Ch 5 SmartBook Asgn
Assume that Missvel Inc. has credit sales terms of 3/10, n90. On May 5, Missvel Inc. made a $10,000 sale to Terene Co. This means that Terene Co. has the option of paying:
$9,700 by May 15 or paying $10,000 by August 3.
Assume that Missvel Inc. has credit sales terms of 2/10, n30. On May 5, Missvel Inc. made a $10,000 sale to Terene Co. This means that Terene Co. has the option of paying:
$9,800 by May 15 or paying $10,000 by June 4.
Which of the following are alternative cost flow assumptions?
- First-in, first-out (FIFO)- Weighted-average
Cash managers are interested in minimizing investment risks and thus would normally consider making investments in which of these? More than one answer may be correct.
Bank certificates of deposit Commercial paper
The amounts reported for ending inventory and cost of goods sold will differ depending on whether the weighted-average, FIFO, or LIFO cost flow assumption is used by the reporting company because the (cost/profit) per unit (purchased/sold) changes over time.
Blank 1: cost Blank 2: purchased
In times of rising prices, inventory profits (or phantom profits) are said to occur under the FIFO cost flow assumption. This occurs because under FIFO, the release of (older/newer), (higher/lower) costs to the income statement results in (higher/lower) profits than if current costs were to be recognized.
Blank 1: older Blank 2: lower Blank 3: higher
The LIFO cost flow assumption results in the most (distant/recent) costs being transferred to cost of goods sold. In times of rising prices, the costs transferred to cost of goods sold under LIFO will therefore be (higher/lower) than the costs transferred to cost of goods sold under FIFO.
Blank 1: recent Blank 2: higher
Identify a true statement about cash equivalents.
Cash equivalents are short-term investments readily convertible into cash with minimal risk of price change.
Beginning inventory = $15,000, Purchases = $24,000, and Ending inventory = $17,000. Thus: Multiple choice question.
Cost of goods available for sale = $39,000 and Cost of goods sold = $22,000.
How can "Cost of goods available for sale" be calculated? More than one answer may be correct.
Cost of goods sold + Ending inventory Beginning inventory + Purchases
If ending inventory was understated at the end of Year 1 but counted correctly at the end of Year 2 and this error was not discovered until sometime in Year 3, then: Multiple choice question.
Cost of goods sold was overstated in Year 1 and understated in Year 2 but the error would have self-corrected in total.
Identify the correct entries to record a sales transaction under the perpetual inventory system. More than one answer may be correct
Dr. Cost of Goods Sold Cr. Inventory Dr. Accounts Receivable (or Cash) Cr. Sales
The entry to accrue interest on short-term marketable debt securities is:
Dr. Interest Receivable xx Cr. Interest Income xx
The entry to accrue interest on short-term marketable debt securities is: Multiple choice question.
Dr. Interest Receivable xx Cr. Interest Income xx
The entry to record accrued interest on Notes Receivable is:
Dr. Interest Receivable xx Cr. Interest Revenue xx
The entry to record the purchase of inventory is: Multiple choice question.
Dr. Inventory Cr. Accounts Payable (or Cash)
In the bank reconciliation process, how are errors handled? More than one answer may be correct.
Either added to or subtracted from the company's book balance, if the error was made by the company Either added to or subtracted from the bank balance, if the error was made by the bank
In times of rising prices, inventory profits (or phantom profits) occur under the FIFO cost flow assumption. This occurs because under FIFO, the release of older, lower costs to the income statement results in higher profits than if current costs were to be recognized. How does this create a problem for the reporting company?
Lower cost means higher taxable income and higher taxes payable.
Cash managers are interested in minimizing investment risks and thus would normally consider making investments in which of these? More than one answer may be correct.
Money market mutual funds U.S. Treasury securities
Which accounts on financial statements will increase when interest is accrued on short-term marketable debt securities? More than one answer may be correct.
Net income Revenues Assets
Which of these would be included in the Cash account, which is reported as an asset on the balance sheet?
Savings account balances Undeposited receipts, including checks Checking account balances Money on hand in petty cash funds
Identify the true statements regarding the balance sheet presentation of accounts receivable.
The allowance for bad debts is subtracted from accounts receivable while presenting the accounts receivable in the balance sheet. "Net accounts receivable" is the net realizable value reported on the balance sheet. "Net accounts receivable" represents the balance of an asset account less the balance of a contra asset account.
The internal control process is designed to provide reasonable assurance that objectives are achieved with respect to which of the following?
The organization's compliance with applicable laws and regulations The effectiveness and efficiency of the operations of the organization The reliability of the organization's financial reporting
The amounts reported for ending inventory and cost of goods sold will differ depending on whether the weighted-average, FIFO, or LIFO cost flow assumption is used by the reporting company. Which of the following is the primary reason for such differences in reported amounts? Multiple choice question.
The purchase price (i.e., cost) per unit of inventory items changes over time.
Identify the true statements regarding debt and equity securities that fall in the trading and available-for-sale categories.
They are reported on the balance sheet at the market value of the securities, and any unrealized gains or losses are recognized. Their accounting treatment shows the application of MATCHING concept.
Bad debt expenses can be estimated using a percentage of credit sales method and _____.
an aging of receivables method
The net realizable value of accounts receivable is not affected by:
an entry to the write-off of an account receivable.
The net realizable value of accounts receivable is not affected by: Multiple choice question.
an entry to the write-off of an account receivable.
The effects on the financial statements of accruing interest on Notes Receivable include:
an increase to assets. an increase to net income. an increase to revenues.
To calculate the cost of an item purchased for inventory, costs associated with the purchase of the item are added to the invoice price paid to the supplier and _____.
any cash discount allowed on the purchase is subtracted.
Financial controls:
are related to the concept of separation of duties.
outstanding checks
are subtracted from the bank's balance.
Bank service charges:
are subtracted from the company's book balance.
A bank reconciliation is performed to:
bring the bank's reported balance and the cash account balance into agreement
Periodically, the petty cash fund is reimbursed to:
bring the cash in the fund back to the original amount.
The beginning inventory for ProKnows, Ltd. consisted of 20 units at $4 each. During March, 40 more units of inventory were purchased for $5 each and during May an additional 40 units were purchased for $6 each. A total of 70 units of inventory were sold during the year. Under the FIFO cost flow assumption, ending inventory ______.
= (30 @ $6) = $180
An operating cycle can be described as the process of going from:
cash to inventory to accounts receivable and back to cash.
The beginning inventory for ProKnows Ltd. consisted of 20 units at $4 each. During March, 40 more units of inventory were purchased for $5 each, and during May, an additional 40 units were purchased for $6 each. A total of 70 units of inventory were sold during the year. Under the weighted-average cost flow assumption, _____.
cost of goods sold = 70 units x $5.20 per unit = $364
The cost of an item purchased for inventory:
includes freight and material handling charges. is reduced by cash discounts allowed on the purchase. includes the invoice price paid to the supplier.
Under the FIFO method, the amounts reported as ending inventory and cost of goods sold will always be the same, whether a periodic or perpetual system is used because: Multiple choice question.
once first-in, always first-in; under FIFO, costs flow in the chronological order of purchase transactions.
When a firm's account balance reported by its bank and the bank account balance in its ledger do not agree, then the firm needs to _____.
perform a bank reconciliation
Expenses that could be treated as prepaid and included in current assets include insurance, rent, office supplies, and ______.
postage
Other than prepaid insurance, expenses that could be treated as prepaid and included in current assets include:
postage, rent, office supplies
If appropriate allowance for bad debts is not provided, then _____. Multiple choice question.
the ROI, ROE, and liquidity measures will be distorted
The net realizable value of accounts receivable is not affected by the write-off of an account receivable because:
the decrease to an asset account is offset by a decrease to a contra asset account.
Short-term marketable debt securities that are in the held-to-maturity category are reported on the balance sheet at:
the entity's cost of the securities.
Under the LIFO method, the amounts reported as ending inventory and cost of goods sold will differ depending on whether a periodic or perpetual system is used because:
the last-in cost is redefined as each purchase transaction takes place, so the timing of the application of LIFO rules will influence the results.
Debt and equity securities that fall in the trading and available-for-sale categories are reported on the balance sheet at:
the market value of the securities, and any unrealized gains or losses are recognized.
The internal control process is designed to provide reasonable assurance that each of the following objectives are achieved, except:
the promotion of a positive organizational image.
The "market" in the lower of cost of market valuation is generally: Multiple choice question.
the replacement cost of the inventory.
An operating cycle is the average time it takes:
to convert an investment in inventory back to cash.
A note receivable:
usually bears interest. involves penalties if not paid on the maturity date. represents a formal, legal contract.
Alternative cost flow assumptions include FIFO, LIFO, _____. Multiple choice question.
weighted-average, and specific identification
Under the FIFO method, the amount reported as ending inventory:
will always be the same whether a periodic or perpetual system is used.
Under the FIFO method, the amount reported as ending inventory: Multiple choice question.
will always be the same whether a periodic or perpetual system is used.
Under the LIFO method, the amount reported as ending inventory:
will vary under periodic and perpetual systems because the last-in cost is redefined each time a purchase transaction occurs.
Current assets include cash and other assets that are expected to be converted to cash or used up ______.
within a year, or an operating cycle, whichever is longer
Which of these are acceptable approaches in estimating bad debts? More than one answer may be correct.
Aging of receivables method Percentage of credit sales method
Assume that the balances in Accounts Receivable and the Allowance for Bad Debts accounts were $50,000 and $3,000, respectively, before a write-off entry for $1,000 was recorded. How much would have been reported on the balance sheet as "Net accounts receivable" after the write-off entry was recorded? Multiple choice question.
$47,000 Reason: The net change in the net accounts receivable after a write-off is zero because Accounts Receivable will be reduced by the same amount as the Allowance for Bad Debts account.
How does the year-end adjustment for bad debts normally affect financial statements? More than one answer may be correct.
A decrease in the carrying value (the net realizable value) of accounts receivable An increase to expenses
How does a write-off of an account receivable affect the financial statements?
A decrease to a contra asset account
How does a write-off of an account receivable affect the financial statements?
A decrease to an asset account
How does the year-end adjustment for bad debts normally affect the financial statements? More than one answer may be correct.
A decrease to total assets An increase to a contra asset account
If appropriate allowance for bad debts is not provided, what will happen?
Accounts Receivable and net income will be overstated.
The entry to record the transfer of cost of the inventory sold to the income statement is:
Dr. Cost of Goods Sold Cr. Inventory
If ending inventory was overstated at the end of Year 1 but counted correctly at the end of Year 2 and this error was not discovered until sometime in Year 3, then:
Gross profit (and net income) was overstated in Year 1 and understated in Year 2 but the error would have self-corrected in total.
The entry that reflects the transfer of cost of goods sold to the income statement involves a _____. Multiple choice question.
debit to Cost of Goods Sold and credit to Inventory
In the bank reconciliation process, errors are:
either added to or subtracted from the bank balance or the company's book balance.
The beginning inventory for ProKnows Ltd. consisted of 20 units at $4 each. During March, 40 more units of inventory were purchased for $5 each, and during May, an additional 40 units were purchased for $6 each. A total of 70 units of inventory were sold during the year. Under the weighted-average cost flow assumption, _____. Multiple choice question.
ending inventory = 30 units x $5.20 per unit = $156
The amount in the Cash account, which is reported as an asset on the balance sheet, includes all of the following except:
expected litigation settlements.
The cost of an inventory item is released to the income statement as an:
expense when the product is sold (or becomes worthless or is lost or stolen).
The cost of an inventory item is released to the income statement as an:
expense when the product is sold. expense when the product is lost or stolen. expense when the product becomes worthless.
A firm paying its suppliers within the discount period _____.
gives a positive signal to the credit-rating agencies and credit grantors regarding the firm's creditworthiness and liquidity
Cash equivalents are short-term investments readily convertible into cash with minimal risk of price change due to:
interest rate movements
The petty cash fund:
is used to make small payments of cash.
In times of rising prices, LIFO results in:
lower ending inventory value and higher cost of goods sold value than FIFO.
Inventory is reported on the balance sheet at: Multiple choice question.
lower of cost or market value.
Most firms will almost always pay within the discount period to take advantage of the cash discounts (such as 2/10, n30) offered by their suppliers because:
most credit terms represent a significant financing cost if the discounts are not taken.
A note receivable:
normally includes a maturity date. often identifies collateral pledged by the borrower to support the loan. often includes covenants made by the borrower.
Short-term marketable debt securities that fall in the held-to-maturity category are reported on the balance sheet at the entity's cost, which is usually about the same as market value, because _____. Multiple choice question.
of their high quality and the short time until maturity
Administrative controls:
often involve limit (or reasonableness) tests.
Under the FIFO method, the amounts reported as ending inventory and cost of goods sold will always be the same, whether a periodic or perpetual system is used because:
once first-in, always first-in; under FIFO, costs flow in the chronological order of purchase transactions.
