ACCT 5315 Exam 1

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable for the inventory purchased in Event 1. (4) Sold inventory purchased in Event 1 for $5,000 to customers on account. At the end of the first accounting period what would be reported for net operating cash flow on the statement of cash flows?

$(4,000) Only Event 3 affects cash flow. The account payable is $4,000 ($5,000 original cost − $1,000 purchase return) and is paid in cash. Therefore, net operating cash flow is $(4,000). Event 4 does not affect cash because the inventory was sold on account to customers.

Escrow Company's multistep income statement shows cost of goods sold of $60,000, a gross margin of $42,000, operating income of $12,000 and a $20,000 loss on the sale of land. Based on this information, the net income or (net loss) amounted to

$(8,000). On a multistep income statement, net income would be determined by subtracting the loss on the sale of land from the operating income. In this case, since the amount of the loss on the sale of the land is greater than the operating income, the company would experience a net loss rather than net income. Specifically, the net loss is $(8,000) [$12,000 − $20,000].

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable for the inventory purchased in Event 1. (4) Sold inventory purchased in Event 1 for $5,000 to customers on account. At the end of the first accounting period what would be reported on the Income Statement for net income?

$1,000. The cost of the inventory is $4,000 ($5,000 original cost − $1,000 purchase return). The inventory was sold to customers for $5,000. Net income would be $1,000 (Sales $5,000 − Cost of Goods Sold $4,000).

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of depreciation expense recognized on the Year 2 income statement is

$10,000.

Walter Company's multistep income statement shows cost of goods sold of $60,000, a gross margin of $42,000, operating income of $12,000 and a $20,000 loss on the sale of land. Based on this information the sales revenue amounted to

$102,000. The first step in a multistep income statement is to determine gross margin which is calculated as revenue minus cost of goods sold. Algebraically, if revenue − cost of goods sold = gross margin; then cost of goods sold + gross margin = revenue. In this case revenue is $102,000 ($60,000 cost of goods sold + $42,000 gross margin). Operating income and losses are shown after the computation of gross margin and therefore, are not relevant to the determination of revenue in this problem.

Kilgore Company experienced the following events during its first accounting period. (1) Borrowed $10,000 cash from a creditor. (2) Earned $5,000 of cash revenue. (3) Paid $2,000 cash to pay off a portion of its note payable. (4) Paid cash dividends amounting to $100. (5) Paid $2,200 cash for operating cash expenses. Based on this information, what is the amount of expense shown on the income statement?

$2,200.

An analysis of the inventory owned by Owens Company as of the company's fiscal closing date is shown in the following table. Item Quantity Cost per Unit Market Value per Unit A 200 $20 $17 B 190 $50 $52 C 400 $34 $30 D 320 $25 $29 Assuming Owens applies the lower-of-cost-or-market rule on an individual basis, the company would be required to recognize an expense amounting to

$2,200. Since the market values of items A and C are below their cost, these items would have to be written down as follows: Item Quantity × Write Down per Unit = Write Down A 200 × ($20 − $17) = $600 C 400 × ($34 − $30) = $1,600 Total $2,200

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of accumulated depreciation shown on the Year 2 balance sheet is

$20,000.

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest expense that Clayton would report in Year 1 and Year 2, respectively would be

$270, and $90.

The following information was drawn from the inventory records of Alpha Company as of December 31, Year 2. Beginning inventory (purchased in Year 1) 200 units @ $5 each Purchases made in Year 2 800 units @ $8 each Units sold 900 units @ $12 each Which of the following is the amount of the gross margin shown on the Year 2 income statement assuming Alpha uses a LIFO cost flow method?

$3,900 The amount of sales revenue is $10,800 (900 units × $12 per unit). The cost of goods sold is $6,900. There are 1,000 units available for sale (200 units purchased in Year 1 + 800 units purchased in Year 2). Given that there were 900 units sold you must determine which of the 1,000 units available for sale were considered to have been sold. The 800 units purchased in Year 2 represent the last items purchased and under LIFO will be the first items sold. The remaining 100 units (900 − 800) are drawn from the units in beginning inventory. The specific computation is shown below: Purchases made in Year 2 800 units @ $8 each =$ 6,400 Beginning inventory (purchased in Year 1) 100 units @ $5 each =500 Cost of goods sold $ 6,900 The gross margin is $3,900 ($10,800 Sales revenue − $6,900 Cost of goods sold).

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10, n/30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable within the discount period for the inventory purchased in Event 1. Immediately after the three events have been recognized, the balance in the inventory account is

$3,960. The cost of the inventory is $3,960 ($5,000 original cost − $1,000 purchase return − $40 cash discount). The amount of the cost of the inventory will remain in the inventory account until the inventory is sold.

An analysis of the inventory owned by Owens Company as of the company's fiscal closing date is shown in the following table. Item Quantity Cost per Unit Market Value per Unit A 200 $20 $17 B 190 $50 $52 C 400 $34 $30 D 320 $25 $29 Assuming Owens applies the lower-of-cost-or-market rule on an individual basis the amount of inventory shown on the balance sheet would be

$32,900. Since the market value of items A and C is below the cost, these items would have to be written down to the market value. GAAP does not permit inventory to be written up when market value exceeds cost. Instead these items must continue to be reported at cost. Accordingly, the book value of the inventory shown on the balance sheet is computed as follows: Item Quantity × Lower of Cost or Market = Statement Amount A 200 × $17 = $3,400 B 190 × $50 = $9,500 C 400 × $30 = $12,000 D 320 × $25 = $8,000 Total $32,900

In Year 1, Pepper Company reported a $40,000 gross margin on $200,000 of sales revenue. In Year 2 Pepper's accounting records showed sales revenue of $220,000 and cost of goods available for sale of $210,000. Using the gross margin method of estimating inventory, the estimated amount of ending inventory for Year 2 is

$34,000. Year 1 Gross margin percentage = $40,000 gross margin ÷ $200,000 sales revenue = 20% Estimated Year 2 gross margin = $220,000 sales revenue × 0.20 gross margin percentage = $44,000 Estimated Year 2 cost of goods sold = $220,000 sales revenue − $44,000 gross margin = $176,000 cost of goods sold Estimated Year 2 ending inventory = $210,000 Cost of goods available for sale − $176,000 cost of goods sold = $34,000 ending inventory

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of book value shown on the Year 2 balance sheet is

$38,000.

Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. Based on this information, the amount of cash flow from investing activities appearing on the statement of cash flows is

$4,000 outflow.

The following information was drawn from the inventory records of Alpha Company as of December 31, Year 2. Beginning inventory (purchased in Year 1) 200 units @ $5 each Purchases made in Year 2 800 units @ $8 each Units sold 900 units @ $12 each Which of the following is the amount of the gross margin assuming Alpha uses a FIFO cost flow method?

$4,200 The amount of sales revenue is $10,800 (900 units × $12 per unit). The cost of goods sold is $6,600. There are 1,000 units available for sale (200 units purchased in Year 1 + 800 units purchased in Year 2). Given that there were 900 units sold, you must determine which of the 1,000 units available for sale were considered to have been sold. The 200 units in beginning inventory represent the first items coming into the business and under FIFO will be the first items charged to cost of goods sold. The remaining 700 units (900 sold − 200 from beginning inventory) would have been drawn from the units purchased in Year 2. The specific computation is shown below: Beginning inventory (purchased in Year 1) 200 units @ $5 each =$ 1,000 Purchases made in Year 2 700 units @ $8 each =5,600 Cost of goods sold $ 6,600 The gross margin is $4,200 ($10,800 Sales revenue − $6,600 Cost of goods sold).

The following information was drawn from the inventory records of Preston Company. Beginning inventory (purchased in Year 1) 100 units @ $10 each First purchase made in Year 2 400 units @ $12 each Second purchase made in Year 2 500 units @ $14 each Units sold 950 units @ $15 each Based on this information, which of the following represents the amount of ending inventory appearing on the balance sheet assuming a LIFO cost flow?

$500 Calculate cost of goods available for sale: Beginning inventory (purchased in Year 1) 100 units @ $10 each =$ 1,000 First purchase made in Year 2 400 units @ $12 each =4,800 Second purchase made in Year 2 500 units @ $14 each =7,000 Cost of goods available for sale $ 12,800 Calculate cost of goods sold: Under LIFO determining the cost of the 950 units sold would start with the last 500 items purchased, then proceed with the next 400 items purchased, and then take the final 50 units from the beginning inventory. The specific calculations are as follows: Second purchase made in Year 2 500 units @ $14 each =$ 7,000 First purchase made in Year 2 400 units @ $12 each =4,800 Beginning inventory (purchased in Year 1)50 units @ $10 each =500 Cost of goods sold $ 12,300 Calculate ending inventory: Cost of goods available for sale $ 12,800 Less: Cost of goods sold12,300 Ending Year 2 inventory balance$ 500

Buckley Company started in Year 1 by issuing stock for $17,000 cash. During Year 1, Buckley earned $12,500 of revenue on account. The company collected $6,000 cash from accounts receivable and paid $4,000 cash for operating expenses. Based on this information alone, the balance in accounts receivable as of December 31, Year 1 is:

$6,500.

Retained earnings at the beginning of the period was $300. During the period, Kilgore Company earned revenue of $1,100 and incurred expenses of $400. Assuming dividends paid to stockholders were $200, the ending balance in retained earnings must have been:

$800

Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. Based on this information the amount of net income is

$800.

Knoll Company started Year 2 with a $500 balance in its Cash account, a $500 balance in its Supplies account and a $1,000 balance in its Common Stock account. During Year 2 the company experienced the following events. (1) Paid $400 cash to purchase supplies (2) Physical count revealed $100 of supplies on hand at the end of Year 2 Based on this information the amount of supplies expense reported on the Year 2 income statement is

$800.

The following items were drawn from a company's accounting records: (1) Accounts receivable (2) Accounts payable (3) Cash paid to purchase land (4) Supplies (5) Supplies expense (6) Cash collected for service to be provided in the future (7) Unearned revenue (8) Prepaid rent (9) Earned Revenue (10) Accrued salaries expense (11) Common stock (12) Dividends (13) Cash paid for prepaid rent (14) Retained earnings Which of the items listed above appear on the balance sheet?

1, 2, 4, 7, 8, 11, and 14 The balance sheet shows a company's assets, liabilities and stockholders' equity. Items 1, 4, and 8 are asset accounts; items 2 and 7 are liability accounts; and items 11 and 14 are stockholders' equity accounts.

If a company has total assets of $800,000, total liabilities of $300,000, total stockholders' equity of $500,000, sales of $400,000, and net income of $80,000, what is its return on equity ratio?

16%

In Year 1, Day Company incurred $350 of utility expense on account. Day paid cash for this expense in Year 2. Which of the following shows how these events will affect Day's accounting equation in Year 2?

350 decrease in cash and 350 decrease in accounts payable. While the expense was incurred and recognized in Year 1, the cash payment occurred in Year 2. The Year 2 cash payment would cause the asset account (cash) and the liability account (accounts payable) decrease.

Which of the following formulas is used to calculate the number of days to sell inventory?

365 ÷ Inventory turnover

The following items were drawn from a company's accounting records: (1) Accounts receivable (2) Accounts payable (3) Cash paid to purchase land (4) Supplies (5) Supplies expense (6) Cash collected for service to be provided in the future (7) Unearned revenue (8) Prepaid rent (9) Earned Revenue (10) Accrued salaries expense (11) Common stock (12) Dividends (13) Cash paid for prepaid rent (14) Retained earnings Which of the items listed above appear on the income statement?

5, 9, and 10 The income statement shows a company's revenues and expenses. Item 9 is a revenue account. Note that item 7 is a liability account even though its name has the word revenue in it. Items 5 and 10 are expense accounts.

If a company has total assets of $100,000, current assets of $20,000, total liabilities of $60,000, current liabilities of $10,000, and total stockholders' equity of $40,000, what is its debt to assets ratio?

60% $60,000 total liabilities ÷ $100,000 total assets = 60%. This means that for every dollar of assets, the company has $0.60 of debt.

Keisha Dress Shops experienced the following events during its third accounting period. (1) Sold merchandise that cost $92,000 for $140,000 cash. (2) Paid $30,000 of operating expenses. (3) Paid a $4,000 cash dividend. Based on this information, the amount of the gross margin is A. $48,000 B. $18,000 C. $14,000 D. None of the above is correct

A Gross margin is determined by subtracting cost of goods sold from the sales revenue. In this case, the gross margin is $48,000 ($140,000 sales revenue - $92,000 cost of goods sold). Operating expenses are subtracted from the gross margin to determine the net income. Dividends are not shown on the income statement.

On December 31, Year 1, Hilton Company recognized $600 of accrued salary expense. Hilton paid cash to the employees in Year 2. Which of the following shows how these events will affect Hilton's ledger accounts on December 31, Year 1?

A 600 increase in accounts payable and 600 decrease in retained earnings Under accrual accounting the full amount of the expense is recognized in Year 1 regardless of the fact that cash was not paid until Year 2.

Lawyers Incorporated accepted a $12,000 retainer for which the company agreed to provide services in the future. Recognizing this event would

All of the answers are correct. Collecting cash for services to be provided in the future is an asset source transaction. The asset account (cash) and the liability account (unearned revenue) increase. The unearned revenue account shows the lawyer's obligation to perform services in the future. Revenue recognition is deferred until the services are actually performed.

When a company earns revenue on account

All of the answers are correct. When a company earns revenue but does not get paid, it receives a promise from the customer to collect cash in the future. This promise is shown on the balance sheet as an account titled accounts receivable. Since the company has already done the work, it will recognize the revenue even though no cash has been collected. Liabilities are not affected. The company does not owe the customers anything. Indeed, the customer owes the company for the work the company has performed.

Liabilities

All of the answers are qualities of liabilities.

Which of the following shows how collecting cash from accounts receivable will affect a company's financial statements? Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. A. NA = NA + NA NA - NA = NA + OA B. + = NA + + + - NA = + + OA C. NA = NA + NA + - NA = + NA D. + = NA + + + - NA = + + IA

Assets = Liab. + Equity Rev. − Exp. = Net Inc. A. NA = NA + NA NA - NA = NA + OA Collecting receivables results in an increase in one asset account (cash) and a decrease in another asset account (accounts receivable) leaving total assets unaffected. The income statement is not affected because the revenue was recognized when the receivable was created. The increase in cash is an operating activity.

On August 1, Year 1, Gomez Company borrowed $48,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the December 31, Year 1, recognition of accrued interest will affect Gomez's ledger accounts?

Assets = Liabilities + Equity D. NA = 1,000 + (1,000)

Juarez Company acquired $1,200 from the issue of common stock. Which of the following shows how this event will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected.

Assets: $1,200 Liabilities: NACommon Stock: $1,200 Retained Earnings: NA

At the end of Year 1, Clayton Company had $6,000 of cash, $7,000 land, $2,000 of liabilities, $3,000 of common stock, and $8,000 of retained earnings. During Year 2, Clayton experienced the following events. Borrowed $1,500 cash. Earned $6,500 of cash revenue. Paid $4,000 of cash expenses. Paid $5,000 cash to purchase land. Based on this information the amount of total assets, total liabilities, and retained earnings appearing on the Year 2 financial statements is

Assets: $17,000 Liabilities: $3,500 Retained Earnings: $10,500

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10, n/30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable within the discount period for the inventory purchased in Event 1. Based on this information, which of the following shows how paying off the account payable account (Event 3) will affect the company's financial statements?

Assets: (3,960) ===== Liabilities: (3,960)Equity: NA == Revenue: NA Expense: NA Net Income: NA == Cash Flow: (3,960) OA The balance in accounts payable after the three events is $3,960 (i.e. $5,000 − $1,000 return − $40 discount). Paying off the account payable balance decreases cash (Assets) and accounts payable (Liabilities). Is does not affect the income statement as the expense is recognized when the inventory is sold not when the account payable account is paid off. This transaction does affect the statement of cash flows. It is a $3,960 cash outflow for operating activities.

The gross margin appears on a A. single-step income statement. B. multistep income statement. C. single-step statement of cash flows. D. multistep statement of cash flows.

B Gross margin is the difference between sales revenue and the cost of goods sold expense. It is normally shown as the first step in a multi-step income statement. The operating expenses are then subtracted from gross margin to determine the amount of net income. In contrast, on a single step income statement cost of goods sold is shown as one of a number of operating expenses that are subtracted from sales revenue to determine net income. This single-step format does not show the determination of gross margin. Multistep and single-step formats are used only for income statements, they do not apply to the statement of cash flows.

Which of the following financial statements is prepared as of a specific date?

Balance Sheet

On November 1, Year 1, Cove Company borrowed $7,000 cash from Shelter Company. The one-year note carried a 7% rate of interest. Which of the following shows how the loan will affect Cove's financial statements on November 1, Year 1?

Balance Sheet: Assets = Liabilities + Equity 7000 = 7000 + NA ________________________________________________________________ Income Statement: Revenue − Expense = Net Income NA -NA = NA _________________________________________________________________ Statement of Cash Flows:7,000 FA

Mary Company collected cash from an account receivable. The recognition of the cash collection will affect which of the following financial statements?

Balance sheet and the statement of cash flows Collecting an account receivable is an asset exchange event. The balance in the cash account will increase and the balance in the accounts receivable account will decrease. These changes will affect the amount of the balances show on the balance sheet. Since the revenue was recognized when it was earned, it will not be recognized again when the cash is collected. Therefore the income statement is not affected. The cash inflow will be shown in the operating section of the statement of cash flows.

Taha Company purchased $8,000 of inventory under terms FOB shipping point. Freight cost amounted to $200. The cost of inventory and freight were paid with cash. Which of the following shows how the recognition of this purchase, including freight costs if applicable, will affect Taha's financial statements? A. Assets = Liab. + Equity Rev. - Exp. = Net Inc.Cash + Inventory =(8,000) 8,000 NA NA NA NA NA NA B. Assets = Liab. + Equity Rev. - Exp. = Net IncomeCash + Inventory =(8,200) 8,200 NA NA NA 8,200 (8,200) NA C. Assets = Liab. + Equity Rev. - Exp. = Net Inc.Cash + Inventory =(8,200) 8,200 NA NA NA NA NA (8,200) OA D. Assets = Liab. + Equity Rev. - Exp. = Net Inc.Cash + Inventory =(8,000) 8,000 NA NA NA 200 (200) (8,200) OA

C Since the terms are FOB shipping point, Taha (the buyer) takes ownership of the goods at the point where the goods are shipped. Since the buyer owns the goods before they are transported, the buyer is responsible for paying the cost of transporting the goods. In this case, Taha would classify the freight cost as transportation-in or freight-in. Since Taha had to pay the freight cost to obtain the inventory, the transportation-in cost is part of the cost of the inventory and is added to the inventory account. The cash purchase of inventory including freight cost is an asset exchange transaction. One asset account (cash) decreases and another asset account (inventory) increases. The income statement is affected when inventory is sold not when inventory is purchased. As a result, there is no impact on the income statement. Since the cash was paid to purchase a short-term asset used in the operations of the company, the cash outflow is an operating activity.

Which of the following shows the effects of purchasing inventory on account? Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. - Exp. = Net Inc. A. + = + + NA NA - + = - NA B. + = NA + + NA - NA = NA +OA C. + = + + NA NA - NA = NA NA D. + = + + NA NA - NA = NA +OA A. Option A B. Option B C. Option C D. Option D

C Purchasing inventory on account is an asset source transaction. It causes assets (inventory) and liabilities (accounts payable) to increase. Buying inventory does not affect revenue. Revenue is affected when the inventory is sold. As a result, there is no effect on the income statement. Since the inventory was purchased on account, the company did not spend cash; therefore there is no effect on the statement of cash flows.

The cash flow associated with buying and selling inventory is not affected by the inventory cost flow method. This statement is

Cash flow depends on when cash is collected and paid. It is independent from when expenses are recognized. Since inventory cost flow focuses on expense recognition, it is not related to cash flow.

Which of the following statements is true? A. To determine the book value of a long-term asset, the balance in the accumulated depreciation account must be subtracted from cost of the asset. B. Accumulated depreciation is a contra asset account. C. The amount of depreciation expense recognized each year is added to the beginning balance of accumulated depreciation account to determine the ending balance of the account. D. All of the statements are true.

D. All of the statements are true.

Assume a company paid $800 for a computer that it plans to sell to its customers. Suppose that because of new technology the company could buy the same computer today for $600. How would the lower-of-cost-or-market rule affect the financial statements?

Decrease net income on the income statement Writing down the inventory reduces the amount of total assets and increases expenses which decreases net income and stockholders' equity. Therefore, the only correct answer is "decrease net income on the income statement"

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. When the company sold one of the items for $40, it expensed $30 to its cost of goods sold account. Based on this information which of the following cost flow methods is the company using?

FIFO FIFO is an acronym meaning "first in first out." In other words, the first item coming into the business (first item purchased) is the first item going out of the business (first item sold). In this case the first item the business purchased cost $30. Since cost of goods sold is $30, the business must be using the FIFO method.

Assume four companies have the following debt to assets ratios: Trent Company 57% Gardendale Company 39% Palmetto Company 78% Dunes Company 82% All other things being equal, which company appears to have the lowest financial risk?

Gardendale Company

Yang Company recognized accrued salary expense. The recognition will affect which of the following financial statements?

Income statement and the balance sheet Recognizing accrued salary expense will cause an increase in a liability account (salaries payable) that appears on the balance sheet. The recognition will also cause an increase in the salaries expense account that appears on the income statement. Since cash was not collected or paid, the statement of cash flows is not affected.

Garcia Company recognized revenue on account. The recognition will affect which of the following financial statements?

Income statement and the balance sheet Recognizing revenue on account will cause an increase in an asset account (accounts receivable) that appears on the balance sheet. The recognition will also cause an increase in the revenue account that appears on the income statement. Since cash was not collected or paid, the statement of cash flows is not affected.

On May 1 of Year 1, Matthew Company paid $2,400 cash for an insurance policy that would protect the company for one year. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense and the cash flow from operating activities shown on the Year 1, financial statements would be

Insurance Expense: $ 1,600 Cash Flow: ($ 2,400)

John Hamilton borrowed $500,000 from Stone Creek Bank to open a new restaurant called Sauce-It-Up. John transferred $450,000 of the cash he borrowed to the Company on first day of the year. Which of the follow appropriately reflects the cash transactions between these reporting entities?

John: $50,000 increase Sauce-It-Up: $450,000 increase Stone Creek Bank: 500,000 decrease

Which of the following cost flow methods would provide the lowest amount of net income in an inflationary environment?

LIFO In an inflationary environment the last items in (last items purchased) are the most expensive items. If the last items in (most expensive items) are the items recognized as cost of goods sold, the amount of gross margin and net income will be the lowest.

Which of the following formulas yields the return on assets ratio?

Net income divided by total assets

Which of the following shows how recognizing cash revenue will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. A. + = NA + + NA − NA = NA NA B. + = NA + + + − NA = + NA C. + = NA + + + − NA = + + OA D. + = NA + + + − NA = + + IA

OPTION C Cash generated through earnings is an asset source transaction. It causes assets (cash) and equity (retained earnings) to increase. Since the company engaged in operations to generate revenue, there is an effect on the income statement. Specifically, revenue and net income increase. Since the cash inflow is from customers, it is an operating activity.

A strong set of internal controls is designed to minimize which of the following factors that motivate fraud?

Opportunity

Which of the following transactions would be reported on the Statement of Changes in Stockholders' Equity?

Paid a $100 cash dividend to the owners

On October 1 of Year 1, Lesikar Company paid $1,200 cash for an insurance policy that would provide protection for a one year term. Which of the following shows how the required adjustment on December 31, Year 1, will affect Lesikar's ledger accounts?

Prepaid Insurance: $(300) Retained Earnings: $(300)

Knopp Company experienced an event that had the following effects on its financial statements. Balance Sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Revenues − Expenditures = Net Income NA = + + − NA - + = − NA Which of the following events would have caused these effects?

Recognized accrued salary expense

Which term describes assets generated through operations that have been reinvested into the business?

Retained earnings

Assume four companies have the following return on assets ratios: Gamma Company = 7% Alpha Company = 8% Beta Company = 9% Sigma Company = 10% All other things being equal, which company appears to conduct the most efficient use of its assets?

Sigma Company

Because of its size, cost of goods sold normally has a significant impact on the amount of net income that is reported on the income statement. Since the reported balance in the inventory account has a direct effect on the amount of cost of goods sold, inventory manipulation is a target for unscrupulous managers seeking to control the amount of reported earnings. These statements are

True

T or F: Businesses earn profits by converting financial, physical, and labor resources into goods and services that satisfy consumer demands. This statement is

True

AmRon Company sold land that had cost $25,000 for $26,500. Based on this information, the company's year-end financial statements would show

a cash inflow from investing activities of $26,500 on the statement of cash flows. The sale resulted in a $1,500 gain ($26,500 sales price − $25,000 cost). Even so, the amount of the cash inflow was $26,500 not $1,500. All of the inflow resulted from the sale of a long-term asset and is therefore an investing activity.

All other things being equal, the profitability is maximized when a company sells inventory with

a high gross margin per unit and a high inventory turnover.

Sims Company received cash from the issue of common stock. This event is

an asset source transaction.

The statement of changes in stockholders' equity presents

an explanation of the changes in the beginning and ending balances of stockholders' equity.

At the end of its Year 1 accounting period, Voss Company had a $35,000 balance in its inventory account. Even so, when the company took a physical count of the inventory, it found only $34,300 of inventory on hand. Which of the following shows how recognizing the inventory shrinkage will affect the company's financial statements?

cash: NA inventory: (700) == liab: NA eq: (700) == rev: NA exp: 700 net: (700) == CF: NA Inventory shrinkage means that a company has experienced an economic sacrifice in the form of a decrease in its assets. The shrinkage may have been due to lost, damaged, or stolen goods. Regardless of the specific reason, the company experienced a decrease in its assets in the process of conducting its normal operating activities. Therefore, the inventory shrinkage is classified as an expense. The recognition of the shrinkage will cause assets (inventory) to decrease and expenses to increase. The increase in expenses will cause net income and ultimately equity (retained earnings) to decrease. Since cash was not affected by the shrinkage, the statement of cash flows is not affected. If the amount of the shrinkage is material, it must be shown as an operating expense on the income statement. However, the amount of the shrinkage is normally immaterial and is usually included in cost of goods sold as a matter of convenience.

Contours, Incorporated sold merchandise that cost $6,000 to a customer on account for $9,000 under terms 2/10, n/30. Customers returned merchandise that had been sold for $1,000. This merchandise had originally cost Contours $700. The remaining receivables were collected within the discount period. Which of the following shows how recognizing the collection of the receivables will affect the company's financial statements?

cash: NA 7840 ar: (160) (7840) inv: NA NA ========================== liab: NA NA equit: (160) NA ========================== N. Sales: (160) NA Exp: NA NA net inc: (160) NA ========================== CF: NA 7840 OA

Contours, Incorporated sold merchandise that cost $6,000 to a customer on account for $9,000 under terms 2/10, n/30. Customers returned merchandise that had been sold for $1,000. This merchandise had originally cost Contours $700. Which of the following shows how the sales return will affect the company's financial statements?

cash: NA NA ar: (1000) NA inv: NA 700 ====================== liab: NA NA equit: (1000) 700 ====================== N. Sales: (1000) NA Exp: NA (700) net inc: (1000) 700 ===================== CF: NA NA

The adjusting entry to recognize the write down of inventory based on the lower-of-cost-or-market rule will

increase the amount of expenses. Writing down inventory decreases the amount of assets and increases the amount of expenses which decreases net income and ultimately stockholders' equity. Liabilities and cash flow are not affected.

The statement of cash flows presents

information in three categories including operating, investing, and financial activities.

If total assets increase then

liabilities, common stock, or retained earnings must increase.

If the amount of ending inventory is overstated, the amount of

net income will be overstated total assets will be overstated retained earning will be overstated

When a company collects cash from accounts receivable,

total assets are not affected. When a company collects an account receivable one asset (cash) increases and another asset (accounts receivable) decreases. The amount of total assets is not affected.