ACC Ch. 4 / 5 / 7

The components of a merchandiser's multi-step income statement are shown below. In which order would they appear on the statement?

1. net sales 2. costs of good sold 3. gross profit 4. expenses 5. net income

Given the following information, calculate the acid-test ratio for XYZ Company: Year 20x1 Cash $ 8,000 Short-term investments $10,000 Current receivables $12,000 Total current assets $40,000 Total current liabilities $22,000 Total liabilities $28,000

1.36 ($8,000+$10,000 +$12,000)/$22,000

On January 3, ATA Company purchases a copy machine for $11,500. The machine is expected to last five years and have a salvage value of $1,500. Compute depreciation expense for the first year, assuming the company uses the straight-line method.

2000 11500-1500 / 5 =

Companies sometimes convert receivables to cash before they are due. When a company sells its receivables, the buyer is called a -----(pledgor/factor). When a company uses receivables as security for a loan, it is called -----(pledging/factoring).

Blank 1: factor Blank 2: pledging or pledge

Which of the costs below would be included in the recorded cost of merchandise inventory? (Check all that apply.)

Storage costs Insurance costs Invoice cost

One identical unit is purchased on each of the following three dates and at the respective costs: June 1 at $10; June 2 at $15; and July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the FIFO cost flow assumption.

The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory.

Assume that three identical units are purchased separately on the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the LIFO perpetual cost flow assumption. The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory. The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory. The June 1 at $10 is sold; the June 2 at $15 and the July 4 at $20 remains in ending inventory.

The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory.

A(n) ______ is a supplementary record created to maintain a separate account for each customer.

accounts receivable ledger

The __-___ ratio measures a merchandiser's ability to pay its current liabilities.

acid test

The _____method, also referred to as balance sheet method, uses balance sheet relations to estimate bad debts—mainly, the relationship between accounts receivable and the allowance account. bad debts aging of accounts receivable percentage of sales allowance

aging of accounts receivable

Explain what the credit terms of 2/10,n/30 mean

The full payment is due within a 30-day credit period. The buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date.

Which of the following statements correctly explains what the inventory turnover ratio assesses. The inventory turnover ratio assesses what percentage of a company's assets are tied up in its inventory. The inventory turnover ratio assesses the company's ability to generate a profit from the sales of its inventory. The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.

The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.

Accumulated depreciation is a----- asset account (one that is linked with the plant asset account, but has an opposite normal balance) and is reported on the balance sheet.

contra

Sales Discounts is a Blank______ account.

contra-revenue

A ----- account appears in the general ledger and is supported by a subsidiary ledger.

control

The Merchandise Inventory account on a classified balance sheet is reported in the:

current assets section

An advantage of the LIFO method is that it best matches current costs with revenues the flow of goods for most businesses erratic changes in costs the costs of items with the revenues they generate

current costs with revenues

Plant assets are recorded at cost, which includes all expenditures necessary to get the asset in place and ready for use. All of the following would be included as part of the cost of a plant asset except: cost to purchase the new plant asset costs to customize the new plant asset costs to modify the new plant asset damage done when unpacking the plant asset

damage done when unpacking the plant asset

Jello's Market purchased $1,000 of goods on account with terms of 2/10,n/30. They returned $200 of the goods due to defect the next day. If Jello pays for the purchase within the discount period and uses the perpetual inventory system, the required journal entry to record the payment would:

debit Accounts Payable $800; credit Merchandise Inventory $16; and credit Cash $784

Jan's Jams makes a credit sale for $300 with terms of 2/10,n/30. The cost of the merchandise is $200. The required journal entry to record the sale and the cost of the sale is: debit Accounts Receivable $300; credit Sales $300; debit Cost of Goods Sold $200; and credit Merchandise Inventory $200 debit Accounts Payable $300; and credit Sales $300 debit Sales $300 and credit Cost of Goods Sold $300 debit Accounts Receivable $200; credit Sales $200; debit Cost of Goods Sold $300; and credit Merchandise Inventory $300

debit Accounts Receivable $300; credit Sales $300; debit Cost of Goods Sold $200; and credit Merchandise Inventory $200

The Blank______ method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts expense. percentage of receivables direct write-off percentage of sales allowance

direct write-off

The principal and interest of a note are due on its maturity date. If the maker of the note pays the note in full, the maker is said to have (honored/dishonored)_______ the note.

dishonored

The FIFO cost flow assumption assumes that the cost of items purchased ---- (earliest/latest) are the costs that will be transferred first to the cost of goods sold on the income statement

earliest

Cost of goods sold is the ______ of buying and preparing merchandise.

expense

The ___ principle states that inventory costs are expensed as cost of goods sold when inventory is sold.

expense recognition

Sioux Co. replaced the roof on its existing building, therefore increasing the building's life by 10 years. The cost of the roof is considered a(n):

extraordinary repair

Assets that increase the benefits of land, have a limited useful life, such as parking lots and lighting systems, are called:

land improvements

The LIFO cost flow assumption assumes that the cost of items purchased ---- are the costs that will be transferred first to cost of goods sold on the --- ----.

latest/income statement

The purchase of a group of plant assets for one price is called a Blank______ purchase.

lump sum

The _______ constraint is permitted under GAAP when the results approximate those using the allowance method.

materiality

The formula to compute cost of goods sold is

merchandise available for sale minus ending inventory

Damaged goods which can be sold are reported in inventory at

net realizable value

Accounts receivable turnover is calculated using the following formula: total accounts receivable/sales sales/total accounts receivable average accounts receivable/net sales net sales/average accounts receivable, net

net sales/average accounts receivable, net

The Blank______ method of estimating allowance for doubtful accounts is based on the idea that a given percent of a company's credit sales for the period are uncollectible. percentage of sales aging of receivables percentage of accounts receivable

percentage of sales

Estimates of inventory are not usually required when a company uses a ----(FIFO/LIFO/periodic/perpetual) inventory system because they would presumably have updated inventory data.

perpetual

When purchase costs are (rising/declining) ------ FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

rising

Straight-line depreciation is calculated by taking cost minus----- (salvage/market) value divided by useful life.

salvage

Tops Co. purchases equipment for $12,000 and has been using straight-line depreciation, estimating a 5-year life and $500 salvage value. At the beginning of the third year, Tops decides to use the equipment for a total of 6-years with no salvage value. Compute the revised depreciation for the third year.

$1,850 Reason: (12,000-500)/5=2,300 per year. $2,300 x 2 years = $4,600 depreciation taken. Book value at beginning of year 3 = $12,000-4,600= $7,400/4 = $1,850.

Arc Co. purchased a piece of equipment for $25,000. At the end of the year, the book value of the equipment is $12,000. The salvage value is 0. How much is accumulated depreciation, using the straight-line method, at the end of the period?

$13,000 25,000-12,000 =13,000

On May 14, X-Mart purchased $500 of merchandise with terms of 3/15,n/40. If payment is made on May 28, calculate the purchase discount that may be taken by X-Mart.

$15 $500x.03=$15

Bina Co. purchased a vehicle on January 1st for $15,000 and estimates it will use the vehicle for eight years with a $3,000 salvage value. Using the double declining-balance depreciation method, compute the vehicle's second year depreciation expense.

$2,812.50 Salvage value is not subtracted up front with the double-declining balance method. (100%/8=.125) x 2=25%. 15,000 x 25%=3,750 for first year. Second year=(15,000-3750) x 25% =2812.50. The question asked for the second year depreciation expense.

Juno Co. purchased a machine for $10,000 and estimates it will use the machine for three years with a $2,000 salvage value. It expects to produce a total of 8,000 units as follows: 3,000 during year one; 2,500 during year two; and 2,500 during year three. Using the units-of-production depreciation method, compute the machine's first year depreciation expense. $2,000 $3,000 $2,500 $4,000

$3,000 cost - salvage value / total units of production $10,000 - 2,000 = $8,000. $8,000 / 8000 units = $1.00 per unit. Year one 3,000 x $1.00 = $3,000.

Calculate the cost-to-retail ratio and the cost of goods sold for T-Mart, assuming the following information. Item Cost Goods available at retail selling prices $100,000 Goods available for sale at cost $80,000 Goods sold at retail prices $50,000 Cost to retail ratio is 80%. $40,000 is cost of goods sold. $10,000 is cost of goods sold. $50,000 is cost of goods sold. Cost to retail ratio is 50%.

$40,000 is cost of goods sold. Reason: $50,000 x 80%= $40,000 Cost to retail ratio is 80%. Reason: $80,000/$100,000 = 80%

Juno Co. purchased a machine for $10,000 and estimates it will use the machine for four years with a $2,000 salvage value. Using the double declining-balance depreciation method, compute the machine's first year depreciation expense.

$5,000 $10,000 x (.25 x 2) = $5,000. 100% of 4 years = .25

On June 30, Nance company receives a $5000, 90-day, 4% note from a customer as payment on her account. How much interest will be due on the note's maturity date?

$50 $5000 x 0.04 x (90/360)

At the beginning of the year, Jobs Co. owned one piece of office equipment, a copier. The copier was purchased two years ago for $12,000. At the beginning of the year, the balance in accumulated depreciation was $4,000. Jobs uses straight-line depreciation of $2,000 per year with a zero salvage value. How much is accumulated depreciation at the end of the year?

$6,000 Reason: 4,000 + 2,000 = 6,000

Jerry's Flowers had the following cost information related to its purchases of merchandise. Calculate the total cost of merchandise purchased using the information below: Invoice cost of merchandise purchases $100,000 Purchase discounts received $ 9,000 Cost of transportation-in (shipping) $ 500 Costs of purchase returns and allowances $ 400

$91,100. $100,000 - $9,000 - $400 + $500 = $91,100.

Recall the formula for figuring Days' Sales in Inventory. (Ending inventory/Average inventory) x 365 (Ending inventory/Cost of goods sold) x 365 (Ending inventory/Gross profit) x 365

(Ending inventory/Cost of goods sold) x 365

Straight-line depreciation can be calculated by taking: (cost minus salvage value)/productive life (cost minus salvage value)/useful life (cost plus salvage value)/productive life (cost plus salvage value)/useful life

(cost minus salvage value)/useful life

Franco Co. reported net sales of $10,000 in year 2 and $8,000 in year 1. Franco reported total assets of $18,000 in year 2 and $22,000 in year 1. Total asset turnover for year 2 would equal (answer should be a decimal number). Hint: compute average total assets first.

.5

Assume that Widgets, Inc. uses a perpetual specific identification inventory system. During the period, it sold 4 units from beginning inventory, 8 units from the Jan. 5 purchase, and 2 units from the Jan. 29 purchases. Calculate the dollar value of its cost of goods sold for the period. Date - Activity Jan 1 - Beginning Inventory - 10 @ $12 Jan 5 - Purchase - 10 @ $15 Jan 29 - Purchase - 10 @ $18 Jan 30 - Sale - 14 units $204 $246 $210 $140

204 What is sold =(4@$12) + (8@$15) + (2@$18).

Chocolate Inc. uses the weighted average cost flow assumption in a perpetual inventory system. During the month, it had two sales totaling 15 units. Calculate the cost of goods sold for the first sale made on Mar. 20. Date Activity Mar 1 Beginning Inventory 10 @ $25 = $250 Mar 15 Purchase 20 @ $22= $440 Mar 20 Sale 12 @ $45 each Mar 25 Purchase 10 @ 30 = $300 Mar 29 Sale 3 @ $50 each

276 ($250+$440)/30 units = $23/unit; $23 x 12 units=$276.

Apply the retail inventory method to estimate ending inventory for XYZ Co., assuming the following information. Item Cost Goods available at retail selling prices $100,000 Goods sold at retail prices $60,000 Cost of goods sold is 70% of retail Cost of ending inventory ? Multiple choice question. $40,000 $28,000 $42,000

28,000 $100,000-$60,000= $40,000. $40,000 x 70% = $28,000

Review the following credit terms and identify the one that states that the buyer will receive a 3% discount if the payment is made within 15 days. Otherwise, full payment is expected within 45 days of the invoice date.

3/15,n/45

Given the following information for Q-mart, calculate its gross margin ratio. Net sales $10,000 Cost of goods sold $3,200

68% $10,000 - $3,200= $6,800. $6,800/$10,000= 68%. Net Sales - Costs of goods sold / Net Sales

Determine which of the following statements are correct regarding damaged or obsolete goods. (Check all that apply.) Damaged goods are included in inventory at their net realizable value. Net realizable value of damaged goods is determined solely by the sales price of the good. A loss in value is reported in the period when goods are damaged or become obsolete. If damaged goods can be sold at a reduced price, they are included in inventory. Damaged goods are not included in inventory if they cannot be sold.

A loss in value is reported in the period when goods are damaged or become obsolete. Damaged goods are not included in inventory if they cannot be sold. If damaged goods can be sold at a reduced price, they are included in inventory. Damaged goods are included in inventory at their net realizable value.

Why is it important for a business to have a high gross margin? Without sufficient gross profit on the sale of its merchandise, a business's inventory level will be too low to maintain sales demands. A high gross margin helps creditors determine if debt can be repaid on time. A high gross margin ratio measures the efficiency of capital spending. A merchandiser must make a sufficient profit on the sale of its merchandise to cover the other expenses of its business.

A merchandiser must make a sufficient profit on the sale of its merchandise to cover the other expenses of its business.

1) A company purchased property for $100,000. The property included a building, a parking lot, and land. The building was appraised at $52,000; the land at $53,000, and the parking lot at $20,000. Land should be recorded in the accounting records with an allocated cost of:

A) $42,400. Calculation :- Percentage of land in total assets = 53,000/125,000 = 42.40% Cost allocated to land should be = 100,000 x 42.40% = $42,400

1) A total asset turnover ratio of 4.9 indicates that:

A) For every $1 in assets, the firm produced $4.9 in net sales during the period.

1) On October 12 of the current year, a company determined that a customer's account receivable was uncollectible and that the account should be written off. Assuming the allowance method is used to account for bad debts, what effect will this write-off have on the company's net income and total assets?

A) No effect on net income; no effect on total assets. When bad debts is actually recorded then accounts receivable is decreased as well as allowance for doubtful accounts is decreased. Total assets does not change with this entry because the decrease in accounts receivable and decrease in allowance for doubtful account is the same which setsoff book value of receivables. On recording right off of accounts, no expenses recorded. Expense of bad debts is recorded at year end.

Ella Co. owns a mineral deposit and recognizes $15,000 of depletion expense during the period. This entry will be recorded with a credit to: Depletion Expense - Mineral Deposit Accumulated Depreciation - Mineral Deposit Accumulated Depletion - Mineral Deposit Mineral Deposit

Accumulated Depletion - Mineral Deposit

If an account receivable balance previously written off using the direct write-off method is later collected in full, the entry to record the payment must include a credit to: Accounts Payable Cash Bad Debts Expense Sales

Bad Debts Expense

Explain how to compute gross profit by completing the following sentence. Gross profit is calculated by taking the net ----_ (sales/costs) of a product and ------ (adding/subtracting) the cost of the goods sold.

Blank 1: sales Blank 2: subtracting

Describe good cash management practices involving inventory purchases. (Check all that apply.) Inventory should be purchased with cash whenever possible. Buyers should take advantage of early payment discounts. Invoices should be paid on the last day of the discount period. Invoices should be paid on the first day of the discount period.

Buyers should take advantage of early payment discounts. Invoices should be paid on the last day of the discount period.

T. Hillcrest Co. sold $500 of merchandise on a bank credit card with a 5% fee. The entry to record this sales transaction would include debit(s) to: Sales for $500 Cash for $475 and to Credit Card Expense for $25 Cash for $500 and Credit Card Expense for $25 Accounts Receivable for $500

Cash for $475 and to Credit Card Expense for $25

Sales Discounts is a contra- --- (expense/revenue/asset) account and is increased with a ---- (debit/credit)

Contra revenue Debit

Determine which of the following statements are correct regarding the difference between physical flow and the cost flow of inventory. Cost flow is an assumption about which goods/items are sold. Perishable items usually have an actual physical flow of FIFO. A business may adopt any cost flow assumption when accounting for perishable items. Physical flow refers to the actual movement of goods. Perishable items have an actual physical flow of LIFO.

Cost flow is an assumption about which goods/items are sold. Perishable items usually have an actual physical flow of FIFO. A business may adopt any cost flow assumption when accounting for perishable items. Physical flow refers to the actual movement of goods.

Dogs R US uses the perpetual inventory system to account for its merchandise. On May 1, it returned $50 of merchandise due to a defect. Assuming that the purchase was originally bought on credit, demonstrate the required journal entry to record the return by selecting all of the correct actions below. (Check all that apply.) Credit Accounts Payable $50. Debit Cash $50. Credit Purchase Returns $50. Credit Merchandise Inventory $50. Debit Accounts Payable $50. Debit Merchandise Inventory $50.

Credit Merchandise Inventory $50. Debit Accounts Payable $50.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.) Debit Cost of Goods Sold $500. Debit Merchandise Inventory $500. Credit Sales $1,400. Debit Sales $1,400. Credit Cost of Goods Sold $500. Credit Accounts Receivable $1,400. Debit Cash $1,400. Credit Merchandise Inventory $500.

Credit Sales $1400. Credit Merchandise Inventory $500. Debit Cash $1400. Debit Cost of Goods Sold $500.

Zion Company sells merchandise on credit to BRC, Inc. in the amount of $1,200. The entry to record this sale would include a: (Check all that apply.) credit to Accounts Receivable. credit to Cash. debit to Cash. debit to Sales. credit to Sales. debit to Accounts Receivable.

Credit to Sales. Debit to Accounts Receivable.

LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5, n/60. If payment is made on December 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below

Debit Accounts Payable $1,000. Credit Cash $1,000.

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 16, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $980; credit Merchandise Inventory $20.

______ is the process of allocating the cost of a plant asset to expense while it is in use.

Depreciation

Sally Beauty Warehouse uses the perpetual inventory system to account for its merchandise. On Nov 2, it sold $700 of merchandise on credit with terms of 2/15,n/30. Demonstrate the required journal entry to record the receipt of payment from the customer on Nov 13, by selecting all of the correct actions Debit Cash $700. Debit Sales Discounts $14. Debit Accounts Receivable $700. Credit Sales Discounts $14. Credit Accounts Receivable $700. Debit Cash $686.

Debit Sales Discounts $14. Credit Accounts Receivable $700. Debit Cash $686.

The ___ ____ is the time period in which a discount may be taken by the buyer.

Discount period

A company sells a machine that cost $7,000 for $500 cash. The machine had $6,500 accumulated depreciation. The entry to record this transaction will include which of the following entries?

Debit to Accumulated Depreciation - Machinery for $6,500. Credit to Machinery for $7,000. Debit to Cash for $500.

Sangmoon Co. sells equipment for $1,000 cash. The equipment cost Sangmoon $6,500 and has accumulated depreciation of $2,000 at the time of sale. Sangmoon will record the sale with a credit to which account and for how much?

Equipment for $6,500.

T OR F The cost of plant assets should include all of the normal and reasonable expenditures necessary to get the asset in place and ready for its intended use, including repairs to damages incurred after installation

FALSE

If the seller is responsible for the shipping costs of merchandise sold, the shipping terms will be specified as:

FOB destination

Recall the formula for computing a company's inventory turnover ratio. Inventory turnover = Cost of goods sold/Gross profit Inventory turnover = Merchandise Inventory/Average inventory Inventory turnover = Merchandise Inventory/Cost of goods sold Inventory turnover = Cost of goods sold/Average inventory

Inventory turnover = Cost of goods sold/Average inventory

The advantages of using the allowance method to account for bad debts include which of the following? (Check all that apply.) Requires no accounting estimates Matches expenses in the same period with the related sales Reports accounts receivable balance at the estimated amount to be collected

Matches expenses in the same period with the related sales Reports accounts receivable balance at the estimated amount to be collected

Earns net income by buying and selling produc

Merchandiser

A ___ ____ refers to merchandise a buyer acquires, but then returns to the seller.

Purchase return

The following information on current assets and current liabilities is for Belkin Company. Cash$ 1,490 Prepaid expenses$ 700 Accounts receivable 2,800 Accounts payable 5,750 Inventory 6,000 Other current liabilities 850 Compute Belkin's acid-test ratio. If its competitor, Logit, has an acid-test ratio of 1.2, which company is better able to pay for current liabilities with its quick assets?

Quick assets / current liabilities = 4290 / 6600 = .65 Logit is the better company because 1.2

Merchandise inventory is generally converted to cash more quickly than accounts receivable. True false question

Reason: Merchandise inventory is generally converted to cash less quickly than accounts receivable. False

An intermediary that buys products from manufacturers or wholesalers and sells them to consumers

Retailer

______ value, also called residual value or scrap value, is an estimate of the asset's value at the end of its useful life.

Salvage

Credit terms of 1/10, net 30 means.

The buyer will receive a 1% discount if they pay within 10 days of the date of the invoice.

Determine which of the definitions below describes gross profit. The amount of money received on the sale of goods The difference between net sales and the cost of the goods sold The total money paid by the merchandiser to its supplier including freight costs The original cost of the merchandise when purchased from the supplier

The difference between net sales and the cost of the goods sold

A note is honored when it is paid in full. T OR F

True

Which of the following summarizes the weighted average cost flow assumption? Weighted average assumes that cost flow is allocated by the physical weight of items purchased. Weighted average assumes that costs flow in the order incurred. Weighted average assumes that costs flow at an average of the costs available. Weighted average assumes that costs flow in the reverse order incurred.

Weighted average assumes that costs flow at an average of the costs available.

An intermediary that buys products from manufacturers and sells them to retailers

Wholesaler

A sales allowance can be described as

a reduction in the selling price of defective or unacceptable merchandise sold to customers

Merchandise inventory that is still available for sale is considered a(n) Blank______ (asset/expense/revenue) and is reported on the Blank______ (balance sheet/income statement) and merchandise that is sold during the period is considered a(n) Blank______ (asset/expense/liability) and reported on the Blank______ (balance sheet/income statement).

asset -> balance sheet -> expense -> income statement

Niren Co. made modifications to a manufacturing machine that increased its productivity by 40%. Niren would classify this expense as a(n):

betterment

The asset's acquisition costs less its accumulated depreciation is called:

book value

An advantage of the weighted average method under a periodic inventory system is that it: smooths out erratic changes in costs approximates current costs on the income statement approximates current costs on the balance sheet matches the costs with the revenues they generate

smooths out erratic changes in costs

In step 2 of the gross profit method, the estimated cost of goods sold are

subtracted from the goods available for sale at cost

Companies sometimes convert receivables to cash before they are due by selling them or using them as security for a loan. The reasons that a company may convert receivables before their due date include: (Check all that apply.)

the company needs cash. the company does not want to deal with collecting receivables.

The ----- life of a plant asset is the length of time it is productively used in a company's operations

useful