ACC 201 Test 2

If merchandise is sold on account to a customer for $1,000, terms FOB shipping point, 1/10, n/30, and the seller prepays $50 in freight, the amount of the discount for early payment would be:

$10.00

Administrative expenses

Expenses incurred in the administration or general operations of the business; costs not directly related to selling, such as officer salaries.

Which term indicates that merchandise is free of transportation charges to the buyer?

FOB destination

Controlling account

The account in the general ledger that summarizes the balances of the accounts in a subsidiary ledger.

T/F: A multi-step income statement calculates income by grouping certain revenues and expenses together and then calculating several subtotals of income.

True

T/F: Cost of Merchandise Sold is used in accounting for transactions by sellers of merchandise.

True

T/F: Cost of sales is the cost of the inventory that was sold during an accounting period.

True

T/F: In case of FOB shipping point, freight costs incurred by the buyer are added to the cost of the inventory by increasing inventory.

True

Which of the following is true of a petty cash fund? a. The company can place restrictions on the type of payments. b. The petty cash custodian has to authorize the payments made. c. The company cannot place any restrictions on the maximum amount of payment. d. The company does not keep records of the details of the payments made.

a. The company can place restrictions on the type of payments.

Which of the following is true of monitoring? a. Monitoring can be done by giving responsibilities for related operations to the same person. b. Monitoring evaluates the internal control system, locates weaknesses, and improves it. c. Monitoring is the overall attitude of management and employees about the importance of controls. d. Monitoring is a substitute for control procedures.

b. Monitoring evaluates the internal control system, locates weaknesses, and improves it.

The adjusted cash balance determined in a bank reconciliation is reported on a(n) _____. a. statement of stockholders' equity b. income statement c. balance sheet d. variance report

c. balance sheet

A _____ provides reasonable assurance that business goals can be achieved. a. control report b. control assessment c. control procedure d. control environment

c. control procedure

Aries Inc. buys merchandise from Andy Co. on account, $1,900, terms free on board (FOB) shipping point and pays the freight cost of $50. Identify the transaction's effect on the working capital of Aries Inc. a. There is a decrease in the working capital of Aries Inc. by $50. b. There is no effect on the working capital of Aries Inc. c. There is an increase in the working capital of Aries Inc. by $1,850. d. There is a decrease in the working capital of Aries Inc. by $1,950.

b. There is no effect on the working capital of Aries Inc.

A(n) _____ is a set of procedures for authorizing and recording liabilities and cash payments. a. operating system b. voucher system c. banking system d. accrual system

b. voucher system

The revenues from services are reported on the income statement of a service business as _____. a. fees earned b. gross profit c. sales d. non-recurring income

a. fees earned

Multiple-step income statements show: a. gross profit but not net income. b. neither gross profit nor net income. c. gross profit but not cost of merchandise sold. d. gross profit, cost of merchandise sold, income from operations, and net income.

d. gross profit, cost of merchandise sold, income from operations, and net income.

Using a perpetual inventory system, the return of merchandise purchased on account includes a(n):

decrease in Merchandise Inventory

The income statement in which the total of all expenses is deducted from the total of all revenues is termed:

single-step form

Cost of goods sold

The cost of products sold; also may be referred to as cost of merchandise sold or cost of sales.

As of December 31, 20Y4, Ames Corporation's physical inventory was $275,000, and its book inventory was $290,000. The effect of the inventory shrinkage on the accounts is:

To increase Cost of Goods Sold and decrease Inventory by $15,000.

Endive & Co., a service company, earned fees of $360,000 in the year 20Y6. It incurred operating expenses of $250,000. Calculate the operating income of Endive for the year 20Y6. a. $110,000 b. $305,000 c. $610,000 d. $55,000

a. $110,000

Slateblue and Co. is a retail company. In 20Y5, it reported a gross profit of $1,000,000. If 60 % of the gross profit were operating expenses, calculate the operating income of Slateblue and Co. for 20Y5. a. $400,000 b. $1,600,000 c. $600,000 d. $1,400,000

a. $400,000

If a company issues a credit memo of $600 to a customer, what is its effect on the company's liquidity and profitability? a. Both liquidity and profitability remain unchanged. b. Both liquidity and profitability increase. c. The liquidity increases whereas profitability decreases. d. The liquidity decreases whereas profitability increases.

a. Both liquidity and profitability remain unchanged.

_____ is a measure that is useful in assessing the ability of the company to operate in the event of negative net cash flows from operations. a. Cash to monthly cash expenses ratio b. Price to cash flow ratio c. Operating cash flow ratio d. Cash flow margin ratio

a. Cash to monthly cash expenses ratio

Aztec Inc's inventory records indicate the following on December 31, 20Y7: Account balance of Inventory $70,500 Physical merchandise inventory on hand $69,000 Estimated customer refund $2,500 Aztec's inventory shrinkage is equal to _____. a. $500 b. $1,500 c. $2,500 d. $1,000

b. $1,500

Leto Inc. purchased merchandise on account from Metis Inc. for $25,000, credit terms being 2/10, n/30. If Leto pays the invoice within the discount period, what amount will Metis receive as payment? a. $25,500 b. $24,500 c. $22,000 d. $22,500

b. $24,500

Compute the ratio of cash to monthly cash expenses from the information given below. Cash in hand $500 Cash at bank 1,500 U.S. Treasury bills 2,000 Short-term investment 725 Equity investment 1,250 Net cash flows from operations for the year 12,600 a. 6.20 months b. 4.50 months c. 3.10 months d. 5.70 months

b. 4.50 months

Which of the following is true of a remittance advice? a. It is sent to the Purchases Department. b. It serves as a record of cash initially received. c. It is the portion of an invoice that is retained by the customer. d. It cannot be used to control cash received in the form of money orders.

b. It serves as a record of cash initially received.

Which of the following is the equation for calculating markup percent? a. Markup Percent = Operating Income / Sales b. Markup Percent = Gross Profit / Cost of Goods Sold c. Markup Percent = Cost of Goods Sold / Sales d. Markup Percent = Net Income / Cost of Goods Sold

b. Markup Percent = Gross Profit / Cost of Goods Sold

Consider the following example and determine the amount to be recorded under the cash short and over account: Cash register total for cash sales $25,000 Cash receipts from cash sales $24,975 a. $25 b. $50 c. ($25) d. ($50)

c. ($25)

Which of the following is the formula for gross profit percent? a. (Sales - Gross Profit) / Sales b. (Operating Income - Non-Operating Income) / Sales c. (Sales - Cost of Goods Sold) / Sales d. (Cost of Goods Sold - Operating Expenses) / Cost of Goods Sold

c. (Sales - Cost of Goods Sold) / Sales

The following data were adapted from recent financial statements of Elite Corporation. Using the data provided, determine Elite's markup percentage. Then select the letter which corresponds with your answer. Net sales $85,680 Cost of goods sold 69,200 Gross profit 17,300 Average total assets 86,500 a. 80% b. 20% c. 25% d. 45%

c. 25%

_____ are subtracted from the operating income to arrive at the net income. a. Tax expenses b. Interest expenses c. Both "Tax expenses" and "Interest expenses" d. Neither "Tax expenses" nor "Interest expenses"

c. Both "Tax expenses" and "Interest expenses"

Which of the following is an effect on financial statements if a petty cash fund of $800 is established? a. Cash will increase by $800 and petty cash fund of $800 will be reported as a liability on the balance sheet. b. The petty cash fund of $800 will be reported as expenses on the income statement. c. Cash will decrease by $800 and petty cash will increase by $800 on the balance sheet. d. The petty cash fund of $800 will be reported as cash flow from financing activities on the cash flow statement.

c. Cash will decrease by $800 and petty cash will increase by $800 on the balance sheet.

On October 1, Collins Company sold merchandise of $8,000 on account to James Company. The terms are FOB destination; 2/10, n/30. The cost of the merchandise sold was $5,200. Which of the following is true of this transaction? a. James Company will increase Accounts Receivable by $8,000. b. James Company's net income will increase by $2,800. c. Collins Company will reduce Merchandise Inventory by $5,200. d. Collins Company will increase Merchandise Inventory by $8,000.

c. Collins Company will reduce Merchandise Inventory by $5,200.

Citron Inc. pays transportation charges of $200 for delivery of the merchandise sold to Megaton Co. Identify the effect of this transaction in the books of Citron and Megaton. a. In the books of Citron Inc. the retained earnings decrease by $200, and in the books of Megaton Co. the operating expenses decrease by $200. b. In the books of Citron Inc. the retained earnings increase by $200, and in the books of Megaton Co. the operating expenses increase by $200. c. In the books of Citron Inc. the retained earnings decrease by $200, and in the books of Megaton Co. there is no effect. d. In the books of Citron Inc. the retained earnings increase by $200, and in the books of Megaton Co. there is no effect.

c. In the books of Citron Inc. the retained earnings decrease by $200, and in the books of Megaton Co. there is no effect.

Which of the following is true of the ratio of cash to monthly cash expenses? a. It indicates the number of times financial obligations are covered by cash available. b. The numerator excludes short-term investments that are reported under current assets. c. It is especially used when assessing the ability of new companies to operate. d. It can only be applied when the net cash flows are positive.

c. It is especially used when assessing the ability of new companies to operate.

The _____ is the overall attitude of management and employees about the importance of controls. a. control management b. control environment c. control application d. control procedure

b. control environment

T/F: On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.

True

T/F: The markup percent is calculated as gross profit divided by cost of goods sold.

True

T/F: Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are made.

True

The gross profit of a retail business is determined as: a. sales minus cost of goods sold. b. fees earned minus cost of goods sold. c. sales minus cost of goods sold minus operating expenses. d. fees earned minus cost of goods sold minus operating expenses.

a. sales minus cost of goods sold

In the _____, inventory records consist of the inventory account, called the controlling account, and a subsidiary record of each item of inventory, called a subsidiary ledger. a. perpetual inventory system b. just-in-time inventory system c. periodic inventory system d. controlling inventory system

a. perpetual inventory system

T/F: The revenue cycle of a business is the process it takes for the business to spend cash to generate revenue, earn revenues and receive cash from customers.

False

Credit memorandum

A form used by a seller to inform the buyer of the amount the seller proposes to decrease the account receivable due from the buyer.

T/F: A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the cash discount.

False

Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 15; the merchandise is received by the buyer on November 17; the transaction is recorded in the buyer's accounts on November 18. The credit period begins with what date?

November 15

_____ is computed by dividing net cash flows from operations by 12. a. Monthly cash burn b. Monthly cash and cash equivalent c. Investing cash flow d. Cash to monthly cash payoff

a. Monthly cash burn

Which of the following is the equation for calculating a firm's working capital? a. Working Capital = Current Assets - Current Liabilities b. Working Capital = Total Assets - Non-Current Liabilities c. Working Capital = Current Liabilities - Current Assets d. Working Capital = Total Liabilities - Current Liabilities

a. Working Capital = Current Assets - Current Liabilities

The balance of the estimated returns inventory account is reported on a company's balance sheet _____. a. as a current asset b. as a current liability c. as a long-term liability d. as a long-term asset

a. as a current asset

Generally, cash is listed _____ on the balance sheet. a. as the first item in the Current Assets section b. after inventories in the Current Assets section c. as an inclusion in notes receivable in the Current Assets section d. after short-term investments in the Current Assets section

a. as the first item in the Current Assets section

How would the following error be recorded in the bank reconciliation statement? A company recorded a deposit of $2,300 as $3,200. a. The difference of $900 would not be record in the bank reconciliation statement. b. The difference of $900 would be deducted from cash balance in the company section. c. The difference of $900 would be added to the cash balance in the company section. d. The difference of $900 would be added to the cash balance in the bank section.

b. The difference of $900 would be deducted from cash balance in the company section.

When a seller decreases a customer's accounts receivable balance to account for a refund to the customer, the seller sends the customer a _________ indicating the seller's intent to decrease the account receivable balance. a. purchase order b. invoice c. credit memo d. debit memo

c. credit memo

Which of the following is recorded as an increase in liability in a company's account by a bank? a. Service charges b. Electronic funds transfer (EFT) payments c. Electronic funds transfer (EFT) deposits d. Not sufficient funds (NSF) checks

c. Electronic funds transfer (EFT) deposits

Which of the following is the correct way to account for inventory shrinkage? a. It is written off against the balance of the consumer refunds payable account. b. It is treated as an abnormal loss. c. It is included in the cost of goods sold. d. It is written off against the balance of the estimated returns inventory account.

c. It is included in the cost of goods sold.

Which of the following equations shows the relationship between markup percent and gross profit percent? a. Markup Percent = Gross Profit Percent × (Gross Profit / Selling Price) b. Markup Percent = Gross Profit Percent × (Cost / Selling Price) c. Markup Percent = Gross Profit Percent × (Selling Price / Cost) d. Markup Percent = Gross Profit Percent × (Gross Profit / Cost)

c. Markup Percent = Gross Profit Percent × (Selling Price / Cost)

Which of the following accounts is reported on the balance sheet of a retail business but not on the balance sheet of a service business? a. Accounts receivable b. Prepaid insurance c. Merchandise inventory d. Accounts payable

c. Merchandise inventory

Which of the following is the correct equation for computing the operating income of a retail business? a. Operating income = Fees earned + Non-operating income b. Operating income = Sales - Cost of goods sold + Non-operating income c. Operating income = Sales - Cost of goods sold - Operating expenses d. Operating income = Fees earned - Operating expenses

c. Operating income = Sales - Cost of goods sold - Operating expenses

Which of the following is a reason for differences between the cash balance according to a bank statement and the cash balance according to the company's records? a. Reduction of cash balance due to employee fraud b. Time lag between date of purchasing goods and writing a check c. Time lag between the date a check is written and the date that it is paid by the bank d. Overstatement of a travel expense in a report by a sales executive

c. Time lag between the date a check is written and the date that it is paid by the bank

Which of the following is the purpose of the Sarbanes-Oxley Act? a. To ensure the goals of the organization are achieved b. To influence companies to minimize the cost of production c. To restore public confidence and trust in the financial reporting of companies d. To minimize operating risk by reducing fixed operating costs

c. To restore public confidence and trust in the financial reporting of companies

The following data relates to Dory Inc. for the year ending December 31, 20Y6. Sales $5,000,000 Cost of goods sold $3,700,000 Selling expenses $100,000 Administrative expenses 150,000 Dory Inc.'s operating income is _____. a. $250,000 b. $1,200,000 c. $8,950,000 d. $1,050,000

d. $1,050,000

On January 1, 20Y6, Setasilk Inc. had $150,000 of inventory on hand, and it purchased $4,000,000 of merchandise during the year. On December 31, 2016, Setasilk Inc. took count of its physical inventory and determined that $205,000 of inventory was on hand. Setasilk Inc.'s cost of goods sold for 20Y6 is _____. a. $3,645,000 b. $4,205,000 c. $4,055,000 d. $3,945,000

d. $3,945,000

Which of the following is the correct statement regarding a single-step income statement? a. A single-step income statement is prepared after the statement of stockholders' equity. b. A single-step income statement contains several sections and subtotals. c. A single-step income statement does not report selling and administrative expenses. d. A single-step income statement does not report gross profit and operating income.

d. A single-step income statement does not report gross profit and operating income.

Which of the following statements is true about sales tax? a. At the time of payment of sales tax, the seller records the tax payment by increasing the sales tax payable account and decreasing the cash account. b. When a sale is made on account, the seller charges the buyer for the sales tax payable by increasing the accounts payable account. c. The liability for sales tax is incurred only when the sale is made in cash. d. At the time of sale, the seller increases the sales account for the amount of the sale and increases the sales tax payable account for the amount of the tax.

d. At the time of sale, the seller increases the sales account for the amount of the sale and increases the sales tax payable account for the amount of the tax.

Which of the following factors influencing the control environment is the framework for planning and controlling operations? a. Company's personnel policies b. Management's operating style c. Management's philosophy d. Company's organizational structure

d. Company's organizational structure

On July 1, Tango Co. sold merchandise on account to Salsa Co. for $12,000. Which of the following is the adjustment in the books of Tango Co. and Salsa Co.? a. In the books of Tango Co. there is an increase of $12,000 in the accounts payable account, and in the books of Salsa Co. there is a decrease of $12,000 in the accounts receivable account. b. In the books of Tango Co. there is an increase of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is a decrease of $12,000 in the accounts payable account. c. In the books of Tango Co. there is a decrease of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is a decrease of $12,000 in the accounts payable account. d. In the books of Tango Co. there is an increase of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is an increase of $12,000 in the accounts payable account.

d. In the books of Tango Co. there is an increase of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is an increase of $12,000 in the accounts payable account.

Which of the following statements is true of cash received by electronic funds transfer (EFT)? a. It reduces the internal controls over cash since the cash is received directly by the bank. b. It increases the risk of late payments from customers. c. It involves more cost as compared to cash received through mail. d. It speeds up the processing of cash receipts.

d. It speeds up the processing of cash receipts.

Magenta Inc. buys merchandise worth $1,000 from Zeus Inc. on account, terms FOB (free on board) shipping point and pays the freight cost of $100. Based on this scenario, which of the following is the effect on the liquidity and profitability of Magenta Inc.? a. Its liquidity as well as profitability decrease. b. Its liquidity increases and profitability decreases. c. Its liquidity decreases and profitability increases. d. Its liquidity as well as profitability remains unchanged.

d. Its liquidity as well as profitability remains unchanged.

Which of the following is an example of other expense? a. Advertising expense b. Depreciation of plant and equipment c. Freight cost d. Loss from disposing of fixed assets

d. Loss from disposing of fixed assets

Which of the following is deducted from cash balance according to the bank statement while calculating the adjusted balance? a. Service charges b. Deposits in transit c. Not sufficient funds (NSF) checks d. Outstanding checks

d. Outstanding checks

Which of the following parties often lose billions of dollars when a company commits financial fraud? a. Stockholders, accounting standard boards, and government b. Stockholders, other investors, and revenue commission c. Stockholders, creditors, and auditors d. Stockholders, creditors, and other investors

d. Stockholders, creditors, and other investors

Which of the following statements is true of a bank reconciliation statement? a. The company's records do need to be updated for any items in the bank section of the bank reconciliation. b. The company's records do not need to be updated for any items in the company section of the bank reconciliation. c. The company's records do need to be updated for items in the company and the bank section of the bank reconciliation. d. The company's records do need to be updated for any items in the company section of the bank reconciliation.

d. The company's records do need to be updated for any items in the company section of the bank reconciliation.

Identify the effect on the liquidity and profitability metrics of a seller, when the seller records receipt of the returned inventory and issues a credit memo to the buyer? a. There is a decrease in liquidity, and there is an increase in the profitability of the seller. b. There is a decrease in liquidity, but there is no effect on the profitability of the seller. c. There is no effect on liquidity and profitability. d. There is no effect on liquidity, but there is a decrease in the profitability of the seller.

d. There is no effect on liquidity, but there is a decrease in the profitability of the seller.

Turquoise Inc. expects that customers of 20Y6 sales will be issued refunds or allowances of $8,000 in 20Y7. To make an adjustment for the expected refunds and allowances, Turquoise Inc. will _____. a. increase the estimated returns inventory account by $8,000 and decrease the cost of goods sold by $8,000 b. decrease the estimated returns inventory account by $8,000 and increase the cost of goods sold by $8,000 c. decrease the customer refunds payable account by $8,000 and increase the sales account by $8,000 d. increase the customer refunds payable account by $8,000 and decrease the sales account by $8,000

d. increase the customer refunds payable account by $8,000 and decrease the sales account by $8,000

A(n) _____ is a preapproved amount the bank is willing to lend to a customer upon request. a. investment credit b. consolidated loan c. signature loan d. line of credit

d. line of credit

If merchandise purchased on account is returned, the buyer can inform the seller of the details by issuing:

debit memorandum

On a multiple-step income statement, the excess of sales over the cost of goods sold is called:

gross profit

The difference between sales and cost of goods sold for a merchandising business is__________

gross profit