CH 3,4,5 Test 2 Preparation
bad debts are
the accounts receivable that are deemed to be uncollectible
in terms of a company's accounts receivable, the "net realizable value" is
the amount of cash the company expects to collect
there are seven steps of the accounting cycle, what is the first step?
analyze the transactions
the matching principle requires that expenses...
be recorded when they are incurred, regardless of when cash is paid
on the accounting worksheet, which of the following account balances would be transferred from one of the adjusted trial balance columns to a trained earnings column?
beginning retained earnings
the statement of cash flows shows
both the sources and uses of cash during the year
the stage of the operating cycle adn cash management that focuses on inventory levels is
buying inventory
internal control procedures for sales and returns must be established to identify the _____ and _____ required before a sales return or a sales allowance can be recorded
conditions; documentation
accumulated depreciation is considered to be a(n) ____ account
contra asset
employee theft and fraud result in losses because what component of internal control is not followed?
control activities
what do accountants mean whan they say revenue can be recognized under the accrual basis of accounting?
the company's performance obligation is satisfied
the interest on the note refers to
the compensation paid to the lender for giving up the use of the resources for the period
one of the reasons companies make adjusting entries is to record..
the completed portion of partially completed activities
what is the operating cycle of a business
the elapsed time between the purchase of good for wholesale and the collection of cash from customers
the underlying difference between the percentage of credit sales method and the aging method is
the percent of credit sales method is primarily concerned with appropriately estimating the bad debt expense on the income statement
What is the primary role of internal controls in managing a business?
to control employees activities to prevent deviating from responsibilities and encouraging them to act in the best interest of the business
what is the purpose of closing entries?
to transfer the balances in the temporary accounts to retained earnings
accrual-basis accounting provides a better estimate of future cash flows than cash-basis accounting (t/f)
true
an order document is necessary for the buyer to be obligated to accept and pay for the orders goods (t/f)
true
occasionally, accounts receivable that are written off are later partially or entirely collected (t/f)
true
When is revenue recognized under accrual accounting?
when earned, and expenses when incurred
a customer's check for $25 that had been deposited into the company's checking account the previous month was returned stamped NSF by the bank. What journal entry is required?
debit accounts receivable 25; credit cash 25
the entry to close salaries expense of $50,000
debit income summary; credit salaries expense
when a note receivable is issued because a customer cannot pay its accounts receivable, what entry is made?
debit notes receivable, credit accounts receivable
the journal entry to record a properly documented credit sale includes a _____ (credit/debit) to ______ (account type)
debit to accounts receivable
more conservative adjusting entries are viewed as contributing to
higher earnings quality
cash basis accounting violates what principles?
revenue recognition principle and the expense rec/ matching principle
what is designed to safeguard cash?
separating cash-handling activities and cash recording activities by assigning the activities to different individuals
cash is reported on both the balance sheet and the
statement of cash flows
a 10%, $5,000 note is dated July 1. The principal and interest are due at the end of 6 months. How much interest will be paid on the due date?
$250
there are 6 steps to complete a worksheet
1. 2. adjusted trial balance 3. 4. 5. retained earnings statement 6.
What are the steps in the accounting cycle (1-9)
1. analyze business transactions 2. journalize the transactions 3. post to ledger accounts 4. prepare a trial balance 5. journalize and post adjusting entries 6. prepare an adjusted trial balance 7. prepare financial statements 8. journalize and post closing entries 9. prepare a post-closing trial balance
a company has net sales of 1,000,000; gross profit of $700,000; operating income of $300,000; net income of 100,000; and average accounts receivable of $50,000. the net profit margin is.. (%)
10%
if the accounts receivable balance in the general ledger is $2,000,000 adn the accounts receivable (net) reported on the balance sheet is 1,900,000 (net realizable value), the allowance for doubtful accounts is
100,000 (2M-1900000)
company's balance according to general ledger: 15,000 outstanding checks: 2500 bank service charges: 15 customer's NSF check returned by bank: 100 What is the company's adjusted cash balance?
14,885 (balance on general ledger- service charges- NSF check)
a company receiving payment of a $20,000 accounts receivable within 10 days of terms 2/10, n/30, would record a sales discount of
2% of $20,000
liberty corporation has total receivables of $2,000,000 for the year and estimates at the end of the year that 1.5% of these receivables will be uncollectible based on an analysis of the aging of the receivables. The allowance for doubtful accounts at the end of the year before the adjusting entry is made is a credit balance of $10,000. If liberty uses the aging method, what is the estimate of the bad debt expense for the period?
20000 (2M x 1.5% - 10000)
the following items were identified during the June 30 bank reconciliation" company's balance according to general ledger: 18750 outstanding checks: 3400 deposit in transit: 1200 bank service charge: 25 credit memo for receivable collected by the bank: 500 Customers NSF check returned by bank: 100 What is the cash balance form the bank statement?
21325 (ledger balance+ credit memo - service charge - NSF check + outstanding checks - deposits in transit)
a 10%, $5,000 note is dated july1. the principal and interest are due at the end of 6 months. how much interest will be paid on the due date?
250 (5000 x10% x(6/12))
liberty corporation has credit sales of $2,000,000 for the year and estimates at the end of the year that 1.5% of the credit sales will default. The allowance for doubtful accounts at the end of the year before the adjusting entry is made is a credit balance of $10,000. if liberty uses the percentage of credit sales method, what is the estimate of the bade debt expense for the period?
30000 (2M X 1.5%)
Net Sales: 135,000 Cost of Goods Sold: 48,000 Other Expenses: 37,000 Net Income: 50,000 Calculate the net profit margin ratio. Round answer to nearest whole percent.
37% (Net Income/Net Sales)
the following items were identified during the June 30 bank reconciliation" company's balance according to general ledger: 18750 outstanding checks: 3400 deposit in transit: 1200 bank service charge: 25 credit memo for receivable collected by the bank: 500 Customers NSF check returned by bank: 100 what is the increase (decrease) to cash resulting from adjusting entries after the bank reconciliation?
375 (credit memo- nsf check- service charge)
Beginning accounts receivable were 43,375. All sales were on account and totaled 187,600. Cash Collected form customers totaled 182,450. Calculate the ending accounts receivable balance.
48,525 (all sales on account- cash collected+ beginning balance)
Net Sales: 135,000 Cost of Goods Sold: 48,000 Other Expenses: 37,000 Net Income: 50,000 Calculate the gross profit margin ratio. Round answer to nearest Whole Percent
64% (Net Sales-COGS)/Net Sales
a company needs to record 6 months of accrued interest on a 4-year, 12%, 12,000 promissory note payable. How much interest expense should be accrued?
720 (12000 X .12 X (6/12)) (interest percent always for one year)
currency: $27,500 Customer Checks that haven't been deposited: 850 US govt. bonds originally maturing in 3 months: 11,000 US govt bonds maturing in 12 months: 14,000 Cash in savings and checking accounts: 50000 Certificates of Deposits originally maturing in 18 months: 47000 How Much should Richter report as cash and equivalents on its balance sheet?
89,350 (currency + checks not deposited+ cash in savings/checking+ bonds maturing in 3 months)
the recognition and valuation of receivables under US GAAP is generally the same as under...
IFRS
a 10%, $1000 note is dated June 1. The principal and interest are due at the end of 6 months. On what date will the note be due and how much will the interest be?
November 30, $50 (november 30= end of 6th month; interest = 1000X10%X(6/12))
an entry to record the collection of a note at its maturity date will include...
a debit to cash
all of the following are advantages for the seller of accepting bank credit cards except a. the credit card company charges a service charge to the seller b. the seller receives the money immediately c. the seller's recordkeeping costs decrease d. the seller avoids bad debts
a
all of the following are profitability ratios except the a. current ratio b. operating margin c. net profit margin d. gross profit margin
a
an unethical practice by companies that are facing sales shortfalls for the period is a. channeling stuff b. sellers of goods recognizing revenue in the period title passes to the customer c. making sales on account d. estimating bad debts
a
the stage of the operating cycle and cash management that focuses on speeding up collection of receivables is a. selling inventory b. buying inventory c. paying for inventory
a
what would be a good way for a company to manage its cash? a. selling account receivables for less than face value b. paying a late fee to suppliers in order to hold on to cash as long as possible c. paying high dividends to investors to encourage potential investors to buy stock d. stockpiling inventory to avoid shortages
a
when interest is accrued at the end of the year, which of the following entries is made? a. Debit Interest receivable, credit interest income b. debit interest receivable, credit sales revenue c. debit Interest Receivable, credit accounts receivable d. debit interest income, credit interest receivable
a
which of the following activities is part of the operating cycle of a business? a. collecting cash from customers b. purchasing building and equipment for the business c. receiving cash from the owners of the business d. repaying creditors the principal loaned to the business
a
a customer may return goods as unsatisfactory or agree to keep the good if the seller is willing to make an allowance. The sales return and allowance is a reduction of the sale. This type of account is called
a contra revenue account
sales revenues should be recorded when
a purchase order is received, a shipment is sent to the customer, and an invoice is prepared
an information schedule that is often used by accountants to assist them in organizing and preparing the information necessary to perform the end-of-period steps in the accounting cycle is called
a worksheet
the financial statements are prepared using the balances obtained from the
adjusted trial balance
The final portion of the worksheet is completed by transferring
all of the balance sheet account balances from the adjusted trial balance to the income statement columns
the purpose of adjustments is to make sure that
all revenues and expenses are recognized in the proper accounting period
the final portion of the worksheet is completed by transferring
all the balance sheet account balances from the adjusted trial balance to the balance sheet columns
the allowance for doubtful accounts is
an account that has been established to "store" the estimate of the accounts receivable which are not expected to be collected
what is not a typical column found on an accounting worksheet?
assets debit column
cash-basis financial statements may not reflect all of the _____ and ______ of a company
assets, liabilities
all of the following are strategic risks except a. customers b. employees c. the economic environment d. competitors
b
What entry properly closes a temporary account? a. debit dividends and credit retained earnings b. debit income summary and credit salaries expense c. debit accumulated depreciation and credit income summary d. debit income summary and credit service revenue
b
control activities are the policies and procedures top management establishes to help ensure that its objectives are met. Which of the following is not one of the control activities? a. segregation of duties (separation) b. adequate information communicated (information) c. clearly defined authority and responsibility (authority) d. safeguards over assets and records (safeguarding)
b
failure to record the earned portion of unearned revenue would result in which of the following? a. total assets being understated b. net income being understated c. stockholder's equity being overstated d. no effect on total liabilities
b
periodically, the company should verify the pretty cash balance. Which of the following equals the petty cash balance? a. the initial petty cash fund amount + the sum of receipts on hand b. the sum of the receipts and the petty cash on hand c. the initial petty cash fund amount + the cash on hand d. there is no way to verify the balance until the fund is replenished
b
sales returns and allowances are all of the following except a. an allowance made to induce the customer to keep the goods if the price is reduced b. a 2% cash discount allowed to encourage payment within 10 days c. a contra-revenue account d. merchandise returned by the customer
b
the revenue recognition principle dictates that revenue should be recognized in the accounting records a. when it is received b. when it is earned c. at the end of the month d. in the period that income taxes are paid
b
which of the following is not a reason that a seller would offer its customers a 5% cash discount? a. the sooner the customers pay their accounts receivable, cash is more quickly available b. the company is able to reduce its revenue, which reduces its taxes c. offering cash discounts helps a company avoid borrowing money d. the seller's collection costs are reduced
b
all of the following are advantages to factoring except a. factor accepts all risks of collectability b. fewer employees are needed to manage these accounts c. the fees for factoring can be expensive d. immediate receipt of cash
c
many companies pay for something in cash in advance in the current accounting period but not recognize expenses until a later period. Which of the following is the correct adjusting entry to record the $2000 supplies expense for the last week of November for hall manufacturing company when the supplies were paid in advance? a. debit supplies expense; credit accounts payable b. debit supplies expense; credit retained earnings c. debit supplies expense; credit supplies d. debit supplies expense; credit cash
c
operations objectives ensure the effectiveness and efficiency of the entity's operations. this includes which of the following a. safeguarding assets against loss b. financial performance goals c. safeguarding assets against loss and financial performance goals d. none of the above
c
what would not require an adjusting entry a. a check returned and marked NSF b. error in recording a canceled check in the company's records c. deposits in transit d. interest earned and deposited by the bank to the company's account
c
which of the following expenses will require a liability to be recognized prior to the expense being paid? a. a yard maintenance company was paid today for today's cleaning of the property b. postage was purchased on june 1 to use when mailing company letters in june c. employee salaries will be %5,000 for the last week of june but they will not be paid until july 3 d. the rent was paid on june 1 for the month of june
c
which of the following is true of a credit memo issued by a bank a. it might result if the bank makes a prearranged deduction from the business' account to pay a utility b. it is an asset to the bank c. if it has not yet been recorded by the business, the bank balance will be larger than the cash account balance d. it is recorded on the company's books by crediting the cash account
c
which of the following items would be added to the company's cash balance on a bank reconciliation? a. bank service charges b. outstanding checks c. interest earned on bank account d. deposits in transit
c
Cash Basis Accounting calculates change in..
cash
GAAP does not recommend what type of accounting?
cash basis Accounting
What does cash basis accounting use to calculate change in cash?
cash receipts and cash disbursements
urban enterprises established a petty cash fund for $100. at the end of the month, the following receipts were presented by the petty cash custodian for reimbursement: us post office: 12 fedex: 36 water delivery: 48 the journal entry to record replenishment fo the petty cash fund with include a ___ (credit/debit) to ____ (account) for __ (amount)
credit to cash for 96
If Duke Corporation bills Liberty Advisors $15,000 for product sold during the week with terms of 2/10, n30 under the net method, but liberty pays after the discount period has ended, which of the following transactions will be a part of the entry to record the receipt of cash? a. credit cash for 15000 b. credit accounts receivable for 15000 c. debit sales revenue for 15000 d. credit sales revenue for 300
d
which of the following items is not considered a cash equivalent? a. 60-day corporate commercial paper b. 75-day US treasury bill c. 30-day certificate of deposit d. 180-day note issued by a local govt
d
a receivable is money due from another business/individual. Receivables are typically categorized along 3 different dimensions. Which of the following is not one of these three dimensions? a. accounts receivable or notes receivable b. current or noncurrent c. trade or nontrade d. tangible or intangible
d
all of the following are true about nonbank credit cards except a. they also result in a receivable for the seller because they do not immediately pay cash to the seller b. they may charge a higher service charge to the seller c. some businesses may not accept nonbank cards d. they are usually less expensive than bank credit cards
d
cash and cash equivalents include a. currency and coin b. savings and checking accounts c. all highly liquid investments with an original maturity of 3 months or less d. all of the above
d
depreciation is required for which of the following accounts? a. accounts receivable b. accounts payable c. land d. equipment
d
in practice, both ____ and _____ are typically categorized as current assets on the balance sheet a. accounts receivable, buildings b. accounts receivable, sales revenue c. accounts receivable, patents d. accounts receivable, notes receivable
d
increasing the speed of collecting receivables may be achieved by using all of the following except a. factoring b. accepting credit cards c. accepting debit cards d. notes receivable
d
internal control systems are designed to provide reasonable assurance that the company's objectives are being met in a. reporting objectives b. compliance objectives c. operations objectives d. all of the above
d
the accounting system consist of methods and records used to accomplish all of the following except a. record and communicate financial information b. measure financial information c. identify financial information d. ensure profitability using financial information
d
which of the following adjusting entries involves the cash account? a. deferred liabilities b. deferred expenses c. accrued expenses d. none of these choices are correct
d
which of the following would not need adjusting entries for the month under accrual accounting? a. insurance that is prepaid for several months b. rent that is prepaid for the current and the net month c. wages that are earned by employees but not yet paid by the company d. office supplies treated as a continuous business activity
d
there is more than one method to record bad debt expense. Which method is not consistent with the matching concept? a. the percentage of credit sales method b. the aging method c. the allowance method d. the direct write-off method
d. (matching concept requires that expenses be matched with related revenues in the period in which the revenues are recognized on the income statement.
gross profit margin is calculated by
dividing gross profit by net sales
operating margin is calculated by ...
dividing operating income by net sales
cash basis accounting needs adjusting entries (T/F)
false
the formula to calculate interest is
interest= principal x fraction of 1 year x annual interest rate
why do companies invest their cash in short-term investments?
investments earn a greater rate of return than the return of a bank account
billing documents are called
invoices
unearned revenue is classified as a(n) ____ account
liability
what is not a part of good cash management?
making payments to suppliers as quickly as possible
the income summary account is closed to which account?
retained earnings
what type of account is not closed during the closing process?
retained earnings