MGMT 20010 Test 2

Papercraft Corporation purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2018 would be: A) $12,000 B) $11,000 C) $60,000 D) None of these

B) $11,000 ($60,000 - $5,000 / 5 years)

Consider the following year-end info for Knomark Corporation: Cost of goods sold ........ $420,000 Sales revenue ................... $800,000 Non operating expenses ... $10,000 Operating expenses ....... $170,000 Income tax expense ....... $80,000 What amount will Knomark report for operating income? A) $200,000 B) $210,000 C) $380,000 D) $120,000

B) $210,000 Sales ..... $800,000 - Cost of goods sold ..... $420,000 = Gross profit ..... $380,000 - Operating expenses .... $170,000 = Operating income ..... $210,000

On September 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018? A) $20 B) $40 C) $30 D) $60

B) $40 Interest revenue = $1,000 x 12% x 4/12 = $40

During a period of rising prices, which inventory cost flow assumption would result in the highest cost of goods sold, and thereby the lowest net income? A) FIFO B) LIFO C) Weighted-average D) Simple LIFO average

B) LIFO

Which of the following statements is true? A) Product costs affect only the balance sheet B) Product costs affect only the income statement C) Period costs affect only the balance sheet D) Neither product costs nor period costs affect the Statement of Retained Earnings. This can also be a true statement if the period costs were prepaid (i.e., prepaid advertising, depreciation) E) Product costs eventually affect both the balance sheet and the income statement

E) Product costs eventually affect both the balance sheet and the income statement

The normal balance of the account "Allowance for Uncollectible Accounts" is a ________________ because __________________. A) Debit; it is a contra account to Revenue (a credit account) B) Credit; it is a contra account to Accounts Receivable (a debit account) C) Debit; it is an expense in the income statement D) Credit; it is a contra account to Bad Debt Expense (a debit account)

B) Credit; it is a contra account to Accounts Receivable (a debit account)

The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is: A) FIFO B) LIFO C) Weighted-average D) Specific identification

B) LIFO

Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements? A) Increase assets B) Decrease revenues C) Increase expenses D) Increase revenues

C) Increase expenses

Which of the following would be recorded as land improvements? A) Property taxes B) Title insurance C) Real estate commissions D) Adding a parking lot

D) Adding a parking lot

Beginning inventory is $30,000. Purchases of inventory during the year are $50,000. Cost of goods sold is $60,000. What is ending inventory? A) $20,000 B) $30,000 C) $10,000 D) $50,000

A) $20,000 Beginning Inventory ...... $30,000 + Purchases ........................ $50,000 = Costs of goods available for sale ... $80,000 - Ending Inventory ......... $60,000 = Costs of Goods Sold ...... $20,000

Cedarhurst purchased land, a building, and equipment for $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land? A) $80,000 B) $90,000 C) $100,000 D) $800,000

A) $80,000 $800,000 x 10% = $80,000

Losses on the sale of long-term assets for cash: A) Are the excess of the book value over the cash received B) Are recorded as a credit C) Are reported on a net-of-tax basis if material D) Are the excess of the cash received over the book value

A) Are the excess of the book value over the cash received

The cost of unsold inventory at the end of the year is classified as a(n) _________ in the __________. A) Asset; Balance sheet B) Expense; Income statement C) Liability; Balance sheet D) Revenue; Income statement

A) Asset; Balance sheet

One advantage of the allowance method for accounting for uncollectible accounts is that the company reports: A) Bad debt expense in the same period as the credit sale B) Greater total sales to customers C) Fewer returns by customers D) Greater total cash collected from customers

A) Bad debt expense in the same period as the credit sale

Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system? A) Costs of incoming freight charges on merchandise inventory B) A return of damaged inventory to the vendor C) A purchase discount taken for prompt payment D) Shipping charges for outgoing inventory

A) Costs of incoming freight charges on merchandise inventory

Identify the likely disadvantage(s) of extending credit to customers: A) Delay or failure to collect cash B) Lower profitability C) Lower revenues D) All of the other answers are disadvantages of extending credit to customers

A) Delay or failure to collect cash

Research and development costs should be: A) Expensed in the period incurred B) Expensed in the period they are determined to be unsuccessful C) Deferred pending determination of success D) Expensed if unsuccessful, capitalized if successful

A) Expensed in the period incurred

The inventory cost flow assumption that generally best matches the physical flow of inventory is: A) FIFO B) LIFO C) Weighted-average D) Lower of cost or net realizable value

A) FIFO

If A sells to B, and B obtains title while goods are in transit, the goods were shipped _________. If C sells to D, and C maintains title until the goods arrive at D's door, then the goods were shipped ____________. A) FOB shipping point; FOB destination B) FOB destination; FOB shipping point C) FOB destination; FOB destination D) FOB shipping point; FOB shipping point

A) FOB shipping point; FOB destination

Cost of goods sold is: A) Reported in the income statement B) Reported in the balance sheet C) A current asset D) The cost of inventory on hand at the end of the period

A) Reported in the income statement

Which of the following subsequent expenditures would not be capitalized? A) Unsuccessful legal defense of intangible assets B) Additions C) Improvements D) Successful legal defense of intangible assets

A) Unsuccessful legal defense of intangible assets

A company has the following inventory transactions: 1/1 Beginning inventory .... 100 units @ $4 each 1/15 Purchase ..... 100 units @ $5 each 1/31 Purchase ..... 100 units @ $6 each What would be the cost of goods sold under the FIFO method if 120 units were sold in January? A) $600 B) $500 C) $620 D) $720

B) $500 100 x $4 = $400 20 x $5 = $100 120 units = $500

Real Angus Steakhouse purchased land for $75,000 cash. They also incurred commissions of $4,500, property taxes of $5,000, and total insurance of $800. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land? A) $83,500 B) $84,300 C) $85,300 D) $75,000

B) $84,300 Cash ..... $75,000 Commissions ... $4,500 Title insurance ... $800 Property taxes (back only) .. $4,000 = Cost of land ... $84,300

The factors used to compute depreciation expenses are an asset's: A) Cost, residual value, physical life B) Cost, residual value, service life C) Fair market value, residual value, and economic life D) Cost, replacement value, service life

B) Cost, residual value, service life

Good Inc., sold inventory for $1,200 that was purchased for $700. Good records which of the following when it sells inventory using a perpetual inventory system? A) No entry is required for cost of goods sold and inventory B) Debit Cost of Goods Sold $700; credit inventory $700 C) Debit Cost of Goods Sold $1,200; credit inventory $1,200 D) Debit inventory $700; credit Cost of Goods Sold $700

B) Debit Cost of Goods Sold $700, credit inventory $700

ABO purchased a truck at the beginning of 2018 for $140,000. They sold the truck at the end of 2019 for $95,000. If the expected useful life of the truck was six years with a residual value of $20,000 and ABO uses straight-line depreciation, which of the following is true regarding the entry to record the sale of the truck? A) Credit Gain $5,000 B) Debit Loss $5,000 C) Credit Accumulated Depreciation $40,000 D) Credit Equipment $100,000

B) Debit Loss $5,000

One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for: A) Current assets B) Inventory C) Selling expenses D) Deferred revenue

B) Inventory

A perpetual inventory system measures cost of goods sold by: A) Estimating the amount of inventory sold B) Making entries to the inventory account for each purchase and sale C) Counting inventory at the end of the period D) Debiting cost of goods sold for all purchases of inventory

B) Making entries to the inventory account for each purchase and sale

The formula for the receivables turnover ratio is: A) Average accounts receivable divided by average total assets B) Net credit sales divided by average accounts receivable C) Net credit sales divided by average total assets D) Average accounts receivable divided by net credit sales

B) Net credit sales divided by average accounts receivable

Cochrane, Inc. accounts for bad debts using the allowance method. On June 1, Cochrane wrote off $2,500 customer account. Based on Cochrane's estimation, the customer will never pay any portion of the balance in his account. What effect will this write-off have on Cochrane's balance sheet at the time of the write-off? A) An increase to stockholder's equity and a decrease to liabilities. B) No effect C) An increase to assets and an increase to stockholder's equity D) A decrease to assets and a decrease to stockholder's equity

B) No effect

Which level of profitability is considered profit from normal operations? A) Gross profit B) Operating Income C) Income before taxes D) Net income

B) Operating Income

The primary distinction between operating activities and non operating activities in a multiple-step income statement is whether the activity is: A) A large or small dollar amount B) Part of primary business operations C) Related to current versus long-term assets D) Reported as a revenue or an expense

B) Part of primary business operations

When customers purchase products on account, Knomark, Inc. offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of: A) Bad debt B) Sales discount C) Sales Return D) Sales allowances

B) Sales discount

Capital Construction purchased a 3-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of total insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is: A) $366,400 B) $366,150 C) $364,650 D) $231,150

C) $364,650 Purchase price .... $350,000 Demolition ..... $12,000 - Scrap sold ...... $1,500 Title insurance .... $900 Legal fees ... $500 Property taxes ... $2,750 ($3000-$250) =Total cost of land ... $364,650

The direct write-off method is not normally an acceptable method for GAAP because it fails to report: A) Revenue from the sale of goods or services to customers B) Cash collected from customers C) Accounts receivable for their net realizable value D) The amounts receivable from customers

C) Accounts receivable for their net realizable value

Gross profit is calculated as net sales minus: A) Non operating expenses and income tax expense B) Operating expenses C) Cost of goods sold D) All of the other answers are subtracted from net sales

C) Cost of goods sold

Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. This transaction would include a: A) Credit to cash B) Debit to sales discount C) Debit to notes receivable D) Credit to notes receivable

C) Debit to notes receivable

Inventory does not include: A) Materials used in the production of goods to be sold B) Assets intended to be sold in the normal course of business C) Equipment used in the manufacturing of assets for sale D) Assets currently in production for normal sales

C) Equipment used in the manufacturing of assets for sale

In accounting, goodwill: A) May be recorded whenever a company achieves a level of net income that exceeds the industry average B) Is amortized over its useful life C) May be recorded when a company purchases another business D) Must be expensed in the period it is recorded because benefits from goodwill are difficult to identify

C) May be recorded when a company purchases another business

An increase in a company's receivables turnover ratio typically means they company is: A) Having trouble paying debts as they become due B) Less profitable C) More effectively granting and collecting credit to customers D) Losing customers to its competitors

C) More effectively granting and collecting credit to customers

Suppose a customer is unable to pay its account on time, so the company accepts a six-month interest-bearing note receivable to replace the customer's account receivable. What effect will accepting the note receivable have on the company's financial statements at the time of acceptance? A) Total assets increase B) Total assets decrease C) No change in total assets D) Total revenues increase

C) No change in total assets

The purpose of recording an allowance for uncollectible accounts is to: A) Record the sales returns and allowances B) Report net sales conservatively C) Report accounts receivable at net realizable value D) Report accounts receivable for the total amount of sales in the period

C) Report accounts receivable at net realizable value

The inventory turnover ratio measures: A) The portion of inventory that becomes obsolete each period B) How many times the company purchases inventory during the current reporting period C) The times per period the average inventory balance is sold D) How many days it takes to collect its sales of inventory sold on account

C) The times per period the average inventory balance is sold

Which of the following computations would be used to compute Net Revenue? A) Total Revenue + Accounts Receivable - Sales Discounts - Sales Allowances B) Net Revenue + Sales Allowances - Sales Discounts C) Total Revenue - Sales Discounts - Sales Allowances D) Net Income - Change in Accounts Receivable

C) Total Revenue - Sales Discounts - Sales Allowances

At the end of the year, a company reports the following inventory amounts ($ per unit): A .... 100 units ..... $4 .... Net Realizable Value: $8 B ... 150 units ..... $8 ..... Net Realizable Value: $6 The amount to report for ending inventory using the lower of cost and net realizable value is: A) $1,600 B) $1,700 C) $2,000 D) $1,300

D) $1,300 Lower of cost and net realizable value is: A = $4 per unit (cost) B = $6 per unit (net realizable value) Ending inventory = $1,300 $1,300 = (100 units x 4) + (150 units x $6)

Given the information, what is the company's gross profit? Sales revenue .................... $350,000 Accounts receivable ...... $280,000 Ending inventory .............. $230,000 Cost of goods sold ........ $180,000 Sales returns ...................... $50,000 Sales discount .................. $20,000 A) $280,000 B) $170,000 C) $50,000 D) $100,000

D) $100,000 Sales ........................... $350,000 - Sales returns ........ $50,000 - Sales discounts ... $20,000 = Net sales ................ $280,000 - Cost of goods sold ...$180,000 = Gross profit ............$100,000

Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account? A) $29,000 B) $28,000 C) $27,000 D) $26,000

D) $26,000 ($600,000 x 1%) ......... $6,000 ($100,000 x 10%) ....... $10,000 ($50,000 x 20%) ....... $10,000 Total ............................... $26,000

Consider the following year-end information for Knomark Corporation: Cost of goods sold ........... $500,000 Sales revenue ...................... $1,000,000 Non operating expenses ..... $100,000 Operating expenses ............. $200,000 What amount will Knomark report for operating income? A) $0 B) $500,000 C) $200,000 D) $300,000

D) $300,000 Sales ........ $1,000,000 - Cost of goods sold ..... $500,000 = Gross profit .................... $500,000 - Operating expenses .... $200,000 = Operating income ...... $300,000

Wiley Company purchased new equipment for $60,000. Wiley paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was: A) $60,000 B) $61,000 C) $64,000 D) $66,500

D) $66,500 $60,000 + $1,000 + $3,000 + $2,500

Amalgamated Company has the following info: Total revenues.......$860,000 Sales returns and allowances......$50,000 Sales discounts..........$30,000 Ending inventory..........$100,000 What is the amount of net revenues for Amalgamated? A) $330,000 B) $230,000 C) $680,000 D) $780,000

D) $780,000 $860,000 - $50,000 - $30,000 = $780,000

The primary difference between a note receivable and an account receivable is: A) A note receivable cannot be classified as a current asset B) Borrowers have the portion of not paying a note receivable C) An account receivable is more likely to be collected D) A note receivable is evidence by a written debt instrument

D) A note receivable is evidence by a written debt instrument

Which of the following items are classified as receivables? A) Tax refund claims B) Amounts owed by customers C) Amounts loaned and expected to be collected D) All of the other answers are classified as receivables

D) All of the other answers are classified as receivables

Which accounting concept does the direct write-off method violate? A) Total assets equal total liabilities plus total stockholder's equity B) Recording amount owed within one year as current liabilities C) Recognizing revenue when goods or services are provided to customers D) An attempt to match revenues and their related expenses

D) An attempt to match revenues and their related expenses

The practice of using the lower of cost and net realizable value to evaluate inventory reflects which of the following accounting principles? A) Matching principle B) Materiality C) Conservatism D) Answers A and C

D) Answers A and C

The account "Allowance for Uncollectible Accounts" is classified as a(n): A) Liability account in the balance sheet B) Contra revenue to credit sales in the income statement C) Expense in the income statement D) Contra asset to accounts receivable in the balance sheet

D) Contra asset to accounts receivable in the balance sheet

Credit sales are recorded as: A) Debit cash, credit Deferred Revenue B) Debit Service Revenue, credit Accounts Receivable C) Debit Cash, credit Service Revenue D) Debit Accounts Receivable, credit Service Revenue

D) Debit Accounts Receivable, credit Service Revenue

At the end of 2018, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (credit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2018, to record its estimated uncollectible accounts included a: A) Credit to Allowance for Uncollectible Accounts of $12,000 B) Debit to Bad Debt Expense of $7,500 C) Credit to Allowance for Uncollectible Accounts of $7,500 D) Debit to Bad Debt Expense of $7,500; credit to Allowance for Uncollectible Accounts of $7,500

D) Debit to Bad Debt Expense of $7,500; credit to Allowance for Uncollectible Accounts of $7,500

Suppose Company A places an order with Company B on May 12. On May 14, Company B ships the ordered goods to Company A with terms FOB destination. The goods arrive at Company A on May 17. Company A begins selling the goods to customers on May 19 and pays Company B on May 20. When would Company B record the sale of goods to Company A? A) May 12 B) May C) May 19 D) May 17

D) May 17

Which of the following is true about the aging method? A) No estimate for uncollectible accounts is made B) Older accounts are more likely to be collected C) It is not acceptable for GAAP D) Older accounts are less likely to be collected

D) Older accounts are less likely to be collected

Costs that are expensed when incurred are called: A) Product costs B) Direct costs C) Inventoriable costs D) Period costs E) Indirect costs

D) Period costs

LePage's Inc. shipped the wrong color of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of: A) Sales revenue B) Sales discount C) Sales return D) Sales allowance

D) Sales allowance

Identify the condition(s) that must exist for a sale and the related receivable to be recognized: A) Collection of cash is probable B) The company must have collected cash from at least one previous sale to the customer C) Goods or services have been provided to the customer D) Two of the other answers are conditions that must exist

D) Two of the other answers are conditions that must exist (A AND C)

T or F: In accounting for inventory, the assumed cost flow must match the physical goods flow.

False

T or F: Inventory methods such as LIFO and FIFO deal more with goods flow than with costs flow.

False

T or F: We record gain if we sell an asset for less than the book value.

False

T or F: If a company has ending inventory of $25,000, purchases during the year of $95,000, and beginning inventory of $30,000, cost of goods sold equals $90,000.

False Beginning Inventory ...... $30,000 + Purchases ........................ $90,000 = Costs of goods available for sale ... $125,000 - Ending Inventory ......... $25,000 = Costs of Goods Sold ...... $100,000

T or F: A sales allowance is recorded as a debt to Accounts Receivable and a credit to Sales Allowances.

False - A sales allowance is recorded as a debt to Sales Allowances and a credit to Accounts Receivable.

T or F: When the value of inventory falls below its cost, companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value.

False - Companies must report inventory at the lower of cost and net realizable value

T or F: During periods of rising costs, FIFO generally results in a higher cost of goods sold.

False - FIFO generally results in a lower cost of goods sold

During periods of rising costs, LIFO generally results in a higher ending inventory balance.

False - LIFO generally results in a lower ending inventory balance since earliest costs are assigned to CGS.

T or F: The Sales Returns account is an expense account.

False - Sales Returns is a contra revenue account

T or F: Sales revenue less cost of goods sold is referred to as operating income.

False - Sales revenue less cost of goods sold equals gross profit (margin)

T or F: Trade discounts represent a discount offered to the purchases for quick payment.

False - Trade discounts represent a reduction in the listed price of a product or service.

T or F: We record a long-term asset at its cost less all expenditures necessary to get the asset ready for use.

False - We record a long-term asset at its cost PLUS all expenditures necessary to get the asset ready for use

T or F: Accumulated Depreciation is a liability account that is increased by credits.

False - contra-asset account, reduces an asset account.

T or F: The franchisee's initial fee is recorded as an expense on the income statement.

False - it is recorded as an intangible asset and then expensed over the life of the franchise agreement.

T or F: The net realizable value of accounts receivable is the full amount owed by customers.

False - net realizable value is the net amount of cash we expect to collect.

T or F: Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets.

False - no effect on total assets

T or F: We capitalize repairs and maintenance expenditures because they maintain a given level of benefits.

False - only capitalize if the expenditure extends the useful life.

T or F: Under the allowance method, when a company writes off an account receivable as an actual bad debt, it record an expense.

False - writing off an account receivable has no effect on expenses

Book value or carrying value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation.

True

T or F: A basket purchase is the purchase of more than one asset at the same time for one purchase price.

True

T or F: A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts was too low.

True

T or F: Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life.

True

T or F: If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000.

True

T or F: In an activity-based depreciation method, we allocate an asset's cost based on its use.

True

T or F: Many intangible assets are not recorded on the balance sheet at their estimated market values.

True

T or F: Most companies use straight-line amortization for intangibles and credit the amount of amortization to the intangible asset account itself rather than to Accumulated Amortization.

True

T or F: Straight-line depreciation assumes that the benefits we derive from the use of an asset are the same each year.

True

T or F: The LIFO difference (reserve) is the additional amount of inventory a company would report if it used FIFO instead of LIFO.

True

T or F: The Sales Discounts account is an example of a contra revenue account.

True

T or F: The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory.

True

T or F: When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.

True