Intro to accounting exam 2

Adequate Documents and Records

underlying documentation must be thorough to allow evaluation of performance

Direct write-off method

waits until an account is deemed uncollectible before reducing accounts receivable and recording the bad debt expense

Carlock Systems received a 6-month, 12% note for $50,000 from a customer on November 1, 2019. The note is due on April 30, 2020. Assuming the company's accounting period ends on December 31, how much interest revenue should be recognized during 2019 and 2020?

$1000 and $2000

Data for the year ended December 31 are presented below: Sales (credit) $2,500,000 Sales returns and allowances 50,000 Accounts Receivable (December 31) 640,000 Allowance for Doubtful Accounts (Before adjustment at December 31) 20,000 Estimated amount of uncollected accounts based on aging analysis 45,000 Refer to AT&U Company. If the company estimates its bad debt to be 2% of net credit sales, what will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?

69,000

A company needs to record 6 months of accrued interest on a 4-year, 12%, $12,000 promissory note payable. How much interest expense should be accrued?

720

petty cash

A fund containing a small amount of cash that is used to pay for minor expenditures.

A customer's check for $25 that had been deposited into the company's checking account the previous month was returned stamped "NSF" by the bank. Which of the following journal entries is required?

Accounts Receivable 25 Cash 25

Which of the following entries properly closes a temporary account? a. Dividends200 Retained Earnings200 b. Income Summary400 Salaries Expense400 c. Accumulated Depreciation1,600 Income Summary1,600 d. Income Summary20,000 Service Revenue20,000

B. Income Summary 400 Salaries Expense 400

Internal control system

To control employees' activities, management puts in place procedures

Nontrade receivables

arise from transactions not involving inventory

Revenue Recognition Principle

determines when revenue is recorded and reported

Matching Principle

expenses are recognized in the same period as the related revenues

Cozy Corporation purchased supplies at a cost of $15,000 during the year. At January 1, supplies on hand were $5,000. At December 31, supplies on hand are $2,000. Calculate supplies expense for the year.

$18,000

If the end-of-year supplies on hand totaled $200, and purchases totaled $300, and supplies on hand at the beginning of the year amounted to $100, how much will be reported as supplies expense for the current year?

$200

The following information relates to the company's November bank reconciliation: Bank statement balance $10,700 Unadjusted cash balance from the company's records ? Deposit in transit 2,100 Outstanding checks 1,200 Bank service charges 300 Interest earned on the bank account 100 Customer's NSF check returned by the bank 400 Refer to Dreammaker Kitchens. As a result of the bank reconciliation process, what is the net increase or decrease in cash which must be recorded on the company's books?

$600 decrease

Control activities: clearly defined authority and responsibility

*identifies who has authority to perform important duties and responsibility for performance of assigned tasks *when a document listing out who is in charge of what exists

Segregation of Duties

*reduces the incidence of fraud because no one person prepares all the documents and reccords for any one type of activity *when two related tasks are given to two different people.

•While preparing the April 30th bank reconciliation, the accountant identified the following items: •Company's balance according to the general ledger $12,000 •Outstanding checks 2,500 •Bank service charge 20 •A customer's NSF check returned by the bank 200

11,780

While preparing the April 30th bank reconciliation, the accountant identified the following items: Company's balance according to the general ledger $15,000 Outstanding checks 2,500 Bank service charge 15 A customer's NSF check returned by the bank 100 What is the company's adjusted cash balance at April 30th?

14,885

A company receiving payment of a $20,000 accounts receivable within 10 days with terms of 2/10, n/30, would record a sales discount of

2% of $20,000

•Carlock Systems received a 6-month, 9% note for $40,000 from a customer on November 1, 2019. The note is due on April 30, 2020. •Assume the company's accounting period ends on December 31. how much interest revenue should be recognized during 2019 and 2020? How much interest revenue should be recognized during 2019 and 2020?

2019: $600 2020: $1,200

Data for the year ended December 31 are presented below: Sales (credit) $2,500,000 Sales returns and allowances 50,000 Accounts Receivable (December 31) 640,000 Allowance for Doubtful Accounts (Before adjustment at December 31) 20,000 Estimated amount of uncollected accounts based on aging analysis 45,000 Refer to AT&U Company. If the company estimates its bad debts at 1% of net credit sales, what amount will be reported as bad debt expense?

24,500

•Carlock Systems received a 6-month, 9% note for $40,000 from a customer on November 1, 2019. The note is due on April 30, 2020. •Assume the company's accounting period ends on December 31. Prepare Note and Interest Journal Entries

Accrue 2019's interest revenue: Interest Receivable 600 Interest Revenue 600 •Increases assets by 600 and increase revenues/retained earnings/equity by 600 Journal entry to earn/receive interest in 2020: Cash 41,800 •Note Receivable 40,000 •Interest Receivable 600 •Interest Revenue 1,200 •Increases assets by 41,800 but also decreases assets by 40,600 (total asset effect: increase 1,200) and increases revenues/retained earnings/equity by 1,200

Which of the following adjusting entries involves the cash account? A. Deferred Liabilities B. Deferred Revenues C. Accrued Expenses D. None of these choices are correct.

D. None of these choices are correct.

Service charges

Fees charged by the bank for checking acount services.

The company received a promissory note from a customer on March 1, 2019. The principal amount of the note is $20,000; the terms are 3 months and 9% annual interest.Refer to the information for Accent Flooring. At the maturity date, the customer pays the amount due for the note and interest. What entry is required on the books of Accent Flooring on the maturity date assuming that none of the interest had already been recognized?

Increase Cash by $20,450, increase Interest Revenue by $450, and decrease Notes Receivable by $20,000

Failure to record the earned portion of unearned revenue would result in which of the following?

Net income being understated

Strategic risks

Possible external threats to the organization's success in accomplishing its goals

Expense Recognition Principle

Process of identifying an expense with a particular time period.

Checks on Recorded Amounts

Requires independent verification, reconciliation of accounts, etc. A third-party person verifying cash transactions.

Accrued revenues

Revenues for services performed but not yet received in cash recorded

Which of the following entries properly closes a temporary account? a. Salaries Expense 200 Income Summary 200 b. Dividends 50 Retained Earnings 50 c. Accumulated Depreciation 100 Income Summary 100 d. Service Revenue 500 Income Summary 500

Service Revenue 500 Income Summary 500

The College Store accepts MasterCard for payments of purchases made by students. The credit card drafts are deposited directly in a bank account. MasterCard charges a 1.55% collection fee. Credit card drafts totaling $10,000 are deposited during August. Recording the sales and deposits will result in an increase in

Service charge expense for $155

Cozy Corporation purchased supplies at a cost of $12,000 during the year. At January 1, supplies on hand were $7,000. At December 31, supplies on hand are $3,000. Calculate the supplies expense for the year.

Supplies Expense 16,000 Supplies 16,000

The asset account, Supplies, has a balance of $10,000 on January 1. During January, $22,000 of supplies were purchased on account and the liability was appropriately recorded. A count of supplies at the end of January indicates a balance of $2,000. What adjusting entry is necessary at January 31?

Supplies expense $30,000 Supplies $30,000

Under accrual accounting when is revenue recognized?

When earned, and expenses when incurred.

Internal control activity: checks on recorded amounts

When the records are verified by someone.

safeguarding of assets and records

When there are passwords for a system, pertains to the physical safety of assets/documents

Each of the following items is considered a cash equivalent except

a 180-day note issued by a local government.

The following items were identified during the June 30 bank reconciliation: Company's balance according to the general ledger: $18,750 Outstanding checks: $3,400 Deposit in transit: $1,200 Bank service charge: $25 Credit memo for receivable collected by the bank: $500 A customer's NSF check returned by the bank: $100 What is the increase (decrease) to cash resulting from adjusting entries after the bank reconciliation?

a. $375 18,750 -25+500-100=19125 19125-18,750=375

A company has net sales of $1,000,000; gross profit of $700,000; operating income of $300,000; net income of $100,000; and average accounts receivable of $50,000. The operating margin is a.30%. b.70%. c.10%. d.5%.

a. 30%

Which of the following is a basis of accounting that records both cash and noncash transactions? a.Accrual basis of accounting b.Cash basis of accounting c.Cost basis of accounting d.Accounting cycle basis of accounting

a. Accrual basis of accounting

The stage of the operating cycle and cash management that focuses on inventory levels is a.buying inventory. b.paying for inventory. c.selling inventory. d.None of these choices are correct.

a. Buying inventory

Which of the following accounts is never included in an adjusting entry? a.Cash b.Accounts Payable c.Sales Revenue d.Supplies

a. Cash

Which of the following activities is part of the operating cycle of a business? a.Collecting cash from customers b.Receiving cash from the owners of the business c.Repaying creditors the principal loaned to the business d.Purchasing building and equipment for the business

a. Collecting cash from customers

There are seven steps in the accounting cycle. Which of the following is the fourth step? a.Prepare a trial balance b.Post the transactions to the ledger c.Journalize the transactions d.Analyze the transactions

a. Prepare a trial balance

To be consistent with the matching principle, generally accepted accounting principles (GAAP) require that bad debt expense must be recorded in the period related to the sales. The allowance for doubtful accounts is a.an account that has been established to "store" the estimate of the accounts receivable that are not expected to be collected. b.the same as the bad debt expense account. c.the amount that has been billed to a customer less the "2% cash discount" allowed for prompt payment. d.the reduction in sales revenue that results from the seller's actions, such as disputes and allowances.

a. an account that has been established to "store" the estimate of the accounts receivable that are not expected to be collected.

Which would be ADDED to the BANK'S cash balance on a bank reconciliation? a. deposits in transit b. interest earned on the bank account c. outstanding checks d. NSF checks

a. deposits in transit

Which of the following describes an account receivable? a.A customer's promise to pay that is classified as a current asset b.A legal document given by a borrower to a lender stating the timing of repayment and the amount to be repaid c.A formal agreement to rent an apartment d.A formal agreement to pay a vendor for supplies

a.A customer's promise to pay that is classified as a current asset

Cash Over and Short

an account that records the discrepancies between deposited amounts of actual cash received and the total of the cash register tape

Deposit in transit

an amount received and recorded by a company, but which has not been recorded by the bank in time to appear on the current bank statement.

trade receivables

are due from customers purchasing inventory in the ordinary course of business

Business process risks

arise out of the internal processes of the company—specifically, how the company allocates its resources to meet its objectives.

Time Period Assumption

assumes that the economic life of a business can be divided into artificial time periods

Employee theft and fraud result in losses because which of the following components of internal control is NOT followed? a.Information and communication b.Control activities c.Clearly defined authority d.Risk assessment

b. Control activities

If Duke Corporation bills Liberty Advisors $15,000 for product sold during the week with terms of 2/10, n30 under the net method, but Liberty pays after the discount period has ended, which of the following transactions will be a part of the entry to record the receipt of cash? a.Credit Cash for $15,000 b.Credit Sales Revenue for $300 c.Credit Accounts Receivable for $15,000 d.Debit Sales Revenue for $15,000

b. Credit Sales Revenue for $300

A company uses accrual accounting in order to produce a month's financial statements that include the effects of activities for that month. Which of the following usually would NOT need adjusting entries for the month? a.Insurance that is prepaid for several months b.Office supplies treated as a continuous business activity c.Wages that are earned by employees but not yet paid by the company d.Rent that is prepaid for the current and the next month

b. Office supplies treated as a continuous business activity

There are seven steps in the accounting cycle. Which of the following is the third step? a.Prepare a trial balance b.Post the transactions to the ledger c.Journalize the transactions d.Analyze the transactions

b. Post the transactions to the ledger

Closing the accounts is an integral part of the accounting cycle. Which of the following account types is closed? a.Accounts with a zero balance b.Temporary accounts c.Permanent accounts d.Contra accounts

b. Temporary accounts

What do accountants mean when they say revenue can be recognized under the accrual basis of accounting? a.Cash is received. b.The company's performance obligation is satisfied. c.The customer promised to come back later and buy the item. d.The customer gives a deposit on a product to be delivered in six months.

b. The company's performance obligation is satisfied.

In practice, both __________ and __________ are typically categorized as current assets on the balance sheet. a.accounts receivable, buildings b.accounts receivable, notes receivable c.accounts receivable, sales revenue d.accounts receivable, patents

b. accounts receivable, notes receivable

More conservative adjusting entries are viewed as a.generating lower retained earnings. b.contributing to higher earnings quality. c.creating higher taxable income. d.unnecessary.

b. contributing to higher earnings quality

Net profit margin percentage is calculated by a.dividing gross profit by net sales. b.dividing net income by net sales. c.subtracting operating income from net sales. d.dividing operating income by net sales.

b. dividing net income by net sales.

Operating margin is calculated by a.dividing gross profit by net sales. b.dividing operating income by net sales. c.subtracting operating income from net sales. d.dividing net income by net sales.

b. dividing operating income by net sales

Which would be ADDED to the COMPANY'S cash balance on a bank reconciliation? a. deposits in transit b. interest earned on the bank account c. oustanding checks d. NSF checks

b. interest earned on the bank account

One of the reasons that companies make adjusting entries is to record a.only those revenues and expenses paid in cash. b.the completed portion of partially completed activities. c.partially completed activities as if they had been completed during the period. d.only noncash revenues.

b. the completed potion of partially completed activities

Significant changes in sales revenue and sales returns and allowances should be investigated by management. This statement is a.true for companies that sell services only. b.true for companies that sell products only. c.true for companies that sell either products or services. d.false for all companies.

b. true for companies that sell products only

Aging method

bad debt expense is estimated by determining the collectability of the accounts receivable rather than by taking a percentage of total credit sales

accrue

brings something into a different time period

The Sarbanes-Oxley Act requires all publicly traded corporations to have an internal audit function that reports to the a.Securities and Exchange Commission. b.accounting department manager. c.audit committee of the board of directors. d.president of the corporation.

c. Audit committee of the board of directors

The statement of cash flows shows a.the sources of cash during the year. b.the uses of cash during the year. c.both the sources and uses of cash during the year. d.investments that will be converted to cash during the year.

c. Both the souces and uses of cash during the year

Many companies pay for something in cash in advance in the current accounting period but not recognize expenses until a later period. Which of the following is the correct adjusting entry to record the $2,000 supplies expense for the last week of November for Hall Manufacturing Company when the supplies were paid in advance? a.Debit Supplies Expense $2,000; credit Accounts Payable $2,000 b.Debit Supplies Expense $2,000; credit Cash $2,000 c.Debit Supplies Expense $2,000; credit Supplies $2,000 d.Debit Supplies Expense $2,000; credit Retained Earnings $2,000

c. Debit supplies expense $2,000 Credit supplies $2000

Companies incur expenses for a variety of reasons. Sometimes expenses are incurred when an asset is used. In other instances, expenses are incurred when liability is created. Which of the following expenses will require a liability to be recognized before the expense is paid? a.A yard maintenance company was paid today for today's cleaning of the property. b.The rent was paid on June 1 for the month of June. c.Employee salaries will be $5,000 for the last week of June, but they will not be paid until July 3. d.Postage was purchased on June 1 to use when mailing company letters in June.

c. Employee salaries will be $5,000 for the last week of June, but they will not be paid until July 3.

Which of the following items would be added to the company's cash balance on a bank reconciliation? a.bank service charges b.deposits in transit c.interest earned on the bank account d.outstanding checks

c. Interest earned on the bank account

The time-period assumption is essential to a.investors and creditors and other financial statement users. b.the Internal Revenue Service. c.management because it allows them to manipulate the income of the business. d.the cash basis of accounting.

c. Investors and creditors and other financial statement users.

While cash-basis accounting is acceptable for many small businesses and small service organizations, it is not adequate for larger businesses. Under cash-basis accounting, which of the following statements is correct? a.Expenses are recognized when they occur, regardless of when cash is paid. b.Revenue is recognized as it is earned, regardless of when cash is received. c.Revenue is recorded when cash is received, regardless of when it is earned. d.Cash-basis accounting is required by generally accepted accounting principles (GAAP).

c. Revenue is recorded when cash is received, regardless of when it is earned.

To encourage prompt payment, businesses may offer a sales discount. The discount is a reduction of the normal selling price. Which of the following is NOT a reason that a seller would offer its customers a 5% cash discount? a.The seller's collection costs are reduced. b.The sooner the customers pay their accounts receivable, cash is more quickly available. c.The company is able to reduce its revenue, which reduces its taxes. d.Offering cash discounts helps a company avoid borrowing money.

c. The company is able to reduce its revenue, which reduces its taxes.

There is more than one method to record bad debt expense. Which method is not consistent with the matching concept? a.The percentage of credit sales method b.The allowance method c.The direct write-off method d.The aging method

c. The direct write-off method

On the accounting worksheet, which of the following account balances would be transferred from one of the adjusted trial balance columns to a retained earnings column? a.Ending retained earnings b.Net income for the period c.Beginning retained earnings d.Common stock

c. beginning retained earnings

There are three key elements of accrual accounting. Which of the following is NOT one of these key elements? a.Revenue recognition principle b.Time-period assumption c.Cash-basis assumption d.Matching principle

c. cash basis assumption

When the petty cash custodian submits receipts for replenishment of the petty cash fund, the resulting journal entry includes a a.credit to Petty Cash. b.debit to Petty Cash. c.debit to Cash. d.credit to Cash.

c. credit to cash

If the accounts receivable balance in the general ledger is $2,000,000 and the accounts receivable (net) reported on the balance sheet is $1,900,000 (the net realizable value), the allowance for doubtful accounts a.is the same as the net realizable value, or $1,900,000. b.is also $2,000,000. c.is $100,000. d.Cannot be determined from the information given.

c. is $100,000

Which would be SUBTRACTED from the BANK'S cash balance on a bank reconciliation? A.deposits in transit B.interest earned on the bank account C.outstanding checks D.NSF checks

c. outstanding checks

The final portion of the worksheet is completed by transferring a.all of the revenue and expense account balances from the adjusted trial balance to the revenue and expense columns. b.all of the income statement account balances from the adjusted trial balance to the income statement columns. c.all of the balance sheet account balances from the adjusted trial balance to the balance sheet columns. d.all of the asset and liability account balances from the adjusted trial balance to the asset and liability columns.

c.) all of the balance sheet account balances from the adjusted trial balance to the balance sheet columns.

After the adjusted trial balance is completed, the financial statements are prepared in a particular order. The correct order is a.statement of retained earnings, balance sheet, and income statement. b.balance sheet, statement of retained earnings, and income statement. c.income statement, statement of retained earnings, and balance sheet. d.balance sheet, income statement, and statement of retained earnings.

c.income statement, statement of retained earnings, and balance sheet.

The interest on a note refers to a.the amount of money loaned or borrowed plus the fee for the duration of time of the borrowing. b.the amount of money loaned or borrowed. c.the compensation paid to the lender for giving up the use of the resources for the period. d.the amount of money that was factored.

c.the compensation paid to the lender for giving up the use of the resources for the period.

Non-sufficient fund (NSF)

check is a check that has been returned to the depositor because funds in the issuer's account are not sufficient to pay the check (bounced check)

credit memo

could result if the bank collected a note receivable for the business and deposited it into the business's bank account.

Sales return

customer returns a product

A 5% note receivable dated January 31 and due on December 31 of the same year will have interest due for a.one month. b.12 months. c.10 months. d.11 months.

d. 11 months

Internal control systems are designed to provide reasonable assurance that the company's objectives are being met in a.reporting objectives. b.compliance objectives. c.operations objectives. d.All of these choices are correct.

d. All of these choices are correct

Management's reporting objectives apply to a.internal financial reporting. b.external financial reporting. c.nonfinancial reporting. d.All of these choices are correct.

d. All of these choices are correct

Which of the following account types has a zero balance after the accounts are closed? a.Liabilities b.Assets c.Retained earnings d.Expenses, revenues, and dividends

d. Expenses, revenues, and dividends

Which of the following is true of a credit memo issued by a bank? a.It is recorded on a company's books by crediting the cash account. b.It might result if the bank makes a prearranged deduction from the business' account to pay a utility bill. c.It is an asset to the bank. d.If it has not yet been recorded by the business, the bank balance will be larger than the cash account balance.

d. If it has not yet been recorded by the business, the bank balance will be larger than the cash account balance.

The correct formula to calculate interest is a.Interest = Principal × Number of Years × Annual Interest Rate. b.Interest = Principal × Annual Interest Rate. c.Interest = Principal × Fraction of 2 Years × Annual Interest Rate. d.Interest = Principal × Fraction of 1 Year × Annual Interest Rate.

d. Interest = Principal × Fraction of 1 Year × Annual Interest Rate.

Billing documents are called a.notes receivable. b.purchase orders. c.accounts receivable. d.invoices.

d. Invoices

Which would be SUBTRACTED from the COMPANY'S cash balance on a bank reconciliation? A.deposits in transit B.interest earned on the bank account C.outstanding checks D.NSF checks

d. NSF checks

Sales revenue may be recognized for the sale of goods or the sale of services. Which of the following statements is NOT true? a.Sellers of goods recognize revenue in the period title passes to the customer. b.Service companies recognize revenue in the period they provide the service to the customer. c.For most retail sales, the performance obligation is satisfied at the point of sale when the product is given to the customer. d.Sales of product may be recognized when a contract is drawn up for a purchase in three months.

d. Sales of product may be recognized when a contract is drawn up for a purchase in three months.

All of the following are advantages of factoring EXCEPT a.factor accepts all risks of collectability. b.immediate receipt of cash. c.fewer employees are needed to manage these accounts. d.the fees for factoring can be expensive.

d. The fees for factoring can be expensive

All of the following are true about debit cards EXCEPT a.debit cards may be disadvantageous to the card holder because transactions cannot be rescinded by stopping payment. b.a debit card is used like a credit card but the bank electronically reduces the holder's bank account and increases the merchant's bank account. c.a purchase using a debit card causes an immediate reduction in the user's bank account. d.a debit card is not at all like a credit card.

d. a debit card is not at all like a credit card

The purpose of closing entries is to transfer the temporary accounts to the Income Summary account. The entry to close dividends of $50,000 is a.debit Retained Earnings $50,000; credit Stockholders' Equity $50,000. b.debit Income Summary $50,000; credit Dividends $50,000. c.debit Cash $50,000; credit Dividends $50,000. d.debit Retained Earnings $50,000; credit Dividends $50,000.

d. debit retained earnings $50,000; credit dividends

The journal entry to record a properly documented credit sale includes a a.credit to Cash. b.debit to Cash. c.debit to Sales Revenue. d.debit to Accounts Receivable.

d. debit to accounts receivable

Cash is reported on both the balance sheet and the a.statement of retained earnings. b.income statement. c.statement of stockholders' equity. d.statement of cash flows.

d. statement of cash flows

Bank reconciliation

help to ensure that the company's and bank's records are consistent

Outstanding check

is a check issued and recorded by the business that has not been "cashed" by the recipient of the check (a vendor)

Adjusting entries

journal entries made at the end of a period to record to completed portion of partially completed transactions.

Debit memo

might result if the bank makes a prearranged deduction from the business's account to pay a bill, such as a utility bill

securization

occurs when large businesses and financial instituions frequently package factored receivables as financial instruments or securities and sell them to investors.

Contra revenue accounts

often you see them together in one acccount called sales returns and allowances, but you can also just debit sales revenue instead.

Accrual-basis accounting

required by GAAP, alternative to cash basis accounting, transactions are recorded when they occur.

Cash Basis Accounting

revenue is recorded when cash is received, regardless of when the goods are delivered, or services are provided expenses are recorded when the cash is paid.

•The College Store accepts MasterCard for payments of purchases made by students. The credit card drafts are deposited directly in a bank account. MasterCard charges a 1.55% collection fee. Credit card drafts totaling $10,000 are deposited during August. Recording the sales and deposits will result in an increase in

•Cash 9,845 •Service Charge Expense 155 •Revenue 10,000