A201 exam 2 concepts

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

average collection period; receivable turnover ratio

Notes payable is classified as a liability that has which of the following effects?

creates interest expense on the income statement

Sales to customers in which the customers pay within 30 to 60 days are referred to as

credit sales, sales on account

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory

Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio?

prepaid assets; inventory

When an asset is no longer useful, but cannot be sold, it is called an asset

retirement

Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?

sales discount

Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise. The customer has not yet paid for any of the goods. What will Adrian record on May 15?

Debit to sales returns, credit to accounts receivable

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

For internal record keeping, most companies carry their inventory using the _____ basis.

FIFO

Which of the following methods are available for costing inventory?

FIFO, specific identification, weighted-average, LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO

When prices increase, the ______ inventory method tends to decrease a company's tax liability during a particular fiscal period.

LIFO

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

LIFO

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the

LIFO reserve

The receivables turnover ratio indicates

The number of times during a year that the average accounts receivables were collected.

Which of the following represent reasons why managers closely monitor inventory levels?

To ensure that sufficient units are available. To minimize costs of inventory write-downs due to obsolete inventory.

Liquidity

a company having a sufficient amount of cash to pay its current debts

The normal balance of notes receivable is:

a debit

A retirement or abandonment of an asset is different from a sale of an asset because

a loss must be recognized for the remaining book value; no cash is received

A company purchases inventory or supplies and promises to pay within 30 to 45 days. No formal agreement is signed. This transaction is recorded as a(n)

accounts payable

Goodwill is recognized only when one company ______ another company.

acquires

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

assets decrease by the cost of the inventory; assets increase by the sales price of the inventory

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period

The journal entry to record bad debt expense includes:

debit to bad debt expense; credit to allowance for uncollectible accounts

Adrian Corp. sells goods on account for $100,000 on May 1. The customer paid for the goods on May 10. On May 15, the customer returns $40,000 of the merchandise. The entry Adrian makes on May 15 will include the following:

debit to sales returns, credit to cash

If a liability is classified as current, rather than noncurrent, the company's working capital will

decrease

A calendar-year-end company that accepts a 3-month interest-bearing note on December 1 must accrue _______ , Incorrect Unavailable revenue on December 31.

interest

Identify characteristics of notes payable that are not common to accounts payable.

interest bearing; based on promissory note

The ______ method of valuing inventory was developed to avoid reporting inventory at an amount that is ______ than the benefits it can provide.

lower of cost and net realizable value; greater

Purchases goods that are primarily in finished form for resale to customers.

merchandising

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.

multiple-step

What is the formula for the profit margin ratio?

net income/net sales

Asset Turnover Ratio

net sales/average total assets

Receivables not expected to be collected should

not be counted in assets of the company

A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.

note payable

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming

outdated

The exclusive legal right to manufacture a product or to use a process is called a(n)

patent

The acid-test ratio is based on a more conservative measure than the current ratio of the company's ability to:

pay its current liabilities

a trade discount is

percentage reduction from the list price

Sherman company recognizes cost of goods sold after completing a physical inventory

periodic inventory system

LIFO

provides better matching of current revenues with current inventory cost

Records revenues when providing services to customers.

service

in a basket purchase of assets, the cost must be allocated to the individual assets because

the assets have different useful lives

Straight-line deprecation is calculated as the depreciable cost divided by

the estimated service life of the asset

The service life or useful life of an asset is

the estimated use that the company expects to obtain from the asset before disposing of it

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

FOB destination means title to the goods passes

when they arrive at the destination

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the LIFO _____

reserve

An interest rate, unless otherwise specified, is typically ____ rate.

annual

Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)

annual, 12 month rate

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the benefits it provides

The estimated expense for accounts that may not be collected is referred to as

bad debt expense

When assets are purchased in a group for a single sum, it is referred to as a

basket purchase

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to

be more accurate

When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold.

book

The original cost of an asset minus accumulated depreciation is

book value

The original cost of the asset less the accumulated depreciation is the ____ ____ of the asset.

book value

A trade discount is recognized

by reducing the revenue amount recorded

means to record an expenditure as an asset

capitalize

In accounting, expenditures recorded as assets are said to be

capitalized

Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should

credit notes payable $5000

The term used to describe the amount the company expects to receive for an asset at the end of its service life is

residual value

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n)

sales return

The estimated use the company expects to obtain from an asset before disposing of it is referred to as the _____ life of the asset.

service

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.

specific identification

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?

stockholders' equity increases; total assets increase; net income increases

The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the

straight line method

commonly used depreciation methods

straight-line; activity-based; declining-balance

The primary benefit of LIFO is:

tax savings

depreciable cost

the cost of the asset minus its residual value

The journal entry to retire old equipment that is not fully depreciated includes a:

credit to equipment; debit to loss; debit to accumulated depreciation

Liabilities are classified as

current and long term

Working capital formula

current assets - current liabilities

Current Ratio

current assets divided by current liabilities

Which of the following measure liquidity?

current ratio; acid-test ratio; working capital

Josh Corporation uses the perpetual inventory system. Josh sells goods to a customer on account for $2,000. The cost of goods sold is $1,500. What is the entry required to record the expense of the inventory sold?

debit cost of goods sold $1500; credit inventory $1500

On October 1, 2018, Logan Corporation signed a 6-month, 8% interest-bearing promissory note for $10,000. The journal entry required at December 31, 2018 would include which of the following?

debit interest expense $200

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

decrease an asset and increase an expense; increase an asset and increase revenue

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

decrease in accounts receivable

A sales allowance ____ the amount owed by the customer for merchandise that is _____ by the customer.

decreases; retained

The financial statement effects of recording an allowance for estimated sales returns are that:

equity decreases, net income decreases, assets decrease

If a company generates its own goodwill through advertising or training, how should these costs be treated?

expense the costs as incurred

Interest Formula

face amount x annual interest rate x fraction of the year

The formula for calculating interest on a note is

face value x annual rate x fraction of the annual period.

A multiple-step income statement reports multiple levels of

income

Purchasing inventory on account:

increase assets; increase liabilities

Obtaining a note payable for cash results in a(n)

increase in assets and an increase in liabilities

in a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs

incurred several years earlier

Intangible assets that are acquired from other entities are referred to as purchased intangibles, whereas intangibles that are created by a company are referred to as

indefinite intangibles

Although a company may have a high current ratio and appear successful, the accounts used to calculate the current ratio that may have issues or problems are

inventories and accounts receivable

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

inventory, cost of goods sold

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for

inventory; cost of goods sold

Which statement is true about the straight-line method of depreciation?

it allocates an equal amount of depreciation to each year the asset is used

The distinction between land and land improvements is that:

land has an indefinite life

long-term tangible assets

land, equipment, buildings

Which of the following costs should be capitalized in the costs of acquiring a building?

legal fees to obtain title; purchase price; realtor commissions

Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?

legal fees to secure title; title insurance; grading the land; costs to remove an old building

A probable future sacrifice of economic benefits arising from present obligations of an entity to transfer assets or provide services as a result of past transactions or events is a(n)

liability

The cost of land improvements are capitalized separately from land because land improvements tend to have a ____ useful life.

limited

in times of rising prices, ending inventory determined using the LIFO inventory assumption will be ____ than ending inventory determined using the FIFO

lower

Kilian Company's inventory balance at the end of the current year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered, the effect of this error on financial statements in the following year will be:

overstated net income

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are

paid by supplier

Peter Company recognizes cost of goods sold each time it recognizes a sale

perpetual inventory system

Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs?

perpetual inventory system

_____ _____ inventory includes the cost of components that will become part of the finished product but have not yet been used in production.

raw materials

The Work-in-Process inventory account typically includes which costs?

raw materials, indirect manufacturing costs, direct labor

Which of the following accounts are typically reported in the balance sheet of a manufacturing company?

raw materials, work in process, finished goods

When an asset's fair value falls below its book value, the difference between fair value and book value is

recognized as an impairment loss

Two entries are required when a previously written off account is collected. These two entries include:

record the collection on the account receivable; reinstate the account receivable

True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

true

Which of the following accounts would be found in the balance sheet of a manufacturing company?

work in process

The specific identification method (select all that apply):

would be beneficial to a company that makes fine jewelry; matches each unit of inventory with its actual cost

What are the two steps in the two-step process of measuring impairments?

1. test for impairment using the future cash flows 2. measurement of the impairment and record the loss

Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?

18000

A patent is the exclusive right to manufacture a product or use a process granted for a period of ______ years.

20

When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?

An entry to reinstate the account receivable and an entry to record payment.

Generally, if a company wants its inventory cost flows to be the same as the inventory's physical flows, what inventory method would it use?

FIFO

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO

Identify a primary reason why financial statement users assess a company's liquidity.

Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.

Produces the goods they sell to customers.

Manufacturing

FIFO

Most closely approximates the actual physical flow of inventory

Which of the following methods are not used for inventory costing?

NIFO, simple-average

Gross Profit is

Net sales revenue minus the cost of goods sold.

Norton's current ratio is 2.5 and its quick ratio is .9. What is the most likely cause for this difference in the current and quick ratio?

Norton has a high inventory balance.

Which of the following transactions will increase a company's working capital?

Receipt of cash on a long-term notes receivable

A(n) _____ payable results from an agreement with a supplier to pay within 30 to 60 days, whereas ______ payable is a signed contract that promises to pay a specific amount with interest at a specific maturity date.

account; note

The allowance for uncollectible accounts is a contra account to

accounts receivable

What will be the effect of paying off an accounts payable balance on the current and the acid-test ratios? Assume that both ratios are greater than 1.

acid and current will increase

Which of the following items are initially recorded as an expense on the income statement?

advertising costs; research and development costs

the approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the _____ allowance , Incorrect Unavailable method of accounts receivable.

aging

depreciation

allocation of the cost of a tangible fixed asset

Amorization

allocation of the cost of an intangible asset

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the

allowance method

"Net credit sales" refers to credit sales net of:

allowances, returns, discounts

The gain or loss on disposal of an asset is calculated as:

amount received less the book value of asset sold

Amend Inc. debited Accounts Receivable and credited Allowance for Doubtful Accounts to reestablish an account previously written off. Amend Inc. should also debit _______ and credit _______.

cash; accounts receivable

A trade discount is a reduction from the list price, which is used to:

change prices without publishing a new catalog, disguise real prices from competitors, give quantity discounts to customers

The ratio that shows the approximate number of days the average accounts receivable balance is outstanding is referred to as the average

collection period

A(n) _______ is protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.

copyright

Which of the following items should be capitalized as land improvements?

cost of parking lots, cost of fences, cost of parking lots

Which of the following items should be capitalized in the cost of equipment?

freight to deliver the equipment; installation and testing of equipment; sales tax; legal fees to establish title

What comparative advantages do notes receivables possess compared to other receivables?

higher likelihood of collectibility; interest-bearing

When an asset has a significant decline in value and is written down, this is called

impairment

Net revenues is calculated as total revenues minus which of the following items?

sales discounts, sales returns, sales allowance

straight line depreciation formula

(cost-residual value)/service life

In accounting, the term impairment refers to

an asset's significant decline in value

contra account

an account that is an offset to, or reduction of, another account

The purchase price and all costs to bring an asset to its desired condition and location for use should be

capitalized

Straight-line, declining-balance, and activity-based refer to methods commonly used to _______ property, plant, and equipment.

depreciate

Goodwill may only be recognized

in a business acquisition