AC 210 Exam 2

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250

Fraudsters may rationalize their actions ______.

- Through a feeling of personal entitlement - By convincing themselves their actions are justified - As legitimate since they are underpaid

Inventory Turnover Ratio

COGS/Average Inventory

ABC Corp. sells a product for $1,000 cash that cost $600. The journal entry(ies) for this transaction using a perpetual inventory system include a debit to ______.

Cash of $1,000 and a credit to Sales Revenue of $1,000; a debit to Cost of Goods Sold of $600 and a credit to Inventory of $600

Independent verify

Check others' work

Cost of Goods Sold

Cost times the quantity sold

JE The receipt of the principal payment

Debit cash and Credit Notes receivable

EFT

Electronic Funds Transfer

On May 3, Botit Inc. purchased merchandise on account for $1,000, FOB shipping point, with terms 1/10, n/30 from Cellar, Inc. On May 6, Botit received the merchandise, along with an invoice for $1,000. In addition, $100 in shipping costs was owed to We Deliver, Inc. On May 12, Botit paid all amounts owed, which amounted to

1,090 = 1000 * .01 (1% discount if paid in 10 days)

Fraud Triangle

RIO- Rationalization, Incentive, Opportunity

Which of the following may occur with a higher inventory turnover ratio?

Reduction in inventory storage costs Reduction in obsolescence

Which parts of the Sarbanes-Oxley (SOX) Act may encourage employees to be honest?

Requiring anonymous tip lines Providing legal protection to whistle-blowers Requiring a code of ethics

Which of the following are reported on the income statement?

Sales Revenue Gross Profit Cost of Goods Sold

Gross Profit

A subtotal on the income statement and is the amount earned from adding value to the inventory sold

Which of these will require a credit to the inventory account in a perpetual inventory system?

Selling inventory for cash Selling inventory on account

______ is classified as a ______ asset and and reports the amount of merchandise available for sale

inventory, current

An EFT cash receipt from a customer is ______.

added to the cash balance

The journal entry to record taking a discount when paying for goods previously purchased on account and recorded using the gross method includes a

credit to two asset accounts debit to a liability account

An example of an EFT is ______.

direct deposit of employee paychecks

An increase in a company's inventory balance from a prior year is ______.

good if the inventory turnover ratio is higher

The fees charged by major credit card companies are included in ______.

selling expenses on the income statement

Some managers commit fraud because they are under great pressure to report a high net income to meet ______.

shareholders' expectations financial analysts' earnings forecasts loan covenant requirements

When recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. The reason is ______.

the company would lose track of which customers still owe money the amounts are estimates and no one knows which particular customers will not pay

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______.

write off of a specific customers account

Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings?

Depreciation Expense Sales Revenue Bad Debt Expense

FOB destination means that goods are owned by the buyer as soon as ______.

they arrive at the buyer's place of business

What effect does the collection of a note receivable, excluding interest, have on the accounting equation?

total assets remain the same

FIFO, an inventory costing method, actually describes how to calculate the cost of ______.

goods sold

Merchandisers record revenue when they ______.

fulfill their performance obligations by transferring control of the goods to customers

Using a perpetual inventory system, what is recorded when a customer returns a product and gets the cash back and the product is put back on the store shelf to be resold?

A debit to Sales Returns & Allowances and a credit to Cash; and a debit to Inventory and a credit to Cost of Goods Sold

Net Accounts Receivable Equation

Accounts Receivable - Allowance for Doubtful Accounts

In financial statements, Sales on account will cause an increase in ______.

Accounts Receivable on the balance sheet Sales Revenue on the income statement

What are reasons internal controls can never completely prevent and detect errors and fraud?

Collusion Costs exceed benefits Human error

Inventory is reported as a(n) ______.

Current Asset on the Balance Sheet

JE the receipt of an interest payment

Debit Cash and Credit Interest Receivable

JE Issuance of a note

Debit Notes Receivable and Cr Cash

At the end of June, bad debt expense is estimated to be $14,000.

Debit- Bad debt expense 14000, Credit- Allowances for Doubtful accounts 14000

Restrict access

Do not provide access to assets or information unless it is needed to fulfill the assigned task

Assuming rising inventory prices, rank which inventory method results in the higher ending inventory value. List from top to bottom, in order of highest ending inventory to lowest ending inventory value.

FIFO, Weighted Avg, LIFO

How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?

Only the items that have market values lower than the costs will be written down.

Document procedures

Prepare documents to show activities that have occurred

FOB ______ is the term used when ownership of the goods transfers to a buyer as soon as the goods leave the seller's place of business.

shipping point

Which inventory method is typically used when accounting for expensive and unique inventory items?

specific identification

The allowance method requires that ______.

Allowance for Doubtful Accounts be netted against Accounts Receivable Bad Debt Expense be recorded in the same period as the related credit sales

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and Sales Revenue of $100,000 (all on credit). Management estimates that 2% of credit sales will be uncollectible. Delectable's financial statements will show ______.

Bad Debt Expense of $2,000 Allowance for Doubtful Accounts of $2,050 credit balance

What are the two stages of accounting for a purchase discount using the gross method?

The Inventory account is later reduced if payment is made within the discount period. The purchase is first recorded at full cost.

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take?

Write off the uncollectible account and its corresponding allowance from the accounting records.

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ.

What effect does the inventory costing method have on the income statement? The inventory methods affects the amount of the ______.

Cost of Goods Sold, Gross Profit, Income from Operations, Income before Income Tax Expense, Income Tax Expense and Net Income

BetterBuy sells a computer from inventory for $599 on credit. BetterBuy originally bought the computer from IBM for $395 and uses the perpetual inventory system. How is the sale recorded in BetterBuy's journal entries?

Debit Accounts Receivable for $599, credit Sales for $599; debit Cost of Goods Sold for $395 and credit Inventory for $395.

In July, customer balances are written off in the amount of $7,000.

Debit Allowances for Doubtful Accounts, Credit accounts receivable

In a perpetual inventory system, which of the following statements are true?

The purchaser should record freight-in as an asset, Inventory. The seller should record freight-out as a selling expense.

Which of the following provisions of the Sarbanes-Oxley (SOX) Act aim to encourage honesty and the reporting of dishonest acts?

Whistle-blower protection Code of ethics Anonymous tip lines

3 categories of employee fraud

corruption, asset misappropriation, financial statement fraud

weighted average cost

cost of goods available for sale/number of units available for sale

Which of the following is not a component of Net Sales?

cost of goods sold

When using the specific identification inventory method, cost of goods sold equals the ______.

cost of the actual item sold

SOX reduces the opportunities for fraud by requiring publicly-traded companies to ______.

evaluate and report on its internal controls establish an audit committee of independent directors have external auditors evaluate the companies' internal controls

Snarl Company has $10,000 in deposits in transit. This means that these deposits:

have been recorded by the company but not yet by the bank

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

Net Sales on an income statement equals Sales Revenue ______.

minus Sales Returns, Allowances and Discounts

Internal control for cash is important because ______.

of the high risk of theft of the large volume of cash transactions cash is portable and is "owned" by whomever possesses it the risk of cash-handling errors is significant

Inventory shrinkage as a result of theft, damage or obsolescence that is discovered during a physical inventory count at the end of the accounting period is recorded with a decrease to Inventory ______.

only in perpetual

Alowance for doubtful accounts is a __________ account.

permanent

If Inventory is debited and Accounts Payable is credited, then the company uses the ______.

perpetual inventory system and is recording a purchase on account

Inventory consists of the purchase price ______.

plus freight-in

If a seller sells its merchandise with the shipping terms FOB shipping point, it credits Revenue when the merchandise is _______.

shipped from the seller's place of business

Why is Bad Debt Expense an estimate?

GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay.

FIFO, LIFO, and weighted average inventory costing methods are based on ______.

assumptions that accountants make about the flow of inventory costs

The journal entry to record the payment for merchandise previously purchased on account includes a ______.

credit to Cash debit to Accounts Payable

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ______ and inventory on its ______.

income statement; balance sheet

The procedure of bank reconciliation is an example of which principle of internal control?

independent verification

Which of the following is recorded at the end of an accounting period when accounting for receivables using the allowance method?

An estimate is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Account in the same period as the related sale.

What would be the effect of forgetting to record the adjusting entry for estimated bad debts?

Assets and stockholders' equity would be overstated.

The Cost of Goods Sold equation is ______.

Beginning Inventory + Purchases - Ending Inventory

Breyer Company bought inventory FOB shipping point from Cellar Company for $4,000 cash, including shipping charges. On December 31, the last day of the accounting year, the goods were on a truck owned by Common Carrier Company, and not expected to arrive until January 3. Which company should include these goods in its December 31 inventory?

Breyer Company should include the $4,000 in its inventory.

Inventory

Current asset on the balance sheet available for sale

Every merchandise sale has 2 components which require an entry in a perpetual inventory system. Select these two components given the sale was made on account to a customer.

Debit Cost of Goods Sold and credit Inventory in the amount of the cost times the quantity sold Debit Accounts Receivable and credit Sales Revenue in the amount of the selling price times the quantity sold

JE Adjusting entry to record interest owed

Debit Interest Receivable and Cr Interest Rev

Record the payment made for goods purchased on October 5 adjusting for the discount received for early payment on October 20 using gross method. on terms 2/30, n/60. for $5,000 on October 5.

Debit accounts payable 5000, credit cash 4900, credit inventory 100

Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are received?

FIFO

Which of the following income statement line items are affected by the inventory method chosen?

Gross Profit Income Tax Expense Income from Operations Income before Income Tax Expense Net Income

Which line items are found on a multi-step but not on a single-step income statement.

Gross Profit Income from Operations

Which of the following is not a significant objective of the Sarbanes-Oxley (SOX) Act?

Increase rationalization

disadvantages of extending credit

Increased wage costs, bad debt costs, delayed receipt of cash

Which of the following is not an internal control for checks received through the mail?

The accounting department counts the cash, prepares the deposit slip and deposits the cash in the bank

Acme Enterprises, which uses a perpetual inventory system, recorded a debit to Sales Returns & Allowances and a credit to Accounts Receivable. (No other accounts were affected.) What business event must have taken place?

The customer received a damaged product, but kept the product and asked for a reduction in the price.

In which of these situations would a merchandiser record revenue?

The obligation has been fulfilled and control of the goods has been transferred to the customer. Goods were sent FOB Shipping Point but have not yet arrived at the buyer's place of business.

What does the sales discount 2/10, n/30 mean?

You can take a 2% discount if you pay within 10 days, or the full amount is due within 30 days.

In a perpetual inventory system, the buyer of merchandise with the shipping terms FOB shipping point will ______.

add the transportation costs to its Inventory account

Tresses, Inc., which has a December 31 year end, lent $1,000 on December 1 to an employee at 6% due in 6 months. When will Tresses record Interest Revenue? It will record ______.

an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December

An advantage of direct deposits is they ______.

are convenient and efficient

Sales returns and allowances ______

are typically recorded after the initial sale when the actual return or allowance occurs reduce the amount the seller expects to receive from customers are adjusted for at the end of the accounting period for estimated returns and allowance expected to occur in the following months

When applying the lower of cost or market/net realizable value rule if the market value of goods in inventory is $50,000 and the cost of inventory is 76,000, the company should:

credit inventory for $26,000

The Sarbanes-Oxley (SOX) Act aims to reduce fraud by ______.

encouraging honesty in employees reducing opportunities counteract incentives

The benefits of internal control procedures are that they ______.

enhance the reliability of accounting information improve the efficiency and effectiveness of operations protect against theft of assets

Each cash drawer is assigned to only one employee in a supermarket. This is an example of the internal control principle of ______.

establishing responsibility

The accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called the ______.

expense recognition (matching) principle

true false: When the value of inventory increases above the cost of inventory shown in the financial records, the inventory should be increased to the higher value.

false

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, the 3 goods sold are assumed to be ______.

from the beginning inventory

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a debit balance when the amount of write offs recorded during the period is ______ the amount estimated to uncollectible in the prior accounting period.

greater than

SOX reduces the opportunities for fraud by requiring publicly-traded companies to ______

have external auditors evaluate the companies' internal controls evaluate and report on its internal controls establish an audit committee of independent directors

When costs to purchase inventory are rising, using LIFO leads to reporting ______ cost of goods sold and ______ net income than FIFO.

higher; lower

Which financial statements are needed to calculate the inventory turnover ratio?

income statement, balance sheet

Which component of the fraud triangle is exemplified best by an employee being able to steal because no documentation is required for amounts taken from the petty cash?

opportunity

_____________ is one of the 3 components of the fraud triangle that relates to taking advantage of weak internal controls.

opportunity

Which method requires estimating the amount of the Bad Debt Expense and then determining the balance in the Allowance for Doubtful Accounts which will differ from the expense if there is an unadjusted balance?

percentage of credit sales method

A multistep income statement is useful to financial statement users because it ______.

separates income statement items into meaningful components separates cost of goods sold from other operating expenses, which allows the calculation of gross profit

Among the requirements of SOX is those who commit fraud face ______.

stiff fines of up to $5 million plus repayment of fraud proceeds possible jail time up to 20 years for each violation

The adjusting entry to record the allowance for doubtful accounts causes total ______.

stockholders' equity to decrease assets to decrease

Weighted Average Method

An inventory costing method based on the weighted-average cost per unit of inventory that is calculated after each purchase. Weighted-average cost per unit is determined by dividing the cost of goods available for sale by the number of units available.

Establish responsibilities

Assign each task to only one employee in order to allow one to determine who is at fault for an error or theft

ABC Corp. wants to avoid lengthy cash collection periods and, therefore, allows customers to pay with a national credit card, rather than extend credit to its customers directly. What is the downside to such a strategy?

credit card companies charge fees

Incentives for committing fraud in order to satisfy personal greed include _______

increasing personal wealth getting a bigger paycheck

two objectives when accounting for accounts receivable and bad debts

1. report accounts receivable at the amount the company expects to collect (Net accounts receivable) 2. match the costs of bad debts to the accounting period in which the related credit sales are made

Place the income statement line items in the proper order from the top to bottom.

1. sales rev, gross 2. sales returns 3. sales rev, net 4. cost of goods sold 5. gross profit

Days to Sell

365/inventory turnover ratio

A goal of the Sarbanes-Oxley Act is improving corporations' internal controls. Which of these may accomplish this goal?

External auditors must test the effectiveness of the company's internal controls. An audit committee of independent directors oversees financial matters of the company. Marketing managers must determine whether the marketing team is submitting accurate sales and expense reports.

Why would a company debit Interest Receivable?

It generated interest on its notes receivable which will be collected in a later accounting period.

Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO

Merchandise costing $2,400 is sold for $3,400 on terms 2/30, n/60. If the customer pays within the discount period, what amount will be reported on the income statement as net sales and as gross profit?

Net Sales $3,332 Gross Profit $932

Gross Profit Formula

Net Sales - COGS

An incentive to commit fraud may be caused by managers who receive bonus payments based on the strength of the company's reported ______.

Net income

Receivables Turnover Ratio

Net sales rev / avg net receivable

direct write off

Not considered an acceptable method under GAAP

Which account is used to reduce assets for the amount of estimated bad debts?

The contra-asset account called Allowance for Doubtful Accounts

If costs are rising, which of the following will be true?

The cost of goods sold will be greater if LIFO is used rather than weighted average

aging of accounts receivable

Uses more detailed data and is more accurate

When will a bankrupt customer's accounts receivable be eliminated? When the company records ______.

a write-off

Fraud is best defined as ______.

an attempt to deceive others for personal gain

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______.

bad debt expense to decrease sales to decrease

Berkley Company had beginning inventory of $4,000 and purchases of $20,000. If half of its inventory is sold, Berkley's total goods available for sale for the period will ______.

be split between cost of goods sold and ending inventory

Goods Available for Sale will ______ when sold.

become Cost of Goods Sold on the income statement

Bijoux Company has sales of $40,000, beginning inventory of $5,000, purchases of $25,000, and ending inventory of $7,000. The goods available for sale for the period equals ______. Multiple choice question.

beginning inventory + purchases = 30,000 (goods available for sale)

Sales Returns & Allowances is a ______ account and is ______ when goods are returned by customers for a refund.

contra-revenue; debited

Allowance for Doubtful Accounts is a(n) _____________-asset account and has a normal __________ balance.

contra; credit

The Sarbanes-Oxley (SOX) Act provides increased regulations for ______.

corporate executives auditors internal controls

Under a perpetual inventory system, the entry to record the return of goods you had previously purchased on account was recorded with a debit to Accounts Payable and a credit to Inventory. This entry is ______.

correct

The entry to record the issuance of a note receivable is ______.

debit Notes Receivable and credit Cash

Record the purchase of goods from a manufacturer on terms 2/30, n/60. for $5,000 on October 5.

debit inventory 5000, credit accounts payable 5000

Assuming sales remain unchanged, if Cost of Goods Sold increases then Gross Profit

decreases

The allowance method is a method of accounting that ______ for estimated bad debts.

decreases net accounts receivable

An adjusting entry to accrue for interest earned is often needed when a company has ______.

notes receviable

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a credit balance when the amount of write offs recorded during the period is ______ the amount allowed in the prior accounting period.

less than

A company had beginning inventory of 3 units that cost $5 each. During the month, 17 units were purchased for $6 each. The company sold 15 units during the month and had 5 remaining in ending inventory. If the company uses FIFO instead of LIFO to calculate cost of goods sold, then cost of goods sold will be ______.

lower using FIFO, leading to higher gross profit and higher income taxes

Incentives for fraud

make the business appear successful to investors, bring in new business partners, or meet loan requirements. increasing personal wealth and getting a bigger paycheck

The goals of inventory managers include ______.

making sure that inventory quality meets customer expectations keeping the costs of buying and storing inventory as low as possible having enough inventory on hand to meet customer demand

companies that sell goods they have produced

manufacturing company

allowance method

records bad debt expense by estimating uncollectible accounts at the end of the accounting period, write off specific customer balances when they are known to be uncollectible

When accounting for accounts receivable and bad debts, the objectives are to ______.

report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect. match the cost of bad debts to the accounting period in which the related credit sales are made

Bad Debt Expense

reports the estimated amount of this period's credit sales that customers will fail to pay

The services provided by a bank help business control cash by ______.

restricting access and providing documentation and independent verification

Target has $400 of inventory on hand at the beginning of the month. During the month, the company buys $4,100 of merchandise and sells merchandise that had cost $3,000. At the end of the month, $1,300 of inventory is on hand. How much shrinkage occurred during the month?

200

days to collect formula

365/receivables turnover ratio

_____________ is one of the 3 fraud triangle components where the fraudsters perceive the misdeed is unavoidable or justified.

Rationalization

Sales Revenue

Selling price times the quantity sold

percentage of credit sales

Simpler to apply but less accurate

Using a perpetual inventory system, the entry to record the return of goods you previously purchased on account includes a ______.

credit to Inventory debit to Accounts Payable

A contra-asset account, such as Allowance for Doubtful accounts has a normal balance of a _________ and causes total assets to _______.

credit; decrease

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with ______.

credits

FOB ______ is the term used when ownership of the goods transfers to a buyer when the goods arrive at the buyer's place of business.

destination

On May 1, Doormart received an order from a customer. The goods were shipped FOB shipping point on May 3. The customer received the goods on May 5 and paid for the merchandise on June 1. When should Doormart record the sale?

may 3

LIFO uses the ______ unit costs for Cost of Goods Sold on the income statement and the ______ unit costs for Inventory on the balance sheet.

newest; oldest

To find a description of the inventory accounting method used by a company, you need to look at the ______.

notes to the financial statements

If Accounts Payable is debited and Cash is credited, then the company is recording a ______.

payment of amounts owed for purchases made on account

A benefit of the ______ inventory system is that inventory shrinkage from theft, fraud, and error is able to be estimated.

perpetual

Segregate duties

Do not make one employee responsible for all parts of a process

Which of the following should be debited to Inventory?

purchases of merchandise on account freight-in if shipped FOB shipping point

ABC Company has the following amounts in its multiple-step income statement: revenues of $5,000, cost of goods sold of 2,000, operating expense of $2,000, and income tax expense of $200. What is the ABC Company's Income from operations?

1000 (5000 -2000-2000)

If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $11,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of ______.

1000 debit

Which of the following are limitations in internal control systems?

A control may not be implemented because the cost of the control may exceed the benefit of reducing the fraud or potential errors. Collusion can exist making it impossible to completely prevent fraud.