Accounting exam 2

The COSO Framework

1. Control Environment 2. Risk Assessment 3. Control Activities 4. Information and Communication 5. Monitoring

Two primary steps for service firms:

1. Perform a service—accounts receivable but no inventory 2. Payment from the customer —cash

Reasons actual inventory may differ from the accounting records:

1. Periodicinventorymethodisused 2. Theft 3. Spoilage 4. Errors

4 steps for a manufacturing firm.

1. Purchase Raw material 2. Manufacture finished product 3. Sell Finished product to customer 4. Collect cash from customer

Three primary steps for merchandising firms:

1. Purchase of merchandise—inventory 2. Sale of the merchandise —accounts receivable 3. Payment from the customer —cash

Beginning Inv + Purchases

= Cost of Goods Available for Sale

Beginning inventory + Purchases

= Cost of Goods Available for Sales = Cost of Goods Sold + Ending inventory

Cost of Goods Sold

= Cost of Goods Sold + Ending Inv

Which of the following statements regarding inventory costing methods is true? A. The LIFO method assumes that the costs for the newest goods (the last ones in) are used first and the older costs are left in ending inventory. B. During a period of rising prices, LIFO results in a higher income tax expense than does FIFO. C. International Financial Reporting Standards (IFRS) allow the use of LIFO but not FIFO. D. In the U.S., if a company uses LIFO on the income tax return, it may use a different method for financial reporting.

A

Which of the following bank reconciliation items should not be added to or subtracted from the bank statement balance to determine the reconciled cash balance?

A bank service charge should not be added to or subtracted from the bank statement balance to determine the reconciled cash balance, because it is already reflected in the bank statement balance.

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

In accounting for credit losses: A) The allowance method matches losses with related sales better than the direct write-off method. B) The direct write-off method involves estimating credit losses. C) The direct write-off method consistently understates assets on the balance sheet. D) Both (B) and (C).

A) The allowance method matches losses with related sales better than the direct write-off method.

Which of the following statements regarding methods of accounting for bad debts is true? A. When the allowance method is used, the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet. B. The two methods of accounting for bad debts that are acceptable under GAAP are the allowance method and the direct write-off method. C. When the allowance method is used, if actual results differ from the estimates, the prior year financial statements must be corrected. D. When the allowance method is used, bad debt expense is equal to the write-offs that occurred during the period.

A. When the allowance method is used, the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet.

12. A store holding a "50% off" sale will probably experience ______________ gross profit than usual and _______________ sales volume

A. lower; higher

In reconciling the January bank statement, the vice president discovered that the bookkeeper had recorded a check written for $681 as $816 in the cash disbursements journal. For the bank reconciliation, the $135 error should be:

Added to balance per general ledger

In subsequent periods the following accounts will be analyzed:

Allowance for sales discounts Sales refunds payable Estimated inventory return

Accounting cost flow assumption—Cost flow

An assumed flow of the cost of goods from acquisition to sale.

If inventory at the end of the year is understated by $105,000, what will this error cause?

An understatement of net income for the year by $105,000

Procedures requiring that the recording of asset transactions be separated from the custody of those assets:

Are especially important in handling cash

Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method? A) Increasing sales prices B) Buying extra inventory near the end of the year in an inflationary environment C) Allowing the inventory quantity at year end to fall below beginning year levels D) None of these. All would cause increasing taxes

B

Which of the following is desirable in a good system of internal accounting control? A) Responsibility and authority for a given function should be shared among several employees B) Appropriate forms, such as checks and sales invoices, should have preprinted control numbers C) All accounting personnel in a firm should be bonded D) To obtain the benefit of specialization, employees should not be rotated among similar jobs E) None of the above

B

In reconciling the July bank statement, the vice president discovered that the bookkeeper had recorded a check written for $353 as $533 in the cash disbursements journal. For the bank reconciliation, the $180 error should be: A) Added to balance per bank statement B) Added to balance per general ledger C) Deducted from balance per bank statement D) Deducted from balance per general ledger E) None of the above

B) Added to balance per general ledger

In reconciling the May bank statement, the vice president discovered that the bookkeeper had recorded a check written for $219 as $291 in the cash disbursements journal. For the bank reconciliation, the $72 error should be: A) Added to balance per bank statement B) Added to balance per general ledger C) Deducted from balance per bank statement D) Deducted from balance per general ledger E) None of the above

B) Added to balance per general ledger

Which of the following would you add to the balance per general ledger to arrive at the reconciled cash balance in a bank reconciliation? A) Bank service charge B) Collection of a note by bank C) "NSF" checks D) Deposits in transit E) None of the above

B) Collection of a note by bank

Merchandise was sold on credit for $4,000, terms 1/10, n/30. How should the seller record the cash collection?

B. Debit Cash, $4,000, and credit Accounts Receivable, $4,000, if collected after the discount period.

Which of the following would overstate a company's net income?

B. Shipping goods to customers without receiving orders from those customers, and recording the transactions as revenue.

A company's sales revenue decreases. Average total assets and net income are unchanged. The company's A. net profit margin and asset turnover both rise. B. net profit margin rises and its asset turnover falls. C. net profit margin and asset turnover ratio both fall. D. net profit margin falls and its asset turnover ratio rises.

B. net profit margin rises and its asset turnover falls.

Bank Balance

Balance as per the Bank Statement (prepared by the bank)

After writing off a customer's account, a company using the allowance method subsequently collected the account in full. It should: Debit Cash and credit Accounts Receivable Debit Cash and credit Miscellaneous Income Debit Accounts Receivable and credit Allowance for Doubtful Accounts

Both A) and C)

Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method?

Buying extra inventory near the end of the year in an inflationary environment

Which of the following is not true for a retailer using perpetual inventory system? A) When merchandise is purchased FOB shipping point, the buyer assumes the risk of any damage in transit. B) After a physical inventory count, the retailer credits the Inventory account for any missing inventory. C) When the retailer returns defective merchandise to the manufacturer, the retailer credit Purchase Returns. D) The Cost of Goods Sold account is closed at the end of the year with a debit to Income Summary.

C

Procedures requiring that the recording of asset transactions be separated from the custody of those assets: A) Will uncover collusion among employees B) Are important only in very large businesses C) Are especially important in handling cash D) Make it easy for an employee to cover up the theft of an asset E) None of the above

C) Are especially important in handling cash

If a company fails to make an adjusting entry to estimate uncollectible accounts, then this error: A) Understates owners' equity B) Understates assets C) Overstates net income D) Overstates expenses E) Does none of the above

C) Overstates net income

30. A $15,000 overstatement of the 2014 ending inventory was discovered after the financial statements for the year were prepared. How would that inventory error impact the 2014 financial statements? A. Current assets were overstated and net income was understated. B. Current assets were understated and net income was understated. C. Current assets were overstated and net income was overstated. D. Current assets were understated and net income was overstated.

C. Current assets were overstated and net income was overstated.

Assuming rising prices, which method will give the highest dollar value for cost of goods sold on the income statement? A) FIFO B) Average Cost C) LIFO D) All of these give equal values for cost of goods sold

C. LIFO

Which of the following situations would cause the balance per bank to be more than the balance per books? A. Deposits in transit. B. Service charges. C. Outstanding checks. D. Checks from customers returned as NSF.

C. Outstanding checks.

20. Which of the following statements regarding inventory costing methods is true? A. International Financial Reporting Standards (IFRS) allow the use of LIFO but not FIFO. B. In the U.S., if a company uses LIFO on the income tax return, it may use a different method for financial reporting. C. The LIFO method assumes that the costs for the newest goods (the last ones in) are used first and the older costs are left in ending inventory. D. During a period of rising prices, LIFO results in a higher income tax expense than does FIFO.

C. The LIFO method assumes that the costs for the newest goods (the last ones in) are used first and the older costs are left in ending inventory.

1. An adjustment to ending inventory under the lower of cost or market (LCM) rule would be least likely to be recorded by a company that sells: i. A household staple like laundry detergent. ii. Kitchen items like paper towels. iii. Seasonal items like snow blowers.

C. i and ii only

Included in net sales are each of the following except:

Cost of the merchandise

Using a periodic inventory system, the buyer's journal entry to record the payment for merchandise within the discount period includes a:

Credit to Purchase Discounts

In establishing an effective internal control structure, management should: A) Establish a good control environment. B) Provide an effective accounting system. C) Integrate control procedures into the control environment and accounting system. D) All of the above. E) None of the above

D) All of the above.

Under the allowance method of accounting for credit losses, the entry to write off a specific account: A) Will increase total assets. B) Debits Bad Debts Expense and credits Allowance for Uncollectible Accounts. C) Is the same as the entry to write off a specific account under the direct write-off method. D) Does not affect net income or total assets. E) None of the above

D) Does not affect net income or total assets.

Which of the following does not occur when a company receives additional information that requires it to increase its expectations of uncollectible accounts receivable? A) Accounts receivable (net) is reduced B) Bad debts expense is increased C) Net income is reduced D) The allowance account is decreased

D) The allowance account is decreased

10. Which of the following statements regarding inventory counts is not true?

D. If a company uses a perpetual inventory system and the inventory count at the end of the accounting period is greater than the balance in the inventory ledger account, there must have been shrinkage.

7. A company has net income of $148,000 and a net profit margin ratio of .087. Which of the following is not a true statement?

D. If income from operations is less than net income, this means that the company had no non-operating revenue.

Which of the following is not a commonly used internal control? A. Mandatory vacations. B. Anonymous hotlines. C. Segregation of duties. D. Sales generation duties.

D. Sales generation duties.

27. Which of the following statements is true? i. When unit costs are steadily rising or falling, the weighted average cost method yields a cost of goods sold between that of FIFO and LIFO. ii. FIFO will lead to the highest net income if unit costs are falling. iii. LIFO will always yield a smaller net income than FIFO under inflationary conditions.

D. i & iii only

5. Fraud investigators identify three things that must exist for accounting fraud to occur. Which of the following is/are elements of the fraud triangle? i. The incentive to commit fraud. ii. The lack of a business Code of Ethics. iii. The opportunity to commit fraud.

D. i & iii only

Which of the following statements are true? I. The use of internal controls guarantees protection against losses due to fraud, errors, and inefficiencies. II. A highly effective internal control should not be implemented if the cost is greater than the benefit. III. Internal controls include the policies and procedures a company implements to protect against theft of assets, to promote efficiency, and to ensure compliance with laws and regulations.

D. ii & III only

19. Which of the following is a true statement? i. Sales discounts is a contra-asset account. ii. Sales returns & allowances will reduce the sales revenue, that will be shown in the income statement. iii. Sales returns & allowances is a contra-revenue account.

D. ii & iii only

29. Your company has 100 units in inventory, purchased at $20 per unit, that could be replaced for $15. i. The company should credit cost of goods sold for $500. ii. The company should debit cost of goods sold for $500. iii. The company should credit inventory for $500.

D. ii & iii only

Using a perpetual inventory system, the seller's journal entry to record the return, by the buyer, of merchandise purchased on account includes a:

Debit to Sales Return & Allowance account

At May 31, Michaelis Company has outstanding checks totaling $19,600. The bank reconciliation for May should show these checks as a(n):

Deduction from balance per bank statement

Under the allowance method of accounting for credit losses, the entry to write off a specific account: Does not affect net income or total assets Will increase total assets Debits Bad Debts Expense and credits Allowance for Doubtful Accounts Is the same as the entry to write off a specific account under the direct write-off method

Does not affect net income or total assets

If a company fails to make an adjusting entry to accrue interest on a note receivable, then this error: A) Overstates expenses B) Understates income C) Understates assets D) Understates owners' equity E) All of these except A

E) All of these except A

Any act by management or employees of a business involving an intentional deception for personal gain

Embezzlement of cash Theft of assets Filing of false insurance claims Financial statement fraud

The credit period is the maximum time given for payment, often stated in net terms as n/.

For example, 30 day terms will be stated as n/30

A purchase discount may be given for faster payment. This is often stated as the discount amount and discount period.

For example, a 2% discount if paid in 10 days is stated as 2/10

F.O.B. (free on board) shipping point

Freight terms in which the buyer pays the transportation costs from the shipping point to the final destination.

Which of the following statements are true? i. A highly effective internal control should not be implemented if the cost is greater than the benefit. ii. Internal controls include the policies and procedures a company implements to protect against theft of assets, to promote efficiency, and to ensure compliance with laws and regulations. iii. The use of internal controls guarantees protection against losses due to fraud, errors, and inefficiencies.

I & II only

11. Which one of the following statements regarding sales discounts is true? i. If a company offers a discount to encourage prompt payment and the discount is taken, the discount reduces the amount of Net Sales. ii. Credit terms of "2/10, n/30" mean that if payment is made within 10 days, a 2% discount may be taken; if not paid within 10 days, the full invoice price will be due in thirty days. iii. The terms "sales discounts" and "sales credits" are used interchangeably by a company

I and ii only

LIFO conformity rule

IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting

The specific identification inventory costing method:

Is more appropriate for a firm selling construction equipment than for a firm selling greeting cards

Examples of physical controls

Locked doors Safes Fences with guards

Controls for cash involve

Mailroom or retail sales area for receipt Treasurer for custody Controller for recording Internal audit

First-In, First-Out (FIFO)

Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold.

Rationalization

Most fraudsters come up with rationalizations to overcome the feeling of guilt

Pressure

Nearly all frauds committed by individuals under either financial or vice pressure. Financial statement fraud often associated with pressure to "make the numbers.

A major shortcoming of the direct write-off method is that credit losses are:

Not matched with sales

If a company fails to make an adjusting entry to estimate doubtful accounts, then this error:

Overstates net income

Risk Assessment

Risk is the possibility that an event will occur that will have a negative impact on the organization. Risk assessment involves identifying and analyzing relevant risks.

The cost of inventory includes each of the following except:

Sales returns and allowances

The internal control that requires no one individual is assigned too much responsibility is:

Segregation of duties

F.O.B. (free on board) destination

Seller maintains ownership until the buyer takes possession.

Physical flow of goods—Goods flow

The actual flow of goods from acquisition to sale (order of what sells first).

Which of the following does not occur when a company receives additional information that requires it to increase its expectations of doubtful accounts receivable? The allowance account is decreased Accounts receivable (net) is reduced Bad debts expense is increased Net income is reduced

The allowance account is decreased

In accounting for credit losses:

The allowance method matches losses with related sales better than the direct write-off method

Which of the following best describes the flow of inventory costs?

The cost of goods purchased plus beginning inventory is equal to the cost of goods sold plus ending inventory.

Conduct Internal Audits

The internal audit function provides appraisals of a company's internal control and financial records

Assuming rising prices, which method will give the highest dollar value for cost of goods sold on the income statement?

Under LIFO, the most costly units are the ones last purchased during a period of rising prices. LIFO matches these higher cost items against sales as cost of goods sold.

Which of the following statements regarding methods of accounting for bad debts is true?

When the allowance method is used, the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet.

Weighted Average Method

a process costing method that blends together units and costs from both the current and prior periods

Perpetual system

a system in which the inventory account is increased at the time of each purchase and decreased at the time of each sale

Periodic system

a system in which the inventory account is updated only at the end of the period

Reconciled Cash Balance =

cash balance per bank statement - outstanding checks + deposits in transit

The Grass is Greener Corporation uses the allowance method and learns that a customer who owes $500 has gone bankrupt and payment will not be made. The Grass is Greener Corporation should:

debit the Allowance for Doubtful Accounts and credit Accounts Receivable for $500.

Gross Profit Percentage =

gross profit on sales/net sales

Which of the following is desirable in a good system of internal accounting control? I. Appropriate forms, such as checks and sales invoices, should have preprinted control numbers II. Important documents should be kept in a safe, and data should be password restricted to relevant employees only. III. To obtain the benefit of specialization, employees should not be rotated among similar jobs

i & ii only

Fraud investigators identify three things that must exist for accounting fraud to occur. Which of the following is/are elements of the fraud triangle? i. The incentive to commit fraud. ii. The ability to rationalize fraud. iii. The opportunity to commit fraud.

i, ii and iii

4. If a company declares and pays a dividend during the year, this will: i. decrease the company's net profit margin. ii. increase the company's debt-to-assets ratio. iii. decrease the company's inventory turnover ratio.

ii. increase the company's debt-to-assets ratio.

Work-in-process inventory

items partially completed

Raw Materials Inventory

items to be used in the production of products

If an uncollectible account, previously written off, is recovered:

net accounts receivable decreases.

return on sales ratio =

net income/net sales

Cash Balance

the balance in the firm's cash account at the end of the year

finished good inventories

the final outputs of manufacturing operations