ACG exam 2

Helix Company purchased merchandise with an invoice price of $1,000 and credit terms of 1/10, n/40. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

12% The company saves $10 (i.e., $1,000 x 10%) if it pays no later than 10 days after the sale. Use the formula for interest: Interest = Principal x Interest rate x Time $10 = $1,000 x Interest rate x (40-10)/360 Solving for the interest rate: Interest rate = [360/(40-10)] x $10/$1,000 = 0.12 (i.e., 12%)

Which of the following is true regarding the profit margin ratio and the gross profit rate?

A profit margin ratio of 7% means that the company has 7 cents of net income for each dollar of net sales, and a gross profit rate of 7% means that the company has 7 cents of gross profit for each dollar of net sales.

Which one of the following account pairs are both permanent accounts?

Accounts Receivable; Allowance for Doubtful Accounts

Inventory is accounted for at cost. After a company has determined the quantity of units of inventory, it applies unit costs to the quantities to determine the total cost of inventory and the cost of goods sold. Which of the following statements is not a method for computing the cost of inventory?

Allowance estimation

Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method?

Allowance for Doubtful Accounts is debited. accounts receivable is credited

Which of the following would affect the gross profit rate if sales remain constant?

An increase in cost of goods sold

When is a receivable recorded by a merchandiser? Group of answer choices

At the point of sale of the merchandise on account.

Which of the following is not a component or step of the operating cycle for a service company?

Buy inventory to be resold to customers

Which of the following accounts is debited when a company factors its accounts receivable?

Cash

Which of the following would appear on both a single-step and a multiple-step income statement?

Cost of goods sold

Which of the following ordinarily has the shortest operating cycle?

Service companies

Which one of the following is not one of the principles of managing accounts receivable?

Determining from which vendor credit should be requested

Marsh, Inc. uses the perpetual inventory system. It paid for freight costs to ship merchandise to a customer. Besides the cash account, what account will Marsh record?

Freight-out

What is the term used to describe the excess of net sales over the cost of goods sold?

Gross profit

Which of the following is true of the FIFO inventory method?

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

Which is true about a wholesaler?

It sells to another business that will sell to the customer rather than sell directly to the consumer.

Which of the following is true with regards to receivables?

Receivables are claims that are expected to be collected in cash.

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods purchased as inventory has increased during the period, then the company using

The company using FIFO will have the highest ending inventory.

Why are discounts on the acquisition of inventory credited to the inventory account when a company buys inventory under a perpetual inventory system?

The discounts reduce the cost of the inventory and the inventory account should reflect this lower cost.

Under a perpetual inventory system

accounting records continuously show the amount of inventory.

A company uses the periodic inventory method and the beginning inventory is understated by $4,000 because the ending inventory in the previous period was understated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are

assets are correct and stockholders' equity is correct.

The lower of cost or market basis of valuing inventories is an example of

conservatism.

Inventory costing methods place primary reliance on assumptions about the flow of

costs

A company uses the allowance method for uncollectible accounts. In the current year, the company is notified that the customer is bankrupt and will not pay the company the amount owed. What journal entry does the company record when it is notified that the customer will not pay?

debit Allowance for Doubtful Accounts and credit Accounts Receivable.

When goods sold for cash are returned to the selling company, the selling company should

debit Sales Returns and Allowances.

A purchaser may be dissatisfied with goods purchased and decide to return them to the seller. If the purchaser uses the perpetual inventory system, the purchaser's journal entry to record the return of merchandise purchased on account would include a credit to the following account:

inventory

The direct write-off method of accounting for uncollectible accounts

is not generally accepted as a basis for estimating bad debts.

Accounts receivable are reported in the current assets section of the balance sheet at

net realizable value.

When terms are FOB shipping point

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

Under what inventory system is cost of goods sold determined after each sale?

perpetual

If a company is using aggressive accounting techniques in order to accelerate income recognition then its quality of earnings ratio is

significantly less than 1.

Freight costs incurred by a seller on outgoing merchandise sold to customers are recorded as Freight Out and these costs will increase

the operating expenses of the seller.

The Sales Returns and Allowances account does not provide information to management about

the percentage of credit sales versus cash sales.

Which of the following is true regarding the profit margin ratio and the gross profit rate?

the profit margin ratio is computed by dividing net income by net sales and The gross profit rate is computed by dividing gross profit

If a company that uses the allowance method for uncollectible accounts collects an account receivable after having been previously written it off

there will be both a debit and a credit to accounts receivable.

Which of the following is a legitimate business reason for taking a physical inventory?

to determine cost of goods sold To check the accuracy of the perpetual inventory records To determine if any inventory has been lost from waste, shoplifting, or employee theft

Merchandising companies that sell to retailers are known as

wholesalers