Exam 3 Concepts

In order to be classified as a cash equivalent, an investment must have a maturity date of

three months or less

A manufacturing firm would not normally have an account titled

Merchandise Inventory

Purple Inc. purchased raw materials with a catalog price of $60,000. Credit terms of 3/15,n/60 apply. If the net price method is used, Purple will record the purchase at

$58,200

Silver Corporation estimates bad debt expense using a percentage of credit sales (4%). Silver began its current year with an $8,500 balance in the allowance account. During the current year, $10,500 of accounts receivable were written off, and $1,200 of previously written off accounts were collected. Credit sales for the year were $200,000. The bad debt expense for the year is

$8000

All of the following are nontrade receivables except a. deposits paid to utility companies. b. advances to executives. c. accrued interest on investments. d. accounts receivable.

...

Red Company began business in 2013. On December 31, 2013, Red's single pool of inventory was valued at $300,000, using the dollar-value LIFO inventory method. On December 31, 2014, the value of Red's inventory at current costs was $450,000. The 2014 year-end cost index was 120. What was the value of Red's inventory at the end of 2014, using the dollar-value LIFO method?

450,000 x (100/120) = 375,000. 450,000 - 375,000 = 75,000. 75,000 x 120 = 90,000. $300,000 + 90,000 = $390,000

Which of the following is not an advantage of a perpetual inventory system? a. Requires less data processing effort than periodic systems. b. Assists in the prevention of stockouts. c. Maintains up-to-date inventory and cost of goods sold balances. d. Provides evidence of inventory shrinkage

A

Which one of the following inventories may be valued for balance sheet purposes at the inventory's selling price less distribution costs even if it is above the cost of the inventory? a. Gold for a mining corporation b. Athletic shoes for a retail store c. Steel for a steel manufacturer d. Automobiles for an automobile manufacturer

A

Which one of the following statements is not true? a. In the periodic system, the acquisition costs of inventory are debited directly to an inventory account. b. When the perpetual system is used, a physical count still needs to be made. c. A company using the periodic system does not maintain a continuous record of the physical quantities (or costs) of inventory on hand. d. In the perpetual inventory system, recording in detailed subsidiary records can be in units only, not in total inventory dollar costs.

A

In a secured borrowing, a company may assign its _____ as collateral for a loan

Accounts Receivable

Retail stores typically make changes in selling prices after setting the original price. The increase above the original sales price is a(n) ________ while a decrease below the original selling price is a _____.

Additional Markup, Markdown

Cash includes all of the following except a. coins and currency. b. sinking funds. c. foreign currencies on deposit in foreign banks. d. demand deposits.

B

Under certain circumstances, GAAP allows a company to report its inventory above cost. Each of these exceptions must be justified by all of the following except a. immediate marketability of the inventory at a quoted market price. b. an ability to determine appropriate costs. c. the interchangeability of the units of inventory. d. an inability to determine appropriate costs.

B

Which is not a key element of internal control over cash receipts? a. Daily deposit of all receipts in the company's bank account. b. Making all payments by check so there is a record of every company expenditure. c. Daily recording of all cash receipts in the accounting records. d. Immediate counting of receipts by the person opening the mail and verification by an independent person

B

Which of the following cost-flow assumptions produces the lowest cost of goods sold in a period of rising prices? a. LIFO perpetual b. FIFO c. Moving average d. LIFO periodic

B

Which one of the following inventories may not be valued for balance sheet purposes at the inventory's selling price less distribution costs even if it is above the cost of the inventory? a. Crude oil for an oil company b. Laptops for a computer manufacturer c. Gold for a mining corporation d. Grain for an agricultural company

B

Which one of the following statements is not true with regard to the gross profit method of estimating inventories? a. The percentage used for the gross profit method is determined by using previous year's historical data. b. The gross profit method may only be used with a perpetual inventory accounting system. c. The gross profit method is not as accurate as the retail inventory method. d. The gross profit method may be used to determine inventory for interim financial reporting purposes without taking a physical count.

B

Which one of the following types of costs is most likely to be included in determining the cost of inventory? a. Freight-out costs b. Freight-in costs c. Interest cost for amounts borrowed to finance the purchase of inventory d. Marketing costs

B Freight-In

The relationship between cost of goods sold and inventory is

Beginning Inventory + Purchases = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold

Black Corporation sells goods to Brown Company. The goods remain in the inventory of the seller (and no revenue should be recognized) until delivery has occurred means that the companies are using a

Bill and Hold Sale

In order to improve the reporting of a company's risk, liquidity, and financial flexibility, companies are required to disclose all of the following except a. the fair value of all its financial instruments. b. any valuation accounts as well as the methodology used to estimate these amounts. c. any accounting policy related to receivables that might be helpful to internal users. d. any receivables designated as collateral.

C

Which of the following statements is true regarding purchase discounts? a. The net price method results in recording accounts payable at the maximum value of the liability that the company may be required to pay out. b. An advantage of the gross price method is that it isolates purchase discounts lost and thus highlights inefficiencies. c. Purchase discounts taken should be deducted from the acquisition cost of the inventory. d. Purchase discounts lost should be included in the cost of inventory

C

T/F: If a company discovers an error in the same accounting period that the error was made, it treats the correction as a prior period adjustment.

False

The application of the lower of cost or market rule to inventory valuation is an example of

Conservatism

A manufacturer may transfer goods to a retailer under a consignment arrangement. The company delivering the goods is the

Consignor

When a company discounts its notes receivable at a bank, the common practice is to record the discount on the notes in a(n)

Contra Asset Account

All of the following are period costs except a. selling costs. b. advertising costs. c. general and administrative costs. d. product costs

D

The dollar-value LIFO method follows the same cost flow assumption as the LIFO method, but it overcomes three difficulties involved in applying the LIFO approach. Which is not one of the three issues? a. LIFO liquidations b. Detailed record keeping c. Technological change d. Outdated inventory

D

The work in process inventory account would include all the following except a. direct labor. b. manufacturing overhead. c. direct materials. d. administrative costs

D

Which of the following is a key element of internal control over cash payments? a. Authorizing and verifying that all cash received is recorded daily. b. Making daily bank deposits. c. Immediately counting receipts by the person opening the mail and verification by an independent person. d. Periodically reconciling the cash account balance on the company's books to the bank statement balance

D

Which of the following statements is true? a. FOB shipping point means the seller has legal title to the goods while they are in transit. b. FOB shipping point means the buyer acquires legal title to the goods when they reach the seller's place of business. c. FOB destination means the buyer has legal title to the goods while they are in transit. d. FOB destination means the seller has legal title to the goods until they reach the buyer's place of business

D

Which of the following statements regarding the gross profit method is not true? a. The gross profit method is often used to estimate the year-end inventory for comparison to actual on-hand inventory. b. The gross profit method results in a less accurate inventory valuation than the retail inventory method. c. The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty. d. The gross profit method is a complicated method to use in practice.

D

Gold, Inc. is preparing its monthly bank reconciliation. Bank service charges will be

Deducted from the book balance

For companies that have little change in the characteristics of their inventory items, the most appropriate method for computing a cost index for dollar value LIFO is the

Double-Extension Method

With the retail inventory method, how is the total beginning inventory value used in the calculation of the cost-to-retail ratio for the current period under the FIFO, Average Cost, and LIFO cost flow assumptions?

FIFO - exclude; Average Cost - include; LIFO - exclude

If goods are shipped _____, control of (and legal title to) the goods is not transferred until the goods are delivered to the buyer's destination

FOB Destination

T/F: If a company has a LIFO liquidation in an interim reporting period but expects to replace the inventory by year-end, the impact of the liquidation is added to its interim financial statements.

False

T/F: LIFO liquidation brings units with a cost from previous years into cost of goods sold and produces an unrealistically low income

False

Greater emphasis is being placed on internal control systems as they apply to computer technology because _____ physical source documents are available to verify cash inflows and outflows

Fewer

In accounting for sales discounts, most companies use the

Gross Price

Which inventory cost flow assumption is not allowed for financial reporting in many foreign countries?

LIFO

Which of the following cost-flow assumptions provides the lowest inventory value in periods of rising prices?

LIFO

If a company uses _____ for annual reporting purposes, it must use _____ for interim reporting purposes.

LIFO, LIFO

During 2013, Charcoal Company purchased $90,000 of merchandise. To bring the merchandise to the warehouse, Charcoal paid $3,200 in freight costs. By paying within the discount period, they were able to take advantage of $4,500 of discounts offered. When the merchandise arrived, inspection revealed that $1,400 of goods were not as ordered and were returned to the supplier. The net purchases of Charcoal Company were

Net purchases = Purchases + Freight In - Purchases Discounts - Purchases Returns and Allowances. 90,000 + 3,200 - 4,500 - 1,400 = $87,300

The cost of goods sold can be determined only after a physical count of inventory on hand under the

Periodic System

_____ are amounts owed to the company by customers and other parties arising from the company's operations

Receivables

A retail firm would normally use an inventory account titled

Retail Inventory

The _____ can be used to estimate the cost of inventory when there is a consistent pattern between the cost of a company's purchases and its selling prices.

Retail Inventory Method

The _____ requires a company that uses LIFO to disclose the amount that the LIFO valuation of inventory differs from the valuation of inventory under FIFO

SEC

Marmalade Company uses the lower of cost or market rule in valuing its inventory. The floor constraint for one item in the inventory is $58.20. Additional information concerning this unit includes transportation costs of $4.00; normal profit margin of $11.70; and packaging costs are $4.20. The selling price for this item is

Selling price - packaging costs - transportation costs = Ceiling (also referred to as net realizable value). Ceiling - normal profit margin = floor. Therefore: X - $4.20 - $4.00 = $69.90; $69.90 - $11.70 = $58.20. X = $78.10

The entry to replenish the petty cash fund for various minor expenditures would include a

The journal entry to replenish the petty cash fund would include a credit to Cash

Lavender Company accepts credit cards. The clearinghouse collection fee is 2.5%. If credit card sales are $75,000 for the current month, the correct summary journal entry would include

The journal entry will debit Accounts Receivable for $72,750, debit Credit Card Expense for $2,250, and credit Sales for $75,000.

Receivables that arise from the sale of the company's products or services to customers are

Trade Receivables

T/F: Errors in the valuation of inventory or the recording of purchases can result in inaccurate values on the company's balance sheet and income statement

True

T/F: If a company discovers a material error after it has closed the books, it treats the correction as a prior period adjustment.

True

T/F: The LIFO conformity rule prevents a company from using FIFO for financial reporting and LIFO for income taxes.

True

T/F: The purpose of inventory pools is to maintain the benefits from using LIFO when fluctuations in the physical quantities of similar inventory items occur and when technological change takes place.

True

When a company records the estimate of bad debts, the journal entry is a

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

When preparing a bank reconciliation, outstanding checks would be

added to the balance per bank statement

When the net price method is used to record credit sales, the sales discounts not taken account is reported as a(n)

addition to the Other Items section on the income statement.

Items classified as 'cash' on the balance sheet must:

be available to pay current obligations

During 2013, a Blue Company wrote off $6,000 in uncollectible accounts receivable. At the end of the year, Blue estimated bad debt expense using a percent of gross sales. In 2014, Blue Co. recovered a $1,000 account that had been written off in 2013. Recording this recovery would first include a

credit to Allowance for Doubtful Accounts

For valuation of inventory, the lower of cost or market rule may be applied to:

each item, the total of inventory, or major categories of inventory

A company can record uncollectible accounts by using the:

either the allowance method or the direct write-off method

The gross profit method is most commonly used to:

estimate the cost of inventory from incomplete records

The major criticism of the lower of cost or market rule for valuation of inventory is that

holding losses are recognized, but holding gains are not

The policies and procedures a company uses to ensure that its financial reports are reliable and that operations are effective, efficient, and legal are

internal control systems

A company uses a LIFO reserve because

internal reporting is not the same as GAAP reporting and tax reporting

IFRS does not allow the use of LIFO because it

is clearly inconsistent with any presumed physical flow of inventory.

Short-term noninterest-bearing notes receivable are usually recorded at their

maturity value.

An unconditional written agreement that gives the holder the right to collect a certain sum of money on a specific date is a

note receivable

Compensating balance agreements that do not legally restrict the amount of funds shown on the balance sheet should be reported in the

notes to the financial statements

Generally, valuing inventory above cost is acceptable__________

only in selected industries and in certain circumstances

Companies should use petty cash funds to

pay for minor business expenses

Revenue is recognized when

realization has occurred and revenue is earned.

Nontrade receivables, such as deposits with utility companies or advances to employees, should be

recorded in separate accounts and separately reported on the balance sheet.

The two basic forms of financing agreements that companies use to obtain cash from accounts receivable are

secured borrowing and sale of receivables

One of the two issues related to the valuation of receivables is the estimation of the probability of collection; the other is

the initial recording of the receivables.

When receivable are sold with recourse,

the seller retains the risks of ownership and uncollectible accounts