Financial Accounting Exam 2
In a perpetual inventory system, a purchase allowance is treated as a decrease in expenses by the company that purchased the goods. True or False?
FALSE
Inventory Costing under a Perpetual System
One of the most important issues in accounting for inventory is determining the per unit cost assigned to inventory items
When processing a bank reconciliation, when is an adjustment required?
Only the items reconciling the book balance requires and adjustment.
What drives human fraud?
Opportunity (refers to internal control deficiencies), Pressure (refers to financial, family, society, and other stresses), Rationalization (refers to employees justifying fraudulent behavior)
What are two important types of cash receipts?
Over-the-counter cash receipts and cash receipts by mail.
When using a perpetual inventory system, which of the following events is an asset use transaction? A) Paid cash to purchase inventory B) Paid cash for transportation-out costs C) Purchased inventory on account D) Paid cash for transportation-in costs
Paid cash for transportation-out costs
What is the journal entry for setting up a petty cash fund?
Petty cash - Debit. Cash - Credit.
What are the goals of cash management?
Plan cash receipts to meet cash payments when due and keep a minimum level of cash necessary to operate.
What is a purchase order?
A document used by a person or department that places an order with a vendor.
A multistep income statement shows sales revenue, cost of goods sold, and gross margin. True or False?
TRUE
What is the gross margin that results from these four transactions? A) $5,100 B) $7,726 C) $6,550 D) $11,074
$7,726
What is the net cash flow from operating activities as a result of the four transactions? A) $5,100 B) $7,726 C) $6,550 D) $11,074
$7,726
Full-disclosure principle
(Method change is acceptable if it will improve financial reporting) Requires statement notes report type of change, its justification, and its effect on income
Lower-of-Cost or market pricing is applied in one of three ways:
1. Each individual item separately. 2. Major categories of items. 3. To the entire inventory
What are the 7 principles of Internal Control?
1. Establish responsibilities 2. Maintain adequate records 3. Insure assets and bond key employees 4. Separate recordkeeping from custody of assets 5. Divide responsibility for related transactions 6. Apply technological controls 7. Perform regular and independent reviews
When purchase costs regularly rise (When costs regularly decline, reverse occurs for FIFO and LIFO):
1. FIFO assigns the lowest amount to cost of goods sold resulting in the highest gross profit and the highest net income. ADVANTAGE: Inventory on the balance sheet approximates its current replacement cost; it also mimics the actual flow of goods for most businesses. 2. LIFO assigns the highest amount to cost of goods sold resulting in the lowest gross profit and the lowest net income. ADVANTAGE: Better match of current costs with revenues in computing gross margin. 3. Weighted Average method yields results between FIFO and LIFO. ADVANTAGE: Smoothing out of price changes. 4. Specific Identification always yields results that depend on which units are sold. ADVANTAGE: Exactly matches costs and revenues
Three basic guidelines to Cash/Like-cash asset handling are what?
1. Handling cash is separate from recordkeeping of cash 2. Cash receipts are promptly deposited in a bank 3. Cash disbursements are made by check
What are the 9 steps to bank reconciliation?
1. Identify the bank statement balance 2. List any unrecorded deposits and bank errors understating the balance (Add) 3. List any oustanding checks and any bank errors overstating the balance (Deduct) 4. Compute adjusted bank balance 5. Identify the company's book balance 6. List any unrecorded credits, interest, and errors understating the book balance from the bank (Add) 7. List any unrecorded debits, service charges, and errors overstating the book balance (Deduct) 8. Compute the adjusted book balance 9. Compare
Balance sheet effects:
1. If ending inventory is understated, assets and equity are understated 2. If ending inventory is overstated, assets and equity are overstated 3. Errors in beginning inventory do not yield misstatements in the end-of-period balance sheet, but they do affect current period's income statement
Income statement effects:
1. If ending inventory is understated, cost of goods sold is overstated and net income is understated 2. If beginning inventory is understated, cost of goods sold is understated and net income is overstated 3. If ending inventory is overstated, cost of goods sold is understated and net income if overstated 4. If beginning inventory is overstated, cost of goods sold is overstated and net income is understated
Internal control when taking physical count of inventory
1. Prenumbered inventory tickets; each ticket must be accounted for. 2. Those responsible for inventory do not count inventory. 3. Counters confirm inventories existence, amount, and quality. 4. Second count is taken by different counter. 5. Manager confirms that al inventories are ticketed once, and only once
What does final approval imply?
1. Requisition checked 2. Purchase order checked 3. Receiving report checked 4. Invoice checked (Price, calculations, and terms)
Aaron Company uses the periodic inventory system. If Aaron's ending inventory is understated due to an accounting error, what is the effect on net income and the ending balance of retained earnings? Net Income Retained Earnings A. Understated Understated B. Understated Overstated C. Overstated Understated D. Overstated Overstated
A
Assume a company uses the periodic inventory system. Which of the following accounts would not be affected when recording purchases and related transactions? A) Merchandise Inventory B) Purchase Returns and Allowances C) Purchase Discounts D) Purchases
A
During the current year, Gomez Co. had beginning inventory of $2,400 and ending inventory of $1,200. The cost of goods sold was $9,600. What is the amount of inventory purchased during the year? A) $8,400 B) $9,600 C) $10,800 D) $13,200
A
Garrett Company uses the perpetual inventory system. The company's records showed a book balance of $18,000 in the Merchandise Inventory account, and a physical count finds only $16,250 of inventory. Which of the following represents the financial statement effect of writing-down the inventory? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. (1,750) NA (1,750) NA 1,750 (1,750) NA B. NA 1,750 (1,750) NA 1,750 (1,750) NA C. 16,250 NA 16,250 16,250 NA 16,250 16,250 IA D. (18,000) NA (18,000) (18,000) NA (18,000) NA
A
Sullivan Company uses the periodic inventory system. The following balances were drawn from the accounts of Sullivan Company prior to the closing process: Sales revenue $ 24,000 Beginning inventory balance 6,400 Purchases 16,000 Transportation-in 800 Transportation-out 1,200 Purchase discounts 400 Ending inventory balance 7,200 What is the gross margin that will be shown on the income statement? A) $8,400 B) $7,200 C) $15,600 D) $18,400
A
What happens when merchandise is delivered FOB shipping point? A) The buyer pays the freight cost. B) The seller pays the freight cost. C) The buyer records transportation cost as an expense. D) The seller records transportation-out expense.
A
What is the chief advantage of the periodic system? A) Efficiency and ease of recording B) Immediate feedback on the inventory on hand at any time during the period C) Timely discovery of losses due to theft D) Better control over inventory
A
What is the final steps for an obligaton once a voucher is reviewed and completed?
A check is written usually on the due date of the invoice.
What is a purchase requisition?
A document that lists the items needed and requested by a person or department.
What is a receiving report?
A document used within the company to notify the appropriate persons that ordered goods have been received and to desribe the quantities and conditions of the goods.
What is days' sales uncollected (receivables)?
A measure of how quickly a company can convert its accounts receivable into cash.
10) Llewelyn Company paid the amount due on a purchase of merchandise on account. Llewelyn uses the perpetual inventory system. Which of the following reflects the effect of the payment on the financial statements? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. - = - + NA NA - NA = NA - OA B. - = - + NA NA - + = - - OA C. + - = NA + NA NA - NA = NA - IA D. + - = NA + NA NA - NA = NA - OA
A)- = - + NA NA - NA = NA - OA
On April 1, Snell Company made a $50,000 sale giving the customer terms of 3/10, n/30. The receivable was collected from the customer on April 8. How does the collection of cash from the customer affect the company's financial statements? Assets = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. (1,500) = NA + (1,500) (1,500) - NA = (1,500) 48,500 OA B. (1,500) = NA + (1,500) (1,500) - NA = (1,500) NA C. (1,500) = NA + (1,500) NA - (1,500) = 500 1,500 OA D. 48,500 = NA + 48,500 48,500 - NA = 48,500 48,500 OA
A. (1,500) = NA + (1,500) (1,500) - NA = (1,500) 48,500 OA
A common size income statement is prepared by dividing all amounts on the statement by net income. True or False?
FALSE
Account No. Account Title (1) Cash (2) Merchandise inventory (3) Cost of goods sold (4) Transportation-out (5) Dividends (6) Common stock (7) Selling expense (8) Loss on the sale of land (9) Sales Which accounts would appear on the income statement? A) Account numbers 3, 4, 7, 8, and 9 B) Account numbers 3, 4, 5, 7, and 9 C) Account numbers 2, 3, 7, 8, and 9 D) Account numbers 3, 5, 7, and 8
Account numbers 3, 4, 7, 8, and 9
Which of the following is considered a period cost? A) Transportation cost on goods received from suppliers B) Advertising expense for the current month C) Cost of merchandise purchased D) None of these answer choices are considered a period cost
Advertising expense for the current month
A company using the perpetual inventory system paid $250 cash to have goods delivered from one of its suppliers. How would the payment of $250 for transportation-in be classified? A) An asset source transaction B) An asset use transaction C) An asset exchange transaction D) A claims exchange transaction
An asset exchange transaction
What is an invoice?
An itemized statement of goods prepared by the vendor listing the customer's name, items sold, sales prices, and terms of sale.
What effect will the return of merchandise to the supplier in event (2) have on Darlington's financial statements? A) Assets and stockholders' equity decrease by $1,176. B) Assets and liabilities decrease by $1,176. C) Assets and liabilities decrease by $1,200. D) None. It is an asset exchange transaction.
Assets and liabilities decrease by $1,200.
Weighted average
Assumes costs flow in an average of the costs available --> As sales occur, weighted average computes the average cost per unit of inventory at the time of sale and charges this cost per unit sold to cost of goods sold leaving average cost pr unit on hand in inventory. Weighted average equals cost of goods available for sale divided by the units available
First-in, first-out (FIFO)
Assumes costs flow in the order incurred --> As sales occur, FIFO charges costs of the earliest units acquired to cost of goods sold, leaving costs of the most recent purchases in inventory
Last-in, first-out (LIFO)
Assumes costs flow in the reverse order occurred --> As sales occur, LIFO charges costs of the most recent purchase to cost of goods sold, leaving costs of the earliest purchases in inventory
What are some specific requirements of the Sarbanes-Oxley Act?
Auditors must evaluate internal controls and issue an internal control report, Auditors of a client are restricted as to what consulting services they can provide that client, the person leading an audit can serve no more than seven years without a two-year break, Auditors' work is overseen by the Public Company Accounting Oversight Board, Harsh penalties exist for violators (sentences up to 25 years in prison with severe fines.
Costs of selling inventory are product costs.
FALSE
Ashton Company uses the perpetual inventory system. The company's inventory account had a $6,600 balance as of December 31, Year 1. A physical count of inventory shows only $5,900 of merchandise in stock at December 31, Year 1. How will recognizing the missing inventory affect the company's financial statements? A) Increase assets. B) Increase expense. C) Decrease cash flow from operating activities. D) All of these answer choices are correct.
B
Assume the perpetual inventory system is used. 1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point. 2) Green Company paid freight cost of $2,400 to have the merchandise delivered. 3) Payment was made to the supplier on the inventory within 10 days. 4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB destination with freight cost amounting to $1,600. What is the net cash flow from operating activities that results from these transactions? A) $94,000 inflow B) $27,280 inflow C) $66,720 outflow D) $31,280 inflow
B
Ballard Company uses the perpetual inventory system. The company purchased $16,000 of merchandise from Andes Company under the terms 2/10, net/30. Ballard paid for the merchandise within 10 days and also paid $500 freight to obtain the goods under terms FOB shipping point. All of the merchandise purchased was sold for $30,000 cash. What is the amount of gross margin that resulted from these business events? A) $14,000 B) $13,820 C) $16,000 D) $13,500
B
Based on common-sized income statements, which of the companies spent the least on operating expenses in relationship to its sales? A) Company A B) Company B C) Company C D) Company D
B
Butte Company recognized $24,000 of revenue on the cash sale of merchandise that cost $11,000. How will the sale be reported on the statement of cash flows? A) Cash inflow from investing activities B) Cash inflow from operating activities C) Cash inflow from financing activities D) Cash inflow from principal activities
B
Flagler Company purchased $4,000 of merchandise on account. Flagler sold the merchandise to a customer for $7,000 cash. What is the increase in gross margin and the net change in cash flow from operating activities as a result of these transactions? (Consider the effects of both parts of this event.) Gross Margin Cash Flow From Operating Activities A. $ 7,000 $ 4,000 inflow B. $ 3,000 $ 7,000 inflow C. $ 3,000 $ 7,000 outflow D. $ 4,000 $ 7,000 inflow
B
Glen Company uses the perpetual inventory system. The company entered into the following events: 1) Purchased merchandise inventory that cost $10,000 under terms of 2/10, n/30. 2) Made payment to the supplier within the discount period. 3) Sold all of the goods to customers on account for $22,000. What is Glen's cost of goods sold as a result of these three transactions? A) $9,000 B) $9,800 C) $10,000 D) $21,800
B
How is the net income percentage calculated? A) Net Sales divided by net Income B) Net Income divided by net Sales C) Total stockholders' equity divided by net sales D) Net Income divided by Gross Margin
B
JCS Incorporated experienced the following transactions during its first year of business. The company purchased $16,000 of merchandise from Kent Company. The company paid $2,000 for selling and administrative expenses and purchased land for $5,000. All of the merchandise purchased was sold for $30,000 cash. What is the company's gross margin? A) $7,000 B) $14,000 C) $23,000 D) $30,000
B
JJ Co. purchased on account merchandise with a list price of $10,000. Payment terms were 1/15, n/45. If collection occurs before the discount expires, what is the effect of the sales discount on the balance sheet? A) Decreases accounts receivable B) Decreases inventory C) Increases accounts payable D) Increases cash
B
SX Company sold merchandise on account for $16,000. The merchandise had cost the company $6,000. What is the effect of the sale on the income statement? A) Revenue increases by $10,000. B) Expenses increase by $6,000. C) Net income increases by $16,000. D) All of these answer choices are correct.
B
Sam Company reported the following amounts on its income statement: Net income $ 100,000 Cost of goods sold 400,000 Gross margin 200,000 Based on the information provided, what was the amount of sales reported on the income statement? A) $700,000 B) $600,000 C) $300,000 D) $200,000
B
Three of the companies are upscale stores and one is a discount store. Which company is most likely to be the discount store? A) Company A B) Company B C) Company C D) Company D
B
Which of the following retailers would be expected to have the highest gross margin percentage? A) Kmart B) Neiman Marcus C) Walmart D) A supermarket chain such as Safeway
B
Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $42,000 of common stock for cash. 2) The company paid cash to purchase $26,400 of inventory. 3) The company sold inventory that cost $16,000 for $30,600 cash. 4) Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $35,200 of inventory. 2) The company sold inventory that cost $32,800 for $57,000 cash. 3) Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. 31) What is the amount of inventory that will be shown on the balance sheet at December 31, Year 2? A) $2,400 B) $12,800 C) $61,600 D) $28,800
B) $12,800
Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $42,000 of common stock for cash. 2) The company paid cash to purchase $26,400 of inventory. 3) The company sold inventory that cost $16,000 for $30,600 cash. 4) Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $35,200 of inventory. 2) The company sold inventory that cost $32,800 for $57,000 cash. 3) Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. 30) What is Sanchez's gross margin for Year 2? A) $6,200 B) $24,200 C) $21,800 D) $32,800
B) $24,200
Account No. Account Title (1) Cash (2) Merchandise inventory (3) Cost of goods sold (4) Transportation-out (5) Dividends (6) Common stock (7) Selling expense (8) Loss on the sale of land (9) Sales Which accounts would affect gross margin? A) Account numbers 2 and 9 B) Account numbers 3 and 9 C) Account numbers 3, 4, 7, and 9 D) Account numbers 3, 7, 8, and 9
B) Account numbers 3 and 9
A company using the perpetual inventory system paid cash for freight costs to purchase merchandise. Which of the following reflects the effects of this event on the financial statements? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. - = NA + - NA - NA = NA - OA B. + - = NA + NA NA - NA = NA - OA C. + - = NA + NA NA - NA = NA NA D. + - = NA + NA NA - + = - - OA A) Option A B) Option B C) Option C D) Option D
B. + - = NA + NA NA - NA = NA - OA
Account No. Account Title (1) Cash (2) Merchandise inventory (3) Cost of goods sold (4) Transportation-out (5) Dividends (6) Common stock (7) Selling expense (8) Loss on the sale of land (9) Sales Which accounts would affect operating income? A) Account numbers 2, 4, and 9 B) Account numbers 3, 5, 7, and 9 C) Account numbers 3, 4, 7, and 9 D) Account numbers 3, 4, 7, 8, and 9
C
Assume the perpetual inventory system is used. 1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point. 2) Green Company paid freight cost of $2,400 to have the merchandise delivered. 3) Payment was made to the supplier on the inventory within 10 days. 4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB destination with freight cost amounting to $1,600. What is the amount of gross margin that results from these transactions? A) $31,280 B) $27,280 C) $28,880 D) $29,680
C
Leonard Company paid freight costs to have goods shipped to one of its customers. What effect will the payment of these freight costs have on the company's financial statements? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. + - = NA + NA NA - NA = NA - OA B. - = + + NA NA - NA = NA - OA C. - = NA + - NA - + = - - OA D. - = NA + - NA - NA = NA - IA A) Option A B) Option B C) Option C D) Option D
C
Olly Company is a merchandising business that sells dog food. Based on the following information, what is the gross margin for Olly Company? Sales Revenue $ 500,000 Cash 100,000 Accounts Receivable 50,000 Inventory 25,000 Cost of goods sold 300,000 Operating expenses 40,000 A) $135,000 B) $160,000 C) $200,000 D) $285,000
C
The financial statements of Tin Company included the following: Sales $ 1,000,000 Gross margin 300,000 Ending Inventory 100,000 Based on the information provided, what was the company's cost of goods sold? A) $200,000 B) $600,000 C) $700,000 D) $900,000
C
The following are the income statements for Ace and Diamond Companies. Ace Diamond Revenue $ 70,000 $ 76,000 Cost of goods sold 49,000 45,600 Gross margin 21,000 30,400 Operating expenses 9,500 12,500 Net income $ 11,500 $ 17,900 What are the net income percentages for Ace and Diamond, respectively? A) 6.09% and 4.25% B) 1.83% and 1.70% C) 16.4% and 23.6% D) 30% and 40%
C
The following data is from the income statement of Ralston Company: Revenue $ 36,000 Cost of goods sold (14,400 ) Operating expenses (16,000 ) Net income $ 5,600 What is the company's gross margin percentage? A) 66.67% B) 25.93% C) 60.00% D) 15.60%
C
What do the credit terms, 2/15, n/30 mean? A) A fifteen percent discount can be deducted if the invoice is paid within two days following the date of sale. B) A two percent discount can be deducted for a period up to thirty days following the date of sale. C) A two percent discount can be deducted if the invoice is paid before the fifteenth day following the date of the sale. D) A two percent discount can be deducted if the invoice is paid after the fifteenth day following the sale, but before the thirtieth day.
C
When a company recognizes cost of goods sold, how does that event impact the elements of the financial statements? (Ignore the effects of recognizing sales revenue.) A) Assets increase. B) Liabilities increase. C) stockholders' equity decreases. D) Dividends decrease.
C
Which of the following statements regarding a multistep income statement is true? A) When a company sells inventory for more than its cost, the difference between the sales revenue and the cost of goods sold is called the operating income. B) A single-step income statement shows sales, gross margin, and net income. C) Gross margin is calculated as sales revenue minus cost of goods sold. D) Gross margin equals net income.
C
Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $42,000 of common stock for cash. 2) The company paid cash to purchase $26,400 of inventory. 3) The company sold inventory that cost $16,000 for $30,600 cash. 4) Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $35,200 of inventory. 2) The company sold inventory that cost $32,800 for $57,000 cash. 3) Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. What is the amount of retained earnings that will be shown on the balance sheet at December 31, Year 2? A) $6,200 B) $26,000 C) $6,800 D) $38,800
C) $6,800
Account No. Account Title (1) Cash (2) Merchandise inventory (3) Cost of goods sold (4) Transportation-out (5) Dividends (6) Common stock (7) Selling expense (8) Loss on the sale of land (9) Sales Which accounts would appear on the balance sheet? A) Account numbers 1, 2, 4, and 5 B) Account numbers 1, 3, 7, and 8 C) Account numbers 1, 2, and 6 D) Account numbers 3, 4, 8, and 9
C) Account numbers 1, 2, and 6
Gains and losses are recorded for increases and decreases in the market value of land. True or False?
FALSE
Howell Company granted a sales allowance of $360 to a customer who was not totally satisfied with the quality of goods received. The customer did not return the goods and had not yet paid for them. Which of the following reflects the effects of this event on the financial statements? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. (360) NA (360) (360) NA (360) (360) OA B. NA (360) 360 360 NA 360 NA C. (360) NA (360) (360) NA (360) NA D. NA (360) 360 360 NA 360 NA
C. (360) NA (360) (360) NA (360) NA
A company purchased inventory on account. If the perpetual inventory system is used, which of the following choices accurately reflects how the purchase affects the company's financial statements? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. + = + + NA NA - + = - NA B. + - = NA + NA NA - NA = NA - OA C. + = + + NA NA - NA = NA NA D. + = + + NA NA - NA = NA - OA
C. + = + + NA NA - NA = NA NA
What are outstanding checks?
Checks that are written by the depositor, deducted on the depositor's records, and sent to the payees but not yet received by the bank for payment.
Exeter Company sold merchandise for $10,000 cash. The merchandise had cost the company $4,500. What is the effect of the sale on the balance sheet? A) Cash increases by $10,000. B) Inventory decreases by $4,500. C) Retained earnings Increases by $5,500. D) All of these answer choices are correct.
D
Jake Co. purchased on account merchandise with a list price of $90,000. Payment terms were 1/15, n/45. If collection occurs within 18 days, what discount will Jake Co. recognize on the merchandise? A) $13,500 B) $900 C) $500 D) $0
D
Ramirez Company returns merchandise previously purchased on account. It had not yet been paid for. Ramirez uses the perpetual inventory system. Which of the following reflects the effects on the financial statements of only the purchase return? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt ofCash Flows A. + = NA + - - - NA = - + OA B. - = - + NA NA - + = - NA C. + - = NA + NA NA - NA = NA + OA D. - = - + NA NA - NA = NA NA A) Option A B) Option B C) Option C D) Option D
D
The following are the income statements of the Hancock Company for two consecutive years. Increases in which of the expenses contributed to the net loss in Year 2? Year 2 Year 1 Revenue $ 30,000 $ 20,000 Cost of goods sold 17,800 12,000 Gross margin 12,200 8,000 Operating expenses: Selling expenses 4,800 4,600 Administrative expenses 7,800 3,000 Total operating expenses 12,600 7,600 Net income $ (400 ) $ 400 A) Cost of goods sold and selling expenses B) Selling expenses and administrative expenses C) Cost of goods sold and administrative expenses D) Administrative expenses
D
The following information for Year 2 is taken from the accounts of Tuttle Company. The company uses the periodic inventory system. Inventory, December 31, Year 1 $ 16,000 Purchases 80,000 Purchase returns and allowances 1,200 Purchase discounts 800 Freight on goods purchased under terms FOB shipping point 3,200 Freight on goods sold under terms FOB destination 1,600 Cost of goods sold 56,800 Based on this information, what is the inventory at December 31, Year 2? A) $55,200 B) $24,400 C) $38,800 D) $40,400
D
Under a periodic system, the account debited for freight costs on goods received from the vendor is called: A) Merchandise Inventory B) Cost of Goods Sold C) Transportation-out D) Transportation-in
D
Vargas Company sold a piece of land for $39,000 that had originally cost $32,500. How does this business event affect the company's financial statements? A) An increase in cash flows from investing activities by $39,000. B) No effect on operating income. C) An increase in net income by $6,500. D) All of these answer choices are correct.
D
What happens when merchandise is delivered FOB Destination? A) The seller pays the freight cost. B) The seller records transportation-out expense. C) The buyer pays the freight cost. D) The seller pays the freight cost and records an expense.
D
What is (are) the term(s) used to describe a discount given to encourage prompt payment? A) Cash discount. B) Sales discount by the seller. C) Purchase discount by the buyer. D) All of these answer choices are correct.
D
Which factor has removed most of the practical limitations associated with use of the perpetual inventory system? A) A more honest work force B) Recent changes in GAAP C) Recent changes in federal and state laws D) Advancements in technology
D
Which of the following account titles is normally used in a periodic inventory system? A) Transportation-in. B) Purchases. C) Purchase Returns and Allowances. D) All of these answer choices are normally used.
D
Which of the following describes the purpose of a common size financial statement? A) Compare the amount of common stock to other types of stock B) Make comparisons between firms of different sizes C) Make comparisons between different time periods D) Make comparisons between firms of different sizes and between different time periods
D
Foote Company was granted a purchase discount of $200 on merchandise the company had purchased a few days ago. Foote uses the perpetual inventory system. Which of the following reflects the effects of this event on the financial statements? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. NA (200) 200 200 NA NA 200 OA B. NA (200) 200 200 NA 200 NA C. (200) (200) NA NA NA NA (200) OA D. (200) (200) NA NA NA NA NA
D. (200) (200) NA NA NA NA NA
A company using the perpetual inventory system paid cash for a transportation-in cost. Which of the following choices reflects the effects of this event on the financial statements? Asset = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows A. - = NA + - NA - NA = NA - OA B. + - = NA + NA NA - NA = NA NA C. + - = NA + NA NA - + = - - OA D. + - = NA + NA NA - NA = NA - OA
D. + - = NA + NA NA - NA = NA - OA
Gross margin is equal to the amount of change (increase or decrease) in Merchandise Inventory during a period. True or False?
FALSE
What is the formula for days' sales uncollected?
Days' sales uncollected = Accounts receivable / net sales X 365
What are deposits in transit (outstanding deposits)?
Deposits made and recorded by the depositor but not yet recorded on the bank statement.
Specific identification
Each item can be identified with a specific purchase and invoice. Specific identification is usually only practical for companies with expensive, custom-made inventory --> As sales occur, cost of goods sold is charged with the actual or invoice cost, leaving actual costs of inventory on hand in the inventory account
What are the cash management principles?
Encourage collection of receivables, delay payment of liabilities, keep only necessary levels of assets, plan expenditures, and invest excess cash.
What type of account is the Cost of Goods Sold account? A) Liability B) Asset C) Contra asset D) Expense
Expense
Melbourne Company sold merchandise that it had purchased with a list price of $3,300. The credit terms were of 2/10, n/30. Assuming that Melbourne paid for the merchandise during the discount period, the cost of goods sold for this transaction would be $2,970. True or False?
FALSE
Merchandising businesses include retail companies and manufacturing companies. True or False?
FALSE
Net sales is calculated by subtracting cost of goods sold from sales revenue. True or False?
FALSE
Sales discounts do not affect a company's gross margin percentage. True or False?
FALSE
Selling costs are recognized as expenses in the period when goods are sold. True or False?
FALSE
The beginning inventory plus cost of goods sold equals the cost of goods available for sale during the period. True or False?
FALSE
The return on sales ratio indicates the amount of each sales dollar that is left over after covering the cost of goods sold. True or False?
FALSE
The term FOB shipping point indicates that the seller is responsible for freight costs. True or False?
FALSE
With a periodic inventory system, the cost of goods sold is recorded at the time of a sale of merchandise. True or False?
FALSE
With a perpetual inventory system, the cost of merchandise inventory is recognized at the time of purchase. True or False?
FALSE
Four methods of Inventory Cost Flow Assumption
Four methods are commonly used to assign cost to inventory and cost of goods sold. Each method assumes a particular pattern for how costs flow through inventory. 1. First-in, first-out (FIFO). 2. Last-in, first-out (LIFO). 3. Weighted Average. 4. Specific identification
Which of the following items is not a product cost? A) Freight cost on goods delivered FOB destination to customers B) Cost of merchandise purchased for resale C) Transportation cost on merchandise purchased from suppliers D) All of these answer choices are product costs
Freight cost on goods delivered FOB destination to customers
What are the two categories of the human element?
Human fatigue and human fraud.
Faust Company uses the perpetual inventory system. Faust sold goods that cost $2,300 for $3,600. The sale was made on account. What is the net effect of the sale on the company's financial statements? (Consider the effects of both parts of this event.) A) Increase total assets by $2,300 B) Increase total stockholders' equity by $3,600 C) Increase total assets by $1,300 D) Increase total assets by $3,600
Increase total assets by $1,300
Market
Is the current replacement cost of purchasing the same inventory items in the usual manner. When the recorded cost of inventory is higher than the replacement cost, a loss is recognized; when the recorded cost is lower, no adjustment is made
What is the cost-benefit principle of the limitation of Internal Control?
It dictates that the cost of Internal Controls must not exceed their benefits.
What is an invoice approval (check authorization)?
It is a checklist of steps necessary for approving an invoice for recording and payment.
What is a voucher?
It is a record summarizing a transaction and once completed, it authorizes recording an obligation.
What is a bank reconciliation?
It is a report explaining any differences between teh checking account balance according to the depositor's records and the balance reported on the bank statement.
What is a voucher system?
It is a set of procedures and approvals designed to control cash disbursements and the acceptance of obligations.
What do you maintain the petty cash fund?
Maintain all the receipts and records. At the end of the month, a payment will be made into the petty cash fund to maintain it's fund balance.
Which of the following would be considered as primarily a merchandising business? A) West Consulting B) Martin's Supermarket C) Sandridge and Associates Law Offices D) KPM Accounting and Tax Service
Martin's Supermarket
Which of the following statements about period costs is true? A) Most period costs are expensed in the period the costs are incurred. B) Period costs are expensed when the products associated with these costs are sold. C) Period costs are usually recorded as assets. D) Period costs do not adhere to the matching concept.
Most period costs are expensed in the period the costs are incurred.
Physical count of inventory
Nearly all companies take physical count at least once a year to adjust inventory account balance to the actual inventory on hand
What are deductions for uncollectible items and for services?
Non-suffiencient funds check that the bank initially credits to the depositors account. Once it's learned that the check is uncollectible, the bank reduces the depositor's account for the amount of the check and usually a fee.
Conservatism constraint
Prescribes the use of the less optimistic amount when more than one estimate of the amount to be received or paid exists and these estimates are about equally likely
What is the purpose of an Internal Control System?
Protect assets, establish reliable accounting, promote efficient operations, and urge adherence to company policies.
What are advantages of Technology on the Internal Controls?
Reduces processing errors, more extensive tests of records, limits evidence of processing, crucial separation of duties, increases e-commerce.
Which of the following would not be considered as primarily a merchandising business? A) Abercrombie and Fitch B) Sam's Clubs C) Amazon D) Regal Cinemas
Regal Cinemas
Consistency Concept
Requires the use of the same accounting methods period after period so the financial statements are comparable across periods
What is separation of duties?
Responsibility for transactions are divided to two or more people or departments to ensure that the work of one acts as a check on the other.
Kenyon Company experienced a transaction that had the following effect on the financial statements: Assets = Liab. + Stk. Equity Rev. - Exp. = Net Inc. Stmt of Cash Flows - - NA NA NA NA NA Which of the following business events would result in this effect on the financial statements? A) Paid for merchandise that had been purchased on account B) A loss on land that was sold for cash C) Return by a customer of a sale that was made on account D) Return to a supplier of merchandise purchased on account
Return to a supplier of merchandise purchased on account
What are cash-equivalents?
Short-term, highly liquid investment assets that readily convert to a known cash amount and sufficiently close to their due date that their market value is not sensitive to interest rate changes.
Tax effects of costing methods
Since inventory costs affect net income, they have potential tax effects. Financial reporting often differs from the method used for tax reporting. EXCEPTION: LIFO may only be used for tax purposes if it is also used for financial reporting
Materiality constraint (cost-to-benefit constraint)
Some companies use materiality constraint to avoid assigning those incidental costs to inventory. Instead, they expense them when incurred
Expense recognition or Matching principle
States that inventory costs should be recorded against revenue in the period when inventory is sold. Used to decide how much of the cost of goods available for sale is deducted from sales (on the income statement) and how much is carried forward as inventory (on the balance sheet)
A company that purchases merchandise treats a cash discount as a reduction to the cost of merchandise inventory. True or False?
TRUE
A company using a perpetual inventory system treats transportation-out as an operating expense. True or False?
TRUE
A company's amount of cost of goods sold reported on the income statement will be the same with a periodic inventory system as it would be with a perpetual system.
TRUE
A multistep income statement separates routine operating results from peripheral or nonoperating items. True or False?
TRUE
A perpetual inventory system updates the Merchandise Inventory account for all purchases of inventory, as well as returns of inventory to suppliers. True or False?
TRUE
Common size financial statements are prepared by converting dollar amounts to percentages. True or False?
TRUE
Costs charged to the Merchandise Inventory account are product costs. True or False?
TRUE
For a company that uses the perpetual inventory system, a physical count of the inventory can reveal the amount of inventory shrinkage the company has experienced. True or False?
TRUE
If a company uses the periodic inventory system, it records inventory purchases in the Purchases account at the time of purchase. True or False?
TRUE
Net income is not affected by a purchase of merchandise. True or False?
TRUE
Sales discounts affect net sales, but purchase discounts do not. True or False?
TRUE
The write-off to record the amount of inventory shrinkage affects both the balance sheet and the income statement. True or False?
TRUE
Wholesale companies sell goods primarily to other businesses. True or False?
TRUE
With a perpetual inventory system, assets and stockholders' equity increase by the amount of the gross margin when inventory is sold. (Consider the effects of both parts of this event.) True or False?
TRUE
Middleton Company uses the perpetual inventory system. The company purchased an item of inventory for $130 and sold the item to a customer for $200. How will the sale affect the company's Inventory account? A) The Inventory account will decrease by $200. B) The Inventory account will decrease by $130. C) The Inventory account will decrease by $70. D) The Inventory account will not change.
The Inventory account will decrease by $130.
Inventory Costs
The cost of an inventory item includes its invoice cost minus any discount, plus any incidental costs (such as import duties, freight, storage, insurance, etc...)
The limits of Internal Controls arise from what?
The human element and/or the cost-benefit principle
Net realizable value
The sales price minus the cost of making the sale
What are petty cash disbursements?
The small payments required for items such as postage, courier fees, minor repairs, and low-cost supplies.
What are cancelled checks?
They are checks the bank has paid and deducted form the customer's account during the period.
What is the effect of recording the purchase of inventory on account under the perpetual inventory system? A) Total assets increase B) Total liabilities increase C) Total assets are unaffected D) Total assets and total liabilities increase
Total assets and total liabilities increase
Galaxy Company sold merchandise costing $1,700 for $2,600 cash. The merchandise was later returned by the customer for a refund. The company uses the perpetual inventory system. What effect will the sales return have on the financial statements? (Consider the effects of both parts of this event.) A) Total assets and total stockholders' equity decrease by $900. B) Total assets decrease by $2,600 and total stockholders' equity decreases by $1,700. C) Total assets and total stockholders' equity decrease by $2,600. D) Total assets and total stockholders' equity increase by $900.
Total assets and total stockholders' equity decrease by $900.
Anchor Company sold merchandise with a cost of $560 to a customer for $890 on account. Due to an error, this sale was never recorded in the accounting records. What effect will the failure to make the necessary entries have on the company's financial statements? A) Total assets and total stockholders' equity will be overstated. B) Total assets will be overstated and total stockholders' equity will be understated. C) Total assets and total stockholders' equity will be understated. D) The financial statements will not be affected.
Total assets and total stockholders' equity will be understated.
Which of the following is considered a product cost? A) Utility expense for the current month B) Salaries paid to the employees of a merchandiser C) Transportation cost on goods received from suppliers D) Transportation cost on goods shipped to customers
Transportation cost on goods received from suppliers
What does collude mean?
Two or more people agree in secret to commit fraud.
Lower-of-Cost-or-Market
Using the lower of cost or market means comparing the market value of each item in ending inventory with its cost and then using the lower of the two as its inventory value. Process consists of comparing the cost of every product in inventory- meaning the cost that's recorded for each product in the inventory asset account according to the FIFO or LIFO method. Accounting principles require that inventory be reported on the balance sheet at the lower of cost or market (LCM)
The voucher system of control establishes procedures for what?
Verifying, approving and recording obligations for eventual cash disbursement, and issuing checks for payment of verified, approved, and recorded obligations.
Financial statement effects of costing methods
When purchase prices do not change, each inventory costing method assigns the same amounts to inventory and to cost of goods sold. When purchase prices are different, the methods assign different cost amounts
When are product costs matched directly with sales revenue? A) In the period immediately following the purchase B) In the period immediately following the sale C) When the merchandise is purchased D) When the merchandise is sold
When the merchandise is sold
What is the term used to describe a firm that primarily sells merchandise to other businesses? A) Wholesale firm B) Service firm C) Retail firm D) Consulting firm
Wholesale firm
Indicate whether each of the following statements is true or false. (Assume a periodic inventory system) ________ a) If the balance in ending inventory is overstated, net income will be understated. ________ b) If the balance in ending inventory is understated, retained earnings will be understated. ________ c) If the balance in ending inventory is overstated, selling and administrative expenses will not be affected. ________ d) If the balance in ending inventory is overstated, cost of goods sold will be overstated. ________ e) If the balance in ending inventory is overstated, assets will be overstated.
a) F b) T c) T d) F e) T
Indicate whether each of the following statements is true or false. ________ a) The perpetual inventory system recognizes inventory transactions as they occur. ________ b) The periodic inventory system recognizes sales revenue at the end of the accounting period. ________ c) A physical count of inventory at the end of each accounting period is necessary for the periodic inventory system, as well as for the perpetual inventory system. ________ d) A periodic inventory system requires more detailed record keeping than a perpetual inventory system. ________ e) With a periodic inventory system, cost of goods sold is not determined until the end of the accounting period.
a) T b) F c) T d) F e) T