True / False Exam 2

Bad Debts expense is debited and Accounts Receivable is credited at the end of the period to recognize bad debts under the allowance method.

False BDE is debited A4DA is credited

On a bank reconciliation, bank charges for the month are added to the cash balance per the books.

False Balance per books includes : -Service charges -NSF checks +Interest Earned +N/R

Some cash equivalents appear in the long term investment section of a balance sheet.

False Cash Equivalents are short term commitments

A six-month certificate of deposit would be considered to be a cash equivalent

False Cash Equivalents must be able to be converted in 3 months or less

When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.

False Deposits in transit are already received and recorded by the company, but not recorded by the bank.

Because the allowance method results in better matching, accounting standards require its use rather than the direct write-off method, unless bad debts are immaterial.

True

Checks received from customers are considered to be cash in the company's books.

True

Cost of goods sold represents an outflow of an asset, inventory, from the sale of products.

True

Credit terms of n/30 mean that the net amount of the invoice, less any returns or allowances, is due within 30 days of the date of the invoice

True

Purchase discounts decrease the total cost of merchandise acquired.

True

Sales revenue is an inflow of assets.

True

The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit.

True

When reconciling a bank account, the company does not have to prepare an adjusting entry for outstanding checks.

True

Whether investments are reported as current assets or noncurrent assets depends on the company's intent.

True

Promissory notes are non-negotiable.

False Promissory notes are negotiable

The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place

True

Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.

True

When a bank pays interest or collects an amount owed to a company by one of the bank's customers, the bank issues a credit memorandum.

True

On the income statement of a merchandising company, cost of goods is added to net sales to arrive at gross margin or gross profit.

False Gross Profit = (Net Sales) - (COGS)

Cash equivalents are investments that are readily convertible to a known amount of cash, where readily means six months or less

False Must be 3 months or less

Purchase returns and allowances is subtracted from cost of goods sold to determine net purchases.

False Net Purchases = (COG Purchased) - (Transportation-In)

Net purchases equal purchases less purchase return, allowances, and discounts plus transportation-in.

False Net Purchases = (Cost of Goods Purchased) - (Transportation-In)

A check written by a company but not yet presented to the bank for payment is called a check in transit.

False Outstanding checks are written, but not yet presented to the bank

The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for Doubtful Accounts.

False Percentage of receivables considers any existing balance in A4DA

With the periodic inventory system, the inventory account is updated after each sale or purchase.

False Periodic updated at the end of the period Perpetual updated after each sale / purchase

A company prepares adjusting entries for debit memorandums but not for credit memorandums.

False They prepare for both.

Accounts receivable are shown on the balance sheet at their net realizable value.

True

The maker of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

True

The payee of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

True

The three distinct types of cost to a manufacturer are direct materials, direct labor, and manufacturing overhead.

True