Accounting Exam 2

Which term indicates the merchandise is free of transportation charges to the buyer?

FOB destination

What does FOB stand for?

Free on board

Magenta Inc. buys merchandise worth $1,000 from Zeus Inc. on account, terms FOB (free on board) shipping point and pays the freight cost of $100. Based on this scenario, which of the following is the effect on the liquidity and profitability of Magenta Inc.?

His liquidity as well as profitability remains unchanged

Turquoise Inc. expects that customers of 20Y6 sakes will be issued refunds or allowances of $8,000 in 20Y7. To make an adjustment for the expected refunds and allowances, Turquoise inc. will:

Increase the customer refunds payable account by $8,000 and decrease the sales account by $8,000

What are the effects of a debit memorandum?

Inventory(asset) and accounts payable(liability) decrease, no effect on liquidity or profitability

Which of the following is true of the accrual basis of accounting/

It is designed to avoid misleading information from arising from the timing of cash receipts and payments.

The accrual basis of accounting is essential to assess and interpret the financial condition and performance of a company b/c:

It is generally a better predictor of the profitability of a company than is the cash basis of accounting

Which of the following best describes the accrual basis of accounting?

It records revenue as it is earned and matches expenses against the revenue they generate

Which of the following equations shows the relationship btw. markup percent and gross profit percent?

MP= Gross Profit Percent x (selling price/cost)

Which of the following is the equation for calculating markup percent?

MP= Gross Profit/Cost of goods sold

Which of the following expenses is always listed last?

Misc. expense

Maroon Inc. made sales of $100,000 during 20Y7. The cost of goods sold was $75,000. The company calculated its gross profit ratio, but later its inventory records indicated an inventory shrinkage of $1,500. Identify the effect of inventory shrinkage on the gross profit percent.

There is a 1.5% decrease in the gross profit percent

On Dec. 1, Atlas Inc. paid a premium of $3.,600 for a two-yr. general business insurance policy that covers risks from fire and theft. Which of the following is the effect of this transaction on Atlas financial statements?

There is a change in the mix of assets in the balance sheet.

Aries Inc. buys merchandise from Andy Co. on account, $1,900, terms free on board (FOB) shipping point and pays the freight cost of $50. Identify the transaction's effect on the working capital of Aries Inc.

There is no effect on the working capital of Aries Inc.

operating income formula

excess of gross profit/total operating expenses

Quick assets:

exclude inventories and include accounts receivables

T/F: A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the cash discount:

false

T/F: The revenue cycle of a business is the process it takes for the business to spend cash to generate revenue, earn revenue, and to receive cash from customers

false

T/F: inventory shrinkage will increase inventory

false

Which of the following is reported on the income statement of a service business but not on that of a retail business?

fees earned

Forward Corp. purchased Planet Inc. for $12,000. The normal market value of the assets of Planet Inc was $10,500. This difference of $1,500(12,000-10,500) is recorded on Foreword Corp.'s balance sheet as:

goodwill

examples of intangiblel assets are:

goodwill, copyrights, and patents

The difference btw. sales and cost of goods sold for a merchandising business is

gross profit

Multiple-step income statements show:

gross profit, cost of merchandise sold, income from operations and net income

What does a classified balance sheet do?

groups together accounts of similar nature and reports them under a few major classifications

Under which of the following situations does a business earn a profit but incur a net loss?

if the sum of its operating income and other revenue is less than its other expenses

in what order are current assets listed on a classified balance sheet?

in order of liquidity

The inventories of a retail business:

include merchandise

what are the effects of the purchase of merchandise on account for the buyer

inventory and accounts payable increase, no effect on liquidity or profitability

For retailers, the physical inventory on hand at the end of an accounting period is usually less than the balance of the inventory account. This difference is referred to as _____.

inventory shrinkage

The gross profit of a retail business is determined as:

sales minus cost of goods sold

gross profit formula

sales- cost of merchandise sold

The seller issues a credit memo for $700 for damaged merchandise to the buyer, and the merchandise was not returned by the buyer. Which of the following is the effect on the financial statements of the selling company?

The accounts receivable account decreases by $700, and the customer refunds payable account decreases by $700.

Amber Inc. purchased merchandise on account from a supplier for $25,000, with credit terms of 2/10, n/30. If Amber Inc. pays the invoice within the discount period, the amount of the discount for early payment is _____

$500

Although quick ratios vary by industry, a quick ratio of at least _____ is normal.

1.0

If Daisy Inc.'s gross profit percent is 10%, selling price of its product is $500, and the cost of the product is $350, then Daisy's markup percent is

14.3%

Atom & Co.'s total sales during the year is $750,000, and its operating income for the year is $100,000. If its operating expenses for the year are $50,000, what is its markup percent for the year?

25.0%

Which of the following is the correct statement regarding a multiple-step income statement:

The multiple step reports gross profit operating income, as well as net income

Which of the following is true of quick ratio of a company?

The quick ratio is a better metric than quick assets for comparing among companies

Synergy Inc. purchased supplies for $240 on account. How does this transaction affect the financial statements?

The statement of cash flows and the income statement are unaffected

Elite Inc. purchased 6,500 of office equipment. It paid $1,250 cash as a down payment with the remaining $5,250 due in 5 monthly installments of 1, 050 (5250/50) beginning Jan. 1st 20y6. Which of the following is the effect of this transaction on the financial statement?

There are no entries in the income statement

Which of the following is an example of a long-term liability?

A note payable due in 3 yrs.

Endive & Co., a service company, earned fees of $360,000 in the year 20Y6. It incurred operating expenses of $250,000. Calculate the operating income of Endive for the year 20Y6.

$110,000

Leto Inc. purchased merchandise on account from Metis Inc. for $25,000, credit terms being 2/10, n/30. If Leto pays the invoice within the discount period, what amount will Metis receive as payment?

$24,500

What is a debit memorandum?

A form used by a buyer to inform the seller of the amount the buyer proposes to decrease the account payable due the seller.

Calculate the quick ratio using the following information: cash= 50,000 Accounts receivable = 130,000 Inventories= 210,000 Prepaid assets = 15,000 Current Liabilities =200,000

Accounts receivable + cash = $200,000

What is estimated returns inventory?

An asset representing inventory expected to be returned in the future, which is estimated at the end of the period as part of the adjusting process

What is an invoice?

An invoice is the seller's request for payment from the buyer. It is also called a bill.

What are the effects of paying the invoice (when merchandise is purchased on account) on the accounts and financial statements of the seller

Cash and accounts payable decrease, no effect on liquidity and profitability

On October 1, Collins Company sold merchandise of 8,000 on account to James Company. The terms are FOB destination; 2/10, n/30. The cost of the merchandise sold was $5,200. Which of the following is true of this transaction:

Collins company will reduce merchandise inventory by $5,200

On July 1, Tango Co. sold merchandise on account to Salsa Co. for $12,000. Which of the following is the adjustment in the books of Tango Co. and Salsa Co.?

In the books of Tango Co. there is an increase of $12,000 in the accounts receivable account, and in the books of Salsa Co. there is an increase of $12,000 in the accounts payable account

When using the integrated financial statement framework for recording transactions, the balances of the ____________ columns carry forward from period to period.

Income statement

Which of the following statements is true about other revenue?

Other revenue is revenue from sources apart from the primary operating activity of a business

The following data relates to Dory Inc. for the yr. ending Dec. 31, 20Y6. Sales= 5,000,000 Cost of goods sold= 3,700,000 Selling expenses= 100,000 Administrative expenses 150,000 Dory's operating income is?

Sales-cost of goods sold and expenses= 1,050,000

Which of the following is true of the adjustment process?

The accounting records are normally updated just prior to preparing the financial statements

T/F: On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues:

True

T/F: The markup percent is calculated as gross profit divided by cost of goods sold

True

Which of the following increases as a result of inventory shrinkage?

cost of goods sold

When a seller decreases a customer's account receivable balance to account for a refund to the customer, the seller send the customer a ____________________ indicating the seller's intent to decrease the account receivable balance

credit memo

what is true of cash basis accounting

a company records only transactions involving increases or decreasse of cash

working capital formula

current assets - current liabilities

inventory shrinkage=

account balance of inventory- physical merchandise inventory on hand

The updating of the accounting records prior to preparing financial statements as required by accrual accounting is called the:

adjustment process

On Nov. 1, Atlas Inc. paid a premium of $3,600 for a 3 yr. general business insurance policy that covers risks from fire and theft. What amount of insurance will expire each month?

amount/ #of months (3600/36)= $100

The balance of the estimated returns inventory account is reported on a company's balance sheet _____.

as a current asset

How are processing fees charged to the retailer for use of credit cards recorded?

as an expenses

__________________________ are subtracted from the operating income to arrive at the net income

both "tax expenses" and "interest expenses"

what are purchase discounts?

discount offered by seller to buyer for quick payment

effects of paying a refund on the accounts and financial statements are:

cash and customer refunds payable decreases, no effect on liquidity or profitability

Which of the following is an example of a cash flow from an investing activity for an insurance company?

cash paid for the purchase of office equipment

examples of quick assets are:

cash, marketable securities, and accounts receivable

Using perpetual inventory system, the return of merchandise purchased on account includes a(n):

decrease in merchandise inventory

Which of the following is the correct way to account for inventory shrinkage?

it is included in the cost of goods sold

which metric is working capital recorded under

liguidity

Which of the following is an example of other expense?

loss from disposing of fixed assets

under the cash basis, the __________ is not used

matching concept

Which of the following accounts is reported on the balance sheet of a retail business but not on the balance sheet of a service business?

merchandise inventory

Th ability of a company to pay debts as they become due is best analyzed using:

net cash flows from operating activities

the indirect method of preparation of cash flow statement records net income w/ net cash flows from_________________________

operating activities

The ___________________ of a business is the process it takes for the business to spend cash to generate revenue, earn revenues, and receive cash from customers

operating cycle

In the ______________________, inventory records consist of the inventory account, called the controlling account, and a subsidiary record of each item of inventory, called a subsidiary or ledger

perpetual inventory system

which statement is gross profit percent recorded on

profitability

formula for quick ratio

quick assets/current liabilities

Which of the following is true of net cash flows from operating activities?

the ability of a company to pay debts as they become due is best analyzed using net cash flows from operating activities

What is a controlling account (perpetual inventory system)?

the account in the general ledger that summarizes the balances of the accounts in the subsidiary ledger

what is a credit period

the amount of time allowed before full payment is due

what is the operating cycle

the business process of spending cash to acquire assets used to generate revenue, earning revenues, and receiving cash from customers

If the terms of invoice are FOB shipping point, it means that

the buyer pays the freight charges from the shipping point to the final destination

When a customer returns merchandise for a cash refund or allowance, which of the following is the correct to record receipt of the returned inventory:

the inventory account is increased by the cost of the goods returned, and the estimated returns inventory account is decreased by the same amount

under perpetual inventory system, the cost of merchandise sold is recorded when sales are made:

true

Which of the following statements is true of sales tax, if a sale is made on account?

the seller charges the buyer for sales tax by increasing the accounts receivable account

Inventory shortage is recorded when:

there is a difference btw. a physical count of inventory and inventory records

In case of FOB shipping point, freight costs incurred by the buyer are added to the cost of the inventory by increasing inventory.

true

T/F: A multistep income statement calculates income by grouping certain revenues and expenses together and then calculating several subtotals of income

true

T/F: Cost of merchandise sold is used in accounting for transactions by sellers of merchandise

true

T/F: cost of sales is the cost of inventory that was sold during an accounting period

true

T/F: merchandise returns effects profitability?

true

T/F: the credit period begins when the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller

true

The accounting cycle is the process that begins with analyzing transactions and ends:

with preparing financial statements

effects of a cash sale on the liquidity and profitability metrics

working capital increase, gross profit percent increases