Accounting 225 Exam 2

The number of days' sales uncollected: A. Is used to evaluate the liquidity of receivables. B. Is calculated by dividing accounts receivable by sales. C. Measures a company's ability to pay its bills on time. D. Measures a company's debt to income. E. Is calculated by dividing sales by accounts receivable.

ANSWER : A Is used to evaluate the liquidity of receivables

Spencer Co. decides to establish a petty cash fund with a beginning balance of $200. The company decides that any purchase under $25 can be processed through petty cash instead of the voucher system. The journal entry to record establishing the account is: A. Debit Cash $200 and credit Petty Cash $200. B. Debit Cash $200 and credit Cash Over and Short $200. C. Debit Petty Cash $200 and credit Cash $200. D. Debit Petty Cash $200; credit Cash $175; and credit Cash Over and Short $25. E. Debit Cash $200 and credit Petty Cash Over and Short $200.

ANSWER : C Debit Petty Cash $200 and credit cash $200

If a check correctly written and paid by the bank for $749 is incorrectly recorded in the company's books for $794, how should this error be treated on the bank reconciliation? A. Subtract $45 from the bank's balance. B. Add $45 to the bank's balance. C. Subtract $45 from the book balance. D. Add $45 to the book balance. E. Subtract $45 from the bank's balance and add $45 to the book's balance.

ANSWER : D Add $45 to the book balance $749 - $794 = $45 too much deducted from the company's cash account balance that must be added back to cash.

A set of procedures and approvals for verifying, approving and recording obligations for eventual cash disbursement, and for issuing checks for payment only of verified, approved, and recorded obligations is referred to as a(n): A. Internal cash system. B. Petty cash system. C. Cash disbursement system. D. Voucher system. E. Cash control system.

ANSWER : D Voucher System

Managers place a high priority on internal control systems because the systems assist managers in all of the following except: A. Promoting efficient operations. B. Protecting assets. C. Upholding company policies. D. Ensuring reliable accounting. E. Assuring that no loss will occur.

ANSWER : E Assuring that no loss will occur

Clayborn Company deposits all cash receipts on the day they are received and makes all cash payments by check. At the close of business on May 31, its Cash account shows a debit balance of $17,025. Clayborn's May bank statement shows $15,800 on deposit in the bank. Determine the adjusted cash balance using the following information: Deposit in transit $5,200 Outstanding checks $4,600 Bank service fees, not yet recorded by company $25 A NSF check from a customer, not yet recorded by the company $600 The adjusted cash balance should be: A. $16,400 B. $11,200 C. $21,000 D. $16,425 E. $17,000

ANSWER: A $16,400

The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is: A. FIFO. B. Weighted average. C. LIFO. D. Specific identification. E. Lower of cost or market.

ANSWER: A FIFO

McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the FIFO perpetual inventory method, what is the value of inventory after the October 4 sale? A. $3,485. B. $3,445. C. $3,500. D. $3,472. E. $3,461.

ANSWER: A: $3,485 Units in inventory = 8 + 20 - 11 = 17 17 units * $205 = $3,485

Great Falls Co.'s bank reconciliation as of February 28 is shown below. Bank balance $37,643 Book balance $38,153 + Deposit in transit 2,950 Note collection +745 - Outstanding checks -1,730 Check printing -35 Adjusted bank balance $38,863 Adjusted book balance $38,863 One of the adjusting journal entries that Great Falls must record as a result of the bank reconciliation includes: A. Debit Note Payable $745; credit Cash $745. B. Debit Cash $745; credit Note Receivable $745. C. Debit Cash $2,950; credit Sales $2,950. D. Debit Cash $2,950; credit Accounts Receivable $2,950. E. Debit Miscellaneous Expense $35; credit Accounts Payable $35.

ANSWER: B Debit Cash $745; credit Note Receivable $745

Marquis Company uses a weighted-average perpetual inventory system and has the following purchases and sales: August 2 10 units were purchased at $12 per unit. August 18 15 units were purchased at $14 per unit. August 29 12 units were sold. What is the amount of the cost of goods sold for this sale? (Round average cost per unit to 2 decimal places.) A. $148.00 B. $150.50 C. $158.40 D. $210.00 E. $330.00

ANSWER: C : $158.40 Average cost = [(10 * $12) + (15 * $14)]/25 units = $13.20/unit Cost of sale = 12 units * $13.20/unit = $158.40

A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per unit. This company's current inventory consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per unit. What is the amount of the lower cost of market adjustment the company must make as a result of this decline in value? A. $1,000. B. $1,400. C. $400. D. $600. E. $800.

ANSWER: D: $600 200 units * ($16 - $13) = $600

A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each. On November 8, 8 units were sold for $55 each. Using the LIFO perpetual inventory method, what was the value of the inventory on November 8 after the sale? A. $304 B. $296 C. $288 D. $280 E. $276

ANSWER: E : $276 Units available = 5 + 10 + 6 = 21 units Units in inventory = 21 - 8 units = 13 units Cost of inventory = (5 * $20) + (8 * $22) = $276

Cash equivalents meet all of the following criteria except: A. Are readily convertible to a known cash amount. B. Include short-term investments purchased within 3 months of their maturity dates. C. Have a market value that is not sensitive to interest rate changes. D. Include short-term U.S. treasury bills. E. Are more liquid than cash.

ANSWER: E : Are more liquid than cash

Bedrock Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available: ▪ The ending inventory balance of $412,000 included $72,000 of consigned inventory for which Bedrock was the consignor. ▪ The ending inventory balance of $412,000 included $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year. Based on this information, the correct balance for ending inventory on December 31 is: A. $412,000 B. $340,000 C. $318,000 D. $362,000 E. $390,000

Answer E $390,000 - Start with beginning inventory of $412,000. The information in the first bullet point was handled correctly since inventory should include consigned goods for which the subject company is the consignor. No adjustment. With respect to the second bullet point, inventory should not include office supplies held for use. Subtract $22,000. Ending inventory should be $412,000 - $22,000 = $390,000.

A company's net sales are $775,420, its costs of goods sold are $413,890, and its net income is $117,220. Its gross margin ratio equals: A. 46.6%. B. 53.4%. C. 28.3%. D. 31.5%. E. 40.5%.

Answer: A : Gross Margin Ratio = (Net Sales - Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($775,420 -$413,890)/$775,420 = 46.6%

Prentice Company had cash sales of $94,275, credit sales of $83,450, sales returns and allowances of $1,700, and sales discounts of $3,475. Prentice's net sales for this period equal: A. $94,275. B. $172,550. C. $174,250. D. $176,025. E. $177,725.

Answer: B : Net Sales = $94,275 + $83,450 - $1,700 - $3,475 = $172,550

Goods in transit are included in a purchaser's inventory: A. At any time during transit. B. When the purchaser is responsible for paying freight charges. C. When the supplier is responsible for freight charges. D. If the goods are shipped FOB destination. E. After the half-way point between the buyer and seller.

Answer: B When purchaser is responsible for paying freight charges

Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Gross profit equals: A. $770,000. B. $115,000. C. $390,000. D. $402,000. E. $408,000.

Answer: C Gross Profit (Margin) = $800,000 - $12,000 - $18,000 - $380,000 = $390,000

On March 12, Fret Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Fret uses the perpetual inventory system and the gross method of accounting for sales. The journal entry or entries that Fret will make on March 12 is (are):

Answer: D Accounts Receivable 7,800 Sales 7,800 Cost of Goods Sold 4,500 Merchandise Inventory 4,500

Which of the following accounts is used in the periodic inventory system but not used in the perpetual inventory system? A. Merchandise Inventory B. Sales C. Sales Returns and Allowances D. Accounts Payable E. Purchases

Answer: E : Purchases

If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point. True or False?

Answer: FALSE

If obsolete or damaged goods can be sold, they will be included in inventory at their original cost. True or False?

Answer: FALSE

Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 26, it paid the full amount due. The amount of the cash paid on August 26 equals: A. $8,167.50 B. $9,652.50. C. $9,750.00. D. $8,250.00. E. $8,152.50.

Cash Paid = ($9,750 - $1,500) = $8,250 No discount may be taken because the payment was not within 10 days of the purchase.

Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are debited to close the accounts during the closing process. True or False?

False