Exam 2

Under a periodic inventory system, the inventory costing methods are applied: a. as if all purchases during an accounting period take place at the end of the period. b. as if all purchases during an accounting period take place prior to any sales of the period. c. as if all purchases and sales during an accounting period take place at the same time. d. as if each purchase during an accounting period takes place just before each batch of sales during the period.

b

Under the lower of cost or market (LCM) rule, market is defined as: a. historical replacement cost b. current replacement cost c. historical value d. current value

b

When a sale for cash is made under the periodic inventory system, the entry would include which accounts? a. Cash, Sales Revenue, Purchases, Cost of Goods Sold b. Cash, Sales Revenue c. Cash, Sales Revenue, Purchases, Purchase Discounts d. Cash, Sales Revenue, Inventory, Cost of Goods Sold

b

Cost of goods available for sale is equal to the: a. beginning inventory less ending inventory. b. beginning inventory plus purchases made during the period less ending inventory. c. beginning inventory plus purchases made during the period. d. ending inventory plus the sales made.

c

What is a sales discount? a. A sales discount is an amount deducted from the sales price because the product is dented and scratched. b. A sales discount is a period of time (called a discount) in which the customer must pay its bill. c. A sales discount is a reduction of the normal selling price of a good or service. d. A sales discount is the same as a trade discount.

c

LIFO method

the most recent purchases (the last in) are the first to be sold (the first out). Under the LIFO method, the most recent purchases (newest costs) are allocated to the cost of goods sold the earliest purchases (oldest costs) are allocated to inventory.

Direct write off method

waits until an account is deemed uncollectible before reducing accounts receivable and recording the bad debt expense

Sales returns and allowances are all of the following except: a. merchandise returned by the customer. b. a 2% cash discount allowed to encourage payment within 10 days. c. an allowance made to induce the customer to keep the goods if the price is reduced. d. a contra-revenue account.

B

Which of these statements is TRUE? A) GAAP requires that companies pick an inventory method that closely matches the physical flow of their goods B) Companies are free to select any inventory method but must disclose it in the Notes to their financial statements C) Once a company selects an inventory method they cannot change it

B

Allowance method

Bad debt expense is recorded in the period of the sale, matched with revenues according to the matching concept (percentage of credit sales method and aging method)

Cost of good sold

Beginning inventory + Purchases - Ending Inventory

What is a receivable? a. Money due for a purchase made by the business b. Money due in equal monthly payments for the next 24 months c. Money due from another business or individual d. A sale made for cash

C

The normal balance for a revenue account is (C or D)

Credit

Sales allowance

Customer will keep the low quality item for a discount. or if it arrives late

Normal balance for a contra-revenue account is (C or D)

Debit

Average cost method

allocates the cost of goods available for sale between ending inventory and cost of goods sold based on an average. This weighted average cost per unit is calculated after each purchase of inventory as follows: Weighted Average Cost per Unit = Cost of Goods Available for Sale / Units Available for Sale

Notes receivable

are receivables that generally specify an interest rate and a maturity date at which any interest and principal must be repaid

Accounts Receivable are classified on the balance sheet as: a. long-term assets. b. current assets. c. long-term liabilities. d. Current Liabilities.

b

Accounts Receivable turnover refers to: a. how many times average Accounts Receivables are converted into notes receivable during a period. b. how many times average trade receivables are collected during a period. c. how many times average notes receivable are being collected during a period. d. the number of times that a specific customer pays its trade receivable.

b

In terms of a company's Accounts Receivable, the "net realizable value" is: a. the amount that has been billed to a customer for their purchase. b. the amount of cash the company expects to collect. c. the amount that has been billed to a customer less the "2% cash discount" allowed for prompt payment. d. the reductions in sales revenue that result from the seller's actions, such as a sales return.

b

Increasing the speed of collecting receivables may be achieved by using all of the following except: a. factoring. b. notes receivable. c. accepting credit cards. d. accepting debit cards.

b

The principal of a note receivable refers to the: a. amount of interest due at maturity. b. amount loaned plus any interest that is due. c. amount of money that was loaned. d. amount factored by Visa.

b

The purchase price of inventory includes all of the following except: a. purchase discounts. b. F.O.B. destination or freight-out. c. purchase returns. d. F.O.B. shipping point or freight-in.

b

There is more than one method to record bad debt expense. Which method is not consistent with the matching concept? a. The allowance method b. The direct write-off method c. The percentage of credit sales method d. The aging method

b

As purchase transactions occur, they are recorded in one of four temporary accounts, which are

(1) purchases, (2) purchase discounts, (3) purchase returns and allowances, and (4) transportation-in.

Accrual basis accounting recognized revenue when it is

(1) realized or realizable, which means that non-cash resources (such as inventory) have been exchanged for cash or near cash (accounts receivable) and (2) earned, which means the earnings process is substantially complete.

The process by which businesses and financial institutions frequently package factored receivables as financial instruments or securities and sell them to investors is known as: a. securitization. b. bundling. c. factoring. d. direct-write off.

A

Net accounts receivable=

Accounts receivable - allowance for doubtful accounts

2 methods to record bad debt expense

Direct write off method The allowance method (preferred GAAP method) -Aging of accounts recievable -% of credit sales

3 changes to sales revenue include

Discounts, returns, and allowances

Cost of ending inventory

Ending inventory (x) Cost per unit

Which method focuses on ensuring the value of Bad Debt expense on the income statement is accurate?

Percentage of credit sales

The formula for calculating interest on a note receivable is

Principal (x)Rate (x)Time

Contra-revenue

Reduction in revenue

Quality discount

Reduction in selling price granted by the seller because selling costs per unit are less when larger quantities are ordered.

Trade discount

Reduction in the selling price granted by the seller to a particular class of customers

Net sales=

Sales - sales returns and allowances - sales discounts

Contra-revenue accounts

Sales discounts, sales returns, sales allowances, all have normal balance of debits and are netted against sales to show truer revenue picture of sales activity

4 costing methods

Specific identification FIFO LIFO Average cost

FIFO method

The earliest purchases (the first in) are assumed to be the first sold (the first out), the oldest purchases are in costs of goods sold. the more recent purchases are in ending inventory this cost flow assumption is an accurate representation of the physical flow of goods, e.g., perishables, fashion, technology

Percentage of credit sales method formula

Total Credit Sales x Percentage of Credit Sales Estimated to Default = Estimated Bad Debt Expense

Ending inventory is reported on the: a. balance sheet. b. statement of retained earnings. c. statement of cash flows. d. income statement.

a

Ratios are extremely important when analyzing profitability and asset management. Which ratio is not a profitability ratio? a. Accounts payable turnover b. Operating margin ratio c. Gross profit margin d. Net profit margin ratio

a

What do accountants mean when they say revenue is earned? a. The earnings process is substantially complete. b. The customer promised to come back later and buy the item. c. The cash is received for the sale. d. The customer gives a deposit on a product to be delivered in six months.

a

When the perpetual inventory system is used, which of the following accounts is affected? a. Inventory b. Purchases c. Receiving department salaries d. Sales discounts

a

Which of the following would not be an important internal control document for ensuring sales revenue is correctly recognized by a company? a. The company's purchase request b. A shipping document c. A purchase order from a customer d. An invoice

a

Bad debts are: a. the notes receivable that are in default because of nonpayment. b. amounts allowed by the seller for a trade discount. c. amounts deducted by a purchaser for defective merchandise. d. the Accounts Receivable that are deemed to be uncollectible.

d

Inventory is all of the following except: a. a current liability. b. held for resale. c. can be composed of many thousands of different products or materials. d. a current asset.

d

The cost of goods sold is reported on the: a. statement of stockholder's equity. b. balance sheet. c. statement of cash receipts and disbursements. d. income statement.

d

Under the accrual basis of accounting, there are three terms used for recognizing revenue. Which term is not one of them? a. Realized b. Earned c. Realizable d. Cash-received

d

When purchase prices are rising, which inventory costing method produces the lowest cost for ending Inventory? a. Average cost b. First-in, first-out (FIFO) c. Specific identification d. Last-in, first-out (LIFO)

d