Accounting Exam 2

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable for the inventory purchased in Event 1. (4) Sold inventory purchased in Event 1 for $5,000 to customers on account. At the end of the first accounting period what would be reported for Net Operating Cash Flow on the Statement of Cash Flows?

$(4,000) ($5,000 original cost − $1,000 purchase return)

Jefferson Company made a loan of $6,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of cash flow from operating activities that Jefferson would report in Year 1 and Year 2, respectively would be

$0, and $360 $6,000x.06 = $360

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable for the inventory purchased in Event 1. (4) Sold inventory purchased in Event 1 for $5,000 to customers on account. At the end of the first accounting period what would be reported on the Income Statement for net income?

$1,000 ($5,000 original cost − $1,000 purchase return) (Sales $5,000 − Cost of Goods Sold $4,000).

Walter Company's multistep income statement shows cost of goods sold of $60,000, a gross margin of $42,000, operating income of $12,000 and a $20,000 loss on the sale of land. Based on this information the sales revenue amounted to

$102,000. $102,000 ($60,000 cost of goods sold + $42,000 gross margin)

During year 2, Omark Company sold merchandise costing $120,000 for $160,000. Customers returned 10% of the merchandise and a 2% cash discount was provided on $90,000 of the sales. Based on this information the amount of net sales is

$142,200 [$160,000 gross sales - ($160,000 gross sales x 10% sales returns) - ($90,000 x 2% cash discount)].

On December 31, Year 3, Alpha Company had an ending balance of $200,000 in its accounts receivable account and an unadjusted (current) balance in its allowance for doubtful accounts account of $300. Alpha estimates uncollectible accounts expense to be 1% of receivables. Based on this information, the amount of uncollectible accounts expense shown on the Year 3 income statement is

$1700 (2000-300=1700)

DeKalb Company made a loan of $6,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest revenue that DeKalb would report in Year 1 and Year 2, respectively would be

$270, and $90.

The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1) 200 Units @ $5 each Purchases made in Year 2 800 Units @ $8 each Units Sold 900 Units @ $12 each Which of the following is the amount of the gross margin shown on the Year 2 income statement assuming Alpha uses a LIFO cost flow method?

$3,900 ($10,800 Sales revenue - $6,900 Cost of goods sold).

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the LIFO cost flow method, the balance in the inventory account after the sales transaction will be

$30

Sales on account amounted to $80,000. Sales returns were $2,000 and sales discounts were $1,000. Cost of goods sold amounted to $45,000. Based on this information the amount of gross margin was

$32,000. Net sales = $80,000 Sales revenue - $2,000 Sales returns - $1,000 Sales discounts = $77,000. Gross Margin = $77,000 Net sales - $45,000 Cost of goods sold = $32,000.

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable for the inventory purchased in Event 1. Immediately after the three events have been recognized, the balance in the inventory account is

$4,000 ($5,000 original cost − $1,000 purchase return).

The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1) 200 Units @ $5 each Purchases made in Year 2 800 Units @ $8 each Units Sold 900 Units @ $12 each Which of the following is the amount of the gross margin shown on the Year 2 income statement assuming Alpha uses a weighted average cost flow method?

$4,140 ($10,800 Sales revenue - $6,660 Cost of goods sold).

At the end of the accounting period Anderson Company had $4,500 in accounts receivable and $500 in its allowance for doubtful accounts account. Based on this information the net realizable value of accounts receivable is

$4000 ($4,500 - $500 = $4,000)

The following information was drawn from the inventory records of Alpha Company as of December 31, Year 2. Beginning inventory (purchased in Year 1) 200 Units @ $5 each Purchases made in Year 2 800 Units @ $8 each Units Sold 900 Units @ $12 each Which of the following is the amount of the gross margin assuming Alpha uses a FIFO cost flow method?

$4200 The gross margin is $4,200 ($10,800 Sales revenue - $6,600 Cost of goods sold).

Keisha Dress Shops experienced the following events during its third accounting period. (1) Sold merchandise that cost $92,000 for $140,000 cash. (2) Paid $30,000 of operating expenses. (3) Paid a $4,000 cash dividend. Based on this information, the amount of the gross margin is

$48,000 ($140,000 sales revenue - $92,000 cost of goods sold).

The following information was drawn from the inventory records of Preston Company. Beginning inventory (purchased in Year 1) 100 Units @ $10 each 1st Purchase made in Year 2 400 Units @ $12 each 2nd Purchase made in Year 2 500 Units @ $14 each Units Sold 950 Units @ $15 each Based on this information, which of the following represents the amount of ending inventory appearing on the balance sheet assuming a LIFO cost flow?

$500

On August 1 of Year 1 Presco Enterprises paid $1,200 cash for an insurance policy that would provide protection for a one year term. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense appearing on the Year 1 income statement would be

$500 Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount used = $100 per month x 5 months = $500 insurance expense Future benefit = $100 per month x 7 months = $700 prepaid insurance

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the weighted average cost flow method, the amount of gross margin shown on the income statement will be

$9 $31 per unit [($30 + $32) ÷ 2]. Based on this computation, $31 would be recognized as cost of goods sold and $31 would be left in inventory after the sales transaction. Recall that the amount of gross margin is equal to the amount of sales revenue minus the cost of goods sold. Therefore, the amount of gross margin is $9 ($40 sales revenue - $31 cost of goods sold).

Escrow Company's multistep income statement shows cost of goods sold of $60,000, a gross margin of $42,000, operating income of $12,000 and a $20,000 loss on the sale of land. Based on this information, the net income or (net loss) amounted to

($8,000). $8,000 [$12,000 − $20,000 = ($8,000)].

The following information was drawn from the annual reports of two companies. Company A Company B Sales revenue $ 1,000 $ 2,000 Cost of Goods Sold (600 ) (1,100 ) Gross Margin 400 900 Operating Expenses (220 ) (700 ) Operating Income 180 200 Gain on the sale of equipment 150 0 Net Income $ 330 $ 200 Based on this information, Company B's return on sales is

10% $200 operating income ÷ $2,000 sales revenue = 10%

The following information was drawn from the annual reports of two companies. Company A Company B Sales revenue $ 1,000 $ 2,000 Cost of Goods Sold (600 ) (1,100 ) Gross Margin 400 900 Operating Expenses (220 ) (700 ) Operating Income 180 200 Gain on the sale of equipment 150 0 Net Income $ 330 $ 200 Based on this information, Company A's gross margin percentage is

40%. $400 gross margin ÷ $1,000 sales revenue = 40%

Baltimore Company paid $3,600 cash for the right to use office space during the coming year. Which of the following shows how this event would affect Baltimore's ledger accounts?

Assets = Liabilities + Stockholders' Equity Cash + Prepaid Rent = Accounts Payable + Common Stock + Retained Earnings (3,600) 3,600

Delta Company started Year 2 with a $1,700 balance in its Cash account, a $700 balance in its Supplies account and a $2,400 balance in its Common Stock account. During Year 2 the company experienced the following events. (1) Paid $1,600 cash to purchase supplies. (2) Physical count revealed $400 of supplies on hand at the end of Year 2. Based on this information, which of the following show how the year end adjusting entry required to recognize supplies expense would affect Delta's account balances?

Assets = Liabilities + Stockholders' Equity Cash + Supplies = Accounts Payable + Common Stock + Retained Earnings (1,900) (1,900)

Howard Company purchased $300 of supplies on account. Which of the following shows how this purchase will affect Howard's ledger accounts?

Assets = Liabilities + Stockholders' Equity Cash + Supplies = Accounts Payable + Common Stock + Retained Earnings 300 300

Which of the following shows how paying cash to purchase supplies will affect a company's financial statements?

Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA NA NA − OA

Which of the following shows how adjusting the accounts to recognize supplies expense will affect a company's financial statements?

Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA + − NA

Which of the following financial statements will be affected by a sales return? Assume the original sale and the sales return were cash transactions.

Balance sheet, income statement, and statement of cash flows

The following information was drawn from the annual reports of two companies. Company A Company B Sales revenue $ 1,000 $ 2,000 Cost of Goods Sold (600 ) (1,100 ) Gross Margin 400 900 Operating Expenses (220 ) (700 ) Operating Income 180 200 Gain on the sale of equipment 150 0 Net Income $ 330 $ 200 Assume both companies receive a $1,000 increase in sales and the return on sales ratio does not change. Under these circumstances

Company A's operating income would increase by $180.

Assume a company paid $800 for a computer that it plans to sell to its customers. Suppose that because of new technology the company could buy the same computer today for $600. How would the lower-of-cost of market rule affect the financial statements?

Decrease net income on the income statement

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. When the Company sold one of the items for $40, it expensed $30 to its cost of goods sold account. Based on this information which of the following cost flow methods is the company using?

FIFO

The amount of net sales is determined by which of the following formulas?

Gross sales - Sales Returns and Allowances - Sales discounts

Which of the following events experienced by a department store would be presented in the operating section of a multistep income statement?

Inventory sold for less than its cost

Which of the following cost flow methods would provide the lowest amount of net income in an inflationary environment?

LIFO

When a merchandising company pays cash to purchase inventory

None of the answers is correct.

Bookmyer Company experienced a business event that affected its financial statements as indicated below. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA NA NA − OA Which of the following events could have caused these effects?

Paid cash to purchase supplies

Which of the following statements is false?

Prepaid insurance is shown on the income statement.

On October 1 of Year 1 Zeta Company collected $1,200 cash for services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of revenue appearing on the Year 1 income statement would be

Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 3 months = $300 service revenue Future obligation = $100 per month x 9 months = $900 unearned revenue

The following income statements were drawn from GreyCo's annual report: Year 1 Year 2 Sales revenue $ 1,000 $ 2,000 Cost of Goods Sold (600 ) (1,100 ) Net Income $ 180 $ 100 At the end of Year 1 GreyCo developed a plan based on a new business strategy. Specifically, the Company planned to move its store to a more expensive location and then to raise its prices to cover the additional cost. Which of the following best describes the results of implementing the plan?

The strategy was unsuccessful because the company was not able to raise its prices enough to cover the additional operating expenses.

A cost may be recorded as an expense or as an asset purchase. This statement is

True

Which of the following is a cost of selling merchandise on account?

Uncollectible accounts expense Determining customers credit worthiness Recording keeping and collection costs

Underwood Company's gross margin percentage increased from 40% to 45%. Which of the following is not a possible explanation for this increase, assuming all other things being equal?

Underwood sold more products.

Zane Enterprises accepts a credit card as payment for $500 of services provided to a customer. The credit card company charges a 4% handling charge for its collection services. Based on this information

Zane will collect $480 cash from the credit card company.

AmRon Company sold land that had cost $25,000 for $26,500. Based on this information, the company's year-end financial statements would show

a cash inflow from investing activities of $26,500 on the statement of cash flows.

Inventory is

an asset account that appears on the balance sheet.

Paying cash to purchase inventory is

an asset exchange transaction

On December 31, Year 1 Adam Company incurred $3,000 of accrued salary expense. The Year 2 recognition of the cash payment for these expenses

decreases the amount of liabilities shown on the Year 2 balance sheet.

Lawyers Inc. accepted a $12,000 retainer for which the company agreed to provide services in the future. Recognizing this event would

defer the recognition of revenue. cause the company's assets to increase. cause the company's liabilities to increase.

When a company purchases prepaid rent, it

defers recognition of rent expense.

The gross margin percentage is determined by

dividing the gross margin by the net sales.

Under the allowance method the uncollectible accounts expense is

estimated and recognized at the end of the accounting period.

A deferral

exists when a company receives cash before recognizing the associated revenue.

GAAP requires that inventory be shown on the balance sheet at its cost (the price paid) regardless of its current value. This statement is

false

McDonald's will recognize a gain if it generates an amount of revenue that is higher than its operating expenses. This statement is

false

Most companies expect to collect the full balance of all of their accounts receivable. This statement is

false

Product costs are expensed when they are incurred. This statement is

false

Recognizing a sales discount will cause the amount of net sales to increase. This statement is

false

The amount of net income shown on a multi-step income statement will differ from the amount of net income shown on a single-step income statement. This statement is

false

Smith Company sold inventory that cost $5,000 for $9,000 cash. Freight cost was $600 paid in cash. The freight terms were FOB shipping point. Based on this information,

gross margin would be $4,000. $4,000 (Revenue $9,000 - $5,000 cost of goods sold). The net income would also be $4,000 ($4,000 gross margin - zero operating expense).

The following income statements were drawn from the annual report of The Western Sales Company. Year 2 Year 1 Sales 40,000 40,000 Cost of Goods Sold (25,000 ) (25,000 ) Gross Margin 15,000 15,000 Operating Expenses (7,000 ) (9,000 ) Operating Income 8,000 6,000 Gain on the sale of land 0 5,000 Net Income 8,000 11,000 If the trends continue, investors can expect the company's net income for Year 3 to

increase

The adjusting entry to recognize the write down of inventory based on the lower-of-cost-or-market rule will

increase the amount of expenses.

When a company purchases supplies on account

liabilities increase.

The gross margin appears on a

multistep income statement.

Smith Company purchased inventory for $5,000 on account. Freight cost was $600 paid in cash. The freight terms were FOB destination. The inventory was sold to customers for $8,000. Freight cost was $600 paid in cash. The freight terms were FOB shipping point. Based on this information,

net income would be $3,000. ($8,000 sales - $5,000 cost of goods sold).

Smith Company sold inventory that cost $5,000 for $9,000 cash. Freight cost was $600 paid in cash. The freight terms were FOB destination. Based on this information,

net income would be $3,400. $4,000 (Revenue $9,000 - $5,000 cost of goods sold). The net income would be $3,400 ($4,000 gross margin - $600 transportation-out expense).

The recovery and collection of an account receivable that had previously been written off will

not affect total assets

When a merchandising company sells inventory it will

recognize revenue and expense.

Zack's, Inc. sold land that cost $85,000 for $70,000 cash. As a result of this event

total assets decreased.

A company will earn more profit from a cash sale than from a credit card sale.

true

Accrued interest revenue will appear on the income statement but not on the statement of cash flows.

true

Cash revenue generated from notes receivable appears in the operating activities section of the statement of cash flows but as a non-operating item on the income statement.

true

Common size statements are presented as percentages to promote comparisons between different size companies. This statement is

true

Many retail companies are motivated to incur credit costs because many customers are emotional buyers and offering credit generally leads to increases in sales revenue. This statement is

true

The balance in the allowance for doubtful accounts provides an estimate of the amount of accounts receivable that is expected to be uncollectible. This statement is

true

The cash flow associated with buying and selling inventory is not affected by the inventory cost flow method. This statement is

true

The net realizable value of accounts receivable represents an estimate of the amount of the accounts receivable that a company realistically expects to collect. This statement is

true

Under the allowance method, recognizing the write-off of an uncollectible account receivable will

will not affect the total amount of the net realizable value of receivables.

On August 1 of Year 1 Accounting Associates collected $1,200 cash for consulting services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of unearned revenue appearing on the December 31, Year 2 balance sheet would be

zero Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 5 months = $500 service revenue Future obligation = $100 per month x 7 months = $700 unearned revenue As of December 31, Year 2: Amount earned = $100 per month x 7 months = $700 service revenue All of the revenue has been earned by the end of Year 2 so the amount of unearned revenue is zero on December 31, Year 2.