Midterm

How would an NSF check from a customer be recorded in the accounting records? a. Debit Accounts Receivable; Credit Cash b. Debit Cash; Credit Accounts Receivable c. Debit Accounts Payable; Credit Cash d. Debit Cash; Credit Miscellaneous Expense

Debit Accounts Receivable; Credit Cash

Gross profit ratio =

Gross profit / Net sales

What does the word debit mean? a. Left side b. Right side c. Increase d. Decrease

Left side - Give/ money going out

Which level of profitability is considered profit from normal operations? a. Gross profit b. Operating income c. Income before taxes d. Net income

Operating income Operating income is measured as gross profit (sales revenue minus cost of goods sold) minus operating expenses.

An inventory error that understates the amount of ending inventory will result in which of the following in the current year? a. Overstated cost of goods sold b. Overstated net income c. Overstated assets d. Overstated gross profit

Overstated cost of goods sold

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 ending inventory

Reported in the income statement

The amounts recorded when the company sells products or provides services to customers are referred to as: a. Liabilities b. Revenues c. Assets d. Expenses

Revenues - Revenues are recorded at the time the company provides products or services to customers.

What would be the effect on total assets if a company purchased land for $200,000 cash? a. Total assets would go up by $200,000. b. Total assets would go down by $200,000. c. There would be zero effect on total assets. d. None of the above

There would be zero effect on total assets. - One asset (land) would go up and another asset (cash) would go down. Therefore there would be zero effect on total assets.

If a company pays an employee $100 per day for a five-day work week that runs from Monday to Friday, and December 31 is a Tuesday, what is the amount of the salaries adjustment, assuming that Friday is payday? a. $500 b. $400 c. $300 d. $200

$200 The employee worked two days in the last week of December (Monday and Tuesday), the amount of the accrual should be for $200 (= $100 per day × 2 days). The adjusting entry on December 31 would be: Salaries Expense 200 Salaries Payable 200

If a company borrowed $20,000 on November 1 at the rate of 6% annually, how much interest expense should be accrued at the year end date of December 31, assuming no accrual has yet been made this year? a. $1,200 b. $200 c. $600 d. $400

$200 The formula to calculate interest for November and December (2 months) is: Note Payable × Annual Interest Rate × Fraction of the Year $200 = $20,000 × 6% × 2/12 The adjusting entry on December 31 would be: Interest Expense 200 Interest Payable 200

A company accepts a note receivable of $5,000 on September 1, 2018, that matures in 10 months and has stated interest of 6%. What amount of interest revenue will the company record in 2018 and 2019? a. 2018 = $100; 2019 = $150 b. 2018 = $125; 2019 = $125 c. 2018 = $150; 2019 = $100 d. 2018 = $0; 2019 = $250

2018 = $100; 2019 = $150 2018: Interest Revenue = $5,000 × 6% × 4/12 = $100 2019: Interest Revenue = $5,000 × 6% × 6/12 = $150

Net sales are $100,000 and cost of goods sold is $70,000. Inventory balances for the past two years are $10,000 and $20,000. What is the inventory turnover? a. 4.67 times per year b. 7.0 times per year c. 6.67 times per year d. 3.5 times per year

4.67 times per year $70,000 ÷ ([10,000 + 20,000] ÷ 2). The result is 4.67 times per year.

On December 31 before adjusting entries, a company reports the following balances: Accounts Receivable $100,000 Allowance for Uncoll. Accts. $2,000 (credit) The company estimates bad debts to be 20% of accounts receivable. The adjusting entry would include: a. A debit to Bad Debt Expense = $18,000 b. A credit to Allowance for Uncoll. Accts. = $24,000 c. A credit to Allowance for Uncoll. Accts. = $22,000 d. A debit to Bad Debt Expense = $20,000

A debit to Bad Debt Expense = $18,000

The effect of a sales allowance will result in which of the following: a. An increase to net income b. A decrease to net income c. An increase to accounts receivable d. An increase to sales revenue

A decrease to net income

Which of the following are sometimes called trade receivables? a. Accounts receivable b. Interest receivable c. Notes receivable d. Tax refund claims

Accounts receivable

Which of the following statements is NOT true of the Sarbanes-Oxley Act of 2002? a. All companies in the U.S. fall under its provisions. b. It helped establish guidelines for internal control procedures. c. It helped establish corporate executive accountability. d. It helped establish guidelines for auditor-client relations.

All companies in the U.S. fall under its provisions.

An adjusting entry would be needed for which of the following transactions? a. Accrued salaries b. Services provided but unbilled c. Interest accrued on a loan payable d. All of the above

All of the above

The resources of a company are referred to as: a. Liabilities b. Revenues c. Assets d. Expenses

Asset - Assets are the resources of the company that will benefit future operations. They include items such as cash, inventory, supplies, buildings, and equipment.

Which relationship is reflected in the balance sheet? a. Revenues − Expenses = Net income b. Assets = Liabilities + Stockholders' Equity c. Assets − Liabilities = Net Income d. Assets = Revenues + Dividends

Assets = Liabilities + Stockholders' Equity - The balance sheet reflects the financial position of a company on a particular date. The company's financial position is summarized by showing that resources (Assets) equal claims to resources (Liabilities + Stockholders' Equity).

What effect does the payment of dividends have on the accounting equation? a. Assets decrease and equity increases b. Assets decrease and equity decreases c. Assets decrease and liabilities increase d. Assets increase and equity increases

Assets decrease and equity decreases - Payment of dividends causes the cash account (which is an asset) to decrease and also causes retained earnings (which is an equity account) to decrease.

Which financial statement would include a line for net income? a. Income statement b. Statement of stockholders' equity c. Balance sheet d. Both a and b

Both a and b - Net income is the final result in the income statement. This is also transferred from the income statement to the statement of stockholders' equity. So net income would appear in both the income statement and the statement of stockholders' equity.

Auditors are independent parties that help: a. To establish accounting rules in the U.S. b. To ensure management has appropriately prepared the company's financial statements c. Investors and creditors in their decisions by adding credibility to the financial statements. d. Both b. and c. are correct

Both b. and c. are correct - Auditors are hired by a company as an independent party to express a professional opinion of the extent to which financial statements are prepared in accordance with GAAP.

Which of the following would NOT be considered a cash equivalent? a. Credit card sales for the day b. Debit card sales for the day c. Money orders received from customers d. Certificate of deposit (CD) that matures one year from now

Certificate of deposit (CD) that matures one year from now

Which of the following accounts would appear in the credit column of a trial balance? a. Prepaid Rent b. Dividends c. Common Stock d. Salaries Expense

Common Stock - The trial balance is a listing of all accounts and their balances. The only account listed that would have a credit balance and therefore appear in the credit column of the trial balance is the common stock account. This is an equity account and equity accounts are increased by credits. (All other accounts listed have debit balances and therefore appear in the debit column.)

Inventory turnover ratio =

Cost of goods sold / Average inventory

Which of the following is equivalent to the book value of an asset? a. Cost of the asset plus the accumulated depreciation b. Cost of the asset less the accumulated depreciation c. The estimate of time that the asset will last d. Cost of the asset divided by its life

Cost of the asset less the accumulated depreciation - The book value of the asset is the asset's cost less its accumulated depreciation. Another common term for book value is carrying value.

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 e. Shipping charges for outgoing inventory

Costs of incoming freight charges on merchandise inventory

Which of the following is recorded with an adjusting entry associated with a prepaid expense? a. Credit an asset b. Debit a liability c. Credit an expense d. Debit an asset

Credit an asset - The adjusting entry involving a prepaid expense always involves a debit to an expense and a credit to an asset.

How would an NSF check from a customer be treated on a bank reconciliation? a. Addition on the bank side b. Deduction on the bank side c. Addition on the company side d. Deduction on the company side

Deduction on the bank side

Which of the following items would be found on the "bank side" of the bank reconciliation? a. Interest income received on the account b. Deposit outstanding c. NSF check from a customer d. Service fee charged by the bank

Deposit outstanding

Which inventory method or cost flow assumption most closely resembles the actual physical flow of goods? a. FIFO b. LIFO c. Weighted-average d. FILO

FIFO -Supermarkets, sporting goods stores, clothing shops, electronics stores, or just about any company you're familiar with generally sell their oldest inventory first (first-in, first-out).

Which of the following is true regarding Allowance for Uncollectible Accounts? a. It is a liability account. b. It is added to the total of Sales Discounts, Sales Returns, and Sales Allowances. c. It is subtracted from the balance of Accounts Receivable in the balance sheet. d. It appears in the income statement as an expense.

It is subtracted from the balance of Accounts Receivable in the balance sheet.

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. FILO

LIFO Using LIFO, we assume that the last units purchased (the last ones in) are the first ones sold (the first out). If prices are rising, cost of goods sold would be composed of the latest (and highest) costs using LIFO.

On December 31 before adjusting entries, a company's balance of Allowance for Uncollectible Accounts is a credit of $2,000. What does a "credit" balance prior to adjusting entries indicate? a. The company did not estimate bad debts last year. b. Last year's estimate of bad debts was too low. c. The company's estimate equals actual bad debts. d. Last year's estimate of bad debts was too high.

Last year's estimate of bad debts was too high.

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

Net Revenue = Total Revenue - Sales Discounts - Sales Allowances

When an entry is made to write off an uncollectible account, a. Bad debt expense is debited. b. Net income is decreased. c. Total accounts receivable is unchanged. d. The allowance account is credited.

Net income is decreased.

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.

Older accounts are less likely to be collected.

The cash collected from a customer would be recorded as which type of activity in the Statement of Cash Flows? a. Operating Activity b. Business Activity c. Investing Activity d. Financing Activities

Operating Activity - Operating activities include revenue and expense transactions. Collecting cash from customers represents activity related to revenues.

If a company places cash receipts from the day in a safe or bank deposit box, this would be an example of: a. Separation of duties b. Physical control c. Reconciliation d. Performance review

Physical control

Which of the following accounts would be debited when a company pays $12,000 in advance for one year of rent? a. Cash b. Rent Expense c. Prepaid Rent d. Rental Income

Prepaid Rent - This transaction creates a prepaid account. Prepaid rent is an asset. In order to increase an asset account you would debit it. The correct answer is the prepaid rent account would be debited for $12,000 when the rent was paid in advance. (Cash would be credited.)

Which of the following accounts would appear in a company's income statement? a. Accounts Payable b. Cash c. Dividends d. Rent Expense

Rent Expense - The income statement is a financial statement that reports the company's revenues and expenses over an interval of time. The only item from the list that would appear in the income statement would be Rent Expense.

Which of the following accounts would you find on a post-closing trial balance? a. Dividends b. Retained Earnings c. Rent Expense d. Service Revenue

Retained earnings - The only account that would remain on a trial balance after all of the revenues, expenses, and dividends were closed would be Retained Earnings. Dividends, rent expense, and service revenue would have been closed during the closing process and therefore would not be on the post-closing trial balance.

Which account would NOT be closed during the closing process? a. Retained Earnings b. Dividends c. Interest Expense d. Interest Revenue

Retained earnings -Only temporary accounts are closed—they include all revenues, expenses, and dividends. Balances of temporary accounts are transferred to the balance of Retained Earnings, which is a permanent account that is not closed.

Which of the following would be true for a company that has an accounts receivable turnover of 10? a. The company turns over their accounts receivable more than once a month. b. The company would have an average collection period of 36.5 days. c. The company would be considered as doing an efficient job of collecting receivables if the terms were net 30. d. The company would have an average collection period of 20 days.

The company would have an average collection period of 36.5 days. The average collection period is computed as 365 divided by the accounts receivable turnover of 10 (= 36.5 days).

Which of the following is used to provide a chronological record of all transactions affecting a firm? a. The general ledger b. The journal c. The trial balance d. The income statement

The journal -The journal is a chronological record of the transactions that have taken place. The general ledger is used to accumulate the balances of the accounts, and the trial balance is a summarized listing of all the debit and credit accounts. The income statement is a financial statement used to determine whether the business was profitable.

When writing off an uncollectible account: a. Bad debt expense is debited. b. Net income is decreased. c. Total assets are unchanged. d. The allowance account is credited.

Total assets are unchanged. - There is no decrease in total assets and no decrease in net income.