Financial Accounting
After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with: A. A credit to notes receivable B. A credit to cash C. A debit to notes receivable D. A credit to accounts receivable
A
On August 1, Energy Company purchased a coal digging machine for $30,000 cash and also gave 100 shares of AT common stock held by Energy Company as an investment. The AT common stock cost Energy Company $5,000 and on August 1 had a market value of $4,200. Installation cost was $700 and shipping cost was $200. What amount should be the total amount debited to the machinery account? A) $35,100. B) $36,200. C) $35,500. D) $35,400
A
Operational assets do not include the following kind of assets A) land held for resale. B) plant and equipment in use. C) patents in use. D) mineral deposits being mined. E) None of the above is correct.
A
The amount of sales tax paid on the purchase of new machinery should be debited to A) the machinery account. B) a separate deferred charge account. C) a sales tax expense account. D) accumulated depreciation for machinery
A
When using the allowance method for bad debts, bad debt expense should be recorded a. as an adjusting entry at the end of the accounting period. b. when a particular account is written off. c. whenever the allowance for uncollectible accounts has a debit balance. d. whenever the allowance for uncollectible accounts has a zero balance.
A
Which inventory method is better described as having a balance sheet focus and why is it considered as such? a) FIFO; better approximates the value of ending inventory. b) LIFO; better approximates the value of ending inventory. c) LIFO; better approximates inventory cost necessary to generate revenue. d) FIFO; better approximates inventory cost necessary to generate revenue.
A
Which of the following account(s) is NOT a contra revenue, circle all that apply: a. Sales b. Sales discounts c. Sales returns d. Sales allowances e. Trade discounts f. Allowance for uncollectible accounts g. Accounts receivable
A E F G
FM provided services to a customer on account for $1,000. FM invoiced the customer and offered credit terms of 2/10, n30. The customer paid FM within 9 days of the invoice date. Identify the true statements (circle all that apply) a. Accounts receivable is credited for $1,000 when the customer pays. b. The customer paid $1,000 in cash c. The customer paid $980 in cash d. Accounts receivable is credited for $980 when the customer pays. e. Sales discounts are debited $20 f. Sales discounts are credited $20 g. Sales are debited $20 h. Allowance for uncollectible accounts are credited $20 i. Sales returns and allowances are debited $20
A, C, E
McGregor Company allows customers to pay with credit cards. The credit card company charges McGregor 3% of the sale. When a customer uses a credit card to pay McGregor $100 for merchandise provided, McGregor would: A. Debit cash for $100 B. Debit service fee expense $3.00 C. Credit sales revenue for $97 D. Credit service fee expense $3.00
B
The distinction between operating and non-operating income relates to: a) Continuity of income. b) Principal activities of the reporting entity. c) Consistency of income stream. d) Reliability of measurements
B
A company had the following sales transactions. 1. Total debit card sales = $200,000 2. Total credit card sales = $400,000 3. Total cash sales = $800,000 4. Total check sales = $100,000 There is a charge of 2% on all credit card transactions. Calculate total CASH recorded for these sales. A. $1,500,000 B. $1,492,000 C. $1,470,000 D. $1,474,000
B (take 400,000 times the 2% for service fee then add rest up)
Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance (checks that have not cleared the bank). (TRUE/FALSE)
True
On August 1, 20XB, Middelton Corp. issues cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp report during 20XB and 20XC? 20XB 20XC a. $100 $20 b. $50 $10 c. $60 $0 d. $0 $120
B, ($1,000 x .12 x 5/12 = $50). Interest was earned for five months in year 20XB—August 1 - December 31, and one month in 20XC ($1,000 x .12 x 1/12 = $10).
In 20XB, Gamma Company made an ordinary repair to a delivery truck at a cost of $300. Gamma's accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect on the financial statements of Gamma? A) The repair was accounted for correctly. B) The error increased assets and net income in 20XB. C) In the years following 20XB, net income will be too high. D) The error decreased net income in 20XB. E) Net income was correctly stated for 20XB.
B, it should have been expensed...so it'll cause assets to be overstated in 20XB and into the future until the asset is fully depreciated...in 20XB net income will be overstated but in future years it'll be understated (too much depreciation expense) until the asset is fully depreciated.
Fine Foods (FF) has beginning inventory for the year of $12,000. During the year, FF purchases inventory for $150,000 and ends the year with $20,000 of inventory. FF will report cost of goods sold equal to: a) $150,000 b) $158,000 c) $142,000 d) $32,000
C
Nu Company reported the following data for its first year of operations. Net sales: $2,800 Cost of goods sold: 1,680 Operating expenses: 880 Ending inventories: 820 What is Nu's gross profit ratio? a) 80% b) 49% c) 40% d) 5%
C
On July 1, KJ Company purchased a new stamping machine for $5,000. KJ paid cash for the machine. Other costs associated with the machine were: transportation costs, $200; sales tax paid $400; and installation cost, $300. The cost recorded for the machine was A) $5,200. B) $5,600. C) $5,900. D) $5,000. E) None of the above is correct.
C
The following information is about the cash balances for Mooner Sooner Inc., at the end of 20XC: Bank balance: $8,000 Checks outstanding: $5,800 Note collected by the bank: $1,500 Service fee: $20 Deposits outstanding: $4,000 NSF check (bad check) returned for $300 What is the correct cash balance for Mooner Sooner Inc.? A. $10,200 B. $7,400 C. $6,200 D. $6,160
C
Which of the following is true regarding LIFO and FIFO? a) In a period of decreasing costs, LIFO results in lower total assets than FIFO. b) In a period of decreasing costs, LIFO results in lower net income than FIFO. c) In a period of rising costs, LIFO results in lower net income than FIFO. d) The amount reported for COGS is based on market value of inventory if LIFO is used.
C
Which of the following would NOT be included in the acquisition cost of a building? A) The purchase price of a building including title transfer fees. B) The cost of putting new windows and doors in the building before it opens for operations. C) The cost of paving the parking lot and outdoor lighting in the lot. D) The cost of paying an architect to design the remodeling modifications of the building before the store opens.
C
On January 31, 20XB, Low Company wrote off an uncollectible account of $2,000. The allowance method is used. The write-off would cause bad debt expense to: a. Decrease $2,000 b. Increase $2000 c. Be unchanged d. Cannot be determined
C, writing off an account does not affect bad debt expense
On January 15, 20XB, the accounts receivable balance was $8,500 and the balance in the allowance for uncollectible accounts was $1,300. On January 15, 20XB, a $800 uncollectible account was written-off. The net realizable value of accounts receivable immediately after the write-off is: a. $6,400 b. $7,700 c. $7,200 d. $8,000
C. (Accounts receivable - allowance for doubtful accounts = net realizable value of A/R) before the write-off $8,500 - 1,300 = $7,200; after the write-off $7,700 - 500 = $7,200. The net A/R does not change when an account is written off. It was $7,200 before and $7,200 after.
1. Which employees are responsible for a company's effective internal controls? A. Upper management B. Mid-level managers C. Lower-level managers D. All employees.
D
Cost of goods sold is given by: a) Beginning inventory - purchases + ending inventory. b) Beginning inventory + accounts payable - purchases. c) Purchases + ending inventory - beginning inventory. d) Purchases + beginning inventory - ending inventory
D
If a company understates its count of ending inventory in Year 1, which of the following is true? a) Cost of goods sold is understated at the end of Year 1. b) Profit is correct in Year 2. c) The balance of retained earnings is overstated at the end of Year 1. d) The balance of retained earnings is correct at the end of Year 2.
D
Which of the following about the characteristics of all long-lived, operational assets is/are true? A) They have physical substance. B) They are being used in the company's operations. C) They are classified as non-current assets on the balance sheet. D) Only B and C are true. E) All of the above are true.
D
Which of the following would not be recorded as a cash sale? A. Customer who pays with a check. B. Customer who pays with a debit card. C. Customer who pays with a credit card. D. Customer who buys on account.
D
On February 1, 20XB, Middelton Corp. issues cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp report during 20XB? a. $120 b. $240 c. $100 d. $60
D, ($1,000 x .12 x 6/12 = $60). Interest was earned for six months this year—February 1 - July 31.
When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this event will: a. decrease the net realizable value of the accounts receivable b. have an effect that is not determinable from the information given. c. increase the net realizable value of the accounts receivable. d. have no effect on the net realizable value of the accounts receivable.
D, writing off an account does not affect net A/R.
Wilson, Inc., a manufacturing company, is preparing their annual financial statements. Which of the following accounts would not be grouped under operational assets? A) Buildings. B) Land on which the building is located. C) Equipment. D) Vehicles. E) Finished goods inventory.
E
Common types of financial statement fraud include creating fictitious revenue from a phantom customer, improperly valuing assets, and mismatching revenues and expenses. (TRUE/FALSE)
True
The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if cash collection is highly likely in the near future (TRUE/FALSE)
False, accounts receivable are a separately reported asset on the balance sheet.
When a company buys equipment for its own use, all costs of acquisition and preparation to get the asset ready for use are included in the asset's acquisition cost including interest if they buy the equipment on credit. (TRUE/FALSE)
False, because the only time interest is included in the purchase price of an asset is if the company self constructs the asset
A company's cash is reported in two financial statements - income statement and statement of cash flows. (TRUE/FALSE)
False, cash is reported on the balance sheet and statement of cash flows (not the income statement).
Cash received from the sale of salvaged materials increases the total cost of land. (TRUE/FALSE)
False, cash received from the sale of salvaged materials DECREASES the total cost of land.
During periods of rising costs, LIFO generally results in a higher ending inventory balance. (TRUE/FALSE)
False, during periods of rising costs, LIFO generally results in a lower ending inventory balance; the higher costs (last cost in) are assigned to the first units sold leaving the lower cost items in ending inventory.
The adjusting entry to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities. (TRUE/FALSE)
False, every adjusting entry affects 1 income statement account and 1 balance sheet account. The adjusting entry to record bad debt, increases allowance for uncollectible accounts (a contra-asset which reduces assets on the balance sheet) and increases bad debt expense (an expense on the income statement). It does not affect liabilities.
To compute the gross profit ratio gross profit is divided by gross sales. (TRUE/FALSE)
False, gross profit ratio is computed by dividing gross profit by NETsales.
Interest earned on a bank account is an example of a cash transaction recorded by the company and then later by the bank after notification. (TRUE/FALSE)
False, interest earned is initially recorded by the bank.
Net sales minus cost of goods sold are referred to as operating income (TRUE/FALSE)
False, net sales less cost of goods sold equals gross profit. Operating income is determined by subtracting operating expenses from gross profit.
Ordinary repairs and maintenance of operational assets should be capitalized and depreciated over the remaining useful life of the related asset. (TRUE/FALSE)
False, ordinary repairs are revenue expenditures (expenses), they should be expensed as they are incurred (put on the income statement as an expense).
A sales allowance is recorded as a debit to accounts receivable and credit to sales allowance. (TRUE/FALSE)
False, sales allowances are increased by debits. When recording sales allowances, sales allowances are debited and Accounts Receivable are credited (the amount the customer owes is reduced) or cash would be credited if the customer already paid and a refund would be necessary.
Separation of duties refers to auditors not being allowed to perform both audit and non-audit services for the same client (TRUE/FALSE)
False, separation of duties is where individuals who have physical responsibility for assets should not also have access to accounting records.
The LIFO conformity rule requires that when a company uses LIFO for tax reporting it may not also use it for financial reporting. (TRUE/FALSE)
False, the LIFO conformity rule requires that when a company uses LIFO for tax reporting it MUST also use it for financial reporting.
The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles (TRUE/FALSE)
False, the Sarbanes-Oxley Act is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX.
Using the weighted average cost method, the weighted average cost of inventory is calculated as the average unit cost of inventory purchased during the year. (TRUE/FALSE)
False, the average is a weighted-average cost which includes both beginning inventory and purchases and is equal to total cost of goods available for sale dividend by the total number of units available for sale.
A sale on account for $1,000 offered with terms 2/10 means that the customers will get a $2 discount if payment is made within 10 days. (TRUE/FALSE)
False, the sales discount would be $20 not $2 ($1,000 x .02 = $20). The 2 is 2% of the credit sale, not $2.
Understating ending inventory in the current year causes cost of goods sold in the current year to be understated
False, understating ending inventory in the current year will cause cost of goods sold in the current year to be overstated. In the year of error in reporting ending inventory, cost of goods sold will be affected in the opposite direction.
We record a gain if we sell an asset for more than its cost.
False, we record a gain if we sell an asset for more than BOOK VALUE; a loss is recorded if the asset is sold for LESS than book value.
We use the term capitalize to describe recording an expenditure as an expense. (TRUE/FALSE)
False, we use the term capitalize to describe recording an expenditure as an asset. Think of an expenditure as spending of money...sometimes when money is spent it is spent to buy an asset, sometime it is spent on an expense.
One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax savings. (TRUE/FALSE)
False, when inventory costs are rising, LIFO provides greater tax savings (through lower pretax income).
When a company writes off an account receivable as an actual bad debt, it reduces total assets. (TRUE/FALSE)
False, writing off an A/R does not change TOTAL assets (or expenses). Writing off an account reduces A/R and reduces the Allowance for Uncollectible accounts (A- and XA- A+); there is no effect on Total Assets.
A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records (TRUE/FALSE)
True
A multiple-step income statement reports multiple levels of profitability, such as gross profit, operating income, income before income taxes, and net income. (TRUE/FALSE)
True
A sales discount represents a reduction not in the selling price of a product or service but in the amount to be paid by a credit customer if payment is made within a specified period of time. (TRUE/FALSE)
True
At the time of a credit sale, a company would record an increase in assets and an increase in revenues (TRUE/FALSE)
True
Bad debt expense is the amount needed to adjust the allowance for uncollectible accounts to its desired ending balance (using the percent of receivables method). (TRUE/FALSE)
True
Building and equipment are recorded at their cost at acquisition and are subsequently reported at cost less accumulated depreciation. (TRUE/FALSE)
True
Cost of goods sold is the expense of the inventory sold this accounting period. (TRUE/FALSE)
True
Depreciation in accounting is a method of cost allocation rather than asset valuation. (TRUE/FALSE)
True
Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. (TRUE/FALSE)
True
Generally, when a company's net income and free cash flows trend in the same direction over time, earnings are believed to have higher quality. (TRUE/FALSE)
True
If a company has total sales revenue of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net sales of $91,000. (TRUE/FALSE)
True
Interest on a note receivable is calculated as the face value (principal) of the note times the annual interest rate stated on the note times the fraction of the year the note has been outstanding. (TRUE/FALSE)
True
Inventory is reported as a current asset because it defines the operating cycle. (TRUE/FALSE)
True
On the acquisition date, operational assets are measured and recorded in conformity with the cost principle; and subsequent to acquisition, their cost is depreciated in conformity with the matching principle. (TRUE/FALSE)
True
Only transactions involving cash affect a company's cash flows. (TRUE/FALSE)
True
Overstating ending inventory in the current year causes net income in the current year to be overstated. (TRUE/FALSE)
True
Profit margin is net income divided by net sales.
True
Repair costs are classified as capital expenditures when they increase the useful life or efficiency of an asset. (TRUE/FALSE)
True
The accumulated depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records. (TRUE/FALSE)
True
The allowance for uncollectible accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect. (TRUE/FALSE)
True
The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers. (TRUE/FALSE)
True
The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls (TRUE/FALSE)
True
The cost of a major addition to an operational asset should be recorded as an asset and depreciated over its useful life. (TRUE/FALSE)
True
The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost as a percentage of net sales. (TRUE/FAlSE)
True
Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first ones sold. (TRUE/FALSE)
True
When a company provides a $100 service to a customer with a 20% trade discount, $80 of revenue is recognized (TRUE/FALSE)
True
Whether a customer uses cash, a check, or a debit/credit card to make a purchase, the company records the transaction as a cash sale. (TRUE/FALSE)
True
If a company has beginning inventory of $15,000, purchases during the year of $75,000, and ending inventory of $20,000, cost of goods sold equals $70,000. (TRUE/FALSE)
True (BI + P - EI = COGS) ($15,000 + $75,000 - $20,000 = $70,000)
Below are some of the titles found in a multiple-step income statement: a. Sales b. Net income c. Operating income d. Income before income taxes e. Gross profit Place these items in the order they would appear from first to last.
a, e, c, d, b