Midterm - COB 241

10. Which of the following is a true statement? A. The bank reconciliation should be performed by someone other than the person who records payments and receipts. B. Separation of duties is not necessary if the bookkeeper has been with the company a long time. C. A good system of internal controls cannot be broken through collusion. D. Physical controls include bonding of employees.

Answer: A - As part of separation of duties, the bank reconciliation should be performed by someone other than the person who records cash payments and receipts. All of the other statements are false.

Babcock Company purchased merchandise with a list price of $1,000 on account. Payment terms were 2/10, n 30. What will be the effect of the entry to record the purchase? A. Assets will increase $1,000. B. Liabilities will increase $980. C. Equity will decrease $980. D. Assets will be unaffected.

Answer: A - At the time of the purchase, assets (inventory) and liabilities (accounts payable) will both increase by the full cost of the inventory. The discount will only be recognized if and when the company pays the invoice within the discount period.

Madison Company purchased merchandise on account. Transportation costs associated with the purchase were $200. Freight terms on the purchase were FOB shipping point. What is true about the transportation cost? A. Madison's merchandise inventory account will increase $200. B. Total assets will decrease $200. C. Madison will record a $200 selling and administrative expense. D. Madison will not record anything.

Answer: A - Freight terms FOB shipping point mean that Madison Company, the buyer, pays for shipping. Transportation-in is a product cost, meaning that Madison will add the $200 cost to its inventory account.

Parker Company experienced an event that had the following effect on its financial statements: Assets: increases Liabilities: NA Equity: increases Revenue: increases Expense: increases Net Income: increases Cash Flow: increases Operating Activities A. Sold merchandise that cost $30 for $55 cash. B. Sold merchandise that cost $30 for $55 on account. C. Returned merchandise to a vendor for credit. D. None of the above.

Answer: A - If merchandise is sold for cash, there will be a net increase in assets (cash increases by $55 and inventory decreases by $30), revenue will increase by $55, cost of goods sold (an expense) will increase by $30, for an increase in net income of $25, and there will be a cash inflow of $55 for operating activities.

7. Which cost flow method will result in a cost of goods sold that is closest to current market value? A. LIFO B. FIFO C. Weighted Average D. Either A or B

Answer: A - LIFO assigns most recent costs to cost of goods sold, so those costs will be closest to current market value.

16. Venice Company purchased 150 units of inventory that cost $3.00 each on January 1. On April 1, the company purchased 200 additional units for $3.50. On July 1, they purchased 250 more for $4.50. On September 1, Venice sold 270 units on account for $8 each. Assuming Venice uses a perpetual inventory system and LIFO cost flow, what is the correct journal entry to record the sale? A. Accounts receivable 2160 Sales 2,160 COGS 1,195 Inventory 1,195 B. Accounts receivable 2160 Sales 2160 COGS 870 Inventory 870 C. Accounts Receivable 2160 Inventory 1195 Sales 965 D. Accounts Receivable 2160 Inventory 870 Sales 1290

Answer: A - LIFO cost of goods sold = [(250 x $4.50) + (20 x $3.50)] = $1,195; 270 x $8 = $2,160 sales revenue

|Units | $/unit | Beginning inv | 10 | $100 1st Purchase | 20 | $110 2nd Purchase | 25 | $115 Sales | 35 | $175 Jefferson uses the FIFO cost flow method. What will Jefferson report as ending inventory? A. $2,300. B. $3,775. C. $2,100. D. $2,500.

Answer: A - There were 55 units available for sale. If 35 were sold, using FIFO, the 20 remaining would have come from the second purchase. 20 x $115 = $2,300.

Bates Company had the following information related to its bank balance and its book balance at March 31, 2015. What is the company's true cash balance on this date? Unadjusted bank balance $ 6,000 Unadjusted book balance 5,445 Outstanding checks 1,500 Deposits in transit 930 Debit memo for bank service charge 35 Credit memo for interest earned 20 A. $5,430 B. $6,570 C. $5,460 D. None of the above

Answer: A - Unadjusted bank balance $6,000 - 1,500 + 930 = $5,430; Unadjusted book balance $5,445 - 35 + 20 = $5,430

|Units | $/unit | Beginning inv | 10 | $100 1st Purchase | 20 | $110 2nd Purchase | 25 | $115 3rd purchase | 20 | $125 What was Timberville's weighted average cost per unit? A. $114.33 B. $112.50 C. $116.67 D. $112.00

Answer: A - Weighted average cost per unit = [(10 x $100) + (20 x $110) + (25 x $115) + (20 x $125)]/75 units = $114.33

4. When prices are declining, which cost flow method will produce the highest ending inventory cost? A. LIFO B. FIFO C. Weighted Average D. Ending inventory cost is not affected by cost flow method.

Answer: A - When prices are declining, ending inventory will be highest if LIFO is used because the older, higher prices will be assigned to ending inventory.

When prices are rising, which cost flow method will produce the highest cost of goods sold? A. LIFO B. FIFO C. Weighted Average D. Cost of goods sold is not affected by cost flow method.

Answer: A - When prices are rising, LIFO will produce the highest cost of goods sold because cost of goods sold will come from the most recent, highest prices.

A CPA conducts an audit on a company's financial statements and finds that the statements are materially correct and are in compliance with GAAP without reservation or exception. What form of opinion will the CPA firm issue on these statements? A. Qualified opinion B. Unqualified opinion C. Adverse opinion D. Disclaimer of opinion

Answer: B - An unqualified opinion is issued when the auditor finds that the statements are materially correct and are in compliance with GAAP without reservation or exception.

When prices are rising, which cost flow method will produce the greatest cash outflow from operating activities? A. LIFO B. FIFO C. Weighted Average D. Cash flows are not affected by cost flow method.

Answer: B - Because FIFO produces the lowest cost of goods sold when prices are rising, it will result in the highest taxable income and highest income tax expense and cash outflow to pay those taxes.

Which cost flow method is most frequently used in the United States? A. LIFO B. FIFO C. Weighted Average D. Specific Identification.

Answer: B - FIFO is the most frequently used cost flow assumption, making up about 2/3 of companies.

Which of the following is a false statement? A. The accounting treatment of purchase returns and purchase allowances is identical. B. The accounting treatment of sales returns and sales allowances is identical. C. The purchase of merchandise for cash has no effect on total assets. D. The payment of transportation-in cost for cash has no effect on total assets.

Answer: B - For both sales returns and sales allowances, sales and accounts receivable (or cash) are decreased. When a sales return is recorded, the inventory account is increased and cost of goods sold is decreased by the amount of the merchandise's original cost because the merchandise is then returned to inventory. When a sales allowance is recorded, however, there is no merchandise returned, so only sales and accounts receivable (or cash) are decreased.

|Units | $/unit | Beginning inv | 10 | $100 1st Purchase | 20 | $110 2nd Purchase | 25 | $115 Sales | 35 | $175 Jefferson uses the LIFO cost flow method. What will Jefferson report as gross margin? A. $2,100. B. $2,150. C. $2,350. D. None of the above.

Answer: B - LIFO cost of goods sold = (25 x $115) + (10 x $110) = $3,975; Sales = 35 x $175 = $6,125; $6,125 - $3,975 = $2,150 gross margin

Which of the following would require a journal entry when preparing the bank reconciliation? A. Error made when the bank deducted $100 from the company's account for a check written against another customer's account. B. NSF check C. Outstanding check D. Both A and B

Answer: B - NSF (non-sufficient funds) checks require journal entries as part of the bank reconciliation in order to correct the unadjusted cash balance. Errors made by the bank and outstanding checks are adjustments made to the unadjusted bank balance and do not require journal entries.

Identify the false statement: A. The balance sheet will report the true cash balance only after all appropriate journal entries related to the bank reconciliation are made. B. Outstanding checks are checks received by the company that have not yet been deposited. C. NSF checks are checks that were deposited but rejected by the bank due to insufficient funds. D. Debit memos are amounts deducted by the bank for items such as service charges.

Answer: B - Outstanding checks are checks that have been written (not received) by the company that have not yet been presented to the bank for payment.

A merchandising company that sells goods to end consumers is known as a A. wholesale company. B. retail company. C. service company. D. manufacturing company.

Answer: B - Retail companies sell goods to end consumers. Wholesale companies are also merchandising companies, but sell goods to retailers.

Baker Company experienced an event that had the following effect on its financial statements: Assets: decreases Liabilities: decreases Equity: NA Revenue: NA Expense: NA Net Income: NA Cash Flow: NA A. Paid an invoice for merchandise purchased on account within the discount period. B. Returned merchandise to a vendor for credit. C. Accepted merchandise returned by a customer for credit. D. Paid to ship merchandise to customers.

Answer: B - Returning merchandise to a vendor for credit decreases both assets (inventory) and liabilities (accounts payable).

A customer returned merchandise to Richmond Company for credit. The merchandise had been sold for $100 and had originally cost $60. Which of the following is true? A. Equity will decrease by $100. B. Inventory will increase by $60. C. Liabilities will decrease by $100. D. Assets will decrease by $100.

Answer: B - When a company accepts a return from a customer, the inventory account will increase by the original cost of the merchandise and accounts receivable will decrease by the amount of the sale. In this example, therefore, there would be a net decrease in assets of $40. There is also a decrease in equity of $40 (sales decreases by $100 and cost of goods sold decreases by $60).

When prices are declining, which cost flow method will produce the lowest gross margin? A. LIFO B. FIFO C. Weighted Average D. Gross margin is not affected by cost flow method.

Answer: B - When prices are declining, FIFO will produce the lowest gross margin because older, higher prices will be assigned to cost of goods sold.

Chavez Company purchased one item for $60, and then purchased a second identical item for $50. One item was sold for $90. Which of the following statements is true?

Answer: B - When prices are falling, FIFO will produce the highest cost of goods sold, followed by weighted average, followed by LIFO.

When prices are rising, which cost flow method will produce the highest gross margin? A. LIFO B. FIFO C. Weighted Average D. Gross margin is not affected by cost flow method.

Answer: B - When prices are rising, FIFO will produce the highest gross margin because it produces the lowest cost of goods sold, coming from the oldest, lowest prices.

When prices are rising, which cost flow method will result in the lowest income tax expense? A. FIFO B. LIFO C. Weighted Average D. Specific Identification

Answer: B - When prices are rising, LIFO will produce the highest cost of goods sold; therefore, it will result in the lowest income tax expense.

|Units | $/unit | Beginning inv | 10 | $100 1st Purchase | 20 | $110 2nd Purchase | 25 | $115 Sales | 35 | $175 Jefferson uses the weighted average cost flow method. Jefferson's cost of goods sold will be closest to which of the following? A. $3,792. B. $4,375. C. $3,866. D. $2,259.

Answer: C - Weighted average cost per unit = [(10 x $100) + (20 x $110) + (25 x $115)]/55 units = $110.45; 35 x $110.45 = $3,866

Which of the following is subtracted from the unadjusted bank balance to determine a company's true cash balance? A. NSF checks B. Deposits in transit C. Outstanding checks D. Both A and C

Answer: C - Outstanding checks are deducted from the unadjusted bank balance. Deposits in transit are added to the bank balance, and NSF checks are deducted from the unadjusted cash (book) balance.

Product costs are recognized on the income statement A. when goods are purchased for resale. B. when invoices on goods purchased for resale are paid. C. when merchandise is sold. D. in the period following the sale of merchandise.

Answer: C - Product costs are recognized as cost of goods sold on the income statement when the merchandise is sold.

Which of the following is not a product cost? A. List price of merchandise purchased for resale B. Transportation cost on merchandise purchased from suppliers C. Cost of shipping merchandise to customers D. Neither B nor C is a product cost

Answer: C - The cost of shipping merchandise to customers is a selling and administrative cost called transportation-out. Shipping paid to purchase inventory, as well as the cost of the merchandise itself, are product costs.

Which of the following is the appropriate journal entry to record the recognition of an NSF check for $100? A. NSF Check 100 : Acc. Rec. : 100 B. NSF Check 100 : Cash : 100 C. Acc. Rec. 100 : Cash : 100 Inventory : 5 D. No journal entry is necessary.

Answer: C - The journal entry to recognize an NSF check is a debit to accounts receivable and a credit to cash because the customer who wrote the check now owes the company the amount of the original check.

Wythe Company purchased $500 of merchandise on account. Payment terms were 1/10, n 30. Wythe paid the invoice on the purchase within the discount period. What is the correct journal entry to record payment of the invoice? A. Acc. Pay. 500 : Cash : 495 Disc. Rev. : 5 B. Inventory 495 : Cash : 495 C. Acc. Pay. 500 : Cash : 495 Inventory : 5 D. Acc. Pay. 495 : Cash : 495

Answer: C - The purchase discount is recognized at the time the invoice is paid. The entry will debit (reduce) accounts payable by $500, credit (reduce) cash by the $495 paid after the discount, and credit (reduce) the inventory account by the amount of the discount, $5.

Burton Company sold merchandise that had cost $50 for $80 cash. Which of the following is the correct journal entry to record the sale? A. Cash 80 : Inventory : 50 Sales : 30 B. Cash 80 : Inventory : 80 C. Cash 80 : Sales : 80 COGS 50 : Inventory : 50 D. Cash 30 : Sales : 30

Answer: C - The sale is recorded as a debit to cash and credit to sales for $80 (the selling price) and a debit to cost of goods sold and credit to inventory for $50 (the cost).

Madison Company paid $100 to have inventory shipped to customers. The $100 payment A. was recorded as a selling and administrative expense. B. was recorded as a cash outflow for operating activities. C. had no effect on total assets. D. Both A and B are correct.

Answer: D - The $100 paid to ship goods to customers will be recorded as a selling and administrative expense (transportation-out) and will be a cash outflow for operating activities.

Which of the following would not be considered an internal control related to cash receipts? A. Cash deposits are made daily. B. The person receiving cash is not the same person who records the receipts in the general journal. C. Cashiers count out their drawers at the end of each shift. D. The company uses prenumbered checks.

Answer: D - The use of prenumbered checks is a control related to cash disbursements, not cash receipts.

| Item | QTY | $ per unit | Market Val A | 15 | $250 | $240 B | 10 | $180 | $195 C | 18 | $160 | $160 D | 24 | $275 |$280 If Flannigan applies the lower-of-cost-or-market rule to inventory in aggregate, what journal entry, if any, will Flannigan prepare as a result? A. COGS 270 Inventory 270 B. Lower of cost/Market expense 120 Inventory 120 C. COGS 150 Inventory 150 D. NO entry would be necessary

Answer: D - Total cost = [(15 x $250) + (10 x $180) + (18 x $160) + (24 x $275)] = $15,030; Total Market = [(15 x $240) + (10 x $195) + (18 x $160) + (24 x $280)] = $15,150. Because total market is higher than total cost, there is no journal entry necessary.

| Item | QTY | $ per unit | Market Val A | 15 | $250 | $240 B | 10 | $180 | $195 C | 18 | $160 | $160 D | 24 | $275 |$280 If Flannigan applies the lower-of-cost-or-market rule to individual lines of inventory, what journal entry, if any, will Flannigan prepare as a result? A. COGS 270 Inventory 270 B. Lower of cost/Market expense 120 Inventory 120 C. COGS 150 Inventory 150 D. NO entry would be necessary

Answer: C - Total cost = [(15 x $250) + (10 x $180) + (18 x $160) + (24 x $275)] = $15,030; Total LCM = [(15 x $240) + (10 x $180) + (18 x $160) + (24 x $275)] = $14,880; Write-down = $15,030 - $14,880 = $150; The entry is a debit to cost of goods sold and a credit to inventory.

Richmond Company purchased 100 units of inventory that cost $5.00 each on January 1. On April 1, the company purchased 200 additional units for $5.50. On July 1, they purchased 250 more for $6.50. On September 1, Richmond sold 50 units on account for $10 each. Assuming Richmond uses a perpetual inventory system and weighted average cost flow, what is the correct journal entry to record the sale? A. Accounts receivable 500 Sales 500 COGS 283 Inventory 283 B. Accounts Receivable 500 Inventory 283 Sales 217 C. Accounts receivable 500 Sales 500 COGS 293 Inventory 293 D. NONE OF THE ABOVE

Answer: C - Weighted average cost per unit = [(100 x $5) + (200 x $5.50) + (250 x $6.50)]/550 = $5.86; $5.86 x 50 = $293 cost of goods sold; 50 units x $10 = $500 sales revenue

Jasper Company's accountant transposed two numbers when recording a check for a cash purchase of supplies. The check was written for $127 but was recorded as $172. What entry is required to correct this recording error? A. Supplies 45 Cash 45 B. Supplies expense 45 supplies 45 C. Cash 45 supplies 45 D. No journal entry required

Answer: C - When the check was recorded, $45 too much was added to the supplies account and deducted from the cash account. To correct the error, the $45 must be deducted from supplies and added back to cash.

Which of the following is added to the unadjusted book balance to determine a company's true cash balance? A. Deposits in transit B. Debit memo for new checks C. Error made when a check written for $68 was recorded by the company bookkeeper for $86. D. None of the above

Answer: C - When the check written for $68 was recorded as $86, too much was deducted from the cash account. Therefore, the difference of $18 must be added back to the cash account (unadjusted book balance) to correct the error. Debit memos are subtracted from the unadjusted book balance, and deposits in transit are added to the bank balance.

20. If a company applies the lower-of-cost-or-market rule in aggregate, A. it will always report a larger write down than if the rule were applied to individual lines of inventory. B. it will usually write inventory to a higher amount than writing it down. C. write downs will generally be smaller than if the rule were applied to individual lines of inventory. D. it will be in violation of GAAP unless the write down is immaterial.

Answer: C - When the lower-of-cost-or-market rule is applied in aggregate, items with market values above cost will offset items with lower market values; therefore, write-downs will general be smaller than if the rule were applied to individual lines of inventory.

The expense account associated with merchandise is called A. merchandise expense. B. selling expense. C. inventory expense. D. cost of goods sold.

Answer: D - Cost of goods sold is the expense account associated with merchandise.

Freight terms FOB Destination mean: A. The merchandising company will always record an expense. B. The merchandising company will never increase the merchandise inventory account. C. The seller pays freight costs. D. Both B and C are correct.

Answer: D - Freight terms FOB Destination means that the seller pays. Therefore a merchandising company will only pay for the freight if it is the seller. When a merchandising company pays transportation cost as a seller, it will never increase the inventory account. Instead, it will record the expense transportation-out.

17. Coleman Company purchased one item for $160, and then purchased a second identical item for $150. One item was sold for $200. Which of the following statements is true? A. Cost of goods sold will be lower if Coleman uses FIFO than LIFO. B. Gross margin will be higher if Coleman uses FIFO than weighted average. C. Coleman will pay less income tax if it uses weighted average than if it uses FIFO. D. Ending inventory will be lower if Coleman uses FIFO than LIFO.

Answer: D - In a period of declining prices ($160 to $150), FIFO will result in an ending inventory than LIFO. In this case, ending inventory would be $150, the cost of the second unit purchased.

Which of the following is not primarily a merchandising company? A. Costco Warehouse Store B. Barnes and Noble C. Whole Foods D. Netflix

Answer: D - Netflix does not purchase goods and resell them to customers. It is a service company. The other companies all purchase goods and resell them.

Payment terms 2/10, n 30 mean: A. The seller can impose a 2% penalty if the invoice is not paid within 30 days. B. The buyer can take a 2% discount if the invoice is paid within 30 days. C. The buyer has 10 days to return merchandise to the vendor; otherwise they must pay a 2% penalty. D. The buyer can take a 2% discount if the invoice is paid within 10 days; otherwise they must pay the full amount within 30 days.

Answer: D - Payment terms 2/10, n 30 (read two-ten, net 30) means that the buyer may take a 2% discount if the invoice is paid within 10 days; otherwise the invoice must be paid within 30 days.

Oliver Company experienced an event that had the following effect on its financial statements: Assets: increases Liabilities: increases Equity: NA Revenue: NA Expense: NA Net Income: NA Cash Flow: NA Which event would have had this effect? A. Paid transportation-in costs with cash. B. Collected on an account receivable. C. Returned merchandise to a vendor for credit. D. Purchased merchandise on account.

Answer: D - Purchasing merchandise on account increases both assets (inventory) and liabilities (accounts payable).

What is the effect of a cash sale of inventory in a perpetual inventory system? A. Total assets will increase by the amount of the gross margin. B. Total equity will increase by the amount of the selling price. C. Expenses will increase by the amount of the merchandise's original cost. D. Both A and C are correct.

Answer: D - Recording a cash sale causes cash (an asset) and sales revenue (equity) to increase by the selling price. Inventory (an asset) decreases by the cost of the merchandise and the expense cost of goods sold decreases equity by the same amount. The net increase in assets is the difference between the selling price and the cost, which is the gross margin.

8. Dayton Company started the accounting period with one unit of inventory that cost $50. During the period, Dayton purchased one more unit at $55 and later purchased two more for $60. During the period, Dayton sold three units for $90 each. Which of the following is true? A. If Dayton uses weighted average, cost of goods sold will be $165. B. If Dayton uses FIFO, cost of goods sold will be $175. C. If Dayton uses LIFO, cost of goods sold will be $180. D. None of the above is true.

Answer: D - Weighted average cost per unit = [(1 x $50) + (1 x $55) + (2 x $60)]/4 = $56.25; Cost of goods sold = $56.25 x 3 = $168.75. FIFO cost of goods sold = [(1 x $50) + (1 x $55) + (1 x $60)] = $165. LIFO cost of goods sold = [(2 x $60) + (1 x $55)] = $170.

Babcock Company purchased merchandise with a list price of $1,000 on account. Payment terms were 2/10, n 30. Babcock paid the invoice on the purchase within the discount period. What will be the effect of the entry to record payment of the invoice? A. Liabilities will decrease $1,000. B. Cash will decrease $980. C. Merchandise inventory will decrease $20. D. All of the above are true.

Answer: D - When the invoice is paid, cash will decrease by $980, inventory will decrease by $20 (the amount of the discount), liabilities will decrease by $1,000 (the amount of the invoice).

Jacobs Company sold merchandise that had cost $40 for $75 on account. When the sale was recorded, A. Assets increased $75. B. Equity increased $35. C. Expenses increased $40. D. Both B and C are correct.

Answer: D - When the sale is recorded, Sales and Accounts receivable both increase by $75. Cost of goods sold increases and Inventory decreases by $40. The net effect is: Assets: increases by 75 Assets: decrease by 40 Liabilities: NA Liabilities: NA Equity: increases by 75 Equity: decreases by 40 Revenue: increased by 75 Revenue: NA Expense: NA Expense: Increases by 40 Net Income: NA Cash Flow: NA Cash Flow: NA