Financial Accounting Exam 2

A check drawn by a company for $360 in payment of a liability was recorded in the journal as $630. What entry is required in the company's accounts?

debit Cash; credit Accounts Payable

Company's retained earnings started year at $80,000. They had a net income of $43,000. They paid $15,000 in dividends. Their retained earnings at the end of the year was...

$80,000 + $43,000 - $15,000 = $108,000

Floors, Inc. offers terms of 2/10, n/30 to credit customers. Tile Magic Corp. purchased 100 tile cutters with a list price of $20 each on August 5, 2016, on account. Tile Magic Corp. paid the invoice on August 31, 2016. How much sales discount will Floors recognize?

0

2/10 N/30

2% discount if paid within 10 days, net amount due within 30 days

Begin year with total assets of $450,000 and total liabilities of $230,000. If total liabilities increases by $31,000 and owners' equity decreases by $53,000 during the year, what is the amount of total assets at the end of the year?

A = ($230,000 + $31,000) + ($220,000* - $53,000) = $428,000 *Owners' equity = $450,000 - $230,000

LIFO liquidation

A company sells the most recently acquired inventory first

Which one of the following statements is false?

A cost of goods sold account is updated after each sale of merchandise under the periodic inventory system.

A voucher is usually supported by...

A supplier's invoice, a purchase order, and a receiving report

Checks are signed by designated officers in the finance department.

Adheres to sound internal control procedures

What is the form sent by the seller to the buyer as evidence of a sale?

An invoice

Allowance Method

Anticipate the percentage of our sales or accounts receivable that will go bad in the future (GAAP)

Element

Assets, Liabilities, Owner's Equity, Revenues, Expenses

Where does accounts payable appear?

Balance Sheet

Satement

Balance sheet, Income statement, Statement of owners equity (dividends)

Deposits in Transit

Banks out of date.

O/S checks

Banks out of date.

Collect by bank

Books out of date.

Interest Income

Books out of date.

NSF checks

Books out of date.

Service Charges

Books out of date.

Checks presented for payment and paid by the bank are known as

Canceled checks

Checks presented for payment and paid by the bank are known as...

Canceled checks

A bank certificate of deposit for one year is not included in...

Cash

The Securities and Exchange Commission (SEC) is concerned with...

Compnaies that issue securities to the general public.

Balance

Debit or Credit

Which of the following statements is true regarding dividend income?

Dividend income is reported on the income statement

Weighted Average Cost Method

Each data point value is multiplied by the assigned weight, which is then summed and divided by the number of data points

Bad debts will cause a __________ on the income statement

Expense

Why is the time period assumption required?

External users of financial statements want statements that accurately reflect net income or earnings for a specific time period.

Prices are rising; COGS is lower with this method

FIFO

Prices are rising; profits are higher with this method

FIFO

T/F: A LIFO liquidation occurs when a company sells fewer units than it buys during the period.

False

T/F: A check written by a company but not yet presented to the bank for payment is called a check in transit.

False

T/F: Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.

False

T/F: Bad Debts expense is debited and Accounts Receivable is credited at the end of the period to recognize bad debts under the allowance method.

False

T/F: Cash equivalents are investments that are readily convertible to a known amount of cash, where readily means six months or less.

False

T/F: If a company has internal auditors, it does not need to have external auditors.

False

T/F: If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must be made to correct the error.

False

T/F: On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement.

False

T/F: Selling on credit protects a company from the risk that some of its receivables will never be collected.

False

T/F: The direct write-off method estimates the amount of bad debts before they occur.

False

T/F: The inventory method that assigns the most recent costs to ending inventory is LIFO.

False

T/F: The three forms or states in the development of inventory for a manufacturer are direct materials, direct labor, and finished goods.

False

T/F: When a company discounts a promissory note at the bank, it receives cash at the same time it would if it held the note to maturity.

False

Income Statement Approach

Focuses on proper balance in the bad debts expense account

Balance Sheet Approach

Focuses on the proper balance of the allowance account

When are consolidated financial statements prepared?

If one company owns more than 50% of another company

Cash flows from purchases, sales, and maturities of investments are usually classified as ___________ activities.

Investing

Prices are declining; gross margin is higher with this method

LIFO

Prices are declining; income taxes are higher with this method

LIFO

When it comes to internal control...

Large companies are able to devote a substantial amount of resources to internal control systems because these companies have the assets to justify the cost.

Most annual reports now include a report of management to the stockholders. In this report, which group has the primary responsibility for the preparation and integrity of the financial statements?

Management

Types of inventory cost

Manufacturing and Retail

The amount of cash the maker is to pay the payee on the maturity date of the note is called the...

Maturity value

Which one of the following would not be found as an asset on the balance sheet of a manufacturer?

Merchandise Inventory

Ending inventory is equal to the cost of items on hand plus...

Merchandise in transit sold to customers FOB destination

The equity method of accounting for an investment is used when a company purchases

More than 20% of the equity securities of a second company

The gross accounts receivable less the allowance for doubtful accounts is known as the...

Net Realizable Amount

Nominal, Permanent, Closed, Not closed

Nominal (Closed) and Permanent (Not closed)

A company is referred to as a parent if it owns

None of these choices

The company's controller is...

Not an external user of financial statements

A bank certificate of deposit for one year is...

Not included in cash

Cash register tapes are...

Not used in the control of cash disbursements

The understatement of ending inventories in one period leads to a(n) ____________________ of cost of goods sold expense in the same period.

Overstatement

FOB Shipping Point

Owned by buyer in transit.

FOB Destination

Owned by seller in transit.

The party that receives the payment due from a note is called the...

Payee

Which one of the following is an investing activity on the statement of cash flows?

Purchase of long-term investments

Inventory accounts

Raw materials, work in progress, finished goods, and cost of goods sold

If a company discounts a note at a bank, but still is contingently liable for the maturity value, then the note was discounted with...

Recourse

Accrual Method

Same year company provides goods or services

Impressed funds

Set up to relax some of the internal controls over cash to facilitate small transactions.

Which financial statement would you analyze to determine if a company distributed any of its profits to its shareholders?

Statement of Retained Earnings

Which of the following best describes the term "retained earnings"?

The cumulative profits earned by the business less any dividends distributed.

Vern Corp. sold merchandise to a customer on credit. The invoice amount was $2,000; the invoice date was June 10; credit terms were 1/20, n/30. Which one of the following statements is true?

The customer should pay $2,000 if the invoice is paid on July 9.

Banks and books could disagree because of

Timing, errors, adjusting entries

If a company records a $310 receipt as $130, this type of error is called a(n) ____________________.

Transposition

T/F: A decrease in accounts receivable represents an increase in a company's cash flow from operating activities.

True

T/F: A note discounted with recourse means that if the original customer fails to pay the bank the total amount due on the maturity date of the note, the company that transferred the note to the bank is liable for the full amount.

True

T/F: A subsidiary is a separate legal entity that is owned or controlled by another entity.

True

T/F: Checks received from customers are considered to be cash in the company's books.

True

T/F: If ending inventory is understated, then cost of goods sold is overstated.

True

T/F: On a bank reconciliation, interest earned for the month is added to the cash balance per the books.

True

T/F: Petty cash typically is composed of coins and currency kept on hand in a business to make minor disbursements.

True

T/F: Specific identification relies on matching unit costs with the actual units sold.

True

T/F: The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit.

True

T/F: The establishment of a petty cash fund has no effect on the company's total cash balance.

True

T/F: The lower of cost or market (LCM) rule violates the historical cost principle.

True

T/F: The maker of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

True

T/F: The three distinct types of cost to a manufacturer are direct materials, direct labor, andmanufacturing overhead.

True

T/F: The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.

True

T/F: Under the indirect method, a decrease in inventory is added to net income to determine cash flow from operating activities.

True

T/F: When an entity's revenues exceed its expenses for a period of time, the entity will report net income.

True

Direct Write off Method

Wait until a debt is determined uncollectible before marking it such in record

Prepaid Expense (Asset)

We pay for good/service that'll be used in operations quickly

When you own stock in a company...

You have a claim to the assets of the business