Financial Accounting Exam 2
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 accounts 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 for Net Operating Cash Flow on the Statement of Cash Flows?
$(4000_)
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 accounts 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?
$1000 5000-4000
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
$102000
At the end of Year 1, Voss Company had $6,000 of inventory. During Year 2 the following events occurred: (1) Voss Company purchased $30,000 of inventory with cash. (2) Sold $20,000 of inventory for $28,000 cash to customers. (3) At the end of the year, during a physical count of the inventory, it found only $16,000 of inventory on hand. What would Voss Company report for cost of goods sold on the Year 2 income statement?
$20000
At the end of Year 1, Voss Company had $6,000 of inventory. During Year 2 the following events occurred: (1) Voss Company purchased $30,000 of inventory with cash. (2) Sold $20,000 of inventory for $28,000 cash to customers. (3) At the end of the year, during a physical count of the inventory, it found only $15,000 of inventory on hand. What would Voss Company report for net income on the Year 2 Income Statement?
$20000+$1000=21000 28000-21000=$7000 Net income
Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the LIFO cost flow method, the balance in the inventory account after the sales transaction will be
$30
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
$34000
The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1)200 Units @ $5 each Purchases made in Year 2800 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?
$3900
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 accounts payable for the inventory purchased in Event 1. Immediately after the three events have been recognized, the balance in the inventory account is
$4000 Cost of Goods Sold will remain in inventory until the inventory is sold
The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1) 200 Units @ $5 each Purchases made in Year 2800 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 weighted average cost flow method?
$4140
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 2800 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?
$4200
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 2400 Units @ $12 each Second purchase made in Year 2500 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
Taha Company purchased $8,000 of inventory under terms FOB destination. 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?
$8000 is transferred from cash to inventory and recorded as a decrease in cash flows for operating activities
Smith Company purchased inventory for $5,000 on account. Freight cost was $600 paid in cash. The freight terms were FOB destination. The inventory was sold to customers for $8,000. Freight cost was $600 paid in cash. The freight terms were FOB shipping point. Based on this information,
$8000+$600=$8600 Sales $8600-$600=$8000 Gross Margin $8000-$5000=$3000Net Income
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?
$8200 is transferred from cash to inventory and recorded as a decrease in cash flows for operating activities
Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the weighted average cost flow method, the amount of gross margin shown on the income statement will be
$9
2 If the amount of ending inventory is overstated, the amount of
-net income will be overstated -total assets will be overstated -retained earnings will be overstated
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
12000-20000=($8000)
At the end of Year 1, Voss Company had $6,000 of inventory. During Year 2 the following events occurred: (1) Voss Company purchased $30,000 of inventory with cash. (2) Sold $20,000 of inventory for $28,000 cash to customers. (3) At the end of the year, during a physical count of the inventory, it found only $15,000 of inventory on hand. What would Voss Company report for net operating cash flow on the Year 2 Statement of Cash Flows?
30000-28000=($2000)
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?
35000-34300=700 deducted (700) from inventory and (700) from equity & recognize the transaction as an expense resulting in a negative net income cash flows not affected
Which of the following formulas is used to calculate the number of days to sell inventory?
365/Inventory Turnover
Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable for the inventory purchased in Event 1. If the Company pays the accounts payable after the discount period has expired, how much cash will be required to settle the liability?
5000-1000= $4000
Pen Paint Company's unadjusted book balance at September 30 is $6,900. The Company's bank statement reveals bank service charges of $50. Two credit memos are included in the bank statement: one for $700 which represents a collection of an account receivable that the bank made for Pen Paint and one for $100 which represents the amount of interest that Pen Paint had earned on its interest-bearing checking account in June. Finally, a comparison of the Company's records with the bank statement revealed $500 of deposits in transit and $300 of outstanding checks. Based on this information, Pen Paint's true cash balance is
6900-50+700+100=7650
Kelly Company's unadjusted bank balance on May 31 is $9,500. An analysis of the bank statement revealed $1,400 of deposits in transit and $900 of outstanding checks. In addition, the bank statement showed a $200 NSF check. Based on this information, Kelly's true cash balance is
9500+1400-900=10000
Which of the following statements is true?
A high inventory turnover ratio produces a low number of days to collect inventory.
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. $48000 B. $18000 C. 14000 D. None
A. $48000
Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $50 of the inventory purchased in Event 1. (3) Sold the inventory for $6,000 cash. Based on this information, which of the following shows how the recognition of the return will affect the Company's financial statements. A. decreases assets and liabilities only. B. decreases liabilities and assets and shows up as an expense on income statement.
A. decreases assets and liabilities only.
Assessment 3 Amarillo Company experienced the... 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 accounts payable for the inventory purchased in Event 1. Based on this information the journal entry necessary to record the return is
Accounts Payable debited $1000 Inventory credited for $1000
Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable within the discount period for the inventory purchased in Event 1. Based on this information the journal entry necessary to record the purchase discount is
Accounts Payable debited $40 Inventory credited $40
Which of the following opinions is the least favorable opinion issued by an external auditor?
Adverse opinion
Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable within the discount period for the inventory purchased in Event 1. Based on this information, which of the following shows how the recognition of the cash discount will affect the Company's financial statements?
Assets credited (50) and liabilities debited (50). Nothing else is affected
Which of the following journal entries would be required to recognize the cash purchase of $500 of merchandise inventory? A. Cash debited $500 Inventory credited $500 B. Cost of Goods Sold debited $500 Cash credited $500 C. Inventory debited $500 Cash credited $500 D. Cost of Goods Sold debited $500 Inventory credited $500
C. Inventory debited $500 Cash credited $500 Asset Exchange
When merchandising company sells inventory it will A. recognize only as expense B. recognize only revenue C. recognize revenue and expense D. not recognize revenue or expense
C. recognize revenue and expense
Beachwood Clothing Company operates a chain of high end men's clothing stores. Beachwood owned land that was originally purchased as a store location. However, after abandoning the plan to build a new store, the land that had cost $5,000 was sold for $6,000 cash. Which of the following journal entries would be required to record the sale of the land?
Cash debited $6000 Land credited $5000 Gain from Sale of Land credited $1000
The framework that is used to assess the effectiveness of a company's internal control was established by the
Committee of Sponsoring Organizations of the Treadway Commission.
Assume a company paid $800 for a computer that it plans to sell to its customers. Suppose that as a result of new technology the company could buy the same computer today for $600. Which of the following journal entries would be required to show the inventory at the lower of cost or market?
Cost of goods sold debited $200 inventory credited $200
Edwards Shoe Store sold shoes that cost the company $5,700 for $8,200. Which of the following journal entries would be required to recognize the cost of goods sold? A. Cash debited $8200 Inventory credited $8200 B. Cost of Goods Sold debited $8200 Cash credited $8200 C. Inventory $5700 Cost of Goods Sold credited $5700 D. Cost of Goods Sold debited $5700 Inventory credited $5700
D. Cost of Goods Sold debited $5700 Inventory credited $5700
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
McDonald's will recognize a gain if it generates an amount of revenue that is higher than its operating expenses. This statement is
False
Product costs are expensed when they are incurred. This statement is
False
Sarbanes Oxley is a major fraud case that motivated Congress to establish rules governing internal control. This statement is
False
The amount of new income shown on a multi-step income statement will differ from the amount of net income shown on a single-step income statement.
False
The implementation of an effective internal control system eliminates the possibility of fraud. This statement is
False
The bank statement for Franklin Company showed a $4,000 credit. Which of the following could have caused this credit?
Franklin Company made a deposit
Which of the following statements is true? Checks that a company has written are shown as credits on a bank statement. Deposits will be shown as debits on a bank statement. Interest revenue will be shown as a credit on a bank statement. Bank services charges are not shown on a bank statement.
Interest revenue will be shown as a credit on a bank statement
Which of the following events experienced by a department store would be presented in the operating section of a multistep income statement?
Inventory sold for less than its cost
Which of the following shows how disbursing funds from a petty cash fund will affect a company's financial statements?
Journal entries are normally not made at the time of reimbursement
Which of the following cost flow methods would provide the lowest amount of net income in an inflationary environment?
LIFO
Which of the following shows how replenishing a petty cash fund will affect a company's financial statements?
Miscellaneous Expense debited Cash credited
Smith Company sold inventory that cost $5,000 for $9,000 cash. Freight cost was $600 paid in cash. The freight terms were FOB destination. Based on this information,
Net Income would be $3400
Gross Margin
Sales Revenue - Cost of Goods Sold Expense
Which of the following entities is responsible for establishing auditing standards?
The Public Company Accounting Oversight Board
Which of the following would raise suspicion that a manager may be attempting to overstate net income by falsifying the physical count of ending inventory?
The amount of estimated inventory calculated using the gross margin method was lower than the amount determined by the physical count.
What are the effects of purchasing inventory on account?
The assets and liabilities entities increase. Nothing else including cash flow is affected.
Edwards Shoe Store sold shoes that cost the company $5,700 for $8,200. How will the recognition of the cost of goods sold will affect the Company's financial statement?
The assets and stockholder equity accounts would decrease and the transaction would be recorded as an expense resulting in a negative net income. The transaction does not affect the Cash Flows account.
Which of the following opinions is the most favorable opinion issued by an external auditor?
Unqualified opinion
Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts 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
[5000-1000].01=40 4000-40=3960
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 $26500 on the statement of cash flows
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
2 To determine the true cash balance
add bank collections of depositors' accounts receivable to the unadjusted book balance subtract bank service charges from the unadjusted book balance add interest earned from bank to the unadjusted book balance all of the answers describe adjustments that must be made to the unadjusted book balance in order to determine the true cash balance
To determine the true cash balance
add deposits in transit to and subtract outstanding checks from the unadjusted bank balance
Rex Company's bank statement shows a $200 NSF check. To determine the true cash balance the
amount of the NSF check must be subtracted from the unadjusted book balance
Inventory is
an asset account that appears on the balance sheet
Paying cash to purchase inventory is
an asset exchange transaction decreases cash increases inventory
Instead of using cash to pay bills, many companies pay with checks because
checks facilitate the separation of duties associated with cash payments
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 journal entries would be required to recognize the inventory shrinkage?
cost of goods sold debited $700 inventory credited $700
If the amount of ending inventory is overstated, the amount of
cost of goods sold will be understated
If an auditor has insufficient information to determine whether a company's statements are prepared in accordance with Generally Accepted Accounting Principles, the auditor should issue a(n)
disclaimer of opinion
A key component of estimating the amount of ending inventory is to determine the gross margin percentage for prior years. The gross margin percentage is calculated by
dividing gross margin by net sales
An adverse opinion is the most common type of opinion issued by independent auditors. This statement is
false
An unqualified audit opinion suggests that all aspects of financial statements are in compliance with generally accepted accounting principles (GAAP). This statement is
false
GAAP requires that inventory be shown on the balance sheet at its cost (the price paid) regardless of its current value. This statement is
false
Smith Company sold inventory that cost $5,000 for $9,000 cash. Freight cost was $600 paid in cash. The freight terms were FOB shipping point. Based on this information,
gross margin would be $4000
Which of the following is not a commonly accepted internal control activity? Hiring only college graduates Separation of duties Requiring employee absences using prenumbered documents
hiring only college graduates
The journal entry to recognize the write down of inventory based on the lower of cost or market rule will
increase the amount of expenses
What does a company recognize the transaction of selling inventory as?
it will recognize sales revenue for the amount of the sales price
Which of the following is not an internal control procedure designed to safeguard cash? keep cash in locations that are accessible by multiple employees record receipts of cash in the company's accounting system immediately provide customers with prenumbered receipts deposit cash in external financial institutions
keep cash in locations that are accessible by multiple employees
The gross margin appears on a
multistep income statement
Gains are benefits generated from
nonoperating activities
Which of the following is an internal control procedure designed to protect cash receipts?
record cash collections immediately provide customers with receipts deposit cash collections immediately all of the answers described internal control procedures designed to protect cash receipts
Internal control is a process designed to ensure
reliable financial reporting effective and efficient operations compliance with applicable laws and regulations Internal control is designed to ensure all of the items described in the answers.
The Committee of Sponsoring Organizations (COSO) framework for the evaluation of internal controls contains which of the following interrelated components?
risk assessment information and communication monitoring all of the answers are components of the COSO framework
Assume that the amount of ending inventory is overstated in Year 1. Further assume the overstatement in Year 1 is not discovered and the ending inventory in Year 2 is reported accurately. Under these circumstances,
the Year 2 ending balance in retained earnings will be accurate
When a company establishes a petty cash fund
the amount of total assets is not affected
What does the company recognize the amount of the cost of the goods that were sold?
the company will recognize a cost of goods sold expense
To avoid the risk of fraud associated with inventory manipulation
the employee in charge of counting inventory should be different from the employee in charge of recording inventory transactions
The gross margin method of estimating ending inventory is frequently used
to check the accuracy of a physical count of inventory on hand
Zack's, Inc. sold land that cost $85,000 for $70,000 cash. As a result of this event
total assets decrease
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
Cash is difficult to protect because it is easy to transfer and its ownership difficult to prove. These statements are
true
Public companies under the jurisdiction of the Securities and Exchange Commission are required by law to hire a certified public accounting firm (independent auditor) to assess whether their published financial statements are in compliance with Generally Accepted Accounting Principles (GAAP). This statement is
true
The cash flow associated with buying and selling inventory is not affected by the inventory cost flow method. This statement is
true
While independent auditors are responsible to the public they receive compensation for their work from the companies they audit. This statement is
true
Wilson Company used a check to pay Smith Company for services provided by Smith. Smith deposited Wilson's check in its account with the State Bank. When Smith's most recent bank statement was examined, the company's accountant noticed that the Wilson check had been classified as an NSF (not sufficient funds) check. The NSF check
was shown as a debit on Smith's bank statement
Expenses are recognized
when the petty cash fund is replenished
Which of the following industries is likely to have the highest number of days to sell inventory?
wine producers