accounting CHAP 4

Recording sales returns and allowances in a separate contra-revenue account helps managers:

keep track of the amounts

Managers who are entrusted with taking care of the assets of the company are referred to as ______ of the company's assets.

stewards

Independent financial statement audits are most commonly required of:

stock exchange listed companies

Since accounting numbers, such as the Allowance for Uncollectible Accounts balance, are based on estimates, financial statements are:

subject to inaccuracy

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

When the direct write-off method is used, an entry for bad debt expense is required

when the account receivable is determined to be uncollectible.

The financial statement effects of recording an allowance for estimated sales returns are that:

net income decreases assets decrease equity decreases

The term net accounts receivable refers to

accounts receivable less the allowance for uncollectible accounts.

Which of the following are common controls over cash receipts? (Select all that apply.)

opening mail daily and making a detailed list of checks received having two different employees take custody of the checks and make the deposit

operating activites outflow

payment of an accounts payable balance payment of salaries purchase of supplies with cash interest paid on notes payment of employee salaries payment of an accounts payable balance

Gammy Corporation provides services with a normal price of $800,000 and a trade discount of $100,000. Terms are 2/10, n/30 and the customers pay within 10 days. The net service revenue is

$686,000.

Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?

$93,000 ($100,000-7,000)

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

40.6 days Rationale: 365/receivables turnover = 40.6 days

The Sarbanes-Oxley Act requires auditors to retain work papers for ______ years.

7

Which method of accounting requires estimating bad debt expense and recording the expense in the same period as the related revenue?

Allowance method

Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

As a noncurrent asset

Which of the following responsibilities are separated in a good internal control system for cash disbursements?

Cash disbursement documentation and the accounting recording function. Check writing and check signing.

Amend Inc. debited Accounts Receivable and credited Allowance for Doubtful Accounts to reestablish an account previously written off. Amend Inc. should also debit _______ and credit _______.

Cash; Accounts Receivable

Who must personally certify the financial statements and company disclosures or risk financial penalties and criminal prosecution for fraudulent misstatements?

Corporate executives

What requirements for corporate accountability are included in the Sarbanes-Oxley Act?

Corporate executives may be criminally liable for fraudulent financial statements Corporate executives must personally certify the financial statements

Rollins Corp. purchases inventory by paying the supplier $1,000 with a credit card. Recording this transaction will require which of the following?

Credit accounts payable $1,000

When an account previously written off is collected in full, the entry to reverse the previous write-off would require which of the following?

Debit Accounts Receivable. Credit Allowance for Uncollectible Accounts.

Joyce Inc. sells $5,000 of goods to a customer. The customer pays with a VISA credit card. VISA charges a 3% fee on the sale. Recording the sale would include which of the following?

Debit Cash $4,850 Debit Service Fee Expense $150 Credit Sales $5,000

Claire provides $100 of services to customers on account with terms 2/10, n/30. The Service Revenue account is credited for $100. If the customer pays within 10 days, Claire will record which of the following?

Debit Cash $98 Credit Accounts Receivable $100 Debit Sales Discount $2

On March 5, Oak Corp. provided services on account to Pine. Oak initially recorded this as an account receivable but it later became apparent Pine could not pay quickly so Oak required Pine to sign a $100,000, 12%, 2-month interest-bearing note. The journal entry required by Oak when Pine signs the note includes

Debit Notes Receivable $100,000; credit Accounts Receivable $100,000.

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?`

Debit Sales Returns; credit Accounts Receivable.

Which of the following entries affect a company's cash flows?

Debit rend expense; credit cash Debit supplies; credit cash

Joyce Corp. uses the percentage-of-receivables method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?

Debit to Allowance for Uncollectible Accounts Credit to Accounts Receivable

Effective internal control over cash requires segregation of duties. Which of the following duties should be segregated?

Depositing checks into the bank and recording receipts in the accounting records Opening the mail and deposit of checks in the bank

Which method of accounting requires recognizing bad debt expense when it is determined that the customer cannot pay?

Direct write-off method

True or false: An internal control goal for cash receipts is to ensure that the business documents the correct amount of cash received and safely deposits the cash into its bank account.

False Rationale: Because cash is valuable, portable, and owned by the person who possesses it, special care must be taken to safeguard all cash receipts.

Why is it often easy for top level management to commit fraud?

Fewer internal controls may be in place at that level. Subordinates feel intimidated and may not report it. They can override the internal control system.

Control environment

Formal policies related to management's philosophy, assignment of responsibilities, and organizational structure

Risk assessment

Identifies and analyzes factors that could prevent objectives from being achieved

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

Monitoring

Includes formal procedures for reporting control deficiencies

What are the financial statement effects of recording bad debt expense using the allowance method?

Increase expenses Decrease assets

Which of the following are cash inflows from financing activities?

Issuance of common stock to investors Borrowing from another company and signing a promissory note sale of land sale of investments

Which information regarding the receivables turnover ratio is true?

It shows the number of times during a period that the average accounts receivable balance is collected. It provides an indication of a company's efficiency in collecting receivables.

Which of the following are classified as receivables?

Loans by a company to other entities Interest due from loans to customers Amounts owed by customers Tax refund claims Amounts loaned and expected to be repaid

The direct write-off method violates which accounting concept?

Matching expenses to the related revenues

Which of the following are components of internal control?

Monitoring Control Activities Control environment Risk assessment

A manager compares the monthly sales revenue to the amount forecasted. Which type of internal control is this?

Performance review

ABC Corp. received a 3-month, 8%, $1,500 note receivable on November 1. The adjustment for interest earned by December 31 will include a:

Rationale: $1,500 x 0.08 x (2/12) = $20; the time is 2/12 of the annual rate of 8%, not 2/3 of the 8% (12-month rate). credit to Interest Revenue of $20

Which of the following are cash outflows from financing activities?

Repay borrowing from bank Pay dividends

Which of the following may be disadvantages of extending credit to customers and relaxing collection policies?

Requires higher investment in receivables Increased bad debt

Under the Sarbanes-Oxley Act, who is responsible for the selection of a corporation's auditor?

The audit committee of the Board of Directors

Prague Company has sales of $1,000,000 each year, but the average collection period has increased from 45 days to 65 days. What are the most likely reasons for the change in average collection period?

The company has become more lax in its credit policies and is extending credit terms to maintain customers. Customers are not paying in a timely manner.

Which of the following occurs when petty cash is used to pay for an item?

The receipt or a voucher is placed in the petty cash fund.

The percentage-of-receivables method of estimating bad debt applies ____ to _____.

a single percentage; accounts receivable

The average accounts receivable balance is calculated by:

adding last year's and this year's ending balances of accounts receivable and dividing the sum by 2

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that (Select all that apply.)

all expenditures are authorized. all disbursements are made by check, debit card, or credit card. checks are signed by authorized individuals.

To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to

allowance for uncollectible accounts.

York Inc. records a year-end adjustment for estimated sales returns and allowances. As a result of this entry, York's financial statements will change as follows: (Select all that apply.)

assets decrease equity decreases

With the allowance method, bad debt expense is recorded

at the end of the period when bad debts are estimated.

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

average collection period receivable turnover ratio

The estimated expense for accounts that may not be collected is referred to as

bad debt expense.

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to

be more accurate

Flounder Corp. sold $12,000 of services on account. When Flounder collects on the account, the transaction will include a debit to

cash

A trade discount is a reduction from the list price, which is used to: (Select all that apply.)

change prices without publishing a new catalog give quantity discounts to customers disguise real prices from competitors

Credit card companies earn revenues from

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

Paying by check helps a business to control cash when the ______.

check is signed by an authorized manager checks are prenumbered and written sequentially

operating activites inflow

collection from customers receipt of interest

Which of the following items are classified as cash inflows from operating activities on the statement of cash flows?

collection of an accounts receivable interest received on notes receivable purchase of supplies with cash payment of employee salaries interest paid on notes interest received on notes receivable

Clancy Corp. establishes a petty cash fund for $200. The entry required is to

credit Cash (checking account) $200. debit Petty Cash $200.

Planters Corp. wrote off a customer's uncollectible account in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require a

credit to Allowance for Uncollectible Accounts.

The journal entry to record bad debt expense includes:

credit to allowance for uncollectible accounts debit to bad debt expense

On December 1, Melinda Corp. performed services on account to Norman. Melinda agreed to accept a 4-month interest-bearing note from Norman in payment for the services. Melinda has a December 31 year-end. On April 1, year 2, when the note matures, Melinda's journal entry will include: (Select all that apply.)

credit to interest receivable debit to cash credit to interest revenue

On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. Light has a December 31 year-end. The entry required on Light's books for interest on April 1 when the note is due requires (Select those that are correct.)

credit to interest revenue, $2,000 debit to cash $4,000 credit to interest receivable, $2,000.

Shannon Corp. uses the aging method to account for bad debt expense. Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include

debit Allowance for Uncollectible Accounts.

Night Corporation establishes a petty cash account for $200. During the month, Night used petty cash to purchase postage for $50 and supplies for $100. At the end of the month, Night recognizes the related expense and replenishes petty cash. The journal entry to replenish petty cash is:

debit Petty Cash $150 credit Cash (checking account) $150

At the beginning of February, Neumann established a petty cash fund. During the month, the petty cash custodian disbursed $105 for small deliveries. At the end of the month, Neumann should:

debit delivery expense credit petty cash

Albert Corp. received a 2-month, 8%, $1,500 note receivable on December 1. The adjustment for interest earned by December 31 will include a:

debit to Interest Receivable of $10

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a

debit to Notes Receivable, $40,000.

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip initially recorded this as an account receivable but it later became apparent Daffodil could not pay quickly so Tulip required Daffodil to sign $40,000, 10%, 3-month interest-bearing note. The entry required on Tulip's books when Daffodil signs the note would include a

debit to Notes Receivable, $40,000.

Abby Fashions sells a suit to a customer for $600 on account. The day after the sale, the customer discovers that the jacket has a small stain on the back. Abby Fashions grants the customer a $60 credit. Abby Fashions will record:

debit to Sales Allowances $60 credit to accounts receivable $60

Adrian Corp. sells goods on account for $100,000 on May 1. The customer paid for the goods on May 10. On May 15, the customer returns $40,000 of the merchandise. The entry Adrian makes on May 15 will include the following: (Select all that apply.)

debit to Sales Returns credit to Cash

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

decrease in Accounts Receivable

Recording bad debt expense: (Select all that apply.)

decreases assets increases expenses decreases net income

A sales allowance ____ the amount owed by the customer for merchandise that is _____ by the customer.

decreases; retained

The Committee of Sponsoring Organizations (COSO) of the Treadway Commission provided a framework for

designing an internal control system.

Controls designed to find errors or fraud that have occurred are referred to as _____ controls.

detective

The Accounts Receivable account is reduced when the seller:

determines that a specific customer account will not be collectible

"Net credit sales" refers to credit sales net of:

discounts returns allowances

The receivables turnover ratio and the average collection period provide information about a company's

effectiveness in managing receivables

The two reasons why companies may issue incorrect financial statements are fraud and

errors

At the beginning of the year, Gerta Company's allowance account has a credit balance of $10,000. This may indicate that the

estimate of uncollectible accounts was too high.

At the beginning of the year, Blocker Company's allowance account has a debit balance of $10,000. This may indicate that the

estimate of uncollectible accounts was too low.

True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

false

True or false: Employee purchases using cash or purchase cards must be recorded immediately as business expense.

false

, Published financial statements may be incorrect because of

fraud, errors

Which of the following may be the result of extending payment periods?

greater required investment in receivables increased gross sales

What comparative advantages do notes receivables possess compared to other receivables? (Select all that apply.)

higher likelihood of collectibility interest-bearing

Separation of duties requires that

individuals who have physical responsibility for assets should not have access to accounting records.

On November 1, Pepper Corp. sold goods on account to Salt. Pepper agreed to accept a 3-month interest-bearing note from Salt in payment for the goods. Pepper has a December 31 year-end. On February 1, year 2, when the note matures, Pepper's journal entry will include credits to: (Select all that apply.)

interest receivable notes receivable interest revenue

The control environment is most affected by the attitudes and actions of

management

A potential disadvantage of the allowance method is that it:\

may be used to manage earnings

The most common source of occupational fraud is:

misuse of company resources

The three elements present in the fraud triangle are:

motive, opportunity, rationalization

The sum of net cash flows from operating, investings, and financing activities reported in the statement of cash flows represents the:

net increase or decrease in cash during the year

Receivables not expected to be collected should

not be counted in assets of the company.

Separation of duties and E-commerce controls are examples of ______ controls.

preventive

Two types of control activities are

preventive and detective controls.

Which of the following are cash outflows from investing activities?

purchase of building purchase of long-term investments purchase of land Pay dividends Repay borrowing from bank

A good internal control system for cash would require that those who handle cash should not be involved with

reconciliation of bank balances. the accounting records.

Important internal control procedures for employee purchases include:

reconciliation of credit card statements clear rules for purchase authorization predetermined spending limits for employees separation of duties

A good internal control system would require that the employee who handles cash must not be involved in

reconciling the bank statement. the accounting records

At the end of the year, Kunze Corporation estimates that $1,600 worth of merchandise sold during the current year will be returned by customers during the subsequent year. Kunze Corporation must

record the estimated returns at the end of the year.

The key provisions of the Sarbanes-Oxley Act include

requiring that corporate executives certify financial statements. restricting activities of auditors to prevent conflicts of interest. requiring documentation and assessing effectiveness of internal controls.

Internal control consists of plans to

safeguard company assets. provide accurate and reliable accounting information.

Which of the following cash transactions are classified as cash inflows from investing activities?

sale of investments sale of land Issuing stock to investors for cash sale of building sale of equipment

A high ratio of allowance for uncollectible accounts to total accounts receivable can indicate:

the company extends too much credit the company's customers are high-risk

Section 404 of the Sarbanes Oxley Act requires management and auditors to document and assess

the company's internal control procedures.

Under the Sarbanes-Oxley Act, corporate management is responsible for

the financial statements. internal control.

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

Companies commonly restrict cash for which of the following reasons?

to finance a major purchase of equipment to have cash available for future investment opportunities to pay off a large loan when due

True or false: An internal control goal for cash receipts is to ensure that the business documents the correct amount of cash received and safely deposits the cash into its bank account.

true

Which of the following are detective controls?

Performance reviews Audits Reconciliations

Which of the following are preventive controls?

Physical controls Separation of duties

Control activities

Policies and procedures that help ensure management's directives are being carried out

On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. Orange has a December 31 year-end. On February 1, year 2, when the note matures, the journal entry will include a

credit to interest revenue, $400.

The direct write-off method is required for

income tax purposes overstates assets in the prior year overstates net income in the prior year

On March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?

Debit Notes Receivable $100,000; credit Service Revenue $100,000.

Bell provides $500 of services to customers on account with terms 3/10, n/30. The Service Revenue account is credited for $500. If the customer pays within 10 days, Bell will record which of the following?

Debit Sales Discount $15