master 6 7 8

All else being equal, as a company's inventory turnover ratio increases, the average number of days in inventory will ***

decrease

Gross profit ratio

gross profit/net sales

(bank reconciliation)bank credit memorandum for collecting an ETF

added to cash balance per bank

Allowance for Doubtful Accounts is a

contra asset account

three primary components of internal control

control environment, information and communication, and monitoring`

Lopez Corp. and Gilmartin Inc. are in the same industry and are of similar size. During 20X5, Lopez and Gilmartin had inventory turnover ratios of 12 times and 9 times, respectively. Based on this information, which of the following statements is most likely true when comparing these two companies? Select one: a. Gilmartin is better at managing its inventory. b. Gilmartin's customers are quicker at paying off their accounts receivable. c. Lopez's customers are quicker at paying off their accounts receivable. d. Lopez is better at managing its inventory.

d. Lopez is better at managing its inventory.

Which of the following is not an example of an internal control procedure? a.)Bond employees who handle cash b.)The use of prenumbered documents c.)Segregation of recordkeeping duties related to assets from their physical custody d.)Encouraging employees to take no or very little vacation each year

d.)Encouraging employees to take no or very little vacation each year

(bank reconciliation) bank debit memorandum for service charge

deducted from cash balance per bank

(bank reconciliation) outstanding checks

deducted from cash balance per bank

(bank reconciliation) deposit in transit

deducted from cash balance per books

When inventory is shipped F.O.B. destination point and we are doing the accounting from the standpoint of the seller of these goods, title passes at the *** and our company *** be responsible for the freight charges.

destination point, should

increase in COGS

gross margin: decrease income from operations: decrease net income: decrease

increase in sales discounts=

gross margin: decrease income from operations: decrease net income: decrease

increase in sales revenue:

gross margin: increase income from operations: increase net income: increase

increase in bad debts expense=

gross margin: no effect income from operations: decrease net income: decrease

increase in salaries expense =

gross margin: no effect income from operations: decrease net income: decrease

increase in service fees expense

gross margin: no effect income from operations: decrease net income: decrease

increase in interest revenue

gross margin: no effect income from operations: no effect net income: increase

increase in dividends:

gross margin: no effect income from operations: no effect net income: no effect

increase in notes receivable

gross margin: no effect income from operations: no effect net income: no effect

gross profit

gross profit/net sales

operating income

gross profits - (sales discounts + advertising expense)

Brief Exercise 6-1. Identify items to be included in taking a physical inventory. Indicate whether the items identified by Peete Company should be included or excluded from year-end inventory? 900 units of inventory shipped on consignment by Peete to another company

included

All else being equal, as a company's accounts receivable turnover ratio decreases, the average collection period for its accounts receivable in terms of days ***

increases

When a company factors its accounts receivables, the cash it receives will usually be ______ the amount of accounts receivables it factors.

lower than After the service fee is deducted, the cash received will be less than the value of the factored receivables.

Elements of fraud motivation

motive, rationalization, and opportunity

When inventory costs are rising, this method yields the lowest sales revenue.

neither

accounts receivable (AR) turnover =

net credit sales/average net accounts receivable

Bonding

obtaining insurance protection against theft by employees

From a merchandiser's perspective, the purchase and sale of its inventory is an example of which type of business activity?

operating

net income

operating income - (interest+taxes)

(c) Blank checks are stored in a safe in the treasurer's office.

physical controls

When applying the lower-of-cost-or-market method to inventories, the cost of the inventory should be compared to its ______.

replacement cost

Gross profit

sales-cost of goods sold

Identify items in inventory. Below are inventory situations to consider for Gato Inc. at January 31, its year-end. For each situation indicate whether it should or should not be included in ending inventory? Goods held on consignment for Steele Corp. since December 12.

should be considered in ending inventory

Identify items in inventory. Below are inventory situations to consider for Gato Inc. at January 31, its year-end. For each situation indicate whether it should or should not be included in ending inventory? Goods purchased FOB shipping point from a supplier on January 25 that are still in transit.

should be considered in ending inventory

Identify items in inventory. Below are inventory situations to consider for Gato Inc. at January 31, its year-end. For each situation indicate whether it should or should not be included in ending inventory? Goods shipped on consignment to Logan Holdings Inc. on January 5.

should be considered in ending inventory

Notes and accounts receivables which arise from sales transactions are often called trade receivables.

true

SOX requires a company to maintain an adequate system of internal control.

true

The "Allowance Method" of accounting for bad debts is an application of GAAP whereas the "Direct Write-Off Method" is not.

true

The "Allowance Method" of accounting for bad debts requires companies to record an estimate of bad debt expense arising from an uncollectible sale in the same year sales revenue is recorded rather than in the year the bad debt expense is known with certainty.

true

The specific identification inventory method assigns the actual cost of each individual inventory item sold to cost of goods sold and assigns the actual cost of each individual inventory item not sold to inventory?

true

Valuing inventory at the lower-of-cost-or-market (LCM) is an example of the accounting convention of conservatism?

true

When inventory is purchased with the terms FOB shipping point, ownership of the inventory passes to the buyer when the shipping carrier accepts the inventory from the seller?

true

Work in process inventory is the inventory items that have started the production process but are not yet complete?

true

Whereas a merchandiser usually has one inventory account, a manufacturer has which of the following?

work in process inventory finished goods inventory raw materials inventory

gross profit

total revenue-total costs

Compute inventory and cost of goods sold using periodic FIFO, LIFO, and average-cost. Mather sells a snowboard, EZslide, that is popular with snowboard enthusiasts. Below is information relating to Mather's purchases of EZslide snowboards during September. During the same month, 102 EZslide snow boards were sold. Mather uses a periodic inventory system. Date Description Units Unit Cost Sept. 1 Beginning Inventory 12 $100 Sept. 12 Purchase 45 $103 Sept. 19 Purchase 50 $104 Sept. 26 Purchase 20 $105 FIFO cost of goods sold

$10,515 =(12 x $100) + (45 x $103) + (45 x $104)

Compute inventory and cost of goods sold using periodic FIFO, LIFO, and average-cost. Mather sells a snowboard, EZslide, that is popular with snowboard enthusiasts. Below is information relating to Mather's purchases of EZslide snowboards during September. During the same month, 102 EZslide snow boards were sold. Mather uses a periodic inventory system. Date Description Units Unit Cost Sept. 1 Beginning Inventory 12 $100 Sept. 12 Purchase 45 $103 Sept. 19 Purchase 50 $104 Sept. 26 Purchase 20 $105 average cost of goods sold:

$10,549 =(102 x $103.43)

Compute inventory and cost of goods sold using periodic FIFO, LIFO, and average-cost. Mather sells a snowboard, EZslide, that is popular with snowboard enthusiasts. Below is information relating to Mather's purchases of EZslide snowboards during September. During the same month, 102 EZslide snow boards were sold. Mather uses a periodic inventory system. Date Description Units Unit Cost Sept. 1 Beginning Inventory 12 $100 Sept. 12 Purchase 45 $103 Sept. 19 Purchase 50 $104 Sept. 26 Purchase 20 $105 LIFO cost of goods sold:

$10,596 =(32 x $103) + (50 x $104) + (20 x $105)

Compute inventory and cost of goods sold using periodic FIFO, LIFO, and average-cost. Mather sells a snowboard, EZslide, that is popular with snowboard enthusiasts. Below is information relating to Mather's purchases of EZslide snowboards during September. During the same month, 102 EZslide snow boards were sold. Mather uses a periodic inventory system. Date Description Units Unit Cost Sept. 1 Beginning Inventory 12 $100 Sept. 12 Purchase 45 $103 Sept. 19 Purchase 50 $104 Sept. 26 Purchase 20 $105

$13,135=(12 x $100) + (45 x $103) + (50 x $104) + (20 x $105)

Compute inventory and cost of goods sold using periodic FIFO, LIFO, and average-cost. Mather sells a snowboard, EZslide, that is popular with snowboard enthusiasts. Below is information relating to Mather's purchases of EZslide snowboards during September. During the same month, 102 EZslide snow boards were sold. Mather uses a periodic inventory system. Date Description Units Unit Cost Sept. 1 Beginning Inventory 12 $100 Sept. 12 Purchase 45 $103 Sept. 19 Purchase 50 $104 Sept. 26 Purchase 20 $105 Compute the ending inventory at September 30 and the cost of goods sold using the FIFO, LIFO, and average-cost methods. (For average-cost, round the average unit cost to three decimal places.) Prove the amount allocated to cost of goods sold under each method? LIFO ending inventory:

$2,539 =(12 x $100) + (13 x $103)

Compute inventory and cost of goods sold using periodic FIFO, LIFO, and average-cost. Mather sells a snowboard, EZslide, that is popular with snowboard enthusiasts. Below is information relating to Mather's purchases of EZslide snowboards during September. During the same month, 102 EZslide snow boards were sold. Mather uses a periodic inventory system. Date Description Units Unit Cost Sept. 1 Beginning Inventory 12 $100 Sept. 12 Purchase 45 $103 Sept. 19 Purchase 50 $104 Sept. 26 Purchase 20 $105 average-cost ending inventory:

$2,586 =(25 x $103.43)

Compute inventory and cost of goods sold using periodic FIFO, LIFO, and average-cost. Mather sells a snowboard, EZslide, that is popular with snowboard enthusiasts. Below is information relating to Mather's purchases of EZslide snowboards during September. During the same month, 102 EZslide snow boards were sold. Mather uses a periodic inventory system. Date Description Units Unit Cost Sept. 1 Beginning Inventory 12 $100 Sept. 12 Purchase 45 $103 Sept. 19 Purchase 50 $104 Sept. 26 Purchase 20 $105 FIFO ending inventory:

$2,620 =(5 x $104) + (20 x $105)

The following information was taken from Mitchell Company's cash budget for the month of July: Beginning cash balance $ 25,000 Cash receipts 120,000 Cash disbursements 135,000 If the company has a policy of maintaining an end of the month cash balance of $25,000, the amount the company would have to borrow is: a.)$15,000. b.)$10,000. c.)$35,000. d.)$40,000. e.)$25,000.

7. A 25k + 120k - 135k + x = 25k. Solve for "x".

On May 1, 20X1, Wrigley Corp. provided services worth $50,000 on account. At that time, Wrigley debited "Accounts Receivable" and credited "Service Revenue" for $50,000. On June 1, 20X1, Wrigley agreed to convert the account receivable to a 12-month, 12%, note receivable. The customer will pay Wrigley $50,000 plus interest on June 1, 20X2. Interest on the note is compounded annually. Note: Round all interest calculations to the nearest whole month. How much total interest will Wrigley eventually earn on the Note Receivable?

$50,000 x 12% x 12/12 = $6,000

Determine the correct inventory amount. Umatilla Bank and Trust is considering giving Pohl Company a loan. Before doing so, it decides that further discussions with Pohl's accountant may be desirable. One area of particular concern is the Inventory account, which has a year-end balance of $275,000. Discussions with the accountant reveal the following. Pohl sold goods costing $55,000 to Hemlock Company FOB shipping point on December 28. The goods are not expected to reach Hemlock until January 12. The goods were not included in the physical inventory because they were not in the warehouse. The physical count of the inventory did not include goods costing $95,000 that were shipped to Pohl FOB destination on December 27 and were still in transit at year-end. Pohl received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Yanice Co. The goods were not included in the physical count. Pohl sold goods costing $51,000 to Ehler of Canada FOB destination on December 30. The goods were received in Canada on January 8. The goods were not included in Pohl's physical inventory. Pohl received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $275,000. Determine the correct inventory amount on December 31.

$55,000 properly excluded from ending inventory $95,000 properly excluded from ending inventory $25,000 should be added to ending inventory amount $51,000 should be added to ending inventory amount $42,000 should be subtracted from ending inventory amount Ending inventory should be $275,000 + $25,000 + $51,000 - $42,000 = $309,000

interest expense

(interest rate/periodic rate) x outstanding balance

which of the following are cash equivalents? 1. $60 of currency and coin in a locked box used for incidental cash transactions 2. A $10,000 U.S. Treasury bill, due May 31, 2017 3. $260 of April-dated checks that Wyne has received from customers but not yet deposited 4. An $85 check received from a customer in payment of its April account, but postdated to May 1 5. $2,500 in the company's checking account 6. $4,800 in its savings account 7. $75 of prepaid postage in its postage meter 8. A $25 IOU from the company receptionist

1. Currency $60 2. U.S. Treasury Bill 10,000 3. April checks 260 5. Checking account 2,500 6. Savings account 4,800 Total Cash and Cash Equivalents $17,620 4. Post dated check - Accounts Receivable; Balance Sheet 7. Prepaid postage in postage meter - Prepaid Postage Expense; Balance Sheet, or Postage Expense; Income Statement 8. IOU from company receptionist - Accounts Receivable; Balance Sheet

Average collection period =

360 ÷ AR turnover

average collection period =

360/AR turnover

days in inventory

365/inventory turnover

Date Number of Units Cost per unit August 1 Beginning Inventory 10 $25.00 August 10 Purchases 30 $29.00 Malfoy sold 35 units in August. Question: What is the total cost of goods sold for August using the average-cost method? Round average cost per unit to the nearest penny before computing total cost of goods sold.

980

If a company underestimates its bad debts expense for the year, what are the effects on its net income, total assets, total liabilities, and total stockholders' equity?

As bad debts expense goes up, net income goes down. Therefore, if bad debts expense is underestimated (too low), net income will be overstated (too high) for the year. If bad debts is understated, the "AFDA" account balance will be left understated as well. This will result in total assets being overstated. Net income flows into retained earnings on the balance sheet. Therefore, if net income is overstated, the retained earnings balance will be left overstated. Retained earnings is a component of total stockholders' equity.

Brief Exercise 6-3. Compute the ending inventory using average-cost. In its first month of operations, MeLanie Company made three purchases of inventory in the following sequence: (1) 300 units at $6 (2) 400 units at $8 (3) 500 units at $9 Assuming there are 200 units on hand at the end of the period, compute the cost of the ending inventory under average-cost inventory costing method (assuming periodic inventory system)?

Average cost -- ((300 x 6) + (400 x 8) + (500 x $9))/(300 + 400 +500) = $7.91667 Ending inventory -- 7.91667 x 200 = $1,583.33

The following reconciling items are applicable to the bank reconciliation for Forde Co. (a) Outstanding checks. (b) Bank debit memorandum for service charge. (c) Bank credit memorandum for collecting an electronic funds transfer. (d) Deposit in transit. Indicate the items that will result in an adjustment to the depositor's records.

B. Items (b) and (c) above will require adjustment on the books of the depositor. **The reconciling items per the books, items (b) and (c) above, will require adjustment on the books of the depositor. The other reconciling items (a) and (d) do not require adjustment because they have already been recorded on the depositor's books.**

Ending AR balance=

Beginning AR balance + Credit Sales - Collections - Specific Write-Offs

calculate COGS

Beginning Inventory Costs (at the beginning of the year) + Additional Inventory Cost (inventory purchased during the year) - Ending Inventory (at the end of the year) indirect method for determining COGS

inventory turnover

COGS/[(beginning inv + ending inv)/2]

Inventory turnover ratio

COGS/avg inventory

total assets

Cash + Accounts Receivables - AFDA + Inventory + Prepaid Insurance + Machinery - Accumulated Depreciation.

The entry to record the collection of the note's face value plus interest on June 1, 20X2.

Cash 56,000 Note Receivable 50,000 Interest Receivable 3,500 Interest Revenue (50,000 x 12% x 5/12 = 2,500) 2,500

Fix!! **always want balance per bank and per book to be equal!** Cash balance per bank $3,677.20 Add: NSF check $450.00 Less: Bank service charge $28.00 Adjusted balance per bank $4,099.20 Cash balance per books $3,975.20 Less: Deposits in transit $590.00 Add: Outstanding checks $770.00 Adjusted balance per books $4,155.20

Cash balance per bank $3,677.20 Add: Deposits in transit $590.00 Less: Outstanding checks $770.00 Adjusted balance per bank $3,497.20 Cash balance per books $3,975.20 Less: NSF check $450.00 Less: Bank service charge $28.00 Adjusted balance per books $3,497.20

FIX: original incorrect book balance: $6,738.90 original incorrect bank balance: $6,698.00 financial shenanigans: 1.)The statement included a debit memo of $40 for the printing of additional company checks 2.)Cash sales of $883.15 on May 12 were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $933.15. The bank credited Timmins Company for the correct amount. 3.)Outstanding checks at May 31 totaled $276.25, and deposits in transit were $1,880.15. 4.)On May 18, the company issued check No. 1181 for $685 to H. Moses, on account. The check, which cleared the bank in May, was incorrectly journalized and posted by Timmins Company for $658. 5.)$2,690 was collected by the bank for Timmins Company on May 31 through electronic funds transfer 6.)Included with the canceled checks was a check issued by Tomins Company to C. Pernod for $360 that was incorrectly charged to Timmins Company by the bank 7.)On May 31, the bank statement showed an NSF charge of $380 for a check issued by Sara Ballard, a customer, to Timmins Company on account

Cash balance per bank statement $6,968.00 Add: Deposits in transit $1,880.15 Bank error - Tomins 360 2,240.15 Less: Outstanding checks 276.25 Adjusted cash balance per bank $8,931.90 Cash balance per books $6,738.90 Add: Electronic funds transfer received 2,690.00 Less: NSF check $380.00 Error in May 12 deposit 50 Error in recording check No. 1181 27 Check printing charge 40 497 Adjusted cash balance per books $8,931.90

Problem 7-3A. On July 31, 2017, Keeds Company had a cash balance per books of $6,140. The statement from Dakota State Bank on that date showed a balance of $7,690.80. A comparison of the bank statement with the Cash account revealed the following facts. The bank service charge for July was $25 The bank collected $1,520 for Keeds Company through electronic funds transfer The July 31 receipts of $1,193.30 were not included in the bank deposits for July. These receipts were deposited by the company in a night deposit vault on July 31. Company check No. 2480 issued to L. Taylor, a creditor, for $384 that cleared the bank in July was incorrectly entered in the cash payments journal on July 10 for $348 Checks outstanding on July 31 totaled $1,860.10 On July 31, the bank statement showed an NSF charge of $575 for a check received by the company from W. Krueger, a customer, on account

Cash balance per bank statement $7,690.80 Add: Deposits in transit 1,193.30 Less: Outstanding checks 1,860.10 Adjusted cash balance per bank $7,024.00 Cash balance per books $6,140.00 Add: Electronic funds transfer received 1,520.00 Less: NSF check $575.00 Error in recording check No. 2480 $36.00 Bank service charge $25.00 636 Adjusted cash balance per books $7,024.00

Brief Exercise 7-11. In the month of November, Fiesta Company Inc. wrote checks in the amount of $9,750. In December, checks in the amount of$11,762 were written. In November, $8,800 of these checks were presented to the bank for payment, and $10,889 in December. What is the amount of outstanding checks at the end of November? At the end of December?

Checks written in November $9,750 Less: Checks paid by bank in November $8,800 Checks outstanding at the end of November $950 Add: Checks written in December $11,762 Less: Checks paid by bank in December 10,889 Checks outstanding at the end of December $1,823

List the five primary components of internal control.

Control environment Risk assessment Control activities Information and Communication Monitoring

On July 1, Jarvis Co. sold merchandise on account to Stacey Inc. for $23,000, terms 2/10, n/30.

Debit Accounts Receivable $23,000 Credit Sales Revenue $23,000

a. On July 1, Jarvis Co. sold merchandise on account to Stacey Inc. for $23,000, terms 2/10, n/30. Debit Accounts Receivable $23,000 Credit Sales Revenue $23,000 b. On July 8, Stacey Inc. returned merchandise worth $2,400 to Jarvis Co. Debit Sales Returns and Allowances $2,400 Credit Accounts Receivable $2,400 c. On July 11, Stacey Inc. paid for the merchandise

Debit Cash $20,188 Debit Sales Discounts $412 Credit Accounts Receivable $20,600 Sales Discounts is calculated by $20,600 x 0.02 = $412 Cash is calculated by ($23,000 - $2,400) * (1.00 - 0.02) = $20,1880 Accounts receivable is calculated by $23,000 - $2,400 = $20,600

On July 1, Jarvis Co. sold merchandise on account to Stacey Inc. for $23,000, terms 2/10, n/30. Debit Accounts Receivable $23,000 Credit Sales Revenue $23,000 b. On July 8, Stacey Inc. returned merchandise worth $2,400 to Jarvis Co.

Debit Sales Returns and Allowances $2,400 Credit Accounts Receivable $2,400

On December 15, Butler Corp. sold inventory having a cost of $4,000 for $20,000. Butler accepted the customer's MasterCard for the sales amount. At the end of the day, MasterCard receipts were deposited in the company's bank account. MasterCard charges a 3% service charge for credit card sales. Butler uses the perpetual inventory system. Required: Prepare the journal entries Butler should make on December 15 related to the above sale.

Dec 15 Dr. Cash 19,400 Dr. Service Charge Expense (3% x 20,000) 600 Cr. Sales Revenue 20,000 Dr. Cost of Goods Sold 4,000 Cr. Inventory 4,00

(a) Company checks are prenumbered.

Documentation procedures

Wolfpack Corp. uses the allowance method for estimating is uncollectible accounts receivable. On March 18, it specifically wrote-off the receivable balance of one of its customers. This customer owed Wolfpack $1,000. Required: In the journal below, complete the journal entry to record the specific write-off.

Dr. Allowance for Doubtful Accounts 1,000 Cr. Accounts receivable 1,000

On April 15, Clemmons Corp. sold $800,000 of its accounts receivables to a factor company. The factor company assesses a service charge of 3% on the accounts receivables sold. Required: Prepare the journal entry Clemmons should make when it factors its receivables.

Dr. Cash 776,000 Dr. Service Charge Expense (3% x 800,000) 24,000 Accounts Receivable 800,000

The entry to record the conversion of the account receivable to a note receivable on June 1, 20X1

Dr. Note Receivable 50,000 Cr. Account Receivable 50,000

d) Only the treasurer or assistant treasurer may sign checks.

Establishment of responsibility

Brief Exercise 6-1. Identify items to be included in taking a physical inventory. Indicate whether the items identified by Peete Company should be included or excluded from year-end inventory? 1,200 units of inventory sold but being held for customer pickup

Excluded

Brief Exercise 6-1. Identify items to be included in taking a physical inventory. Indicate whether the items identified by Peete Company should be included or excluded from year-end inventory? 3,000 units of inventory in transit from a supplier shipped FOB destination

Excluded

Brief Exercise 6-1. Identify items to be included in taking a physical inventory. Indicate whether the items identified by Peete Company should be included or excluded from year-end inventory? 500 units of inventory held on consignment from another company

Excluded

The Sarbanes-Oxley Act (SOX) applies to only privately held corporations.

F Publicly held only.

When inventory costs are declining, this method yields the lowest cost of ending inventory.

FIFO

When inventory costs are rising, this method yields the lowest cost of goods sold.

FIFO

Brief Exercise 6-2. Compute ending inventory using FIFO and LIFO. In its first month of operations, MeLanie Company made three purchases of inventory in the following sequence: (1) 300 units at $6 (2) 400 units at $8 (3) 500 units at $9 Assuming there are 200 units on hand at the end of the period, compute the cost of the ending inventory under FIFO

FIFO ending inventory = 200 x $9 = $1,800

(b) The bank statement is reconciled monthly by an internal auditor.

Independent internal verifucation

The entry to record accrued interest on December 31, 20X1

Interest Receivable 3,500 Interest Revenue (50,000 x 12% x 7/12 = 3,500) 3,500

Determine the LCM valuation. Wahlowitz Video Center accumulated the following cost and market data at December 31. Item Cost Market Cameras $12,500 $13,400 Camcorders $9,000 $9,500 DVDs $13,000 $12,200 Compute the lower-of-cost-or-market valuation for the company's inventory?

Item LCM Cameras $12,500 Camcorders $9,000 DVDs $12,200 LCM $33,700

Assume that due to an error during the count of its physical inventory, a company overstated the cost of its ending inventory at the end of 20X5. As a result of this error, indicate how each of the following items are affected on the company's 20X5 income statement and balance sheet. Its net income for 20X5 will: Its ending retained earnings balance for 20X5 will: Its cost of goods sold for 20X5 will:

Its net income for 20X5 will: be overstated Its ending retained earnings balance for 20x5 will: be overstated Its cost of goods sold for 20x5 will: be understated

When inventory costs are declining, this method yields the highest gross margin.

LIFO

When inventory costs are rising, this method yields the lowest income tax expense

LIFO

Brief Exercise 6-2. Compute ending inventory using FIFO and LIFO. In its first month of operations, MeLanie Company made three purchases of inventory in the following sequence: (1) 300 units at $6 (2) 400 units at $8 (3) 500 units at $9 Assuming there are 200 units on hand at the end of the period, compute the cost of the ending inventory under LIFO

LIFO ending inventory = 200 x $6 = $1,200

AR turnover =

Net credit sales ÷ Average Net AR

To eliminate the opportunity for fraud, companies implement a system of procedures called internal controls. What are the primary goals of an internal control system?

Safeguard a company's assets Enhance the reliability of its accounting information Increase efficiency of operations Ensure compliance with laws and regulations

(e) Check-signers are not allowed to record cash disbursement transactions.

Segregation of duties

What does the accounts receivable turnover indicate? Also, in general, when comparing the turnover from one year to the next, do companies prefer it to be higher or lower over time?

The accounts receivable turnover indicates, on average, how many times during the year accounts receivables turnover - that is, created and collected. Theoretically, the receivable starts at zero. It is created when a sale on account occurs. The subsequent cash collection completes the turnover. This ratio is a measure of liquidity. It is also a measure of how effective the company is at managing its receivables (ex. do they collect cash in a timely fashion?). Companies prefer a higher turnover. A low receivable turnover may indicate the company's credit policy is too lenient or customers are not paying quickly enough

tone at the top

The control environment that sets the overall ethical tone with respect to internal control

net mark-up ratio

gross margin/COGS

Brief Exercise 8-3. At the end of 2016, Safer Co. has accounts receivable of $700,000 and allowance for doubtful accounts of $25,000. On January 24, 2017, it is learned that the company's receivable from Madonna Inc. is not collectible and therefore management authorizes a write-off of $4,300. Prepare the journal entry to record the write-off first. Then answer the following: the cash realizable value of the accounts receivable before and after the write-off is $675,000.

The correct answer is TRUE. The journal entry to record the write off is as follows: Allowance for Doubtful Accounts 4,300 Accounts Receivable 4,300 The Cash Realizable values are calculated as follows: Before Write-Off After Write-Off Accounts Receivable $700,000 $695,700 Less: Allowance for doubtful accounts 25,000 20,700 Cash Realizable Value $675,000 $675,000

What are the three elements of the "fraud triangle" and which of these elements does a company's management have the most control over?

The three elements are financial pressure, rationalization, and opportunity. Management has the most control over opportunity.

What is the relationship (ex. direct correlation or inverse) between the account receivable turnover and the average collection period? Also, in general, when comparing the average collection period from one year to the next, do companies prefer it to be higher or lower over time?

There is an inverse relationship between the receivable turnover and average collection period. The more times receivables turn over during the year, the fewer days they are outstanding before cash is collected. In general, companies prefer the collection period to be lower rather than higher

Assume that on April 30, 20X6, Barham Corp. had the following information available: Balance per the bank (Apr 30) $ 8,400 Balance per the books (Apr 30) 8,867 Deposits in transit 900 NSF check 50 Outstanding checks 500 Bank service charges 25 Interest earned 8 Prepare the bank reconciliation for April. A description of each reconciling item amount should be included.

Unadjusted Bank Balance - 4/30 $8,400 Add: Deposits in transit 900 Less: Outstanding checks (500) Adjusted Bank Balance - 4/30 $8,800 Unadjusted Book Balance - 4/30 $8,867 Less: Service charges (25) Add: Interest earned 8 Less: NSF check (50) Adjusted Book Balance - 4/30 $8,800

If a company fails to record accrued interest revenue at the end of its fiscal year, what are the effects on its net income, total assets, total liabilities, and total stockholders' equity?

When interest revenue is accrued, the interest revenue account balance increases and interest receivable increases. Interest revenue is an income statement account and interest receivable is an asset account. Failure to accrue interest revenue will result in net income being understated (too low). Failure to record interest receivable will result in total assets being understated. Net income flows into retained earnings on the balance sheet. Therefore, if net income is understated, the retained earnings balance will be left understated. Retained earnings is a component of total stockholders' equity.

As a customer's account receivable balance is specifically written-off due to its being uncollectible, what is the effect on the company's net accounts receivable amount?

While the individual account balances for the "Accounts Receivable" and "Allowance for Doubtful Accounts" accounts are decreasing, the net amount stays the same.

Effectively managing accounts receivables includes which of the following? (Check all that apply) Select one or more: a. Evaluating their liquidity b. Determining to whom to extend credit c. Establishing a payment period d. Monitoring collections e. Accelerating cash receipts when necessary

b. Determining to whom to extend credit c. Establishing a payment period d. Monitoring collections e. Accelerating cash receipts when necessary

Which of the following would not be a way for a company to accelerate its cash receipts? Select one: a. Offering a discount for early payment. b. Writing off receivables. c. Accepting a credit card for customer purchases. d. Selling receivables to a factor company.

b. Writing off receivables.

Having one person responsible for the related activities of ordering, receiving, and paying for inventory: a.)Is a good example of safeguarding company assets. b.)Increases the potential for errors and fraud. c.)Is a good example of a human resource control. d.)Is cost efficient since the employee can verify their own work.

b.)Increases the potential for errors and fraud.

Which of the following is not one of the basic principles of cash management? a.)Invest idle cash b.)Keep inventory levels high c.)Monitor payment of liabilities d.)Increase the speed of receivables collections e.)Plan the timing of major expenditures

b.)Keep inventory levels high

At the beginning of 20X6, Turner Corp.'s "Allowance for Doubtful Accounts" had a credit balance of $10,000. During 20X6, account receivable balances totaling $12,000 were specifically written-off as being uncollectible. As a result of the above, which of the following statements is true immediately after the write-off? a. The "Allowance for Doubtful Accounts" account has a debit balance of $2,000 which implies that last year's estimate of bad debts was overestimated (too high). b. The "Allowance for Doubtful Accounts" account has a credit balance of $22,000 which implies that last year's estimate of bad debts was underestimated (too low). Incorrect c. The "Allowance for Doubtful Accounts" account has a debit balance of $2,000 which implies that last year's estimate of bad debts was underestimated (too low). d. The "Allowance for Doubtful Accounts" account has a credit balance of $22,000 which implies that last year's estimate of bad debts was overestimated (too high).

c. The "Allowance for Doubtful Accounts" account has a debit balance of $2,000 which implies that last year's estimate of bad debts was underestimated (too low).

The difference between ending inventory's cost using the FIFO method compared to its cost using the LIFO method is referred to as: Select one: a. gross profit. b. the FIFO reserve. c. the LIFO reserve. d. cost of goods sold. e. profit margin.

c. the LIFO reserve.

Employees which evaluate the internal control system of the company which employs them are commonly referred to as: a.)Certified public accountants. b.)Cashiers. c.)Internal auditors. d.)Tax agents. e.)Human resource managers.

c.)Internal auditors.

Which of the following items would not be considered "cash"? a.)Currency on hand b.)The company's own checking account. c.)Postdated check received from a customer. d.)Money order received from a customer.

c.)Postdated check received from a customer.

The control principle related to not having the same person authorize and pay for inventory purchases is known as: a.)Establishment of responsibility. b.)Independent internal verification. c.)Separation of duties. d.)Bonding.

c.)Separation of duties.

gross margin ratio

gross margin/net revenues

The process of estimating bad debts and recording the estimate in the same period as the sales associated with those accounts receivables is an application of which accounting principle?

expense recognition principle (matching principle)

A just-in-time inventory management system increases inventory carrying costs as well as the risk of obsolescence.

false

As a company's receivables turnover ratio increases, the average collection period in terms of days should also be increasing

false

Cash is the asset least susceptible to employee fraud.

false

Companies should strive to keep a large amount of petty cash on hand.

false

In a period of decreasing inventory prices (deflation), the FIFO inventory costing method produces a higher ending inventory than the LIFO inventory costing method?

false

In a period of increasing inventory prices (inflation), the FIFO inventory costing method produces a lower income tax than the LIFO inventory costing method?

false

Raw materials inventory is the inventory items that have completed the production process and are ready for sale?

false

Restricted cash should be reported on the liability side of the balance sheet.

false

The LIFO inventory method assigns the cost of the earliest inventory purchased to cost of goods sold and the cost of the last inventory purchased to ending inventory?

false

True or False: A company is permitted to regularly switch its inventory costing methods from year to year

false

United States accounting standards require that the inventory costs assigned to cost of goods sold be consistent with the physical movement of inventory to the seller?

false

When preparing an aging report, most companies should expect that the longer a particular customer's account has been outstanding, the less likely it is to become uncollectible.

false

The "Allowance for Doubtful Accounts" account is an example of a contra-revenue account.

false, It is a contra-asset account since its balance is reported in the asset section.

The specific write-off of an account receivable will decrease the net realizable value of the accounts receivables.

false, Net realizable value does not change.

The amount shown on the balance sheet called "Net Accounts Receivable" is determined by adding together the balances in the "Accounts Receivable" and "Allowance for Uncollectible Accounts" accounts.

false, Since Accounts Receivable has a normal debit balance while the normal balance in the Allowance account is a credit, their two balances should be netted together by subtracting the Allowance balance from the Accounts Receivable balance.

If the "Allowance for Doubtful Accounts" account has a debit balance before the year-end journal entry to record bad debts, it implies the estimate of uncollectible accounts at the beginning of the year was too high.

false, Specific write-offs were more than previous estimates of bad debts. This implies the previous estimate was too low

rue or False: The LIFO Conformity Rule states that if the LIFO method is used for income tax purposes, it can not be used for financial statement purposes.

false, The LIFO Conformity Rule states that if the LIFO method is used for income tax purposes, it must be used for financial statement purposes as well. There is no such rule for the FIFO method.

Employees are bonded when it is determined that the likelihood of them stealing from the company is extremely small.

false, bonding is insuring against any and all fraud

Only companies which use the periodic inventory system are required to take a physical count of their inventory at the end of the year.

false, both do

Collusion occurs when two or more employees work together to make internal controls more effective.

false, collusion is when they work together to do bad things

Investments, regardless of maturity date, should be classified as a cash equivalent on the balance sheet.

false, generally those with an original maturity of three months or less qualify as a cash equivalent

After a company specifically writes off a customer's account receivable as being uncollectible, it may not subsequently collect the cash from the customer.

false, it can still collect

When a company's receivables turnover ratio is increasing from one year to the next, it implies customers are paying off their accounts receivable less quickly than in the past.

false, they're paying them more quickly

Interest revenue calculation: 4/1/X1 - 12/31/X1 =

given amount x rate x time/periods

Identify items in inventory. Below are inventory situations to consider for Gato Inc. at January 31, its year-end. For each situation indicate whether it should or should not be included in ending inventory? Goods shipped to a customer, FOB destination, on January 29 that are still in transit.

should be considered in ending inventory

Inventory owned by Dusty but held on consignment by a company in a different state.

should be considered in ending inventory count

Inventory purchased and being shipped to Dusty F.O.B. shipping point. The shipment is in transit on Dec 31.

should be considered in ending inventory count

Identify items in inventory. Below are inventory situations to consider for Gato Inc. at January 31, its year-end. For each situation indicate whether it should or should not be included in ending inventory? Goods purchased FOB destination from a supplier on January 25 that are still in transit.

should not be considered in ending inventory

Identify items in inventory. Below are inventory situations to consider for Gato Inc. at January 31, its year-end. For each situation indicate whether it should or should not be included in ending inventory? Goods shipped to a customer, FOB shipping point, on January 29 that are still in transit

should not be considered in ending inventory

Identify items in inventory. Below are inventory situations to consider for Gato Inc. at January 31, its year-end. For each situation indicate whether it should or should not be included in ending inventory? Office supplies on hand at January 31.

should not be considered in ending inventory

Inventory sold but being held by Dusty for customer pickup.

should not be considered in ending inventory count

Supplies ordered and being shipped to Dusty F.O.B. shipping point. The shipment is in transit on Dec 31. The supplies will be used in Dusty's business.

should not be considered in ending inventory count

Proper segregation of duties

the person responsible for the record keeping be different than the person responsible for the physical custody of an asset

net sales

total sales-(sales allowances +sales discounts+returns+allowances)

"Net Accounts Receivable", also called net realizable value, represents the portion of the total accounts receivable balance the company estimates it will collect.

true

A company may accelerate its cash receipts by selling its accounts receivable to a factor company.

true

All else being equal, an ending inventory error occurring in year one (20X1) will affect net income in year one and year two (20X1 and 20X2).

true

Cash equivalents are readily convertible to known amounts of cash.

true

In a period of increasing inventory prices (inflation), the FIFO inventory costing method produces a higher net income than the LIFO inventory costing method?

true