Financial Accounting Exam 2 Chapters 4-6

False

A bank statement is presented from the customer's point of view. Therefore, a customer deposit reduces the bank's liabilities. These statements are

dividing gross margin by net sales.

A key component of estimating the amount of ending inventory is to determine the gross margin percentage for prior years. The gross margin percentage is calculated by

a high gross margin per unit and a high inventory turnover.

All other things being equal, the profitability is maximized when a company sells inventory with

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

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

False

An adverse opinion is the most common type of opinion issued by independent auditors. This statement is

False

An unqualified audit opinion suggests that all aspects of financial statements are in compliance with generally accepted accounting principles (GAAP). This statement is

the Year 2 ending balance in retained earnings will be accurate.

Assume that the amount of ending inventory is overstated in Year 1. Further assume the overstatement in Year 1 is not discovered and the ending inventory in Year 2 is reported accurately. Under these circumstances,

True

Because of its size, cost of goods sold normally has a significant impact on the amount of net income that is reported on the income statement. Since the reported balance in the inventory account has a direct effect on the amount of cost of goods sold, inventory manipulation is a target for unscrupulous managers seeking to control the amount of reported earnings. These statements are

True

Cash is difficult to protect because it is easy to transfer and its ownership difficult to prove. These statements are

($8,000).

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

when the petty cash fund is replenished.

Expenses are recognized

False

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

disclaimer of opinion.

If an auditor has insufficient information to determine whether a company's statements are prepared in accordance with Generally Accepted Accounting Principles, the auditor should issue a(n)

All of the answers are correct.

If the amount of ending inventory is overstated, the amount of

cost of goods sold will be understated.

If the amount of ending inventory is overstated, the amount of

$34,000

In Year 1 Pepper Company reported a $40,000 gross margin on $200,000 of sales revenue. In Year 2 Pepper's accounting records showed sales revenue of $220,000 and cost of goods available for sale of $210,000. Using the gross margin method of estimating inventory, the estimated amount of ending inventory for Year 2 is

checks facilitate the separation of duties associated with cash payments.

Instead of using cash to pay bills, many companies pay with checks because

Internal control is designed to ensure all of the items described in the answers.

Internal control is a process designed to ensure

$10,000.

Kelly Company's unadjusted bank balance on May 31 is $9,500. An analysis of the bank statement revealed $1,400 of deposits in transit and $900 of outstanding checks. In addition, the bank statement showed a $200 NSF check. Based on this information, Kelly's true cash balance is

36.5%

Mahan Company purchased inventory on account under terms 2/10/n30. Mahan would like to pay the accounts payable within the discount period in order to receive the discount. Unfortunately, Mahan does not have the cash. What is the maximum annual interest rate that Mahan would be willing to pay in order to borrow the money necessary to settle the accounts payable?

False

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

an asset exchange transaction.

Paying cash to purchase inventory is

$7,650.

Pen Paint Company's unadjusted book balance at September 30 is $6,900. The Company's bank statement reveals bank service charges of $50. Two credit memos are included in the bank statement: one for $700 which represents a collection of an account receivable that the bank made for Pen Paint and one for $100 which represents the amount of interest that Pen Paint had earned on its interest-bearing checking account in June. Finally, a comparison of the Company's records with the bank statement revealed $500 of deposits in transit and $300 of outstanding checks. Based on this information, Pen Paint's true cash balance is

False

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

True

Public companies under the jurisdiction of the Securities and Exchange Commission are required by law to hire a certified public accounting firm (independent auditor) to assess whether their published financial statements are in compliance with Generally Accepted Accounting Principles (GAAP). This statement is

amount of the NSF check must be subtracted from the unadjusted book balance.

Rex Company's bank statement shows a $200 NSF check. To determine the true cash balance the

False

Sarbanes Oxley is a major fraud case that motivated Congress to establish rules governing internal control. This statement is

net income would be $3,000.

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 $3,400.

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,

gross margin would be $4,000.

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,

All of the answers are components of the COSO framework

The Committee of Sponsoring Organizations (COSO) framework for the evaluation of internal controls contains which of the following interrelated components?

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.

Franklin Company made a deposit.

The bank statement for Franklin Company showed a $4,000 credit. Which of the following could have caused this credit?

True

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

Committee of Sponsoring Organizations of the Treadway Commission.

The framework that is used to assess the effectiveness of a company's internal control was established by the

multistep income statement.

The gross margin appears on a

to check the accuracy of a physical count of inventory on hand.

The gross margin method of estimating ending inventory is frequently used

False

The implementation of an effective internal control system eliminates the possibility of fraud. This statement is

increase the amount of expenses.

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

the employee in charge of counting inventory should be different from the employee in charge of recording inventory transactions.

To avoid the risk of fraud associated with inventory manipulation

All of the answers describe adjustments that must be made to the unadjusted book balance in order to determine the true cash balance.

To determine the true cash balance

add deposits in transit to and subtract outstanding checks from the unadjusted bank balance.

To determine the true cash balance

$102,000.

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

$30.

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

$9.

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

FIFO

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?

the amount of total assets is not affected.

When a company establishes a petty cash fund

recognize revenue and expense.

When a merchandising company sells inventory it will

LIFO

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

The Public Company Accounting Oversight Board.

Which of the following entities is responsible for establishing auditing standards?

Inventory sold for less than its cost

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

Cost of goods sold ./. Inventory

Which of the following formulas is used to calculate the inventory turnover ratio?

365 ÷ Inventory turnover

Which of the following formulas is used to calculate the number of days to sell inventory?

Wine producers

Which of the following industries is likely to have the highest number of days to sell inventory?

All of the answers described internal control procedures designed to protect cash receipts.

Which of the following is an internal control procedure designed to protect cash receipts?

Hiring only college graduates

Which of the following is not a commonly accepted internal control activity?

Keep cash in locations that are accessible by multiple employees

Which of the following is not an internal control procedure designed to safeguard cash?

Adverse opinion

Which of the following opinions is the least favorable opinion issued by an external auditor?

Unqualified opinion

Which of the following opinions is the most favorable opinion issued by an external auditor?

A high inventory turnover ratio produces a low number of days to collect inventory.

Which of the following statements is true?

Interest revenue will be shown as a credit on a bank statement.

Which of the following statements is true?

The amount of estimated inventory calculated using the gross margin method was lower than the amount determined by the physical count.

Which of the following would raise suspicion that a manager may be attempting to overstate net income by falsifying the physical count of ending inventory?

True

While independent auditors are responsible to the public they receive compensation for their work from the companies they audit. This statement is

was shown as a debit on Smith's bank statement.

Wilson Company used a check to pay Smith Company for services provided by Smith. Smith deposited Wilson's check in its account with the State Bank. When Smith's most recent bank statement was examined,the company's accountant noticed that the Wilson check had been classified as an NSF (not sufficient funds) check. The NSF check

total assets decreased.

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

Inventory

an asset account that appears on the balance sheet.