Accounting exam 2 study guide

True

Accounts reported on the balance sheet that are carried forward from year to year are known as permanent accounts.

False

All companies must use a calendar year as their fiscal year.

True

All income statement accounts will be closed at the end of the period.

True

Any twelve month accounting period adopted by a company is known as its fiscal year.

False

As we compare a merchandising business to a service business, the financial statement that changes the most is the balance sheet.

False

Because many companies use computerized accounting systems, periodic inventory is widely used.

False

Cash and any other assets that may reasonably be expected to be realized in cash, sold, or consumed through the normal operations of a business, usually longer than one year, are called current assets.

False

Cost of goods sold is the amount that the merchandising company pays for the merchandise it intends to sell.

True

During periods of increasing costs, the use of FIFO method of costing inventory will result in a greater amount of net income than would result from the use of LIFO cost method.

False

Entries required to close the balances of the temporary accounts at the end of the period are called final entries.

True

FIFO is the inventory costing method that follows the physical flow of the goods.

True

FOB stands for free on board.

True

Freight-in is considered a cost of purchasing inventory.

False

Freight-in is the amount paid by the company to deliver merchandise sold to a customer.

False

If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.

False

If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination.

True

If the perpetual inventory system is used, the inventory account is debited for purchases of merchandise.

False

In a merchandising business, sales minus operating expenses equals net income.

False

In a multiple-step income statement, the dollar amount for income from operations is always the same as net income.

False

In the merchandising income statement, sales will be reduced by administrative expenses to arrive at operating income.

True

In valuing merchandise for inventory purposes, not realizable value is the estimated selling price less any direct costs of disposal.

True

Income that CANNOT be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Revenue on the multiple- step income statement.

True

Inventory normally has a debit balance.

False

It is not necessary to post the closing entries to the general ledger.

False

Journalizing and posting closing entries must be completed before financial statements can be prepared.

True

Journalizing and posting the adjustments and closing entries updates the ledger for the new accounting period.

True

Liabilities that will be due within one year or less and that are to be paid out of current assets are called current liabilites

False

Most companies will NOT take a purchase discount, because 1% or 2% are insignificant.

True

Of the 3 widely used inventory costing methods(FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first.

True

On the income statement in the single- step form, the total of all expenses is deducted from the total of all revenues.

True

One negative effect of carrying too much inventory is risk that customers will change their buying habits.

True

One of the two internal control procedures over inventory is to properly report inventory on the financial statements.

True

Other revenue and expenses are items that are not related to the primary operating activity.

True

Prepaid insurance is an example of a current asset.

True.

Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point.

True

Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer.

False

Sales to customers who use bank credit cards, such as Mastercard and VISA, are generally treated as credit sales.

True

Service businesses provide services for income, while a merchandising business sells merchandise.

True

The 3 inventory costing methods will normally each yield different amounts of net income.

True

The balance sheet accounts are referred to as real or permanent accounts.

True

The chart of accounts for a merchandising business would include an account called Delivery Expense.

False

The choice of an inventory costing method has no significant impact on the financial statements.

True

The closing process is sometimes referred to as closing the books

False

The cost of inventory is limited to the purchase price less any purchase discounts.

True

The fees associated with credit card sales are periodically recorded as expenses.

True

The income summary account is closed to the retained earnings account.

True

The last step of the accounting cycle is prepare a post closing trial balance.

True

The lower of cost or market is a method of inventory valuation.

True

The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item by item, by major classification of inventory, or by the total inventory.

True

The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements.

True

The most important output of the accounting cycle is the financial statements.

True

The seller may prepay the freight costs even though the terms are FOB shipping point.

False

The trial balance prepared after all the closing entries have been posted is called a pre-closing trial balance.

False

The usual presentation of the retained earnings statement is 1.) Beginning balance, 2.) Net income or loss 3.) Dividends 4.) stockholders' contributions 5.) ending balance

False

There is really no benefit in preparing financial statements in any particular order.

False

Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business.

True

Under a periodic inventory system, the cost of inventory on hand at the end of the accounting period is determined by a physical count of the inventory.

True

Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the goods sold.

False

Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to record the purchase will include a debit to Cash and a credit to Sales.

True

Under the perpetual inventory system, when a sale is made, both the sale and cost of goods sold are recorded.

True

When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.

True

When inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown.

True

When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.

False

When using the FIFO inventory method, the most recent costs are assigned to the cost of goods sold.

True

A perpetual inventory system is an effective means of control over inventory.

False

A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of $750.

True

A sales discount encourages customers to pay accounts more quickly than if a discount were not available.

False

"Market" as used in the phrase "lower cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by the company.

False

A business using the perpetual inventory system, with its detailed subsidiary records, does NOT need to take a physical inventory.

False

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the sales discount.

True

A consignor who has goods out on consignment with an agent should be include the goods in ending inventory even though the are not in the possession of the consignor.