Acctcy 4356 Exam 2

describe 2/10, n/30

a 2% discount is available it the invoice is paid within 10 days of the date of the sale & the full sales price is due within 30 days of the sale

what is correct with respect to a loss on the sale of a depreciable asset?

total assets decrease and stockholders' equity decreases (decrease in net income reduces retained earnings)

when bonds are issued at premium, interest expense over the life of the bond =

total payments for interest - the premium on bonds payable at the issue date

when does a gain occur?

when the selling price of a depreciable asset exceeds book value

what is used to determine whether the lessor maintains effective control of the leased asset?

"does the lease transfer ownership of the leased asset to the lessee by the end of the lease term?"

what are 3 reasons for having controls to safeguard inventories?

1. keep track of overstocked items 2. protect inventory items from theft 3. avoid stock-outs from not having enough inventory on hand

inventory turnover =

COGS/avg. inventory

T/F: selling off long-lived, productive assets while maintaining sales will lead to a lower fixed asset turnover

FALSE

T/F: when a company plans to refinance the currently maturing debt on a long-term basis, and had the ability to do so, it may report the currently maturing debt as a long-term liability.

FALSE

T/F: the effective-interest method if one of the options allowed by GAAP for all bond issues

FALSE (not allowed for amounts that are immaterial)

who develops generally accepted accounting principles?

FASB

during a period of increasing inventory unit costs, which inventory accounting method has the lower cost of goods sold?

FIFO has the lowest COGS

income tax expense =

IFRS tax liability + increase in deferred income tax liability

is COGS larger on a LIFO or FIFO basis?

LIFO

which method is prohibited under IFRS?

LIFO

return on assets =

NI / avg. total assets

does writing off an uncollectible amount affect the net realizable value of accounts receivable?

NO there is no effect

describe the journal entry involving the recording of a sales return

a debit to sales returns and allowances, which reduces net sales, which will reduce gross profit and net income

which of the following does not correctly describe the effect of a credit card discount? a. neither operating expenses nor net income is affected b. net sales decrease and net income decreases c. operating expenses remain the same & net income decreases d. net sales decrease and gross profit decreases

a. neither operating expenses nor net income is affected

which of the following transactions results in a decrease in the return on assets ratio? a. purchasing land by signing a long-term note payable b. collecting cash from an account receivable c. increasing the sales price of the products sold d. an increase in the net profit margin ratio

a. purchasing land by signing a long-term note payable

which of the following is an objective of the external audit of a company's financial statements?

a. to provide credibility that the financial statements are fairly presented WHI

what will affect the inventory turnover balance?

an increase in COGS or a decrease in avg. inventory balances

what kind of expense is bad debt expense?

an operating (selling) expense & therefore does not affect gross profit

a company made an ordinary repair to a delivery truck during 2019 at a cost of $500 & capitalized the repair cost. What is the effect on the 2019 financial statements as a result of the incorrect capitalization?

assets are overstated b/c of the capitalization & net income is overstated b/c expenses are understated

information disclosed in a balance sheet about shares of common stock includes the number of shares that are what?

authorized, issued, & outstanding

which of the following would NOT be included on an income statement? a. cost of goods sold b. accumulated depreciation c. discontinued operations d. insurance expense

b. accumulated depreciation

which of the following would NOT be classified as a current asset? a. inventories b. goodwill c. accounts receivable d. non-trade receivables

b. goodwill

which of the following tasks is NOT performed by the Securities & Exchange Commission (SEC)? a. overseeing the work of the Public Company Accounting Oversight Board (PCAOB) b. the development of generally accepted accounting principles c. taking responsibility for protecting investors & maintaining the integrity of the securities markets d. overseeing the work of the financial accounting standards board (FASB)

b. the development of generally accepted accounting principles

which of the following statements regarding internationals financial reporting standards (IFRS) is FALSE? a. common stock is titled as share capital b. the last-in first-out (LIFO) inventory method is permitted c. property, plant, and equipment can be reported on the balance sheet at either fair value or historical cost d. development costs are capitalized

b. the last-in first-out (LIFO) inventory method is permitted

which of the following is NOT true about the audit committee of the board of directors? a. they are responsible for ensuring that processes are in place for maintaining the integrity of the financial statement preparation & reporting b. they ensure the accuracy & completeness of all reports provided to the SEC c. they meet with the auditors to discuss management's compliance with their financial reporting responsibilities d. they are responsible for hiring the company's external auditors

b. they ensure the accuracy & completeness of all reports provided to the SEC (this is the job of the CEO & CFO)

allowance for doubtful accounts =

bad debt expense + previous credit balance of allowance for doubtful accounts

if 2 companies each use different inventory accounting methods, the companies can be made comparable from information reported in the financial statements by doing what?

by converting inventory on a LIFO basis to a FIFO basis using the LIFO Reserve

how do you decrease the net profit margin ratio?

by decreasing the cost of goods sold and/or operating expenses

how do you increase the net profit margin ratio?

by increasing the sales volume and/or the sales price

which of the following correctly describes the effect of a journal entry involving the recording of a sales return? a. net income increases b. current assets remain the same c. gross profit decreases d. net sales increases

c. gross profit decreases

which of the following is NOT reported as an operating expense on the income statement? a. administrative expenses b. selling expenses c. interest expense d. research & development expense

c. interest expense

which of the following statements does NOT correctly describe the allowance for doubtful accounts balance? a. it is a contra-asset account b. it is reported on the balance sheet as a component of current assets c. it is reported on the balance sheet as a component of stockholders' equity d. it is created as a result of the adjusting entry to record bad debt expense

c. it is reported on the balance sheet as a component of stockholders' equity

which of the following does not correctly describe the effect of a journal entry involving the recording of a credit card discount? a. operating expenses remain the same and net income decreases b. net sales decrease and gross profit decreases c. net sales decrease, operating expenses increase, & net income remains the same d. net sales decrease and net income decreases

c. net sales decrease, operating expenses increase, & net income remains the same

which responsibilities need to be kept separate for the bookkeeper?

cash recordkeeping & cash handling responsibilities

overstatement of ending inventory -->

causes COGS to be understated & NI to be overstated

understatement of ending inventory -->

causes both net income & assets (inventory) to be understated

overstatement of beginning inventory -->

causes cost of goods sold & net income to be overstated

understatement of beginning inventory does what to net income?

causes net income to be overstated

understatement of ending inventory does what to net income?

causes net income to be understated

stockholders' equity, also called shareholders' equity, includes which of the following 2 accounts?

common stock & retained earnings

deferred revenue account

considered a liability account until the company has provided the services, at which time the revenue will be recognized

allowance for doubtful accounts is what type of account?

contra-asset account

credit card discount account

contra-revenue account, which reduces net sales, gross profit, and therefore net income

examples of contra-revenue accounts

credit card discounts, sales discounts, sales returns & allowances

which of the following is NOT a contra-revenue account? a. credit card discounts b. sales discounts c. sales returns & allowances d. allowance for doubtful accounts

d. allowance for doubtful accounts

which one of the following would NOT be recorded as an intangible asset? a. franchises b. patents c. copyrights d. internally generated goodwill

d. internally generated goodwill

which of the following is NOT included as a primary part of the financial disclosure in Form 10-K? a. four basic financial statements b. business operations and strategy c. summarized financial data for a 5-year period d. management's opinion of the financial statements

d. management's opinion of the financial statements (should NOT be an opinion)

which of the following items is NOT part of disclosure notes to the financial statements? a. additional detail of income taxes payable reported in the balance sheet b. descriptions of the significant accounting methods applied in the company's financial statements c. commitments under long-term supply agreements to buy inventory & equipment d. names of executive officers & salaries for each officer listed

d. names of executive officers & the salaries for each officer listed

which of the following is NOT a responsibility of the CEO and the CFO? a. the disclosure to the audit committee of any frauds they are aware of b. ensuring the accuracy and completeness of all reports provided to the SEC c. the certification of the strength of the internal control system d. overseeing the financial statement external audit

d. overseeing the financial statement external audit

journal entry for writing off an uncollectible amount

debt to allowance for doubtful accounts (contra-asset account) & a credit to accounts receivable (asset)

LIFO Reserve

disclosed in notes to the financial statements & can be used to convent inventory on a LIFO basis to what inventory would have been using a FIFO basis

what additional information is required to be presented on the same page as the income statement?

earnings per share

when shares of the reporting company's common stock are issued in exchange for cash, where is this reported on a statement of cash flows?

financing activities

which is NOT a control for safeguarding inventories?

having the person responsible for receiving inventory purchases also be responsible for shipping inventory sales (increased likelihood of goods not being properly guarded & ultimately theft)

gross profit percentage is helpful with what?

helpful to managers, analysts, & creditors for assessing a company by itself as well as for comparing companies in the same industry

why is LIFO Reserve important?

if one company reports using FIFO & one reports using LIFO, after LIFO Reserve conversion, the companies can be analyzed on a comparable basis

under which conditions would a company most likely adopt the double-declining-balance method for financial reporting?

if the company has high technology, robotic equipment in its plant that becomes obsolete quickly & declines in utility to the company more rapidly in the early years of the assets' lives

where are gains and losses on the sales of investments included?

included in nonoperating income (loss) --> they are not part of the company's primary operations

where would "cash paid to acquire a patent" be in the cash flow statement?

investing activities cash flow

how should a contingent liability that is reasonably possible but cannot reasonably be estimated be reported within the financial statements?

it must only be disclosed as a note to the financial statements

when using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is determined to be uncollectible & is written off, the recording of this event will do what?

it will have no effect on the net realizable value of the accounts receivable

if a company fails to record depreciation expense, what is the result?

net income & assets are overstated & expenses are understated

failure to record amortization expense on a patent during the current year will result in what?

net income for the year & total assets would both be overstated

does bad debt expense affect gross profit?

no (it can be considered an operating expense)

freight out costs are a component of what?

of operating expenses

when is goodwill recorded?

only when a business entity is acquired & goodwill is a component of the transaction cost

what kind of expenses are rent expense, wages expense, & utilities expense?

operating expenses --> presented before the subtotal of operating income

Farrell company has rent expense, wages expense, and utilities expense. Where will the company present these expenses on the income statement?

prior to income from operations

what is included in inventory?

raw materials, work in process, & finished goods (& maybe freight-IN costs for delivery to the warehouse)

accrued liability

recorded when an expense is incurred but not yet paid

inventory turnover means what?

reflects how many times, on average, that the inventory balance was sold during the year

safeguarding inventory

requires controls for the care of the physical goods

what results from using the double-declining-balance depreciation method?

results in more depreciation in the earlier years of an asset's life

deferred revenue will eventually become...

revenue earned

nonoperating items that would appear on an income statement:

revenues, expenses, gains, and losses that do not relate to the company's primary operations (ex. interest expense, interest income, & gains/losses on the sale of investments

operating income =

sales - COGS - operating expenses

total asset turnover =

sales / avg. total assets

what will result in a decrease in the account receivables turnover ratio?

selling inventory on account

where is accumulated depreciation found?

the balance sheet

who selects the external auditors?

the board of directors

which of the following demonstrates a poor internal control procedure?

the bookkeeper makes cash deposits & records journal entries related to cash, while the treasurer prepares the bank reconciliation

who is in charge of overseeing the financial statement external audit?

the external auditors that are hired by the board of directors

components of other comprehensive income can be reported in combination with what?

the income statement

what correctly describes the accounting for bonds that were issued at premium?

the interest expense over the life of the bond is less than the total cash interest payments

what will result in an increase in the account receivables turnover ratio?

the journal entry to record bad debt expense (this involves a credit to allowance for doubtful accounts which decreases AR)

a disclosure note is NOT required when...

the loss probability is remote

-the accrual of interest expense on a six-month note payable -collected cash for services to be provided within the next six months -the reclassification of short-term debt to long-term debt which of these transactions results in an increase in working capital?

the reclassification of short-term debt to long-term debt (this decreases current liabilities, which increases WC)

FOB destination

title passes to the customer when the goods are received

FOB shipping point

title passes to the customer when the goods are shipped