Intermediate Test 2

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that at the end of 2016, Pernell's ending inventory would have been

$150,000 higher if it had used FIFO.

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been

$2,000 higher.

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

$2,000 lower. Rationale: Currently cost of goods sold is computed using the 1,000 units at $20 plus 200 units at $10 so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been higher resulting in lower pretax income.

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's cost of goods sold for the 2016 fiscal year would have been

$50,000 lower if it had used FIFO.

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's pretax income for the 2016 fiscal year would have been

$50,000 lower if it had used FIFO.

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$723,600 Rationale: $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

$758,200 Rationale: $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

Which of the following are potential benefits of offering cash discounts to customers?

-Accelerated customer payment -Reduction in bad debt -Increased sales volume

When a specific account receivable is determined to be uncollectible, what happens?

-Allowance account is reduced -Account receivable is reduced

Which of the following are services performed by a factor?

-Buy accounts Receivable -handle billing and collection of accounts receivable

Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million, total construction costs are $3.75 million, actual costs incurred during the first year are $1.5 million, and the revenue recognized is $2 million. The journal entry to record revenue during year 1 is:

-Debit Construction in progress $500,000 -Debit Cost of construction $1.5 million -Credit Revenue $2 million

What type of expenditures should be included in the cost of inventory of a manufacturing company?

-Expenditures necessary to bring inventory to sales location. -Expenditures necessary to acquire inventory.

Which of the following costs must be excluded from the calculation of the cost-to-cost ratio? (Select all that apply.) -Inefficiencies related to the project -Costs that don't reflect progress toward completion -Variable overhead costs

-Inefficiencies related to the project -Costs that don't reflect progress toward completion

Which methods of estimating progress toward completion represent output-type measures?

-Number of units produced or delivered -Achievement of milestones -Appraisal of performance completed to date

What indicates surrender of control over the assets transferred?

-Receivables are sold without recourse. -The transferor will have no continuing involvement.

Disadvantages of LIFO

-Significant recordkeeping costs -Possibility of LIFO liquidation

Which of the following items are not included in cash? -balance in checking accounts -currency and coins -accounts receivable from customers -cash in savings account

-accounts receivable from customers

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that

-all disbursements (other than petty cash) are made by check. -checks are signed by authorized individuals. -all expenditures are authorized.

The dollar-value LIFO (DVL) inventory method

-allows a broader range of goods to be included in pools. -reduces the risk of liquidation of layers. -simplifies recordkeeping.

Which items are classified as receivables?

-amounts loaned and expected to be repaid -amounts owed by customers -tax refund claims

When revenue related to a long-term construction contract is recognized over time, the journal entry to recognize revenue includes

-credit revenue from long-term contracts -debit construction in progress -debit cost of construction

A trade discount is a reduction from the list price, which is to

-disguise real prices from competitors. -give quantity discounts to customers. -change prices without publishing a new catalog.

Internal control consists of plans to

-enhance the reliability of accounting data. -promote operational efficiency. -enhance the accuracy of accounting data.

Cost of inventory includes

-expenditures to acquire the inventory -the cost to bring inventory to its desired location -the cost to bring inventory to its desired condition

Which of the following accounts are typically reported on the balance sheet of a manufacturing company?

-finished goods -work in process -raw materials

Ownership of inventory at the end of the accounting period is determined for

-goods shipped by suppliers. -goods shipped to customers.

Inventory cost flow assumptions can be used to assign dollar amounts to

-goods sold. -ending inventory.

The definition of inventory includes

-items held for resale -items currently in production for future sale -items used currently in the production of goods to be sold

The specific identification method

-matches each unit of inventory with its actual cost -would be beneficial to a company that makes fine jewelry

Receivables represent a company's claims to the future collection of

-other assets -cash -services

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Rounding to the nearest percent, the company's gross profit ratio would be

40%. Rationale: Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($5 million -$3 million)/$5 million

Chase Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Rounding to the nearest percent, the company's gross profit ratio would be

50%. Rationale: Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($7 million -$3.5 million)/$7 million

When a company has a claim to receive assets in the future, how is this recorded on the balance sheet?

A receivable

Which of the following is a cost of offering a cash discount?

A reduction in the amount of cash collected from customers who take advantage of the discount.

What does a sales discount represent?

A reduction in the amount to be paid if paid within a specified period of time.

When is gross profit recorded in the construction in progress account for a long-term contract accounted for upon completion?

At the completion of the contract.

Which of the following is usually reported on the balance sheet as a noncurrent asset? A. Inventory B. Restricted cash C. Cash equivalents D. Accounts receivable

B

Which of the following situations would result in a LIFO liquidation for a company that has 200 units in beginning inventory and sales of 1,000 units? A. The company purchases 1,000 units during the year. B. The company purchases 950 units during the year. C. The company purchases 1,100 units during the year.

B. The company purchases 950 units during the year.

Orange Co., a computer retailer, shows the following selected assets on its balance sheet. Indicate which account would be properly classified as inventory. A. Patents B. Office supplies C. Mouse pads D. Desks

C

Why are estimated losses on an entire long-term project fully recognized in the first period the loss is anticipated?

Construction in progress would be valued at an amount greater than the company expects to realize from the contract.

Which of the following is an internal control procedure for cash disbursements? A. Disbursements should be made only at the end of each month. B. Disbursements should be made in cash. C. Disbursements should be made with a cashier's check. D. Disbursements should be made by check.

D

What journal entry should be made to recognize accounts receivable for long-term construction projects?

Debit Accounts Receivable and Credit Billings on Construction Contract

What is the journal entry to recognize gross profit when revenue is recognized upon completion of a long-term construction project?

Debit Construction in Progress and Debit Cost of Construction; Credit Revenue from Long-Term Contracts

journal entry required to record the collection of cash from a customer related to a long-term construction contract

Debit cash Credit accounts receivable

An application where the interest rate stays the same over time, but interest revenue increases as the rate is multiplied by a receivable balance that increases is referred to as what?

Effective interest method

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

Both IFRS and U.S. GAAP permit the fair value option for accounting for receivables. Which of the following is correct regarding the application of this option?

IFRS restricts the circumstances for applying the fair value option

Checks received from customers that have not been deposited yet are included where on a company's balance sheet?

In the current asset "cash" account.

When is a loss recognized on a long-term contract?

In the first period in which the loss become evident.

The construction-in-progress account most closely relates to which type of account?

Inventory

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting.

LIFO

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO

At what amount are accounts receivable initially recorded?

The exchange price agreed on by the buyer and seller.

A company is allowed to account for the transfer of receivables as a sale if what occurs?

The transferor has surrendered control over the assets transferred.

What is the difference between journal entries to recognize gross profits when revenue is recognized over time and when revenue is recognized upon completion of a long-term project?

Timing

Which of the following will not differ between revenue recognized over time and revenue recognized at completion? (Select all that apply.) Total expense The timing of recognition Total revenue Total profit

Total expense Total revenue Total profit

The construction in progress account is equivalent to which account in a manufacturing environment?

Work-in-progress

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

A contra-asset account is used to reduce the carrying value of accounts receivable to the amount of cash expected to be received under the _____ method of accounting for bad debts.

allowance

Which method of estimating bad debts is required by GAAP when the amount of bad debt is material?

allowance method

When initially recorded, the typical accounts receivable is valued at the

amount expected to be received.

Restricted cash is usually reported in the balance sheet

as noncurrent assets.

A secured borrowing occurs when accounts receivable are __________ or ______________ as collateral for a loan.

assigned; pledged

Cost flow _______________ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory.

assumptions

Determining ownership of goods that are in transit at the end of the accounting period is important to

assure proper inventory cutoff.

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____.

at the end of the period; each time goods are sold

The expense associated with the estimate of the amount of accounts receivable that may not be collected during the year is referred to as

bad debt expense

The amount billed to customers on long-term construction project is recorded in the

billings on construction account

Which of the following is an example of separation of duties in a good system of internal control? a. The individual who receives the inventory does not have access to the accounting records. b. The individual who evaluates the employees may not hire employees. c. The individual who receives the inventory cannot count the inventory. d. The individual who hires the employees may not manage the employees.

c

Coins, balances in checking accounts, checks received from customers and money orders received are all included in the _______________ account on the balance sheet.

cash

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to

combine a large variety of goods in one pool.

If a contract qualifies for revenue recognition over time, revenue is recognized based on progress toward

completion

The billings on construction account is a contra account to

construction in progress

When revenue is recognized on long-term construction projects, a journal entry is recorded to recognize revenue and cost of goods sold. The difference between revenue and cost of goods sold (gross profit) is recognized in which account?

construction in progress

The billings on construction contract account is classified as a(n)

contra asset

At the end of the period, if construction in progress exceeds billings on construction contracts, it is recorded as a(n)

contract asset

At the end of the period, if construction in progress is less than billings on construction contracts, it is recorded as a(n)

contract liability

The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of

control

When recognizing revenue from a construction type long term contract over time, the balance in the CIP account includes

costs of labor materials used gross profit and losses

Long-term contracts require careful consideration in identifying performance obligations because these type of contracts typically include many products and services that

could be viewed as separate performance obligations.

At the end of an accounting period, it is important to ensure proper inventory _____ to determine the ownership of goods in transit.

cutoff

When inventory quantities _____ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system.

decline

A LIFO liquidation occurs when inventory quantities ______.

decrease

The transfer of a note to a financial institution is referred to as

discounting

The transfer of a note receivable to a financial institution for an amount less than the face amount of the note is referred to as

discounting a note receivable.

At the end of a long-term construction project, the amounts in the construction in progress account will be ______ the billings on construction contract.

equal to

In a _____________ arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections.

factor

The gross profit ratio is computed as _____ divided by net sales.

gross profit

The construction in progress account represents the total construction costs (labor, material, overhead) and

gross profit recognized to date

Separation of duties requires that

individuals who have physical responsibility for assets should not have access to accounting records.

Progress toward completion can be measured based on the proportion of effort expended thus far relative to the total effort expected to satisfy a performance obligation. This is referred to as a(n)

input method

(Face amount x annual rate x fraction of the annual period) is the formula for

interest on a note.

Items a company intends to sell in the normal course of business, has in production for future sale, or uses currently in production, are all examples of what?

inventory

Items held for sale in the normal course of business are referred to as

inventory

What can be used as indicators of progress toward completion under the input method?

labor hours expended costs incurred machine hours used

Typical costs included in a construction project include

labor, materials, and overhead.

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

Use of LIFO inventory pools reduces the chance of unintentional LIFO layer

liquidations

Finished goods is a type of inventory found on a _____ company's balance sheet.

manufacturing

A _____ company resells goods while a _____ company produces goods.

merchandising; manufacturing

Estimates relating to long-term contracts

must be periodically updated.

The two methods used for recording sales discounts are the

net method and gross method

in an _____________ bearing note, interest is deducted from the face amount of the loan to determine the cash proceeds available to the borrower at the time of loan.

noninterest

A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.

note payable

A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender

note receivable

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable.

Proportion of total units produced or delivered to date, achievement of specific milestones, and appraisals reflect estimation methods referred to as

output method

The essential difference between revenue recognition over time and upon completion relates to the

pattern of recognition of the related gross profit.

Revenue recognized each period is determined by multiplying total estimated revenue by

percentage completed to date and subtracting revenue recognized in prior periods

Which inventory system allocates cost of goods available for sale only at the end of each reporting period?

periodic

inventory system adjusts inventory at the end of the each reporting period.

periodic

inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise.

perpetual

The cost-to-cost ratio is the most common approach used to estimate

progress toward completion

A shortcoming of the output method for estimating progress toward completion is that it may

provide a distorted view of actual completion

The formula: total estimated revenue times percentage completed to date less revenue recognized in prior periods is used to measure:

revenue recognized for the current period

Which of the following is a discount that is a reduction in the amount to be paid if the customer pays within a specified time period?

sales discount

Assigning or pledging accounts receivable is used in a

secured borrowing

LIFO inventory pools

simplify recordkeeping.

Which inventory costing method matches each unit sold with its actual cost?

specific identification

A DVL pool is made up of items

that are likely to have similar cost change pressures.

The billings on construction account represents

the amont billed to customers to date

Revenue is recognized upon completion of a long-term contract if:

the contract does not qualify for revenue recognition over time

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

The LIFO inventory method assumes that the units that remain in ending inventory are

the oldest units in inventory.

A long-term contract that includes many products and services that are capable of being distinct, may be accounted for as a single performance obligation because

the seller's role is to combine those products and services prior to delivery or completion.

Accounts receivable are almost always considered current assets because

their normal collection, even if longer than a year, is part of the normal operating cycle.

The journal entires used to recognize the costs of long-term construction contracts are identical when revenue is recognized upon completion and when it is recognized over time; however the two methods differ with respect

to the timing of revenue recognition

a ___________ discount is a way to change prices without publishing a new catalog.

trade

Who houses the financed receivables on their balance sheet in a secured borrowing?

transferor

When revenue is recognized upon completion of a long-term contract, CIP is updated to include gross profit

upon completion

In a perpetual inventory system the inventory account is adjusted

when inventory is purchased AND when inventory is sold.

Under the allowance method, when is bad debt expense recognized?

when the allowance is created