ACC3305 exam 2

Which one of the following would appear on the income statement of a merchandising company, but not on the income statement of a service company? a. Cost of goods sold b. Selling and administrative expenses c. Net sales d. Income tax expense

a. Cost of goods sold

Which one of the following statements is true if a company's collection period for accounts receivable is unacceptably long? a. The company may need to borrow to acquire operating cash. b. The company may offer trade discounts to lengthen the collection period. c. Cash flows from operations may be higher than expected for the company's sales. d. The company should expand operations with its excess cash

a. The company may need to borrow to acquire operating cash.

During 2017, the accounts receivable turnover ratio for Cordner Company increased from 10 to 14 times per year. Which one of the following statements is the most likely explanation for the change? a. The company's credit department has followed up with customers whose account balances are past due in order to generate quicker collections. b. The company has decreased sales to its most creditworthy customers. c. The company has increased the amount of time customers have to pay their accounts before they are past due. d. The company has extended credit to more risky customers in order to increase sales.

a. The company's credit department has followed up with customers whose account balances are past due in order to generate quicker collections.

Borden Company incurred the following costs to acquire and prepare land for a new parking lot: purchase price for land, cost to clear the land, cost of paving, lighting for the parking lot, and landscaping for the parking lot. How should the company determine which costs should be recorded as Land Improvements and which cost should be recorded as Land? a. The costs with an unlimited life will increase Land, and the costs with a limited useful life will increase Land Improvements b. The costs with a limited life will increase Land, and the costs with an unlimited useful life will increase Land Improvements c. The costs to be depreciated will increase Land, and the costs that will not be depreciated will increase Land Improvements. d. Costs that are depreciable will increase Land Improvements, while other costs are expensed immediately because of a lack of definite life.

a. The costs with an unlimited life will increase Land, and the costs with a limited useful life will increase Land Improvements

How is the gross profit method used as it relates to inventory valuation? a. To verify the accuracy of the perpetual inventory records. b. To verify the accuracy of the physical inventory. c. To estimate cost of goods sold. d. To provide an inventory value of LIFO inventories.

a. To verify the accuracy of the perpetual inventory records.

Royal Company purchased a dump truck at the beginning of 2015 at a cost of $60,000. The truck had an estimated life of six years and an estimated residual value of $24,000. On January 1, 2017, the company made major repairs of $20,000 to the truck that extended the life one year. Thus, starting with 2017, the truck has a remaining life of five years and a new salvage value of $8,000. Royal uses the straight-line depreciation method. When calculating depreciation for 2017, Royal should a. add the $20,000 to the book value at December 31, 2016, and then allocate the revised basis over the remaining adjusted useful life of five years. b. report the effect of the change in life as an expense on the income statement in 2016 c. ignore the change in life on the original cost of $60,000 and depreciate the additional $20,000 cost separately over its useful life. d. expense the $20,000 and depreciate the original cost of $60,000 over its revised estimated total live of seven years

a. add the $20,000 to the book value at December 31, 2016, and then allocate the revised basis over the remaining adjusted useful life of five years.

Lower-of-cost or net realizable value as it applies to inventory is best described as the a. drop of future utility below its original cost b. method of determining cost of goods sold. c. assumption to determine inventory flow. d. change in inventory value to market value.

a. drop of future utility below its original cost

Interest is capitalized when incurred in connection with the construction of plant assets because a. interest is considered a part of the acquisition cost of the related plant asset. b. the decision to purchase a plant asset is a business decision separate from the financing decision. c. many plant assets last longer than 20 years. d. interest is considered an expense of the period.

a. interest is considered a part of the acquisition cost of the related plant asset.

The recognition of cost of goods sold as an expense in the same period that sales revenue is recognized from the sale of merchandise is a good example of the a. matching principle. b. full disclosure principle c. revenue realization principle d. historical cost principle

a. matching principle.

On January 1, 2017, Accounts Receivable and Allowance for Uncollectible Accounts for Darius Company carried balances of $20,000 and $550, respectively. During the year, the company reported $70,000 of credit sales. There were $400 of receivables written off as uncollectible in 2017. Cash collections of receivables amounted to $74,700. The company estimates that it will be unable to collect 5% of the year-end accounts receivable balance. The amount of bad debts expense recognized in the 2017 income statement will be: a. $545. b. $595. c. $745. d. $795.

b. $595.

A company began the year with $150,000 in inventory and ended the year with $170,000 in inventory. Cost of goods sold for the year amounted to $960,000. Assuming 360 days in a year, how long, on average, does it take the company to sell its inventory (to the nearest day)? a. 6 days b. 60 days c. 120 days d. 3 days

b. 60 days

A customer returned damaged goods and was given an allowance. Which of the seller's accounts decreases? a. Purchase Returns b. Accounts Receivable c. Sales Returns d. Sales Revenue

b. Accounts Receivable

On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account called a. Accumulated Amortization b. Accumulated Depreciation. c. Amortization Expense d. Depreciation Expense

b. Accumulated Depreciation.

A credit memorandum appeared on Central Company's bank statement. How will Central treat this amount on its bank reconciliation? a. Add it to the bank balance b. Add it to the book balance c. Deduct it from the bank balance d. Deduct it from the book balance

b. Add it to the book balance

Which of the following statements is true regarding dividend income? a. Dividend income is never accrued at year-end. b. Dividend income is reported on the income statement c. Dividend income appears in the Stockholders' Equity section of the balance sheet. d. Dividend income is recognized by companies that own debt securities.

b. Dividend income is reported on the income statement

What are the effects on the accounting equation from the purchase of a short-term investment? a. Assets and stockholders' equity decrease. b. No effects—assets increase and decrease by the same amount. c. Assets and liabilities decrease. d. Stockholders' equity decreases and liabilities increase.

b. No effects—assets increase and decrease by the same amount

Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2017. The goods were shipped the same day. The merchandise's selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Park received the merchandise on June 10, 2017. Park paid the amount due on June 13, 2017. ​ Who is responsible for payment of the transportation costs on the merchandise sold by Jay Zee Music to Park? a. Jay Zee Music Company b. Park, Inc. c. Split equally between the two companies d. Cannot be determined from the information provided

b. Park, Inc.

Vern Corp. sold merchandise to a customer on credit. The invoice amount was $2,000; the invoice date was June 10; credit terms were 1/20, n/30. Which one of the following statements is true? a. The customer can take a $20 discount if the invoice is paid on July 10. b. The customer should pay $2,000 if the invoice is paid on July 9 c. The customer must pay a $20 penalty if payment is made after July 9. d. The customer must pay $2,020 if payment is made after June 20.

b. The customer should pay $2,000 if the invoice is paid on July 9

Why do businesses invest in short-term investments? a. They are trying to gain control over the activities of other companies. b. They are investing excess cash to meet future business operation or investment needs. c. They are lending money to companies that cannot obtain bank loans. d. None of these are correct.

b. They are investing excess cash to meet future business operation or investment needs.

In no case can "market" in the lower-of-cost-or-market rule be more than a. estimated selling price in the ordinary course of business. b. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal. c. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin. d. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses.

b. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal.

The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the a. net realizable value b. net realizable value less normal profit margin. c. replacement cost. d. selling price less costs of completion and disposal.

b. net realizable value less normal profit margin.

An internal control system consists of all of the following policies and procedures except those necessary to ensure a. the safeguarding of an entity's assets. b. that cash on hand and on deposit in checking accounts is beyond the minimal amount for ongoing operations c. the reliability of an entity's accounting records d. the accomplishment of an entity's overall objectives.

b. that cash on hand and on deposit in checking accounts is beyond the minimal amount for ongoing operations

At the year-end inventory count, if goods in transit are shipped FOB shipping point, they should be included in the inventory count of a. the seller. b. the buyer. c. both the seller and the buyer. d. neither the seller nor the buyer.

b. the buyer.

Given the historical cost of product Z is $20, the selling price of product Z is $25, costs to sell product Z are $3, the replacement cost for product Z is $21, and the normal profit margin is 40% of sales price, what is the market value that should be used in the lower-of-cost-or-market comparison? a. $18 b. $20 c. $21 d. $22

c. $21

The accountant for Fazzi Corp. was preparing a bank reconciliation as of April 30, 2017. The following items were identified: Fazzi's book balance $46,200Outstanding checks 1,100Interest earned on checking account 50Customer's NSF check returned by the bank 500 In addition, Fazzi incorrectly recorded a customer's check in cash receipts as $150; the bank recorded the amount correctly as $510. What amount will Fazzi report as its adjusted cash balance at April 30, 2017? a. $44,650 b. $45,890 c. $46,110 d. $46,250

c. $46,110

Birken Co. purchased a building for $500,000 in 2016. At the end of 2017, when it had a book value of $450,000, it was appraised for $1,000,000. A potential buyer offered $900,000. Birken rejected the offer. What amount is in Birken's records at the end of 2017 in the Building account? a. $2,000,000 b. $800,000 c. $500,000 d. $350,000

c. $500,000

Which one of the following is not an accurate description of Allowance for Doubtful Accounts? a. Contra account b. Balance sheet account c. Income statement account d. Current asset account

c. Income statement account

On January 2, 2017, Hannah Company sold a machine for $1,000 that it had used for several years. The machine cost $12,000 and had accumulated depreciation of $9,000 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine? a. Gain of $2,000 b. Loss of $11,000 c. Loss of $2,000 d. Gain of $3,000

c. Loss of $2,000

When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at? a. Sales price b. Historical cost c. Net realizable value d. net realizable value less normal profit margin.

c. Net realizable value

Which of the following is not a generally recognized internal control procedure? a. Establishing of clear lines of authority to carry out specific tasks b. Physically counting inventory in a perpetual inventory system c. Reducing the cost of hiring seasonal employees d. Limiting access to computerized accounting records

c. Reducing the cost of hiring seasonal employees

Which of the following is an example of a capital expenditure? a. Cleaning the carpet in the front room b. Tune-up for a company truck c. Replacing an engine in a company car d. Replacing burned-out light bulbs in the factory

c. Replacing an engine in a company car

Which one of the following statements is not true? a. The Inventory account is updated after every sale or purchase of merchandise under the perpetual inventory system. b. The Inventory account is updated only at the end of the accounting period under the periodic inventory system. c. The Cost of Goods Sold account is updated after each sale of merchandise under the periodic inventory system. d. The Purchases account is used only under the periodic inventory system.

c. The Cost of Goods Sold account is updated after each sale of merchandise under the periodic inventory system.

Which of the following statements is true? a. The audit committee provides contact between the board of directors and the key officers of the company. b. The audit committee has become less involved in the financial accounting system as a result of the Foreign Corrupt Practices Act c. The audit committee is a subset of individuals on the board of directors that acts as a direct contact between the stockholders and the independent accounting firm. d. The board of directors consists of the company's external auditors

c. The audit committee is a subset of individuals on the board of directors that acts as a direct contact between the stockholders and the independent accounting firm.

Which one of the following statements is true? a. When a company uses a subsidiary ledger, the balance in the control account, Accounts Receivable, shows only the amount the company expects to collect from the accounts receivable, net of any expected uncollectible accounts. b. An accounts receivable subsidiary ledger represents amounts due to vendors and suppliers. c. The balance in the control account, Accounts Receivable, should be equal to the sum of the balances in the subsidiary ledger for accounts receivable. d. A subsidiary ledger takes the place of the control account for some companies.

c. The balance in the control account, Accounts Receivable, should be equal to the sum of the balances in the subsidiary ledger for accounts receivable.

How are cash equivalents reported or disclosed in the financial statements? a. They appear only on the statement of cash flows b. They are included with short-term investments under current assets on the balance sheet. c. They are included with cash under current assets on the balance sheet. d. They are disclosed only in a footnote to the balance sheet.

c. They are included with cash under current assets on the balance sheet.

In order to determine inventory for its balance sheet, it is best for a company to count the inventory at the end of its accounting period for a. the periodic inventory system b. the perpetual inventory system c. both the periodic and perpetual inventory systems d. neither the periodic nor perpetual inventory systems

c. both the periodic and perpetual inventory systems

Arena, Inc. uses straight-line depreciation for its equipment. Arena purchased equipment for $300,000 and estimated its useful life at eight years. The bookkeeper failed to consider the residual value of $50,000. What is the impact on earnings per share and operating income of failing to consider the residual value? a. Earnings per share will be overstated and operating income will be understated. b. Earnings per share will be understated and operating income will be overstated. c. Both earnings per share and operating income will be overstated d. Both earnings per share and operating income will be understated.

d. Both earnings per share and operating income will be understated.

A debit memorandum appeared on Cinco Inc.'s May bank statement. How will Cinco treat this amount on its May bank reconciliation? a. Add it to the bank balance b. Add it the book balance c. Deduct it from the bank balance d. Deduct it from the book balance

d. Deduct it from the book balance

Which inventory costing method assigns the cost of the most recent items purchased to ending inventory? a. Specific identification b. Weighted average cost c. LIFO d. FIFO

d. FIFO

Which of the following statements is incorrect regarding the lower-of-cost-or-market rule? a. It is inconsistent because losses are recognized but not gains. b. It usually understates assets. c. It can increase future income if the expected reductions do not materialize. d. It incorporates both gains and losses in value that occur during the course of business

d. It incorporates both gains and losses in value that occur during the course of business

Which one of the following types of inventory accounts would be used by a retailer? a. Raw Materials Inventory b. Work-in-Process Inventory c. Finished Goods Inventory d. Merchandise Inventory

d. Merchandise Inventory

What is the distinguishing characteristic between accounts receivable and notes receivable? a. Accounts receivable are usually current assets, while notes receivable are usually long-term assets. b. Accounts receivable require payment of interest if not paid within the usual credit terms. c. Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable result from credit sale transactions for service companies. d. Notes receivable result from a written promise to pay within a specified amount of time.

d. Notes receivable result from a written promise to pay within a specified amount of time.

Which of the following sets of factors is needed to calculate depreciation on plant and equipment? a. The asset's acquisition cost, replacement cost, and its estimated residual value b. The estimated residual value of the asset, its replacement cost, and its market value c. The asset's replacement cost, its estimated life, and its estimated residual value d. The estimated life of the asset, its acquisition cost, and its estimated residual value

d. The estimated life of the asset, its acquisition cost, and its estimated residual value

Blanket Airlines acquires a new aircraft. It has an estimated life of 15 years and should be used for 15,000 hours of flight. What is the most appropriate method of depreciation to properly match revenues and expenses? a. Double-declining-balance b. Revenue expenditure method c. Straight-line d. Units-of-production

d. Units-of-production

Oakland Corp. purchased land and a building for a combined cost of $500,000. Oakland must a. record the $500,000 acquisition cost in an account called Land and Buildings. b. depreciate the $500,000 acquisition cost, less any residual value, over the expected useful life of the building. c. record all of the cost in the Land account because part of the purchase involved land d. allocate the $500,000 acquisition cost to separate Land and Buildings accounts based on their respective fair market values.

d. allocate the $500,000 acquisition cost to separate Land and Buildings accounts based on their respective fair market values.

Effective cash management and control includes all of the following except a. the use of a petty cash fund b. bank reconciliations. c. short-term investments of excess cash. d. purchase of stocks and bonds

d. purchase of stocks and bonds

Net realizable value is a. acquisition cost plus costs to complete and sell. b. selling price c. selling price plus costs to complete and sell. d. selling price less costs to complete, sell, and transport

d. selling price less costs to complete, sell, and transport

The following information is available for October for Barton Company.Beginning inventory $350,000Net purchases 1,050,000Net sales 2,100,000Percentage markup on cost 66.67%A fire destroyed Barton's October 31 inventory, leaving undamaged inventory with a cost of $21,000. Using the gross profit method, the estimated ending inventory destroyed by fire is a. $119,000. b. $539,000. c. $560,000. d. $700,000.

a. $119,000.

Which of the following assets is considered the most liquid? a. Cash b. Accounts receivable c. Merchandise inventory d. Prepaid expenses

a. Cash

The data presented below are for Falconi, Inc. for 2017. Credit sales during the year $2,100,000 Accounts receivable—December 31, 2017 395,000 Allowance for doubtful accounts—December 31, 2017 20,000 Bad debts expense for the year 17,000 What amount will Falconi show on its year-end balance sheet for the net realizable value of its accounts receivable? a. $378,000 b. $375,000 c. $358,000 d. $ 20,000

b. $375,000

A building with an appraisal value of $250,000 is made available at an offer price of $180,000. The purchaser acquires the property for $35,000 in cash, a 90-day note payable for $65,000, and a mortgage amounting to $63,000. The cost basis recorded in the buyer's accounting records to recognize this purchase is a. $250,000 b. $180,000. c. $163,000. d. $100,000.

c. $163,000.

On August 31, a hurricane destroyed a retail location of Vinny's Clothier including the entire inventory on hand at the location. The inventory on hand as of June 30 totaled $1,920,000. Since June 30 until the time of the hurricane, the company made purchases of $510,000 and had sales of $1,500,000. Assuming the rate of gross profit to selling price is 40%, what is the approximate value of the inventory that was destroyed? a. $1,920,000. b. $1,089,000. c. $1,230,000. d. $1,530,000

d. $1,530,000

Using the following information, what is the amount of cost of goods sold? Purchases $32,000 Merchandise Inventory, September 1 5,700 Merchandise Inventory, September 30 6,370 Purchase returns and allowances 1,200 Purchase discounts 960 Transportation-in 1,040 Sales 63,000 a. $26,900 b. $20,530 c. $28,130 d. $30,210

d. $30,210

Which of the following is not a requirement of the Sarbanes-Oxley Act? a. A company's annual report must include an internal control report. b. External auditors can no longer provide human resource services. c. External auditors can no longer provide brokerage services. d. An internal control system that guarantees financial accuracy must be established

d. An internal control system that guarantees financial accuracy must be established

Which of the following is not a requirement of the Sarbanes-Oxley Act? a. A company's annual report must include an internal control report. b. External auditors can no longer provide human resource services. c. External auditors can no longer provide brokerage services. d. An internal control system that guarantees financial accuracy must be established.

d. An internal control system that guarantees financial accuracy must be established.