15,000 10 Purchase, Aug. 28 20,000 12 If the company has 7,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

Average cost per unit = [(5,000 x $8) + (15,000 x $10) + (20,000 x $12)] ÷ (5,000 + 15,000 + 20,000) = $430,000 ÷ 40,000 units = $10.75 per unit. Ending inventory = $10.75 x 7,000 units = $75,250.

Oak Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $90,000 at year-end. The total credit sales were $2,600,000 for the year. Management estimates that 4% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $300 before the year-end adjusting entry for Bad Debt Expense?

Bad Debts Expense 3,900 Allowance for Doubtful Accounts 3,900 The Allowance for Doubtful Accounts needs an ending credit balance of 4% of $90,000 or $3,600. Since the pre-adjusted debit balance is $300, a credit of $3,900 is necessary to increase it to $3,600. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $3,900.

The operating cycle of a merchandising company has an extra expense account compared to a service company. What is that extra expense account?

Cost of Goods Sold

Net sales are $2,200,000, cost of goods sold is $1,200,000, and average inventory is $50,000. How many days' sales are in inventory?

Cost of goods / Average inventory = Days' sales in inventory 1,200,000 / 50,000 = 24 365/24 = 15.2

The following information came from the income statement of the Wilkens Company: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. What is Wilkens' inventory turnover ratio?

Cost of goods sold is the difference between sales revenue and gross profit: $1,800,000 - $600,000 = $1,200,000. Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,200,000/[($160,000 + $240,000)/2] = 6.0.

Inventory costing methods place primary reliance on assumptions about the flow of

Costs

Starlight Corporation, which uses a perpetual inventory system, purchased $3,000 of merchandise on August 2 on account. Credit terms were 1/10, n/30. It returned $250 of the merchandise on August 4. Which of the following is one effect when Starlight pays its bill on August 12?

Credit Inventory for 27.50

Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?

Credit balance of $12,000 The ending balance in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be a credit balance equal to 7.5% of $160,000, or $12,000.

A bank holds a 60-day, 7%, $27,000 note. The maker of the note pays in full on the maturity date. Which of the following is part of the journal entry that the bank will record on the maturity date?

Credit to Interest Revenue for $315 The bank's journal entry will decrease Notes Receivable for the value of the note, recognize Interest Revenue for the term of the note, and increase the Cash account for the total owed by the maker including principal and interest. The bank's journal entry is: Debit: Cash 27,315 Credit: Notes Receivable 27,000 Credit: Interest Revenue 315 (i.e., $27,000 x 7% x 60/360 = $315)

Baker Co. loaned $25,000 to Idaho Co. on June 1, at 12% interest for 3 months. What adjusting entry should Baker Co. record on June 30 before preparing the financial statements on June 30?

Debit Interest Receivable for $250 and credit Interest Revenue for $250 Interest earned is calculated by multiplying the face value (i.e., principal) times the interest rate times the portion of the year that has passed since the note was issued. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. Interest = Principal x interest rate x time = $25,000 x 12% x 1/12 = $250 Remember, all interest rates are annual interest rates unless designated otherwise. Baker Co. is the creditor; it loaned money to the other company. Baker Co. records increases to Interest Receivable and Interest Revenue.

At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (4) $8,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

Do not include the following in inventory: --FOB destination purchases not yet received (i.e., $23,000) --FOB shipping point goods sold and shipped (i.e., $8,000) --Goods held on consignment (i.e., $13,000) Ending inventory = $400,000 - 23,000 - 8,000 - 13,000 = $356,000

At what amount is a short-term note receivable recorded on the issue date?

Face value Short-term notes receivable are recorded at face value, which is the principal amount of the note.

Which of the following should be included in the physical inventory of a company?

Good shipped on consignment to another company Goods shipped on consignment to another company remain owned

A company started business in August and it made the following purchases of inventory: (1) on August 1, it purchased 100 units for $1,500; (2) on August 12, it purchased 100 units for $1,550; and (3) on August 24, it purchased 100 units for $1,575. A physical count of the inventory on August 31 reveals that there are 500 units on hand. What inventory method produces the lowest gross profit for August?

LIFO method On August 1, it spent $15 per unit; on Aug. 12, it spent $15.50 per unit; and on Aug. 24, it spent $15.750 per unit. This company is experiencing inflation. Low gross profit (i.e., low gross margin) occurs with higher cost of goods sold. During periods of inflation, the inventory costing method that considers the most expensive inventory to be sold is LIFO (i.e., last-in, first-out). The LIFO method will produce the lowest gross profit because LIFO results in the highest cost goods sold in periods of rising prices. The choice of a periodic versus perpetual inventory system does not change whether LIFO or FIFO produces the highest or lowest cost of goods sold or gross profit.

In periods of inflation, what will LIFO produce?

Lower total assets than FIFO

Marsh Company uses the perpetual inventory system. Which of the following transactions neither increases nor decreases its inventory account?

Marsh granted a customer an allowance by reducing the purchasing price. when a grants a customer an allowance by reducing the purchasing price it does not affect the inventory account because sales allowances increase the Sales Returns and Allowances account (debit it) and decreases accounts receivable (credit it).

Which of the following determines the quality of earnings ratio?

Net cash provided by operating activities / net income

A company has the following accounts balances: Sales revenue $100,000; Sales Returns and Allowances $20,000; Sales Discounts $5,000; Cost of Goods Sold $40,000; and Net Income $7,000. How much is the gross profit rate?

Net sales = Sales revenue - sales returns and allowances - sales discounts Net sales = 100,000 - 20,000 - 5,000 = 75,000 Gross profit = Net sales - cost of goods sold Gross profit = 75,000 - 40,000 = 35,000 Gross profit rate = Gross profit / net sales. Gross profit rate = 35,000/75,000 = 46.7%

Marsh uses a perpetual inventory system. On December 29, Marsh, Inc. sold inventory for $5,500 on account with terms 2/10 n/30. The customer pays on January 3. What amount will Marsh record in its inventory account on January 3?

No entry will be made (its a perpetual system)

Harold Company overstated its ending inventory by $15,000 at the end of the first year. It never noticed the error. As a result, what was the effect on Harold's stockholders equity at the end of the first year and at the end of the second year, respectively?

Overstated and properly stated If the first year's ending inventory is overstated, that same year's cost of goods sold will be understated and stockholders' equity and net income will be overstated (i.e., reported as being higher than it should be reported). If the error is not corrected, the next year's beginning inventory has the error. The second year's net income will be understated by the same amount it was overstated in the first year. The combined total net income for the two periods will be correct (but one is too high and the other is too low) which causes stockholders' equity at the end of the two periods to be correct.

Perpetual or Periodic System provides better control over inventories than does a periodic inventory system.

Perpetual

A company has the following: Sales revenue $300,000; Sales Returns and Allowances $30,000; Sales Discounts $3,000; Cost of Goods Sold $107,000; Operating Expenses $60,000; Other expenses $7,600; Net Cash from Operating Activities $100,000. How much is the company's profit margin?

Profit margin = Net income / net sales Net sales = Sales revenue - sales returns and allowances - sales discounts Net sales = 300,000 - 30,000 - 3,000 = 267,000 Net income = Net sales - cost of goods sold - operating expenses - other expenses Net income = 267,000 - 107,000 - 60,000 - 7,600 = 92,400 Profit margin = Net income / net sales Profit margin = 92,400/267,000 = 34.6%.

If a company is concerned about lending money to a risky customer, which one of the following would it not want to do?

Provide the customer a lengthy payment period Longer payment period will increase the chances the company will not pay

Which of the following will not be shown on the income statement for a merchandising company?

Retained earnings The sales section appears first followed by cost of goods sold. The difference between sales and cost of goods sold is gross profit.

How is gross profit measured?

Sales revenue minus cost of goods sold

What are the two accounts debited when a company factors its accounts receivable?

Service Charge Expense and Cash are the two accounts debited when accounts receivable are factored.

A company uses LIFO. At the beginning of the current year its inventory was $300,000, and at the end of the current year its inventory is $340,000. At the start of the year its LIFO reserve was $10,000 and at the end of the year its LIFO reserve is $15,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be

The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number, add the LIFO reserve to LIFO inventory to determine the company's FIFO inventory. FIFO ending inventory = LIFO ending inventory + LIFO reserve = $340,000 + 15,000 = $355,000

Starlight Corporation, which uses a perpetual inventory system, purchased $3,000 of merchandise on August 2 on account. Credit terms were 1/10, n/30. It returned $250 of the merchandise on August 4. Which of the following is one effect when Starlight pays its bill on August 12?

The accounting entry will debit Accounts Payable for $2,750, credit Cash for $2,722.50, and credit Inventory for $27.50.

A company's gross profit rate increased in the current year relative to the prior year. Which of the following would be a possible explanation for this change?

The company's global sourcing efforts at the beginning of the current year resulted in a lower cost of merchandise sold.

Which one of the following is not one of the five basic issues in accounting for notes receivable?

The five basic issues in accounting for notes receivable are 1) determining the maturity date 2) computing interest 3) recognizing notes receivable 4) valuing notes receivable 5) disposing of notes receivable.

At December 31, Sunrise Company's inventory records indicated a balance of $723,000. Upon further investigation it was determined that this amount included the following: (1) $5,000 of inventory held by Sunrise on consignment from another company. (2) $125,000 of inventory purchased by Sunrise under the terms FOB destination, and this inventory did not arrive until January 2. (3) $86,000 of inventory sold and shipped by Sunrise on December 29 under the terms FOB destination, and this inventory did not reach the buyer until January 3. What is Sunrise's correct ending inventory balance at December 31?

The inventory balance of $723,000 should not include the $125,000 since ownership passes at destination on January 2. It should include the $86,000 because ownership does not pass at the shipping point on December 29. It should not include the $5,000 on consignment because these goods are not owned by Sunrise. The corrected inventory balance = $723,000 - $125,000 - $5,000 = $593,000.

How many journal entries are necessary for recording the sale of goods for cash in a perpetual inventory system (and what do they do)

Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.

Irwin Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 45 $44 The company sold 100 units at $80 each and has a tax rate of 25%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's gross profit using LIFO? (rounded to whole dollars)

Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). Sales revenue = 100 x $80 = $8,000 Cost of goods sold = (45 x $44) + [(100 - 45) x $43] = $1,980+ 2,365= $4,345 Gross profit = Sales revenue - cost of goods sold = $8,000 - 4,345 = $3,655

Howe Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $41 Mar. 14 Purchase 60 $42 May 1 Purchase 55 $43 The company sold 100 units at $80 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,200, what is the company's after tax net income using LIFO? (rounded to whole dollars)

Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory).Sales revenue = 100 x $80 = $8,000 Cost of goods sold = (55 x $43) + [(100 - 55) x $42] = $2,365 + 1,890 = $4,255 Gross profit = Sales revenue - cost of goods sold = $8,000- $4,255 = $3,745 Net income before taxes = 8,000 - 4,255 - 1,200 = 2,545 Net income = 2,545 x (100% - 20%) = 2,036

Big Time Widgets has the following inventory data: December 1 Beginning inventory of 15 units at $6.00 per unit December 7 Purchased 50 units at $6.60 per unit December 12 Sold 45 units December 20 Purchased 30 units at $7.50 per unit December 29 Sold 15 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?

When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred. On Dec. 12, the company sold 45 units from the Dec. 7 layer of inventory. On Dec. 29, the company sold 15 units from the Dec. 20 layer of inventory. Cost of goods sold = (45 x $6.60) + (15 x $7.50) = 297 + 112.50 = $409.50 When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred. On Dec. 12, the company sold 45 units. On Dec. 29, the company sold 15 units. Cost of goods sold is based on the last 60 units of inventory acquired = (30 x $7.50) + (30 x $6.60) = 225 + 198 = $423

Wilma's Foods recorded the following events involving a recent purchase of inventory: Received goods for $45,000, terms 1/10, n/30. Returned $1,000 of the shipment for credit. Paid $250 freight on the shipment. Paid the invoice within the discount period. The company uses the perpetual inventory system. As a result of these events, the company's inventory

[($45,000 - 1,000) x 99%] + $250 = $43,810

A company uses the allowance method for uncollectible accounts. Last year, a customer purchased $100 of services on account from the company. In the current year, the company is notified that the customer is bankrupt and will not pay the company the amount owed. What journal entry does the company record when it is notified that the customer will not pay?

debit Bad Debt Expense and credit Allowance for Doubtful Accounts