Unit 2 Exam Ch. 5-9

Accounts that shouldn't be closed in an Income Summary

Accounts Payable Merchandise Inventory Supplies Valery Lavine, Drawing Wages Payable

No subsidiary ledger posting

Adjustment for expired insurance

General Journal

Adjustment to prepaid insurance at the end of the month. Adjustment to prepaid rent at the end of the month. Adjustment to record accrued salaries at the end of the period. Adjustment to record depreciation at the end of the month.

Accounts that should be closed in an Income Summary

Advertising Expense Cost of Merchandise Sold Sales Supplies Expense

Cost flow is assumed to be in the reverse order of costs incurred.

Last-in, first-out (LIFO)

On March 1, Shore Co. sold merchandise to Blue Star Co. on account, $112,000, terms FOB shipping point, 2/10, n/30. The cost of the merchandise sold is $67,200. Shore Co. paid freight of $1,800 and on March 9 received the amount due. Journal Shore Co. Accounts Receivable-Blue Star Co. (merchandise) = $112,000 - ($112,000 x 0.02) Accounts Receivable-Blue Star Co. (freight) = 1,800

Mar 1 Accounts Receivable-Blue Star Co. 109,760 Sales 109,760 Mar 1 Cost of Merchandise Sold 67,200 Merchandise Inventory 67,200 Mar 1 Accounts Receivable-Blue Star Co. 1,800 Cash 1,800 Mar 9 Cash 111,560 Accounts Receivable-Blue Star Co. 111,560

On March 1, Shore Co. sold merchandise to Blue Star Co. on account, $112,000, terms FOB shipping point, 2/10, n/30. The cost of the merchandise sold is $67,200. Shore Co. paid freight of $1,800 and on March 9 received the amount due. Journal Blue Star Co. Accounts Payable-Shore Co. = [112,000 - (112,000 x 0.02) + 1,800)

Mar 1 Merchandise Inventory 111,560 Accounts Payable-Shore Co. 111,560 Mar 9 Accounts Payable-Shore Co. 111,560 Cash 111,560

Journal Boone Co. Accounts Payable-Sather Co. = 33,800 - (33,800 x 0.02)

Mar 1 Merchandise Inventory 33,124 Accounts Payable-Sather Co. 33,124 Mar 14 Accounts Payable-Sather Co. 33,124 Cash 33,124

Journal Sather Co. Accounts Receivable-Boone Co. = 33,800 - (33,800 x 0.02)

Mar 1. Accounts Receivable-Boone Co. 33,124 Sales 33,124 Mar 1 Cost of Merchandise Sold 18,000 Merchandise Inventory 18,000 Mar 14 Cash 33,124 Accounts Receivable-Boone Co. 33,124

Account used to record merchandise on hand under a perpetual inventory system.

Merchandise Inventory

Statement that includes subtotals for net sales, gross profit, and net operating income in determining net income.

Multiple-step income statement

Under the periodic inventory system, the journal entry to record the cost of merchandise sold at the point of sale will include which of the following?

None of these choices are correct.

Castle Furnishings Company's perpetual inventory records indicate that $675,400 of merchandise should be on hand on November 30, 2016. The physical inventory indicates that $663,800 of merchandise is actually on hand.

Nov 30 Cost of Merchandise Sold 11,600 Merchandise Inventory 11,600 Inventory shrinkage = 675,400 - 663,800.

Purchased equipment on account

P, subsidiary posting

Purchased supplies on account

P, subsidiary posting

Accounts payable subsidiary ledger / Accounts Payable Dr.

Payments to creditors on account

Inventory system that updates the merchandise inventory account only at the end of the accounting period based on a physical count of merchandise on hand.

Periodic inventory system

Inventory system that updates the merchandise inventory account for every purchase and sale transaction.

Perpetual inventory system

Account where returned merchandise or price adjustments are recorded by the buyer under the periodic inventory system.

Purchase Returns and Allowances

Discount taken by the buyer for early payment of invoice.

Purchase discount

Cash Payments Journal

Purchase of office supplies for cash. Advance payment of a one-year fire insurance policy on the office. Purchase of office equipment for cash. Payment of six months' rent in advance.

Purchases Journal

Purchase of services on account. Purchase of office supplies on account. Purchase of an office computer on account.

Accounts payable subsidiary ledger / Accounts Payable Cr.

Purchases on account

Issued an invoice to a customer

R, subsidiary posting

On the basis of the following data, determine the value of the inventory at the lower-of-cost-or-market by applying lower-of-cost-or-market to each inventory item, as shown in Exhibit 10. Item Inventory Quantity Unit Cost Price Unit Market Price CK3J 146 $29 $33 BJ54 289 15 11

$7,413 (146 x 29) + (289 x 11)

Discount to government agencies or customers who purchase large quantities of merchandise.

Trade discount

FIFO is the inventory costing method that follows the physical flow of the goods.

True

Internal control is enhanced by separating the control of a transaction from the record-keeping function.

True

Sarbanes-Oxley's purpose is to maintain public confidence and trust in the financial reporting of companies.

True

Service businesses provide services for income, while a merchandising business sells merchandise.

True

The Sarbanes-Oxley Act applies only to companies whose stock is traded on public exchanges.

True

The average cost method will always yield results between FIFO and LIFO.

True

The control environment in an internal control structure is the overall attitude of management and employees about the importance of internal control.

True

The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements.

True

The three inventory costing methods will normally each yield different amounts of net income.

True

Under a periodic inventory system, the cost of merchandise on hand at the end of the year is determined by a physical count of the inventory.

True

Deposit in transit

bank statement adjustment

Outstanding checks

bank statement adjustment

Bank charges

company books adjustment

Error in recording a check

company books adjustment

Interest revenue

company books adjustment

NSF check

company books adjustment

Note collected by the bank

company books adjustment

Under a periodic inventory system, closing entries will include

debits to Sales, Purchases Returns and Allowances, and Purchases Discounts

risk assessment

identify, analyze and assess likeliness of vulnerabilities

control environment

overall attitude of management and employees

control procedures

provides reasonable assurance that business goals will be achieved

Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as

selling expenses

outstanding checks

subtracted from the bank statement balance

NSF check

subtracted from the company's books

bank service charge

subtracted from the company's books

Cost flow is in the order in which the costs were incurred.

First-in, first-out (FIFO)

There are three internal control objectives and they are to safeguard the company's reputation, ensure accurate financial reports, and ensure compliance with applicable laws.

False

When merchandise that was sold is returned, a credit to sales returns and allowances is made.

False

When using the FIFO inventory costing method, the most recent costs are assigned to the cost of merchandise sold.

False

Issued check for advertising expense

CP, no subsidiary posting

Issued check for purchase of supplies

CP, no subsidiary posting

Issued check for rent

CP, no subsidiary posting

Issued check for salary

CP, no subsidiary posting

Paid for the equipment purchased on account

CP, no subsidiary posting

Purchased a computer for cash

CP, no subsidiary posting

Issued check for a payment on account

CP, subsidiary posting

Received cash for a sale

CR, no subsidiary posting

Received a check from a customer for payment on account

CR, subsidiary posting

Accounts receivable subsidiary ledger / Accounts Receivable Cr.

Collections from customers on account

The units of an item available for sale during the year were as follows: Jan. 1 Inventory 50 units @ $104 Mar. 10 Purchase 70 units @ $116 Aug. 30 Purchase 30 units @ $120 Dec. 12 Purchase 50 units @ $124 There are 80 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost and the cost of merchandise sold by three methods. Round interim calculations to one decimal and final answers to the nearest whole dollar.

Cost of Merchandise Inventory and Cost of Merchandise Sold Inventory Method (FIFO): 9,800 (50 x 124) + (30 x 120) (LIFO): 8,680 (50 x 104) + ( 30 x 116) W.A.C: 9,248 (6,200 + 3,600 + 5,200 + 8,120)= 23,120/200= (115.6 x 80) Merchandise Inventory Merchandise Sold (FIFO): 13,320 (23,120 - 9,800) (LIFO): 14,440 (23,120 - 8,680) W.A.C: 13,872 (23,120 - 9,248)

During the taking of its physical inventory on December 31, 2014, Zula Company incorrectly counted its inventory as $360,165 instead of the correct amount of $388,980. Indicate the effect of the misstatement on Zula's December 31, 2014, balance sheet or income statement for the year ended December 31, 2014. For each, select if the amount is overstated or understated. Then, input the over or under amount, entered as a positive value. 388,980 - 360,165= 28,815

Cost of merchandise sold: Income Statement Overstated $28,815 Current assets: Balance Sheet Understated $28,815 Gross profit: Income Statement Understated $28,815 Merchandise inventory: Balance Sheet Understated $28,815 Net income: Income Statement Understated $28,815 Owner's equity: Balance Sheet Understated $28,815 Total assets: Balance Sheet Understated $28,815

Payment arrangements determined by the seller as to when invoices are due and whether early payment discount is offered.

Credit terms

Informs the seller of the reasons for the return of merchandise or the request for a price allowance.

Debit memo

Expense account for recording shipping costs paid by the seller.

Delivery Expense

Shipping terms where the ownership of merchandise passes to the buyer when the buyer receives the merchandise.

FOB destination

Shipping terms where the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier.

FOB shipping point

Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell.

False

Freight in is the amount paid by the company to deliver merchandise sold to a customer.

False

If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30.

False

In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory.

False

Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the control procedure: separating operations, custody of assets, and accounting.

False

The choice of an inventory costing method has no significant impact on the financial statements.

False

The units of an item available for sale during the year were as follows: Jan. 1 Inventory 15 units at $47 $705 July 7 Purchase 5 units at $49 245 Nov. 23 Purchase 9 units at $51 459 29 units $1,409 There are 17 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost using (a) the first-in, first-out (FIFO) method; (b) the last-in, first-out (LIFO) method; and (c) the weighted average cost method (round per unit cost to two decimal places and your final answer to the nearest whole dollar).

First-in, first-out (FIFO) $845 Last-in, first-out (LIFO) $803 Weighted average cost $826 (9 x 51) + (5 x 49) + (3 x 47)= 845 (15 x 47) + (2 x 49)= 803 (1,409/29) (17)= 826

The cost associated with delivery of merchandise to the customer.

Freight

Recorded the adjustment for supplies used during the month

G, no subsidiary posting

The following financial statement data for years ending December 31 for Gillispie Company are shown below. 2016 Cost of merchandise sold: $1,168,000 Beginning of year: $299,300 End of year: 430,700 2015 Cost of merchandise sold: $711,312 Beginning of year: $208,780 End of year: 99,300

Inventory Turnover 2016 3.2 (299,300 + 430,700/2)= 365,000 (1,168,000/ 365,000) 2015 2.8 (208,780 + 99,300/2)= 154,040 (711,312/154,040) Number of Days' Sales in Inventory 2016 114.1 days (1,168,000/365)= 3,200 (365,000/3,200) 2015 130.4 days (711,312/365)= 1,948.8 (711,312/ 1,948.8) Favorable

Losses of inventory due to theft, damage, spoilage, etc. that cause the actual inventory on hand to be less than that on record.

Inventory shrinkage

Generally, the revenue account for a merchandising business is entitled

Sales

Multiple Step Income Statement Final Question: The multiple-step income statement shows the relationship of gross profit to sales.

Sales - $6,627,450.00 cost of merchandise sold- 3,900,350.00 gross profit- $2,727,100.00 operating expense selling expense- $710,900.00 administrative expense - 515,750.00 total operating expense- 1,226,650.00 income from operations- $1,500,450.00 other income and expense interest expense - (9,750.00) net income- $1,490,700.00

Early payment discount offered to customers by the seller.

Sales discount

Accounts receivable subsidiary ledger / Accounts Receivable Dr.

Sales on account

Statement where net income is determined by deducting all expenses from all revenues.

Single-step income statement

Cost flow matches the unit sold to the unit purchased.

Specific identification

Hydro White Water Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 2014, Hydro White Water incorrectly counted its inventory as $628,260 instead of the correct amount of $647,110. Enter all amounts as positive numbers. 647,110 - 628,260= 18,850

State the effect of the error on the December 31, 2014, balance sheet of Hydro White Water. Balance Sheet Items Understated/Overstated Amount Merchandise Inventory: Understated $18,850 Current Assets: Understated $18,850 Total Assets: Understated $18,850 Owner's Equity: Understated $18,850 State the effect of the error on the income statement of Hydro White Water for the year ended December 31, 2014. Income Statement Items Overstated/Understated Amount Cost of Merchandise Sold: Overstated $18,850 Gross Profit Understated: $18,850 Net Income Understated: $18,850 . If uncorrected, what would be the effect of the error on the 2015 income statement? Income Statement Items Overstated / Understated Amount Cost of Merchandise Sold Understated: $18,850 Gross Profit Overstated: $18,850 Net Income Overstated: $18,850

The cost of the units sold and in ending inventory is a weighted average of the purchase costs.

Weighted average

charges for some other company's safe deposit box were posted to your account

added to the bank statement balance

deposit in transit

added to the bank statement balance

EFT deposit from a customer

added to the company's books

a $1,000 note from one of your customers was collected by the bank

added to the company's books

interest revenue earned by the note above

added to the company's books

President's salaries, depreciation of office furniture, and office supplies are

administrative expenses

Inventory shrinkage is recorded when

there is a difference between a physical count of inventory and inventory records

information and communication

used by management for guiding operations and ensuring compliance with requirements

monitoring

used to locate weaknesses and improve controls