Exam 2 Study Guide

Under a perpetual inventory system, acquisition of merchandise for resale is debited to a. the Inventory account. b. the Purchases account. c. the Supplies account. d. the Cost of Goods Sold account.

a. the Inventory account

. Expenses are recognized when: a. they contribute to the production of revenue. b. they are paid. c. they are billed by the supplier. d. the invoice is received.

they contribute to the production of revenue.

1. Prepare multiple-step income statement Suppose in its income statement for the year ended December 31, 2017, Clayton Company reported the following data. Instructions: Prepare a multiple-step income statement. (Hint: Research & Development Expense is included under Operating Expenses).

SOLUTION CLAYTON COMPANY Income Statement For the Year Ended June 30, 2017 Sales Sales revenue $5,730 Less: Sales returns and allowances 280 Net sales $5,450 Cost of goods sold 3,104 Gross profit 2,346 Operating expenses Advertising expense 499 Salaries and wages expense 460 Research and development expense 114 Rent expense 105 Depreciation expense 90 Utilities expense 60 Total operating expenses 1,328 Income from operations 1,018 Other expenses and losses Interest expense 161 Loss on disposal of plant assets 46 207 Income before income taxes 811 Income tax expense 276 Net income $ 535

2. Prepare a multi-step income statement In its income statement for the year ended December 31, 2017, Morrow Corporation reported the following condensed data. Operating expenses $ 725,000 Interest revenue $33,000 Cost of goods sold 1,256,000 Loss on disposal of plant assets 17,000 Interest expense 70,000 Net sales 2,200,000 Income tax expense 47,000 Instructions: Prepare a multi-step income statement.

SOLUTION MORROW CORPORATION Income Statement For the Year Ended December 31, 2017 Net sales $ 2,200,000 Cost of goods sold 1,256,000 Gross profit 944,000 Operating expenses 725,000 Income from operations 219,000 Other revenue and gains Interest revenue 33,000 Other expenses and losses Loss on disposal of plant assets .........$(17,000) Interest expense..................................(70,000) (87,000) Income before income taxes 165,000 Income tax expense 47,000 Net income................................................... $118,000

51. Peach Pink Inc. has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 30 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,450 b. $1,480 c. $1,490. d. $1,470.

a. $1,450 (20*20=400; 50*21=1050; 400+1050=1450)

13. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue earned $14,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $6,750 b. $9,000 c. $4,500 d. $7,200

a. $6,750 (14000 - 7250)

42. Which of the following should not be included in the physical inventory of a company? a. Goods held on consignment from another company. b. Goods in transit from another company shipped FOB shipping point. c. Goods shipped on consignment to another company. d. All of the above should be included.

a. Goods held on consignment from another company.

22. Under a perpetual inventory system a. accounting records continuously disclose the amount of inventory. b. increases in inventory resulting from purchases are debited to purchases. c. there is no need for a year-end physical count. d. the account purchase returns and allowances is credited when goods are returned to vendors.

a. accounting records continuously disclose the amount of inventory.

An accounting time period that is one year in length is called: a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period.

a. a fiscal year.

. A company using a perpetual inventory system that returns goods previously purchased on credit would a. debit Accounts Payable and credit Inventory. b. debit Sales and credit Accounts Payable. c. debit Cash and credit Accounts Payable. d. debit Accounts Payable and credit Purchases.

a. debit Accounts Payable and credit Inventory.

29. The collection of an $800 account within the 2 percent discount period will result in a a. debit to Sales Discounts for $16. b. debit to Accounts Receivable for $784. c. credit to Cash for $784. d. credit to Accounts Receivable for $784.

a. debit to Sales Discounts for $16.

. One of the accounting concepts upon which adjustments for prepayments and accruals are based is: a. expense recognition. b. cost. c. monetary unit. d. economic entity.

a. expense recognition.

16. Accrued expenses are: a. incurred but not yet paid or recorded. b. paid and recorded in an asset account after they are used or consumed. c. paid and recorded in an asset account before they are used or consumed. d. incurred and already paid or recorded.

a. incurred but not yet paid or recorded.

41. If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered.

a. the seller has legal title to the goods until they are delivered.

Alpha First Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,300 b. $1,365 c. $1,650 d. $1,620

b. $1,365 (780 + (1170 / 2) = 1365)

40. Financial information is presented below: Operating Expenses $ 45,000 Sales Revenue 150,000 Cost of Goods Sold 90,000 The profit margin ratio would be a. .70. b. .10. c. .30. d. .40.

b. .10. (150000 - 90000 - 45000 = 15000, 15000 / 150000 = .10)

36. Financial information is presented below: Operating Expenses $ 45,000 Sales Returns and Allowances 13,000 Sales Discounts 6,000 Sales Revenue 160,000 Cost of Goods Sold 77,000 The amount of net sales on the income statement would be a. $154,000. b. $141,000. c. $160,000. d. $166,000.

b. $141,000. (160000 - 13000 - 6000)

The following is selected information from L Corporation for the fiscal year ending October 31, 2011. Cash received from customers $300,000 Revenue earned 370,000 Cash paid for expenses 170,000 Cash paid for computers on November 1, 2010 that will be used for 3 years 48,000 Expenses incurred including any depreciation 216,000 Proceeds from a bank loan, part of which was used to pay for the computers 100,000 Based on the accrual basis of accounting, what is L Corporation's net income for the year ending October 31, 2011? a. $184,000 b. $154,000 c. $152,000 d. $170,000

b. $154,000 (370000 - 216000)

55. Nelson Corporation sells three different products. The following information is available on December 31: Inventory Item Units Cost per unit Market value per unit X 200 $4.00 $3.50 Y 400 $2.00 $1.50 Z 1,000 $3.00 $4.00 When applying the lower of cost or market rule to each item, what will Nelson's total ending inventory balance be? a. $4,600 b. $4,300 c. $5,300 d. $4,400

b. $4,300 (200*3.50=700; 400*1.50=600; 1000*3.00=3000; 700+600+3000=4300)

19. Walton Company collected $7,200 in May of 2010 for 4 months of service which would take place from October of 2010 through January of 2011. The revenue reported from this transaction during 2010 would be: a. $0 b. $5,400 c. $7,200 d. $1,800

b. $5,400 (7200 / 4 = 1800, 1800 * 3 = 5400)

25. Conway Company purchased merchandise inventory with an invoice price of $8,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays within the discount period? a. $8,000 b. $7,840 c. $7,200 d. $7,360

b. $7,840 (8000 * .02 = 160, 8000 - 160 = 7840)

Pop-up Party Favors Inc has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 40 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $780. b. $820. c. $800. d. $760.

b. $820. (10*22=220; 30*20=600; 220+600=820)

21. Gross profit equals the difference between a. net income and operating expenses. b. net sales revenues and cost of goods sold. c. net sales revenues and operating expenses. d. net sales revenues and cost of goods sold plus operating expenses.

b. net sales revenues and cost of goods sold.

The revenue recognition principle dictates that revenue should be recognized in the accounting records: a. when cash is received. b. when it is earned. c. at the end of the month. d. in the period that income taxes are paid.

b. when it is earned.

Financial information is presented below: Operating Expenses $ 45,000 Sales Revenue 150,000 Cost of Goods Sold 90,000 Gross profit would be a. $105,000. b. $ 45,000. c. $ 60,000. d. $ 15,000.

c. $ 60,000. (150000 - 90000 = 60000)

31. Aber Company sells merchandise on account for $1,500 to Borth Company with credit terms of 2/10, n/30. Borth Company returns $250 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. $1,220 b. $1,230 c. $1,225 d. $1,125

c. $1,225 (1500 - 250 = 1250, 1250 * .02 = 25, 1250 - 25 = 1225)

46. Baker Bakery Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,300 b. $1,365 c. $1,620 d. $1,650

c. $1,620 (990 + (1260 / 2) = 1620)

54. Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories: Product Cost Market A $55,000 $60,000 B 40,000 38,000 C 80,000 81,000 If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be a. $175,000. b. $171,000. c. $173,000. d. $181,000.

c. $173,000. (55000+38000+80000)

Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Revenue earned $14,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $4,500 b. $9,000 c. $2,700 d. $4,950

c. $2,700 (11000 - 6500 - 1800)

48. A company purchased inventory as follows: 200 units at $20 300 units at $22 The average unit cost for inventory is a. $20.00. b. $21.00. c. $21.20. d. $22.00.

c. $21.20. (200*20=4000; 300*22=6600; 6600+4000=10600; 10600/500=21.20)

38. Sampson Company's accounting records show the following at the year ending on December 31, 2012. Purchase Discounts $ 5,600 Freight-in 7,800 Purchases 300,010 Beginning Inventory 23,500 Ending Inventory 28,800 Purchase Returns 6,400 Using the periodic system, the cost of goods sold is a. $301,110 b. $298,910 c. $290,510 d. $309,510

c. $290,510 (23500 + 295810 (from question above) - 28800)

33. Piper Company sells merchandise on account for $1,800 to Morton Company with credit terms of 2/10, n/30. Morton Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Piper Company make upon receipt of the check? a. Cash 1,200 Accounts Receivable 1,200 b. Cash 1,176 Sales Returns and Allowances 624 Accounts Receivable . 1,800 c. Cash 1,176 Sales Returns and Allowances 600 Sales Discounts 24 Accounts Receivable 1,800 d. Cash 1,764 Sales Discounts 36 Sales Returns and Allowances 600 Accounts Receivable 1,200

c. Cash 1,176 Sales Returns and Allowances 600 Sales Discounts 24 Accounts Receivable 1,800

. A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be earned? a. December 5 b. December 10 c. November 30 d. December 1

c. November 30

32. Which sales accounts normally have a debit balance? a. Sales discounts b. Sales returns and allowances. c. both (a) and (b). d. Neither (a) and (b).

c. both (a) and (b).

15. An adjusting entry: a. affects two balance sheet accounts. b. affects two income statement accounts. c. affects a balance sheet account and an income statement account. d. is always a compound entry.

c. affects a balance sheet account and an income statement account.

Under the cash basis of accounting: a. Revenue is recognized when services are performed. b. Expenses are matched with the revenue that is produced. c. cash must be received before revenue is recognized. d. a promise to pay is sufficient to recognize revenue.

c. cash must be received before revenue is recognized.

52. The consistent application of an inventory costing method enhances a. conservatism. b. accuracy. c. comparability. d. efficiency.

c. comparability.

53. The lower of cost or market basis of valuing inventories is an example of a. comparability. b. the cost principle. c. conservatism. d. consistency.

c. conservatism.

27. Under the perpetual inventory system, in addition to making the entry to record a sale, a company would a. debit Inventory and credit Cost of Goods Sold. b. debit Cost of Goods Sold and credit Purchases. c. debit Cost of Goods sold and credit Inventory. d. make no additional entry until the end of the period.

c. debit Cost of Goods sold and credit Inventory.

18. Greese Company purchased office supplies costing $4,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,100 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Office Supplies Expense, $1,100; credit Office Supplies, $1,100. b. debit Office Supplies, $2,900; credit Office Supplies Expense, $2,900. c. debit Office Supplies Expense, $2,900; credit Office Supplies, $2,900. d. debit Office Supplies, $1,100; credit Office Supplies Expense, $1,100.

c. debit Office Supplies Expense, $2,900; credit Office Supplies, $2,900.

17. Accrued revenues are: a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded. d. earned and already received and recorded.

c. earned but not yet received or recorded.

. Under the accrual basis of accounting: a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.

43. Manufacturers usually classify inventory into all the following general categories except: a. work in process b. finished goods c. merchandise inventory d. raw materials

c. merchandise inventory

. The credit terms offered to a customer by a business firm were 2/10, n/30, which means a. the customer must pay the bill within 10 days. b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date. c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date. d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.

The LIFO inventory method assumes that the cost of the latest units purchased are a. the last to be allocated to cost of goods sold. b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold. d. not allocated to cost of goods sold or ending inventory.

c. the first to be allocated to cost of goods sold.

A physical count of merchandise inventory on July 30 reveals that there are 40 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $780. b. $820. c. $1,180. d. $1,220.

d. $1,220. (10*22=220; 50*20=1000; 220+1000=1220)

47. Charlene Cosmetics Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the average cost method, the amount allocated to the ending inventory on June 30 is a. $1,463. b. $1,620. c. $1,575. d. $1,500

d. $1,500. (4200 / 700 = 6, 6 * 250 = 1500)

37. Sampson Company's accounting records show the following for the year ending on December 31, 2012. Purchase Discounts $ 5,600 Freight-in 7,800 Purchases 300,010 Beginning Inventory 23,500 Ending Inventory 28,800 Purchase Returns 6,400 Using the periodic system, the cost of goods purchased is a. $280,210 b. $304,210 c. $308,610 d. $295,810

d. $295,810 (300010 - 5600 - 6400 + 7800)

10. La More Company had the following transactions during 2011: • Sales of $4,500 on account • Collected $2,000 for services to be performed in 2012 • Paid $1,375 cash in salaries for 2011 • Purchased airline tickets for $250 in December for a trip to take place in 2012 What is La More's 2011 net income using accrual accounting? a. $3,375 b. $5,375 c. $5,125 d. $3,125

d. $3,125 (4500 - 1375)

11.La More Company had the following transactions during 2011. • Sales of $4,500 on account • Collected $2,000 for services to be performed in 2012 • Paid $1,125 cash in salaries • Purchased airline tickets for $250 in December for a trip to take place in 2012 What is La More's 2011 net income using cash basis accounting? a. $5,375 b. $875 c. $5,125 d. $625

d. $625 (2000 - 1125 - 250)

39. Financial information is presented below: Operating Expenses $ 45,000 Sales Revenue 150,000 Cost of Goods Sold 90,000 The gross profit rate would be a. .60. b. .10 c. .30. d. .40.

d. .40. (150000 - 90000 = 60000, 60000 / 150000 = .40)

26. The journal entry to record a credit sale is a. Cash Sales Revenue b. Cash Service Revenue c. Accounts Receivable Sales Returns and Allowances d. Accounts Receivable Sales Revenue

d. Accounts Receivable Sales Revenue

14. Adjusting entries are made to ensure that: a. expense are recognized in the period in which they are incurred. b. revenues are recorded in the period in which they are earned. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. All of the above.

d. All of the above.

The closing entry process consists of closing: a. all asset and liability accounts. b. out the Retained Earnings account. c. all permanent accounts. d. all temporary accounts.

d. all temporary accounts.

The entry to record a sale of $900 with terms of 2/10, n/30 will include a a. debit to Sales Discounts for $18. b. debit to Sales Revenue for $882. c. credit to Accounts Receivable for $900. d. credit to Sales Revenue for $900.

d. credit to Sales Revenue for $900.

34. With respect to the income statement a. contra revenue accounts do not appear on the income statement. b. sales discounts increase the amount of sales. c. contra revenue accounts increase the amount of operating expenses. d. sales discounts are included in the calculation of gross profit.

d. sales discounts are included in the calculation of gross profit.

The periodicity assumption states that: a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods.

d. the economic life of a business can be divided into artificial time periods.