ACC EXAM 2 STUDY GUIDE

What would cause a bank statement not to agree with the cash balance in the accounting records?

-The bank made an error in recording a deposit made by the company. -The company made an error in recording a deposit. -The bank paid interest that the company has not recorded. -Deposits outstanding that have been recorded on the company's records, but not on the bank's.

Sales returns and allowances ______.

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

NSF checks are the same as ______.

-bounced checks -non-sufficient funds checks

Supervisor (responsibilities)

-compares cash in register with cash count sheet -stores cash in vault box -completes bank deposit

Accounting department (responsibilities)

-compares cash register records with cash count sheet and bank deposit slip -prepares journal entry

An effective internal control system...

-generate and communicate information to support sound decision making -is monitored to detect and communicate deficiencies to those responsible -is monitored regularly to determine whether controls are working as intended

Internal control procedures surrounding payment of bills includes ______.

-marking the voucher "paid" to avoid duplication of payments -using prenumbered checks -making payments only when a purchase is supported by complete voucher documentation

Cashier (responsibilities)

-scans items sold -collects customer payments -prepares cash count sheet

Put the 5-step revenue model for a bundle sale in its proper order by placing the 1st step at the top.

1) Identify the contract 2) Identify the seller's performance obligation 3) Determine the transaction price 4) Allocate the transaction price to each performance obligation in the bundle sale 5) Recognize revenue when (or as) each performance obligation is satisfied

Which of the following is the typical sequence of accounting for sales made on account using the allowance method? Place in order of occurrence from top to bottom.

1) accounts receivable are debited in the period revenue is recognized 2) bad debt expense is estimated and recorded with an adjusting entry 3) Specific customer balances are written off

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

1) sales revenue, gross 2) sales returns, allowances, discounts 3) sales revenue, net 4) cost of goods sold 5) gross profit

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

100 less than The method used is the Percentage of Sales method whereby the expense is calculated first and then the balance in the Allowance for Doubtful Accounts is determined. The adjusting entry includes a debit to Bad Debt Expense (+E,-SE) of $1,000 (=1% x $100,000) and credit to Allowance for Doubtful Accounts (+xA,-A). After adjustment, the Allowance will have a $1,100 credit balance (=$1,000 credit + 100 credit) on the balance sheet and Bad Debt Expense will equal $1,000 on the income statement. The Allowance (a permanent account) on the balance sheet is $100 more because of the $100 unadjusted credit balance carried forward from the prior period's credit sales. The expense is a temporary account and reports only the expense on the current period's credit sales.

(MATH) 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, Cost of Goods Sold equals ______..

30

Which company is most likely to have a higher inventory turnover than its competitors within the same industry?

A company with lower-priced goods and lower gross profit

Gross Profit

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

Why is Allowance for Doubtful Accounts credited, instead of Accounts Receivable, when recording the adjusting entry for bad debts?

Accounts Receivable consists of many customer accounts and thus cannot be credited unless it is known which specific customer is not going to pay.

Deposits in transit have already been ______.

Added to your cash balance per your books and not to the bank balance

Which method of allowing for estimated uncollectible accounts is generally more accurate?

Aging of accounts receivable method

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 credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______.

Allowance for Doubtful Accounts of $1,000 Bad Debt Expense of $950

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.

Which of these would explain an increase in a company's inventory turnover ratio?

An increase in the demand for the company's products A decrease in total inventory

Which of the following statements are true?

An increased inventory balance is desirable if management is building up stock in anticipation of higher sales. An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory.

ABC, Inc.'s unadjusted trial balance included Accounts Receivable $80,000 debit; Allowance for Doubtful Accounts $750 credit; and credit sales $400,000 credit. ABC uses the aging of accounts receivable method and estimates that $8,000 of its receivables will be uncollectible. After the adjusting entry is made, ABC's financial statements will report ______.

Bad Debt Expense of $7,250 on the income statement Allowance for Doubtful Accounts of $8,000 on the balance sheet

The ______ is used to document the amount of cash collected and available for deposit at the bank.

Cash Count Sheet

When a check is presented to a bank for payment and the amount is deducted from the payer's account, the check is said to have_____the bank

Cleared

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

Cost of Goods Sold

Cost x Quantity Sold Net Sales -Gross Product

What is the entry a company records at the time it issues a $1,000, 6% note to one of its employees that the employee needs to repay in 6 months?

Credit Cash Debit Notes Receivable

Which company will have the higher number of days to sell?

Days to sell (=365/inventory turnover ratio) would be higher for Company A at 36.5 days (=365 days/($1,000/$100)) versus Company B at 18.25 days (=365 days/($2,000/$100)).

Which of the following reconciling items does not require a journal entry?

Deposit in transit

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

A_______ deposit is initiated by an EFT instructing a bank to transfer pay due employees into the employees' bank accounts.

Direct

Segregate Duties

Do not make on employee responsible for all parts of a process ex: Inventory buyers do not also approve payments to suppliers

Restrict Access

Do not provide access to assets or information unless it is needed to fulfill assigned responsibilities ex: Secure valuable assets such as cash and restrict access to computer systems (via passwords and firewalls)

If you had 1 unit that cost $3 in beginning inventory, purchased 1 more at $2 and then later another at $1, which method would result in the higher Cost of Goods Sold and lower Gross Profit if you sold 2 of the units?

FIFO

Which of these inventory accounting methods are acceptable under US GAAP?

FIFO Specific identification Weighted average LIFO

A check that you have written has cleared the bank when ______.

Funds have been withdrawn from your bank account to cover the check.

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.

What does FOB shipping point mean?

Goods are owned by the buyer when they leave the seller's place of business.

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

Gross Profit Income Tax Expense Income before Income Tax Expense Income from Operations 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 these might cause the value of inventory to fall below its original cost?

Increased competition Obsolescence from going out of style Damage

(MATH) 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 ______.

Inventory equals $2,250 (=$500 + 550 + (2x$600)). Cost of Goods Sold equals $550. Answer: 2,250

(MATH) Delta Diamonds had 5 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 1 of the diamonds. Using FIFO, its Inventory at December 31 is ______.

Inventory using FIFO =(2 x $550) + (2 x $600). Cost of Goods Sold using FIFO =1 x $500. FIFO assumes the oldest one is sold first. Answer: 2,300

Employee Fraud

Is often grouped into three categories: corruption, asset misappropriation, financial statement fraud.

In times of rising prices, why would a company choose LIFO over FIFO?

LIFO would result in a higher Cost of Goods Sold making the Income Tax Expense lower than FIFO.

Which of these would you expect to have the highest inventory turnover ratio?

McDonald's

_____ companies sell goods that have been obtained from other companies.

Merchandising/ retail

"NSF" stands for:

Non-Sufficient Checks

direct write off

Not considered an acceptable method under GAAP

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.

Which inventory system updates the inventory account only at the end of the accounting period?

Periodic

Which inventory system requires that the purchases of merchandise on account be debited to Purchases?

Periodic system

Document Procedures

Prepare documents to show activities that have occurred ex: Pay suppliers using renumbered checks and digitally documented electronic fraud transfers.

After approval of a purchase has been obtained, the purchasing agent completes a prenumbered _____ that identifies the supplier, the delivery location, and the approved quantity and cost.

Purchase Order

The purchasing system begins with an authorized employee completing a manual or electronic ______ which is then reviewed and approved by a supervisor before an order is placed with a supplier.

Purchase Requisition

The document that indicates the date, quantity, and condition of the goods is called a report. It is then sent to the accounting department to notify that the purchase can be recorded.

Receiving

This document indicates the date, quantity, and condition of the goods. It is then sent to the accounting department to notify the purchase can be recorded.

Receiving Report

A bank ______ is an important control because it provides independent verification of all cash transactions the bank has processed for the company. This internal report should be prepared by an employee whose duties are separate from recording and handling of cash.

Reconciliation

Comparing two sets of records is called ______.

Reconciling

Perpetual Inventory System

Records all inventory-related transactions in the inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale.

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

Reduction in inventory storage costs Reduction in obsolescence

When a seller fulfills its performance obligation, it credits ______.

Revenue

Which of the following are found on the income statement of a merchandiser?

Sales Revenue Gross Profit Cost of Goods Sold

Sales on account will cause an increase in ______.

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

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

Selling inventory for cash Selling inventory on account

The purchaser of inventory pays for shipping if the shipping terms are FOB ______.

Shipping Point

Percentage of credit sales

Simpler to apply but less accurate 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 Estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses

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 1 of the diamonds that was purchased on July 9. Using periodic specific identification, its Cost of Goods Sold is ______.

Specific identification records the actual cost of the actual diamond sold. The diamond that was purchased on July 9 cost $550. Answer: 550

This document is compared to the internally generated documents of the voucher system to ensure the quantity and costs agree with what has been ordered and received. If all reconciles, the accounting department will record the purchase in the accounting records.

Supplier Invoice

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10. It purchased 3 more at $12. It sold 4 units during the period. What is the Cost of Goods Sold using the weighted average cost method?

The Cost of Goods Available equals $56 (=(2x$10)+(3x$12)). The Weighted Average Cost equals $11.20 ($56 Goods Available/5 units). Cost of Goods Sold equals $44.80 = ($11.20/unit x 4 units sold). Answer: 44.80

Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the adjustment, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

The aging method specifies the desired ending balance in the Allowance account. The amount of the entry will depend on what the unadjusted balance in the Allowance is. The aging method specifies the desired ending balance in the Allowance account needs to be $90,000. The $1,000 unadjusted credit balance in the Allowance for Doubtful Accounts needs to be increased by $89,000 to get to the desired $90,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $89,000.The expense will only be $89,000 because there is a $1,000 credit balance remaining in the Allowance account before adjustment.

Interest Receivable

The amount of interest you earned but not yet collected

Who decides which of the many inventory accounting methods a company should use?

The company's management

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, its Cost of Goods Sold for the month is ______.

The cost of the 18 quilts sold equals 18 quilts x $210. Answer: 210

(MATH) Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, its Cost of Goods Sold for the month is ______.

The cost of the 18 quilts sold equals 18 quilts x $210. Answer: 3,780

(MATH) King Costume started the month with 8 masks in its beginning inventory that cost $10 each. During the month, King Costume purchased 40 additional masks for $12 each. At the end of the month, King counted its inventory and found that 5 masks remained unsold. If King Costume uses LIFO periodic, its Cost of Goods Sold for the month is ______.

The cost of the 43 masks sold equals (40 masks x $12) + (3 masks x $10). Ending inventory equals the 5 remaining masks at $10 each or $50. Answer: 510

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.

Information and Communication

The internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties.

Example of weak internal controls

The mail-room clerk records daily cash receipts in the journal.

Which of the following is recorded with a debit to Cash and a credit to Notes Receivable?

The receipt of the principal payment

(MATH) Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 7 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 2 quilts remained unsold. If Mountain Made uses periodic weighted average cost, its Cost of Goods Sold for the month is ______.

The weighted average cost per quilt equals ((3 x $200) + (7 x $210))/10 which is then multiplied the 8 quilts sold to get cost of goods sold. Answer: 1,656

aging of accounts receivable

Uses more detailed data and is more accurate method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance Estimates the allowance for doubtful accounts based on the age of each account receivable

Periodic Inventory System

Uses separate accounts for these items and records cost of goods sold at the end of the accounting period.

(MATH) Beta Company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Beta's weighted average cost is ______.

Weighted average=((80 x $12) + (20 x $12.50))/100 Answer: 12.10

Using a perpetual inventory system, the journal entry to record a sale on account will include a ______.

a credit to Sales Revenue debit to Cost of Goods Sold debit to Accounts Receivable credit to Inventory

The direct write-off mismatches revenues with expenses because a customer's account is expensed in ______ the related credit sale.

a later accounting period than

Gross Profit is ______.

a subtotal on the income statement equal to Net Sales minus Cost of Goods Sold

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

a write off

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

Deposits in transit are ______ on a bank reconciliation.

added to the bank balance

Establish Responsibilities

assign each task to only one employee ex: give a separate cash register drawer to each cashier at the start of a shift.

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

assumptions that accountants make about the flow of inventory costs

The SOX act provides increased regulations for...

auditors/ internal controls / corporate executives

The weighted average cost method uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

average; average

Why is inventory reported as a current asset?

because it will be converted into cash within a year of the balance sheet date

Goods Available for Sale will ______ when sold.

become Cost of Goods Sold on the income statement

Independently Verify

compare the cash balance in the company's accounting records to the cash balance reported by the bank and account for any differences ex: check other's work

Internal Control

consists of the actions taken by people at every level of an organization to achieve its objectives relating to operations, reporting, and compliance Can fail because of human error or fraud

In a perpetual inventory system, Inventory is initially recorded at ______.

cost

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

cost of the actual item sold

Using the aging approach, management estimates that $1,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______.

credit to Allowance for Doubtful Accounts of $900 debit to Bad Debt Expense of $900

On February 1, Stretchers, Inc., receives $4,000 of interest of which $3,000 was generated and recorded in the prior accounting period ended December 31. The entry to record the collection of interest on February 1 includes a ______.

credit to Interest Revenue of $1,000 credit to Interest Receivable of $3,000 debit to Cash of $4,000

In a perpetual system, the entry to record the sale of merchandise to a customer on account would include a ______.

credit to Inventory debit to Cost of Goods Sold

Days to sell measures the average number of ______.

days from the time inventory is purchased to the time it is sold

ABC Corp. received a 2-month, 8% per year, $1,500 note receivable on December 1. The adjusting entry on December 31 will include a ______.

debit to Interest Receivable of $10 $1,500 x 0.08 x (1/12)=$10. Only 1/12 of the 8% annual rate has been generated since December 1.

Outstanding checks have already been ______.

deducted from your cash balance per your books but not the bank balance

To ensure the accuracy of inventory accounted for using a perpetual system, physical counts ______.

detect bookkeeping errors detect theft detect shrinkage

To ensure the accuracy of inventory accounted for using a perpetual system, physical counts ______.

detect shrinkage detect theft detect bookkeeping errors

Notes receivable are used for ______.

extending payment periods lending money to individuals or businesses selling large dollar-value items

The 2 steps required using the allowance method, are to ______.

first make an end-of-period adjustment to record the estimated bad debts later write-off specific customer balances when they are known to be uncollectible

Compliance (internal control)

focus on adhering to laws and regulations

Operations (internal control)

focus on completing work efficiently and effectively by protecting assets against the possibility of fraud

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

good if the inventory turnover ratio is higher

When the allowance method is used, the entry to record the write-off of an uncollectible account ______.

has no effect on net income

Outstanding checks are checks that ______.

have been written but have not yet cleared the bank

When costs to purchase inventory are falling over time, using LIFO leads to reporting ______ than FIFO.

higher Inventory on the balance sheet When prices are falling, using LIFO assumes the newer, less expensive inventory is sold first and the older, higher priced inventory is left in Inventory on the balance sheet.

Reporting (internal control)

include producing reliable and timely accounting information for use by people internal and external to the organization

Control Activities

include various work responsibilities and duties completed by employees to reduce risks to an acceptable level

Sales Returns and Allowances are reported on the ______

income statement

A bank reconciliation is a(n) ______.

internal report prepared to compare the company's cash records with the bank statement

Financial statement fraud

involves misreporting amounts in financial statements (least frequent case/ lowest median loss)

Voucher

is a collection of documents prepared in the process of approving, processing and documenting all purchases and payment made on account.

Bad Debt Expense ______.

is a cost of extending credit to customers is an estimate

Gross Profit

is a subtotal, not an account, found on the income statement.

The gross profit percentage

is the ratio to watch if you are worried about increased competition

If a company were to ignore the fact that the market value of its inventory is lower than its cost, then ______.

its assets and stockholders' equity would be overstated

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

lower; higher

Risk assessment

managers should continuously assess the potential for fraud and other risks that could prevent the company from achieving its objectives

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

market value if lower than cost

The objectives when accounting for accounts receivable and bad debts are to ______.

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

Net Sales on an income statement equals Sales Revenue ______.

minus Sales Returns, Allowances and Discounts

Fraudulent reporting by management includes...

misreporting revenues and expenses

Corruption

misusing ones position for inappropriate personal gain (2nd most frequent case/ 2nd highest median loss)

The receivables turnover ratio is computed as ______.

net sales revenue divided by average net accounts receivable

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

When accounting for accounts receivable, a primary objective is to ______.

not overstate assets and stockholders' equity by the estimated amount of bad debt

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

notes to the financial statements

The inventory turnover measures the ______.

number of times the average inventory balance is bought and sold

The costs of carrying inventory include the costs of ______.

obsolescence theft spoilage storage

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

oldest; newest

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 a perpetual system

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

perpetual inventory system and is recording a purchase on account

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

reducing opportunities, counteract incentives, encouraging honesty in employees

Control Environment

refers to the attitude that people in the organization hold regarding internal control

A channel stuffing senario

refers to when a company increases its credit sales by selling to less financially secure customers.

A receivable write-off removes a non-paying customer's account receivable and ______.

removes the same amount from Allowance for Doubtful Accounts

Inventory on a balance sheet

reports the merchandisers total cost of acquiring goods that it has not yet sold

multistep income statement

shows how much profit is earned from product sales without being clouded by other operating expenses and separates other items that are not core to the operations of the company.

Interest revenue

the amount of interest earned

A major drawback to the periodic inventory system is ______.

the amount of inventory on hand and sold is unavailable during the accounting period

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

Monitor Activities

the internal control system is evaluated often to determine whether it is working as intended. Deficiencies should be communicated to those responsible for taking correct action.

Notes Receivable

the principal amount

An objective of the expense recognition (matching) principle is to have bad debt expense debited in ______.

the same period the related credit sales are recorded

Asset Misappropriation

theft (embezzlement)/ cash is the target (most frequent case/ highest median loss)

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

they arrive at the buyer's place of business

periodic inventory system

updates the inventory records for merchandise purchases, sales, and returns only at the end of the accounting period

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 ______.

$1,000 debit The Allowance for Doubtful Accounts is increased (credited) when the adjusting entry is recorded and is later decreased (debited) when specific accounts receivables are written off. Since the $10,000 estimated amount in the Allowance account is less than the $11,000 debited for write offs, a $1,000 unadjusted debit balance will result, i.e., more was written off than was originally allowed. This underestimate will cause Bad Debt Expense on the income statement to be $1,000 greater than the Allowance balance on the balance sheet.

Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is ______.

$20 is FIFO Inventory, not Cost of Goods Sold. Since 8 eggs of the 35 eggs available to sell were left, then 27 eggs were sold. The oldest eggs are assumed to be sold first. Thus, Cost of Goods Sold equals (5 eggs x $2) + (22 eggs x $2.50). Answer: 65

Delta Diamonds had 5 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 1 of the diamonds. Using FIFO, its Cost of Goods Sold for the year ended is ______.

$500 FIFO assumes that the 1st diamond purchased for $500 is the first diamond sold.

Sales Revenue reports the ______.

(sales price) x (the quantity of goods sold)

Book Balance

+ Notes/Interest Collected - NSF Checks - Service/Overdraft Charges +/- Book Errors

Bank Balance

+deposit in transit -outstanding checks +/- bank errors

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.

On a bank reconciliation, which of the following are typical reconciling items the bank would not know about because of time lags?

-Deposits in transit -Outstanding checks

Why might a bank statement and the company's records differ?

-Deposits were made at the end of the bank statement date in an ATM. -Not all checks written cleared the bank. -Customer checks that bounced (NSF).

Which of the following are typical reconciling items on the book side of a reconciliation because the company did not know about these items until it got the bank statement?

-Electronic funds transfers -Interest income -Services charges

Which of the following items are netted against Sales Revenue to arrive at Net Sales (Sales Revenue, net)?

-Sales Discounts -Sales Returns -Sales Allowances