ACCT 2010 Exam 2

will increase intangible assets

$10,000 was spent to purchase a patent, a company purchased a franchise for $100,000, and a company purchased another company for $10,000 more than its assets

boron company has net sales of $60,000; beginning inventory of $7,000; purchases of $35,000; and ending inventory of $5,000. what is the cost of goods sold?

$37,000

gross profit percentage

(net sales - COGS) / net sales * 100

how do banks help control cash

- documenting procedures - restricting access to cash - independently verifying

banks provide important controls surrounding a companies cash, these include

- providing statements used for independent verification -restricting access -providing documentation

which line items would be found on a merchandisers income sheet and not a service firms

- sales revenue - cost of goods sold

pcards are ...

- used in place of a petty cash fund - used by employees to purchase business related items

steps of segregating duties involving cash receipts, specific responsibilities are assigned to various employees

1. cashiers are responsible for collecting cash and issuing a receipt at the point of sale 2. a supervisor is responsible for collecting cash at the end of the cashiers shift 2. members of the accounting department are responsible for ensuring that cash sales are properly recorded

what does gross profit percentage tell you?

a higher ratio means that more is available to cover operating expenses

tangible assets are first recorded at _______

all costs to acquire them and prepare them for use

the adjusting entry to record the estimated amount of bad credit sales is a debit to bad debt expense and a credit to

allowance for doubtful accounts

allocating the cost of intangible assets over time

amortization

an assets cost minus accumulated depreciation is its _______

book value

the gross profit percentage measures the percentage of profit earned on each dollar of sales before deducting all expenses other than cost of goods sold. this ratio is used to:

compare one company with another and make comparisons over time

in a periodic system for cost of goods sold to be updated what must occur

compute cost of goods sold by subtracting ending inventory from goods available for sale and take a physical count of inventory

allowance for doubtful accounts is a _________-asset account and has a normal ______ balance

contra; credit

= Beginning inventory + Purchases − Ending inventory

cost of goods sold

days to sell measures the average number of _________

days from the time inventory is purchased to the time it is sold

entry for the receipt of an interest payment

debit cash and credit interest receivable

entry for the receipt of the principle payment on a note

debit cash and credit notes receivable

the adjusting entry to record interest owed on a note

debit interest receivable and credit interest revenue

entry for issuing a note

debit notes receivable and credit cash

after performing a physical count of inventory it was discovered that the amount of inventory on hand was less than the accounting records reported. the entry to record this inventory shrinkage includes:

debit to cost of goods sold, credit to inventory

disadvantages of extending credit to customers

delayed receipt of cash, increased wage costs, increased bad debt costs

the supervisor prepares a deposit slip

document procedures

= Beginning inventory + Purchases − Cost of goods sold

ending inventory

A company either performs a service, sells inventory that it purchases from others, or manufacturers a product; it cannot serve more than one of these functions.

false

Consignment inventory is reported on the balance sheet of the company holding the inventory.

false

Sales discounts are discounts that consumers get from buying clearance items at a reduced price.

false

When the amount of annual depreciation is revised because of a change in the estimated useful life of an asset, prior years' financial statements should be restated.

false

a highly effective internal control should be implemented even if the cost is greater than the benefit

false

If inventory is sold with terms of FOB shipping point, the goods belong to the seller while in transit.

false, belongs to the buyer

Goods placed in inventory are initially recorded at market value.

false, they are initially recorded at cost

The entry recorded when the petty cash fund is replenished includes a debit to Petty Cash and a credit to Cash.

false, this happens when establishing the petty cash fund

An overstatement of ending inventory will cause an overstatement of assets and an understatement of stockholders' equity on the balance sheet.

false, will cause overstatement of assets and stockholders equity

The useful life of an asset is always measured in units of time, such as years or months.

false; can be measured in units of production

Interest revenue from notes receivable is typically reported on a multiple step income statement as a part of Income from Operations.

false; it would be reported as interest revenue directly

If the receivables turnover ratio rises significantly, the increase may be a signal that the company is extending credit to high-risk borrowers or allowing an overly generous repayment schedule.

false; this would be the case for a lower receivables turnover ratio

beginning inventory + purchases =

goods available for sale

oops inc overstated its ending inventory in year 1 by $1,000 what else will be misstated in year one?

gross profit will be overstated by $1,000, cost of goods sold will be understated by $1,000

sales on account _______

increase assets and stockholders equity and increase accounts receivable on the balance sheet and sales revenue on the income statement

advantages of extending credit to customers

increased demand, increased sales

the supervisor reconciles the cashiers count sheet to the cash collected

independent verification

principle x interest rate x time (years)

interest

Gains on the disposal of fixed assets are recorded with a credit and occur on when the book value is __________ than the sales price.

less

acmes company balance shows three inventory accounts - raw materials, work in progress and finished goods. acme must be a ________

manufacturer

when accounting for accounts receivable, a primary objective is to ______

not overstate assets and stockholders equity by the estimated amount of bad debt

allowance for doubtful accounts is a ________ account

permanant

a benefit of the _____ inventory system is that inventory shrinkage from theft, fraud and error is able to be estimated

perpetual

an intangible asset can only be recorded if _______

purchased

an intangible asset may be recorded when a company _______

purchases a trademark or pays more than the net assets of the company purchased

_______ inventory will enter the production process and become ________ inventory. once complete the goods will become _______ inventory

raw materials; work in progress; finished goods

to be in accordance with GAAP companies are required to estimate the amount of uncollectible receivables and make an adjusting entry, the effect of the adjusting entry is to _______

reduce net income by debiting bad debt expense and crediting allowance for doubtful accounts

the estimated amount a long lived asset is expected to be sold for at the end of its useful life is the _______

residual value

the supervisor is responsible for keeping the cash safe and getting the cash to the bank

restrict access

another term for a residual value is a _______ value

salvage

the supervisor forwards the verified deposit slip to the accounting record to record the cash receipts

segregation of duties

in a strong system of internal control which employee should be the one to verify cash count sheets and prepare deposit slips and take cash to the bank

supervisor

an assets useful life may be expressed in _____

terms of time or units of capacity

depreciation

the allocation of the cost of a long lived, tangible asset over its useful life creating an expense on the income statement that is matched against the revenue generated by using the asset

in which situations does a company issue a notes receivable

the company lends money to employees or businesses, and the company converts an existing account receivable to grant the customer an extended payment period for the amount owed plus interest

depletion

the process used to allocate the cost of natural resources to the period in which the resources are used to help generate revenue

the entry to record annual straight line depreciation will increase a company's _______ and ________

total expenses; accumulated depreciation

Accumulated Depreciation is classified as a contra-asset account on the balance sheet.

true

Cash that is legally or contractually required to be set aside for a specific purpose cannot be reported with Cash and Cash Equivalents on the balance sheet.

true

Credit card companies charge a fee to the seller that accepts the credit cards. This fee is recorded by the seller as a selling expense on its income statement.

true

FOB shipping point means that ownership of goods passes to the buyer when the goods leave the seller's place of business.

true

Factoring refers to an arrangement in which a company sells its receivables to another company and receives cash immediately.

true

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

true

Interest on a two-month, 7%, $1,000 note would be calculated as $1,000 × 0.07 × 2/12.

true

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

true

Some analysts compare companies by focusing on earnings before interest, taxes, depreciation, and amortization (EBITDA), rather than net income.

true

The accounts receivable account for each customer is called a subsidiary account.

true

The allowance method for uncollectible accounts conforms to the expense recognition principle.

true

The allowance method for uncollectible accounts is used for both accounts receivable and notes receivable.

true

The calculation for depletion of natural resources is similar to the calculation for depreciation when the units-of-production method is used.

true

The cost assigned to cost of goods sold and to inventory under the FIFO method will be the same whether the perpetual or the periodic inventory system is used.

true

The direct write-off method for uncollectible accounts is not allowed by either GAAP or IFRS, but is required by the Internal Revenue Service (IRS) for tax purposes.

true

The primary goals of inventory managers are to maintain a sufficient quantity of inventory to meet customers' needs, ensure inventory quality meets customers' expectations and company standards, and minimize the cost of acquiring and carrying inventory.

true

When a company routinely sells on credit, it is inevitable that some of its customers will not pay the amount owed.

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

When an asset is sold and the selling price exceeds the asset's book value, net income will increase.

true

When assets are purchased as a group, the total cost must be divided up and allocated to each asset in proportion to the market value of the assets as a whole.

true

When duties are properly segregated, the accounting department should compare the cash in the register with the cash count sheet

true

a higher receivables turnover ratio the more favorable

true

an increased inventory balance is desirable if management is building up stock in anticipation of higher sales

true

an increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory

true

on a bank statement deposits are listed as credits and cleared checks are listed as credits

true

Long-lived assets found on a company's balance sheet may include some assets that have no physical substance.

true; these are known as intangible assests

Extraordinary repairs, replacements, and additions are added to the appropriate asset accounts rather than being recorded as expenses.

true; they are capitalized

Depreciation is an allocation method, not a valuation method.

true; this is re-allocation of costs that have already been recorded as long term assets

petty cash

used to avoid the time and cost of writing checks for business expenses that are small in amount and is controlled by limiting the amount in it and subjecting it to surprise audits

a _____ system involves the processing of purchases and payments made on account

voucher

anticipated inventory turnover for the following companies; highest to lowest: tiffany and co, walmart, bath iron works (sells battle ships to the US government)

walmart (highest inventory turnover ratio), tiffany and co, bath iron works (lowest inventory turnover ratio)

ending inventory in 2019 ________

will affect the 2020 goods available for sale but will not affect the 2020 ending inventory

which financial statements will be misstated if year 1 ending inventory is understated

year 1 balance sheet and income statement, year 2 income statement