Conceptual questions for final

During 2020, which was the first year of operations, Oswald Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end. Which of the following recording procedures would result in the highest cost of goods sold for 2020? 1. Recording purchases at gross amounts 2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement a. 1 b. 2 c. Either 1 or 2 will result in the same cost of goods sold. d. Cannot be determined from the information provided.

a. 1

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues? a. Associating cause and effect b. Systematic and rational allocation c. Immediate recognition d. Partial recognition

a. Associating cause and effect

Which of the following concepts relates to using the allowance method in accounting for accounts receivable? a. Bad debt expense is an estimate that is based on historical and prospective information. b. Bad debt expense is based on the actual amounts determined to be uncollectible. c. Bad debt expense is an estimate that is based only on an analysis of the receivables aging. d. Bad debt expense is management's determination of which accounts will be sent to the attorney for collection.

a. Bad debt expense is an estimate that is based on historical and prospective information.

What is the normal journal entry when writing-off an account as uncollectible under the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable

Which of the following methods of determining annual bad debt expense does not satisfy the matching concept? a. Direct write-off b. Percentage of ending accounts receivable c. Aging of accounts receivable d. All of these methods satisfy the matching concept.

a. Direct write-off

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. FIFO. b. LIFO. c. base stock. d. weighted-average.

a. FIFO.

In a period of rising prices, the inventory method which tends to give the highest reported inventory is a. FIFO. b. moving average. c. LIFO. d. weighted-average.

a. FIFO.

Which of the following is not an acceptable approach in applying the lower-of-cost-and net realizable value method to inventory? a. Inventory location. b. Categories of inventory items. c. Individual item. d. Total of the inventory.

a. Inventory location.

Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct? a. Net approach. b. Gross approach. c. Allowance approach. d. Contra revenue approach

a. Net approach.

Which of the following is not a capital expenditure? a. Repairs that maintain an asset in operating condition b. An addition c. A betterment d. A replacement

a. Repairs that maintain an asset in operating condition

Which of the following is not considered an advantage of LIFO when prices are rising? a. The inventory will be overstated. b. The more recent costs are matched against current revenues. c. There will be a deferral of income tax. d. A company's future reported earnings will not be affected substantially by future price declines.

a. The inventory will be overstated.

What is "recourse" as it relates to selling receivables? a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay. b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay c. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale. d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.

When using the periodic inventory system, which of the following generally would not be separately accounted for in the computation of cost of goods sold? a. Trade discounts applicable to purchases during the period b. Cash (purchase) discounts taken during the period c. Purchase returns and allowances of merchandise during the period d. Cost of freight-in for merchandise purchased during the period

a. Trade discounts applicable to purchases during the period

How is the gross profit method used as it relates to inventory valuation? a. Verify the accuracy of the perpetual inventory records. b. Verify the accuracy of the physical inventory. c. To estimate cost of goods sold. d. To provide an inventory value of LIFO inventories.

a. Verify the accuracy of the perpetual inventory records.

Why might inventory be reported at sales prices (net realizable value or market price) rather than cost? a. When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal. b. When there are no significant costs of disposal. c. When a non-cancellable contract exists to sell the inventory. d. When there is a controlled market with a quoted price applicable to all quantities.

a. When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal.

If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as a. a deduction from sales in the income statement. b. an item of "other expense" in the income statement. c. a deduction from accounts receivable in determining the accounts receivable amount expected to be collected. d. sales discounts forfeited in the cost of goods sold section of the income statement.

a. a deduction from sales in the income statement.

Assets that qualify for interest cost capitalization include a. assets under construction for a company's own use. b. assets that are ready for their intended use in the earnings of the company. c. assets that are not currently being used because of excess capacity. d. All of these assets qualify for interest cost capitalization.

a. assets under construction for a company's own use.

Lower-of-cost or net realizable value as it applies to inventory is best described as the a. drop of future utility below its original cost. b. method of determining cost of goods sold. c. assumption to determine inventory flow. d. change in inventory value to market value.

a. drop of future utility below its original cost.

When boot is involved in an exchange having commercial substance a. gains or losses are recognized in their entirety. b. a gain or loss is computed by comparing the fair value of the asset received with the fair value of the asset given up. c. only gains should be recognized. d. only losses should be recognized.

a. gains or losses are recognized in their entirety.

The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach a. gives a reasonably correct statement of receivables in the balance sheet. b. best relates bad debt expense to the period of sale. c. is the only generally accepted method for valuing accounts receivable. d. makes estimates of uncollectible accounts unnecessary.

a. gives a reasonably correct statement of receivables in the balance sheet.

Goods in transit which are shipped f.o.b. destination should be a. included in the inventory of the seller. b. included in the inventory of the buyer. c. included in the inventory of the shipping company. d. None of these answers are correct.

a. included in the inventory of the seller.

The activity method of depreciation a. is a variable charge approach. b. assumes that depreciation is a function of the passage of time. c. conceptually associates cost in terms of input measures. d. all of these answers are correct.

a. is a variable charge approach.

The designated market value a. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. b. should always be equal to net realizable value. c. may sometimes exceed net realizable value. d. should always be equal to net realizable value less a normal profit margin.

a. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin.

Depletion expense a. is usually reported as cost of goods sold when the resource is sold. b. includes tangible equipment costs in the depletion base. c. excludes intangible development costs from the depletion base. d. excludes restoration costs from the depletion base.

a. is usually reported as cost of goods sold when the resource is sold.

If a unit of inventory has declined in value below original cost, but the market value exceeds net realizable value, the amount to be used for purposes of inventory valuation is a. net realizable value. b. original cost. c. market value. d. net realizable value less a normal profit margin.

a. net realizable value.

Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange has a. no commercial substance and additional cash is paid. b. no commercial substance and additional cash is received. c. commercial substance and additional cash is paid. d. commercial substance and additional cash is received.

a. no commercial substance and additional cash is paid.

The accounts receivable turnover measures the a. number of times the average balance of accounts receivable is collected during the period. b. percentage of accounts receivable turned over to a collection agency during the period. c. percentage of accounts receivable arising during certain seasons. d. number of times the average balance of inventory is sold during the period.

a. number of times the average balance of accounts receivable is collected during the period.

The major difference between the service life of an asset and its physical life is that a. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last. b. physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value. c. physical life is always longer than service life. d. service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

a. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.

The period of time during which interest must be capitalized ends when a. the asset is substantially complete and ready for its intended use. b. no further interest cost is being incurred. c. the asset is fully depreciated. d. the activities that are necessary to get the asset ready for its intended use have begun.

a. the asset is substantially complete and ready for its intended use.

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when the exchange has commercial substance is usually recorded at a. the fair value of the asset given up, and a gain or loss is recognized. b. the fair value of the asset given up, and a gain but not a loss may be recognized. c. the fair value of the asset received if it is equally reliable as the fair value of the asset given up. d. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company.

a. the fair value of the asset given up, and a gain or loss is recognized.

Each of the following is an example of an asset's involuntary conversion except a. the sale of a fully depreciated asset. b. a condemnation of property. c. a fire damaging an asset. d. a theft of the asset.

a. the sale of a fully depreciated asset.

The term "depreciable base," or "depreciation base," as it is used in accounting, refers to a. the total amount to be charged (debited) to expense over an asset's useful life. b. the cost of the asset less the related depreciation recorded to date. c. the estimated market value of the asset at the end of its useful life. d. the acquisition cost of the asset.

a. the total amount to be charged (debited) to expense over an asset's useful life.

For income statement purposes, depreciation is a variable expense if the depreciation method used is a. units-of-production. b. straight-line. c. sum-of-the-years'-digits. d. declining-balance.

a. units-of-production.

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense? a. Actual losses from uncollectible accounts b. A percentage of accounts receivable adjusted for the balance in the allowance c. A percentage of accounts receivable not adjusted for the balance in the allowance d. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance

b. A percentage of accounts receivable adjusted for the balance in the allowance

Which of the following is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for resale c. Acquired for use d. Yields services over a number of years

b. Acquired for resale

Which inventory costing method most closely approximates current cost for each of the following: Ending Inventory Cost of Goods Sold a. FIFO FIFO b. FIFO LIFO c. LIFO FIFO d. LIFO LIFO

b. FIFO LIFO

In a period of rising prices which inventory method generally provides the greatest amount of net income? a. Average cost. b. FIFO. c. LIFO. d. Specific identification.

b. FIFO.

Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations? a. Average cost b. First-in, first-out c. Last-in, first-out d. Base stock

b. First-in, first-out

Which statement is true about the gross profit method of inventory valuation? a. It may be used to estimate inventories for annual statements. b. It may be used to estimate inventories for interim statements. c. It eliminates the need for physical inventories. d. When calculated on selling price, it will always be more than the related percentage based on cost.

b. It may be used to estimate inventories for interim statements.

When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at? a. Sales price b. Net realizable value c. Historical cost d. Net realizable value reduced by a normal profit margin

b. Net realizable value

Which of the following statements is correct regarding receivables? a. Receivables are written promises of the purchaser to pay for goods or services. b. Receivables are claims held against customers and others for money, goods, or services. c. Receivables are non-financial assets. d. Receivables that are expected to be collected within a year are classified as noncurrent.

b. Receivables are claims held against customers and others for money, goods, or services.

Which of the following statements is true regarding capitalization of interest? a. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account. b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. c. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.

b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

What is the normal journal entry for recording bad debt expense under the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

Which of the following most accurately reflects the concept of depreciation as used in accounting? a. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred. b. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. c. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved. d. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.

b. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to a. charge a full year's depreciation to the year of acquisition. b. determine depreciation expense for the full year and then prorate the expense between the two periods involved. c. use the straight-line method for the year in which the asset is sold or otherwise disposed of. d. use a salvage value equal to the first year's partial depreciation charge.

b. determine depreciation expense for the full year and then prorate the expense between the two periods involved.

In no case can "market" in the lower-of-cost-or-market rule be more than a. estimated selling price in the ordinary course of business. b. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal. c. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin. d. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses.

b. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal.

In a period of rising prices, the inventory method which tends to give the highest reported net income is a. base stock. b. first-in, first-out. c. last-in, first-out. d. weighted-average.

b. first-in, first-out.

A principal objection to the straight-line method of depreciation is that it a. provides for the declining productivity of an aging asset. b. ignores variations in the rate of asset use. c. tends to result in a constant rate of return on a diminishing investment base. d. gives smaller periodic write-offs than decreasing charge methods.

b. ignores variations in the rate of asset use.

Goods on consignment are a. included in the consignee's inventory. b. included in the consignor's inventory. c. included in the consignee's revenue. d. included in both the consignee's and the consignor's inventory.

b. included in the consignor's inventory.

Goods in transit which are shipped f.o.b. shipping point should be a. included in the inventory of the seller. b. included in the inventory of the buyer. c. included in the inventory of the shipping company. d. None of these answer choices are correct.

b. included in the inventory of the buyer.

Fences and parking lots are reported on the balance sheet as a. current assets. b. land improvements. c. land. d. property and equipment.

b. land improvements.

The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the a. net realizable value. b. net realizable value less normal profit margin. c. replacement cost. d. selling price less costs of completion and disposal.

b. net realizable value less normal profit margin.

Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except a. at the date of acquisition, cost reflects fair value. b. property, plant, and equipment items are always acquired at their original historical cost. c. historical cost involves actual transactions and, as such, is the most reliable basis. d. gains and losses should not be anticipated but should be recognized when the asset is sold.

b. property, plant, and equipment items are always acquired at their original historical cost.

The book value of a plant asset is a. the fair market value of the asset at a balance sheet date. b. the asset's acquisition cost less the total related depreciation recorded to date. c. equal to the balance of the related accumulated depreciation account. d. the assessed value of the asset for property tax purposes.

b. the asset's acquisition cost less the total related depreciation recorded to date.

Which of the following items should be included in accounts receivable reported on the balance sheet? a. Notes receivable. b. Interest receivable. c. Allowance for doubtful accounts. d. Advances to related parties and officers.

c. Allowance for doubtful accounts.

Which of the following is a characteristic of a perpetual inventory system? a. Inventory purchases are debited to a Purchases account. b. Inventory records are not kept for every item. c. Cost of goods sold is recorded with each sale. d. Cost of goods sold is determined as the amount of purchases less the change in inventory.

c. Cost of goods sold is recorded with each sale.

During 2020, which was the first year of operations, Oswald Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end. Which of the following recording procedures would result in the highest net income for 2020? 1. Recording purchases at gross amounts 2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement a. 1 b. 2 c. Either 1 or 2 will result in the same net income. d. Cannot be determined from the information provided.

c. Either 1 or 2 will result in the same net income.

Which of the following nonmonetary exchange transactions may result in recorded gains or losses? a. Exchange of assets with no difference in future cash flows. b. Exchange of products by companies in the same line of business with no difference in future cash flows. c. Exchange of assets with a difference in future cash flows. d. Exchange of an equivalent interest in similar productive assets that causes the companies involved to remain in essentially the same economic position.

c. Exchange of assets with a difference in future cash flows.

What is consigned inventory? a. Goods that are shipped, but title transfers to the receiver. b. Goods that are sold, but payment is not required until the goods are sold. c. Goods that are shipped, but title remains with the consignor. d. Goods that have been segregated for shipment to a customer.

c. Goods that are shipped, but title remains with the consignor.

In a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is a. FIFO. b. average cost. c. LIFO. d. None of these choices are correct.

c. LIFO.

When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term "market"? a. Net realizable value b. Net realizable value less a normal profit margin c. Replacement cost, Net realizable value, or Net realizable value less a normal profit margin. d. Discounted present value

c. Replacement cost, Net realizable value, or Net realizable value less a normal profit margin.

Which of the following is a reason why the specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold? a. The potential for manipulation of net income is reduced. b. There is no arbitrary allocation of costs. c. The cost flow matches the physical flow. d. Able to use on all types of inventory.

c. The cost flow matches the physical flow.

Which of the following statements about involuntary conversions is false? a. An involuntary conversion may result from condemnation or fire. b. The gain or loss from an involuntary conversion may be reported as other revenues and gains or other expenses and losses. c. The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets. d. All of these answers are correct.

c. The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets.

Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset? a. Interest cost is being incurred. b. Expenditures for the assets have been made. c. The interest rate is equal to or greater than the company's cost of capital. d. Activities that are necessary to get the asset ready for its intended use are in progress.

c. The interest rate is equal to or greater than the company's cost of capital.

Why would a company sell receivables to another company? a. To improve the quality of its credit granting process. b. To limit its legal liability. c. To accelerate access to amounts collected. d. To comply with customer agreements.

c. To accelerate access to amounts collected.

Why are inventories stated at lower-of-cost and net realizable value? a. To report a loss when there is a decrease in the future utility. b. To keep track of the market value of the inventory. c. To report a loss when there is a decrease in the future utility below the original cost. d. To permit future profits to be recognized.

c. To report a loss when there is a decrease in the future utility below the original cost.

Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the site. The cost of the Emporia Hotel should be a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down. b. written off as a loss in the year the hotel is torn down. c. capitalized as part of the cost of the land. d. capitalized as part of the cost of the new hotel.

c. capitalized as part of the cost of the land.

All of the following are problems associated with the valuation of accounts receivable except a. uncollectible accounts. b. returns. c. cash discounts under the net method. d. allowances granted.

c. cash discounts under the net method.

When a company purchases land as a site for a plant, interest costs capitalized during the period of construction are part of the: a. period cost. b. cost of acquisition. c. cost of the plant. d. cost of the land.

c. cost of the plant.

The cost of land does not include a. costs of grading, filling, draining, and clearing. b. costs of removing old buildings. c. costs of improvements with limited lives. d. special assessments.

c. costs of improvements with limited lives.

Lower-of-cost-or-market a. is most conservative if applied to the total inventory. b. is most conservative if applied to major categories of inventory. c. is most conservative if applied to individual items of inventory. d. must be applied to major categories for taxes.

c. is most conservative if applied to individual items of inventory.

Use of the sum-of-the-years'-digits method a. results in salvage value being ignored. b. means the denominator is the years remaining at the beginning of the year. c. means the book value should not be reduced below salvage value. d. all of these answers are correct.

c. means the book value should not be reduced below salvage value.

Each of the following are physical factors affecting depreciation except a. casualties. b. decay. c. obsolescence. d. wear and tear.

c. obsolescence.

For a nonmonetary exchange of plant assets, accounting recognition should not be given to a. a loss when the exchange has no commercial substance. b. a gain when the exchange has commercial substance. c. part of a gain when the exchange has no commercial substance and cash is paid (cash paid/received is less than 25% of the fair value of the exchange). d. part of a gain when the exchange has no commercial substance and cash is received (cash paid or received is less than 25% of the fair value of the exchange).

c. part of a gain when the exchange has no commercial substance and cash is paid (cash paid/received is less than 25% of the fair value of the exchange).

The cost of land typically includes the purchase price and all of the following costs except a. grading, filling, draining, and clearing costs. b. street lights, sewers, and drainage systems cost. c. private driveways and parking lots. d. assumption of any liens or mortgages on the property.

c. private driveways and parking lots.

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to a. the total interest cost actually incurred. b. a cost of capital charge for stockholders' equity. c. that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made. d. that portion of weighted-average accumulated expenditures on which no interest cost was incurred.

c. that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.

When using a perpetual inventory system, a. no Purchases account is used. b. a Cost of Goods Sold account is used. c. two entries are required to record a sale. d. All of these answer choices are correct.

d. All of these answer choices are correct.

Which of the following is true of depreciation accounting? a. It is not a matter of valuation. b. It is part of the matching of revenues and expenses. c. It is the process of cost allocation. d. All of these answers are correct.

d. All of these answers are correct.

Which of these is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for use in operations c. Yields services over a number of years d. All of these are major characteristics of a plant asset.

d. All of these are major characteristics of a plant asset.

In order for a cost to be capitalized (capital expenditure), the following must be present: a. The useful life of an asset must be increased. b. The quantity of assets must be increased. c. The quality of assets must be increased. d. Any of these answers are correct.

d. Any of these answers are correct.

Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets? a. Assets under construction for an enterprise's own use. b. Assets intended for sale or lease that are produced as discrete projects. c. Assets financed through the issuance of long-term debt. d. Assets not currently undergoing the activities necessary to get them ready for use.

d. Assets not currently undergoing the activities necessary to get them ready for use.

Which method(s) may be used to record a loss due to a price decline in the value of inventory? a. The cost-of-goods-sold method. b. The sales method. c. The loss method d. Both the cost-of-goods-sold method and the loss method.

d. Both the cost-of-goods-sold method and the loss method.

Which method may be used to record cash discounts a company receives for paying suppliers promptly? a. Net method. b. Gross method. c. Average method. d. Both the net method and the gross method.

d. Both the net method and the gross method.

Which of the following methods of determining bad debt expense does not properly match expense and revenue? a. Charging bad debts with a percentage of sales under the allowance method. b. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method. c. Charging bad debts with an amount derived from aging accounts receivable under the allowance method. d. Charging bad debts as accounts are written off as uncollectible.

d. Charging bad debts as accounts are written off as uncollectible.

Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

Which of the following is a realistic assumption of the straight-line method of depreciation? a. The asset's economic usefulness is the same each year. b. The repair and maintenance expense is essentially the same each period. c. The rate of return analysis is enhanced using the straight-line method. d. Depreciation is a function of time rather than a function of usage.

d. Depreciation is a function of time rather than a function of usage.

Why is the allowance method preferred over the direct write-off method of accounting for bad debts? a. Allowance method is used for tax purposes. b. Estimates are used. c. Determining worthless accounts under direct write-off method is difficult to do. d. Improved matching of bad debt expense with revenue.

d. Improved matching of bad debt expense with revenue.

Which of the following accounts is credited in the loss method of writing-down of inventory to its net realizable value if no allowance account is used? a. Allowance to Reduce Inventory to NRV b. Loss Due to Decline of Inventory to NRV c. Cost of Goods Sold d. Inventory

d. Inventory

Which of the following statements is incorrect regarding the lower-of-cost-or-market rule? a. It is inconsistent because losses are recognized but not gains. b. It usually understates assets. c. It can increase future income if the expected reductions do not materialize. d. It incorporates both gains and losses in value that occur during the course of business.

d. It incorporates both gains and losses in value that occur during the course of business.

Interest cost incurred in purchasing an asset that is ready for its intended use should a. be written off over the remaining term of the debt. b. be accumulated in a separate deferred charge account and written off equally over a 40-year period. c. not be written off until the related asset is fully depreciated or disposed of. d. None of these answers are correct.

d. None of these answers are correct.

Plant assets may properly include a. deposits on machinery not yet received. b. idle equipment awaiting sale. c. land held for possible use as a future plant site. d. None of these answers are correct.

d. None of these answers are correct.

Which of the following is a capital expenditure? a. Payment of an account payable b. Retirement of bonds payable c. Payment of Federal income taxes d. None of these answers are correct.

d. None of these answers are correct.

Which of the following is true regarding the use of LIFO for inventory valuation? a. If LIFO is used for external financial reporting, then it must also be used for internal reports. b. For purposes of external financial reporting, LIFO may not be used with the lower of cost or market approach. c. If LIFO is used for external financial reporting, then it cannot be used for tax purposes. d. None of these answers are correct.

d. None of these answers are correct.

Where should goods in transit that were recently purchased f.o.b. destination be included on the balance sheet? a. Accounts payable. b. Inventory. c. Equipment. d. Not on the balance sheet.

d. Not on the balance sheet.

What is the rationale behind the ceiling when applying the lower-of-cost-or-market method to inventory? a. Prevents understatement of the inventory value. b. Allows for a normal profit to be earned. c. Allows for items to be valued at replacement cost. d. Prevents overstatement of the value of obsolete or damaged inventories.

d. Prevents overstatement of the value of obsolete or damaged inventories.

Which of the following is not a basic assumption of the gross profit method? a. The beginning inventory plus the purchases equal total goods to be accounted for. b. Goods not sold must be on hand. c. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand. d. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.

d. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.

When should a transfer of receivables be recorded as a sale? a. The buyer surrenders control of the receivables to the seller b. The transferor maintains effective control over the transferred assets through an agreement to repurchase or redeem them prior to their maturity. c. The transferee cannot pledge or exchange the transferred assets. d. The transferred assets are isolated from the transferor

d. The transferred assets are isolated from the transferor

Economic factors that shorten the service life of an asset include a. obsolescence. b. supersession. c. inadequacy. d. all of these answers are correct.

d. all of these answers are correct.

Use of the double-declining balance method a. results in a decreasing charge to depreciation expense each year. b. requires that salvage value is not deducted in computing the depreciation base. c. requires that the book value not be reduced below salvage value. d. all of these answers are correct.

d. all of these answers are correct.

The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in a. an overstatement of assets and net income. b. an understatement of assets and net income. c. an understatement of cost of goods sold and liabilities and an overstatement of assets. d. an understatement of liabilities and an overstatement of owners' equity.

d. an understatement of liabilities and an overstatement of owners' equity.

The gross profit method of inventory valuation is invalid when a. a portion of the inventory is destroyed. b. there is a substantial increase in inventory during the year. c. there is no beginning inventory because it is the first year of operation. d. applying a blanket gross profit rate to merchandise that have widely varying rates of gross profit.

d. applying a blanket gross profit rate to merchandise that have widely varying rates of gross profit.

When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n) a. trade discount. b. nominal discount. c. enhancement discount. d. cash discount.

d. cash discount.

Termination of an asset's service due to theft, fire, etc., is called: a. special assessment. b. nonreciprocal transfers. c. speculation. d. involuntary conversion.

d. involuntary conversion.

Net realizable value is a. acquisition cost plus costs to complete and sell. b. selling price. c. selling price plus costs to complete and sell. d. selling price less costs to complete, sell, and transport

d. selling price less costs to complete, sell, and transport

When the cost-of-goods-sold method is used to record inventory at net realizable value a. there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale. b. a loss is recorded directly in the inventory account by crediting Inventory and debiting Loss on Inventory Decline. c. only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements. d. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold.

d. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold.

Usually, companies compute depletion for accounting purposes using a a. percentage depletion method. b. decreasing charge method. c. straight-line method. d. units-of-production method.

d. units-of-production method.