Principles of Accounting Exam 2

At December 31, Gill Co. reported accounts receivable of $274,000 and an allowance for uncollectible accounts of $800 (credit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 5% of accounts receivable. The amount of the adjustment for uncollectible accounts would be: Multiple Choice: A. $13,700 B. $800 C. $13,210 D. $12,900

D. $12,900 Explanation: ($274,000 × 5%) − $800 = $12,900

Use the information below to calculate net revenues. Service Revenue: $100,000 Sales Discounts: $2,000 Accounts Receivable: $15,000 Sales Allowances: $7,000 Cash: $18,000 Multiple Choice: A. $98,000 B. $85,000 C. $68,000 D. $91,000

D. $91,000 Explanation: Net revenue = Service Revenue - Sales Discounts - Sales Allowances 100,000 - 2,000 - 7,000 = $91,000

Schmidt Company's Accounts Receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4,000, and its bad debt expense is $3,800. The net amount of accounts receivable is: Multiple Choice: A. $96,200 B. $100,000 C. $104,000 D. $96,000

D. $96,000 Explanation: Net Amount of Accounts Receivable = Accounts Receivable balance - adjusted balance in Allowance for Uncollectable Accounts (Accounts Receivable - allowance = net receivables)

The component of internal control that includes the policies and procedures that help ensure that management's directives are being carried out is: Multiple Choice: A. Monitoring B. Risk assessment C. Information and communication D. Control activities

D. Control activities

Under the direct write-off method, uncollectible accounts are recorded: Multiple Choice: A. Never B. In the period the account is estimated to be uncollectible C. In the period following the account being actually uncollectible D. In the period the account is determined actually uncollectible

D. In the period the account is determined actually uncollectible

A company's own cash records show a balance of $3,200. After examining the bank statement, the following information is revealed: Bank's balance for cash: $4,000 Deposits outstanding: $2,300 NSF check: $600 Checks outstanding: $1,800 Note collected by the bank: $2,000 Service fee charged by the bank: $100 After reconciliation, the correct balance of cash is: Multiple Choice: A. $3,700 B. $3,400 C. $4,500 D. $4,800

C. $4,500 Bank's balance for cash: $4,000 Deposits outstanding: $2,300 Checks outstanding: $1,800 $4,000 + $2,300 - $1,800 = $4,500

On April 1, 20X1, Nelsen Inc. accepts a $100,000, 8% note. The note receivable and interest are due on March 31, 20X2 (one year later). On December 31, 20X1, Nelsen will accrue interest revenue of: Multiple Choice: A. $0 B. $2,000 C. $6,000 D. $8,000

C. $6,000 Explanation: April 1, 2021 - December 31, 2021 = 9 months 100,000 *(9/12) = $75,000 75,000 * .08 = $6,000

The formula for average collection period is: Multiple Choice: A. Net credit sales divided by average accounts receivable B. 365 days divided by average accounts receivable C. 365 days divided by the receivable turnover ratio D. 365 days divided by net credit sales

C. 365 days divided by the receivable turnover ratio

A company has the following aging schedule of its accounts receivable with the estimated percent uncollectible: Age Group Amount Receivable Estimated Percent Uncollectible Not yet due $175,000 4% 0-60 days past due $40,000 10% 61-120 days past due $10,000 30% More than 120 days past due $5,000 60% Assuming the balance of Allowance for Uncollectible Accounts is $3,000 (credit) before adjustment, which of the following would be recorded in the year-end adjusting entry? Multiple Choice: A. Credit Allowance for Uncollectible Accounts for $20,000. B. Credit Allowance for Uncollectible Accounts for $17,000. C. Debit Bad Debt Expense for $14,000. D. Debit Allowance for Uncollectible Accounts for $14,000.

C. Debit Bad Debt Expense for $14,000. Explanation: Bad Debt Expense = Total Amount Uncollectable - Allowance for Uncollectable Accounts Total Amount Uncollectable: 175,000 * .04 = 7,000 40,000 * .10 = 4,000 10,000 * .3 = 3,000 5,000 * .6 = 3,000 7,000 + 4,000 + 3,000 + 3,000 = 17,000 Allowance for Uncollectable Accounts: = 3,000 Bad Debt Expense: 17,000 - 3,000 = $14,000

On January 18, a company provides services to a customer for $500 and offers the customer terms 2/10, n/30. Which of the following would be recorded when the customer remits payment on January 25? Multiple Choice: A. Credit Accounts Receivable for $490 B. Debit Cash for $500 C. Debit Sales Discount for $10 D. Credit Service Revenue for $500

C. Debit Sales Discount for $10 Explanation: The customer pays within 30 days (n/30) because January 18 - January 25 = 7 days 2/10 (2 %) discount applies because he paid within 30 days $500 * .02 = $10

Separation of duties refers to: Multiple Choice: A. Preventing top management and lower-level employees from interacting B. Making each manager personally responsible for his/her department C. Individuals who have physical responsibility for assets should not also have access to accounting records D. Keeping functions across different departments separate

C. Individuals who have physical responsibility for assets should not also have access to accounting records

On October 31, 2021, Damon Company's general ledger shows a checking account balance of $8,412. The company's cash receipts for the month total $74,420, of which $71,320 has been deposited in the bank. In addition, the company has written checks for $72,482, of which $71,072 has been processed by the bank. The bank statement reveals an ending balance of $12,092 and includes the following items not yet recorded by Damon: bank service fees of $200, note receivable collected by the bank of $5,500, and interest earned on the account balance plus from the note of $570. After closer inspection, Damon realizes that the bank incorrectly charged the company's account $500 for an automatic withdrawal that should have been charged to another customer's account. The bank agrees to the error. Prepare a bank reconciliation to calculate the correct ending balance of cash on October 31, 2021. On the Bank's Cash Balance Side: Per Bank Statement =

$12,092

On October 31, 2021, Damon Company's general ledger shows a checking account balance of $8,412. The company's cash receipts for the month total $74,420, of which $71,320 has been deposited in the bank. In addition, the company has written checks for $72,482, of which $71,072 has been processed by the bank. The bank statement reveals an ending balance of $12,092 and includes the following items not yet recorded by Damon: bank service fees of $200, note receivable collected by the bank of $5,500, and interest earned on the account balance plus from the note of $570. After closer inspection, Damon realizes that the bank incorrectly charged the company's account $500 for an automatic withdrawal that should have been charged to another customer's account. The bank agrees to the error. Prepare a bank reconciliation to calculate the correct ending balance of cash on October 31, 2021. On the Bank's Cash Balance Side: Bank Balance per Reconciliation =

$14,282

On October 31, 2021, Damon Company's general ledger shows a checking account balance of $8,412. The company's cash receipts for the month total $74,420, of which $71,320 has been deposited in the bank. In addition, the company has written checks for $72,482, of which $71,072 has been processed by the bank. The bank statement reveals an ending balance of $12,092 and includes the following items not yet recorded by Damon: bank service fees of $200, note receivable collected by the bank of $5,500, and interest earned on the account balance plus from the note of $570. After closer inspection, Damon realizes that the bank incorrectly charged the company's account $500 for an automatic withdrawal that should have been charged to another customer's account. The bank agrees to the error. Prepare a bank reconciliation to calculate the correct ending balance of cash on October 31, 2021. On the Company's Cash Balance Side: Company Balance per Reconciliation =

$14,282

Spielberg Company's general ledger shows a checking account balance of $22,890 on July 31, 2021. The July cash receipts of $1,805, included in the general ledger balance, are placed in the night depository at the bank on July 31 and processed by the bank on August 1. The bank statement dated July 31 shows bank service fees of $47. The bank processes all checks written by the company by July 31 and lists them on the bank statement, except for one check totaling $1,380. The bank statement shows a balance of $22,418 on July 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on July 31, 2021. On the Bank's Cash Balance Side: Per Bank Statement =

$22,418

Spielberg Company's general ledger shows a checking account balance of $22,890 on July 31, 2021. The July cash receipts of $1,805, included in the general ledger balance, are placed in the night depository at the bank on July 31 and processed by the bank on August 1. The bank statement dated July 31 shows bank service fees of $47. The bank processes all checks written by the company by July 31 and lists them on the bank statement, except for one check totaling $1,380. The bank statement shows a balance of $22,418 on July 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on July 31, 2021. On the Bank's Cash Balance Side: Bank Balance per Reconciliation =

$22,843

Spielberg Company's general ledger shows a checking account balance of $22,890 on July 31, 2021. The July cash receipts of $1,805, included in the general ledger balance, are placed in the night depository at the bank on July 31 and processed by the bank on August 1. The bank statement dated July 31 shows bank service fees of $47. The bank processes all checks written by the company by July 31 and lists them on the bank statement, except for one check totaling $1,380. The bank statement shows a balance of $22,418 on July 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on July 31, 2021. On the Company's Cash Balance Side: Company Balance per Reconciliation =

$22,843

Spielberg Company's general ledger shows a checking account balance of $22,890 on July 31, 2021. The July cash receipts of $1,805, included in the general ledger balance, are placed in the night depository at the bank on July 31 and processed by the bank on August 1. The bank statement dated July 31 shows bank service fees of $47. The bank processes all checks written by the company by July 31 and lists them on the bank statement, except for one check totaling $1,380. The bank statement shows a balance of $22,418 on July 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on July 31, 2021. On the Company's Cash Balance Side: Per General Ledger =

$22,890

On October 31, 2021, Damon Company's general ledger shows a checking account balance of $8,412. The company's cash receipts for the month total $74,420, of which $71,320 has been deposited in the bank. In addition, the company has written checks for $72,482, of which $71,072 has been processed by the bank. The bank statement reveals an ending balance of $12,092 and includes the following items not yet recorded by Damon: bank service fees of $200, note receivable collected by the bank of $5,500, and interest earned on the account balance plus from the note of $570. After closer inspection, Damon realizes that the bank incorrectly charged the company's account $500 for an automatic withdrawal that should have been charged to another customer's account. The bank agrees to the error. Prepare a bank reconciliation to calculate the correct ending balance of cash on October 31, 2021. On the Company's Cash Balance Side: Per General Ledger =

$8,412

During 2021, LeBron Corporation accepts the following notes receivable. 1. On April 1, LeBron provides services to a customer on account. The customer signs a four-month, 9% note for $6,600. 2. On June 1, LeBron lends cash to one of the company's vendors by accepting a six-month, 10% note for $10,600. 3. On November 1, LeBron accepts payment for prior services by having a customer with a past-due account receivable sign a three-month, 8% note for $5,600. Record the acceptance of each of the notes receivable.

(1) Notes Receivable: Debit $6,600 Service Revenue: Credit $6,600 (2) Notes Receivable: Debit $10,600 Cash: Credit $10,600 (3) Notes Receivable: Debit $5,600 Accounts Receivable: Credit $5,600

Bad Debit Expense =

(Accounts Receivable * bad debts % of accounts receivable) - Allowance for Uncollectable Accounts

Interest Revenue =

(Receivable * % interest) * (# of months you held the receivable/12)

adjustment for uncollectible accounts =

(accounts receivable * Estimated % that will be uncollectable) - allowance for uncollectible accounts

Allowance for Uncollectable Accounts =

- Base the estimate of bad debts on a balance sheet amount — accounts receivable (aka Balance Sheet Method)

Accounts Receivable

- Cash owed to the company by its customers from sales or services on account. - Recorded at the time of the sale or service. - Also called "trade receivables".

Aging Method of Accounts Receivable

- Considers the age of receivables - Older accounts are more likely uncollectible - More accurate than using a single percentage - The account titles in the journal entry are the same as when we applied a single percentage to the ending balance, but the amount will differ.

Allowance For Uncollectible Accounts

- Contra asset reported in the balance sheet - Reduces the balance of accounts receivable

We examine items used to reconcile the company's cash balance: •Debit Cash for items that _____ to the balance •Credit Cash for items that _____ from the balance

- Debit Cash for items that add to the balance - Credit Cash for items that subtract from the balance

FIFO method

- First in, first out. - Assumes first units purchased are first ones sold.

LIFO method

- Last in, first out. - Assumes last units purchased are first ones sold.

Sales Discounts

- Offer a customer a reduction if payment is made within a specified period of time. - Sales Discounts = Contra revenue account - Reported with total revenues in the income statement, but with a negative balance.

trade discounts

- Reduction in list price of a product or service - Used to provide incentives to larger customers or certain consumer groups (senior citizens, military) - Recognized by recording revenue for lower amount

Allowance Method (GAAP)

- Some accounts receivables will not be collected - Companies are required to: 1. Estimate future uncollectible accounts 2. Record estimates in the current year - Estimated uncollectible accounts 1. Reduce assets (accounts receivable) 2. Increase expenses (bad debt expense)

Credit Sales

- Transfer products and services to a customer today and expect to collect cash in the future. - Also known as sales on account or services on account.

nontrade receivables

- receivables that originate from sources other than customers Examples: Tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees

2 Reasons for Incorrect Financial Statements

1. Errors 2. Fraud

Common items that will decrease the company's cash balance include:

1. NSF checks received (-) 2. Unrecorded debit card payments (-) 3. Unrecorded EFT payments (-) 4. Bank service fees (-)

Common items that will increase the company's cash balance include:

1. Notes received by bank (+) 2. Interest received (+)

3 Elements of the Fraud Triangle

1. Opportunity 2. Financial Pressure (motivation) 3. Rationalization

2 Types of Internal Controls

1. Preventive Controls 2. Detective Controls

3 Types of Detective Controls

1. Reconciliations 2. Performance reviews 3. Audits

5 Types of Preventive Controls

1. Separation of duties 2. Physical controls 3. Proper authorization 4. Employee management 5. E-commerce controls

4 Cost Flow Assumptions

1. Specific Identification 2. FIFO 3. LIFO 4. Weighted-Average Cost

average collection period =

365/accounts receivable turnover ratio

Average days in inventory =

365/inventory turnover ratio

Apple offers terms of 2/10, n/30 on $2,000 owed; Customer pays on March 10 (w/in 10 days) What are the entries and their amounts for this transaction?

Cash: Debit $1960 Sales Discounts: Debit $40 Accounts Receivable: Credit $2000

Spielberg Company's general ledger shows a checking account balance of $22,890 on July 31, 2021. The July cash receipts of $1,805, included in the general ledger balance, are placed in the night depository at the bank on July 31 and processed by the bank on August 1. The bank statement dated July 31 shows bank service fees of $47. The bank processes all checks written by the company by July 31 and lists them on the bank statement, except for one check totaling $1,380. The bank statement shows a balance of $22,418 on July 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on July 31, 2021. On the Bank's Cash Balance Side: What cash transactions are recorded and what is their balance?

Checks Outstanding: - $1,380 Deposits Outstanding: + $1,805

On October 31, 2021, Damon Company's general ledger shows a checking account balance of $8,412. The company's cash receipts for the month total $74,420, of which $71,320 has been deposited in the bank. In addition, the company has written checks for $72,482, of which $71,072 has been processed by the bank. The bank statement reveals an ending balance of $12,092 and includes the following items not yet recorded by Damon: bank service fees of $200, note receivable collected by the bank of $5,500, and interest earned on the account balance plus from the note of $570. After closer inspection, Damon realizes that the bank incorrectly charged the company's account $500 for an automatic withdrawal that should have been charged to another customer's account. The bank agrees to the error. Prepare a bank reconciliation to calculate the correct ending balance of cash on October 31, 2021. On the Bank's Cash Balance Side: What cash transactions are recorded and what is their balance?

Checks Outstanding: - $1,410 Deposits Outstanding: + $3,100 Bank error: + $500

Select the appropriate term associated with a bank reconciliation for each of the following descriptions: Checks written by the company but not yet recorded by the bank.

Checks outstanding

Common items that will decrease the bank's cash balance include:

Checks outstanding (-)

Select the appropriate term associated with a bank reconciliation for each of the following descriptions: The company recorded a deposit twice.

Company error

Common item that will increase or decrease the company's cash balance include:

Company errors (+/-)

Company Side

Consists of Cash transactions recorded by bank but not company such as: 1. Notes received by bank: Bank collections on the company's behalf (+) 2. Interest received: Interest earned on average daily balance (+) 3. NSF checks received: A customer's account has "nonsufficient funds" if it is unable to pay a check written to the company (-) 4. Unrecorded debit card payments: results in cash being withdrawn immediately from the bank account, but they may not be known by the company's accountant until examination of the bank statement (-) 5. Unrecorded EFT payments: transfers funds from one bank account to another (sometimes referred to as electronic checks or e-checks). (-) 6. Bank service fees: for various activities related to monthly maintenance, overdraft penalties, ATM use, wire transfers, foreign currency exchanges, automatic payments, and other account services. (-) 7. Company errors (+/-)

Bank Side

Consists of Cash transactions recorded by the company, but not yet recorded by its bank such as: 1. Deposits outstanding: cash receipts of the company that have not been added to the bank's record of the company's balance (+) 2. Checks outstanding: checks the company has written that have not been subtracted from the bank's record of the company's balance (-) 3. Bank errors (+/-)

Ending Inventory =

Cost of Goods Available for Sale - Cost of Goods Sold

During the year, Wright Company sells 525 remote-control airplanes for $110 each. The company has the following inventory purchase transactions for the year. Jan. 1: Beginning inventory 60 Unit Cost: $66 Total Cost: $3,960 May. 5: Purchase 280 Unit Cost: $69 Total Cost: $19,320 Nov. 3: Purchase 230 Unit Cost: $74 Total Cost: $17,020 Total # of Units: 570 Total Cost of Every Purchase: $40,300 Calculate ending inventory and cost of goods sold for the year, assuming the company uses weighted-average cost.

Cost of Goods Available for sale: Average Cost per unit: 40,300 / 570 = 70.7018 Cost of Goods Sold: 525 * 70.7018 = $37,118.45 Ending Inventory: 570 - 525 = 45 45 * 70.7018 = $3,181.58

For the company, calculate the missing amount. Company: Lennon Sales Revenue: $17,000 Cost of Goods Sold: Gross Profit: $7,500 Operating Expenses: $3,250 Net Income: $4,250 What is the Cost of Goods Sold?

Cost of Goods Sold = Sales Revenue - Gross Profit Sales Revenue: $17,000 Gross Profit: $7,500 Cost of Goods Sold = 17,000 - 7,500 = $9,500

On May 31, Money Corporation's Cash account showed a balance of $15,000 before the bank reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items: Checks outstanding: $2,850 Deposits outstanding: $3,200 NSF check: $280 Service fees: $140 Error: Money Corp. wrote a check for $45 but recorded it incorrectly for $450. What is the amount of cash that should be reported in the company's balance sheet as of May 31? Multiple Choice: A. $14,985 B. $14,580 C. $14,085 D. $15,350

A. $14,985 ON COMPANY SIDE Company's Balance for Cash: $15,000 NSF check: $280 Service fees: $140 Company error: $405 Cash balance = $15,000 − $280 − $140 + $405 = $14,985.

The balance in a company's Cash account on August 31 was $19,300 before the bank reconciliation was prepared. After examining the August bank statement and items included with it, the company's accountant found the following items: Checks outstanding: $3,500 NSF check: $130 Note collected by bank for the Colt Company: $1,300 Deposits outstanding: $3,000 Bank service fees: $70 What is the amount of cash that should be reported in the balance sheet as of August 31? Multiple Choice: A. $20,400 B. $19,100 C. $20,530 D. $18,800

A. $20,400 ON COMPANY SIDE Company's Balance for Cash: $19,300 Note collected by bank for the Colt Company: $1,300 NSF check: $130 Service fees: $70 Cash balance = $19,300 + $1,300 - $130 - $70 = $20,400.

On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a credit of $500 and that the company estimates 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on December 31 will be: Multiple Choice: A. $5,100 B. $6,100 C. $5,600 D. $5,000

A. $5,100 Explanation: Bad Debt Expense = Total Amount Uncollectable - Allowance for Uncollectable Accounts Total Amount Uncollectable: 80,000 * .07 = $5,600 Allowance for Uncollectable Accounts: $500 Bad Debt Expense = $5,600 - $500 = $5,100

The entry to record the estimate for uncollectible accounts includes: Multiple Choice: A. A debit to Bad Debt Expense B. A debit to Allowance for Uncollectible Accounts C. A debit to Sales Revenue D. A credit to Accounts Receivable

A. A debit to Bad Debt Expense

The effect of writing off a specific account receivable is: Multiple Choice: A. A reduction in the Allowance for Uncollectible Accounts B. An increase in the Allowance for Uncollectible Accounts C. An increase in the amount of Accounts Receivable D. An increase in the amount of Bad Debt Expense

A. A reduction in the Allowance for Uncollectible Accounts

Operating cash flows include which of the following? Multiple Choice: A. Cash paid for supplies B. Cash received from the sale of a used company truck C. Cash received from a bank loan D. Cash received from the issuance of common stock

A. Cash paid for supplies

Which of the following adjusts the bank's balance of cash in a bank reconciliation? Multiple Choice: A. Deposits outstanding B. Interest on bank deposit C. Bank service fees D. NSF check

A. Deposits outstanding

The Sarbanes-Oxley Act of 2002 applies to all companies that: Multiple Choice: A. File reports with the Securities and Exchange Commission B. Use accrual-basis accounting C. Use either cash or accrual- basis accounting D. File their tax return with the Internal Revenue Service

A. File reports with the Securities and Exchange Commission

Which of the following refers to the seller reducing the customer's balance owed because of some deficiency in the company's product or service? Multiple Choice: A. Sales Allowance B. Trade Discount C. Allowance for Uncollectible Accounts D. Sales Discount

A. Sales Allowance

When preparing a bank reconciliation, outstanding checks would be: Multiple Choice: A. Subtracted from the bank's cash balance B. Subtracted from the company's cash balance C. Added to the company's cash balance D. Added to the bank's cash balance

A. Subtracted from the bank's cash balance

Allowance for Uncollectable Accounts =

Accounts Receivable * Estimated % that will be uncollectable

Bad Debt Expense =

Accounts Receivable * Estimated % that will be uncollectable

Net Amount of Accounts Receivable =

Accounts Receivable balance - adjusted balance in Allowance for Uncollectable Accounts

Typical price for eye surgery is $3,000. Eye doctor runs a "special" for $2,400 by offering trade discount of $600. What are the entries and their amounts for this transaction?

Accounts Receivable: Debit $2400 Service Revenue: Credit $2400

On March 1, a company provides services to a customer for $500. The customer doesn't pay cash at the time of service, but instead promises to pay the $500 by March 31. What are the entries and their amounts for this transaction?

Accounts Receivable: Debit $500 Service Revenue: Credit $500

Gerish Company buys merchandise on account from Mangus Company. The selling price of the goods is $900. Journalize the transactions on the books of Mangus Company.

Accounts Receivable: Debit 900 Sales Revenue: Credit 900

Percentage of Accounts Receivable Method

An approach to estimating bad debt expense and uncollectible accounts that bases estimates of uncollectible accounts on the historical percentage of ending accounts receivable that subsequently prove to be uncollectible

On April 25, Foreman Electric installs wiring in a new home for $2,900 on account. However, on April 27, Foreman's electrical work does not pass inspection, and Foreman grants the customer an allowance of $540 because of the problem. The customer makes full payment of the balance owed on April 30. Record the Journal entries for the above information. April 25 = April 27 = April 30=

April 25: Accounts Receivable: Debit $2,900 Service Revenue: Credit $2,900 April 27: Sales Allowances: Debit $540 Accounts Receivable: Credit $540 April 30: Cash: Debit $2,360 Accounts Receivable: Credit $2,360

Physical controls

Assets and accounting records must be kept safe and accessible only to authorized personnel.

Weighted-Average Cost method

Assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items

Internal Controls

Attempt to eliminate the opportunity element of fraud. Internal controls represent plans to: 1. Safeguard the company's assets 2. Improve the accuracy and reliability of accounting information

Match the situation with the type of detective control as either: 1. Reconciliations 2. Performance reviews 3. Audits Situation: An expert auditor could be asked to assess internal control procedures to detect any deficiencies or fraudulent behavior of employees

Audits

Below is Walmart Company's Receivables Turnover Ratio. Receivables Turnover Ratio: 142.8 What is their Average Collection Period?

Average Collection Period = 365 / Receivables Turnover Ratio 365 / 142.8 = 2.6 days

At the beginning of the year, Dawnetta Fashions has total accounts receivable of $300,000. By the end of the year, Dawnetta reports total credit sales of $1,500,000 and total accounts receivable of $200,000. What is the receivables turnover ratio for Dawnetta Fashions? Multiple Choice: A. 5.0 B. 6.0 C. 1.5 D. 7.5

B. 6.0 Explanation: Receivables Turnover Ratio = Net sales / Average Accounts Receivable Net Sales: $1,500,000 Average Accounts Receivable: (300,000 + 200,000) / 2 = $250,000 $1,500,000 / $250,000 = 6.0

Using the allowance method, the entry to record a write-off of accounts receivable will include: Multiple Choice: A. No entry because an allowance for uncollectible accounts was established in an earlier period. B. A debit to Allowance for Uncollectible Accounts. C. A debit to Bad Debt Expense. D. A debit to Service Revenue.

B. A debit to Allowance for Uncollectible Accounts.

The three elements of the fraud triangle are: Multiple Choice: A. Opportunity B. All of the other answers are elements of the fraud triangle C. Motivation D. Rationalization

B. All of the other answers are elements of the fraud triangle

Financing cash flows include which of the following? Multiple Choice: A. Cash paid for supplies B. Cash received from the issuance of common stock C. Cash received from a customer D. Cash received from the sale of a used company truck

B. Cash received from the issuance of common stock

Investing cash flows include which of the following? Multiple Choice: A. Cash received from the issuance of common stock B. Cash received from the sale of a used company truck C. Cash paid for supplies D. Cash received from a customer

B. Cash received from the sale of a used company truck

Which of the following is considered cash for financial reporting purposes? Multiple Choice: A. Accounts payable B. Checks received from customers C. Investments with maturity dates greater than three months D. Accounts receivable

B. Checks received from customers

Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control? Multiple Choice: A. Employee management B. Physical controls C. Separation of duties D. Proper authorization

B. Physical controls

Consider the following cash flow items: 1. Pay amount owed to bank for previous borrowing. 2. Pay utility costs. 3. Purchase equipment to be used in operations. 4. Purchase office supplies. 5. Purchase one year of rent in advance. 6. Pay workers' salaries. 7. Pay for research and development costs. 8. Pay taxes to the IRS. 9. Sell common stock to investors. How many of these cash flow items involve financing activities? Multiple Choice: A. Three B. Two C. One D. Zero

B. Two (1) Pay amount owed to bank for previous borrowing (9) Sell common stock to investors

At the end of 2021, Kimzey is owed $20 million from customers and estimates that 30% will not be collected. Using the Percentage of Accounts Receivable Method what is the Bad Debt Expense and Allowance for Uncollectable Accounts?

Bad Debt Expense $6 million Allowance for Uncollectable Accounts $6 million ($20 million * 30% = $6 million)

Mercy Hospital has the following balances on December 31, 2021, before any adjustment: Accounts Receivable = $64,000; Allowance for Uncollectible Accounts = $1,400 (credit). The following shows the age group with the estimated amount uncollectable : Not yet due: $6,600 0-30 days past due: $2,080 31-90 days past due: $3,330 More than 90 days past due: $1,870 Total: $13,880 Record the adjusting entry for uncollectible accounts on December 31, 2021.

Bad Debt Expense: Debit $12,480 Allowance for Uncollectible Accounts: Credit $12,480 Total Estimated Amount Uncollectable: $13,880 Allowance for Uncollectable Accounts: $1,400 $13,880 - $1,400 = $12,480

At the end of 2021, Worthy Co.'s balance for Accounts Receivable is $18,000, while the company's total assets equal $1,480,000. In addition, the company expects to collect all of its receivables in 2022. In 2022, however, one customer owing $6,100 becomes a bad debt on March 14. Record the write off of this customer's account in 2022 using the direct write-off method.

Bad Debt Expense: Debit $6,100 Accounts Receivable: Credit $6,100

Indicate whether the firm should add or subtract each item below from its Bank Balance and Company Balance in preparing a bank reconciliation. (Select "No entry" if an item is not a reconciling item.) Reconciliation Item: Deposits outstanding Bank Balance = Company Balance =

Bank Balance: Add Company Balance: No entry

Indicate whether the firm should add or subtract each item below from its Bank Balance and Company Balance in preparing a bank reconciliation. (Select "No entry" if an item is not a reconciling item.) Reconciliation Item: Interest earned Bank Balance = Company Balance =

Bank Balance: No entry Company Balance: Add

Indicate whether the firm should add or subtract each item below from its Bank Balance and Company Balance in preparing a bank reconciliation. (Select "No entry" if an item is not a reconciling item.) Reconciliation Item: Bank service fees Bank Balance = Company Balance =

Bank Balance: No entry Company Balance: Subtract

Indicate whether the firm should add or subtract each item below from its Bank Balance and Company Balance in preparing a bank reconciliation. (Select "No entry" if an item is not a reconciling item.) Reconciliation Item: Deposit recorded twice by company Bank Balance = Company Balance =

Bank Balance: No entry Company Balance: Subtract

Indicate whether the firm should add or subtract each item below from its Bank Balance and Company Balance in preparing a bank reconciliation. (Select "No entry" if an item is not a reconciling item.) Reconciliation Item: NSF checks Bank Balance = Company Balance =

Bank Balance: No entry Company Balance: Subtract

Indicate whether the firm should add or subtract each item below from its Bank Balance and Company Balance in preparing a bank reconciliation. (Select "No entry" if an item is not a reconciling item.) Reconciliation Item: Checks outstanding Bank Balance = Company Balance =

Bank Balance: Subtract Company Balance: No entry

Common item that will increase or decrease the bank's cash balance include:

Bank errors (+/-)

Allowance for Uncollectable Accounts =

Base the estimate of bad debts on a balance sheet amount - accounts receivable

Ending Balance =

Beginning Balance - Write Offs

During 2021, its first year of operations, Pave Construction provides services on account of $138,000. By the end of 2021, cash collections on these accounts total $99,000. Pave estimates that 20% of the uncollected accounts will be uncollectible. In 2022, the company writes off uncollectible accounts of $7,020. Calculate the balance of Allowance for Uncollectible Accounts at the end of 2022 (before adjustment in 2022):

Beginning Balance in 2022: $7,800 Less: Write offs during 2022: - $7,020 Ending Balance in 2022: $780

Cost of goods sold =

Beginning inventory + Purchases - Ending inventory

Purchase Returns

Buyer returns unwanted or defective inventory

Spielberg Company's general ledger shows a checking account balance of $22,890 on July 31, 2021. The July cash receipts of $1,805, included in the general ledger balance, are placed in the night depository at the bank on July 31 and processed by the bank on August 1. The bank statement dated July 31 shows bank service fees of $47. The bank processes all checks written by the company by July 31 and lists them on the bank statement, except for one check totaling $1,380. The bank statement shows a balance of $22,418 on July 31. On Bank's Cash Balance Side: Per Bank Statement: $22,418 Checks Outstanding: - $1,380 Deposits Outstanding: + $1,805 Bank Balance per Reconciliation: $22,843 On Company's Cash Balance Side: Per General Ledger: $22,890 Service Fees: - $47 Company Balance per Reconciliation: $22,843 Record the necessary entry(ies) to adjust the balance for cash. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) For July 31, 2021:

Debit Bank Service Fees: $47 Credit Cash: $47

During 2021, its first year of operations, Pave Construction provides services on account of $138,000. By the end of 2021, cash collections on these accounts total $99,000. Pave estimates that 20% of the uncollected accounts will be uncollectible. In 2022, the company writes off uncollectible accounts of $7,020. Record the adjusting entry for uncollectible accounts on December 31, 2021. For December 31, 2021 =

December 31, 2021: Bad Debt Expense: Debit $7,800 Allowance for Uncollectable Accounts: Credit $7,800

During 2021, its first year of operations, Pave Construction provides services on account of $138,000. By the end of 2021, cash collections on these accounts total $99,000. Pave estimates that 20% of the uncollected accounts will be uncollectible. In 2022, the company writes off uncollectible accounts of $7,020. Record the write-off of accounts receivable in 2022. For December 31, 2022 =

December 31, 2022: Allowance for Uncollectable Accounts: Debit $7,020 Accounts Receivable: Credit $7,020

Select the appropriate term associated with a bank reconciliation for each of the following descriptions: Cash receipts received by the company but not yet recorded by the bank.

Deposits outstanding

Common items that will increase the bank's cash balance include:

Deposits outstanding (+)

Purchase Discounts

Discount offered by seller to buyer for quick payment

Match the situation with the type of preventive control as either: 1. Separation of duties 2. Physical controls 3. Proper authorization 4. Employee management 5. E-commerce controls Situation: Only authorized personnel should have passwords to conduct electronic business transactions; firewalls are maintained to prevent unauthorized access; and the system's antivirus software should be regularly updated.

E-commerce controls

Match the situation with the type of preventive control as either: 1. Separation of duties 2. Physical controls 3. Proper authorization 4. Employee management 5. E-commerce controls Situation: Employees should be trained to carry out their job and must be made aware of any internal control procedures, ethical responsibilities, and channels for reporting irregular activities.

Employee management

Bad Debt Expense

Expense reported in the income statement

During the year, Wright Company sells 500 remote-control airplanes for $110 each. The company has the following inventory purchase transactions for the year. Jan. 1: Beginning inventory 60 Unit Cost: $66 Total Cost: $3,960 May. 5: Purchase 280 Unit Cost: $69 Total Cost: $19,320 Nov. 3: Purchase 230 Unit Cost: $74 Total Cost: $17,020 Total # of Units: 570 Total Cost of Every Purchase: $40,300 Calculate ending inventory and cost of goods sold for the year, assuming the company uses FIFO.

FIFO: 500 remote controls January 1st: 60 @ $66 = $3,960 May 5th: 280 @ $69 = $19,320 November 3rd: 160 @ $74 = $11,840 Cost of Goods Sold Under FIFO: 3,960 + 19,320 + 11,840 = $35,120 Ending Inventory: November 3rd: 70 @ 74 = $5,180 Ending Inventory = $5,180

Match the situation with the fraud triangle factor (opportunity, motivation/financial pressure, or rationalization) that best describes it. Situation: An employee has an expensive gambling habit.

Financial Pressure (Motivation)

Match the situation with the fraud triangle factor (opportunity, motivation/financial pressure, or rationalization) that best describes it. Situation: An employee's monthly credit card payments are nearly 75% of their monthly earnings.

Financial Pressure (Motivation)

On March 12, Medical Waste Services provides services on account to Grace Hospital for $10,900, terms 3/10, n/30. Grace pays for those services on March 20. For Medical Waste Services, record the service on account on March 12 and the collection of cash on March 20. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.) For #1: March 12 = For #2: March 20 =

For #1: March 12 Accounts Receivable: Debit $10,900 Service Revenue: Credit $10,900 For #2: March 20 Cash: Debit $10,573 Sales Discounts: Debit $327 Accounts Receivable: Credit $10,900

On October 31, 2021, Damon Company's general ledger shows a checking account balance of $8,412. The company's cash receipts for the month total $74,420, of which $71,320 has been deposited in the bank. In addition, the company has written checks for $72,482, of which $71,072 has been processed by the bank. The bank statement reveals an ending balance of $12,092 and includes the following items not yet recorded by Damon: bank service fees of $200, note receivable collected by the bank of $5,500, and interest earned on the account balance plus from the note of $570. After closer inspection, Damon realizes that the bank incorrectly charged the company's account $500 for an automatic withdrawal that should have been charged to another customer's account. The bank agrees to the error. On Bank's Cash Balance Side: Per Bank Statement: $12,092 Checks Outstanding: - $1,410 Deposits Outstanding: + $3,100 Bank error: + $500 Bank Balance per Reconciliation: $14,282 On Company's Cash Balance Side: Per General Ledger: $8,412 Interest Earned: +$570 Note Received: +$5,500 Service Fees: - $200 Company Balance per Reconciliation: $14,282 Record the necessary entries to adjust the balance for cash. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) For October 31, 2021: Entry #1 = For October 31, 2021: Entry #2 =

For October 31, 2021: Entry #1: Cash: Debit $6,070 Notes Receivable: Credit $5,500 Interest Revenue: Credit $570 For October 31, 2021: Entry #2: Service Fee Expense: Debit $200 Cash: Credit $200

Separation of duties

Fraud is prevented by not allowing the same person to be responsible for both controlling the asset and accounting for the asset.

Proper authorization

Fraud is prevented when unauthorized individuals are not allowed to use company resources.

For the company, calculate the missing amount. Company: Harrison Sales Revenue: $18,500 Cost of Goods Sold: $10,500 Gross Profit: Operating Expenses: $2,250 Net Income: $2,500 What is the Gross Profit?

Gross Profit = Sales Revenue - Cost of Goods Sold Gross Profit = 18,500 - 10,500 = $8,000

A multiple-step income statement reports multiple levels of profitability. What is included on the Multiple-step income statement?

Gross profit = net revenues (or net sales) - cost of goods sold. Operating income = gross profit - operating expenses. Income before income taxes = operating income + nonoperating revenues - nonoperating expenses. Net income = all revenues - all expenses.

Audits

Hire an independent auditor to assess the internal control procedures to detect any deficiencies or fraudulent behavior of employees.

On February 1, 2021, Sanger Corp. lends cash and accepts a $2,500 note receivable that offers 18% interest and is due in six months. What would Sanger record on August 1, 2021, when the borrower pays Sanger the correct amount owed?

Interest Revenue = $2,500 × 18% × 6 / 12 = $225. Answer: Cash: Debit $2,725 Interest Revenue: Credit $225 Notes Receivable: Credit $2,500

Select the appropriate term associated with a bank reconciliation for each of the following descriptions: Money earned on the average daily balance of the checking account.

Interest earned

On October 31, 2021, Damon Company's general ledger shows a checking account balance of $8,412. The company's cash receipts for the month total $74,420, of which $71,320 has been deposited in the bank. In addition, the company has written checks for $72,482, of which $71,072 has been processed by the bank. The bank statement reveals an ending balance of $12,092 and includes the following items not yet recorded by Damon: bank service fees of $200, note receivable collected by the bank of $5,500, and interest earned on the account balance plus from the note of $570. After closer inspection, Damon realizes that the bank incorrectly charged the company's account $500 for an automatic withdrawal that should have been charged to another customer's account. The bank agrees to the error. Prepare a bank reconciliation to calculate the correct ending balance of cash on October 31, 2021. On the Company's Cash Balance Side: What cash transactions are recorded and what is their balance?

Interest earned: + $570 Note received: + $5,500 Service fees: - $200

Rationalization

Justification for the deceptive act by the one committing the fraud

During the year, Wright Company sells 500 remote-control airplanes for $110 each. The company has the following inventory purchase transactions for the year. Jan. 1: Beginning inventory 60 Unit Cost: $66 Total Cost: $3,960 May. 5: Purchase 280 Unit Cost: $69 Total Cost: $19,320 Nov. 3: Purchase 230 Unit Cost: $74 Total Cost: $17,020 Total # of Units: 570 Total Cost of Every Purchase: $40,300 Calculate ending inventory and cost of goods sold for the year, assuming the company uses LIFO.

LIFO: 500 remote controls Nov. 3rd: 230 @ $74 = 17,020 May 5th: 270 @ $69 = 18,630 Cost of Goods Sold Under LIFO: 17,020 + 18,630 = $35,650 Ending Inventory: May 5th: 10 @ $69 = $690 Jan 1st: 60 @ $66 = $3,960 Ending Inventory = 690 + 3,960 = $4,650

Creative Technology reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory. Inventory: Optima cameras Quantity: 120 Unit Cost: $52 NRV: $82 Inventory: Inspire speakers Quantity: 30 Unit Cost: $62 NRV: $52 Calculate the total amount to be reported for ending inventory.

Lower of Cost and NRV per unit = $52 Optima Cameras: 120 * $52 = 6,240 30 * $52 = 1,560 Ending Inventory = 6,240 + 1,560 = $7,800

Reconciliations

Management should periodically determine whether the amount of physical assets of the company (cash, concession items, movie t-shirts, etc.) agree with the accounting records.

specific identification method

Matches each unit of inventory with its actual cost

Select the appropriate term associated with a bank reconciliation for each of the following descriptions: Checks written to the company that are returned by the bank as not having adequate funds.

NSF checks

For the company, calculate the missing amount. Company: Starr Sales Revenue: $15,000 Cost of Goods Sold: $5,500 Gross Profit: $9,500 Operating Expenses: $6,250 Net Income: What is the Net Income?

Net Income = Gross Profit - Operating Expenses Net Income = 9,500 - 6,250 = $3,250

Receivables Turnover Ratio =

Net sales / Average Accounts Receivable

Mercy Hospital has the following balances on December 31, 2021, before any adjustment: Accounts Receivable = $64,000; Allowance for Uncollectible Accounts = $1,400 (credit). Mercy estimates uncollectible accounts based on an aging of accounts receivable as shown below. The following shows the age group with the amount receivable and the estimated percent uncollectable: Not yet due: $44,000 15% 0-30 days past due: 10,400 20% 31-90 days past due 7,400 45% More than 90 days past due 2,200 85% Total $64,000 Estimate the amount of uncollectible receivables for each age group:

Not yet due: $6,600 0-30 days past due: $2,080 31-90 days past due: $3,330 More than 90 days past due: $1,870 Total: $13,880

ending inventory using the lower of cost and net realizable value =

Number of units * lowest number between unit cost and NRV

For the company, calculate the missing amount. Company: McCartney Sales Revenue: $12,000 Cost of Goods Sold: $8,500 Gross Profit: $3,500 Operating Expenses: Net Income: $1,250 What is the Operating Expenses?

Operating Expenses = Gross Profit - Net Income Operating Expenses = 3,500 - 1,250 = $2,250

Match the situation with the fraud triangle factor (opportunity, motivation/financial pressure, or rationalization) that best describes it. Situation: An employee has check writing and signing responsibilities for a small company and is also responsible for reconciling the bank account.

Opportunity

E-commerce controls

Passwords should be required to conduct electronic business transactions, and firewalls and antivirus software should be kept current.

Match the situation with the type of detective control as either: 1. Reconciliations 2. Performance reviews 3. Audits Situation: Employees' actual performance must be measured against their expected performance to detect unusual trends.

Performance reviews

Match the situation with the type of preventive control as either: 1. Separation of duties 2. Physical controls 3. Proper authorization 4. Employee management 5. E-commerce controls Situation: Assets and accounting records must be kept safe and accessible only to authorized personnel.

Physical controls

Match the situation with the type of preventive control as either: 1. Separation of duties 2. Physical controls 3. Proper authorization 4. Employee management 5. E-commerce controls Situation: Only personnel with authorization should be allowed to collect money, process transactions, or make purchases.

Proper authorization

Match the situation with the fraud triangle factor (opportunity, motivation/financial pressure, or rationalization) that best describes it. Situation: An employee earns minimum wage at a firm that has reported record earnings for each of the last five years.

Rationalization

Below are amounts (in millions) from three companies' annual reports. Walmart Company: Beginning Accounts Receivable: $1,715 Ending Accounts Receivable: $2,662 Net Sales: $312,427 What is Walmart Company's Receivables Turnover Ratio?

Receivables Turnover Ratio = Net sales / Average Accounts Receivable Net Sales: $312,427 Average Accounts Receivable: $1,715 + $2,662 / 2 = $2,188.5 $312,427 / $2,188.5 = 142.8

Match the situation with the type of detective control as either: 1. Reconciliations 2. Performance reviews 3. Audits Situation: Physical assets must be verified periodically to see if they match with the accounting records.

Reconciliations

Performance reviews

Reviews of actual vs. expected results, which can be applied to the employees as well as business processes.

Net revenue =

Sales Revenue - Sales Allowances

Match the situation with the type of preventive control as either: 1. Separation of duties 2. Physical controls 3. Proper authorization 4. Employee management 5. E-commerce controls Situation: Activities such as authorizing transactions, recording transactions, and maintaining control of the related assets should be separated among employees.

Separation of duties

Net revenue =

Service Revenue - Sales Discounts - Sales Allowances

On April 25, Foreman Electric installs wiring in a new home for $2,900 on account. However, on April 27, Foreman's electrical work does not pass inspection, and Foreman grants the customer an allowance of $540 because of the problem. The customer makes full payment of the balance owed on April 30. Calculate net revenue associated with these transactions.

Service Revenue: $2,900 Sales Allowances: - $540 Net revenue = Service Revenue - Sales Allowances = $2,360

Spielberg Company's general ledger shows a checking account balance of $22,890 on July 31, 2021. The July cash receipts of $1,805, included in the general ledger balance, are placed in the night depository at the bank on July 31 and processed by the bank on August 1. The bank statement dated July 31 shows bank service fees of $47. The bank processes all checks written by the company by July 31 and lists them on the bank statement, except for one check totaling $1,380. The bank statement shows a balance of $22,418 on July 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on July 31, 2021. On the Company's Cash Balance Side: What cash transactions are recorded and what is their balance?

Service fees: - $47

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the cost of goods sold under the FIFO method if 120 units were sold in January?

Solution: 100 units @ $4 each from January 1st purchase = $400 20 units @ $5 each from January 15th purchase = $100 COGS (Cost of Goods Sold) = $400 + $100 = $500

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the cost of goods sold under the LIFO method if 120 units were sold in January?

Solution: 100 units @ $6 each from January 31st purchase = $600 20 units @ $5 each from January 15th purchase = $100 COGS (Cost of Goods Sold) = $600 + $100 = $700

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the ending inventory if 150 units were purchased under the FIFO method?

Solution: Ending Inventory = Total Cost of Goods Available for Sale - Cost of Goods Sold Total Cost of Goods Available for Sale: 100 units @ $4 each from January 1st purchase = $400 100 units @ $5 each from January 15th purchase = $500 100 units @ $6 each from January 31st purchase = $600 Total Cost of Goods Available for Sale = $1500 Cost of Goods Sold: 150 units sold under FIFO 100 units @ $4 each from January 1st purchase = $400 50 units @ $5 each from January 15th purchase = $250 Cost of Goods Sold under FIFO = $650 Ending Inventory: $1500 - $650 = $850

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the ending inventory if 150 units were purchased under the LIFO method?

Solution: Ending Inventory = Total Cost of Goods Available for Sale - Cost of Goods Sold Total Cost of Goods Available for Sale: 100 units @ $4 each from January 1st purchase = $400 100 units @ $5 each from January 15th purchase = $500 100 units @ $6 each from January 31st purchase = $600 Total Cost of Goods Available for Sale = $1500 Cost of Goods Sold: 150 units sold under LIFO 100 units @ $6 each from January 31st purchase = $600 50 units @ $5 each from January 15th purchase = $250 Cost of Goods Sold under LIFO = $650 Ending Inventory: $1500 - $650 = $850

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the weighted average cost?

Solution: WAC (Weighted Average Cost) = cost of goods available for sale ÷ number of units available for sale Jan. 1 Beginning inventory 100 units @ $4 each = $400 Jan. 15 Purchase 100 units @ $5 each = $500 Jan. 31 Purchase 100 units @ $6 each = $600 Cost of goods available for sale: $400 + $500 + $600 = $1500 Number of units available for sale: 100 + 100 + 100 = 300 Weighted Average Unit Cost = $1500 ÷ 300 = $5 per unit

Financial Pressure (Motivation)

Someone feels the need to commit fraud, such as the need for money.

Employee Management

The company should provide employees appropriate guidance in how to perform their jobs as well as in their responsibilities for internal control.

Ending Inventory

The value of goods still available for sale and held by a company at the end of an accounting period.

FOB Destination

Title passes at destination (when inventory arrives).

FOB Shipping Point

Title passes at shipping point (when inventory leaves the supplier's warehouse).

Net Accounts Receivable =

Total Accounts Receivable - Allowance for Uncollectible Accounts

Mercy Hospital has the following balances on December 31, 2021, before any adjustment: Accounts Receivable = $64,000; Allowance for Uncollectible Accounts = $1,400 (credit). The following shows the age group with the estimated amount uncollectable : Not yet due: $6,600 0-30 days past due: $2,080 31-90 days past due: $3,330 More than 90 days past due: $1,870 Total: $13,880 Calculate net accounts receivable.

Total Accounts Receivable: $64,000 Less: Allowance for Uncollectible Accounts: - $13,880 Net Accounts Receivable: $50,120

Bad Debt Expense =

Total Amount Uncollectable - Allowance for Uncollectable Accounts

fraud

a person intentionally deceives another person for personal gain or to damage that person

At the end of the year, a company reports the following inventory amounts ($ per unit): Items: A: Number of Units: 100 Unit Cost: $4 NRV: $8 B: Number of Units: 150 Unit Cost: $8 NRV: $6 The year-end adjustment using the lower of cost and net realizable value would include: Multiple Choice: a. A credit to Inventory for $300 b. A debit to Cost of Goods Sold for $400 c. A debit to Inventory for $500 d. A credit to Cost of Goods Sold for $700

a. A credit to Inventory for $300 Explanation: Recorded cost of inventory = (100 units × $4) + (150 units × $8) = $1,600. Lower of cost and NRV = (100 units × $4) + (150 units × $6) = $1,300. The year-end adjustment to reduce inventory from its cost of $1,600 to NRV of $1,300 is: 1600 - 1300 = 300 Debit Cost of Goods Sold for 300 Credit Inventory for 300

On December 31 before adjusting entries, a company reports the following balances: Accounts Receivable: Debit $100,000 Allowance for Uncollectable. Accts. Credit $2,000 The company estimates bad debts to be 20% of accounts receivable. The adjusting entry would include: Multiple Choice: a. A debit to Bad Debt Expense = $18,000 b. A credit to Allowance for Uncoll. Accts. = $24,000 c. A credit to Allowance for Uncoll. Accts. = $22,000 d. A debit to Bad Debt Expense = $20,000

a. A debit to Bad Debt Expense = $18,000 Explanation: 100,000 * .20 = 20,0000 - 2,000 = 18,000

Which of the following generally is recorded at the time a company provides services to customers on account? Multiple Choice: a. Accounts receivable b. Interest receivable c. Notes receivable d. Tax refund claims

a. Accounts receivable

Which of the following statements is NOT true of the Sarbanes-Oxley Act of 2002? Multiple Choice: a. All companies in the U.S. fall under its provisions. b. It helped establish guidelines for internal control procedures. c. It helped establish corporate executive accountability. d. It helped establish guidelines for auditor-client relations.

a. All companies in the U.S. fall under its provisions

Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system? Multiple Choice: a. Costs of incoming freight charges on merchandise inventory b. A return of damaged inventory to the vendor c. A purchase discount taken for prompt payment d. Shipping charges for outgoing inventory

a. Costs of incoming freight charges on merchandise inventory

How would an NSF check from a customer be recorded in the accounting records? Multiple Choice: a. Debit Accounts Receivable; Credit Cash b. Debit Cash; Credit Accounts Receivable c. Debit Accounts Payable; Credit Cash d. Debit Cash; Credit Miscellaneous Expense

a. Debit Accounts Receivable; Credit Cash

Which inventory method or cost flow assumption most closely resembles the actual physical flow of goods? Multiple Choice: a. FIFO b. LIFO c. Weighted-average d. FILO

a. FIFO

An inventory error that understates the amount of ending inventory will result in which of the following in the current year? Multiple Choice: a. Overstated cost of goods sold b. Overstated net income c. Overstated assets d. Overstated gross profit

a. Overstated cost of goods sold

Cost of goods sold is: Multiple Choice: a. Reported in the income statement b. Reported in the balance sheet c. A current asset d. The cost of inventory on hand at the end of the period

a. Reported in the income statement

errors

accidental errors in recording transactions or applying accounting rules

Net income =

all revenues - all expenses

The effect of a sales allowance will result in which of the following: Multiple Choice: a. An increase to net income b. A decrease to net income c. An increase to accounts receivable d. An increase to sales revenue

b. A decrease to net income

Which of the following items would be found on the "bank side," or the left-hand side, of the bank reconciliation? Multiple Choice: a. Interest income received on the account b. Deposits outstanding c. NSF check from a customer d. Service fee charged by the bank

b. Deposits outstanding

During a period of rising prices, which inventory cost flow assumption would result in the highest cost of goods sold, and thereby the lowest net income? Multiple Choice: a. FIFO b. LIFO c. Weighted-average d. FILO

b. LIFO

Which level of profitability is considered profit from normal operations? Multiple Choice: a. Gross profit b. Operating income c. Income before taxes d. Net income

b. Operating income

If a company places cash receipts from the day in a safe or bank deposit box, this would be an example of: Multiple Choice: a. Separation of duties b. Physical control c. Reconciliation d. Performance review

b. Physical control

Everyone in the company has an impact on the operations and effectiveness of internal control, but who must take final responsibility? Multiple Choice: a. Internal auditors b. Top executives c. The firm's attorney d. The majority shareholder

b. Top executives

Select the appropriate term associated with a bank reconciliation for each of the following descriptions: Fees imposed by the bank to the company for providing routine services.

bank service fees

Cost of goods sold =

beginning inventory + purchases - ending inventory

Which of the following is true regarding Allowance for Uncollectible Accounts? Multiple Choice: a. It is a liability account. b. It is added to the total of Sales Discounts, Sales Returns, and Sales Allowances. c. It is subtracted from the balance of Accounts Receivable in the balance sheet. d. It appears in the income statement as an expense.

c. It is subtracted from the balance of Accounts Receivable in the balance sheet.

When an entry is made to write off an uncollectible account: Multiple Choice: a. Bad debt expense is debited. b. Net income is decreased. c. Net accounts receivable is unchanged. d. The allowance account is credited.

c. Net accounts receivable is unchanged.

When writing off an uncollectible account: Multiple Choice: a. Bad debt expense is debited. b. Net income is decreased. c. Total assets are unchanged. d. The allowance account is credited.

c. Total assets are unchanged.

errors of bank reconciliation

can result from mistakes by the bank or by the company

weighted-average cost =

cost of goods available for sale/number of units available for sale

Inventory turnover ratio =

cost of goods sold/average inventory

At the end of the year, a company reports the following inventory amounts ($ per unit): Items: A: Number of Units: 100 Unit Cost: $4 NRV: $8 B: Number of Units: 150 Unit Cost: $8 NRV: $6 The amount to report for ending inventory using the lower of cost and net realizable value is: a. $1,600 b. $1,700 c. $2,000 d. $1,300

d. $1,300 Explanation: 100 * 4 = 400 150 * 6 = 900 400 + 900 = 1300

Which of the following would NOT be considered a cash equivalent? Multiple Choice: a. Credit card sales for the day b. Debit card sales for the day c. Checks received from customers d. Certificate of deposit (CD) that matures one year from now

d. Certificate of deposit (CD) that matures one year from now

How would an NSF check from a customer be treated on a bank reconciliation? Multiple Choice: a. Addition on the bank side b. Deduction on the bank side c. Addition on the company side d. Deduction on the company side

d. Deduction on the company side

Which of the following inventory accounts consists of items for which the manufacturing process is complete? Multiple Choice: a. Raw Materials b. Work in Process c. Cost of Goods Sold d. Finished Goods

d. Finished Goods

On December 31 before adjusting entries, a company's balance of Allowance for Uncollectible Accounts is a credit of $2,000. What does a "credit" balance prior to adjusting entries indicate? Multiple Choice: a. The company did not estimate bad debts last year. b. Last year's estimate of bad debts was too low. c. The company's estimate equals actual bad debts. d. Last year's estimate of bad debts was too high.

d. Last year's estimate of bad debts was too high.

Which of the following is true about the aging method? Multiple Choice: a. No estimate for uncollectible accounts is made. b. Older accounts are more likely to be collected. c. It is not acceptable for GAAP. d. Older accounts are less likely to be collected.

d. Older accounts are less likely to be collected.

Notes Receivable

formal credit arrangements evidenced by written debt instruments (or "notes")

Operating Expenses =

gross profit - net income

Net Income =

gross profit - operating expenses

Operating income =

gross profit - operating expenses

Gross profit ratio =

gross profit/net sales

bank reconciliation

matches the balance of cash in the bank account with the balance of cash in the company's own records.

Gross profit =

net revenues (or net sales) - cost of goods sold.

timing differences of bank reconciliation

occur when the company records transactions before or after the bank records the transactions

Income before income taxes =

operating income + nonoperating revenues - nonoperating expenses

Gross Profit =

sales revenue - cost of goods sold

Cost of Goods Sold =

sales revenue - gross profit

Freight In

shipments from suppliers

Freight Out

shipments to customers

Opportunity

the situation allows the fraud to occur

Occupational Fraud

the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources

Possible differences between the bank's cash records and the company's cash records are due to:

timing differences or errors.