Accounting Exam 2
A plant asset must be fully depreciated before it can be removed from the books.
False
Accounts receivable are one of a company's least liquid assets.
False
Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.
False
All plant assets (fixed assets) must be depreciated for accounting purposes.
False
An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.
False
Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.
False
Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.
False
Freight costs incurred by the seller are part of the cost of its inventory.
False
If goods are shipped with terms FOB destination, the buyer pays the freight.
False
Improvements are costs incurred to maintain the operating efficiency and expected productive life of a plant asset.
False
In accounting for inventory, the assumed flow of costs must match the physical flow of goods.
False
In calculating depreciation, both plant asset cost and useful life are based on estimates.
False
Interest expense on a note payable is only recorded at maturity.
False
Most notes are not interest bearing.
False
Operating expenses include interest expense and income tax expense.
False
Research and development costs that result in a successful product that is patentable are charged to the Patent account.
False
Sales revenue minus operating expenses equals gross profit.
False
T/F: If any portion of a long-term debt is to be paid in the next year, the entire debt should be classified as a current liability.
False
The Accumulated Depreciation account represents a cash fund available to replace plant assets.
False
The Sales Returns and Allowances account and the Sales Discounts account are both classified as expense accounts.
False
The acquisition of treasury stock by a corporation increases total assets and total stockholders' equity.
False
The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.
False
The book value of a plant asset is always equal to its fair value.
False
The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.
False
The gross profit rate is computed by dividing cost of goods sold by net sales.
False
The issuance of common stock affects both paid-in capital and retained earnings.
False
The payment of freight by the seller decreases assets and expenses.
False
When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.
False
When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer.
False
When using the allowance method bad debt expense is recorded when an individual customer defaults.
False
A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity.
True
A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not in prior periods.
True
A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way as a gain on disposal.
True
A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale is less than the asset's book value.
True
A manufacturer's inventory consists of raw materials, work in process, and finished goods.
True
A stockholder has the right to vote in the election of the board of directors.
True
Allowance for Doubtful Accounts is a contra account that is deducted from Accounts Receivable on the balance sheet.
True
An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.
True
Bad debt losses are a cost of selling on credit.
True
Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.
True
Cash dividends are not a liability of the corporation until they are declared by the board of directors.
True
Consigned goods are held for sale by one party although ownership of the goods is retained by another party.
True
Cost of goods sold is considered an expense of a merchandising firm.
True
Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.
True
For accounting purposes, stated value is treated the same way as par value.
True
Freight-out appears as an operating expense in the income statement.
True
Goods in transit shipped FOB shipping point should be included in the buyer's ending inventory.
True
Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer.
True
Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business.
True
If a company uses the allowance method to account for uncollectible accounts, the company records a write off to an uncollectible account that only involves balance sheet accounts.
True
If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.
True
If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.
True
In the absence of other revenue and gains and other expenses and losses, a merchandising company's net income is determined by subtracting operating expenses and income tax expense from gross profit.
True
In the notes to the financial statements, the depreciation and amortization methods used should be described.
True
Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets without physical substance.
True
Inventory methods such as FIFO and LIFO deal more with the flow of costs than with the flow of goods.
True
Net sales minus cost of goods sold is called gross profit.
True
Paid-in capital is the amount paid in to the corporation by stockholders in exchange for shares of ownership.
True
Payroll taxes include the employer's share of Social Security taxes as well as state and federal unemployment taxes.
True
Preferred stock has contractual preference over common stock in certain areas.
True
Preferred stockholders generally do not have the right to vote for the board of directors.
True
Recording depreciation on plant assets affects the balance sheet and the income statement.
True
Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service company.
True
The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.
True
The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.
True
The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders' equity.
True
The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.
True
The term FOB shipping point means that the buyer is paying the freight costs.
True
Trade receivables can be an account receivable or a note receivable.
True
Treasury stock is a contra stockholders' equity account.
True
Treasury stock should not be classified as a current asset.
True
Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.
True
Under a periodic inventory system, the merchandise on hand at the end of the period is determined by a physical count of the inventory.
True
Under the accounts receivable aging method, the balance in Allowance for Doubtful Accounts must be considered carefully prior to adjusting for estimated uncollectible accounts.
True
Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.
True
When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.
True
