Exam 2

Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO

Which of the following was not a change introduced by the Sarbanes-Oxley Act?

Limits on executive compensation for most companies.

Generally accepted accounting principles (GAAP) require that the inventory be reported at:

Lower of cost or market/net realizable value.

Which amount should be reported as cash on the balance sheet?

The up-to-date ending cash balance per the bank reconciliation.

Which of the following statements incorrectly describes an imprest system?

The use of an imprest system eliminates the need for bank reconciliations.

Hayward Company reported net sales revenue of $23.76 billion and cost of goods sold of $7.2 billion. Its gross profit percentage was:

69.7%

Hayward Company reported net sales revenues of $21.6 billion and cost of goods sold of $4.3 billion. Its gross profit percentage was:

80.1%

If inventory is updated periodically, which of the equations is correct?

Cost of goods sold = Beginning inventory + Purchases - Ending inventory

Which of the following are similarities between a six-month note receivable and an account receivable? The both are:

Current assets.

Failing to record bad debt expense in the same period as the related revenue violates which principle?

Expense recognition principle ("matching")

Which inventory costing method uses the oldest cost of goods sold on the income statement and the newest cost for the inventory on the balance sheet?

FIFO

Which method will result in the same cost of goods sold amount whether it is computed using the periodic inventory system or the perpetual inventory system?

FIFO

The LIFO conformity Rule requires that LIFO be used:

For financial reporting if it is used on the company's income tax return.

Which of the following would be in the finished goods inventory of a company making ice cream?

Frozen ice cream that is waiting to be shipped to retailers.

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business.

There are advantages and disadvantages to extending credit to customers. Which of the following statements below expresses the general reason for extending credit?

Gross profits exceed bad debt costs.

Which of the following would be in the work in process inventory of a company making ice cream?

Ice cream in process awaiting the addition of nuts.

Which of the following is not a reason that a business needs an effective internal control system?

Identify ways to evade applicable laws and regulations.

Which line item would be found on a merchandiser's balance sheet and not on a service firm's?

Inventory.

When a company sells goods, it removes their cost from the balance sheet and reports the cost on the income statement as:

cost of goods sold.

When inventory is sold, the cost of the inventory is removed from the inventory account and reported on a multistep the income statement as:

cost of goods sold.

Which of the following is a significant objective of the Sarbanes-Oxley (SOX) Act?

counteract incentives

Inventory is reported as a(n) ______________ on the _______________________.

current asset; balance sheet

The potential disadvantages of extending credit include all of the following except:

customers buying too much.

When using a perpetual inventory system; the Cost of Goods Sold is recorded:

each time a sale is made.

Collusion occurs when:

employees work together to get around internal controls.

The accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called the:

expense recognition principle ("matching").

The direct write-off method is not allowed under GAAP because it violates the:

expense recognition principle ("matching").

The remittance advice:

explains the purpose of a customer's payment.

An arrangement where receivables are sold to another company for immediate cash is called:

factoring

Recording the estimate of bad debt expense:

follows the expense recognition ("matching") principle.

Receivables might be sold ("factored") to:

generate cash immediately

Beginning inventory plus purchases equals:

goods available for sale.

The fraud triangle contains three elements that must exist for accounting fraud to occur. The elements are:

incentive, opportunity, and rationalization.

Sales Returns and Allowances are reported on the:

income statement only.

All of the following will likely be incurred by a company that extends credit except:

increased advertising expenses.

The potential advantages of extending credit to customers include all of the following except:

increased wage expenses.

The control environment:

is the attitude that people in the organization hold regarding internal control.

Acme Company's balance sheet shows three inventory accounts—raw materials, work in process, and finished goods. Acme Company must be a:

manufacturer.

Intel makes microchips from raw materials acquired from suppliers. Intel is a:

manufacturer.

Carrying insufficient quantities of inventory on hand:

may result in lost sales.

The receipt of cash is one of the operating activities of:

merchandising, manufacturing, and service companies.

All of the following are goals of internal control except:

minimizing the amount of income taxes that must be paid.

IBM signs an agreement to lend $200,000 to one of its customers to be repaid in one year at 5% interest. IBM would record this loan as:

notes receivable.

The days-to-collect measures the:

number of days it takes to collect accounts receivable.

A system used to reimburse employees for expenditures they have made on behalf of the organization is referred to as a(n):

petty cash system.

The continuous assessment by management to asses the potential for fraud and other risks is referred to as:

risk assessment.

The principles of internal control include which of the following?

segregate duties

The internal control principle related to assigning responsibilities so that one employee cannot make a mistake or commit a dishonest act without someone else discovering it is referred to as:

segregation of duties.

If your company factors its accounts receivable, it:

sells outstanding receivables to another company.

Multiple-step income statements:

separate core results from peripheral results.

Restricted cash is reported

separately as an asset on the balance sheet.

To determine cost of goods sold for the period requires:

subtracting ending inventory from the goods available for sale.

A series of activities that generates revenues and collects cash from customers is called:

the operating cycle.

An objective of the expense recognition principle ("matching") is to have bad debt expense recorded in:

the same period the related credit sales are recorded.

The inventory turnover ratio directly measures:

the times per period the average inventory balance is sold.

The direct write-off method for uncollectible accounts:

violates the expense recognition principle.

A collection of documents prepared in the process of approving, processing and documenting all purchases and payments made on account is referred to as a(n):

voucher

A process for approving and documenting all purchases and payments on account is referred to as a(n):

voucher system.

A company buys footwear and clothing from manufacturers, which it resells to discount stores in a large urban area. This company is an example of a:

wholesale merchandising company.

When a perpetual system is used and transportation cost is incurred to obtain inventory, the transportation cost is:

added to Inventory.

In a bank reconciliation, a deposit in transit is:

added to the bank balance.

A scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing might suggest:

channel stuffing

To make it easier for financial statement users to compare account balances from one period to the next, companies report:

comparative financial statements.

Goods that a company holds on behalf of another company that are not reported on the company's balance sheet are called:

consignment inventory

Multistep income statements:

contain more detail than just listing revenues and expenses.

A strong system of internal ________ reduces the ___________ to commit fraud.

controls; opportunity

Inventory reports the:

cost of goods available for sale.

The inventory turnover ratio is calculated as:

cost of goods sold divided by average inventory.

Which principle of internal control states that you should assign each task to only one employee?

Establishing responsibility.

Which of the following would be considered merchandise inventory?

Purchased finished goods

Which of the following situations depicts the best receivables management?

Receivables turnover ratio increases and the days to collect decreases.

The direct write-off method for uncollectible accounts is required:

by the IRS.

FAD company uses a periodic inventory system and its inventory records for the period contain the following information: Beginning inventory (105 units @ $56/unit) $5,880 Purchases (180 units @ $56/unit) $10,080 Ending inventory (155 units @ $56/unit) $8,680. What is the amount of cost of goods available for sale?

$15,960

The company has $8,000 in its checking account, $16,000 in its savings account, $800 in petty cash, $20,000 in one-year Treasury bills, and $12,000 in a money market fund. What amount should be reported as cash and cash equivalents on the balance sheet?

$36,800

The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company's adjusted trial balance. Accounts Payable $ 30,000 Accounts Receivable 33,000 Inventory 60,000 Advertising Expense 36,000 Cost of Goods Sold 267,000 Delivery Expense 18,000 Income Tax Expense 6,000 Insurance Expense 3,000 Rent Expense 36,000 Sales Revenue 480,000 Sales Discounts 33,000 Sales Returns & Allowances 57,000 Net sales would be:

$390,000

When goods are sold to a customer with credit terms of 2/15, n/30, the customer will receive a:

2% discount if they pay within 15 days.

Coronado Company purchases $70,000 of inventory from a wholesaler who allows 45 days to pay. In addition, the wholesaler offers a 3% discount if the payment is made within 12 days. These payment terms would be expressed as:

3/12, n/45.

The number of days to sell is calculated as:

365 divided by Inventory turnover ratio.

Which of the following items on a bank reconciliation would require a journal entry on a company's books?

A bank service charge.

Which of the following is not associated with the inventory turnover ratio?

A drop in the demand for the company's products.

If a company returns an item to a supplier, the supplier will record the return as:

A sales return

The objectives of a company's system of internal control include which of the following?

Adhering to laws and regulations.

Which method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance?

Aging of accounts receivable method.

When the direct write-off method is used to account for uncollectible accounts which of the following accounts would not be used?

Allowance for Doubtful Accounts

Accounts Receivable, Net (or Net Accounts Receivable) equals Accounts Receivable (gross) minus:

Allowance for Doubtful Accounts.

The challenge businesses face when estimating the allowance for previously recorded sales is that:

At the time of the sale, it is not known which customer(s) will not make their payment.

The adjusting entry to record the estimated bad debts in the period credit sales occur would normally include a debit to:

Bad Debt Expense and a credit to Allowance for Doubtful Accounts.

Which of the following is the equation for cost of goods sold?

Beginning inventory + purchases - ending inventory

Which of the following statements about an auto manufacturer's inventory is not correct?

Cars that have been sold to dealers would be included in finished goods inventory.

What does a low receivable turnover ratio indicate?

Cash collections are sluggish, taking longer to collect.

A voucher system employs various forms of documentation related to steps in the control over cash. Which of the following is not a document in the voucher system?

Cash count sheet.

Most companies report their lower of cost or market write-down expense as a _____________ expense even if the goods haven't been sold, because it's a necessary cost of carrying and (eventually) selling the goods.

Cost of Goods Sold

Which of the following would be added to the ending cash balance per bank when performing a bank reconciliation?

Deposits in transit

Which of the following is added to the bank balance on a bank reconciliation?

Deposits in transit.

If inventory is updated perpetually, which of the equations is correct?

Ending inventory = Beginning inventory + purchases - cost of goods sold

Which of the following is not one of the primary goals of inventory management?

Minimize the quantity of ending inventory.

Which of the following line items below is present in both the multistep income statement and an income statement in which expenses are simply subtracted from revenues to arrive at net income?

Net income

If companies are required to adopt IFRS, companies will:

No longer be able to use LIFO.

Which of the following is not a primary goal of inventory managment?

Obtaining the lowest cost of inventory.

Common control principles include all of the following, except:

Outsource work to third parties.

Which of the following statements regarding periodic and perpetual inventory systems is correct?

Perpetual inventory systems may assist in determining inventory lost due to shrinkage.

A __________ inventory system will always give updated balances for __________________.

Perpetual; cost of goods sold

Inventory cost consists of purchase price:

Plus freight-in

Which of the following was passed by congress in response to the financial statement frauds that occurred in the early 2000s?

Sarbanes-Oxley Act.

Which inventory method is typically used when accounting for expensive and unique inventory items?

Specific identification

What is the primary goal of internal controls for cash payments?

To ensure that payments are made only for properly authorized transactions.

The cashier uses the cash register and its accompanying point-of-sale accounting system to perform three important functions. Which of the following is one of those functions?

To restrict access

In order to calculate shrinkage:

a perpetual inventory system requires an occasional count of actual inventory.

Company A lends $100,000 to Company B. The interest on the loan is reported as:

a revenue to Company A and an expense to Company B.

A subsidiary account is:

a separate account maintained internally for billing purposes.

Removing an uncollectible account and its corresponding allowance from the account records is called:

a write-off.

The LIFO inventory cost flow method assumes that the cost of the newest goods purchased are:

assumed to be the first ones sold.

The advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the seller's revenue. The disadvantages of extending credit are costs related to:

bad debt expense.

An internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual is a(n):

bank reconciliation.

Berkeley Company had beginning inventory of $4,000 and purchases of $20,000. If half of its inventory was sold, Berkeley's goods available for sale will:

be split between cost of goods sold and ending inventory.

Outstanding checks have:

been recorded by the company but not yet by the bank.

Days to sell measures the average number of:

days from the time inventory is purchased to the time it is sold.

Polk Company uses a perpetual inventory system and had the following transactions during November: November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30. November 8—Returned $1,200 of defective units and received full credit. November 15—Paid the amount due. What journal entry will be recorded by Polk Company on November 8?

debit accounts payable and credit inventory for $1,200.

Recording a Lower of Cost or Market/Net Realizable Value (LCM?NRV) adjustment involves which of the following generic journal entries?

debit cost of goods sold and credit inventory

On July 1, Darin Company sold inventory costing $5,000 to Dee company for $6,000, with terms of 3/10, n/30. Both companies use a perpetual inventory system. What journal entry will be recorded by Dee Company on July 1?

debit inventory and credit accounts payable for $6,000.

When you identify outstanding checks in performing a bank reconciliation, you must:

deduct the amount of the outstanding checks from the balance per bank.

On a bank reconciliation, the amount of an NSF check is:

deducted from the company's balance of cash.

Outstanding checks written by the company should a(n) ____________ on the company's bank reconciliation.

deduction from the bank balance