ACCOUNTING EXAM 2 QUESTIONS

Inventory turnover is computed by dividing cost of goods sold by ____:

(beginning inventory + ending inventory) / 2

aging of receivables method

- Classify each receivable by how long it is past due. - Each age group is multiplied by its estimated bad debts percentage. - Estimated bad debts for each group are totaled.

Disposal of Receivables

- convert to cash before receivables are due - selling / factoring receivables - pledging receivables

acid test ratio should have a value of at least

1

Review the statements below and choose the one that correctly describes a control account.

A control account appears in the general ledger and is supported by a subsidiary ledger.

A company has $150,000 of credit sales during the year and estimates that $1,000 of its accounts receivable will be uncollectible. The adjusting entry will include a credit to:

Allowance for Doubtful Accounts

Notes Receivable

An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates

Specific Identification

Assumes costs flow can be specifically matched with the physical flow of items

On August 1, Hanes Co. determines that it cannot collect $150 from a customer. Hanes uses the direct write-off method. Hanes will record the write-off of this account by debiting:

Bad Debts Expense for $150

quick assets

Cash & cash equivalents + short-term investments + current receivables

Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods.

Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal. Companies using FIFO will report the smallest cost of goods sold. Companies using FIFO will report the highest gross profit and net income. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.

Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.)

Companies using LIFO will report the smallest cost of goods sold. Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average. Companies using LIFO will pay higher taxes than companies using FIFO, assuming all else being equal. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.

Which of the statements below are correct regarding cost of goods sold?

Cost of goods sold is the expense of buying and preparing merchandise.

Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory?

Cost of goods sold plus ending inventory will equal the total goods available for sale. Cost of goods available for sale must be allocated between cost of goods sold and ending inventory.

maturity date of a note

Date when a note's principal and interest are due.

Why would the physical count of inventory be different than what is shown in perpetual inventory records? (Check all that apply.)

Events such as loss, damage, theft, or error

Which of the following lists the four methods used to assign costs to inventory and to cost of goods sold?

FIFO, LIFO, weighted average, specific identification

If the seller is responsible for the shipping costs of merchandise sold, the shipping terms will be specified as:

FOB destination

The allowance method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts.

False

The direct write-off method of accounting for bad debts matches the estimated loss from uncollectible accounts receivable against the sales they helped produce.

False

Which of the following statements is correct regarding goods in transit?

Goods shipped FOB shipping point will be included in the buyer's inventory.

Merchandise inventory includes all of the following except:

Goods sold

Gross Margin Ratio

Gross Margin / Net Sales

LIFO conformity rule

IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting

Recall the formula for computing a company's inventory turnover ratio.

Inventory turnover = Cost of goods sold/Average inventory

An advantage of the _____ costing method is that the cost of goods sold approximates its current cost.

LIFO

Under the conformity rule, companies who use the _____ method for tax reporting, are required by the IRS to also use it in their financial statements.

LIFO

Which statement below correctly describes merchandise inventory?

Merchandise inventory is an asset reported on the balance sheet and contains the cost of products purchased for sale.

Gross Margin

Net Sales - COGS

Accounts Receivable Turnover

Net Sales / Average Accounts Receivable

Which of the following accounts would not be used to compute the acid-test ratio?

Plant Assets

When a classified balance sheet is prepared, merchandise inventory is:

Reported as a current asset.

The advantages of using the allowance method to account for bad debts include which of the following?

Reports accounts receivable balance at the estimated amount to be collected Matches expenses in the same period with the related sales

A single-step income statement:

Reports the same amount of net income as that reported on a multiple-step income statement.

Net sales =

Sales - Sales Discounts - Sales Returns and Allowances

Which of the following statements correctly explains what the inventory turnover ratio assesses.

The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.

Which statements below are correct regarding the purpose of taking a physical inventory count? (Check all that apply.)

The physical count is used to determine if there has been any theft, loss, damage or errors in inventory. The physical count is used to adjust the Inventory account balance to the actual inventory available.

Sometimes companies must estimate ending inventory. Review the reasons given below for estimating inventory and choose all of the correctresponses. (Check all that apply.)

The store was flooded. Fire destroyed the inventory warehouse. Interim financial statements need to be prepared.

Which of the following totals and subtotals are not found on a multiple-step income statement?

Total current assets

There are advantages to using each of the four inventory costing methods. Identify the statements below that are correct regarding these advantages.

Weighted average tends to smooth out erratic changes in costs. FIFO assigns an amount to inventory on the balance sheet that approximates its current cost.

The kind of business that would use the specific identification method of inventory costing includes:

a car dealership

If a perpetual inventory system is in use _____.

a physical inventory count should be taken at least annually.

A(n)______ is a supplementary record created to maintain a separate account for each customer.

accounts receivable ledger

The supplementary record providing information on each customer is called the _____.

accounts receivable ledger

The two most common receivables are ____ receivables and ____ receivables.

accounts, notes

Bad debts are: (Check all that apply.)

an expense of selling on credit. also called uncollectible accounts. accounts of customers who do not pay.

bad debts

are accounts of customers who do not pay what they have promised to pay. It's considered an expense of selling on credit.

Damaged or obsolete goods which can be sold

are included in inventory at net realizable value

Merchandise inventory that is still available for sale is considered a(n) (asset/expense/revenue) and is reported on the (balance sheet/income statement) and merchandise that is sold during the period is considered a(n) (asset/expense/liability) and reported on the (balance sheet/income statement).

asset, balance sheet expense, income statement

weighted average

assumes costs flow at an average of the costs available

FIFO

assumes costs flow in the order incurred

LIFO

assumes costs flow in the reverse order incurred

A periodic inventory system updates the accounting record ___

at the end of the period

If an account receivable balance previously written off using the direct write-off method is later collected in full, the entry to record the payment must include a credit to:

bad debts expense

If all units are purchased at the same unit cost, cost of goods sold will ____?

be the same for all four methods.

COGS equation

beginning inventory + purchases - ending inventory

If goods are shipped FOB shipping point, then the (buyer/seller) is responsible for paying freight charges and the (purchaser/seller) will not include the merchandise in their inventory.

buyer, seller

To record a customer's check in full payment for a sale that was made the prior month, the company should debit the ____ account.

cash

Merchandise inventory includes:

costs to purchase shipping costs, costs to prepare for sale

A company sells merchandise to a customer on credit. The journal entry that the company makes to record this sale would include a (debit/credit) _____ to the sales account

credit

current ratio

current assets / current liabilities

An advantage of the LIFO method is that it best matches

current costs with revenues

percent of sales method

current period sales x bad debt % = estimated bad debts expense

Loss is recorded when

damage or obsolescence occurs

When purchase costs are (rising/declining), LIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

declining

The _____ method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts expense.

direct write-off

The ______ method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts expense.

direct write-off

Days' sales in inventory is computed as

ending inventory divided by cost of goods sold x 365

Gross profit is:

equal to net sales less cost of goods sold.

The _____ principle states that inventory costs are expensed as cost of goods sold when inventory is sold.

expense recognition

A perpetual inventory system updates the accounting records ___

for each purchase and each sale

Merchandise consists of ____ that a company acquires to resell to ____

goods, buyers

The direct write-off methods permitted

if results approximate the allowance method

Goods on consignment are

included in the consignor's inventory.

Inventory cost =

invoice cost - discounts + other costs (other costs include shipping, storage, insurance, import duties)

An accounts receivable ledger: (Check all that apply.)

is a supplementary record to maintain an account for each customer. records journal entries that affect accounts receivable.

shrinkage

losses experienced by retailers due to shoplifting, employee theft, and damage to merchandise

Estimates of inventory are not usually required when a company uses a (FIFO/LIFO/periodic/perpetual) inventory system because they would presumably have updated inventory data.

perpetual

acid test ratio

quick assets/current liabilities

The allowance method of accounting for bad debts has the following advantages over the direct write-off method including:

records estimated bad debts expense in the period when the related sales are recorded reports accounts receivable on the balance sheet at the estimated amount of cash to be collected

Classified Balance Sheet

reports merchandise inventory as a current asset, usually after accounts receivable according to an asset's nearness to liquidity

When purchase costs are (rising/declining) , FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

rising

Net realizable value

sales price minus selling costs

Sellers allow customers to use credit cards for all of the following reasons:

seller does not have to decide who gets credit seller receives cash sooner than if credit is granted directly to the customers may allow seller to increase sales volume

Which of the costs below would be included in the recorded cost of merchandise inventory? (Check all that apply.)

storage costs, insurance costs, invoice costs

A control account appears in the general ledger and is supported by information in a separate (general/subsidiary) ledger

subsidiary

Bad Debt Expense

total estimated bad debt - previous balance in allowance account

The allowance for doubtful accounts is a contra asset account that equals:

total uncollectible accounts

percent of receivables method

year end accounts receivable x bad debt %