Chapter 5 Financial Accounting

The (maker/signer) of the note is the one that signed the note and promised to pay at maturity. The (maker/payee) of the note is the person to whom the note is payable.

-maker -payee

Lower of Cost or Market (LCM)

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost.

End Inventory

Beg. Inventory + Purchases - COGS

What is the purpose of internal controls?

Companies create internal controls to protect assets and ensure reliable accounting.

Goods Damaged or Obsolete

Damaged or obsolete goods are not counted in inventory if they cannot be sold. Cost should be reduced to net realizable value if they can be sold. - Record as an expense

Periodic System

a system in which the inventory account is updated only at the end of the period

The asset account that tracks "amounts due from customers for credit sales" is commonly called:

accounts receivable

When a company makes a sale on credit, it records the amount due from the customer in ____________.

accounts receivable

The formula to compute days' sales uncollected is:

accounts receivable divided by net sales times 365

Question Mode Multiple Choice Question A(n) ____________ is a supplementary record created to maintain a separate account for each customer.

accounts receivable ledger

Last in, Last out (LIFO)

assumes cost flow in the reverse order incurred - costs of goods sold on the income statement approximates its current cost; it also better matches current costs with revenues in computing gross profit

Weighted average

assumes costs flow in an average of the costs available - smooths out erratic changes

First-In, First-Out (FIFO)

assumes costs flow in the order incurred - inventory on the balance sheet approximates its current costs; it also better matches current costs with revenues in computing gross profit

To maintain control of cash payments, all payments should be made by check except

small payments made by petty cash

rising costs

- FIFO reports lowest cost of goods sold yielding the highest gross profit and net income. - LIFO reports highest cost of goods sold yielding the lowest gross profit and net income. - Weighted average yields results between FIFO and LIFO.

Fallings Costs

- FIFO reports the highest cost of goods sold yielding the lowest gross profit and income. - LIFO reports the lowest cost of goods sold yielding the highest gross profit and income.

On November 1, Eli Co. received a $6,000, 60-day, 6% note from a customer as payment on his $6,000 account. Eli's journal entry to record this transaction on November 1, would include a: (Check all that apply.)

- credit to Accounts Receivable for $6,000.- debit to Notes Receivable for $6,000.

Zion Company sells merchandise on account to BRC, Inc. in the amount of $1,200. The entry to record this sale would include a: (Check all that apply.)

-debit to Accounts Receivable. -credit to Sales.

An accounts receivable ledger:

1) is a supplementary record to maintain an account for each customer.2) records journal entries that affect accounts receivable

Which of the answers below correctly describe the Cash Over and Short account? (Check all that apply.)

A debit balance reflects an expense. It is an income statement account. It records the effects of cash overages and cash shortages.

A 60-day note is signed on February 15 (and it's not leap year). The due date of the note is:

April 16

Goods on Consignment

Are goods shipped by the owner to the consignee who sells the goods for the owner - not considered an asset - not part of inventory - do not record

The cash in a cash register equaled $100, but the record of cash receipts/sales equaled $102. Determine which of the following entries is correct to record cash sales and the shortage.

Debit Cash $100; debit Cash Over and Short $2; and credit Sales $102.

Which of the statements below describe the goals and principles of cash management? (Check all that apply.)

Encourage quick collection of receivables.Money should be spent only when it is available.Plan cash receipts to meet cash payments when due.Keep a minimum level of cash necessary to operate.

Days' Sales in Inventory

Ending Inventory / Cost of goods sold x 365

Which of the following are principles of internal control? (Check all that apply.)

Establish responsibilities. Perform regular and independent reviews. Maintain adequate records. Divide responsibility for related transactions.

Identify the basic internal control guidelines which should be in place to protect a business's cash by selecting the correct answers below. (Check all that apply.)

Handling cash is separate from recordkeeping of cash.Cash payments are made by check.Cash receipts are promptly deposited in a bank.

Identify which of the items below are goals of good cash management. (Check all that apply.)

Keep a minimum level of cash necessary to operate. Plan cash receipts to meet cash payments when due.

Summarize the internal control procedure of maintaining adequate records by selecting the correct answers below. (Check all that apply.)

Keeping detailed records makes it unlikely that assets are lost or stolen without detection.Reliable records are a source of information that managers use to monitor activities.

Which statement below explains why liquid assets are needed in a business?

Liquid assets must be readily available to settle near-term debt or obligations.

Identify the principles of internal control by selecting the correct answers below. (Check all that apply.)

Maintain adequate records. Perform regular and independent reviews. Establish responsibilities. Separate recordkeeping from custody of assets. Insure assets. Apply technological controls.

Given the choices below, choose the examples of internal controls designed to control cash payments (Check all that apply.)

Only authorized individuals should be allowed to sign checks.All payments should be made by check.Use of a voucher system.Use of a petty cash system.

Internal Controls

Procedures within the business that are designed to protect cash and other assets and to keep reliable records. ex.) security tags and security check out the door

Which of the following are correct regarding why management uses internal controls? (Check all that apply.)

Promote efficient operations. Uphold company policies. Protect assets. Ensure reliable accounting.

Describe the purpose of a purchase requisition by selecting the correct answer below. (Check all that apply.)

Purchase requisitions are used for control purposes. Purchase requisitions are used to inform the purchasing department of its needs. Managers are not allowed to place orders directly with vendors; instead, they fill out a purchase requisition.

Goods in Transit

Purchased goods not yet received. Sold goods not yet delivered.

Which of the statements below explains how technology has impacted internal control systems? (Check all that apply.)

Technology has encouraged the growth of e-commerce, so there is a higher risk of credit card number theft.Technology has reduced the number of processing errors.Technologically advanced systems can record who made entries, the date and time of the entry and the source of the entry.Technology can be designed to require the use of password before access to the system is granted.

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

A good internal control to protect cash is to make cash payments using Multiple choice question.

checks

Inventory Turnover

cost of goods sold/average inventory Average Inventory = (Beg Inventory + End Inventory) / 2

In September, DK Company sells merchandise to Lions Company on credit. In October, Lions Company pays the balance in full. The entry to record the collection of cash by DK Company in October will include a (debit/credit) _______ , Incorrect Unavailable to

credit

Specific Identification

each item can be identified with a specific purchase and invoice - the costs of items with the revnues they generate. Each method offers certain advantages as follows

Human (error/fraud) is related to misjudgment or confusion. Human (error/fraud) involves intent to defeat internal controls for personal gain.

error; fraud

Inventory Costs

expenses associated with materials and direct labor for production until the product is sold. - Inventory Cost = Invoice Cost - Discounts + Other Costs (e.g., shipping storage, insurance, important duties)

Define what liquidity means by completing the following sentence. Liquidity refers to a company's ability to pay for its (near/long) -term obligations.

near

Responsibility for a task should be clearly established and assigned to:

one person

FOB shipping point

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller

FOB destination

ownership of the goods remains with the seller until the goods reach the buyer

A _________________ is an amount due from another party.

receivable

Each of the following are types of technological impacts related to internal control:

reduced processing errors more extensive testing of records separation of duties new evidence of processing

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

-accounts -notes

Good recordkeeping helps protect assets and helps managers:

monitor company activities

Summarize the internal control principle of establishing responsibility by completing the following sentence. Proper internal control means that responsibility for a (task/shortage/sale) is clearly (posted/established/compensated) and assigned to one person.

task; established