Accounting 2020 Test 2
If the company's accountant mistakenly recorded an $75 deposit as $119, the error would be shown on the bank reconciliation as a(n):
$44 deduction from the book balance
what are the 5 control components a company should implement
1. Control environment 2. risk assessment 3. control activities 4. information and communication 5. monitoring activities
what are the 3 trade offs of extending credit
1. Increased wage costs 2. bad debt expense 3. delayed receipt of cash
what are 3 primary goals of inventory managers
1. Maintain Quantity 2. Quality 3. Minimize Cost
what are the four steps of the budgetary control process
1. develop the budget 2.compare actual results to budgeted amounts 3.take corrective actions 4.establish new objectives and a new budget
5 common principles of internal control
1.Establish Responsibility 2.Segregate Duties 3.Restrict Access 4.Document Procedures 5.Independently verify
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.
which of the following is not a commonly used internal control?
Consolidating duties
what are the SOX key requirements
Counteractive Incentives, Reduced Opportunity, Encourage Honesty
A company uses the direct write-off method. The company writes off a $3,000 customer account balance when it becomes clear that the particular customer will never pay. What is the journal entry that would be prepared to record this write-off?
Debit Bad Debt Expense and credit Accounts Receivable for $3,000.
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 6 using the gross method?
Debit Inventory and credit Accounts Payable for $8,700.
Which inventory costing method will result in the highest inventory if the cost of goods grows over time
FIFO
LIFO reserves represent the excess of ______.
FIFO over LIFO and is reported in the inventory footnote of companies using LIFO
True or False: A different inventory costing method can be used on the income tax return than the financial statements.
False
Lower of cost or market value (LCM)
GAAP requires the inventory to be written down to its lower value when its value falls below its cost
Why is the direct write off method not allowed under GAAP to account for doubtful accounts?
It violates the expense recognitions principle ("Matching")
A $6,000 bank deposit made on the last day of the month did not appear on this month's bank statement. How would this item be treated on the bank reconciliation?
It would be added to the bank balance.
which inventory costing method will result in the highest cost of goods sold if the cost of goods grows over time
LIFO
Which of the following is not one of the primary goals of inventory management?
Minimize the quantity of ending inventory.
Offering customers ______ increases the likelihood the seller will receive the cash before the customer runs out of funds and encourages prompt payment.
Sales discounts
Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______.
Sales to decrease and Bad Debt Expense to decrease
In which situations does a company issue a note receivable? (Check all that apply.)
The company lends money to employees or businesses.The company makes an exception for a financially troubled customer and extends the payment period and charges interest.
Ace Electronics recorded a debit to Sales Returns and Allowances and a credit to Accounts Receivable, along with a debit to Inventory and a credit to Cost of Goods Sold. What business event must have taken place?
The customer received a damaged product and returned it.
What information is provided by the receivables turnover ratio?
The number of times the average receivables balance is collected during the periodThat a higher ratio means faster (better) turnover
cost is recorded as
a decrease in inventory and an increase expenses (cost of goods sold)
budget
a formal statement of a company's plans, expressed in monetary terms
petty cash fund
a system to reimburse employees for expenditures they have made on behalf of the organization
FOB shipping point
a term of sale indicating that goods are owned by the buyer the moment they leave the seller's premises
FOB desitnation
a term of sale indicating that goods are owned by the seller until they are delivered to the buyer
Requiring approval of customers' credit history, reviewing the age of past due accounts and rewarding speedy collections are examples of controls over ______.
accounts receivable
A company made a bank deposit on September 30 that did not appear on the bank statement dated September 30. In preparing the September 30 bank reconciliation, the company should:
add the deposit to the end cash balance per bank statement.
Compliance
adhering to laws and regulations
Which method for accounting for doubtful accounts is more accurate?
aging of accounts receivable
fraud
an attempt to deceive others for personal gain
selling price is recorded as
an increase in revenue and an increase in cash or account receivable
Accounts Receivable
are amounts owed to a business by its customers
what type of fraud occurs the most but causes the least amount of loss?
asset misappropriation
FIFO, LIFO, and weighted average inventory costing methods are based on:
assumptions that accountants make about the flow of inventory costs
ending inventory=
beginning inventory+ purchases- cost of goods sold
Internal Control
behind the scenes practices that help businesses achieve their objectives
In a retail business that uses a perpetual inventory system, scanning a bar code does not:
calculate the gross profit
purchase discount/ sales discount
cash discount received fro prompt payment of an account
what occurs when a sales return or allowance takes place?
cash is decreased and revenue is decreased, inventory is increased and cost of goods sold is decreased (an expense)
any difference between the sales revenue and cash collected is recorded as
cash overage or shortage
reduced opportunities
companies must establish an audit committee of independent directors and evaluate and report on the effectiveness of internal control over financial reporting
weighted average cost=
cost of goods available for sale/ units available for sale
what do merchandisers report that service companies do not?
cost of goods sold, inventory
What conclusion are managers likely to draw from a constant increase to sales returns and allowances?
customers are unhappy with the quality of the merchandise
to write off a customer's account one must
decrease allowance for doubtful accounts (debit) and decrease accounts receivable (credit)
to record a LCM one must
decrease inventory and decrease cost of goods sold
The allowance method is a method of accounting that ______ for estimated bad debts
decreases net accounts receivable
on a bank reconciliation, the amount of an NSF check is:
deducted from the company's balance of cash
Sales discounts should appear in the financial statements as a
deduction from sales
aging of accounts receivable method
estimates the allowance for doubtful accounts ending balance with the chart
cash shortage is an
expense and debited when it increases
the accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called
expense recognition principle
notes payable are typically used for
expensive items, extending payment period, lending money
True or False: When bad debt expense on notes receivable or interest receivable occurs it is recorded differently than bad debt expense for an account receivable.
false
what financial statement is cost of goods sold reported on
income statement
to adjust for bad debt one must
increase allowance for doubtful accounts (credit) and increase bad debt expense (debit)
to record interest received/ paid one must
increase cash (debit), decrease previous interest receivable (credit), increase interest revenue (credit)
to establish a note receivable one must
increase interest receivable (debit) and decrease cash (credit)
Generally accepted accounting Principles (GAAP) require that the inventory be reported at
lower of cost or market/net realizable value
financial statement fraud
misreporting amounts in the financial statements, usually to portray more favorable financial results than what actually exist
corruption
misusing one's position for inappropriate personal gain
percentage of credit sales method
multiplying the estimated percentage of bad debt losses by the current period's credit sales
Electronic Funds Transfer (EFT)
occurs when a customer electronically transfers funds from his or her bank account to the company's bank account
The of credit sales is the method that estimates bad debt expense using credit sales and the of accounts receivable method estimates the allowance for doubtful accounts based on the time each account receivable has been outstanding.
percentage
what is the part of the fraud triangle most affected by SOX
reduce opportunity
purchase returns and allowances are accounted for by
reducing the cost of the inventory and either recording a cash refund or reducing the liability owed to the supplier
gross profit=
sales revenue - cost of goods sold
retailers
sell directly to individual consumers
wholesalers
sell their inventory to retail businesses for resale to consumers
Multistep income statements
separate core results from peripheral results
On January 1, goods were picked up by a FedUp Delivery, Inc. The goods arrived at the customer's place of business on January 12. If the seller recorded the sale on January 1, then the terms must have been FOB ______.
shipping point
An individual customer's accounts receivable is recorded in the customer's ______ account and then summarized with all other customers' accounts on the balance sheet as Accounts receivable.
subsidiary
what do service companies report that merchandisers do not?
supplies
Control environment
the attitude people in the organization hold regarding internal control
managers must ensure that activities of employees and departments contribute to meeting
the company's overall goals
shrinkage
the cost of inventory lost to theft, fraud, and error
Incentive
the employee has a reason for committing fraud
asset misappropriation
theft, embezzlement
counteractive incentives
those who willfully misrepresent financial results face stiff penalties including fines
true or false, Notes receivable generally charged interest
true
periodic inventory system
updates inventory records at the end of the accounting period
perpetual inventory system
updates inventory records every time an item is bought, sold, or returned
Grandview, Inc. uses the allowance method. At December 31, 2018, the company's balance sheet reports Accounts Receivable, Net in the amount of $21,000. On January 2, 2019, Grandview writes off a $2,300 customer account balance when it becomes clear that the customer will never pay. What is the amount of Accounts Receivable, Net after the write-off?
21,000
True or False: Goods in transit and consignment inventory are reported on the balance sheet of the company not the owner.
False
True or false: Net sales is the same as net income and is reported on the income statement
FalseRationale:Net sales is the first line of the income statement above expenses. Net income is net of all expenses.
what makes up the Fraud triangle
Incentive Opportunity Rationalization
______ inventory system will always give updated balances for ______.
Perpetual; cost of goods sold
Interest=
Price of note x interest rates time/12
To help minimize bad debt expense and provide feedback, a good internal control system will require ______.
a periodic aging of accounts receivableapproval of customers' credit history
voucher system
a process for approving and documenting all purchases and payments on account
Expense is associated with the estimated uncollectible accounts receivable.
bad debt
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
The line item Trade accounts receivable, net of allowances will be found on the ______.
balace sheet
Outstanding checks have:
been recorded by the company but not yet by the bank
sales discounts should appear in the financial statements an a
deduction from sales
A high receivables turnover ratio is a sign of a company's ______.
effectiveness in granting and collecting crediteffectiveness in granting and collecting credit
recording the estimate of bad debt expense
follows the expense recognition "matching" principle
beginning inventory + purchases=
goods available for sale
to show accrued interest one must
increase interest receivable (debit) and increase interest revenue (credit)
All of the following will likely be incurred by a company that extends credit except
increased advertising expenses
Identify two benefits to the seller of offering sales discounts to its customers.
increases the likelihood the seller will receive the cash before the customer runs out of fundsprompt receipt of cash
Interest Receivable
is an asset reported the balance sheet
budgetary control process
refers to management's use of budgets to see that planned objectives are met
Imprest System
restricts the total amount paid to others by limiting the amount of money available to be transferred
opportunity
the employee as a means of committing fraud, stem from weak internal controls
Although there are some clear disadvantages associated with extending credit to customers, such as bad debt costs, most managers believe a particular advantage outweighs the costs. To which primary advantage do they refer?
Additional Sales Revenue
Companies may use which of the following to motivate sales and collections? (Select all that apply.)
Allow customers to purchase on creditProvide discounts for early collection
operating cycle
a series of activities that a company undertakes to generate revenues and ultimately cash
Surbanes-Oxley Act
a set of laws established to strengthen corporate reporting in the United States
what financial statement is ending inventory reported on
balance sheet
Rationalization
the employee perceives the misdeed as unavoidable or justified
what is the main difference between the imprest system and a petty cash fund
the imprest system puts cash in a separate account, while for a petty cash fund cash is put in a locked box
Budgeting
the process of planning future business actions and expressing them are formal plans
The estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period?
the same period as credit sales
the inventory turnover ration directly measures:
the times per period the average inventory balance is sold
The inventory turnover ratio directly measures
the times per period the average inventory balance is sold.
True or False: Allowance for doubtful accounts is a contra-asset account.
true
True or False: In a perpetual inventory system inventory still must be counted at least once a year.
true
True or False: Shipping costs are recorded as inventory.
true
True or false: GAAP require companies to include in the notes FIFO values if LIFO is used and is significantly different.
true