Final exam review

At Hoffman Company, one bookkeeper prepares the cash deposits while the other bookkeeper enters the collections in the journal and ledger. Which of the following is the best explanation of this type of internal control principle over cash receipts?

-Segregation of duties

Writing off an account receivable

-Debit allowance for uncollectible accounts -Credit account receivable -write-off of the account receivable has no effect on total amount reported in the balance sheet

Journal entry for bonds at a premium

-Debit cash -Credit premium bonds payable -Credit bonds payable

Journal entry for bonds at a discount

-Debit cash -Debit discount bond payable -Credit bonds payable

An aging of a company's accounts receivable indicates that $13,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $4,800 credit balance, the adjustment to record bad debts for the period will require a

-Debit to bad debt expense for $8,700 ($13,500-$4,800)

Hoffman Corporation issues 10-year, 8%, $7,500,000 bonds dated January 1, Year 1, for $7,500,000. The journal entry to record the issuance will show a

-Debit to cash for $7,200,000

Which of the following items would not appear in an income statement? Interest Expense Delivery Expense Utilities Expense Deferred Revenue

-Deferred revenue

Which of the following adjusts the banks balance of cash in a bank reconciliation?

-Deposits outstanding

What is the concept behind separation of duties in establishing internal control?

-Employee fraud is less likely to occur when access to assets and access to accounting records are separated

Which of the following generally would be considered a good internal control over cash payments?

-Ensure checks are serially numbered and signed only by authorized employees

At the beginning of the year, Hoffman Bush Company had an inventory of $900,000. During the year, the company purchased goods costing $3,375,000. If Hoffman Bush reported ending inventory of $1,125,000 and sales of $4,500,000, their cost of goods sold and gross profit rate would be

-Gross profit/Net sales - dont know number answer

Ratios to know

-Gross profit: gross profit/net sales -Profit ratio: net income/ net sales -Current ratio: current assets/current liabilities

Order to prepare financial statements

-Income statement -Statement of stockholders equity -Balance sheet -Statement of cash flows

Describe an income statement

-Income statement shows a company's revenues, expenses and profitability over a period of time.

Adjustments for accrued revenues (increase/decrease) revenues and assets

-Increases both revenue and assets

Which of the following adjusts the company's balance of cash in a bank reconciliation?

-Interest on bank deposits

A company's plans to minimize theft and enhance the accuracy of accounting information are referred to as:

-Internal controls

What is the definition of an internal user of accounting information?

-Internal users are those within an organization who use financial information to make day-to-day decisions -Manager: plan, organize and run business

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods purchased is recorded in which account?

-Inventory

What describes the classification and normal balance of the deferred (unearned) revenue account?

-Is a liability -Normal balance of credit

Hoffman Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,560 June 10 200 units 2,340 June 15 200 units 2,520 June 28 150 units 900 ​ $ 7,320 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is

-LIFO

A bond issue with a face amount bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is:

-Less than the face amount

Who ultimately is responsible for properly applying GAAP? The company's:

-Management

If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account:

-Net accounts receivable do not change

Outstanding stock

-Number of issued shares held by investors

What is posting?

-Posting is the process of transferring the debit and credit information from the journal to individual accounts in the general ledger -Accumulates the effects of journalized transactions

Types of accrual adjustments

-Prepaid expenses (deferred expense): when a company pays cash (or has an obligation to pay cash) to acquire an asset that is not used until a later period -Debit expense account -Credit prepaid expense account -Accrued expense: when a company has used costs in the current period, but the company hasn't yet paid cash for those costs -Debit expense account -Credit payable account -Accrued revenue: when a company provides products or services but hasn't yet received cash -Debit receivable account -Credit revenue account -Unearned revenue (deferred rev.): when a company receives cash in advance from customers, but goods and services won't be provided until a later period -Debit deferred rev. account -Credit revenue account

Which of the following would increase assets and increase liabilities? - Purchase office supplies on account. -Receive a utility bill for the current month. Plan to pay bill beginning of next month. -Provide services to customers on account. -Pay dividends to stockholders.

-Purchase office supplies on account. Journal entry: Debit supplies Credit accounts payable

Which of the following is not a characteristic of adjusting entries?

-Reduce the balances of revenue, expense, and dividend accounts to zero

Which of the following refers to the seller reducing the customers balance owed because of some deficiency in the company's product or service?

-Sales allowance

Types of bonds

-Secured: bonds backed by collateral -Unsecured: bonds not backed by collateral -Convertible: shares can be exchanged for common stock -Callable: allows the issuer to pay off bonds early at a fixed price -Term: bond issue matures on a single date -Serial: bond issue matures in installments

Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue recognized $28,500 Accounts receivable 4,500 Expenses incurred 10,875 Accounts payable (related to expenses) 1,125 Supplies purchased with cash 2,700

Revenue recognized $28,500 - expenses incurred $10,875 = $17,625

Statement of Cash Flows using indirect method for investing activities

Sale of investments (+) Sale of land (+) Purchase of equipment (-) Purchase of patent (-) Purchase of buildings (-) Purchase of land (-) -Decreases net income

Types of accrual accounting

Under accrual-basis -Revenue recognition principle: record revenues when goods and services are provided to customers -Expense recognition: record expenses for the costs used to provide those goods and services to customers Under cash-basis -record revenue at the time we receive cash -record expenses at the time we pay cash

Hoffman Company issued common stock for proceeds of $561,000 during Year 2. The company paid dividends of $100,500 and issued a long-term note payable for $376,500 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $82,500. The financing section of the statement of cash flows will report net cash inflows of

$378,000 ($561,000-$100,500-$82,500)

At January 1, Year 2, Hoffman Industries reported Retained Earnings of $525,000. During Year 2, Hoffman had a net loss of $112,500 and paid dividends to the stockholders of $75,000. At December 31, Year 2, the balance in Retained Earnings is...

$525,000 - net loss $112,500 - paid dividends $75,000 = $337,500 is new balance of retained earnings and is credited

Use the following data to determine the total dollar amount of assets to be classified as current assets Cash and cash equivalents $ 105,000 Accounts payable $ 195,000 Accounts receivable 150,000 Salaries and wages payable 30,000 Inventory 210,000 Bonds payable 270,000 Prepaid insurance 120,000 Total liabilities 495,000 Long-term investments 270,000 Land 285,000 Buildings $345,000 Common stock 360,000 Less: Accumulated depreciation (90,000) 255,000 Retained earnings 750,000 Total stockholders' equity 1,110,000 Trademarks 210,000 Total liabilities and Total assets $1,605,000 stockholders' equity $1,605,000

$585,000 $195,000 (Acct. Payable) + $150,000 (Acct. Rec.) + $30,000 (Sal. & wages) + $120,000 (Ppd. Ins.) + $90,000 (Acc. Dep.)

Hoffman Company reported a net loss of $22,500 for the year ended December 31, Year 2. During the year, accounts receivable decreased $11,250, inventory increased $18,000, accounts payable increased by $22,500, and depreciation expense of $13,500 was recorded. During Year 2, operating activities net cash of

$6750 (-$22,500+$11,250-$18,000+$22,500+$13500)

Hoffman Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,485 June 10 200 units 2,016 June 15 200 units 2,052 June 28 150 units 1,593 ​ $ 7,146 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is

-$1,989

At April 30, Hoffman Company has the following bank information: Cash balance per bank $10,350 Outstanding checks $630 Deposits in transit $1,237.5 Credit memo for interest earned $22.5 Bank service charge $45 What is Hoffman's adjusted cash balance on April 30?

-$10,957.5 ($10,350+$1,237.5) -$630

Equipment was purchased for $450,000. Freight charges amounted to $21,000 and there was a cost of $60,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $90,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

-$88,200 $450,000+$21,000+$60,000= $531,000 $531,000 -$90,000= $441,000 $441,000/5= $88,200

The interest on a $18,000, 8%, 90-day note receivable is

-360 [($18,000*.08)*3/12]

What would be classified as a current liability?

-6 months note payable

Sole Proprietorship

-A business owned by one person -Unlimited liability

Partnership

-A business owned by two or more people -Unlimited liability

Corporation

-A business that is owned by many investors -An entity that is legally separate from its owners and pays its own taxes -Limited liability -Ability to raise capital

Treasury stock

-A company's own issued stock that it has purchased -Shares bought back that have been previously issued -Purchase of a companies own stock -Decreases stockholders equity -In stockholders equity section on the balance sheet

The entry to record the receipt of payment within the discount period on a sale of $1,350 with terms of 3/10, n/30 will include a

-A credit to accounts receivable for $1,350

If Hoffman Company issues 6,000 shares of $5 par value common stock for $405,000, the journal entry would show

-A credit to paid in capital in excess par value for $375,000 $405,000-(6,000*$5)

The entry to record the estimate for uncollectible accounts includes:

-A debit to Bad Debt Expense

The situation that requires a departure from the cost basis of accounting to the lower-of- cost-or-net-realizable-value basis in valuing inventory is necessitated by

-A decline in the market value

Statement of Cash Flows

-A financial statement that measures activities involving cash receipts and cash payments over a period of time -Operating cash flows: cash receipts and cash payments for transactions involving revenue and expense activities -Investing cash flows: cash transactions for the purchase and sale of investments and long-term assets -Financing cash flows: cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends

Balance Sheet

-A financial statement that presents the financial position of the company on a particular date -Prepared on a specific point in time -Reports assets, liabilities, and stock holders equity -Assets must equal total liabilities & stockholders eq. (accounting eq.)

Income Statement

-A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time -Prepared during a period of time

Statement of Stockholders' Equity

-A financial statement that summarizes the changes in stockholders' equity over an interval of time -Reports information related to changes in common stock and retained earnings each period -Stockholders Eq.= common stock + retained earnings -Retained earnings= all net income - all dividends

The effect of writing off a specific account receivable is:

-A reduction in the Allowance for Uncollectible Accounts

Define assets

-A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit

Management could determine the amounts due from customers by examining which ledger account?

-Accounts Receivables

When a company provides services on account, which of the following accounts is debited?

-Accounts receivable

The basic principle involved with expense recognition is:

-All costs that are used to generate revenue are recorded in the period the revenue is recognized

What is the basic accounting equation?

-Assets = Liabilities + Stockholders' Equity

Which of the following financial statements is concerned with the company at a point in time?

-Balance sheet

A sales discount is recorded by the seller as a(n):

-Contra revenue

Bonds that may be exchanged for common stock at the option of the bondholders are called

-Convertible bonds

The figure for ____ is determined at a different time under the perpetual inventory method than under the periodic method.

-Cost of goods sold

In Year 2, Hoffman Corporation has plant equipment that originally cost $180,000 and has accumulated depreciation of $60,000. A new processing technique has rendered the equipment obsolete, so it is retired. The journal entry to retire the equipment should include which of the following?

-Credit equipment for $180,000

Hoffman Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Hoffman would record this reduction by

-Crediting accounts receivable -Debiting sales allowance

Preferred stock

-Shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued -Stock with preference over common stock in the payment of dividends and the distribution of assets -Redeemable: can be redeemed/returned for a fixed price -Convertible: shares can be converted into common stock -Cumulative: shares receive priority for future dividends, if not declared in a given year -Can have features of both liabilities and stockholder's equity

Issued stock

-Shares sold to investors; includes treasury shares

What are the three forms of business organization?

-Sole proprietorship: a business owned by one person → disadvantages is owners must have sufficient funds to finance the business and does not offer limited liability -Partnership: a business owned by two or more persons → does not offer limited liability -Corporation: a company that is legally separate from its owner → the advantage of being legally separate is that the stockholders have limited liability → disadvantage is double taxation

What is the effect of a stock dividend and stock split on par value per share?

-Stock spilt will decrease it -No change with stock dividend

When preparing a bank reconciliation, outstanding checks would be:

-Subtracted from the bank's cash balance

When preparing a bank reconciliation, nonsufficient funds (NSF) checks would be:

-Subtracted from the company's cash balance

Current assets divided by current liabilities is known as

-The current ratio

Payment date

-The date of the actual distribution of dividends

Record date

-The date on which a company looks at its records to determine who the stockholders of the company are

Declaration date

-The date on which the board of directors announces the next dividend to be paid -Creates a binding legal obligation for the company declaring the divided

If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates what?

-The mathematical equality of the accounting equation -Debits and credits are balanced

If goods in transit are shipped FOB destination, who has legal title of the goods in transit?

-The seller

Authorized stock

-The total number of shares available to sell, stated in the companies articles of incorporation

Multi-Step Income Statement

-The type of income statement that classifies items as operating and non operating

Calculation of loss on disposable asset

-This occurs when we sell an asset for less than its book value -Sale amount - book value = negative amount Debit cash Debit Accumulated depreciation Debit loss Credit equipment

Calculation of gain on disposable asset

-This occurs when we sell an asset for more than its book value -Sale amount - book value = positive amount Debit cash Debit accumulated depreciation Credit equipment Credit Gain

The primary reason the balance of cash in the company's records will differ from the balance of cash in the banks records includes:

-Timing differences of recording cash transactions by the company and by the bank

The net effects on the corporation of the declaration and payment of a cash dividend are

-To decrease assets and decrease equity

What is a direct purpose of internal controls?

-To improve the accuracy and reliability of accounting information

Which of the following assets is not properly classified as property, plant, and equipment?

-a truck held for resale by an auto dealership -There weren't any options to choose from but thats the answer

Calculating the allowance of doubtful accounts

-multiply the accounts receivable by the appropriate percentage for the aging period -Accounts receivable = 50,000; 10% is estimated to be uncollectible; 5000 debit balance [ debit bad debt expense credit allowance for doubtful account ] -Has a normal credit balance -It shows up in the balance sheet in current assets as a contra asset (a deduction from your accounts receivable)

Intangible assets

-patents (granted right for a period of 20 yrs.) -trademarks (protected use for 10 yrs.) -copyrights -franchises -goodwill (equals the purchase price less the fair value of the net assets acquired) -Long-term assets that lack physical substance but do have value -we record intangibles at their original cost plus al other costs, such as legal fees, necessary to get asset ready for use

Tangible assets

-referred to as property, plant, and equipment -consists of land, land improvements, buildings, equipment, and natural resources -we record tangible assets as its cost plus all expenditures necessary to get the asset ready for use

Interest rate

Principal amount *rate* fraction of year

Common stockholder rights vs. Preferred stockholder rights

Common stockholder rights -voting rights -elect board of directors -receive dividends when declared Preferred stockholder rights -redeemable -convertibility -callability -dividend and liquidation preferences

What are the normal balances of the main DEALOR accounts?

D: dividends (debit) E: expenses (debit) A: assets (debit) L: liabilities (credit) O: owners equity (credit) R: revenue (credit)

Sales discounts, someone paid within a discount period; know how to read the terms: Cash collected within the discount period: Hoffman company provides services of 50,000 to Mercado company on June 12 with terms 1/15, n/60. The customer paid on June 23.

Debit cash (what the customer actually paid) 49,500 Debit sales discount (cost x percentage) 500 Credit accounts receivable (original amount) 50,000

Calculate FIFO -ending inventory -the cost of goods sold

FIFO → Inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out) -Cogs: calculate from top to bottom however many units are being sold -Ending inventory: calculate whatever was not used or whatever is left from cogs -In periods of rising prices FIFO will give the lowest cogs and the highest amount for ending inventory

Statement of Cash Flows using indirect method for financing activities

Issuance of common stock (+) Sale of treasury stock (+) Payment of dividends (-) Purchase of treasury stock (-) Repayment of notes payable (-) -Increases net income

If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period?

Journal entry: Debit cash Credit deferred revenue -Net income will be too high (overstated)

If a company spends $75,000 to purchase a delivery van to be used in the operation, how will assets be affected?

Journal entry: Debit equipment Credit cash -Assets will not be affected

Calculate LIFO -ending inventory -the cost of goods sold

LIFO → Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out) -Cogs: calculate from bottom to top however many units are being sold -Ending inventory: calculate whatever was not used or whatever is left from cogs -In periods of rising prices LIFO will give the highest cogs and low ending inventory -This type of cost flow assumption is least likely to match the physical flow of inventory

Statement of Cash Flows using indirect method for operating activities

Net income Depreciation expense (+) Current assets: Account Rec. Inventory Prepaid rent -if current assets is increasing you subtract amount -if current assets is decreasing you add amount Current liabilities: Accounts payable Income tax payable Interest payable -if current liability is increasing you add amount -if current liability is decreasing you subtract amount

Hoffman Company received a check for $27,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $27,000. Financial statements will be prepared on July 31. Hoffman should make the following adjusting entry on July 31

Original -Debit cash $27,000 -Credit deferred revenue $27,000 Adjusted -Debit deferred revenue $4,500 ($27,000/ 6 months) -Credit service revenue $4,500

What are the steps of the accounting cycle?

Step 1 analyze business transactions Step 2 journalize Step 3 post to ledger Step 4 trial balance Step 5 journalize and post adjusting entry Step 6 adjusted trial balance Step 7 prepare financial statements Step 8 journalize closing entries Step 9 post-closing trial balance

The following information is from the Income Statement of Hoffman Service for the quarter ending September 30, Year 2: Service Revenue $6,750 Salaries and Wages expense $ 3,000 Supplies expense 600 Insurance expense 150 Total expenses 3,750 ​ Net Income $3,000 The balance in Retained Earnings on July 1 was $4,800. Hoffman distributed dividends of $3,300 during the period. After closing entries have been posted, Retained Earnings will have a balance of

[($4,800+$6,750) -$3,750] -$3,300= $4,500 -Retained earnings is credited

straight line depreciation

depreciation expense= (asset's cost - salvage value) / (service life)