MGMT Exam 2 Study Questions

Credit sales are recorded as

Debit Accounts Receivable, credit Service Revenue

Cost of goods sold is:

Reported in the income statement

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

Total Revenue - Sales Discounts - Sales Allowances

A business may use the periodic or perpetual inventory systems for different types of inventory.

True

Under the principle of lower of cost and net realizable value, when a company has 10 units of inventory A with net realizable value of $50 and a cost of $60, what is the adjustment?

ebit Cost of Goods Sold $100; credit Inventory $100 ; 10 units × $10 price reduction = $100

How much depreciation should be recorded for the first year for a delivery truck with a cost of $30,000, an expected life of six years, and an estimated residual value of $6,000? Assume the double‐declining‐balance method is used.

$ 10,000 - The straight‐line rate for a six‐year asset is 1/6. This rate would be doubled to 2/6 (or 33.33%). -Depreciation the first year (rounded): $10,000 = $30,000 × 33.33%.

A company makes a basket purchase of land, buildings, and equipment with estimated fair values of $70,000, $150,000, and $30,000, respectively. The purchase price is $210,000. How much should be recorded to the Land account?

$ 58,800; The total fair value of the three assets is $250,000. Land's relative fair value is $70,000/$250,000 (or 28%). Therefore, the land would be recorded for $210,000 × 28% = $58,800.

Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight‐line method, what is the amortization expense for the first year?

$10,000 -$50,000/5 years = $10,000

Papercraft Corporation purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five‐year life, with a residual value of $5,000 at the end of five years. Using the straight‐ line method, depreciation expense for 2018 would be:

$11,000 - ($60,000 ‐ $5,000)/5 years) = $11,000

Wiley Company purchased new equipment for $60,000. Wiley paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was:

$66,500; $60,000 + $1,000 + $3,000 + $2,500

Bahama Catering purchased a commercial dishwasher by paying cash of $8,000. The dishwasher's fair value on the date of the purchase was $10,000. The company incurred $600 in transportation costs, $500 installation fees, and paid $300 annual insurance of the equipment. For what amount will Bahama record the dishwasher?

$9,100; $8,000 + $600 + $500 = $9,100. The annual insurance on the equipment of $300 should be recorded as insurance expense over the first year of coverage.

The practice of using the lower of cost and net realizable value to evaluate inventory reflects which of the following accounting principles?

**A & C** A. Matching principle B. Materiality C. Conservatism D. Answers A and C

Identify the condition(s) that must exist for a sale and the related receivable to be recognized.

A. Collection of cash is probable B. The company must have collected cash from at least one previous sale to the customer C. Goods or services have been provided to the customer D. **Two of the other answers are conditions that must exist

The choice of inventory cost flow assumptions affects which of the following amounts?

A. Inventory. B. Cost of goods sold. C. Gross profit. **D. All of the other answers are affected by the inventory cost flow assumption.**

Which of the following statements is true?

A. Product costs affect only the balance sheet B. Product costs affect only the income statement inventory C. Period costs affect only the balance sheet D. Neither product costs nor period costs affect the Statement of Retained Earnings. This can also be a true statement if the period costs were prepaid (i.e., prepaid advertising, depreciation) E. **Product costs eventually affect both the balance sheet and the income statement. cost of goods sold

Which of the following items are classified as receivables?

A. Tax refund claims B. Amounts owed by customers C. Amounts loaned and expected to be collected D. **All of the other answers are classified as receivables

The direct write‐off method is not normally an acceptable method for GAAP because it fails to report:

Accounts receivable for their net realizable value

Which of the following would be recorded as land improvements?

Adding a parking lot.

Which accounting concept does the direct write‐off method violate?

An attempt to match revenues and their related expenses

Losses on the sale of long‐term assets for cash:

Are the excess of the book value over the cash received

A note receivable is reported in the balance sheet

As either a current asset or long‐term asset depending on the expected collection date

The cost of unsold inventory at the end of the year is classified as a(n) ______ in the ______.

Asset; Balance sheet

One advantage of the allowance method for accounting for uncollectible accounts is that the company reports:

Bad debt expense in the same period as the credit sale

LIFO is considered an income statement approach for reporting inventory because it:

Better approximates inventory cost necessary to generate revenue.

A company's ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management's ability to:

Collect cash from all sales to customers

The account "Allowance for Uncollectible Accounts" is classified as a(n):

Contra asset to accounts receivable in the balance sheet

The factors used to compute depreciation expense are an asset's:

Cost, residual value, and service life

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 Freight charges on inventory increase the balance of the inventory account. Returns & purchase discounts decrease the account balance.

Which of the following subsequent expenditures would be capitalized?

Costs that increase the service life of an asset

The normal balance of the account "Allowance for Uncollectible Accounts" is a _______ because _______.

Credit; it is a contra account to Accounts Receivable (a debit account)

At the end of the year, Mark Inc. estimates future bad debts to be $6,500. The Allowance for Uncollectible Accounts has a credit balance of $2,500 before any year‐end adjustment. What adjustment should Mark Inc. record for the estimated bad debts at the end of the year?

Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000 (Bad Debt Expense = $6,500 ‐ $2,500 = $4,000)

Good Inc., sold inventory for $1,200 that was purchased for $700. Good records which of the following when it sells inventory using a perpetual inventory system?

Debit Cost of Goods Sold $700; credit Inventory $700.

Using the income statement approach for accounting for uncollectible accounts, a company estimates that 2.5% of credit sales will eventually become uncollectible. If credit sales during the year are $400,000 and accounts receivable at the end of the year are $80,000, the adjustment for estimated uncollectible accounts will require a

Debit to Bad Debt Expense for $10,000

At the end of 2018, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (credit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage‐of‐receivables method. Murray State's adjustment on December 31, 2018, to record its estimated uncollectible accounts included a:

Debit to Bad Debt Expense of $7,500; credit to Allowance for Uncollectible Accounts of $7,500 (Bad debt expense = $12,000 ‐ $4,500 = $7,500)

Identify the likely disadvantage(s) of extending credit to customers

Delay or failure to collect cash

Inventory does not include

Equipment used in the manufacturing of assets for sale.

Research and development costs should be:

Expensed in the period incurred

The inventory cost flow assumption that generally best matches the physical flow of inventory is:

FIFO

The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:

FIFO

If A sells to B, and B obtains title while goods are in transit, the goods were shipped _______. If C sells to D, and C maintains title until the goods arrive at D's door then the goods were shipped _______.

FOB shipping point; FOB destination

If prices were to never change, there would still be a need for alternative inventory methods

False

In accounting for inventory, the assumed cost flow must match the physical goods flow.

False

Inventory methods such as LIFO and FIFO deal more with goods flow than with cost flow.

False

We record a gain if we sell an asset for less than book value

False

During periods of consistently falling prices, the FIFO inventory method will produce the highest possible amount of net income

False - LIFO

Using a perpetual inventory system, the purchase of inventory is recorded with a debit to the Purchases account, which is a temporary account closed to cost of goods sold at the end of the period.

False; A "Purchases" account is used under the periodic inventory system

A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances.

False; A sales allowance is recorded as a debit to Sales Allowances and a credit to Accounts Receivable.

Accumulated Depreciation is a liability account that is increased by credits

False; Accumulated Depreciation is a contra‐asset account; it reduces an asset account

Even though the percentage‐of‐receivables method and the percentage‐of‐credit‐sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods.

False; Bad debt expense will typically differ between the two methods

When the value of inventory falls below its cost, companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value

False; Companies must report inventory at the lower of cost and net realizable value.

During periods of rising costs, FIFO generally results in a higher cost of goods sold.

False; During periods of rising costs, FIFO generally results in a lower cost of goods sold.

During periods of rising costs, LIFO generally results in a higher ending inventory balance.

False; During periods of rising costs, LIFO generally results in a lower ending inventory balance since earliest costs are assigned to inventory.

For most companies, actual physical flow of their inventory follows LIFO.

False; Most often, the actual physical flow of goods follows FIFO.

The net realizable value of accounts receivable is the full amount owed by customers

False; Net realizable value is the net amount of cash we expect to collect.

The Sales Returns account is an expense account

False; Sales Returns is a contra revenue account

Using the weighted‐average cost method, the average cost of inventory is calculated as the average unit cost of inventory purchased during the year.

False; The average is a weighted‐average cost which includes both beginning inventory and purchases and is equal to total cost of goods available for sale divided by the total number of units available for sale.

Trade discounts represent a discount offered to the purchasers for quick payment.

False; Trade discounts represent a reduction in the listed price of a product or service

Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense

False; Writing off an account receivable has no effect on expenses

Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets.

False; Writing off an account receivable has no effect on total assets

Goods in transit shipped FOB shipping point should be included in the seller's ending inventory.

False; purchaser's (buyer's) inventory

Which of the following intangible assets has an indefinite useful life?

Goodwill

Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?

Increase expenses

On September 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018?

Interest revenue = $1,000 × 12% × 4/12 = $40

One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for:

Inventory

The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is:

LIFO

Which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue?

LIFO

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?

LIFO - 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.

A perpetual inventory system measures cost of goods sold by:

Making entries to the inventory account for each purchase and sale.

An increase in a company's receivables turnover ratio typically means the company is

More effectively granting and collecting credit to customers.

Suppose a customer is unable to pay its account on time, so the company accepts a six‐month interest‐ bearing note receivable to replace the customer's account receivable. What effect will accepting the note receivable have on the company's financial statements at the time of acceptance?

No change in total assets

Cochrane, Inc. accounts for bad debts using the allowance method. On June 1, Cochrane wrote off $2,500 customer account. Based on Cochrane's estimation, the customer will never pay any portion of the balance in his account. What effect will this write‐off have on Cochrane's balance sheet at the time of the write‐off?

No effect

Silver, LLC accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the accounting equation?

No effect on the accounting equation

In a periodic inventory system, the entry at the time of a sale to record the cost of inventory sold includes a:

Not recorded at this time of the sale

Which level of profitability is considered profit from normal operations?

Operating income; (Income before taxes and net income include nonoperating items, which are not considered part of normal operations.)

The primary distinction between operating activities and nonoperating activities in a multiple‐step income statement is whether the activity is:

Part of primary business operations

Costs that are expensed when incurred are called?

Period costs

In a periodic inventory system, the purchase of inventory is debited to:

Purchases

LePage's Inc. shipped the wrong color of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a:

Sales allowance

When customers purchase products on account, Knomark, Inc. offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a:

Sales discount

The gross profit ratio will typically be higher for companies that:

Sell products that are more highly specialized or require higher operating expenses (advertising).

Which of the following statements is true with respect to the percentage‐of‐credit‐sales method for estimating uncollectible accounts?

The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts

The inventory turnover ratio measures:

The times per period the average inventory balance is sold

A periodic inventory system does not continually modify inventory amounts, but instead adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand

True

Book value or carrying value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation

True

Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory.

True

Land improvements are recorded separately from the land itself because, unlike land, these assets are subject to depreciation.

True

Many intangible assets are not recorded on the balance sheet at their estimated market values

True

The LIFO difference (reserve) is the additional amount of inventory a company would report if it used FIFO instead of LIFO.

True

The Sales Discounts account is an example of a contra revenue account.

True

The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory.

True

Under GAAP, a company is permitted to apply the lower of cost or net realizable value rule to total inventory as compared to item by item analysis.

True

When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.

True

Which of the following subsequent expenditures would not be capitalized?

Unsuccessful legal defense of intangible assets

Which of the following is not a period cost?

Wages of assembly‐line workers (product cost)