Final Financial Accounting
The Garrett Company uses the perpetual inventory system. Although its inventory records indicated $18,000 in the inventory, a physical count showed only $16,250. Which of the following answers indicates the effect of the necessary write-down entry?
The inventory shortage of $1,750 ($18,000 - $16,250) decreases assets (inventory) and increases expenses (cost of goods sold), which deceases net income and equity. It does not affect cash flows.
Elliston Company accepted credit card payments for $10,000 of services provided to customers. The credit card company charges a 3% service charge. This transaction would
increase Retained Earnings by $9,700. The credit card sale increases assets by $9,700 (accounts receivable - credit card), increases revenue by $10,000, and increases expenses by $300. This increases net income and equity (retained earnings) by $9,700.
Landis Company is preparing its financial statements. Gross margin is normally 40% of sales. Information taken from the company's records revealed sales of $55,000; beginning inventory of $5,500 and purchases of $38,500. The estimated amount of ending inventory would be:
$11,000. $55,000 × (1 - 0.40) = $33,000 estimated cost of goods sold; $5,500 beginning inventory + $38,500 purchases = $44,000 goods available for sale; $44,000 - $33,000 cost of goods sold = $11,000 ending inventory
Anton Co. uses the perpetual inventory method. Anton purchased 1,080 units of inventory that cost $7 each. At a later date the company purchased an additional 1,110 units of inventory that cost $9 each. If Anton uses the FIFO cost flow method and sells 1,550 units of inventory, the amount of cost of goods sold will be:
$11,790. (1,080 × $7) + (470 × $9) = $11,790
Jing Company was started on January 1, 2016 when it issued common stock for $50,000 cash. Also, on January 1, 2016 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. At the end of 2020, assuming the equipment had not been sold, the book value of the office equipment using straight-line depreciation and double-declining balance depreciation, respectively, would be:
$12,000/$12,000. At the end of 2020, the end of the office equipment's 5-year useful life, the book value will be equal to the $12,000 salvage value, regardless of which depreciation method is used.
On January 1, 2016, Friedman Company purchased a truck that cost $48,000. The truck had an expected useful life of 8 years and an $8,000 salvage value. The book value of the truck at the end of 2016, assuming that Friedman uses the double declining balance method, is:
$36,000. $48,000 × (2 × 12.5%) = $12,000 Depreciation expense for 2016; $48,000 - $12,000 = $36,000 book value at the end of 2016.
Denver Co. issued bonds with a face value of $87,000 and a stated interest rate of 8%. The bonds have a life of five years and were sold at 102.5. If Denver amortizes discounts and premiums using the straight-line method, the amount of interest expense each full year would be:
$6,525. $87,000 × 8% = $6,960 annual interest payment; $87,000 × 2.50% = $2,175 premium; $2,175/5 years = $435 amortization; $6,960 - $435 = $6,525 interest expense
West Company borrowed $24,000 on September 1, 2016 from the Valley Bank. West agreed to pay interest annually at the rate of 8% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's 2016 income statement would be:
$640. $24,000 × 8% × 4/12 months = $640 interest expense. The fact that it was an 18-month note does not affect the 2016 interest expense.
Kenyon Company experienced a transaction that had the following effect on the financial statements:
A purchase return would decrease assets (merchandise inventory) and decrease liabilities (accounts payable), but would not affect the income statement or the statement of cash flows.
A firm's operating cycle can be determined by:
Adding the average days in inventory to the average days in receivables. Operating cycle = average days in inventory + average days in receivables
Company A and Company B are identical in all regards except that during 2016 Company A borrowed $31,000 at an interest rate of 10%. In contrast, Company B obtained financing by acquiring $31,000 from sale of common stock. Company B agreed to pay a $3,100 cash dividend each year. Both companies are in a 30% tax bracket. Which company would show the greater retained earnings at the end of 2016, and by what amount?
Company A's retained earnings would be higher by $930. $31,000 × 10.0% = $3,100 interest expense; $3,100 × 30% = $930 tax savings from debt financing. The $3,100 cash dividend has no tax savings. Therefore, Company A's net income for 2016 and its retained earnings at the end of 2016 would be $930 higher than Company B's.
Which of the following is not one of the purposes of an internal control system?
Ensuring that the company is using the most effective marketing plan. Internal controls do not relate to effective marketing plans. They do relate to safeguarding assets, evaluating performance, and assessing compliance with company policies and public laws.
After the check is signed, the third employee is the one who records the check in the ledger and examines the appropriate supporting documents.
False. By examining supporting documents, it is the signer who is checking the work of the employee who prepared the check. A third employee should then enter the check into the ledger.
A bank statement debit memo describes a transaction that increases a customer's account balance.
False. A debit memo decreases a customer's account balance.
An error is considered material if it would trigger an IRS audit.
False. An error is considered material if it would influence the opinion of the average prudent investor.
True or False Generally accepted accounting principles do not allow the cost flow pattern for merchandise inventory to differ from the physical flow of merchandise within the business.
False. Companies do not need to select a cost flow method that matches the physical flow of goods.
True or False Gains and losses are recorded for increases and decreases in the market value of assets such as land.
False. Gains and losses are recorded when assets such as land are sold for more or less than their carrying value on the balance sheet.
Tangible assets include land, equipment, and goodwill.
False. Goodwill is an intangible asset.
True or False Merchandising businesses include retail companies and manufacturing companies.
False. Retailers and wholesalers, but not manufacturers, are merchandising companies.
If a company uses the LIFO cost flow method, it is not required by generally accepted accounting principles to apply the lower-of-cost-or-market rule.
False. Selection of cost flow assumption has no bearing on the lower-of-cost-or-market rule.
True or False. Costs of selling inventory are product costs.
False. Selling costs are period costs.
The percent of revenue method for estimating uncollectible accounts expense is considered superior to the percent of receivables method because it is more conservative.
False. The percent of receivables method is considered to be superior to the percent of revenue method because it is based on aging of receivables.
For a company that uses the allowance method, the write-off of an uncollectible account receivable is an asset use transaction.
False. The write-off is an asset exchange transaction that decreases assets (accounts receivable) and increases assets (decreases allowance for doubtful accounts).
In preparing the April bank reconciliation for Oscar Company, it was discovered that on April 10 a check was written to pay delivery expense of $45 but the check was erroneously recorded as $54 in the company's books. The journal entry required to correct the error is
In order to correct the error, which caused delivery expense to be overstated and cash to be understated, the company must increase cash (a debit) and decrease delivery expense (a credit) by $9, the difference between $45 and $54.
An audit is useful to financial statement users because it
Provides reasonable assurance that the financial statements do not have material misstatements. The financial statement audit does not guarantee complete accuracy or the absence of fraud. It does provide reasonable assurance that there are no material misstatements and there is compliance with GAAP.
The accounting records of the Harris and Schubert Companies contained the following account balances:
The average number of days to collect accounts receivable for Harris is 73 days. Harris's accounts receivable turnover = $300,000/$60,000 = 5 times; Harris's average days to collect accounts receivable = 365/5 = 73 days; Schubert's accounts receivable turnover = $180,000/$40,000 = 4.5 times; Schubert's average days to collect accounts receivable = 365/4.5 = 81.11 days; A company with a lower accounts receivable turnover is more likely to incur credit costs.
Abbott Company purchased $6,600 of merchandise inventory on account. Advent uses the perpetual inventory method. Which of the following entries would be required to record this transaction?
The purchase of inventory on account increases inventory (a debit) and increases accounts payable (a credit).
The term "FOB Destination" means
The seller pays the shipping cost and records transportation-out expense. "FOB Destination" means that ownership of the goods stays with the seller during shipment and the seller (owner of the goods) pays the shipping costs. The seller will record transportation-out expense.
The Bradford Company was recently required to record an inventory write-down of $5,200 because the market value of its inventory was less than cost. Assuming the amount of the write-down is not material (the total inventory was over $9,750,000), which of the following is the appropriate journal entry?
The write-down, when immaterial, is a debit (increase) to cost of goods sold and a credit (decrease) to inventory.
How will a certified check be treated in a company's bank reconciliation?
There is no adjustment when preparing the bank reconciliation. Because the certified check was deducted by both the bank and by the company when it was issued, there is no adjustment on the bank reconciliation related to the certified check.
Why are the inventory and cost of goods sold accounts attractive targets for managerial fraud?
These accounts are more significant than most other accounts. In contrast, selling and administrative expenses are made up of many less significant expenses, and are more difficult to misstate to a great extent.
Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000.
Total appraised value = $2,200,000; Land is 17% of appraised value, Building is 50% of appraised value, Equipment is 33% of appraised value; $1,900,000 purchase price times % of appraised value is recorded as the historic cost of each asset.
A savings account or certificate of deposit that imposes a substantial penalty for early withdrawals should not be classified as Cash on the balance sheet.
True. If a savings account or certificate of deposit imposes a substantial penalty for early withdrawal, it should be classified as in investment.
An impairment of an intangible asset reduces the asset, stockholders' equity, and net income.
True. An impairment loss reduces the impaired asset account and increases the impairment loss account, which reduces net income and stockholders' equity.
True or False One of the disadvantages of the specific identification inventory cost flow method is that it can allow managers of a business to manipulate the amount of income the business reports.
True. Managers can choose which costs to assign to cost of goods sold if specific identification is used.
True or False In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method is allowed under generally accepted accounting principles.
True. Most companies rotate their inventory so as to sell the oldest inventory first. However, the company is free to choose other cost flow methods.
True or False A multistep income statement shows Sales, Cost of Goods Sold, and Gross Margin.
True. Multistep income statements show gross margin, but single step income statements do not.
The net realizable value of accounts receivable is the amount of receivables a company expects to collect.
True. Net realizable value is calculated as accounts receivable minus allowance for doubtful accounts.
True or False Costs charged to the Merchandise Inventory account are product costs.
True. Product costs are charged to the merchandise inventory account and expensed when goods are sold.
The Securities and Exchange Commission regulates financial reporting of all publicly traded U.S. companies.
True. The SEC regulates only publicly traded companies.
Zirkle Company understated its ending inventory. Which of the following answers correctly states the effect of the error in the present period?
Understatement of total assets and gross margin. Understating inventory understates assets (inventory) and overstates cost of goods sold, which understates gross margin, net income, and retained earnings, all in the current period.
Which of the following statements is true with regard to depreciation expense?
company should use the depreciation method that best matches expense recognition with the use of the asset. Expense recognition should match as closely as possible the benefit that was derived from the asset in a given period. Total depreciation over an asset's useful life will be the same regardless of the depreciation method. Different companies in the same industry are free to choose whatever depreciation method they see fit. Because double-declining depreciation recognizes greater expense in an asset's early year, straight-line depreciation will result in higher book value until the asset is fully depreciated, at which time the book values will be equal.
