Accounting Exam #3 Practice

A receivable means what?

An amount due to be collected

Debit Memo

Bank statement listing items that decrease the amount in a depositors account

Credit Memo

Bank statement listing items that increase the amount in a depositors account

Establish Responsibility

One person, one task

Under the allowance method, writing off an uncollectible account

Only affects the balance sheet eq

Documentation

Paper trail - ex: receipts, pre numbered documents

Human Resource Controls

Personal policies - ex: vacation time

Independent Internal Verification

Reconciliation- company recorded information with supporting documentation

What are the objectives of internal control?

Reduce risk of errors (not intentional) and irregularities (intentional)

Under the direct write off method, writing off an uncollectible account will result in what?

Results in a decrease in stockholder's equity

Physical Control

Safegaurding of assets - ex: password on a computer

Does the Allowance Method Comply with GAAP?

Yes! It uses the Allowance for Doubtful Accounts contra asset account

Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a balance of $5,000 before adjustment. What is the balance of the allowance account after adjustment?

$12,000

RyTronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $100,000 at year-end and the total credit sales were $800,000. Management estimates that 4% of receivables will be uncollectible. What amount of bad debt expense will be recorded if the Allowance for Doubtful Accounts has a balance of $800 before adjustment?

$3200

Sales revenue totals $10,000. Sales returns and allowances are $500 and sales discounts are $1,000. How much is net sales?

$8,500

Accounts Receivable

- Amounts owed by customers - Results from a sale of goods and services - Collected in 30-60 days

Notes Receivable

- Represent claims for which formal instruments of credit are issued as evidence of debt - Credit instrument normally requires payment of interest, due in 60-90 days - May result in sale goods and services (Trade Receivables)

Net income is $15,000, operating expenses are $20,000, net sales total $75,000, and sales revenues total $95,000. How much is the profit margin?

20%

Unadjusted Cash Balance Per Books

ADDS Collection of Notes, Interest, ect SUBTRACTS NFS Checks, Bank Service Charges, ect

Unajusted Cash Balance Per Bank

ADDS Deposits in Transit SUBTRACTS Outgoing Checks

Cash Receipts Journal

Company log of incoming checks/deposits

Cash Payments Journal

Company log of outgoing checks/deposits

The account Allowance for Doubtful Accounts is classified as a

Contra asset to accounts receivable

Cost of Goods Sold

Cost of Goods Available for Sale (TOTAL) - Ending Inventory

Ending Inventory and Net Income have a __________________ relationship

DIRECT

Net Income and Income Tax have a ______________________ relationship

DIRECT

If a company uses the allowance method for uncollectible accounts, a write-off of $800 will

Decrease AFDA $800 AFDA is a contra asset!!!!!!!!!!!!!

Segregation of Duties

Different individuals should be responsible for related activities

Does Direct Write Off Method Comply with GAAP?

No, it doesn't comply with the matching principle

Gross Profit Rate

Gross Profit/Net Sales

Deflation will make LIFO's ending inventory...

Highest Ending Inventory

Inflation will make FIFO's ending inventory the...

Highest ending inventory

Deflation will make LIFO's net income the...

Highest net income

Inflation will make FIFO's net income the...

Highest net income

Cost of Goods Sold and Net Income have a __________________ relationship

INVERSE

Smith Company pays for goods purchased on account by correctly writing a check for its supplier for $626. The bank correctly records the $626 check. If the company incorrectly records the check as $662 in its cash payments journal, Smith's bank reconciliation will include:

Increase if $36 in cash balance per books

Deflation will make FIFO's ending inventory...

Lowest ending inventory

Inflation will make LIFO's ending inventory the...

Lowest ending inventory

Deflation will make FIFO's net income the...

Lowest net income

Inflation will make LIFO's net income the...

Lowest net income

What is internal control?

Methods and measures used to: - safeguard assets from theft and unauthorized use - enhance accuracy and reliability of accounting records

Profit Margin

Net Income/Net Sales

Gross Profit

Net Sales - Cost of Goods Sold

Bad Debt Expense is reported on the income statement as

an operating expense.

When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is increased when

management estimates the amount of uncollectibles.

The Allowance for Doubtful Accounts is necessary because

when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay.