Accounting exam 2 review

A company has net sales of $655,600 and cost of goods sold of $445,808. The company's gross profit percentage is:

32%. Gross Profit Percentage = [(Net Sales − Cost of Goods Sold) ÷ Net Sales] × 100 = [($655,600 − $445,808) ÷ $655,600] × 100 = 32%

Marilyn Corporation uses the allowance method. Marilyn writes off a $560 customer account balance when it becomes clear that the customer will never pay. Marilyn should debit:

Allowance for Doubtful Accounts and credit Accounts Receivable for $560. (Using the allowance method, the entry to record a write-off includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.)

Accounts Receivable, Net (or Net Accounts Receivable) equals Accounts Receivable (gross) minus:

Allowance for Doubtful Accounts.

The adjusting entry to record the estimated bad debts in the period credit sales occur would normally include a debit to:

Bad Debt Expense and a credit to Allowance for Doubtful Accounts

Which of the following statements about extending credit is not correct?

Bad debts arise from credit sales to individual consumers, but not from credit sales to other companies.

Which of the following statements about an auto manufacturer's inventory is not correct? -Tires, batteries, glass, paint, headlamp bulbs, and electric wiring would be included in raw materials inventory. -Incomplete cars that are still being processed would be included in work in process inventory. -Finished cars ready to be shipped to dealers would be included in finished goods inventory. -Cars that have been sold to dealers would be included in finished goods inventory.

Cars that have been sold to dealers would be included in finished goods inventory. (The generic term inventory means goods that are held for sale in the normal course of business or are used to produce other goods for sale. The finished goods inventory, which is ready for sale, would not include cars that have been sold.)

. If inventory is updated perpetually, which of the equations is correct?

Ending inventory = Beginning inventory + Purchases + Cost of goods sold

Inventory shrinkage is the difference between inventory in the warehouse and inventory counted.

False (Any discrepancy that exists between inventory recorded in the accounting records and inventory counted is known as shrinkage.)

Which of the following would be considered inventory?

Goods held for sale in the normal course of business. (Inventory consists of goods acquired for resale to customers)

Removing an uncollectible account and its corresponding allowance from the accounting records is called:

a write-off

The term "receivables" refers to

amounts due from individuals or companies

The challenge businesses face when estimating the allowance for previously recorded sales is that:

at the time of the sale, it is not known which customer(s) will not make their payment.

In a retail business that uses a perpetual inventory system, scanning a bar code does not:

calculate the gross profit. (Scanning identifies the item sold so the inventory account is adjusted and the amount charged to the customer is recorded. The gross profit is not calculated by scanning the bar code)

Multistep income statements:

contain more detail than just listing revenues and expenses

The potential disadvantages of extending credit include all the following except:

customers buying too much

The days-to-collect measures the

number of days it takes to collect accounts receivable.

Juan sells $75,000 of TVs to a customer. The credit terms state a 2% discount if paid in 7 days and a 1% discount if paid in 8 to14 days. The customer pays in 12 days. How much cash does Juan receive?

$74,250 The customer paid in the 8 to 14 days discount period and, as such, is entitled to a 1% discount in the amount of $750 (or $75,000 × 0.01). The debit to Cash equals $74,250 (or $75,000 − $750).

Which method for estimating bad debts is generally considered to be the most accurate?

Aging of accounts receivable method

Missouri Company uses a perpetual inventory system. On October 1, Missouri Company sold inventory on account in the amount of $6,500 to Montebello Company, terms 1/10, n/30. The items cost Missouri $4,200. On October 4, Montebello returns some of the inventory. This inventory had a selling price of $500 and a cost of $200. On October 8, Montebello Company paid Missouri Company the amount due on that date. What journal entry (entries) will Missouri prepare on October 1 to record this sale?

Debit Accounts Receivable and credit Sales Revenue for $6,500; debit Cost of Goods Sold and credit Inventory for $4,200.

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

Periodic

Under the allowance method, writing off an uncollectible account

affects only balance sheet accounts.

Cost of goods sold = Beginning inventory + Purchases − Ending inventory

true

Grandview, Incorporated uses the allowance method. At December 31, 2021, the company's balance sheet reports Accounts Receivable, Net in the amount of $19,000. On January 2, 2022, Grandview writes off a $1,900 customer account balance when it becomes clear that the customer will never pay. What is the amount of Accounts Receivable, Net after the write-off?

$19,000 (When the allowance method is used and a customer account is written off, a decrease is recorded in Accounts Receivable, which is offset by a decrease in the contra-account, Allowance for Doubtful Accounts. The decrease in Accounts Receivable decreases total assets, while the decrease in the Allowance for Doubtful Accounts increases total assets. As a result, the amount reported as Accounts Receivable, Net does not change.)

The amount of uncollectible accounts at the end of the year is estimated to be $25,500, using the aging of accounts receivable method. The balance in the Allowance of Doubtful Accounts account is an $8,200 credit before adjustment. What is the adjusted balance of the Allowance for Doubtful Accounts at the end of the year?

$25,500 The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense

Kelton Incorporated reported net credit sales of $534,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $890. The company has experienced bad debt losses of 1% of credit sales in prior periods. Using the percentage of credit sales method, what amount should the company record as the estimated Bad Debt Expense?

$5,340 The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate= $534,000 × 0.01 = $5,340

Using the aging method of accounts receivable method, $6,700 of the company's Accounts Receivable are estimated to be uncollectible. At the end of the year, the balance of Accounts Receivable is $117,000 and the unadjusted credit balance of the Allowance for Doubtful Accounts is $840. Credit sales during the year totaled $184,000. What is the current year's Bad Debt Expense?

$5,860 The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $6,700 − $840 = $5,860

Yucca Company updates its inventory periodically. The company's beginning inventory was $4,860 and purchases were $10,080 during the year. The company's ending inventory count was $9,000. What was the amount of its cost of goods sold?

$5,940 Cost of goods sold = Beginning inventory + Purchases − Ending inventory= $4,860 + $10,080 − $9,000 = $5,940

There are advantages and disadvantages to extending credit to customers. Which of the following statements below expresses the general reason for extending credit?

Gross profits exceed bad debt costs. (Generally, managers find that the incremental gross profit obtained by increasing sales on account is greater than the additional costs of extending credit (increased wage costs, bad debt costs, and delayed receipt of cash).)

Which one of the following statements regarding sales discounts is correct?

If a company offers a discount to encourage prompt payment and the discount is taken, the discount reduces the amount of net sales.

Which of the following is not a primary goal of inventory management? -Obtaining the lowest cost of inventory -Ensuring sufficient quantities of inventory are available to meet customers' needs. -Ensuring inventory quality meets customers' expectations and company standards. -Minimizing the costs of acquiring and carrying inventory.

Obtaining the lowest cost of inventory.

Which of the following situations depicts the best receivables management?

Receivables turnover ratio increases and the days to collect decreases. (Good receivables management occurs when the receivables turnover is increasing and the number of days to collect is decreasing. The more frequently that receivables are turning over, the more frequently the receivables are being collected. A lower days to collect means that a company is collecting its receivables more quickly.)

Assuming the perpetual inventory system is used, which of the following statements about the multistep income statement is correct?

Sales discounts affect the calculation of Gross Profit. (Net sales = Sales revenue − Sales discounts − Sales returns & allowances Gross profit = Net sales − Cost of goods soldAs shown above, sales discounts affect the calculation of cost of goods sold and both contra-revenue accounts are included in the calculation of net sales. When a perpetual inventory system is used, Cost of Goods Sold is an account (rather than an amount that is calculated).)

The account Allowance for Doubtful Accounts is classified as a(n)

contra account to Accounts Receivable

A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ________ and causes total assets to ________.

credit; decrease (To account for any bad credit sales that have been included in Sales Revenue and Accounts Receivable, we record offsetting amounts in both the balance sheet and income statement. This adjustment is made at the end of each accounting period to reduce Accounts Receivable (using a contra-asset account called Allowance for Doubtful Accounts) and reduce Net Income (using an expense account called Bad Debt Expense). Since it is a contra-asset account, the Allowance for Doubtful Accounts normally has a credit balance. The adjustment described, which causes this contra-account to increase, results in a decrease in total assets.)

An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 credit balance, the adjustment to record bad debts for the period will require a

debit to Bad Debt Expense for $6,600 ($9,000 - $2,400 = $6,600 (Est. Uncoll. accts. - ADA bal.) The $9,000 estimated from a company's aging schedule is deemed the ENDING balance in the Allowance for Doubtful Account (ADA). Therefore, the adjustment to record bad debt expense is the difference between the ending balance of ADA and the existing balance of ADA, when the existing balance is a credit balance.

Recording the estimate of bad debt expense:

follows the expense recognition ("matching") principle.

Under the allowance method, Bad Debt Expense is recorded

for an amount that the company estimates it will not collect

Merchandisers record revenue when they

fulfill their performance obligations by transferring control of the goods to customers.

Beginning inventory plus purchases equals:

goods available for sale

The receivables turnover ratio:

measures how many times, on average, the process of selling and collecting is repeated during the period.

The expense recognition

necessitates the recording of an estimated amount for bad debts against revenues in the same accounting period in which the revenues are recorded.

Countryside Corporation provides $6,000 worth of lawn care on account during the month. Experience suggests that about 2% of net credit sales will not be collected. In conformity with the expense recognition principle, the company should:

record an estimate of Bad Debt Expense in the same period as the lawn care is provided (In conformity with the expense recognition principle, an estimate of bad debts must be recorded in the same period in which the goods or services are provided.)

Multiple-step income statements:

separate core results from peripheral results. (The multi-step income statement separates the revenues and expenses that relate to core operations from all the other (peripheral) items that affect net income. It also presents important subtotals, such as gross profit, to help distinguish core operating results from other, less significant items that affect net income.)

A merchandising company's operating cycle begins with the acquisition of inventory and ends with the cash collection from sales

true

Generally, a physical count of inventory is performed annually in both a perpetual inventory system and a periodic inventory system.

true

Manufacturers have three types of inventory, which include raw materials, work in process, and finished goods, whereas merchandisers have only merchandise inventory

true

The ending inventory of one accounting period becomes the beginning inventory of the next accounting period.

true

When a company sells goods, it removes their cost from the Inventory account and reports the cost on the income statement as Cost of Goods Sold.

true

Inventory is reported on the balance sheet as a current asset.

true (Because inventory will be used or converted into cash within one year, it is reported on the balance sheet as a current asset.)

The Allowance for Doubtful Accounts is necessary because

when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay.