D103 - Intermediate Accounting - OA2 (Units 5-7)

A manufacturing company incurred the following costs: • direct materials: $2,000 • depreciation on factory equipment: $600 • selling expenses: $1,000 • freight charges on direct materials: $500 What are the total period costs?

$1,000 Accounting Rule: Period costs include any costs not related to the manufacture or acquisition of a product, i.e., nonmanufacturing costs. Sales commissions, administrative costs, advertising and rent of office space are all period costs. These costs are not included as part of the cost of either purchased or manufactured goods but are recorded as expenses on the income statement in the period they are incurred.

How is accounts receivable recorded on 6/30 for a company using the net method for the sale of $500 on 6/18, and payment made on 6/30 with payment terms 2/10, net 30?

Credit accounts receivable for $490. Accounting Rule: 2/10 net 30 is a term-of-art that means customers are eligible to receive a 2% discount if the amount owed is paid within 10 days. In this case, accounts receivable is debited for $490 and sales is credited for $490. Since the customer failed to make payment within the 10-day discount period, the full amount ($500) is due in 30 days which the customer paid. The journal entry is Cash 500 Accounts receivable 490 Sales discounts forfeited 10 Sales discounts forfeited is shown in the income statement under the "Other revenue and gains" section.

A company wants to assess the effectiveness of a company's credit and collection policies. What ratio should it use?

Days to collect accounts receivable. Accounting Rule: The days to collect accounts receivable is also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days' outstanding, to assess the effectiveness of a company's credit and collection policies.

As of December 31, a company has an uncollectible account of $10,000. The accountant uses the allowance method to account for bad debts. What is the journal entry for the write off of the account?

Debit Allowance for doubtful accounts; credit A/R Accounting Rule: When using the direct write-off method, bad debt expense is debited and accounts receivable is credited.

A bank lent a customer $16,529 accepting a 2-year, $20,000 zero-interest bearing note from the customer. The implied interest rate is 10%. What is the bank's journal entries for the note, the recognition of interest each year, and the collection of the note at maturity?

Debit Notes Receivable 20,000 Credit Discount on Notes Receivable 3,471 Credit Cash 16,529 Debit Discount on Notes Receivable 1,653 Credit Interest Revenue 1,653 16,529 x 10% Debit Discount on Notes Receivable 1,818 Credit Interest Revenue 1,818 (16,529 + 1,653) X 10% Debit Cash 20,000 Credit Notes Receivable 20,000 Accounting Rule: Notes receivable are recorded at the present value of the cash expected to be collected, that is the future cash flows. The discount is amortized over the term of the note using the effective interest method. The carrying amount of a note receivable at maturity will be its face value.

A company has the following items: Cash: $ 10,000 Petty cash: $ 100 Short term paper: $ 1,500 Postdated customer check: $ 2,000 Bank overdraft: $ 50 How much should the company report as cash equivalents?

$1,500 Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers' checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash. Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months (90 days). Postdated checks are reported as receivables. Bank overdrafts are reported as a current liability. However, if the overdraft is in the same bank as another account, offsetting can occur.

A company made a $25,000 sale on account with the following terms: 2/10, n/30. What is the journal entry to record the sale using the net method?

Debit accounts receivable 24,500 Credit sales 24,500 $24,500 = $25,000 - ($25,000 x 2%) Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% - discount % x invoice amount. The cash discount is handled using one of two methods - gross method and net method. Under net method, sales are recorded at the net amount i.e., after deducting the amount of discount from the gross price. Accounts receivable is debited and sales account is credited.

A company uses the allowance method for uncollectible accounts. On November 10, 2020, the company wrote off a customer's $4,000 account receivable. The company received payment in full from the customer on December 1, 2020. What entry or entries does the company record on December 1st?

Debit accounts receivable for $4,000; credit allowance for doubtful accounts for $4,000. Debit cash for $4,000; credit accounts receivable for $4,000. Accounting Rule: Under the allowance method, the recovery of a debt previously written off is recorded in two stages. First, a debit to accounts receivable and credit to the allowance for doubtful accounts to reverse the prior write off entry, and then secondly, a debit to cash and a credit to accounts receivable to record the payment.

A business realizes that collection from a customer will be impossible. The accountant needs to write off the uncollectible account using the allowance method. What journal entry is used for this purpose?

Debit allowance for doubtful accounts; credit accounts receivable. Accounting Rule: When using the allowance method to write off an accounts receivable that is deemed uncollectible, allowance for doubtful accounts is debited, and accounts receivable is credited.

The following information is available for a company that uses a perpetual inventory system: October 1: Beginning inventory consisted of 300 units at a cost of $5 each. October 5: 200 units were sold for $12 each. October 15: 250 units were purchased at a cost of $6 each. October 21: 75 units were purchased at a cost of $7 each. October 25: 150 units were sold for $15 each. What is the cost of goods sold and ending inventory using the first-in, first-out (FIFO) method?

$1,800 = COGS: (200 x $5) + (100 x $5) + (50 x $6). $1,725 = Ending Inventory: (200 x $6) + (75 x $7) Accounting Rule: FIFO is the acronym for first-in, first-out, which is a cost flow assumption. Under FIFO, the older costs of products purchased (or manufactured) are the first costs to be removed from inventory and matched with the sales revenues reported on the income statement. This means that the most recent costs remain in inventory.

As of December 31, a company has an uncollectible account of $10,000. The accountant uses the direct write-off method to account for bad debts. What is the journal entry for the write off of the account?

Debit bad debt expense; credit accounts receivable. Accounting Rule: The direct write-off method is simple and convenient to apply, debit bad debt expense and credit accounts receivable. However, this method does not provide for the matching of expenses with current revenues and does not report receivables at their net realizable value. Therefore, the direct write-off method is not considered appropriate, except when the amount uncollectible is immaterial.

The following information is available for a company that uses a perpetual inventory system: October 1: Beginning inventory consisted of 300 units at a cost of $5 each. October 5: 200 units were sold for $12 each. October 15: 250 units were purchased at a cost of $6 each. October 21: 75 units were purchased at a cost of $7 each. October 25: 150 units were sold for $15 each. What is the cost of goods sold and ending inventory using the last-in, first-out (LIFO) method?

$1,975 = COGS: (75 x $7) + (75 x $6) + (200 x $5). $1,550 = Ending Inventory: (175 x $6) + (100 x $5) Accounting Rule: LIFO is the acronym for last-in, first-out, which is a cost flow assumption. Under LIFO, the most recent costs of products purchased (or manufactured) are the first costs to be removed from inventory and matched with the sales revenues reported on the income statement. This means that the oldest costs remain in inventory.

A company has sales of $12,000 and sales returns and allowances of $200. What should the company report as net sales?

$11,800 = $12,000 - $200 Accounting Rule: Sales returns and allowances is a contra-revenue account. It is deducted from sales in the income statement. Sales XXX Less: Sales Returns and Allowances (XXX) Net Sales XXX Sales returns refer to actual returns of goods from customers because defective or wrong products were sold. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price. The journal entry is debit sales returns and allowances; credit accounts receivable.

As of March 1, a company had an inventory balance of $100,000. During March, purchases were $40,000, and inventory was sold for $50,000 that had an original purchase price of $30,000. The company uses a perpetual inventory system. What is the amount in the inventory account as of March 31st?

$110,000 = $100,000 + $40,000 - $30,000 Accounting Rule: To calculate the ending balance in inventory, start with the beginning add purchases and subtract the goods sold using their cost value.

A company has the following balances in its accounts: • beginning inventory: $2,000 • purchases: $3,300 • ending inventory: $1,400 If the periodic system is used, what is the amount of cost of goods sold for the year?

$3,900 = $2,000 + $3,300 - $1,400 Accounting Rule: The cost of goods sold is calculated as beginning inventory plus purchases minus ending inventory. Make sure you know the following formula Beginning Inventory (+) Net Purchases1 (=) Goods Available for Sale (-) Ending Inventory (=) Cost of Goods Sold 1 Net Purchases = Purchases + Freight In- Purchase Discounts - Purchase Returns and Allowances

As of March 1, a company had an inventory balance of $100,000. During March, purchases were $40,000, and inventory was sold for $50,000 that had an original purchase price of $30,000. The company uses a perpetual inventory system. What was the amount transferred from the inventory account to the cost of goods sold account during March?

$30,000

A company has the following account balances as of December 31st • trade receivables: $100,000 • current notes receivable: $200,000 • other receivables (due in six months): $20,000 • allowance for doubtful accounts: $20,000 What amount is reported as net receivables under current assets on the balance sheet?

$300,000 = $100,000 + $200,000 + $20,000 - $20,000 Accounting Rule: Receivables are reported at their net realizable value, which is the net amount expected to be received in cash.

A company using the moving-average method has the following information for a month: no beginning inventories purchases of 10,000 units at $1 per unit in the first week purchases of 15,000 units at $1.50 per unit in the third week purchase of 12,000 units at $1.40 per unit and sales of 13,000 units on the last day of the month What is this month's ending balance in the inventory account, rounded to the nearest hundred?

$32,000

A company has the following items at year-end: cash in bank: $35,000 petty cash: $300 short-term paper with maturity of 120 days: $5,500 postdated checks: $1,400 How much should be reported as cash in the balance sheet?

$35,300 = $35,000 + $300 Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers' checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash. Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months (90 days). Postdated checks are reported as receivables.

A company has the following items at year-end: cash in bank: $30,000 petty cash: $500 short-term paper with maturity of two months: $7,000 postdated checks: $2,000 What amount should be reported as cash and cash equivalents in the balance sheet?

$37,500 = $30,000 + $500 + $7,000 Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers' checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash. Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months. (Note: 3 months is interpreted to mean 90 days or less.) Postdated checks are reported as receivables.

Company A sells goods for $5,000 to Company B with terms 1/10, net 45, and Company A expects that the discount will be taken. Company A uses the net method of accounting. What amount should Company A record for accounts receivable?

$4,950 = $5,000 - ($5,000 x 1%) Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% - discount % x invoice amount. The cash discount is handled using one of two methods - gross method and net method. Under net method, sales are recorded at the net amount i.e., after deducting the amount of discount from the gross price. Accounts receivable is debited and sales account is credited.

The following information is available for a company that uses a specific identification inventory system: • October 1: Beginning inventory consisted of 200 units at a cost of $7.00 each. • October 7: 500 units were purchased at a cost of $8.00 each. • October 18: 250 units were sold from the October 7 purchase. • October 22: 600 units were purchased at a cost of $8.50 each. • October 24: 300 units were purchased at a cost of $9.00 each. • October 26: 350 units were sold from the October 22 purchase. What is the cost of goods sold (COGS) and the value of ending inventory for October?

$4,975 = COGS: (350 x $8.50) + (250 x $8.00). Ending Inventory: $8,225 = (200 x $7) + ((500 -250) x 8) + ((600 - 350) x $8.5) + (300 x $9) Accounting Rule: The specific identification inventory valuation method tracks every single item in an inventory individually from the time it enters the inventory until the time it leaves it. This inventory method is suitable for companies with expensive, easily distinguishable low-volume merchandise such as jewelry, fur coats, automobiles, unique furniture, special manufactured made products.

The face value of a two-year note is $5,000. Both the market and stated interest rates are 5%. What is the present value of this note?

$5,000 Accounting Rule: Companies record short-term notes at face value and long-term notes receivable at the present value of the cash they expect to collect, that is the future cash flows. The present value of the cash expected to be received is equal to the present value of the face amount plus the present value of the interest. When the interest stated on an interest-bearing note equals the effective (market) rate of interest, the note sells at face value. The stated interest rate, also referred to as the face rate or the coupon rate, is the rate contracted as part of the note. The effective-interest rate, also referred to as the market rate or the effective yield, is the rate used in the market to determine the value of the note - that is, the discount rate used to determine present value. When the stated rate differs from the market rate, the cash exchanged (present value) differs from the face value of the note. Companies then record this difference, either a discount or a premium, and amortize it over the life of a note to approximate the effective (market) interest rate.

A company has the following balances in its accounts: • beginning inventory: $2,000 • purchases: $3,300 • ending inventory: $1,400 If the periodic system is used, what is the amount of goods available for sale for the year?

$5,300 = $2,000 + $3,300 Accounting Rule: The cost of goods sold is calculated as beginning inventory plus purchases minus ending inventory. Make sure you know the following formula Beginning Inventory (+) Net Purchases1 (=) Goods Available for Sale (-) Ending Inventory (=) Cost of Goods Sold 1 Net Purchases = Purchases + Freight In- Purchase Discounts - Purchase Returns and Allowances

A company has the following information related to its ending inventory: • owned inventory on shelves: $20,000 • goods out on consignment: $50,000 • goods purchased and in transit free on board (FOB) destination: $10,000 • goods sold and in transit free on board (FOB) destination: $5,000 What amount is included as the final inventory value for this company?

$75,000 = $20,000 + $50,000 + $5,000 Accounting Rule: In a FOB destination, the seller retains title of ownership until the product reaches the buyer's location. In a consignment, the seller retains title of ownership until the product is sold.

A company has cash in the bank of $10,000, restricted cash in a separate account of $1,000 deemed immaterial, and a bank overdraft of $3,000 in the same bank that houses the $10,000 in cash. What amount should this company report as cash in the balance sheet?

$8,000 = $10,000 + $1,000 - $3,000 Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers' checks, personal checks, and bank drafts. The bank overdraft can be offset against the $10,000 since that cash account is in the same bank as the overdraft. Since the restricted cash is immaterial in amount, it doesn't need to be segregated from cash.

A company has the following information related to its ending inventory: • owned inventory on shelves: $20,000 • goods out on consignment: $50,000 • goods purchased and in transit free on board (FOB) shipping point: $10,000 • goods sold and in transit free on board (FOB) shipping point: $5,000 What amount is included as the final inventory value for this company?

$80,000 = $20,000 + $50,000 + $10,000 Accounting Rule: In a FOB shipping point, the seller transfers title of ownership to the buyer upon the product leaving the seller's location. In a consignment, the seller retains title of ownership until the product is sold.

The December 31, 2019, trial balance for a company reported a $100,000 debit balance in accounts receivable. Management estimates that 10% of accounts receivable may not be collected. Prior to year-end adjustment, there was a $1,000 credit balance in the allowance for doubtful accounts. What net realizable value of accounts receivable will be reported on this company's December 31, 2019, balance sheet?

$90,000

A company has current year sales of $500,000, net accounts receivable of $35,000, and prior year net accounts receivable of $43,000. What is the average number of days to collect receivables, rounded to the nearest one decimal place?

28.5 = 365 / ($500,000 / (($35,000 + $43,000) / 2)) Accounting Rule: The days to collect accounts receivable is also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days' outstanding, to assess the effectiveness of a company's credit and collection policies.

A company has current-year cost of goods sold of $150,000, ending inventory of $40,000, and prior-year ending inventory of $60,000. What is the inventory turnover ratio, rounded to two decimal places?

3.0 = 150,000 / (($60,000 + $40,000) / 2) Accounting Rule: The inventory turnover ratio is calculated by taking the cost of goods sold and dividing it by the average inventory. It shows how many times a company has sold and replace inventory during a period. The company can then divide the days in the period by the inventory turn ratio to calculate the days it takes to sell inventory.

A company has current year sales of $200,000, net accounts receivable of $30,000, and prior year net accounts receivable of $50,000. What is the average number of days to collect receivables, rounded to the nearest whole number?

73 = 365 / ($200,000 / (($30,000 + $50,000) / 2)) Accounting Rule: The days to collect accounts receivable is also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days' outstanding, to assess the effectiveness of a company's credit and collection policies.

The journal entry to record the return of goods from a customer is a. debit sales revenue. b. credit sales revenue. c. debit sales returns and allowances. d. credit sales returns and allowance.

Ans c

Which of the following is a product cost as it relates to inventory? a. freight out. b. interest costs. c. raw materials. d. abnormal spoilage.

Ans c Accounting Rule: Product Costs include any cost of acquiring and producing a product. These costs include direct materials, direct labor, and manufacturing overhead. Manufacturing overhead costs include indirect materials, indirect labor, and various manufacturing related costs such as depreciation, taxes, insurance, and utilities. Costs of normal shrinkage and scrap incurred in the manufacture of a product is a product cost. Interest cost incurred in the production process is a product cost, but the question would have to specifically indicate this. Freight out is a selling cost and a period cost but freight in is a product cost.

The sales returns and allowances account is a. an asset account. b. a contra asset account. c. expense account. d. contra revenue account.

Ans d Accounting Rule: Sales returns and allowances is a contra-revenue account. It is deducted from sales in the income statement. Sales XXX Less: Sales Returns and Allowances (XXX) Net Sales XXX Sales returns refer to actual returns of goods from customers because defective or wrong products were sold. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price. The journal entry is debit sales returns and allowances; credit accounts receivable.

A company determined its year-end inventory is $600,000. Information pertaining to that inventory is as follows: Selling price $720,000 Costs to sell $30,000 Norman profit margin $80,000 Replacement cost $620,000 What is the reported value of the company's inventory? a. $600,000. b. $620,000. c. $690,000. d. $610,000.

a. $600,000. NRV = $720,000 − $30,000 = $690,000 NRV - NPM = $690,000 - $80,000 = $610,000 Designated market = $620,000 Cost of $600,000 is lower than designated market of $620,000

What is the journal entry when writing-off an account as uncollectible under the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. Accounting Rule: The journal entry to record the write-off of an uncollectible account using the allowance method is debit allowance for doubtful accounts and credit accounts receivable. The allowance for doubtful accounts is a contra asset account to the accounts receivable account with a credit balance.

What is the journal entry for recording bad debt expense under the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. Accounting Rule: Accounting Rule: The journal entry to record uncollectible accounts receivable using the allowance method is debit bad debt expense and credit allowance for doubtful accounts.

In a perpetual inventory system, the cost of inventory sold is: a. Debited to accounts receivable. b. Credited to cost of goods sold. c. Debited to cost of goods sold. d. Not recorded at the time goods are sold.

c. Debited to cost of goods sold.

In a perpetual inventory system, the cost of purchases is debited to: a. Purchases. b. Cost of goods sold. c. Inventory. d. Accounts payable.

c. Inventory.

Which of the following is true when accounts receivable are factored without recourse? a. The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction. b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. c. The factor assumes the collection risk and absorbs any credit losses in collecting the receivables. d. The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

c. The factor assumes the collection risk and absorbs any credit losses in collecting the receivables. Accounting Rule: Sale without recourse means the purchaser assumes the collection risk and absorbs any credit losses. This is an outright sale of receivables both in form and substance. A loss on the sale is recognized for the excess of the face value of the receivables over the cash proceeds.

Beginning inventory of $40,000 plus purchases of $30,000 equals which of the following? a. cost of sales of $70,000. b. cost of goods sold of $70,000. c. cost of goods available for sale of $70,000.

c. cost of goods available for sale of $70,000. Accounting Rule: Beginning inventory plus purchases equals goods available for sale. Cost of sales and cost of goods sold mean the same thing and are used interchangeably. Make sure you know the following formula Beginning Inventory (+) Net Purchases1 (=) Goods Available for Sale (-) Ending Inventory (=) Cost of Goods Sold 1 Net Purchases = Purchases + Freight In- Purchase Discounts - Purchase Returns and Allowances

What is consigned inventory? a. goods that are shipped, but title transfers to the receiver. b. goods that are sold, but payment is not required until the goods are sold. c. goods that are shipped, but title remains with the consignor. d. goods that have been segregated for shipment to a customer.

c. goods that are shipped, but title remains with the consignor. Accounting Rule: In a consignment, the seller (consignor) retains title of ownership until the product is sold.

A bank overdraft from a separate account of the same bank should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability.

c. netted against cash and a net cash amount reported

A company has inventory with a sales value of $5,000 that requires $1,000 of cost to complete. The company's normal profit margin is 10%. What are the ceiling and floor values? a. Ceiling $5,000, Floor $4,000 b. Ceiling $5,000, Floor $4,500 c. Ceiling $4,000, Floor $3,600 d. Ceiling $4,000, Floor $3,500

d. Ceiling $4,000, Floor $3,500 NRV (ceiling) = sales value minus cost to complete ($5,000 - $1,000) Floor = NRV (ceiling) - normal profit margin ($4,000 - ($5,000 x 10%))

Which of the following is included in the journal entry to record the collection of accounts receivable previously written off when using the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable. b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts. Accounting Rule: Two entries are needed. First, an entry is needed to reverse the write-off of the account receivable and restore it, debit accounts receivable, credit allowance for doubtful accounts. Second, an entry is needed to record collection of the account, debit cash, credit accounts receivable.

The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in: a. an overstatement of assets and net income. b. an understatement of assets and net income. c. an understatement of cost of goods sold and liabilities and an overstatement of assets. d. an understatement of liabilities and an overstatement of net income.

d. an understatement of liabilities and an overstatement of net income.

n a period when costs are rising, and inventory quantities are stable, the inventory method that would result in the lowest ending inventory is: a. average cost. b. specific identification. c. first-in, first-out. d. last-in, first-out.

d. last-in, first-out. Accounting Rule: When prices are rising, and inventory quantities are stable, net income is lower under LIFO because the most recent inventory purchases are included in the determination of cost of goods sold. LIFO provides a better match of expenses with revenues, lower inventory valuation, lower tax liability resulting in deferral of income taxes, improves cash flows, margin reduction, and earnings are not vulnerable to future price decreases.

A company had the following details related to a three-year note receivable on the date of issue: • face value of note: $15,000 • present value of the principal: $10,677 • present value of the interest: $3,603 What is the carrying amount of this note at the end of three years?

$15,000 Accounting Rule: The carrying amount of a note receivable at maturity will be its face value. The present value of the cash expected to be received is equal to the present value of the face amount plus the present value of the interest. Notes receivable are recorded at the present value of the cash they expect to collect, that is the future cash flows. The journal entry to record the issuance of the note is: Debit Notes Receivable 15,000 Credit Discount on Notes Receivable 720 Credit Cash 14,280 The company will amortize the discount over the term of the note by: Debiting Discount on Notes Receivable Crediting Interest Revenue The company will record payment of the note at maturity by: Debiting Cash Crediting Notes Receivable

A company has the following items at year-end: cash in bank - checking account of $18,500 cash on hand of $500 post-dated checks received totaling $3,500 certificates of deposit totaling $124,000 How much should be reported as cash in the balance sheet?

$19,000 = $18,500 + $500 Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers' checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash. Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months (90 days). Postdated checks are reported as receivables.

A company has cash in the bank of $20,000, restricted cash in a separate account of $3,000, and a bank overdraft in an account at another bank of $1,000. How much should the company report in cash?

$20,000 Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers' checks, personal checks, and bank drafts. The bank overdraft is reported as a current liability. It cannot be offset against the other bank's cash account. However, the overdraft could be offset if the company had it in the same bank where it has the $20,000. Restricted cash refers to cash that is held by a company for specific reasons and is, therefore, not available for immediate ordinary business use. It appears as a separate item from cash and cash equivalents on the balance sheet. Restricted cash can be classified as a current (short-term) or non-current (long-term) asset depending on when the cash is expected to be used.

A manufacturing company has the following inventory-related costs: • direct materials: $10,000 • direct labor: $3,000 • indirect labor: $2,000 • indirect materials: $1,000 • manufacturing depreciation: $1,500 • manufacturing utilities: $2,500 • storage costs: $1,600 • purchasing department costs: $1,700 • interest expense: $800 How much is included in inventory?

$20,000 = $10,000 + $3,000 + $2,000 + $1,000 + $1,500 + $2,500 Accounting Rule: Another way of asking the question is how much is product costs? Inventory includes all costs except storage, purchasing department, and interest expense. Accounting Rule: Product Costs include any cost of acquiring and producing a product. These costs include direct materials, direct labor, and manufacturing overhead. Manufacturing overhead costs include indirect materials, indirect labor, and various manufacturing related costs such as depreciation, taxes, insurance, and utilities. Costs of normal shrinkage and scrap incurred in the manufacture of a product is a product cost. Interest cost incurred in the production process is a product cost, but the question would have to specifically indicate this. Freight out is a selling cost and a period cost but freight in is a product cost.

A company has the following cash balances: Large bank: $ 127,000 Small bank: $ 17,000 Continental bank: $ (42,000) Petty cash: $ 450 3-month treasury bill: $ 60,000 CD maturing in 18 months: $ 100,000 What is the amount of cash and cash equivalents that should be reported?

$204,450 = $127,000 + $17,000 + $450 + $60,000 Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers' checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash. Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months (90 days). The bank overdraft for Continental bank is reported as a current liability. It cannot be offset against the other banks' cash account. However, the overdraft could be offset if the company had another cash account with Continental bank.

A company made a $25,000 sale on account with the following terms: 1/15, n/30. How much should be recorded as revenue using the net method?

$24,750 = $25,000 - ($25,000 x 1%) Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% - discount % x invoice amount. The cash discount is handled using one of two methods - gross method and net method. Under net method, sales are recorded at the net amount i.e., after deducting the amount of discount from the gross price. Accounts receivable is debited and sales account is credited at the net amount.

A company made a $25,000 sale on account with the following terms: 1/15, n/30. How much should be recorded as revenue using the gross method?

$25,000 Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% - discount % x invoice amount. The cash discount is handled using one of two methods - gross method and net method. Under gross method, sales are recorded at gross price i.e., without deducting the discount offered. Accounts receivable is debited and sales account is credited at the gross amount.

A manufacturing company incurred the following costs: • direct materials: $2,000 • depreciation on factory equipment: $600 • selling expenses: $1,000 • freight charges on direct materials: $500 What are the total product costs?

$3,100 Accounting Rule: Product Costs include any cost of acquiring and producing a product. These costs include direct materials, direct labor, and manufacturing overhead. Manufacturing overhead costs include indirect materials, indirect labor, and various manufacturing related costs such as depreciation, taxes, insurance, and utilities.

A company has current year sales of $500,000, net accounts receivable of $35,000, and prior year net accounts receivable of $43,000. What is the accounts receivable turnover, rounded to the nearest one decimal place?

12.8 times = $500,000 / (($35,000 + $43,000)) / 2) Accounting Rule: The accounts receivable turnover ratio measures the number of times, on average, receivables are collected during the period. Receivables Turnover = Net Credit Sales ÷ Average Accounts Receivable

A company has the following information for the period just completed: gross sales: $200,000 beginning accounts receivable: $11,000 long-term notes receivables: $102,000 ending accounts receivable: $15,000 net sales: $180,000 What is this company's accounts receivable turnover?

13.85 times $180,000 / (($11,000 + $15,000) / 2)) Accounting Rule: The accounts receivable turnover ratio measures the number of times, on average, receivables are collected during the period. Receivables Turnover = Net Credit Sales ÷ Average Accounts Receivable

A company has net sales of $1,340,000, beginning accounts receivable of $500,000, and ending accounts receivable of $650,000. How many days does it take the company to collect its accounts receivable, rounded to the nearest one decimal place?

156.6 days = (365 / ($1,340,000 / (($500,000 + $650,000) / 2))) Accounting Rule: The days to collect accounts receivable is also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days' outstanding, to assess the effectiveness of a company's credit and collection policies.

A company has the following year-end information: {Note: These figures come from a table. Quizlet doesn't support tables, so I've separated the two year's values with a pipe. So: Year 1 | Year 2} Sales: $ 50,000 | $ 75,000 Cost of goods sold: $ 35,000 | $ 25,000 Gross margin: $ 15,000 | $ 50,000 Inventory: $ 12,000 | $ 11,000 What is the calculation of the average days to sell inventory for Year 2?

167.9 = 365 / ($25,000 / (($12,000 + $11,000) / 2))

A company has the following financial information: Year 1 Gross sales: $ 55,000 Sales return and allowances: $ 5,000 Accounts receivable: $ 4,000 Year 2: Gross sales: $ 110,000 Sales return and allowances: $ 9,000 Accounts receivable: $ 7,500 What is the accounts receivable turnover for Year 2, rounded to the nearest one decimal place?

17.6 times = ($110,000 - $9,000) / (($4,000 + $7,500)) / 2) Accounting Rule: The accounts receivable turnover ratio measures the number of times, on average, receivables are collected during the period. Receivables Turnover = Net Credit Sales ÷ Average Accounts Receivable

A company has the following for the current year: • sales of $100,000 • sales discounts of $15,000 • sales returns and allowances of $5,000 • accounts receivable of $50,000 • allowance for doubtful accounts of $6,000 For the prior year, the company had accounts receivable of $40,000 and allowance for doubtful accounts of $4,000. What is the accounts receivable turnover, rounded to the nearest one decimal place?

2.0 times = $100,000 - $15,000 - $5,000 / ((($50,000 - $6,000) + ($40,000 - $4,000)) / 2) Accounting Rule: The accounts receivable turnover ratio measures the number of times, on average, receivables are collected during the period. Receivables Turnover = Net Credit Sales ÷ Average Accounts Receivable

The ending inventory of a merchandiser is $50,000. The beginning inventory was $200,000. If the income statement for the year reported cost of goods sold of $350,000, how much were purchases during the year?

200,000+P=350,000+50,000, and thus P=$200,000 Accounting Rule: Purchases is calculated as beginning inventory minus ending inventory plus cost of goods sold. Make sure you know the following formula Beginning Inventory (+) Net Purchases1 (=) Goods Available for Sale (-) Ending Inventory (=) Cost of Goods Sold 1 Net Purchases = Purchases + Freight In- Purchase Discounts - Purchase Returns and Allowances

A company had an average inventory balance during a year of $53,000. During the year, the company sold inventory to customers at a price of $770,000. The total cost of the inventory sold was $700,000. What was the company's average days to sell inventory for the year, rounded to two decimal places?

27.64 = ($53,000 / $700,000) x 365

On July 22nd, a company sold $23,500 of inventory items on credit with the terms 2/15, net 30. Full payment was received on August 1st . What is the journal entry to record payment using the gross method?

Debit cash 23,030 Debit sales discount 470 Credit accounts receivable 23,500 Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% - discount % x invoice amount. The cash discount is handled using one of two methods - gross method and net method. Under gross method, sales are recorded at gross price i.e., without deducting the discount offered. Accounts receivable is debited and sales account is credited at the gross amount. If the customer makes the payment within the discount period, the seller allows the customer to take the discount according to the terms of sale. On other hand, the customer fails to make the payment within the discount period, then no discount is allowed.

A grocery store that uses a perpetual inventory system purchases goods on account for resale. What is the journal entry to record this purchase?

Debit merchandise inventory Credit accounts payable

A company receives a three-year, $20,000, zero-interest-bearing note that has a present value of $16,500. What is the journal entry to record this transaction?

Debit notes receivable for $20,000; credit cash for $16,500; credit discount on notes receivable for $3,500. Accounting Rule: A noninterest-bearing note is a note with no stated interest rate on its face. The interest is implied in the face value of the note. The note is issued for a lessor amount than its face value, and cash or sales revenue is credited for this amount. The face value of the note at maturity includes both principal and interest. Hence, the note receivable is always debited for is face value. Account for problems like this as the present value of a single sum.

A company issues a $4,000, four-year, zero-interest-bearing note for the sale of inventory. Assuming an annual interest rate of 4% for four years is appropriate, the present value of the principal is $4,000 × 0.85480 = $3,419. What is the journal entry to record this sale?

Debit notes receivable for $4,000; credit revenue for $3,419; credit discount on notes receivable for $581. Accounting Rule: A noninterest-bearing note is a note with no stated interest rate on its face. The interest is implied in the face value of the note. The note is issued for a lessor amount than its face value, and cash or sales revenue is credited for this amount. The face value of the note at maturity includes both principal and interest. Hence, the note receivable is always debited for is face value. Account for problems like this as the present value of a single sum.

A company sold goods in exchange for a $5,000, two-year, zero-interest-bearing note. The note is issued to a high-risk customer and the market rate for a note of similar risk is 7%. Assuming an annual interest rate of 7% for two years is appropriate, the present value of the principal is $5,000 × 0.87344 = $4,367. What is the journal entry to record this sale?

Debit notes receivable for $5,000; credit revenue for $4,367; credit discount on notes receivable for $633. Accounting Rule: A noninterest-bearing note is a note with no stated interest rate on its face. The interest is implied in the face value of the note. The note is issued for a lessor amount than its face value, and cash or sales revenue is credited for this amount. The face value of the note at maturity includes both principal and interest. Hence, the note receivable is always debited for is face value. Account for problems like this as the present value of a single sum.

A company issues a $7,000, noninterest-bearing note for the sale of inventory. The market rate at the time of the sale is of 8%. The note is due in full at the end of three years. Assuming an annual interest rate of 8% for three years is appropriate, the present value of the principal is $7,000 × 0.79383 = $5,557. Assuming an annual interest rate of 8% for eight years is appropriate, the present value of the principal is $7,000 × 0.78941 = $5,527. What is the journal entry to record this sale?

Debit notes receivable for $7,000; credit revenue for $5,557; credit discount on notes receivable for $1,443. Accounting Rule: A noninterest-bearing note is a note with no stated interest rate on its face. The interest is implied in the face value of the note. The note is issued for a lessor amount than its face value, and cash or sales revenue is credited for this amount. The face value of the note at maturity includes both principal and interest. Hence, the note receivable is always debited for is face value. Account for problems like this as the present value of a single sum.

A grocery store that uses a periodic inventory system purchases goods on account for resale. What is the journal entry to record this purchase?

Debit purchases Credit accounts payable

A company sells two lamps to a customer on account for $2,000. Each lamp sells for $1,000. One month later, the customer returns a lamp. What is the journal entry to record the return of the lamp?

Debit sales returns and allowances for $1,000; credit accounts receivable for $1,000. Accounting Rule: Sales returns and allowances is a contra-revenue account. It is deducted from sales in the income statement. Sales XXX Less: Sales Returns and Allowances (XXX) = Net Sales XXX Sales returns refer to actual returns of goods from customers because defective or wrong products were sold. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price. The journal entry is debit sales returns and allowances; credit accounts receivable.

A company collects $1,500 of rent from a tenant at the end of the year. The company invests the rent money in an investment earning 4% interest per year. Assuming a 4% annual interest rate is appropriate, the implied annual interest is $1,500 × 0.04 = $60, and the present value of the rent is $1,500 × 0.96154 = $1,442. What is the discounted value of this rent at the beginning of Year 1?

Discounting is the process of reducing the face/principal amount to a present value. The present value of $1,500 at the beginning of the year is $1,442. No calculation is required. This is a single-sum problem that requires determining the unknown present value of a known single sum of money in the future that is discounted for a certain number of periods at a certain interest rate. Accounting Rule: Present value is the amount that must be invested now to produce a known future value. It is always a smaller amount than the given future value.

company did not record the credit purchases of inventory and did not include this item in the ending inventory balance. What is the effect of this on the financial statements?

Inventory is understated; net income is unaffected. Since both the purchases and ending inventory are understated, the two errors cancel each other out, and there is no effect on cost of goods sold and net income. Beginning Inventory not affected (+) Purchases understated (-) Ending Inventory understated Cost of Goods Sold not affected

On January 10, a company purchased $5,000 of inventory on terms 1/10, net 30. Payment was made on January 18. The company uses the periodic system. What are the journal entries to record the purchase and the payment using the net method?

Jan 10 debit purchases for $4,950; credit accounts payable for $4,950 Jan 18 debit accounts payable for $4,950; credit cash for $4,950 Accounting Rule: The net method records the purchase net of the cash discount. In other words, the net method assumes that the customer will take advantage of the cash or early payment discount.

On January 10, a company purchased $5,000 of inventory on terms 1/10, net 30. Payment was made on January 18. The company uses the periodic system. What are the journal entries to record the purchase and the payment using the gross method?

Jan 10 debit purchases for $5,000; credit accounts payable for $5,000 Jan 18 debit accounts payable for $5,000; credit cash for $4,950; credit purchase discounts for $50 Accounting Rule: The gross method records purchase at full price without regard to the cash discounts offered. In other words, the gross method assumes that the customer will not take advantage of the cash or early payment discount.

A company that used the periodic inventory system overstated its beginning inventory but correctly stated its ending inventory. What will be the effect of this error on the financial statements at the end of the period?

The cost of goods sold will be overstated and gross profit/net income will be understated. The ending inventory on the balance sheet is correct according to the facts. Accounting Rule: Inventory errors come in two forms: understatements or overstatements. Beginning inventory errors affect only the income statement because cost of goods sold is calculated using beginning inventory + purchases - ending inventory. Ending inventory errors affect both the income statement and the balance sheet and will affect two periods because 1) the ending inventory of one period will become the beginning inventory for the following period, and 2) the calculation of the cost of goods sold is beginning inventory + purchases - ending inventory. As shown in the table below, errors in calculating beginning inventory have a direct effect on cost of goods sold and inverse effect on gross profit and net income. On the other hand, errors in calculating ending inventory have an inverse effect on cost of goods sold and a direct effect on gross profit and net income. Errors in purchases have the same effect as errors in beginning inventory, that is a direct effect on cost of goods sold and inverse effect on gross profit and net income

Equipment is exchanged for a noninterest-bearing note. Payment of $20,000 on the note is to be made in one year. The market rate for notes of similar risk is 5%. Assuming an annual interest rate of 5% is appropriate, the present value of the principal is $20,000 × 0.95238 = $19,048. Assuming that a semiannual interest rate of 2.5% is appropriate, the present value of the principal is ($20,000/2) × 1.92742 = $19,274. What amount should be recorded for the purchase of this equipment?

The equipment is recorded at its present value of $19,048. No calculation is required. Accounting Rule: An asset acquired in exchange for a noninterest-bearing note is valued at the present value of the note.

A company issues a five-year zero-interest-bearing note for a new lathe it purchased for $25,000. The market rate of interest at the time the note was issued is 4%. Assuming an annual interest rate of 4% for five years is appropriate, the present value of the principal is $25,000 × 0.82193 = $20,548. Assuming an annual interest rate of 5% for 4 years is appropriate, the present value of the principal is $25,000 × 0.82270 = $20,568. What amount should be recorded for the cost of the lathe?

The lathe is recorded at its present value of $20,548. No calculation is required. Accounting Rule: An asset acquired in exchange for a noninterest-bearing note is valued at the present value of the note.

A customer signs a noninterest-bearing note, promising to pay the company $11,664 in two years. The payment amount is based on an annual interest rate of 8%, which the company believes is appropriate, resulting in the present value of the note of $11,664 × 0.85734 = $10,000. Which amount should the company record as sales revenue from this transaction to be in accordance with generally accepted accounting principles (GAAP)?

The note is recorded at its present value of $10,000. No calculation is required. Accounting Rule: A note received in exchange for goods is valued at its present value.

Company A sells a parcel of land to Company B in exchange for a note receivable. The terms of the note require Company B to make a single payment of $600,000 in two years. Using a 10% interest rate, the implied annual interest is $600,000 × 0.10 = $60,000, and the present value of the note is $600,000 × 0.82645 = $495,870. What amount must Company A consider as proceeds from the sale of the land in order to calculate gross profit or gain/loss on the sale, and be in accordance with generally accepted accounting principles (GAAP)?

The note is recorded at its present value of $495,870. No calculation is required. Accounting Rule: A note received in exchange for property is valued at its present value.

A company performs services for a customer in exchange for a noninterest-bearing note. The customer agrees to make a payment of$100,000 in three years. Using a 5% interest rate, the implied annual interest is $100,000 × 0.05 = $5,000, and the present value of the note is $100,000 × 0.86384 = $86,384. What amount should the company record as service revenue from this transaction to be in accordance with generally accepted accounting principles (GAAP)?

The note is recorded at its present value of $86,384. No calculation is required. Accounting Rule: A note received in exchange for service is valued at its present value.

Company A sells land to Company B for $100,000. Company A takes a note from Company B that is due in two years. Assuming an annual interest rate of 5% is appropriate, the implied annual interest is $100,000 × 0.05 = $5,000, and the present value of the note is $100,000 × 0.90703 = $90,703. What amount should Company A record for the sale?

The note is recorded at its present value of $90,703. No calculation is required. Accounting Rule: A note received in exchange for property is valued at its present value.

A company uses the days outstanding ratio to evaluate its receivable. What does this ratio represent?

The number of days that a company takes to collect amounts due from customers. Accounting Rule: The days to collect accounts receivable also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days' outstanding, to assess the effectiveness of a company's credit and collection policies. Companies frequently use the average collection period, also known as days' outstanding, to assess the effectiveness of a company's credit and collection policies.

A company requires $8,000 cash in a savings account earning 2% interest at the end of the year. Assuming an annual interest rate of 2% is appropriate, the implied annual interest is $8,000 × 0.02 = $160, and the present value of the savings is $8,000 × 0.98039 = $7,843. What amount should be deposited into the savings account at the beginning of the year?

The present value of $8,000 at the beginning of the year is $7,843. No calculation is required. This is a single-sum problem that requires determining the unknown present value of a known single sum of money in the future that is discounted for a certain number of periods at a certain interest rate. Accounting Rule: Present value is the amount that must be invested now to produce a known future value. It is always a smaller amount than the given future value.

What is "recourse" as it relates to selling receivables? a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay. b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay. c. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale. d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay. Accounting Rule: When accounts/notes receivable are factored (sold), the factoring arrangement can be with recourse or without recourse. If receivables are factored on a with recourse basis, the seller guarantees payment to the factor in the event the debtor does not make payment. When a factor buys receivables without recourse, the factor assumes the collection risk and absorbs any credit losses.

In which account are post-dated checks received classified? a. receivables. b. prepaid expenses. c. cash. d. payables.

a. receivables.

A company purchased dresses on July 17th and received an invoice with a list price amount of $6,000 and payment terms of 2/10, n/30. The company uses the net method to record purchases. The company should record the purchase at a. $5,940. b. $5,880. c. $6,000. d. $6,120.

b. $5,880. $5,880 = $6,000 - ($6,000 x 2%)

In a perpetual inventory system, which of the following is recorded at the time of the sale? a. Sales revenue only. b. Both sales revenue and cost of goods sold. c. Cost of goods sold only. d. Neither sales revenue nor cost of goods sold.

b. Both sales revenue and cost of goods sold.

A company recorded the purchase of 500 units on December 28, Year 1, free on board (FOB) shipping point. The units were shipped immediately and expected to arrive on January 3, Year 2. The company did not include these units in December's ending inventory. Which effect does this action have on the financial statements for December 31, Year 1? a. Cost of goods sold is understated. b. Inventory is understated. c. Net income is overstated d. Working capital is overstated.

b. Inventory is understated.

What is restricted cash segregated on the balance sheet a. a nonmaterial amount set aside for a specific purpose. b. a material amount set aside for a specific purpose. c. a nonmaterial amount set aside for a nonspecific purpose. d. a material amount set aside for a nonspecific purpose.

b. a material amount set aside for a specific purpose.

A company that is using the periodic inventory system correctly records ending inventory but double counts some items in purchases. What will be the effect on the financial statements at the end of this period? a. current ratio will be overstated. b. cost of goods sold will be overstated. c. accounts payable will be understated. d. net income will be overstated.

b. cost of goods sold will be overstated. Ending inventory on the balance sheet would be overstated. Beginning Inventory not affected (+) Purchases overstated (-) Ending Inventory not affected Cost of Goods Sold overstated There is direct relationship between purchases and cost of goods sold. If purchases are overstated, then cost of goods sold is overstated. If purchases are understated, then cost of goods sold is understated.

Which of the following is the formula for the inventory turnover rate? a. net sales/cost of goods sold. b. cost of goods sold/average inventory. c. cost of goods sold/ending Inventory. d. average inventory/cost of goods sold.

b. cost of goods sold/average inventory.

Goods on consignment are a. included in the consignee's inventory. b. included in the consignor's inventory. c. included in the consignee's revenue. d. included in both the consignee's and the consignor's inventory.

b. included in the consignor's inventory. Accounting Rule: In a consignment, the seller (consignor) retains title of ownership until the product is sold.

Which of the following is correct? a. selling costs are product costs. b. manufacturing overhead costs are product costs. c. interest costs for routine inventories are product costs. d. all these answers are correct.

b. manufacturing overhead costs are product costs.

All of the following may be included under the heading of "cash" except a. currency. b. money market funds. c. checking account balance. d. savings account balance.

b. money market funds.

Under which section of the balance sheet is "cash restricted for plant expansion" reported? a. current assets. b. noncurrent assets. c. current liabilities. d. stockholders' equity.

b. noncurrent assets.

A company uses the periodic inventory costing system. The company includes goods shipped to them f.o.b. shipping point in purchases, but not ending inventory. What is the effect on the current ratio? a. no effect. b. understated. c. overstated. d. there is not enough information to determine the effect.

b. understated. Ending inventory is understated because the purchase items were not included in the ending inventory count. Accounts payable is not affected since the items were recorded in the Purchases account and Accounts Payable account. The current ratio is understated. The current ratio formula is current assets/current liabilities. Ending inventory is a current asset and accounts payable is a current liability. Since the numerator is understated and the denominator is correct, the current ratio is understated. For example, assume a correct current ratio of 50 / 20 = 2.5. Now, assume current assets is understated by 10. The current ratio now is 40 / 20 =2. Decreasing the numerator lowers the current ratio.

A company overestimates its ending inventory for a year. What effect will this have on the company's working capital and current ratio? a. understatement of working capital and overstatement of current ratio. b. overstatement of working capital and understatement of current ratio. c. understatement of working capital and current ratio d. overstatement of working capital and current ratio

d. overstatement of working capital and current ratio The formula for working capital is current assets minus current liabilities. Assume current assets is 12 and current liabilities is 5. Working capital would be 7. If inventory is overstated, this would increase the numerator from 12 to say 14. Working capital would now be 9. Hence, working capital is overstated. The current ratio formula is current assets/current liabilities. Assume current assets is 12 and current liabilities is 5. The current ratio would be 2.4. If inventory is overstated, this would increase the numerator from 12 to say 14. The current ratio would now be 2.8. Hence, the current ratio is overstated.

A bank overdraft from a different bank should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability.

d. reported as a current liability.

Which of the following is a period cost? a. direct costs. b. freight in. c. production costs. d. selling costs.

d. selling costs. Accounting Rule: Period costs include any costs not related to the manufacture or acquisition of a product, i.e., nonmanufacturing costs. Sales commissions, administrative costs, advertising and rent of office space are all period costs. These costs are not included as part of the cost of either purchased or manufactured goods but are recorded as expenses on the income statement in the period they are incurred.