Financial Accounting Ch. 4, 5, 6

The net realizable value of accounts receivable is the difference between gross accounts receivable and:

Allowance for Uncollectible Accounts.

A purchase discount decreases the cost of the inventory.

True

By selling on credit, companies run the risk of not collecting some receivables.

True

If a company uses LIFO for tax purposes, they must use LIFO for financial reporting purposes.

True

In a perpetual inventory system, a business maintains a running record of the number of units bought, sold and on hand for each inventory item.

True

Interest rates are always for an annual period unless stated otherwise.

True

When inventory costs are rising, a company using the LIFO costing method will generally pay less taxes than if the company had been using the FIFO method.

True

To determine the cost of ending inventory using the LIFO method:

the beginning inventory and earliest purchase costs are used.

The maker of a note records interest expense.

True

Under the allowance method, Uncollectible-Account Expense is recorded in the same accounting period as the sale.

True

Corbin Company was charged $25 for a check printing fee associated with their checking account. What journal entry is required?

Debit Miscellaneous Expense for $25 and credit Cash for $25.

Under the ________ method, ending inventory is based on the costs of the most recent purchases.

FIFO

Which inventory costing method provides the most current, up-to-date cost of inventory on the balance sheet?

FIFO

The Allowance for Uncollectible Accounts is classified as:

a contra-asset account

When inventory costs are decreasing, the LIFO costing method will generally result in:

a higher gross profit than under FIFO.

Estimating uncollectible accounts by analyzing receivables from specific customers according to how long each has been outstanding is known as the:

aging-of-receivables method.

In a bank reconciliation, items recorded by the bank, but not yet recorded by the company, include:

bank collections of accounts receivable.

Which of the following items can be added to or subtracted from the bank balance when preparing the bank reconciliation?

bank errors

Two accounts that appear on the financial statements of a merchandising company but are not needed by a service company are:

cost of goods sold and inventory.

The two most common types of fraud impacting the financial statements are:

fraudulent financial reporting and misappropriation of assets

The cost of inventory that is still on hand is called:

inventory, a current asset that appears on the balance sheet.

When inventory costs are increasing, the FIFO costing method will generally yield a cost of goods sold that is:

lower than cost of goods sold under the LIFO method.

There are three parties to a check. The person or company to whom the check is paid is the:

payee

The income statement approach to estimating uncollectible accounts is called the ________ method. The balance sheet approach to estimating uncollectible accounts is called the ________ method.

percent-of-sales; aging-of-receivables

When a note matures:

the debtor must pay the creditor the maturity value of the note.

When inventory is shipped from the seller to the buyer with shipping terms of FOB destination:

the seller has title to the goods while they are in transit.

Under a perpetual inventory system, when a sale is made, the seller needs to prepare:

two journal entries.

Which balance sheet account shows the amount of accounts receivable that the business does NOT expect to collect?

Allowance for Uncollectible Accounts

Accounts receivable represents a form of extending credit which requires customers to sign a promise to pay the business a definite sum at the maturity date, plus interest.

False

What is the benefit and cost of extending credit to customers?

Benefit - Increased Sales Cost - Uncollectible-Account Expense

When preparing a bank reconciliation, which of the following items should be added to the book balance?

Both EFT receipts and collection of note receivable

When comparing the FIFO and LIFO inventory methods:

FIFO matches old inventory costs against revenue.

Since a perpetual inventory system continuously updates the inventory account, a physical inventory count is not necessary to prove the inventory records.

False

The Allowance for Uncollectible Accounts has a normal debit balance because it is an asset account.

False

The cost of the inventory that a business has sold to customers is called:

cost of goods sold.

A bank statement included a NSF check from customer Kim Fields for $2,100. The journal entry to record this reconciling item should:

debit Accounts Receivable and credit Cash for $2,100.

Using a perpetual inventory system, which journal entry(ies) is(are) prepared when two units of merchandise are sold on account?

debit Accounts Receivable and credit Sales Revenue; debit Cost of Goods Sold and credit Inventory

The journal entry to record accrued interest on a note receivable at year end is:

debit Interest Receivable and credit Interest Revenue.

Grogan Company purchases inventory on account with a cost of $1300 and a retail price of $2600. Grogan Company uses the perpetual inventory method. What journal entry is required on the date of purchase?

debit Inventory for $1300 and credit Accounts Payable for $1300

The following account balances were extracted from the accounting records of Thomas Corporation at the end of the year: Accounts Receivable - $1,104,000 Allowance for Uncollectible Accounts (Credit) - $39,000 Uncollectible-Account Expense - $63,000

$1,104,000 - $39,000 = 1,065,000 The correct answer is: $1,065,000

New Store has the following information at August 31:• Two deposits made on August 31 were not on the bank statement, totaling $5700.• The bank collected an EFT payment on a note receivable for $2,750. Of this amount, $150 represented interest on the note.• August 31 balance in Cash was $12,107.• The bookkeeper forgot to record check #1578 for $843 which was cashed by the bank on August 15th.• The balance on the bank statement as of August 31 was $10,500.• A check printing fee of $40 was shown on the bank statement. NSF check $100.• Checks #1572, 1606, and 1548, totaling $2326, were not shown on the bank statement, even though the company had sent the checks.What is the adjusted bank balance at August 31?

$10,500 + Deposits $5700 - Outstanding Checks $2326 = $13,874 The correct answer is: $13,874

The selling price of a television is $1600 and the cost to the retailer is $225. What is the retailer's gross profit from the sale of the television?

$1600 - $225 = $1375 The correct answer is: $1375

On July 1, Corrao Company purchased $1600 of inventory on account with credit terms of 2/10, net 30. Corrao Company uses the perpetual inventory system. On July 5, Corrao Company paid the amount due. What journal entry did they prepare on July 5?

$1600 × 2% = $32 discount The correct answer is: debit Accounts Payable for $1600, credit Inventory for $32 and credit Cash for $1568

If a bookkeeper mistakenly records a disbursement as $47 instead of the correct amount of $74 the error should be reconciled on the bank reconciliation as a:

$27 deduction from the balance per books.

Marjorie Company's cash balance per the books at the end of the month was $7400. After comparing the company's records with the monthly bank statement, Marjorie's accountant identified the following reconciling items: outstanding checks, $800; deposits in transit, $700; bank service charge, $30; and NSF check, $100. The bank collection of a note receivable was $1200 plus interest of $170. There also was an EFT payment of $150. What is the adjusted book balance at the end of the month?

$7400 - Service Charge $30 - NSF Check $100 + Note $1200 + Interest $170 - EFT payment $150 = $8490 $7400 - Service Charge $30 - NSF Check $100 + Note $1200 + Interest $170 - EFT payment $150 = $8490 The correct answer is: $8490

Jensen Corporation uses the percentage-of-sales method to estimate uncollectibles. Net credit sales for the current year amount to $2,005,000 and management estimates 3% will be uncollectible. The Allowance for Doubtful Accounts prior to adjustment has a debit balance of $17,000. After all adjusting entries are made, the balance in Allowance for Uncollectible Accounts will be:

(2,005,000 × 0.03) = 60,15060,150 - 17,000 = 43,150 (2,005,000 × 0.03) = 60,15060,150 - 17,000 = 43,150 The correct answer is: $43,150.

A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the following: Days Outstanding: 1-30 days 31-60 days 61-90 days Over 90 days Accounts Receivable: $62,000 $40,000 $23,000 $9000 Est. Percent Uncollectible: 2% 4% 11% 50% Before the year-end adjustment, the credit balance in Allowance for Uncollectible Accounts was $1000. Under the aging-of-receivables method, the Uncollectible-Account Expense at year-end is:

(62,000 × 0.02) + (40,000 × 0.04) + (23,000 × 0.11) + (9000 × 0.5) = 98709870 - 1000 = 8870 The correct answer is: $8870.

A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the following: Days Outstanding: 1-30 days 31-60 days 61-90 days Over 90 days Accounts Receivable: $64,000 $45,000 $25,000 $5,000 Est. Percent Uncollectible: 2% 5% 12% 51% Before the year-end adjustment, the credit balance in Allowance for Uncollectible Accounts was $900. Under the aging-of-receivables method, the balance in the Allowance for Uncollectible Accounts will be ________ after the adjusting entry is made.

(64,000 × 0.02) + (45,000 × 0.05) + (25,000 × 0.12) + (5000 × 0.51) = 9080 The correct answer is: $9080

A company borrows $10,200 from the bank at 13% interest for thirty days. $10,200 is the ________ of the note. The maturity value of the note is ________.

10,200 + (10,200 × 13% × 30/365) = 10,309 The correct answer is: principal; $10,309

Sanfran Company purchased inventory for $110,000. In addition they had purchase returns of $5000 and paid freight-in of $10,000. Sanfran Company's net cost of purchases would be:

110,000 - 5000 + 10,000 = 115,000 The correct answer is: $115,000.

Jumpin Corporation uses the percent-of-sales method to estimate uncollectibles. Net credit sales for the current year amount to $2,020,000, and management estimates 3% will be uncollectible. The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1600. The amount of Uncollectible-Account Expense reported on the income statement will be:

2,020,000 × 0.03 = 60,600 2,020,000 × 0.03 = 60,600 The correct answer is: $60,600.

An aging-of-accounts-receivable indicates that the amount of uncollectible accounts is $3410. The Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $500. The Accounts Receivable balance is $44,820. The amount of the adjusting entry for uncollectible accounts should be for:

3410 - 500 = 2910 The correct answer is: $2910.

Inventory is reported on the balance sheet at the selling price of the inventory still on hand.

False

Service entities report cost of goods sold on the income statement.

False

The choice of an inventory costing method does not impact a company's balance sheet.

False

The principal amount of a note is the amount borrowed by the creditor.

False

The principal amount of a note is the amount lent by the debtor and borrowed by the creditor.

False

When inventory costs are rising, FIFO allows managers to manipulate net income by timing the purchases of inventory.

False

Roadway Company purchases inventory from Fedway Company with the shipping terms FOB destination. This means that:

Fedway Company will pay the freight on this transaction.

If the interest rate on a note is 10.5% and the principal was $60,000, what is the maturity value of the note, if the term of the note is 7 months? (Round your final answer to the nearest dollar.)

Interest = (60,000 × 10.5% × 7/12) = 3675Maturity value = 60,000 + 3675 = 63,675 The correct answer is: $63,675

Which inventory costing method provides the most realistic measure of net income?

LIFO

Which statement about internal controls is FALSE

Public companies do not have to evaluate the effectiveness of internal controls

Accounts receivable are reported on the balance sheet at their net realizable value.

True

The LIFO method assigns the most recent inventory cost to cost of goods sold.

True

The maturity value of a note is the sum of the principal amount of a note plus the interest over the term of the note.

True

Emporium Bank lends money to a customer on a six month note. What journal entry does the bank prepare?

debit Note Receivable and credit Cash

Fourth Company receives a note from a customer for a $13,000 sale. On the date of sale, what journal entry did Fourth Company prepare?

debit Notes Receivable for $13,000 and credit Sales Revenue for $13,000

Under the allowance method, the entry to write off a $3600 uncollectible account includes a:

debit to Allowance for Uncollectible Accounts for $3600 and credit to Accounts Receivable for $3600.

On October 1, 2015, the Early Bank lends money to a customer on a six month note. The bank accrues interest on the note at December 31, 2015. The journal entry on December 31, 2015 by the bank would include a:

debit to Interest Receivable and a credit to Interest Revenue for three months of interest.

Under a perpetual inventory system, the journal entry to record the purchase of inventory on account will include a:

debit to Inventory and a credit to Accounts Payable

If the bank records a deposit of $70 as $700 the error should be reconciled on a bank reconciliation as a(n):

deduction to the bank balance of $630.

Deposits that have been recorded on the books, but have not yet been recorded by the bank are:

deposits in transit.

Estimates are NOT used to record uncollectible accounts expense when using the ________ method.

direct write-off.

An employee states that he steals office supplies for his wife and children because "Everyone is doing it." This is an example of:

rationalization

Sales revenue is based on the ________ of the inventory, while cost of goods sold is based on the ________ of the inventory.

sale price; cost

All of the following costs would be included in the cost of inventory EXCEPT for:

sales commission paid to salesperson when the inventory is sold.

Under the allowance method for estimating uncollectible accounts:

the Allowance for Uncollectible Accounts is a contra account to gross Accounts Receivable. a company sets up an Allowance for Uncollectible Accounts to estimate the amount of the receivables the company does not expect to collect. the Allowance for Uncollectible Accounts will normally have a credit balance. all of the above.