Accounting exam 2

If a company declares and pays a dividend during the year, this will: decrease the company's net profit margin. increase the company's debt-to-assets ratio. decrease the company's inventory turnover ratio.

B. ii only

Sysco Company purchased $4,000 worth of merchandise, FOB shipping point, under the periodic method. Transportation costs were an additional $350. The company later returned $750 worth of merchandise and paid the invoice within the 2% cash discount period. The total amount paid for this merchandise is: A) $3,535 B) $3,520 C) $4,263 D) $3,528

Answer: A Discount = (4,000 - 750) x 2% = 65 Amt paid = 4,000 - 750 - 65 + 350 (shipping) = 3,535

45. Which of the following statements regarding methods of accounting for bad debts is true? A. When the allowance method is used, the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet. B. The two methods of accounting for bad debts that are acceptable under GAAP are the allowance method and the direct write-off method. C. When the allowance method is used, if actual results differ from the estimates, the prior year financial statements must be corrected. D.When the allowance method is used, bad debt expense is equal to the write-offs that occurred during the period.

Answer: A Only the allowance method of accounting for bad debts is acceptable under GAAP. When the allowance method is used, write-offs reduce both the allowance for doubtful accounts and accounts receivable, resulting in no change in the amount of net accounts receivable on the balance sheet. The estimated bad debt expense is not equal to the write-offs of the period, and if actual results differ from the estimate, prior year financial statements are not corrected.

In accounting for credit losses: A) The allowance method matches losses with related sales better than the direct write-off method. B) The direct write-off method involves estimating credit losses. C) The direct write-off method consistently understates assets on the balance sheet. D) Both (B) and (C).

Answer: A: The allowance method matches the bad debt expenses better with the revenue generated from the sales that led to the bad debt expenses. That is why GAAP requires the allowance method. The direct write-off method does not require any estimations. Actual amounts are written off. The direct write-off method does not understate or overstate assets.

Which of the following would you add to the balance per general ledger to arrive at the reconciled cash balance in a bank reconciliation? A) Bank service charge B) Collection of a note by bank C) "NSF" checks D) Deposits in transit E) None of the above

Answer: B Bank service charge is subtracted from the cash balance in the Gen Ledger. Collection of a note by the bank (bank collected the money on your behalf, but since you did not know about it, you have not recorded it), will be added to the cash balance in the general ledger. NSF checks were added to the cash balance, but the bank informed you that they were not cashed. So, they must be subtracted from the cash balance in the gen ledger. Deposits in transit are deposits which you have added to the cash a/c in the gen ledger, but they have not yet been recorded by the bank. So, they must be added to the bank a/c balance.

Smith Company purchases $60,000 of inventory during the period and sells $18,000 of it for $30,000. Beginning of the period inventory was $3,000. What is the company's inventory balance to be reported on its balance sheet at year end? A) $18,000 B) $ 2,000 C) $45,000 D) $ 3,000

Answer: C Rationale: BI + Purch = CoGAS = CoGS + EI ➔ $3,000 + 60,000 - $18,000 = $45,000

Assuming rising prices, which method will give the highest dollar value for cost of goods sold on the income statement? A) FIFO B) Average Cost C) LIFO D) All of these give equal values for cost of goods sold

Answer: C Rationale: Under LIFO, the most costly units are the ones last purchased. LIFO matches these higher cost items against sales as cost of goods sold.

. Which of the following is not a commonly used internal control? A. Mandatory vacations. B. Anonymous hotlines. C. Segregation of duties. D. Sales generation duties.

Answer: D Mandatory vacations, anonymous hotlines, job rotation, and segregating duties are commonly used internal controls.

The Grass is Greener Corporation uses the allowance method and learns that a customer who owes $500 has gone bankrupt and payment will not be made. The Grass is Greener Corporation should A. debit Bad Debt Expense and credit Accounts Receivable for $500. B. debit Bad Debt Expense and credit Cash for $500. C. debit Accounts Receivable and credit Bad Debt Expense for $500. D. debit the Allowance for Doubtful Accounts and credit Accounts Receivable for $500.

D. debit the Allowance for Doubtful Accounts and credit Accounts Receivable for $500.

Your company has 100 units in inventory, purchased at $20 per unit, that could be replaced for $15. i. The company should credit cost of goods sold for $500. ii. The company should debit cost of goods sold for $500. iii. The company should credit inventory for $500.

D. ii & iii only

Which of the following statements are true? I. The use of internal controls guarantees protection against losses due to fraud, errors, and inefficiencies. II. A highly effective internal control should not be implemented if the cost is greater than the benefit. III. Internal controls include the policies and procedures a company implements to protect against theft of assets, to promote efficiency, and to ensure compliance with laws and regulations. A. Ionly B.IIonly C.I&IIonly D.ii&IIIonly

Answer D. Effective internal controls help to create an ethical business environment, safeguard assets, ensure that all necessary regulatory and internal policies and procedures are being followed, and to improve financial performance. An adequate internal control system, makes fraud difficult, but does not guarantee that losses will not occur. Cost-benefit analysis is employed by an organization in determining the internal control procedures to implement.

Benson Company uses the periodic inventory system. Sales for 2013 were $470,000 while operating expenses were $175,000. Beginning and ending inventories for 2013 were $70,000 and $60,000, respectively. Net purchases were $180,000 while freight in was $15,000. The net income or loss for 2013 was: A) $90,000 net income B) $30,000 net income C) $10,000 net income D) $30,000 net loss E) None of the above

Answer: A BI + Purch + Other Expenses with bringing the inventory to the warehouse = CoGS + EI Rationale: $470,000 [Rev] - ($70,000 [BI]+ $180,000 [Purch] + $15,000 [Freight] - $60,000 [EI]) - $175,000 [Op Exp] = $90,000 net income. Note: the yellow highlight represents the CoGS calculation

Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method? A) Increasing sales prices B) Buying extra inventory near the end of the year in an inflationary environment C) Allowing the inventory quantity at year end to fall below beginning year levels D) None of these. All would cause increasing taxes

Answer: B Rationale: LIFO transfers the cost of the most recent purchases to cost of goods sold. These recent purchases are likely to be higher than the cost of earlier purchases, causing income taxes to be lower. Buying extra inventory at year end with a higher cost would cause a lowering of taxes since these units would be part of cost of goods sold.

Which of the following is desirable in a good system of internal accounting control? A) Responsibility and authority for a given function should be shared among several employees B) Appropriate forms, such as checks and sales invoices, should have preprinted control numbers C) All accounting personnel in a firm should be bonded D) To obtain the benefit of specialization, employees should not be rotated among similar jobs E) None of the above

Answer: B Rationale: Responsibility and Authority for a function should be with one person. That way, the person can be accountable. If several people are responsible, they can pass the buck around. Having pre-printed numbers is a good control feature, since missing documents can easily be identified. 'Bonded' means the personnel sing an agreement (or puts the money up front), so that if there is any error or fraud, the company recovers that money from the employees' personal assets. This is demotivating for the employees, and reduces the pool of potential employees. This is not recommended. By rotating employees around, a new employee carrying out the tasks of the old employee will be able to identify errors or fraud that may have been committed. So, rotation is an important control feature. Therefore, the answer is B.

In reconciling the July bank statement, the vice president discovered that the bookkeeper had recorded a check written for $353 as $533 in the cash disbursements journal. For the bank reconciliation, the $180 error should be: A) Added to balance per bank statement B) Added to balance per general ledger C) Deducted from balance per bank statement D) Deducted from balance per general ledger E) None of the above

Answer: B The book keeper has overstated a check written by the firm. So, $533 was subtracted from the cash balance, instead of the correct figure of $353. This means $180 extra was subtracted from the cash balance. To correct it, this amount should be added back to the cash balance.

Phoenix Corporation uses the periodic inventory method. On March 1, it purchased $30,000 of merchandise inventory, terms 2/10, n/30. On March 3, Phoenix returned goods (not damaged) that cost $3,000. On March 9, Phoenix paid the supplier. On March 9, Phoenix should credit: A) Purchase discounts for $600 B) Inventory for $600 C) Purchase discounts for $540 D) Merchandise inventory for $540

Answer: C 2/10; n/30 means the buyer is entitled to a discount of 2% if paid within 10 days. The entire amount is due in 30 days. The payment occurred within the 10 day interval; thus the buyer is entitled to the 2% discount. Note that the discount will apply only to the outstanding amount (purchase less returns). Discount = [Purchase less Returns] x 2% = [30k - 3k] x 2% = 540.

Procedures requiring that the recording of asset transactions be separated from the custody of those assets: A) Will uncover collusion among employees B) Are important only in very large businesses C) Are especially important in handling cash D) Make it easy for an employee to cover up the theft of an asset E) None of the above

Answer: C C is definitely correct, since strict controls with strict segregation of duties is necessary for cash controls. While separation of duties may not uncover collusion, it could prevent collusion. In small firms, while separation of duties maybe desirable, it is impossible to find many employees to perform the segregated tasks.

Which of the following situations would cause the balance per bank to be more than the balance per books? A. Deposits in transit. B. Service charges. C. Outstanding checks. D. Checks from customers returned as NSF.

Answer: C The balance per the bank would be greater than the balance per the books if the books did not reflect cash receipts that were recorded by the bank, or if the balance per the books reflected deductions such as outstanding checks that were not yet recorded by the bank. Deposits in transit should be added to the bank balance. Service charges should be subtracted from the Gen Ledger cash balance. Outstanding checks should be subtracted from the bank balance. Till this correction is made, the bank balance will be higher than the balance in the cash a/c of the gen ledger. NSF checks should be subtracted from the cash bal in the gen ledger.

If a company fails to make an adjusting entry to estimate uncollectible accounts, then this error: A) Understates owners' equity B) Understates assets C) Overstates net income D) Overstates expenses E) Does none of the above

Answer: C The firm fails to record the estimate. This means the firm fails to record an estimated bad debt expense for the period. This understates expenses, overstates net income and therefore, overstates retained earnings.

Which of the following is not true for a retailer using perpetual inventory system? A) When merchandise is purchased FOB shipping point, the buyer assumes the risk of any damage in transit. B) After a physical inventory count, the retailer credits the Inventory account for any missing inventory. C) When the retailer returns defective merchandise to the manufacturer, they credit Purchase Returns. D) The Cost of Goods Sold account is closed at the end of the year with a debit to Income Summary.

Answer: C & D FOB Shipping point means the buyer assumes ownership at the seller's premises. FOB destination means the buyer assumes ownership when the goods reach the buyers premises. If there is missing inventory, the inventory a/c needs to be reduced by the missing amount, so Inventory a/c is debited, and CoGS (or inventory exp) is credited. With the perpetual inventory system, the purchase entry is reversed to record purchase returns. Thus, A/c Payable (or Cash) or debited, and Inventory is credited. 'C' is correct. CoGS is closed by crediting the CoGS a/c and Dr the Income summary, so 'D' is correct as well.

Under the allowance method of accounting for credit losses, the entry to write off a specific account: A) Will increase total assets. B) Debits Bad Debts Expense and credits Allowance for Uncollectible Accounts. C) Is the same as the entry to write off a specific account under the direct write-off method. D) Does not affect net income or total assets. E) None of the above

Answer: D Entry to write off a specific bad debt is Dr to Allow for DD debt and Cr to A/c Rec. This will reduce both A/c Rec and the Allowance for DD. Since Net A/c Rec is A/c Rec less Allow for DD, writing off a specific bad debt will not have an impact on Net A/c Receivables. Thus, Net Income, Retained Earnings and

Which of the following does not occur when a company receives additional information that requires it to increase its expectations of uncollectible accounts receivable? A) Accounts receivable (net) is reduced B) Bad debts expense is increased C) Net income is reduced D) The allowance account is decreased

Answer: D Rationale: The allowance account is increased, resulting in additional expense and a reduction of profit and retained earnings. Also, when the allowance for DD is increased, A/c Rec net (A/c Rec - Allowance for DD) is reduced.

In establishing an effective internal control structure, management should: A) Establish a good control environment. B) Provide an effective accounting system. C) Integrate control procedures into the control environment and accounting system. D) All of the above. E) None of the above

Answer: D Rationale: To have good internal controls, establishing a good control environment, providing an effective accounting system, and integrating control procedures to all aspects of the organization are important attributes.

In reconciling the May bank statement, the vice president discovered that the bookkeeper had recorded a check received for $219 as $291 in the cash disbursements journal. For the bank reconciliation, the $72 error should be: A) Added to balance per bank statement B) Added to balance per general ledger C) Deducted from balance per bank statement D) Deducted from balance per general ledger

Answer: D The book keeper has overstated a check received by the firm. So, $591 was added to the cash balance by mistake, when the correct amount should have been $219. This means $72 extra was added to the cash balance. To correct it, this amount should be subtracted from the cash balance.

If a company fails to make an adjusting entry to accrue interest on a note receivable, then this error: A) Overstates expenses D) Understates owners' equity B) Understates income E) All of these except A C) Understates assets

Answer: E If interest income earned is not accrued (this means interest income was earned, but not recorded), then revenue is understated, net income is understated and therefore, retained earnings and owners equity is understated. Similarly, interest receivable (an asset) would not have been recorded, and therefore, assets would be understated.

Merchandise was sold on credit for $4,000, terms 1/10, n/30. How should the seller record the cash collection? A. Debit Cash, $4,000, credit Accounts Receivable, $3,960, and credit Sales Discounts, $40, if collected after the discount period. B. Debit Cash, $4,000, and credit Accounts Receivable, $4,000, if collected after the discount period. C. Debit Cash, $4,000, and credit Accounts .Receivable, $4,000, if collected within the discount period. D. Debit Cash, $4,000, credit Accounts Receivable, $3,960, and credit Sales Discounts, $40, if collected within the discount period

B. Debit Cash, $4,000, and credit Accounts Receivable, $4,000, if collected after the discount period.

Which of the following would overstate a companies income? A. Counting shipments of customers' orders as revenue before payment has been received. B. Shipping goods to customers without receiving orders from those customers, and recording the transactions as revenue. C. Accruing liabilities for marketing expenses before they are incurred. D. Making an accrual adjusting entry for interest earned on a bond investment

B. Shipping goods to customers without receiving orders from those customers, and recording the transactions as revenue.

A company's sales revenue decreases. Average total assets and net income are unchanged. The company's A. net profit margin and asset turnover both rise. B. net profit margin rises and its asset turnover falls. C. net profit margin and asset turnover ratio both fall. D. net profit margin falls and its asset turnover ratio rises.

B. net profit margin rises and its asset turnover falls.

A $15,000 overstatement of the 2014 ending inventory was discovered after the financial statements for the year were prepared. How would that inventory error impact the 2014 financial statements? A. Current assets were overstated and net income was understated. B. Current assets were understated and net income was understated. C. Current assets were overstated and net income was overstated. D. Current assets were understated and net income was overstated.

C. Current assets were overstated and net income was overstated.

Which of the following statements regarding inventory costing methods is true? A. International Financial Reporting Standards (IFRS) allow the use of LIFO but not FIFO. B. In the U.S., if a company uses LIFO on the income tax return, it may use a different method for financial reporting. C. The LIFO method assumes that the costs for the newest goods (the last ones in) are used first and the older costs are left in ending inventory. D. During a period of rising prices, LIFO results in a higher income tax expense than does FIFO.

C. The LIFO method assumes that the costs for the newest goods (the last ones in) are used first and the older costs are left in ending inventory.

Which of the following statements regarding methods of accounting for bad debts is true? A. The two methods of accounting for bad debts that are acceptable under GAAP are the allowance method and the direct write-off method. B. When the allowance method is used, if actual results differ from the estimates, the prior year financial statements must be corrected. C. When the allowance method is used, the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet. D. When the allowance method is used, bad debt expense is equal to the write-offs that occurred during the period.

C. When the allowance method is used, the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet.

A company lends its supplier $200,000 for 3 years at a 12% annual interest rate. Interest payments are to be made twice a year. The company initially records the transaction by: A. debiting Cash for $24,000 and crediting Interest Revenue for $24,000. B. debiting Cash for $200,000 and crediting Notes Payable for $200,000. C. debiting Notes Receivable for $200,000 and crediting Cash for $200,000. D. debiting Interest Receivable for $72,000 and crediting Interest Revenue for $72,000.

C. debiting Notes Receivable for $200,000 and crediting Cash for $200,000.

Which one of the following statements regarding sales discounts is true? i. If a company offers a discount to encourage prompt payment and the discount is taken, the discount reduces the amount of Net Sales. ii. Credit terms of "2/10, n/30" mean that if payment is made within 10 days, a 2% discount may be taken; if not paid within 10 days, the full invoice price will be due in thirty days. iii. The terms "sales discounts" and "sales credits" are used interchangeably by a company.

C. i and ii only

A company has net income of $148,000 and a net profit margin ratio of .087. Which of the following is not a true statement? A. A net profit margin ratio of .087 means that 8.7 cents of profit or net income is made for each dollar of sales. B. The amount of sales revenue for this period is $1,700,000 (rounded to the nearest hundred thousand). C. A higher net profit margin ratio this year than last year indicates an improvement in controlling expenses. D. If income from operations is less than net income, this means that the company had no non- operating revenue.

D. If income from operations is less than net income, this means that the company had no non- operating revenue.

When preparing this month's bank reconciliation, you find that you failed to record a $200 deposit for a payment you received from a customer. You immediately prepare a journal entry to record the deposit. Which of the following describes the actions to be taken when preparing next month's bank reconciliation? A. You must decrease the balance per bank by $200. B. You must increase the balance per bank by $200. C. You must increase the balance per books by $200. D. No further action is necessary.

D. No further action is necessary.

Fraud investigators identify three things that must exist for accounting fraud to occur. Which of the following is/are elements of the fraud triangle? The incentive to commit fraud. The lack of a business Code of Ethics. The opportunity to commit fraud.

D. i & iii only

Which of the following statements is true? i. When unit costs are steadily rising or falling, the weighted average cost method yields a cost of goods sold between that of FIFO and LIFO. ii. FIFO will lead to the highest net income if unit costs are falling. iii. LIFO will always yield a smaller net income than FIFO under inflationary conditions.

D. i & iii only

Which of the following is a true statement? A. Sales discounts is a contra-asset account. B. Sales returns & allowances will reduce the sales revenue, that will be shown in the income statement. C. Sales returns & allowances is a contra-revenue account.

D. ii & iii only

A store holding a "50% off" sale will probably experience ______________ gross profit than usual and _______________ sales volume. A. lower; higher B. higher; higher C. lower; lower D. higher; lower

A. lower; higher

If an uncollectible account, previously written off, is recovered: A. net accounts receivable stays the same. B. net accounts receivable increases. C. net accounts receivable decreases. D. total revenues increase.

A. net accounts receivable stays the same.

Which of the following statements regarding inventory costing methods is true? A. The LIFO method assumes that the costs for the newest goods (the last ones in) are used first and the older costs are left in ending inventory. B. During a period of rising prices, LIFO results in a higher income tax expense than does FIFO. C. International Financial Reporting Standards (IFRS) allow the use of LIFO but not FIFO. D. In the U.S., if a company uses LIFO on the income tax return, it may use a different method for financial reporting.

Answer : A If LIFO is used on the tax return, it must also be used for financial statements (LIFO Conformity Rule). When costs are rising, cost of goods sold will be higher if LIFO is used as compared to FIFO and this will lower net income and income tax expense. IFRS does not allow the use of LIFO.

An adjustment to ending inventory under the lower of cost or market (LCM) rule would be least likely to be recorded by a company that sells: i. A household staple like laundry detergent. ii. Kitchen items like paper towels. iii. Seasonal items like snow blowers.

C. i and ii only

On August 1, Thomas & Sons bought goods with a list price of $4,800, terms 2/10, n/30. The firm records purchases at invoice price, using the periodic inventory system. On August 5, Thomas returned goods with a list price of $600 for credit. If Thomas paid the supplier the amount due on August 9, the appropriate entry would be:

With the periodic system, purchase discounts are credited to the Purchase Discount A/c. After the returns, the amount outstanding was (4,800 - 600) = 4,200. The discount is on this amount. Therefore, the discount = 4,200 x 2% = $84. A/c Payable is debited 4,200, Cash is credited $4,116, and Purchase Disc credited $84.