Financial Accounting Exam 2

The amounts of all the accounts reported on the balance sheet can be taken from the adjusted trial balance.

False

The fraud triangle identifies incentive, opportunity, and benchmarks as the requirements for a fraud to occur.

False

The gross profit percentage is computed by dividing operating income by net sales.

False

If a company that uses a perpetual inventory system sold inventory which cost $1,000 for a selling price of $3,000, the accounting equation would show a net:

increase in assets and net increase in stockholders' equity.

The Sarbanes-Oxley Act (SOX) requires the establishment of an audit committee that includes the:

independent directors.

Intel makes microchips from raw materials acquired from suppliers. Intel is a:

manufacturer.

The evaluation of the internal control system to determine whether it is working as intended is referred to as:

monitoring activities.

A contra-account:

offsets, or reduces, another account.

A system used to reimburse employees for expenditures they have made on behalf of the organization is referred to as a:

petty cash system.

On April 6, Lopez Co. purchased $5,000 of inventory, terms 1/15, n/30. Lopez Co. uses a perpetual inventory system. The company paid for the purchase on April 26. The entry to record the payment on April 26 includes which of the following?

A credit to Cash for $5,000

Which of the following is an activity in the operations of a manufacturer, but not in the operations of a merchandising or service company?

Buying raw materials

Which of the following is not a term for the value at which an asset is reported on a financial statement?

Carrying value OR Book value OR Accrual value

In comparing the canceled checks on the bank statement with the entries in the accounting records, it is found that check number 2889 for December's utilities was correctly written and drawn for $970, but was erroneously entered in the accounting records as $790. The journal entry to adjust the books for the bank reconciliation would include which of the following for this situation?

Cash and a credit to Utility Expense for $180.

Which of the following items appearing on a bank reconciliation require a journal entry to bring the Cash account up-to-date?

Check from customers returned as NSF

What journal entry must be prepared when the company is notified by the bank that a customer's check that had been deposited in the amount of $776 was returned NSF?

Debit Accounts Receivable and credit Cash in the amount of $776 OR No journal entry is necessary OR Debit NSF Check Expense and credit Accounts Receivable in the amount of $776

Which of the following statements about revenues and expenses is correct?

If revenues are less than expenses, the company has a net loss and Retained Earnings decreases. OR If revenues are less than expenses, the company has a net loss and Common Stock increases to balance off the loss. OR If revenues are greater than expenses, the company has net income and Common Stock increases.

Which is the first financial statement that should be prepared after the adjusted trial balance has been prepared?

Income Statement

Your store buys ice cream at a cost of $1.50 a half gallon and sells it for $4 a half gallon. Selling, general, and administrative expenses are $0.75 per half gallon. Which of the following statements is correct?

Your gross profit per half gallon is $2.50.

When you identify outstanding checks in performing a bank reconciliation, you must:

add the amount of the outstanding checks to the balance per books. OR add the amount of the outstanding checks to the balance per bank. OR deduct the amount of the outstanding checks from the balance per bank.

A company made a bank deposit on September 30 that did not appear on the bank statement dated September 30. In preparing the September 30 bank reconciliation, the company should:

add the deposit to the end cash balance per bank statement.

At the end of the year, accrual adjustments could include a:

credit to a revenue and a debit to an expense. OR debit to cash and a credit to Common Stock. OR debit to an expense and a credit to a liability.

When a company collects from a customer who pays within the discount period, the company:

debits a contra-revenue account. OR credits a liability account. OR debits a revenue account.

On a bank reconciliation, the amount of an unrecorded bank service charge is:

deducted from the company's balance of cash.

The Accumulated Depreciation account is a(n):

expense account. OR contra-asset account. OR asset account.

A company makes a deferral adjustment that decreased a liability. This must mean that a(n):

revenue account was increased by the same amount.

The internal control principle related to assigning responsibilities so that one employee cannot make a mistake or commit a dishonest act without someone else discovering it is referred to as:

segregation of duties.

Multiple-step income statements:

separate core results from peripheral results.

The failure to record an accrual adjustment relating to salaries and wages would not affect the:

statement of cash flows

On October 31, 2015, your company's records say that the company has $16,451.03 in its checking account. A review of the bank statement shows you have three outstanding checks totaling $5,643.01, and the bank has paid you interest of $12.19 and charged you $9.00 in service charges. The bank statement dated October 31, 2015 would report a balance of:

$10,804.83 OR $22,090.85 OR $22,097.23

Lansing Limited had a beginning balance in its Retained Earnings account of $385,600. During the year, the company declared and paid a $4,700 dividend, and at the end of the year, it reported Retained Earnings of $399,860. The company's net income for the year was:

$18,960.

If a company's ending inventory count was $50,000, cost of goods sold was $27,000, and purchases were $56,000, its beginning inventory must have been:

$21,000.

The Don't Tread on Me Tire Company had Retained Earnings at December 31, 2015 of $200,000. During 2016, the company had revenues of $400,000 and expenses of $350,000, and the company declared and paid dividends of $11,000. Retained earnings on the balance sheet as of December 31, 2016 will be:

$239,000

The asset account Office Supplies has a balance of $800 at the beginning of the year. The amount on hand at the end of the year is $500. The company has calculated the Supplies Expense for the year to be $3,500. Based on this information, what amount of office supplies was purchased during the year?

$3,200

A company reported the following: Cost of Goods Sold $250,000 General, Selling, and Administrative Expenses 66,000 Income Tax Expense 4,500 Inventory 15,000 Net Income 28,200 Sales Revenue 355,000 Sales Discounts 3,400 Sales Returns & Allowances 2,900 Use the above information to answer the following question. What is the amount of income before income taxes?

$32,700

Unearned Revenue, which represents the company's obligation to honor gift cards previously issued to customers, totaled $5,500 at the beginning of the year and $7,500 at the end of the year. Customers purchased gift cards amounting to $42,000 during the year. What was the amount of gift cards redeemed by customers during the year?

$40,000

A company purchases software; it has an estimated useful life of three years. The adjustment to recognize amortization for the use of software would cause which of the following?

A decrease in assets, a decrease in stockholders' equity, and an increase in expenses

Recording an adjusting journal entry to recognize depreciation would cause which of the following?

A decrease in assets, a decrease in stockholders' equity, and an increase in expenses OR A decrease in assets, an increase in liabilities, and an increase in expenses OR An increase in assets, an increase in liabilities, and a decrease in expenses

A retailer using a periodic inventory system returned $3,000 of defective inventory which was purchased on account from one of its wholesale suppliers. The entry to record this transaction on the retailer's books would include a debit to:

Accounts Payable.

Which of the following statements about adjusting entries is not correct?

Adjusting entries often affect the cash account.

Wiggly Pet Store had $6,000 of supplies at the end of October. During November, the company bought $2,000 of supplies. At the end of November, the company had $1,000 of supplies remaining. Which of the following statements is not correct?

An asset should be debited for $1,000 in November.

Which of the following will happen if the accrual adjustment entry is not made to record an expense incurred but not yet recorded?

Both expenses and liabilities will be understated. OR Expenses will be understated and liabilities will be overstated. OR Both expenses and liabilities will be overstated.

Which of the following statements relating to restricted cash is not correct?

By including restricted cash as part of the amount reported as cash and cash equivalents, the company more clearly conveys to financial statement users the actual amount of cash available to pay liabilities.

BetterBuy sells $50,000 of TVs to a customer. The credit terms state a 2% discount if paid in 7 days and a 1% discount if paid in 8-14 days. The customer pays in 12 days. How would BetterBuy record the customer's payment?

Debit Cash for $49,500, credit Accounts Receivable for $50,000, and debit Sales Discounts for $500.

On October 1, Robertson Company sold inventory in the amount of $5,800 to Alberta, Inc. with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses a periodic inventory system. Alberta pays the invoice on October 8 and takes the appropriate discount. What journal entry will be recorded by Robertson on October 8?

Debit Cash for $5,684, debit Sales Discounts for $116, and credit Accounts Receivable for $5,800.

Darin Company uses a perpetual inventory system. On October 1, Darin Company sold inventory in the amount of $6,500 to Dee Company, terms 2/10, n/30. The items cost Darin $4,200. On October 4, Dee returns some of the inventory. This inventory had a selling price of $500 and a cost of $200. On October 8, Dee Company paid Darin Company the amount due on that date. Use the information above to answer the following question. What journal entry will be prepared by Darin Company on October 8 to record the receipt of payment from Dee?

Debit Cash for $5,880, debit Sales Discount for $120, and credit Accounts Receivable for $6,000

A company has a loan that accrues interest at a rate of $20 a day. The company pays the interest once a quarter. Which of these would be an accurate adjustment for a month in which no payments are made?

Debit Interest Expense and credit Interest Payable

On December 31, 2015, interest of $500 is owed on a bank loan that will not be paid until June 30, 2016. What is the necessary adjusting journal entry on December 31, 2015?

Debit Interest Expense and credit Interest Payable for $500 OR Debit Interest Expense and credit Cash for $500

A company has a loan that accrues interest at a rate of $20 a day. The company pays the interest once a quarter. Which of the following adjustments would be made at the end of the month in which no payment for interest was made?

Debit Interest Expense and credit Interest Payable.

Flynn Company uses a perpetual inventory system and had the following transactions during November: • November 6 - Purchased $5,800 of inventory on account, terms 2/10, n/30. • November 8 - Returned $800 of defective units and received full credit. • November 15 - Paid the amount due. Use the information above to answer the following question. What journal entry will be recorded by Flynn Company on November 6?

Debit Inventory and credit Accounts Payable for $5,800

On July 1, Darin Company sold inventory costing $4,500 to Dee Company for $6,000, terms 2/10, n/30. Both companies use a periodic inventory system. What journal entry will be recorded by Dee Company on Jul 12?

Debit Purchases and credit Accounts Payable for $6,000 OR Debit Inventory and credit Accounts Receivable for $6,000 OR Debit Cost of Goods Sold and credit Inventory for $4,500

Darin Company uses a perpetual inventory system. On October 1, Darin Company sold inventory in the amount of $6,500 to Dee Company, terms 2/10, n/30. The items cost Darin $4,200. On October 4, Dee returns some of the inventory. This inventory had a selling price of $500 and a cost of $200. On October 8, Dee Company paid Darin Company the amount due on that date. Use the information above to answer the following question. What journal entry (entries) will Darin prepare on October 4 to record the sales return?

Debit Sales Returns & Allowances and credit Accounts Receivable for $500; debit Inventory and credit Cost of Goods Sold for $200

Which of the following statements about an adjusted trial balance is correct?

Debits do not have to equal credits in the adjusted trial balance but they must equal in the post-closing trial balance. OR Debits will equal credits before adjustments are made but not necessarily after. OR Debits should equal credits both before and after adjustments are made.

Which of the following situations would cause the balance per bank to be more than the balance per books?

Deposits in transit OR Outstanding checks OR Service charges

The balance of which of the following accounts would appear in the debit column of an adjusted trial balance?

Dividends

Which of the following statements about the statement of retained earnings is correct?

Dividends are subtracted to calculate the ending balance of Retained Earnings.

A company performs a service, sells inventory that it purchases from others, or manufacturers a product; it cannot serve more than one of these functions.

False

Which of the following statements correctly describes an imprest system?

If the transfers from the payroll account to the employees' checking accounts occur without error, the imprest payroll bank account will equal zero after all employees have been paid.

The balance of which of the following accounts appear in the credit column of an adjusted trial balance?

Income Tax Payble

Which of the following statements about a multistep income statement is not correct?

Income from operations = Income before income tax expense + Other revenues (expenses), net

An example of an account that could be included in an accrual adjustment for expense is:

Interest Payable.

An example of an account that could be included in an accrual adjustment for revenue is:

Interest Receivable.

A company incurred $5,000 in salaries and wages for employees for the year; $4,500 of these salaries and wages had been paid by the end of the year. Which of the following statements about this situation is correct?

Salaries and Wages Payable on the balance sheet will be $500.

Which of the following is a set of regulations passed by Congress in 2002 in an attempt to improve financial reporting and restore investor confidence?

Sarbanes-Oxley Act

Angle Inc. announces that its gross profit rose 5% but its income before income taxes fell. Which of the following statements is correct?

This must mean that selling, general, and administrative expenses increased by more than 5%.

Which of the following statements concerning a petty cash fund is not correct?

To avoid the administrative costs of the use of purchasing cards, or Pcards, many organizations have started using petty cash funds. OR A petty cash fund is similar to an imprest payroll account. OR The company's petty cash custodian is responsible for operating the petty cash fund.

A deferral adjustment may involve one asset and one expense account.

True

If a contra account of $20,000 is mistakenly included in the same column of the trial balance as the account it offsets, the error will cause the debit and credit column totals to differ by $40,000

True

Internal controls include the policies and procedures a company implements to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations.

True

If a perpetual inventory system is in use, which of the following statements about transactions with customers is correct?

When a customer pays within the discount period, Accounts Receivable is credited for the full amount. OR A sales return is recorded with entries that include a credit to Sales Returns & Allowances. OR Sales of inventory are recorded by entries that include a credit to Cost of Goods Sold.

Which of the following is a correct statement about the nature of equipment?

While equipment is an asset, its use is recorded as an expense. OR While equipment is an asset, its use is recorded as affects Common Stock. OR Equipment and its use both affect liabilities.

All of the following bank reconciliation items would result in a journal entry on the company's books except:

a customer's check returned NSF. OR service charge. OR deposits in transit.

If an expense had been incurred but will be paid later, then:

a liability account is created or increased and an expense is recorded.

If an expense has been incurred but will be paid later, then:

a liability account is created or increased and an expense is recorded.

A company reports Equipment on its classified balance sheet. The balance of the Accumulated Depreciation account appears on a classified balance sheet as:

a subtraction to arrive at the amount of Equipment, Net.

Closing entries:

cause the revenue and expense accounts to have zero balances

On December 16, 2015, B. Darin Company received $3,600 from S. Dee Company for rent of an office owned by B. Darin Company. The payment covers the period from December 16, 2015 through February 15, 2016. B. Darin Company recorded this as Unearned Rent when it was received on December 16. The adjusting entry on December 31 would include a:

credit to Rent Revenue of $900.

Accrued revenues recorded at the end of the current year:

often result in cash receipts from customers in the next period.

Which of the following statements regarding periodic and perpetual inventory systems is correct?

Perpetual inventory systems may assist in determining inventory lost due to shrinkage.

The journal entry to establish a petty cash fund should include a debit to:

Petty Cash and a credit to Cash.

The following account balances appeared on the company's trial balance at year-end: Sales Returns & Allowances $500 Accounts Receivable 9,000 Sales Discounts 700 Sales Revenue 57,200 Selling, General, and Administrative Expenses 300 The amount of net sales reported on the income statement would be:

$56,000

The Treasure Chest Corporation had Retained Earnings at the end of December 31, 2015 of $450,000. During 2016, the company had net income of $170,000 and declared dividends of $20,000. The amount of Retained Earnings reported on the balance sheet as of December 31, 2016 will be:

$600,000.

Carrington Inc. reported net sales revenues of $19.8 billion and cost of goods sold of $6.0 billion. Its gross profit percentage was:

69.7%.

Which of the following statements about net income and net losses is not correct?

A net loss increases the balance in Retained Earnings. OR Net income causes stockholders' equity to increase. OR Net income implies that revenues are greater than expenses.

When it paid its rent in advance, a company recorded Prepaid Rent. As of the end of the accounting year, the prepayment had expired. If no adjustment is made to record this expiration, which of the following will occur?

Assets will be overstated and expenses will be understated.

If the total amount that should have been debited to Insurance Expense is mistakenly debited instead to Prepaid Insurance, what will be the effect on the financial statements for the year?

Assets will be overstated.

Darin Company uses a perpetual inventory system. On October 1, Darin Company sold inventory in the amount of $6,500 to Dee Company, terms 2/10, n/30. The items cost Darin $4,200. On October 4, Dee returns some of the inventory. This inventory had a selling price of $500 and a cost of $200. On October 8, Dee Company paid Darin Company the amount due on that date. Use the information above to answer the following question. What journal entry (entries) will Darin prepare on October 1 to record this sale?

Debit Accounts Receivable and credit Sales Revenue for $6,500; debit Cost of Goods Sold and credit Inventory for $4,200 OR Debit Cost of Goods Sold for $4,200, debit Gross Profit for $2,300, and credit Sales Revenue for $6,500 OR Debit Accounts receivable and credit Sales Revenue for $6,500

Inventory was sold on credit for $3,000, terms 1/10, n/30. How should the seller record the cash collection?

Debit Cash for $3,000 and credit Accounts Receivable for $3,000, if collected after the discount period. OR Debit Cash for $3,000 and credit Accounts Receivable for $3,000, if collected within the discount period. OR Debit Cash for $3,000, credit Accounts Receivable for $2,970, and credit Sales Discounts for $30, if collected after the discount period.

A retailer is a company that buys products from manufacturers and sells them to wholesalers.

False

Adjusting entries often involve cash.

False

Which of the following would decrease net income?

Overstating the year-end balance of the Supplies account OR Understating the amount of Depreciation Expense recorded OR Failing to post an adjusting entry to accrue revenue

Which of the following errors cause net income to be understated?

Revenue that has been earned but not yet collected has not been recorded.

A company pays salaries and wages every two weeks. Salaries and wages amount to $100 a day and the company has a seven-day work week. On March 31, the company pays wages for the two weeks ending March 24 and recorded the related journal entry. The adjusting journal entry, dated March 31, to record unpaid wages and salaries owed since March 25 will include a debit to:

Salaries and Wages Expense and a credit to Salaries and Wages Payable for $700.

Which of these accounts would normally not be affected by an adjustment?

The Cash Account.

On December 31, 2014, you count 300 tie clips in inventory. During the next quarter, you carefully record the effect of each purchase and sale transaction on inventory. You buy 128 tie clips during the next quarter. On March 31, 2015, you count 288 tie clips in inventory. Which of the following is not correct?

The amount of shrinkage cannot be determined with this type of inventory system.

The Prepaid Insurance account has a normal balance of $3,750 at the beginning of the month. The company used $980 of insurance coverage during the month. Which of the following statements is correct?

The company should debit Insurance Expense for $980 and credit Prepaid Insurance for $980.

Which of the following statements about the adjusted and post-closing trial balances is correct?

The post-closing trial balance is a check that the accounting records are still in balance after posting all closing entries to the accounts. OR The post-closing trial balance debit column total is the amount to be shown as Total Assets on the Balance Sheet. OR The primary purpose of the post-closing trial balance is to see whether revenues are greater than expenses.

When existing assets are used up in the ordinary course of business:

an expense is recorded.

The Sales Revenue account has a credit balance of $367,200 at year end. After the closing entries have been posted, the account will:

have a zero balance.

Closing journal entries:

transfer net income or loss and Dividends to Retained Earnings.