A201 Exam 2

Delta Diamonds had 5 diamonds available for sale this year: June 1 - purchased 1 for $500; Julty 9 - purchased 2 for $550 each; and on September 23 - purchased 2 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its ending inventory is ___________.

$2,200

Acme, Inc. had cost of goods sold of $2,000. If beginning inventory was $2,100 and ending inventory was $500, Acme's purchases must have been ________.

$400

Delta Diamonds had 5 diamonds available for sale this year: June 1 - purchased 1 for $500; Julty 9 - purchased 2 for $550 each; and on September 23 - purchased 2 for $600 each. On December 24, it sold 1 of the diamonds that was purchased on July 9. Using perpetual specific identification, its Cost of Goods Sold is ___________.

$550

Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its cost of goods sold for the month its _________.

$65

Cellar's Inc. sold $800,000 of merchandise with sales terms of 2/10, n/30 and the customers paid within 10 days. The net sales equals ______.

$784,000

Libby, Inc. sells $1,000 of goods to a customer. The customer pays with a VISA credit card. VISA charges a 4% fee on the sale. Calculate the net sales Libby would report from this sale.

$960

To help minimize bad debt expense and provide feedback, a good internal control system will require _______.

- a periodic aging of accounts receivable - approval of customers' credit history

Contra-asset accounts:

- accumulated depreciation - allowance for doubtful accounts

Credit card companies earn revenues from:

- charging the credit card holder interest - charging the retailer a fee for each credit card sale

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ________.

- debit to Bad Debt Expense - credit to Allowance for Doubtful Accounts

If the direction of change in Accounts Receivable is a(n) _________ (increase/decrease) from the prior period, the amount of that change is added to net income in the __________ activities section of the statement of cash flows.

- decrease - operating

Identify two benefits to the seller of offering sales discounts to its customers.

- increases the likelihood the seller will receive the cash before the customer runs out of funds - prompt receipt of cash

Bad Debt Expense ________.

- is an estimate - is a cost of extending credit to customers

What is a noncurrent asset?

- nontrade receivable due in 3 years - 2 year notes receivable

Identify which of the following would cause timing differences between the bank statement and what is recorded in a company's cash account.

- outstanding checks - bank service charges - NSF checks - deposits in transit

Companies may use these to motivate sales and collections:

- provide discounts for early collection - allow customers to purchase on credit

Accounts Receivable (Net)

- reports the amount of receivables expected to be collected - is the net realizable value

Sales to customers in which the customers pay within 30 days are referred to as _______.

- sales on account - credit sales

What would cause a bank statement NOT to agree with the cash balance in the accounting records?

- the bank made an error in recording a deposit made by the company - the company made an error in recording a deposit - the bank paid interest that the company has not recorded - deposits outstanding that have been recorded on the company's records, but not on the bank's

What are other account titles for Bad Debt Expense?

- uncollectible accounts expense - doubtful accounts expense - provision for uncollectible accounts

Accounting for bad debts using the allowance method requires which 2 steps?

1) Recording an adjusting entry for the estimated bad debts 2) writing off the actual bad debts

Assuming the use of a 365-day year, Barry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its Beginning Inventory was $800, and its Ending Inventory was $1,200. Barry Bee's average days to sell inventory equals ______ days.

36.5

Brewed Awakenings, Inc., sold $100,000 of coffee to Java the Hut with sales terms of 1/7, n/30. Given Java paid within the discount period, the amount of the sales discount equals $________.

$1,000

Beginning inventory was $5,000. During the month, the company purchased an additional $25,000 of inventory and sold goods that cost $20,000. Ending inventory was _______.

$10,000

Statement of Cash Flows

Cash collected during the accounting period

Short-term, highly liquid investments such as money market funds or treasury bills are classified as:

Cash equivalents

In which ways does a periodic system differ from a perpetual system?

Cost of Goods Sold is not updated until the end of the accounting period in a periodic system; Inventory is not updated until the end of the accounting period in a period system

The weighted average cost method uses the weighted average cost to calculate the value of ________.

Cost of Goods Sold, Inventory

Which inventory costing method uses the oldest cost for Cost of Goods Sold on the income statement and the newest cost for Inventory on the balance sheet?

FIFO

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

FIFO, LIFO

Assuming rising inventory prices, rank which inventory method results in the higher ending inventory value. List, from top to bottom, in order of highest ending inventory to lowest ending inventory value. (LIFO, FIFO, Weighted average)

FIFO, Weighted average, LIFO

Which financial statements are needed to calculate the inventory turnover ratio?

Income Statement; Balance Sheet

What is an example of a cash equivalent?

Investments within 3 months to maturity

If a company assumes that its inventory costs flow out in the opposite order from which the goods were purchased, it uses ___________ to calculate inventory.

LIFO

Which inventory system requires that the inventory account be updated when merchandise is purchased?

Perpetual system

Aging of Receivables Method

Requires directly computing the desired allowance for doubtful accounts on the balance sheet and then computing the amount of the adjusting entry necessary to obtain this desired balance

Percentage of Credit Sales Method

Requires directly computing the desired amount of bad debt expense on the income statement

When a customer returns a product for a refund, in which of the seller's accounts is the entry recorded?

Sales returns and allowances

What does the sales discount 2/10, n/30 mean?

You can take a 2% discount if you pay within 10 days, or the full amount is due within 30 days.

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record ______.

a decrease in inventory; cost of goods sold, which will be reported on the income statement

Removing an uncollectible account and its corresponding allowance from the accounting records is called ________.

a write-off

Unsold inventory is classified as a(n) ________ on the _________ _______.

asset; balance sheet

Boopsi Agin, the company's bookkeeper, recorded the purchase of merchandise on account with a debit to Cost of Goods Sold and a credit to Cash. As a result, _________.

assets are understated, stockholders' equity is understated, liabilities are understated

The estimated expense for accounts that may not be collected that is matched against revenue of the period is referred to as _______.

bad debt expense

ABC Corp. sells a product for $1,000 cash that cost $600. The journal entry for this transaction using a perpetual inventory system includes a debit to _______.

cash of $1,000 and credit to sales revenue of $1,000; a debit to cost of goods sold of $600 and a credit to inventory of $600

Independent Verification

compare perpetual records to periodic physical counts of inventory

Inventory is a _______ asset because it normally is used or converted into cash within one year or the next operating cycle.

current

Nim Com Soup, Inc. uses the allowance method to account for bad debt expense. It determines that a customer account of $10,00- should be written off as uncollectible. The write off of the account will include a ________.

debit Allowance for Doubtful Accounts

Probes, Inc. wrote down its inventory to the lower replacement value. The effect on Probes' accounting equation includes a(n) ______.

decrease in stockholders' equity; decrease in assets

Sales discounts should appear in the financial statements as a(n) ________.

deduction from sales

Outstanding checks written by the company should be a(n) _________ on the company's bank reconciliation.

deduction from the bank balance

The bank credited your account for a deposit that should have been deposited into another customer's bank account, not yours. This bank error should be a(n) ________ on a bank reconciliation.

deduction from the bank balance

Separate Duties

do not make one employee responsible for the accounting and handling of inventory

Percentage of credit sales:

estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses

Aging of accounts receivable:

estimates the allowance for doubtful accounts based on the age of each account receivable

A compnay had beginning inventory of 5 units that cost $10 each. During the month, 15 units were purchased for $11 each. The company sold 12 units during the month and has 8 remaining in ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be $5 ______ than if it had used LIFO.

greater

Accounts Receivable (Gross)

includes both collectible and uncollectible receivables

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its _______ and inventory on its _______.

income statement; balance sheet

Using a perpetual inventory system, the effect on the accounting equation of purchasing merchandise on account includes a(n) _________.

increase in assets; increase in liabilities

In a perpetual system, the ______ account is debited when a company purchases merchandise on account.

inventory

Items held for sale in the normal course of business are referred to as ______.

inventory

The definition of inventory includes which items?

items used currently in the production of goods to be sold; items currently in production for future sales; items held for resale

Restrict Access

limit the handling of inventory to authorized personnel only

Applying the lower of cost or market rule results in inventory being reported at the _________.

market value if lower than cost

Weighted average

matches the average cost of each unit of inventory with sales

Specific identification

matches the expense of a particular item made with the sale of that item

FIFO

matches the expense of the first item purchased with sales

LIFO

matches the expense of the last items purchased with sales

Gross profit is _______.

net sales minus cost of goods sold

A reader of financial statements determines when revenues are recognized by looking at the __________.

note to the financial statements called "Summary of Significant Accounting Policies"

FIFO uses the _______ cost for Cost of Goods Sold on the income statement and the _____ cost for Inventory on the balance sheet.

oldest; newest

In a perpetual inventory system, the journal entry to record the payment of cash for the shipping costs of purchased merchandise will cause ______.

one asset to increase and another asset to decrease

If a customer is offered a discount with sales terms of 2/10, n/30, the customer should ______.

pay within 10 days as long as it can borrow at an annual rate of less than 37%

The ________ inventory system requires that the inventory account be updated only at the end of the accounting period.

periodic

Under the _______ inventory system, the inventory account is updated every time inventory is bought, sold, or returned.

perpetual

The _______ inventory system records all inventory-related transactions in the inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale. The ________ inventory system uses separate accounts for these items and records cost of goods sold at the end of the accounting period.

perpetual; periodic

In accrual accounting, according to the revenue _________ principle, revenues should be recognized when the goods or services are transferred to the customer, not necessarily when cash is received.

recognition

Which of the following may occur with a higher inventory turnover ratio?

reduction in obsolescence; reduction in inventory storage costs

merchandising companies

sell goods that have been obtained from a supplier

Manufacturing companies

sell goods that they have made themselves

Service Companies

sell services rather than physical goods

On January 1, goods were picked up by a FedUp Delivery, Inc. The goods arrived at the customer's place of business on January 12. If the seller recorded the sale on January 1, then the terms must have been FOB ________.

shipping point

NSF checks from customers should be a(n) _________ on a bank reconciliation.

subtraction from the book balance

Allowance for Doubtful Accounts

the amount of receivables estimated to be uncollectible

Short-term highly liquid investments with a maturity of ___________ months or less that can be readily converted to cash with little risk of loss are classified as cash equivalents.

three

Bijoux Company uses a perpetual inventory system. Its bookkeeper properly recorded a $5,000 sale on account, but forgot to record the related cost of the sale of $3,000. As a result of this error, ________.

total assets will be too high; net income will be too high

What is the inventory costing method that ads together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory?

weighted average cost

The specific identification method ____________.

would be beneficial to a company that makes fine jewelry; matches each unit of inventory with its actual cost

Trade Accounts Receivable, net of allowances, will be found on the ________.

Balance Sheet

Income Statement

Amount earned during the accounting period

Balance Sheet

Amount not yet collected from customers at the end of the accounting period

Although there are some clear disadvantages associated with extending credit to customer, such as bad debt costs, most managers believe a particular advantage outweighs the costs. To which primary advantage do they refer?

Additional Sales Revenue

Which method for accounting for doubtful accounts is more accurate?

Aging of accounts receivable