ACCT 2301 - Exam 2

Gemini Group has the following assets: Cash in Banks: $125,000 Cash on hand: 2,500 Petty Cash: 325 Restricted Cash: 10,500 Accounts Receivable: 139,025 Treasury bills: 1,125 What amount will Gemini Group report as cash and cash equivalents?

$128,950

Scanlon Company has the following assets: Cash in Banks: $14,450 Accounts Receivable: $8,605 Treasury Bills: 6,250 Commercial Paper: 1,280 Money Market Fund: 9,125 Restricted Cash: 5,000 What amount will Scanlon Company report as cash equivalents?

$16,655

Thornton Retailers uses the periodic inventory system. Determine Thornton's cost of goods sold if its beginning inventory was $117,000, purchases for the year were $283,500, and the ending inventory was $86,450.

$314,050

Which of the following would be the most effective policy to prevent losses due to human element and why?

A company could ensure that employees are assigned an appropriate amount of duties and given breaks to prevent losses due to fatigue and indifference.

Which of the following would be a current liability?

A net negative balance in a bank account

Which of the following journal entries records a credit sale?

Accounts Receivable Sales Revenue

________ are highly liquid investments that are close to their maturity and easily convertible into cash.

Cash equivalents

You have completed your physical count of inventory and determined the ending balance to be $362,000. Your company uses a perpetual inventory system and you are not sure if your inventory records are correct. What will you do in this situation?

Compare the unadjusted balance in the inventory account to the balance per the physical count; if amounts do not agree, make an adjusting entry to inventory.

The company's unadjusted balance in inventory always agrees with the actual amount of inventory on hand.

False

Which of the following would result in Urban Kicks, which banks at First America Bank, recording an increase in cash?

First America Bank collects a note and issues them a credit memorandum.

Why should companies be careful to define cash and cash equivalents correctly?

If a company overstates cash and cash equivalents, they will appear more liquid than they really are which would mislead investors.

What account is used to close temporary accounts with debit and credit balances?

Income Summary

What is one advantage of the periodic inventory system?

It requires less record keeping than a perpetual inventory system.

Bella Epoch Fashion received notice that its bank has processed an NSF check. What would be the result for Bella Epoch Fashion?

It would have an increase in accounts receivable and a corresponding decrease in cash.

Which of the following should be reported as cash and cash equivalents and why?

Money market funds and treasury bills are liquid enough to be reported as cash and cash equivalents.

Which of the following is an example of restricted cash?

Mountain Cola expects to set aside a portion of a lump sum debt payment due next year each month.

Which adjustment to the book side of the bank reconciliation requires action beyond a journal entry?

NSF check

How can the company provide internal controls through the accounting department?

Only allow the accounting department to access a copy of the list of checks to record the change in cash rather than allowing them to handle the actual cash and checks.

A physical count of inventory at the end of the accounting period is ______ under the periodic system.

Required

Merchandisers may grant a reduction in the purchase price, called a _______ _______, so that the buyer will keep merchandise that is defective instead of returning it to the merchandiser.

Sales Allowance

Which of the following has a normal debit balance?

Sales Discount

Which of the following is classified as an expense account?

Sales Discount

Which of the following is a contra revenue account?

Sales Returns

The ________ account is classified as a contra revenue account.

Sales Returns and Allowances

Which of the following is a closing entry to close temporary accounts with credit balances?

Sales Revenue $XXX Income Summary $XXX

Presented here are the components in Fancy Corp.'s income statement. What is Fancy's Sales Revenue and Operating Expenses? Sales revenue: Cost of Goods Sold: $175,000 Gross Profit: $150,000 Operating Expenses: Net Income: $65,000

Sales Revenue = $325,000 Operating Expenses = $85,000

Which of the following best describes the difference between sales transactions, purchase transactions, and adjusting journal entry transactions?

Sales and purchase transactions are recorded daily, whereas adjusting journal entry transactions are recorded at the end of the accounting period.

Which of the following means that a 2 percent discount is allowed on payments made within 10 days of the invoice date?

Terms are 2/10, n/30.

The CFO of Blalock's Industries is frustrated by the Sarbanes-Oxley Act. He has had to hire an extra auditor and consultant to help analyze and detect fraudulent activities, and he feels like this might cost him more than it saves. What aspect of SOX most bothers the CFO?

The extra time and expense required in following the SOX requirements.

Martha ordered $5,000 worth of supplies for her company. When they arrived, she discovered that some of the products were not specifically what she had ordered, and some were the wrong color. As a result, the supplier gave her company a purchase allowance of $800. What is the most likely result of this?

The purchase allowance will cause a decrease to both the buyer's accounts payable and their inventory account.

Which of the following is true of a single-step statement?

The total of all expenses is deducted from the total of all revenues.

What would be the best option for Sporting Good Apparel which is a large national retail chain that sells athletic clothing, accessories, and equipment?

They should employ internal auditors who in addition to providing audits could evaluate and improve the control systems for the company.

Although investors view the Sarbanes-Oxley Act as beneficial, critics of the legislation point to which aspects of accounting information as being the most burdensome for companies?

Timeliness and Cost-Benefit Analysis

Which of the following correctly lists assets from most to least liquid?

Treasury bill, accounts receivable, prepaid expenses

A physical count of goods on hand is taken at the end of each period when a perpetual inventory system is used.

True

Assets purchased for resale are recorded in the Inventory account.

True

Perpetual records are adjusted with entries to inventory and costs of goods sold to make recorded inventory amounts agree with inventory on hand.

True

To calculate the gross profit rate, you divide net income by net sales.

True

Argon Labs has a fund of restricted cash to cover decontamination costs prior to the planned remodel of the storage area for radioactive isotopes in three years. Xenon Tech has a fund of restricted cash to cover worker's compensation claims that have payments due in three months. How would these compare?

Xenon Tech would list their restricted cash as a current asset while Argon Labs would list their restricted cash as a noncurrent asset.

Xenon Technology likes having cutting-edge systems and the latest technology. Old Thyme Market prefers tried and true methods and distrusts technology. How would the two compare in organizing their banking?

Xenon Technology would most likely use online banking, while Old Thyme Market would most likely use a system with paper checks and check stubs.

Freight costs are journalized as __________ for the purchaser and as _________ for the seller of inventory.

a component of inventory cost; an operating expense

The Sales Discount account is classified as

a contra revenue account.

The Sales Return and Allowances account is classified as

a contra revenue account.

What is a remittance advice and when is it used?

a document that accompanies checks to explain their purpose

To record a credit sale in a journal entry, a merchandiser would enter the corresponding double entry under

accounts receivable

How are deposits in transit listed on a bank statement?

as additions to the cash balance per bank statement

How would a collection of a note be found on a bank reconciliation?

as an addition to the cash balance per books

In an income statement, where does freight-out appear?

as an operating expense

Bank customers should reconcile their records frequently with ________ to prevent their checks from ________.

bank statements; bouncing

Why is a journal entry alone not sufficient to resolve an NSF check?

because the customer's debt has not been settled and the company must contact the customer and pursue collection

When can sales revenues be recorded?

before cash is collected

Sales revenue can be recorded

before the cash is received.

Gadget Corp., a wholesaler, uses a periodic inventory system. At year-end, how does Gadget Corp. determine its ending inventory?

by conducting a physical count of inventory

Center Company will report money market funds and treasury bills as __________ due to their

cash and cash equivalents; liquidity.

Money market funds are considered

cash equivalents.

Which optional feature of a bank account is an alternative to an online banking system?

check stubs

Sales Returns is a(n) ________ account.

contra revenue

Although high-volume merchandisers invest in sophisticated inventory-tracking software, many businesses prefer to use less-expensive methods. Why might lower-volume retailers use less expensive methods?

cost-benefit tradeoff

Depending on when it is to be used, how can restricted cash be classified on the balance sheet?

current asset or noncurrent asset

How does a company classify a net negative balance in its bank account?

current liability

Which journal entry indicates an NSF check has been received by a company and processed by the company's bank?

debit accounts receivable; credit cash

When making a bank deposit, which document must accompany checks and currency?

deposit slip

Although some risks are inherent, what means of cash disbursements is the most effective and efficient?

electronic funds transfer (EFT)

Dividing the amount of gross profit by net sales will give you the

gross profit rate.

Mary Moore, ________ for Dexter Company, goes to the bank twice daily to make deposits.

head cashier

One advantage of using the multiple-step income statement is that it

highlights the components of net income.

Eric Hansen is a receiving clerk who has just been denied a raise. He has approached his subordinate, who is the new storeroom clerk, about diverting inventory to sell for personal gain. This example of the ________, which may lead to _________.

human element; collusion.

The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made

in 10 days.

One advantage large companies enjoy is their ability to employ ________, who assist top management in the evaluation of ____________.

internal auditors; control systems

Interest expense would be classified under the heading Other Expenses and Losses on a ________ statement.

multiple-step income

Gross profit divided by ________ equals gross profit rate.

net sales

After making an adjusting entry for inventory, the adjustment would have ______ on cash flows.

no effect

Which of the following is not considered a cash equivalent?

notes receivable

Restricted cash listed as non-current will most likely be used to

payoff debt due three years from the balance sheet date.

The cost of goods sold is determined each time a sale occurs under a(n) ________ system.

perpetual inventory

Which of the following lists only items that should be listed as cash on the balance sheet?

petty cash, cash in hand, cash in banks

The cash account is comprised of cash on hand, cash in banks, and

petty cash.

To be considered cash equivalents investments must be highly liquid and

readily convertible into cash and very close to their maturity dates

The corporate officers at KLM Distributors require the head of the information services department to attend monthly conferences related to emerging technology and potential for fraud. Which aspect of internal control is KLM addressing?

risk assessment

Each year, the security team at HTS Financials walks through the facility to determine if any physical controls are missing that would help prevent fraud. In this way, they are participating in

risk assessment.

What is the transaction called when a customer agrees to retain defective merchandise because the seller is willing to reduce the selling price?

sales allowance

In which account can merchandising companies find information about the presence of correctable problems, such as the need to improve methods for filling customer orders or packaging goods for shipment?

sales returns and allowances

The ________ account provides management with information about inefficiencies in packaging goods and errors in filling customer orders.

sales returns and allowances

A(n) ________ exists when the custody of an asset is the responsibility of one employee, while the accounting for the same asset is the responsibility of another employee.

segregation of duties

Betty's Bakery is a start-up bakery that employs Betty, the owner, as well as one sales clerk, and one baker. Which cash receipt controls may be hardest to enforce in this environment? Select all that apply.

segregation of duties independent internal verification

An investment that has a maturity date of ________ would be reported on the balance sheet as a cash equivalent.

three months or less when purchased

A small business owner allows two employees to work the same cash register. This situation can be viewed as

violating establishment of responsibility.

When are sales revenues usually considered earned?

when goods have been transferred from the seller to the buyer

A department store uses a perpetual inventory system. At year-end, the balance in the merchandise inventory account is $2.5 million. Assuming that the inventory records have been maintained properly, a year-end physical inventory

will probably indicate less than $2.5 million in merchandise on hand due to handling and related losses.