CSU ACT 205 Stubing Test 2, Ch.4-6

A company accepts a note receivable of $5,000 on September 1, 2018, that matures in 10 months and has stated interest of 6%. What amount of interest revenue will the company record in 2018 and 2019?

2018 = $100; 2019 = $150. InterestRevenue= Face value x Annual interest rate x Fraction of the year. 2018: Interest Revenue = $5,000 × 6% × 4/12 = $100 2019: Interest Revenue = $5,000 × 6% × 6/12 = $150

Days' Sales in Inventory =

365 / Inventory Turnover

Net sales are $100,000 and cost of goods sold is $70,000. Inventory balances for the past two years are $10,000 and $20,000. What is the inventory turnover?

4.67 times per year. The inventory turnover measures how often a company sells, or turns over, its inventory. The inventory turnover would be computed as $70,000 ÷ ([10,000 + 20,000] ÷ 2). The result is 4.67 times per year.

At the end of the year, a company reports the following inventory amounts ($ per unit):Item# of UnitsCostNet Realizable Value A100$4$8 B150$8$6The year-end adjustment using the lower of cost and net realizable value would include:

A credit to Inventory for $300. Recorded cost of inventory = (100 units × $4) + (150 units × $8) = $1600. Lower of cost and NRV = (100 units × $4) + (150 units × $6) = $1,300. The year-end adjustment to reduce inventory from its cost of $1,600 to NRV of $1,300 is:Cost of Goods Sold300Inventory300

On December 31 before adjusting entries, a company reports the following balances:Accounts Receivable$100,000Allowance for Uncoll. Accts.$2,000 (credit) The company estimates bad debts to be 20% of accounts receivable. The adjusting entry would include:

A debit to Bad Debt Expense = $18,000. Bad debts are estimated to be $20,000 (= $100,000 × 20%). The current $2,000 credit balance of the Allowance needs a credit adjustment of $18,000 to be equal to $20,000 credit. The adjustment of $18,000 is recorded as a debit to Bad Debt Expense and a credit to the Allowance account.

On December 31 before adjusting entries, a company reports the following balances:Accounts Receivable$100,000Allowance for Uncoll. Accts. $2,000 (credit)Credit Sales$500,000The company estimates bad debts to be 4% of credit sales. The adjust entry would include:

A debit to Bad Debt Expense = $20,000. The adjustment equals $500,000 × 4% = $20,000. The adjusting entry includes a debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts.

The effect of a sales allowance will result in which of the following:

A decrease to net income. The effect of a sales allowance is to decrease net income. A sales allowance decreases sales revenue in the income statement. A sales allowance also decreases assets by decreasing the balance of accounts receivable.

Which of the following are sometimes called trade receivables?

Accounts receivable. Sometimes called trade receivables. Nontrade receivables include tax refund claims, interest receivable, and loans by the company to other entities.

Which of the following statements is NOT true of the Sarbanes-Oxley Act of 2002?

All companies in the U.S. fall under its provisions. The Sarbanes Oxley Act of 2002 applies to companies who are required to file financial statements with the SEC. It does not apply to all companies in the U.S.

Which of the following statements is true?

All of the above are true. Having too much cash represents idle resources that are not being used to produce revenues. One way to assess cash holdings is to compare cash assets to noncash assets. In recent years cash holdings have increased tremendously.

The balance in the Colt Company's Cash account on August 31 was $19,700, before the bank reconciliation was prepared. What is the amount of cash that should be reported in the balance sheet as of August 31?

Book balance ($19,700) - bank service fees ($60) - NSF check ($140) + note collected ($1,200) = $20,700.

Inventory Turnover Ratio =

COGS (Cost Of Goods Sold) / Inventory

A bank reconciliation reconciles the bank statement with the company's:

Cash account in the balance sheet.

Which of the following would NOT be considered a cash equivalent?

Certificate of deposit (CD) that matures one year from now. Cash includes currency, coins, savings accounts, checking accounts, credit card sales, debit card sales, and other cash equivalents. Cash equivalents are generally defined as investments that mature within three months from the date of purchase, such as money market funds, treasury bills, and certificates of deposit. Since the CD doesn't mature until 1 year from now, it would NOT be considered a cash equivalent.

Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system?

Costs of incoming freight charges on merchandise inventory- would increase the balance of the inventory account. Returns of inventory would decrease the account balance, as would a purchase discount given for prompt payment.

How would an NSF check from a customer be recorded in the accounting records?

Debit Accounts Receivable; Credit Cash. Accounts Receivable is debited in order to increase that asset account to show that the customer who paid with an NSF check still owes the company money. The Cash account is credited because the company must adjust its balance of cash downward to reverse the increase in cash it recorded at the time it received the check from the customer.

How would an NSF check from a customer be treated on a bank reconciliation?

Deduction on the company side. An NSF check would be shown on the company's side—the right-hand side—and it would be shown as a deduction. This is because when the company originally deposited the customer's check, they increased the Cash account. Now that the check has been discovered to be an NSF check, or a non-sufficient funds check, the company must reverse the cash out of its books, resulting in a decrease, or a deduction, on the company's side of the bank reconciliation.

Which of the following items would be found on the "bank side," or the left-hand side, of the bank reconciliation?

Deposit outstanding. The common items that are shown on the left-hand side of the bank reconciliation include deposits outstanding, checks outstanding, and bank errors. All of the other items would appear on the "company's side," or the right-hand side, of the bank reconciliation.

What is the concept behind separation of duties in establishing internal controls?

Employee fraud is less likely to occur when access to assets and access to accounting records are separated.

Which inventory method or cost flow assumption most closely resembles the actual physical flow of goods?

FIFO. Supermarkets, sporting goods stores, clothing shops, electronics stores, or just about any company you're familiar with generally sell their oldest inventory first (first-in, first-out).

Which of the following inventory accounts consists of items for which the manufacturing process is complete?

Finished Goods. Raw Materials Inventory is the cost of components that will become finished products, Work-In-Process Inventory consists of products that are not yet complete, and Cost of Goods Sold is not an inventory account but represents the cost of inventory sold during the period.

The Sarbanes-Oxley Act (SOX) mandates which of the following?

Increased regulations related to auditor-client relations. Increased regulations related to internal control. Increased regulations related to corporate executive accountability.

Separation of duties refers to:

Individuals who have physical responsibility for assets should not also have access to accounting records.

Which of the following is true regarding Allowance for Uncollectible Accounts?

It is subtracted from the balance of Accounts Receivable in the balance sheet. The allowance account is a contra asset and is used to record estimated future uncollectible accounts. The balance is subtracted from Accounts Receivable in the balance sheet to arrive at Accounts Receivable's net realizable value.

On December 31 before adjusting entries, a company's balance of Allowance for Uncollectible Accounts is a credit of $2,000. What does a "credit" balance prior to adjusting entries indicate?

Last year's estimate of bad debts was too high.The Allowance for Uncollectible Accounts is a contra account with a credit balance. The balance is reduced (debited) for actual bad debts. If the account balance at the end of the year is a credit, then estimated bad debts for this year are greater than this year's actual bad debts.

Perpetual-

Maintains a continual record of inventory

Which of the following is true about the aging method?

Older accounts are less likely to be collected. The aging method recognizes that the longer accounts are past due, the less likely they are to be collected. The aging method should provide a more accurate estimate of total uncollectible accounts compared to using a single percentage.

Which level of profitability is considered profit from normal operations?

Operating income is measured as gross profit (sales revenue minus cost of goods sold) minus operating expenses. Income before taxes and net income include non-operating items, which are not considered part of normal operations.

An inventory error that understates the amount of ending inventory will result in which of the following in the current year?

Overstated cost of goods sold. An understatement of ending inventory will lead to a higher, or overstated, cost of goods sold, an understatement of net income, and an understatement in assets in the year the error was made.

Which of the following items would be categorized as an investing activity on a statement of cash flows?

Paid for supplies in cash. Cash flows from investing activities include the purchase or sale of long-term assets. The purchase of equipment using cash would be shown in the investing activities section—as a decrease. Borrowing money would be shown in the financing activities section, and the purchase of supplies and payment of salaries would be in the operating activities section.

If a company places cash receipts from the day in a safe or bank deposit box, this would be an example of:

Physical control. This is an example of a physical control. Important items (like cash receipts) should be kept in safe places—like a safe or a bank deposit box.

Cost of goods sold is:

Reported in the income statement. Cost of goods sold is an expense account reported in the income statement.

What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others?

Sarbanes-Oxley Act.

Which of the following would be true for a company that has an accounts receivable turnover of 10?

The company would have an average collection period of 36.5 days. The average collection period is computed as 365 divided by the accounts receivable turnover of 10 (= 36.5 days).

At the end of the year, a company reports the following inventory amounts ($ per unit):Item# of UnitsCostNet Realizable Value A100$4$8 B150$8$6The amount to report for ending inventory using the lower of cost and net realizable value is:

The lower of cost and net realizable value is:Item A = $4 per unit (cost)Item B = $6 per unit (net realizable value)Ending inventory = $1,300 $1,300 = (100 units × $4) + (150 units × $6)

Everyone in the company has an impact on the operations and effectiveness of internal control, but who must take final responsibility?

Top executives. The top executives are the ones who must take final responsibility for the establishment and success of internal controls. The CEO and CFO sign a report each year assessing whether the internal controls are adequate.

Which of the following computations would be used to compute Net Revenue?

Total Revenue - Sales Discounts - Sales Allowances. Net Revenue is equal to Total Revenue less Sales Discounts and Sales Allowances.

When an entry is made to write off an uncollectible account,

Total accounts receivable is unchanged. Overall, the write-off of an account receivable has no effect on total amounts reported in the balance sheet or in the income statement. There is no decrease in total assets and no decrease in net income with the write-off.

When writing off an uncollectible account:

Total assets are unchanged. The write-off of an account receivable has no effect on total amounts reported in the balance sheet or in the income statement. There is no decrease in total assets and no decrease in net income.

A company has the following inventory transactions:Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase100 units @ $5 each Jan. 31 Purchase100 units @ $6 each What would be the cost of goods sold under the FIFO method if 120 units were sold in January?

Using FIFO, the first 120 units purchased are assumed to be sold. Cost of goods sold equals: 100 × $4 = $400(Beginning inventory) 20 × $5 = $100(Purchase on Jan. 15)120 units $500

A company has the following inventory transactions:Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase100 units @ $5 each Jan. 31 Purchase100 units @ $6 each What would be the cost of goods sold under the LIFO method if 120 units were sold in January?

Using LIFO, the last 120 units purchased are assumed to be sold. Cost of goods sold equals:100 × $6 = $600(Purchase on Jan. 31) 20 × $5 = $100(Purchase on Jan. 15)120 units $700

During a period of rising prices, which inventory cost flow assumption would result in the highest cost of goods sold, and thereby the lowest net income?

Using LIFO, we assume that the last units purchased (the last ones in) are the first ones sold (the first out). If prices are rising, cost of goods sold would be composed of the latest (and highest) costs using LIFO.