ACC 190 KC

The matching concept most significantly influences which financial statement?

Income statement

Which of the following would be considered as primarily a merchandising business? West Consulting Martin's Supermarket Sandridge and Associates Law Offices KPM Accounting and Tax Service

Martin's Supermarket

An error, or other reporting problem, that would influence the decision of an average prudent investor.

Material Item

equation for double-declining-balance depreciation

Multiply the straight-line rate times two. Then multiply the double-declining rate by the book value of the asset at the beginning of the period.

Rationalization: Justification of illegal behavior // Has 3 aspects that go into it:

1. Justification: I am only taking what they "owe me" 2. Attitude: I am above the rules. 3. Lack of Personal Integrity: Getting what I want is more important than doing the right thing.

Which of the following financial statements provides information about a company as of a specific point in time?

Balance sheet

Which of the following would be classified as a long-term operational asset? Notes receivable Trademark Inventory Accounts receivable

Trademark

Issuing a note payable is a(n): claims exchange transaction. asset source transaction. asset use transaction. asset exchange transaction.

asset source transaction.

Remitting the tax (paying cash to the tax authority) is an ________________

asset use transaction.

examples of permanent accounts:

cash, notes payable, land, common stock, retained earnings

A ____________ is guaranteed payment by the bank and is deducted when the bank certifies that the check is good. They, therefore, have been deducted by the bank in determining the unadjusted bank balance.

certified check

A ______________ is a potential obligation arising from a past event. The amount of existence of the obligation depends on some future event.

contingent liability

Key Features of Internal Control Systems: The activities usually thought of as "the internal controls" including segregation of duties, account reconciliations, and information processing controls designed to safeguard assets and enable an organization to timely prepare reliable financial statements.

control activities

Key Features of Internal Control Systems: The integrity and ethical values of the company, including its code of conduct and other actions that set the tone of the organization

control enviornment

A ___________ protects writings, musical compositions, works of art, and other intellectual property. The protection extends for the life of the creator plus 70 years. The cost of a copyright is often expensed early because future royalties may be uncertain.

copyright

Accrual accounting calls for recognizing revenue in the period in which it is _____________ regardless of when cash is collected.

earned

Accountants commonly allocate the purchase price using the relative ___________________

fair market value method

A single-step income statement shows the computation of gross margin.

false

Cost of goods available for sale is allotted between cost of goods sold and selling expenses.

false

Cost of goods sold is a part of administrative and selling expenses.

false

FOB shipping point means that purchaser's responsibility ends at shipping point.

false

Gains and losses are included in operating income on a multistep income statement.

false

If a company is located in an area where floods or earthquakes are deemed to be possible, the company should record a contingent liability. True or False

false

The four financial statements prepared by a business bear no relationship to each other. True or False

false

The purchase of merchandise inventory is recorded as an expense.

false

The term FOB means that goods are shipped free of charge to buyer and seller.

false

The treatment of interest on the multistep income statement is consistent with the treatment of interest on the statement of cash flows.

false

True or False: A fidelity bond is a form of insurance that companies ask employees to buy to protect the company from loss due to employee dishonesty.

false

True or False: Safeguarding assets against theft and unauthorized use, acquisition, or disposal is not part of an internal control system.

false

True or False: The mechanics of internal control systems do not vary from company to company.

false

True or False: The most favorable type of audit report is called a qualified opinion.

false

True or False: The proper conduct of an audit guarantees the accuracy of all figures on the financial statements.

false

True or False: Under proper internal controls, the person who collects customer payments should also maintain the records of cash receipts.

false

True or False: Whenever possible, the functions of authorization, recording, and custody of assets should be performed by the same individual.

false

When the seller of merchandise records freight under the terms FOB shipping point, the seller records an expense.

false

With an accelerated depreciation method, an asset can be depreciated below its salvage value. True or False

false

______________ Provides insurance that protects a company from loss caused by employee dishonesty.

fidelity bond

The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased ________ be assigned to cost of goods sold.

first

Key Features of Internal Control Systems: Assessing the quality of a company's internal control over time and taking actions as necessary to ensure it continues to address the risks of the organization.

monitoring

The ______________ of accounts receivable represents the amount of receivables a company estimates it will actually collect.

net realizable value

The amount of accounts receivable that is actually expected to be collected is known as the: allowance for doubtful accounts. uncollectible accounts expense. present value of accounts receivable. net realizable value.

net realizable value

A __________ grants its owner an exclusive legal right to produce and sell a product that has one or more unique features. The legal life of a patent is 20 years. The costs capitalized in the Patent account are usually limited to the purchase price and legal fees.

patent

Internal controls should include independent verification of employee performance. • A physical inventory should be taken at least annually by someone other than the person who has control over the inventory. • Auditors should evaluate the effectiveness of the control system as well as verify the accuracy of the accounting records.

performance evaluation

Tangible assets have a __________ presence; they can be seen and touched.

physical

To limit losses, companies should establish adequate physical control over valuable assets. • Inventory should be kept in a storeroom and not released without proper authorization • Serial numbers on equipment should be recorded along with the name of the individual responsible • CDs and marketable securities should be kept in fireproof vaults.

physical control

Prenumbered forms are used for all important documents such as checks, purchase orders, receiving reports, and invoices. The use of prenumbered forms helps keep track of all forms issued during a particular period.

prenumbered documents

Job rotation and cross training prevent disruptions, may help relieve boredom, and increase ______________

productivity.

Opportunity

the situation that enables fraud to occur, often when internal controls are weak or nonexistent

The reason bonds are sometimes issued at a discount is: the stated rate of interest is higher than the rate being paid on investments in the securities market with comparable risk. the stated rate of interest is the same as the rate being paid on investments in the securities market with comparable risk. the stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk. the bonds are being issued between interest payment dates.

the stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk.

Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions? to repay the debt to pay dividends to pay interest to repay the interest and repay the debt

to repay the interest and repay the debt

A __________________ is a name or symbol that identifies a company or a product. The costs incurred to design, purchase or defend a trademark are capitalized in an asset account called Trademarks. Trademarks have an indefinite legal lifetime.

trademark

A multistep income statement separates product from period costs.

true

Contingent liabilities are only recognized if they arise from past events. True or False

true

FOB destination means that seller's responsibility ends at destination.

true

Generally accepted accounting principles require that, when the estimated useful life of a long-term asset is changed, previously-issued financial statements should not be revised. True or False

true

Interest is normally shown as a separate item on the multistep income statement.

true

Merchandise Inventory is an account appearing on the balance sheet.

true

Merchandise inventory is expensed in the period it is sold.

true

The depreciable cost of a long-term asset is the difference between the amount paid for the asset and its salvage value. True or False

true

The freight terms FOB shipping point increase the cost of inventory to the buyer.

true

True or False: Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations.

true

True or False: One of the basic rules of internal control is to require some employees to take regular vacations.

true

True or False: Separation of duties is an internal control feature that requires different individuals to perform the following functions: authorization, recording, and custody of assets.

true

examples of product costs

Goods purchased for resale, Transportation-in.

Which of the following intangible assets is the value attributable to favorable factors such as reputation, location, and superior products? Copyrights Franchises Goodwill Trademarks

Goodwill

____________ is the value attributable to favorable factors such as reputation, location and superior products.

Goodwill

Houff Company uses the allowance method to account for uncollectible accounts. An account that had been previously written-off as uncollectible was recovered. How would the recovery affect the company's accounting equation? Reduce liabilities and increase stockholders' equity Increase total assets and increase stockholders' equity Have no effect on total assets, liabilities or stockholders' equity Increase total assets and decrease liabilities

Have no effect on total assets, liabilities or stockholders' equity

Which of the following accounts would not appear on a balance sheet?

Service Revenue.

The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1: Cash$ 4,000Accounts receivable$ 3,400Dividends2,000Common stock3,900Land3,200Revenue3,200Accounts payable1,800Expense2,200 What is net income that will be shown on Carolina's Year 1 income statement?

$1,000

Sheldon Company began Year 1 with $1,200 in its supplies account. During the year, the company purchased $3,400 of supplies on account. The company paid $3,000 on accounts payable by year end. At the end of Year 1, Sheldon counted $1,400 of supplies on hand. Sheldon's financial statements for Year 1 would show:

$1,400 of supplies; $3,200 of supplies expense

On January 6, Year 1, the Mount Jackson Corporation purchased a tract of land for a factory site for $1,500,000. An existing building on the site was demolished and the construction of the new factory building was completed on October 11, Year 1. Additional cost data are shown below: Construction cost of new building ($1,760,000) Realtor's and attorney's fees (15,400) Architect's fees relating to construction of new building (138,000) Cost to demolish old building (133,200) Salvage recovery from old building (11,000) Which of the following correctly states the capitalized cost of the land and the new factory building, respectively? $1,637,600 and $1,898,000 $1,515,400 and $2,020,200 $1,648,600 and $1,887,000 $1,500,000 and $2,035,600

$1,637,600 and $1,898,000

Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each. During the period, the company purchased inventory items as follows. Glasgow sold 220 units after purchase 3 for $17.00 each. PurchaseNumber of ItemsCost1200$ 9.0021509.3035010.50 If the company uses the FIFO cost flow method, Glasgow's cost of goods sold would be: Multiple Choice $1,650. $1,860. $2,310. $2,100.

$1,860.

High Ridge Merchandising Company purchased inventory that had a list price of $10,000. The purchase was made under terms 2/10, net 30 FOB shipping point. Freight costs amounted to $300. Assuming High Ridge paid cash for the inventory after the discount period, the cost of the inventory was: $10,000. $9,800. $10,100. $10,300.

$10,300.

The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1: Cash$ 4,000Accounts receivable$ 3,400Dividends2,000Common stock3,900Land3,200Revenue3,200Accounts payable1,800Expense2,200 What is the amount of total assets on Carolina's December 31, Year 1 balance sheet?

$10,600

Eureka Company issued $100,000 in bonds payable on January 1, Year 1. The bonds were issued at face value and carried 5-year term to maturity. They had a 7% stated rate of interest that was payable in cash on January 1st of each year beginning January 1, Year 2. Based on this information, the amount of total liabilities appearing on the December 31, Year 1 balance sheet would be: Multiple Choice$100,000.$7,000.$99,300.$107,000.

$107,000.

Jing Company was started on January 1, Year 1 when it issued common stock for $50,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $2,000. The equipment had a five-year useful life and a $12,000 expected salvage value. At the end of Year 5, assuming the equipment had not been sold, the book value of the office equipment using straight-line depreciation and double-declining-balance depreciation, respectively, would be: $12,000 and $1,680. $12,000 and $12,000. $0 and $0. None of these answer choices are correct.

$12,000 and $12,000.

Sanchez Company engaged in the following transactions during Year 1: Started the business by issuing $42,000 of common stock for cash. The company paid cash to purchase $26,400 of inventory. The company sold inventory that cost $16,000 for $30,600 cash. Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: The company paid cash to purchase $35,200 of inventory. The company sold inventory that cost $32,800 for $57,000 cash. Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. What is the balance in the inventory account as of December 31, Year 2? $2,400 $12,800 $61,600 $28,800

$12,800

Farmer Company purchased equipment on January 1, Year 1 for $82,000. The equipment is estimated to have a 5-year life and a salvage value of $4,000. The company uses the straight-line depreciation method. If the original expected life remained the same (i.e., 5-years), but at the beginning of Year 4, the salvage value was revised to $8,000, the annual depreciation expense for each of the remaining years would be: $5,440. $27,200. $13,600. $14,800.

$13,600.

The following account balances were drawn from the financial statements of Grayson Company: Cash$ 8,800Accounts payable$ 2,500Accounts receivable$ 3,000Common stock?Land$ 16,000Retained earnings, January 1$ 5,400 Revenue$ 19,000 Expenses$ 14,500 Based on the above information, what is the balance of Common Stock for Grayson Company?

$15,400

Anchor Company purchased a manufacturing machine with a list price of $160,000 and received a 2% cash discount on the purchase. The machine was delivered under terms Free On Board shipping point, and freight costs amounted to $2,400. Anchor paid $3,000 to have the machine installed and tested. Insurance costs to protect the asset from fire and theft amounted to $3,600 for the first year of operations. Based on this information, the amount of cost recorded in the asset account would be: Multiple Choice $156,800. $159,200. $165,800. $162,200.

$162,200.

Duke Company's unadjusted bank balance at March 31 is $2,300. The bank reconciliation revealed outstanding checks amounting to $500 and deposits in transit of $400. Based on this information, Duke's true cash balance is:

$2,200.

Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each. During the period, the company purchased inventory items as follows. Glasgow sold 220 units after purchase 3 for $17.00 each. PurchaseNumber of ItemsCost1200$ 9.0021509.3035010.50 If the company uses the LIFO cost flow method, Glasgow's ending inventory would be: Multiple Choice $2,730. $2,460. $2,220. $1,950.

$2,220.

West Company borrowed $10,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1 income statement would be: $0. $150. $60. $200.

$200.

Sanchez Company engaged in the following transactions during Year 1: Started the business by issuing $42,000 of common stock for cash. The company paid cash to purchase $26,400 of inventory. The company sold inventory that cost $16,000 for $30,600 cash. Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: The company paid cash to purchase $35,200 of inventory. The company sold inventory that cost $32,800 for $57,000 cash. Operating expenses incurred and paid during the year, $18,000. Sanchez uses the perpetual inventory system. What is Sanchez's gross margin for the Year 2? $6,200 $24,200 $21,800 $32,800

$24,200

Madison Company issued an interest-bearing note payable with a face amount of $24,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be: $24,720 $24,800 $25,920 $24,000

$24,800

North Woods Company has a line of credit with the Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows: MonthAmount Borrowed (Repaid)Prime Rate for the MonthJanuary$ 40,0006%February60,0005%March(40,000)3% The amount of interest paid at the end of March would be: Multiple Choice $150. $300. $267. $250.

$250.

The April 30 bank statement for Trimble Corporation shows an ending balance of $34,351. The unadjusted cash account balance was $28,250. The accountant for Trimble gathered the following information: There was a deposit in transit for $4,240. The bank statement reports a service charge of $39. A credit memo included in the bank statement shows interest earned of $95. Outstanding checks totaled $10,935. The bank statement included a $650 NSF check deposited in April. What is the true cash balance as of April 30?

$27,656

Assume the perpetual inventory method is used. Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point. The company paid freight cost of $2,400 to have the merchandise delivered. Payment was made to the supplier within 10 days. All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB shipping point with freight cost amounting to $1,600. What is Green Company's gross margin resulting from these transactions? $31,280 $27,280 $28,880 $29,680

$28,880

If Ballard Company reported assets of $500 and liabilities of $200, Ballard's stockholders' equity equals:

$300.

On January 1, Year 2, the Accounts Receivable balance was $37,000 and the balance in the Allowance for Doubtful Accounts was $2,800. On January 15, Year 2, an $800 uncollectible account was written-off. The net realizable value of accounts receivable immediately after the write-off is: $36,200. $33,400. $35,000. $34,200.

$34,200.

On March 1, Bartholomew Company purchased a new stamping machine with a list price of $34,000. The company paid cash for the machine; therefore, it was allowed a 5% discount. Other costs associated with the machine were: transportation costs, $550; sales tax paid, $1,360; installation costs, $450; routine maintenance during the first month of operation, $500. The cost recorded for the machine was: $34,210. $32,300. $35,160. $34,660.

$34,660.

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be: $36,000 and $0. $37,890 and $0. $37,890 and $38,520. $1,890 and $630.

$37,890 and $0.

The Miller Company recognized $190,000 of service revenue earned on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $136,000 of cash from accounts receivable. The company estimates that it will be unable to collect 3% of its sales on account. The net realizable value of Miller's receivables at the end of Year 2 was: $54,000. $49,920. $59,700. $48,300.

$48,300.

The Miller Company recognized $190,000 of service revenue earned on account during Year 2. There was no beginning balance in the accounts receivable and allowance accounts. During Year 2, Miller collected $136,000 of cash from accounts receivable. The company estimates that it will be unable to collect 3% of its sales on account. The amount of uncollectible accounts expense recognized on the Year 2 income statement was: $5,700. $1,320. $4,080. $54,000.

$5,700.

Domino Company uses the aging of accounts receivable method to estimate uncollectible accounts expense. Domino began Year 2 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $76,500 and $5,800, respectively. During the year, the company wrote off $4,640 in uncollectible accounts. In preparation for the company's Year 2 estimate, Domino prepared the following aging schedule: What will Domino record as Uncollectible Accounts Expense for Year 2? $6,132 $1,512 $7,292 $4,640

$6,132

Farmer Company purchased equipment on January 1, Year 1 for $82,000. The equipment is estimated to have a 5-year life and a salvage value of $4,000. The company uses the straight-line depreciation method. At the beginning of Year 4, Farmer revised the expected life to eight years. The annual amount of depreciation expense for each of the remaining years would be: $6,240. $4,400. $7,040. $3,900.

$6,240.

On April 1, Year 1, Fossil Energy Company purchased an oil-producing well at a cash cost of $12,000,000. It is estimated that the oil well contains 600,000 barrels of oil, of which only 500,000 can be profitably extracted. By December 31, Year 1, 25,000 barrels of oil were produced and sold. The amount of depletion for Year 1 on this well would be: $800,000. $600,000. $480,000. $500,000.

$600,000.

On January 1, Year 1, Friedman Company purchased a truck that cost $48,000. The truck had an expected useful life of 100,000 miles over 8 years and an $8,000 salvage value. During Year 2, Friedman drove the truck 18,500 miles. The company uses the units-of-production method. The amount of depreciation expense recognized in Year 2 is: $8,880. $7,400. $6,000. $5,000.

$7,400.

Assume the perpetual inventory method is used. The company purchased $12,500 of merchandise on account under terms 2/10, n/30. The company returned $1,200 of merchandise to the supplier before payment was made. The liability was paid within the discount period. All of the merchandise purchased was sold for $18,800 cash. What is the amount of gross margin from the four transactions? $5,100 $7,726 $6,550 $11,074

$7,726

Rosewood Company made a loan of $16,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest revenue that Rosewood would report during the years ending December 31, Year 1 and Year 2, respectively, would be: $960 and $0. $0 and $960. $240 and $720. $720 and $240.

$720 and $240.

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions. The amount of net income on the Year 2 income statement would be: Multiple Choice$770.Correct$630.$(190).$1,890.

$770.

Current assets include:

- cash - marketable securities - accounts receivable - short-term notes receivable - interest receivable - inventory - supplies - prepaid items

On January 1, Year 1, Missouri Company purchased a truck that cost $57,000. The truck had an expected useful life of 10 years and a $6,000 salvage value. The amount of depreciation expense recognized in Year 2 assuming that Missouri uses the double declining-balance method is: $9,120. $11,400. $10,200. $8,160.

$9,120.

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000. What value will be recorded for the building? Multiple Choice $175,000 $950,000 $800,000 $1,100,000

$950,000

The life cycle of an operational asset involves:

(1) acquiring the funds to buy the asset, (2) purchasing the asset, (3) using the asset, and (4) retiring (disposing of) the asset.

Determining the Cost of Equipment:

(1) purchase price (less discounts), (2) sales taxes, (3) delivery costs, (4) installation costs, and (5) costs to adapt for intended use.

Determining the Cost of Land:

(1) purchase price, (2) sales taxes, (3) title search and transfer document costs, (4) realtor's and attorney's fees, (5) costs for removal of old buildings, and (6) grading costs.

Determining the Cost of Buildings:

(1) purchase price, (2) sales taxes, (3) title search and transfer document costs, (4) realtor's and attorney's fees, and (5) remodeling costs.

equation for straight-line depreciation

(Asset Cost - Salvage Value) / Useful Life

1. If the likelihood is probable and the amount can be reasonably estimated, a liability is recognized in the financial statements. 2. If the likelihood is reasonable possible but not likely or if it is probably but cannot be reasonably estimated, the potential liability is disclosed in the notes to the financial statements. 3. If the likelihood is remote, there is no liability and no disclosure.

..

Interest expense on long-term installment notes increases each year.False Cash for machinery or buildings is often obtained by issuing long-term debt.True Short-term notes payable normally mature within a year.True Long-term installment notes are repaid all at once two to five years after the issue date.False Most long-term loans are obtained from the corporation's stockholders.False

...

Line-of-credit agreements generally involve a fluctuating rate of interest.True A line-of-credit agreement allows a company to borrow on an as-needed basis.True Interest rates on line-of-credit agreements are often pegged to the consumer price index.False The signing of a line-of-credit agreement is an asset source transaction.False The expense recognition for the payment of monthly interest is an asset exchange transaction.False

...

Most businesses finance their investing activities with long-term debt. Current liabilities mature within one year or a company's operating cycle, whichever is longer. Other liabilities are long-term liabilities. Interest charges may be based on a fixed or a variable interest rate. Principal repayment is generally required either in one lump sum at the maturity date or in installments.

...

Reconciling Items Bank Balance Adjusted? Added or Subtracted?Bank service charge No Outstanding checks Yes - Deposits in transit Yes + Debit memo No Credit memo No Certified checks No Petty cash voucher No NSF check from customer No Interest revenue No

...

The amount of warranty expense is an estimate that is based on the amount of merchandise sold.True A warranty obligation only occurs if a buyer purchases an extended warranty.False When a warranty claim is made, the seller's stockholders' equity decreases.False When a warranty claim is settled, the seller's liabilities increase.False Product warranties usually represent legal liabilities that must be reported in the financial statements.True

...

The three elements of the Integrity Triangle are responsibility, accountability and authority. When a person understands and appreciates that they 1) have a responsibility to their organization; 2) are accountable to its mission; and 3) have the authority to effect positive change in that organization, an organizational culture intolerant of improper or inappropriate conduct, such as fraud, is more likely to persist. No matter where you are in an organization, everyone owns a triangle: it defines your job.

...

To use the weighted average cost flow method, first calculate the average cost per unit by dividing the total cost of the inventory available by the total number of units available.

... Cost of goods sold is calculated by multiplying the average cost per unit by the number of units sold

Although the amounts for interest expense and principal repayment differ each year, the effects of the annual payment on the financial statements are the same. On the balance sheet, assets (cash) decrease by the total amount of the payment; liabilities (note payable) decrease by the amount of the principal repayment; and stockholders' equity (retained earnings) decreases by the amount of interest expense.

....

Reconciling Items Book Balance Adjusted? Added or Subtracted? Credit memo Yes + Interest revenue Yes + Deposits in transit No Debit memo Yes - Service charge Yes - Charge for printing new checks Yes - NSF check from customer Yes - Note receivable collected by the bank Yes + Outstanding checks No

....

Three alternative methods for recognizing depreciation expense are:

1) Straight-line 2) Double-declining-balance 3) Units-of-production

Advantages of Issuing Bonds

1. Bonds usually have longer terms than notes issued to banks. Longer terms to maturity allow companies to implement long-term strategic plans without having to worry about frequent refinancing arrangements. 2. Bond interest rates may be lower than bank interest rates. By issuing bonds directly to the public, companies can pay lower interest costs by eliminating the intermediary (banks).

Role of the Independent Auditor (CPA)

1. Conducts a financial audit. 2. Assumes both legal and professional responsibilities to the public as well as to the company paying the auditor. 3. Determines if financial statements are materially correct. 4. Presents conclusions in an audit report that contains an opinion. 5. Maintains professional confidentiality of client records.

Types of Pressure

1. Pressures for Misappropriation of Assets by Employees -Financial -Emotional -Lifestyle 2. Pressures for Financial Reporting Fraud -Industry conditions -Management characteristics

Luna Company accepted credit cards in payment for $6,000 of services performed during July. The credit card company charged Luna a 4 percent service fee; it paid Luna as soon as it received the invoices. Based on this information alone, what is the amount of net income earned during the month of July?

5,760

Which document is issued by a bank to advise the depositor of a deduction to the depositor's checking account balance? A debit entry A debit memo A credit memo A reconciling entry

A debit memo

The adjusting entry to recognize work completed on unearned revenue involves which of the following?

A decrease in liabilities and an increase in stockholders' equity

Which of the following is not a procedure to maintain internal controls over cash payments? A receipt should be provided to each cash customer. Checks should be properly authorized with approval signatures. All checks should be prenumbered. Voided checks should be defaced and retained.

A receipt should be provided to each cash customer.

Which of the following statements concerning internal controls is true? Strong internal controls cannot be circumvented. A system of internal controls is designed to prevent or detect errors and fraud. Internal controls are limited to the policies and procedures used to protect the company from fraud. The control procedure, separation of duties, prohibits the employment of a husband and wife or other closely related parties within the same company.

A system of internal controls is designed to prevent or detect errors and fraud.

Which of the following would most likely not be expensed using the straight-line method? A copyright Equipment A timber stand A patent

A timber stand

Use the following account numbers and corresponding account titles to answer the following question. (1)Cash (2)Merchandise inventory (3)Cost of goods sold (4)Transportation-out (5)Dividends (6)Common stock (7)Selling expense (8)Loss on the sale of land (9)Sales revenue Which accounts would be reported on the balance sheet? Account numbers 1, 2, 4, and 5. Account numbers 1, 3, 7, and 8. Account numbers 1, 2, and 6. Account numbers 3, 4, 8, and 9.

Account numbers 1, 2, and 6.

Use the following account numbers and corresponding account titles to answer the following question. (1)Cash (2)Merchandise inventory (3)Cost of goods sold (4)Transportation-out (5)Dividends (6)Common stock (7)Selling expense (8)Loss on the sale of land (9)Sales revenue Which accounts would affect gross margin? Account numbers 2 and 9. Account numbers 3 and 9. Account numbers 3, 4, 7, and 9. Account numbers 3, 7, 8 and 9.

Account numbers 3 and 9.

Use the following account numbers and corresponding account titles to answer the following question. (1)Cash (2)Merchandise inventory (3)Cost of goods sold (4)Transportation-out (5)Dividends (6)Common stock (7)Selling expense (8)Loss on the sale of land (9)Sales revenue Which accounts would affect the amount of net income shown on the income statement? Account numbers 3, 4, 7, 8, and 9. Account numbers 3, 4, 5, 7, and 9. Account numbers 2, 3, 7, 8, and 9. Account numbers 3, 5, 7, and 8.

Account numbers 3, 4, 7, 8, and 9.

• Deposits in transit have been recorded in the depositor's accounting records but have not yet been added to the depositor's account by the bank. • Outstanding checks are disbursements that have been properly records as cash deductions on the depositor's books but the bank has not deducted the amounts from the depositor's bank account.

Adjustments to the Bank Balance

If the financial statements cannot be relied upon because they contain one or more material departures from GAAP, which type of audit opinion will be issued by the auditor? Qualified opinion Disclaimer Adverse opinion Unqualified opinion

Adverse opinion

Which of the following is considered a period cost? Transportation cost on goods received from suppliers. Advertising expense for the current month. Cost of merchandise purchased. None of these answer choices is considered a period cost.

Advertising expense for the current month.

Which of the following is not a primary role of an independent auditor? Assume legal and professional responsibilities to the public Advise client on tax strategies Determine whether a company's financial statements are materially correct All of these answer choices are correct

Advise client on tax strategies

Which of the following statements about liabilities is true? They represent obligations to repay debts. They may increase when assets increase. They are found on the claims side of the accounting equation. All of the answers are characteristics of liabilities.

All of the answers are characteristics of liabilities.

Benitez Company had sales of $800,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $13,000 of warranty obligations paid in cash during Year 1. Based on this information: Warranty expenses would decrease net earnings by $24,000 in Year 1. Cash would decrease by $13,000 as a result of the accounting events associated with warranties in Year 1. The warranties payable account would increase by $11,000 in Year 1. All of these answer choices are correct.

All of these answer choices are correct.

Which of the following items would typically appear in the current liabilities section of a classified balance sheet? Interest payable Salaries payable Accounts payable All of these answer choices are correct.

All of these answer choices are correct.

Which of the following terms is used to identify the expense recognition for intangible assets? Allocation Depletion Depreciation Amortization

Amortization

For which of the following bank reconciliation adjustments would an adjusting entry not be necessary? Multiple Choice An error in which the company's accountant recorded a check as $235 that was written correctly for $253. A check for $37 deposited during the month, but returned for non-sufficient funds. An error in which the bank charged the company $83 for a check that had been written by another account holder. All of these answer choices would require adjusting journal entries.

An error in which the bank charged the company $83 for a check that had been written by another account holder.

Which of the following represents the impact of a taxable cash sale of $400 on the accounting equation if the sales tax rate is 5%? An increase to cash for $420, an increase to sales tax expense for $20, and an increase to sales revenue for $400. An increase to cash for $400, an increase to sales tax payable for $20, and an increase to sales revenue for $380. An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400. None of these answer choices is correct.

An increase to cash for $420, an increase to sales tax payable for $20, and an increase to sales revenue for $400.

Which of the following correctly describes an installment note? An installment note requires equal interest payments with the entire principal balance paid at maturity. An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note. An installment note requires equal payments of interest and principal in which the amount of interest increases over the life of the note. The installment note requires decreasing payments of interest and principal in which the amount of interest remains constant over the life of the note.

An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note.

When a company's inventory consists of many low-priced, high-turnover goods, the record keeping necessary to use specific identification isn't practical.

Another disadvantage of the specific identification method is the opportunity for managers to manipulate the income statement.

Which of the following statements about materiality is not true? Materiality is different for each company. A material error would change the opinion of the average prudent investor. Any error greater than $5,000 is considered material in a financial statement audit. Material misstatements should not exist in order for a company to receive an unqualified audit opinion.

Any error greater than $5,000 is considered material in a financial statement audit.

How will accounts receivable appear on the following financial statements?

Asset on the balance sheet

Borrowing cash from the bank is an example of which type of transaction?

Asset source

Economic resources that will be used by a business to produce revenue.

Assets

Assume the perpetual inventory method is used. The company purchased $12,500 of merchandise on account under terms 2/10, n/30. The company returned $1,200 of merchandise to the supplier before payment was made. The liability was paid within the discount period. All of the merchandise purchased was sold for $18,800 cash. What effect will the return of merchandise to the supplier have on the accounting equation? Assets and stockholders' equity are decreased by $1,176. Assets and liabilities are decreased by $1,176. Assets and liabilities are decreased by $1,200. None. It is an asset exchange transaction.

Assets and liabilities are decreased by $1,200.

Pace Company issued at 97 bonds with a face value of $200,000. As a result of the issue: Assets and liabilities would both increase by $200,000. Assets and liabilities would both increase by $194,000. Assets would increase by $194,000 and liabilities would increase by $200,000. Assets would increase by $200,000, and liabilities would increase by $194,000.

Assets and liabilities would both increase by $194,000.

1. Maker (also called borrower or debtor) - The person responsible for making payment on the due date. 2. Payee (also called creditor or lender) - The person to whom the note is made payable. 3. Principal - The amount of money loaned. 4. Interest - The economic benefit earned by the payee for loaning the principal 5. Maturity date - The date on which the maker must repay the principal and interest 6. Collateral - Assets that are assigned as security

Characteristics of Notes Receivable

Which of the following businesses is most likely to use a specific identification cost flow method? Multiple Choice Car dealership Grocery store Hardware store Roofing company

Car dealership

• A bank signature card shows the bank account number and the signatures of the people authorized to sign checks. • Each deposit of cash or checks is accompanied by a deposit ticket. • When signed by the authorized person, a bank check authorizes the bank to transfer the face amount of the check from the payer's account to the payee.

Checking Account Documents

Which of the following is an asset exchange transaction? Issued common stock. Accrued salary expense at the end of the accounting period. Collected cash on accounts receivable. Recognized revenue earned on a contract where the cash had been collected at an earlier date.

Collected cash on accounts receivable.

Certificates that evidence ownership in a company.

Common Stock

The statement of changes in stockholders' equity shows changes in which of the following accounts?

Common Stock and Retained Earnings

Opportunity

Condition or situation that allows a person or organization to: 1. Commit the fraud 2. Conceal the fraud -Lapping -Kiting 3. Convert the theft or misrepresentation to personal gain

Which of the following is not one of the articles of the AICPA Code of Professional Conduct? Due Care Objectivity and Independence Integrity Conservatism

Conservatism

• A company should make all disbursements using checks, thereby providing a record of cash payments. • All checks should be prenumbered, and unused checks should be locked up. • The duties of approving disbursements, signing checks, and recording transactions should be separated. • Supporting documents should be required and marked Paid when the check is signed.

Controlling Cash - Cash Payments

A record of all cash collections should be prepared immediately upon receipt. • The amount of cash on hand should be counted regularly. • Employees who receive cash should give customers a copy of a written receipt. • Cash receipts should be deposited in a bank on a timely basks. • Every effort should be made to minimize the amount of cash on hand.

Controlling Cash - Cash Receipts

Which of the following would not be classified as a tangible long-term asset? Delivery truck Timber stand Land Copyright

Copyright

What documentation issued by a bank increases a company's checking account balance at the bank? Credit memo Debit memo Balance sheet Certified check

Credit memo

Individuals or institutions that have loaned goods or services to a business.

Creditors

Which resource providers lend financial resources to a business with the expectation of repayment with interest?

Creditors

________________ are expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer.

Current assets

Which of the following is not a common internal control activity (or procedure)? Establishment of clear lines of authority Having employees covered by a fidelity bond Requiring regular vacations for certain employees Customer service comment cards

Customer service comment cards

The recognition of depreciation expense acts to: Decrease assets, stockholders' equity, and cash flow from operating activities. Increase cash flow from operating activities, and does not affect the amount of total assets. Increase assets, stockholders' equity, and cash flow from operating activities. Decrease assets and stockholders' equity, and does not affect cash flow.

Decrease assets and stockholders' equity, and does not affect cash flow.

What types of accounts are "matched" when the matching concept is used in a discussion of accrual accounting?

Expenses and revenues

Which of the following terms is used to identify the process of expense recognition for property, plant and equipment? Amortization Depreciation Depletion Revision

Depreciation

A bank reconciliation normally begins with the cash balance reported by the bank (the unadjusted bank balance). • The adjustments necessary to determine the amount of cash that the depositor actually owns as of the date of the bank statement are then added to and subtracted from the unadjusted bank balance. • The final total is the true cash balance.

Determining True Cash Balance

If retained earnings decreased for the year, and no dividends were paid, which of the following must be true?

Expenses for the year exceeded revenues.

__________________ balance depreciation produces a large amount of depreciation in the first year of an asset's life, and progressively smaller levels of expense in each succeeding year.

Double-declining

Which of the following is considered an accelerated depreciation method? Double-declining-balance Units-of-production Straight-line Both double-declining-balance and units-of-production

Double-declining-balance

Which of the following is not one of the purposes of an internal control system? Safeguarding the company's assets The evaluation of performance The assessment of the degree of compliance with company policies and public laws Ensuring that the company is using the most effective marketing plan

Ensuring that the company is using the most effective marketing plan

If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold? LIFO FIFO Weighted average LIFO, FIFO, and weighted average will all produce equal amounts.

FIFO

Jones Co. started the year with no inventory. During the year, it purchased two identical inventory items at different times. The first purchase cost $1,060 and the other, $1,380. Jones sold one of the items during the year. Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory on the year-end financial statements, assuming use of following cost flow assumptions: FIFO? LIFO? Weighted average?

FIFO: Cost of goods sold= 1,060 // Ending Inventory: 1,380 LIFO: Cost of goods sold= 1,380 // Ending Inventory: 1,060 Weighted Average: Cost of goods sold= 1,220 // Ending Inventory: 1,220

Which type of accounting information is intended to satisfy the needs of external users of accounting information?

Financial accounting

____________ grant the exclusive right to sell products or perform services in certain geographic areas. The legal and useful lives of a franchise are frequently difficult to determine.

Franchises

Financial accounting standards are known collectively as GAAP. What does that acronym stand for?

Generally Accepted Accounting Principles

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should: Disclose the lawsuit in the notes to the financial statements. Recognize a $5 million liability on its balance sheet for the contingency. Ignore the lawsuit in its financial statements. Settle with the customer immediately for $5 million to avoid harmful publicity.

Ignore the lawsuit in its financial statements.

What term is used to describe the situation where there is a permanent decline in the value of an intangible asset? Amortization Impairment Depletion Depreciation

Impairment

Bluestone Company issued bonds with a face value of $500,000 on January 1, Year 1 at 90. How would this event affect the company's financial statements? Increase assets (cash) by $450,000, decrease liabilities (discounts on bonds payable) by $50,000, and increase liabilities by $500,000. Increase assets (cash) by $500,000, decrease liabilities (discounts on bonds payable) by $50,000, and increase liabilities by $550,000. Increase assets (cash) by $450,000, decrease liabilities (premium on bonds payable) by $50,000, and increase liabilities by $500,000. Increase assets (cash) by $500,000 and increase liabilities by $500,000.

Increase assets (cash) by $450,000, decrease liabilities (discounts on bonds payable) by $50,000, and increase liabilities by $500,000.

Abbott Company purchased $6,500 of merchandise inventory on account. Abbott uses the perpetual inventory method. How does this transaction affect the financial statements? Decrease accounts payable and decrease purchases Increase inventory and increase accounts payable Increase cost of goods sold and increase accounts payable Decrease accounts payable and decrease inventory

Increase inventory and increase accounts payable

Houston Company borrowed $20,000 from Dallas Company on March 1, Year 1. Houston is to repay the principal and interest on March 1, Year 2. The interest rate is 8%. If the year-end adjustment is properly recorded, what will be the effects of the accrual on Houston's Year 1 financial statements? Increase liabilities and increase expenses Increase assets and increase revenues Increase assets and increase liabilities No effect

Increase liabilities and increase expenses

Which of the following terms is applied to long-term assets that have no physical substance and provide rights, privileges and special opportunities to businesses? Tangible assets Intangible assets Natural resources Property, plant and equipment

Intangible assets

limitations

Internal controls can be circumvented by collusion among employees. Two or more employees working together can hide embezzlement by covering for each other. No system can prevent all fraud. Good internal controls minimize fraud and increase likelihood of early detection.

Which of the following is an asset source transaction? Issued common stock. Paid a cash dividend to stockholders. Received a payment on accounts receivable. Accrued salary expense.

Issued common stock.

A review of the bank statement and accounting records of the Blake Company revealed the following items: Item NumberDescription1)Three outstanding checks2)A debit memo showing a bank service charge3)A deposit in transit4)An NSF check written by one of Blake's customers5)A certified check written by Blake6)A credit memo reflecting interest revenue earned by Blake Which of the item(s) would be added to the unadjusted bank balance to determine the true cash balance?

Item number 3

A review of the bank statement and accounting records of the Blake Company revealed the following items: Item NumberDescription1)Three outstanding checks2)A debit memo showing a bank service charge3)A deposit in transit4)An NSF check written by one of Blake's customers5)A certified check written by Blake6)A credit memo reflecting interest revenue earned by Blake Which of the item(s) would be subtracted from the company's unadjusted book balance to determine the true cash balance?

Item numbers 2 and 4

At a time of declining prices, which cost flow method will result in the highest ending inventory? Weighted average FIFO LIFO Either weighted average or FIFO

LIFO

Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value? Weighted average Specific identification LIFO FIFO

LIFO

Which of the following is not subject to depreciation? Computers Buildings Land Office furniture

Land

If total assets decrease, then which of the following statements is true?

Liabilities, common stock, or retained earnings must decrease.

An obligation to pay cash in the future.

Liability

How will accounts payable appear on the following financial statements?

Liability on the balance sheet

__________________ are the costs of routine maintenance and minor repairs that are incurred to keep an asset in good working order. These costs are expensed in the period in which they are incurred.

Maintenance costs

Which of the following items is not classified as a current asset? Office equipment. Merchandise inventory. Office supplies. Prepaid rent.

Office equipment.

Star Company recognizes sales revenue from selling inventory for $2,000 cash. Note that Star is only recording the sales revenue part of the transaction and not the cost of goods sold. Star uses the perpetual inventory system. Which of the following answers reflects the effect of the sales revenue on the financial statements? Balance SheetIncome StatementStatement of Cash FlowsAssets=Liabilities+Stockholders' EquityRevenue−Expense=Net Income A.2,000 − 2,000 2,000 n/a 2,000 2,000 OA B.(2,000) − (2,000) 2,000 + 2,000 n/a C.2,000 2,000 n/a 2,000 n/a 2,000 2,000 OA D.(2,000) n/a (2,000) n/a 2,000 (2,000) (2,000) OA

Option A

The Garrett Company uses the perpetual inventory system. Although its inventory records indicated a book balance of $18,000 in the merchandise inventory account, a physical count showed only $16,250. Which of the following answers indicates the effect of the necessary adjusting entry? Balance SheetIncome StatementStatement of Cash FlowsAssets=Liabilities+Stockholders' EquityRevenue−Expense=Net Income A.(1,750) n/a (1,750)n/a 1,750 (1,750) n/a B.n/a 1,750 (1,750)n/a 1,750 (1,750) n/a C.16,250 n/a 16,250 16,250 n/a 16,2501 6,250 IA D.(18,000) n/a (18,000) (18,000) n/a (18,000) n/a Option A Option B Option C Option D

Option A

Emir Company purchased equipment that cost $110,000 cash on January 1, Year 1. The equipment had an expected useful life of six years and an estimated salvage value of $8,000. Assuming that Emir depreciates its assets under the straight-line method, the amount of depreciation expense shown on the income statement prepared for Year 4 and the amount of accumulated depreciation shown on the balance sheet prepared as of December 31, Year 4, respectively, would be: Depreciation expenseAccumulated depreciationA.$17,000$17,000B.$17,000$68,000C.$68,000$17,000D.$17,000$51,000 Option A Option B Option C Option D

Option B

Star Company recognized $500 of cost of goods sold. Note that Star is only recording the cost of goods sold part of the transaction and not the sales revenue. Star uses the perpetual inventory system. Which of the following answers reflects the effect of recognizing the cost of goods sold on the financial statements? Balance SheetIncome StatementStatement of Cash FlowsAssets=Liabilities+Stockholders' EquityRevenue−Expense=Net Income A.500 − 500 n/a 500 (500) n/a B.(500) − (500) n/a 500 (500) n/a C.(500) (500) n/a n/a 500 (500) 500 OA D.(500) (500) n/a n/a n/a n/a

Option B

One of Rich Company's customers returns merchandise previously purchased on account. The merchandise had not yet been paid for. The merchandise list price was originally $1,000 and the merchandise had cost Rich Company $400. Rich uses the perpetual inventory system. Which of the following answers reflects the effects on Rich Company's financial statements of the sales return? Balance SheetIncome StatementStatement of Cash FlowsAssets=Liabilities+Stockholders' EquityRevenue−Expense=Net Income A.400 n/a 400 − (400) 400 400 OA B.(600) − (600) (1,000) (400) (400) − 1,000 OA C.(1,000) n/a (1,000) (1,000) n/a (1,000) n/a D.(600) n/a (600)(1,000) (400) (600) n/a Option A Option B Option C Option D

Option D

Which of the following assets does not have an indefinite useful life? Copyright Patent Franchise Trademark

Patent

-Three Conditions that are present when Fraud occurs -ALSO THE 3 POINTS ON THE TRIANGLE

Pressure, Rationalization, and Opportunity

An audit is useful to financial statement users because it: Guarantees that the financial statements are accurate and correct. Guarantees that management has not been involved in misappropriation of assets. Provides reasonable assurance that the financial statements do not have material misstatements. Assures users that confidentiality is maintained.

Provides reasonable assurance that the financial statements do not have material misstatements.

Which of the following is a claims exchange transaction? Recognized revenue earned on a contract where the cash had been collected at an earlier date. Issued common stock. Invested cash in an interest earning account. Purchased machine for cash.

Recognized revenue earned on a contract where the cash had been collected at an earlier date.

Which of the following correctly states the proper order of the accounting cycle?

Record transactions, adjust accounts, prepare statements, close temporary accounts.

Which of the following is an asset use transaction? Purchased machine for cash. Recorded insurance expense at the end of the period. Invested cash in an interest earning account. Accrued salary expense at the end of the period.

Recorded insurance expense at the end of the period.

Which internal control procedure addresses the idea that the likelihood of employee fraud or theft is reduced if collusion is required to accomplish it? Separation of duties Physical controls Fidelity bonding Use of prenumbered documents

Separation of duties

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year? Reduces the amount of interest expense each year Increase the amount of interest expense each year Has no effect on interest expense each year Cannot be determined from the information provided

Reduces the amount of interest expense each year

Assets - Liabilities - Common Stock.

Retained Earnings

Elliston Company accepted credit card payments for $10,000 of services provided to customers. The credit card company charges a 3% service charge. This transaction would increase: revenue by $9,700. assets by $10,000. Retained Earnings by $9,700. net income by $10,000.

Retained Earnings by $9,700.

Which of the following accounts is not closed at the end of an accounting cycle?

Retained earnings

Which of the following statements about accrual accounting is true ?

Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred.

Individuals or institutions that have contributed assets or services to a business in exchange for an ownership interest in the business.

Stockholders

Common Stock + Retained Earnings.

Stockholders' Equity

Which method of depreciation is used by most U.S. companies for financial reporting purposes? Straight-line Units-of-production Double-declining-balance None of these answer choices are correct

Straight-line

Which one of the following is not an accurate description of the Allowance for Doubtful Accounts? The account is a contra asset account. The account is a liability. The amount of the Allowance for Doubtful Accounts decreases the net realizable value of a company's receivables. The account is increased when the company's' estimate of uncollectible accounts expense is recorded.

The account is a liability.

Which of the following is not one of the elements that are typically present when fraud occurs? The capacity to rationalize The existence of pressure leading to an incentive The assistance of others The presence of an opportunity

The assistance of others

Which of the following statements about the balance in a revenue account at the beginning of an accounting period is true?

The beginning balance of a revenue account will always be zero.

The term "FOB Shipping Point" means: The buyer pays the shipping cost. The seller pays the shipping cost. The buyer records transportation cost as an expense. The seller records transportation-out cost.

The buyer pays the shipping cost.

Streif Company uses the perpetual inventory method. The company purchased an item of inventory for $80 and sold the item to a customer for $120. What effect will the sale have on the company's inventory account? The inventory account will decrease by $120 The inventory account will decrease by $80 The inventory account will increase by $40 No effect on the inventory account

The inventory account will decrease by $80

Appropriate accounting procedures should be documented in a procedures manual.

The manual should be routinely updated. Periodic reviews should be conducted to ensure that employees are following the procedures outlined in the manual.

Which of the following should be the main determinant for selection of the allocation method for long-term operational assets? The method that is most convenient to compute The method that best matches the pattern of asset use The method that provides the greatest return to the stockholders The method that provides the best tax advantage

The method that best matches the pattern of asset use

The Cost of Goods Sold account is classified as: a liability. an asset. a contra asset. an expense.

an expense.

Under what condition is a pending lawsuit recognized as a liability on a company's balance sheet? The amount can be reasonably estimated. The outcome is probable. The outcome is reasonably possible. The outcome is probable and can be reasonably estimated.

The outcome is probable and can be reasonably estimated.

The term "FOB Destination" means: The seller pays the shipping cost. The seller records transportation-out expense. The buyer pays the shipping cost. The seller pays the shipping cost and records transportation-out expense.

The seller pays the shipping cost and records transportation-out expense.

Which of the following is not an advantage of accepting credit cards from retail customers? The acceptance of credit cards tends to increase sales. The credit card company performs credit worthiness assessments. There are fees charged for the privilege of accepting credit cards. The credit card company assumes the cost of slow collections and write-offs.

There are fees charged for the privilege of accepting credit cards.

A five-year, $500,000 bond was issued on January 1, Year 1. The stated rate of interest was 8%, and the effective rate of interest was 10%. The interest is paid semiannually. Which of the following statements is correct? Multiple Choice This bond was issued at a premium, and each semiannual cash payment is $25,000. This bond was issued at a discount, and each semiannual cash payment is $20,000. This bond was issued at a discount, and the annual interest expense is $40,000. This bond was issued at a premium, and the annual interest expense is $40,000.

This bond was issued at a discount, and each semiannual cash payment is $20,000.

Galaxy Company sold merchandise costing $1,700 for $2,600 cash. The merchandise was later returned by the customer for a refund. If the perpetual inventory method is used, what effect will the sales return have on the accounting equation? Total assets and total stockholders' equity decrease by $900. Total assets decrease by $2,600 and total stockholders' equity is decreased by $1,700. Total assets and total stockholders' equity decrease by $2,600. Total assets and total stockholders' equity increase by $900.

Total assets and total stockholders' equity decrease by $900.

The Wilson Company purchased $44,000 of merchandise from the Poole Wholesale Company. Wilson also paid $3,000 for freight costs to have the goods shipped to its location. Which of the following statements regarding the necessary entries for the transactions is true? Wilson uses the perpetual inventory system. Total increases to the inventory account would be $47,000. Total increases to the inventory account would be $44,000. Transportation-in would be increased by $3,000. Total increases to the inventory account would be $41,000.

Total increases to the inventory account would be $47,000.

Which of the following is considered a product cost? Utility expense for the current month. Salaries paid to employees of a retailer. Transportation cost on goods purchased from suppliers. Transportation cost on goods shipped to customers.

Transportation cost on goods purchased from suppliers.

equation for units of production depreciation

[(Cost-Salvage Value / (Tot. Est. Units of Production)] x (Units of Production in Current Year

• Bank statements normally report

a) The beginning balance of the account b) Additions for customer deposits c) Other additions d) Subtractions for the payment of checks e) Other subtractions f) A running balance g) The ending balance of the account

Since the double-declining balance method recognizes depreciation expense more rapidly than the straight-line method does, it is called an ____________________

accelerated depreciation method.

For financial reporting purposes, cash generally includes currency and other items that are payable on demand, such as checks, money orders, bank drafts and certain savings accounts. • Companies must maintain a sufficient amount of cash to pay employees, suppliers and other creditors. • When a company fails to pay its legal obligations, its creditors can force the company into bankruptcy.

accounting for cash

An ________ opinion means that one or more departures from GAAO are so material that the financial statements do not present a fair picture of the company's status.

adverse

A discount given to encourage prompt payment is called: a cash discount. a sales discount by the seller. a purchase discount by the buyer. all of these answer choices are correct.

all of these answer choices are correct.

Effective internal controls for cash include: disbursements made by prenumbered check. cash deposited in the bank on a timely basis. written cash receipts given to customers as evidence of payment. all of these answer choices are correct.

all of these answer choices are correct.

Reporting accounts receivable at net realizable value is called the ___________ method of accounting for uncollectible accounts.

allowance

Intangible Assets with Identifiable Useful Lives — These intangibles include patents and copyrights. The term used when recognizing expense is ________________

amortization

Straight-line interest amortization of a premium or discount on bonds payable: assigns variable amounts of interest over the term of the liability. uses compound interest principles. assigns the same amount of interest to each interest period over the term of the liability. is required for U.S. income tax reporting.

assigns the same amount of interest to each interest period over the term of the liability.

Liabilities are shown on the:

balance sheet

The percent of receivables method, focused on determining the best estimate of the allowance balance, is often called the ____________ approach.

balance sheet

The amount of retained earnings is shown on the

balance sheet and statement of changes in stockholders' equity.

Acquiring a group of assets in a single transaction is known as a _______________

basket purchase

Employers should screen job applicants using interviews, background checks and recommendations. Employees in positions of trust should be bonded.

bonded employees

The _________________ of a long-term tangible asset is determined by subtracting the balance in the Accumulated Depreciation account from the balance in the associated asset account. The _______________ may also be called the carrying value.

book value

The party that issues a promissory note is known as the: lender. maker. borrower. borrower and maker.

borrower and maker.

Substantial amounts spent to improve the quality or extend the life of an asset are described as ___________________

capital expenditures.

The year-end adjusting entry to recognize uncollectible accounts expense will: decrease assets and decrease stockholders' equity. increase assets and decrease stockholders' equity. increase liabilities and increase stockholders' equity. decrease liabilities and increase stockholders' equity.

decrease assets and decrease stockholders' equity.

The recognition of depletion expense: decreases assets and stockholders' equity and decreases cash flow from investing expenses under the direct approach. decreases cash flow from operating activities, and does not affect the amount of total assets. increases assets, stockholders' equity, and cash flow from operating activities. decreases assets and stockholders' equity, and does not affect cash flow.

decreases assets and stockholders' equity, and does not affect cash flow.

In a bank reconciliation, a customer's NSF check included with the bank statement is: deducted from the company's cash balance to get the true cash balance. added to the bank's cash balance to get the true cash balance. deducted from the bank's cash balance to get the true cash balance. added to the company's cash balance to get the true cash balance.

deducted from the company's cash balance to get the true cash balance.

To attract customers, many companies guarantee their products or services. Within the warranty period, the seller promises to replace or repair ____________ without charge.

defective products

Natural Resources — Mineral deposits, oil and gas reserves, timber stands, coal mines, and stone quarries are some examples of natural resources. The term used to recognize expense is ____________

depletion

The total amount of depreciation a company recognizes for an asset, its _______________, is the difference between its original cost and its salvage value.

depreciable cost

Property, Plant, and Equipment — Sometimes called plant assets or fixed assets. The term used to recognize expense is _________________

depreciation

The amount of an asset's cost that is allocated to expense during an accounting period is called ______________________

depreciation expense.

Specific authorizations apply to specific positions, while general authority applies across ___________levels of management.

different

In a company's bank reconciliation, an outstanding check is a check that: has been issued by the company but has not been presented to the bank for payment. is guaranteed for payment by the bank. has been presented to the bank for payment but has not been reported on the bank statement. has been written for an amount that is greater than the balance in the account holder's bank account.

has been issued by the company but has not been presented to the bank for payment.

If a bond is sold at 101, its stated rate of interest would be: equal to the market rate. unrelated to the market rate. higher than the market rate. lower than the market rate.

higher than the market rate.

Intangible Assets with Indefinite Useful Lives — These intangibles include renewable franchises, trademarks, and goodwill. The cost of these assets is not expensed unless it can be shown that there has been an ____________ in value.

impairment

Expenses are shown on the:

income statement

The percent of revenue method, with its focus on determining the uncollectible accounts expense, is often called the _______________ approach.

income statement

The primary reason for a business to allow customers to purchase goods or services on account is to: increase sales. increase cash flow from financing. decrease cost of goods sold. decrease the marketability of the company's inventory.

increase sales.

Jack's Snow Removal Company received a cash advance of $6,000 on December 1, Year 1 to provide services during the months of December, January, and February. The year-end adjustment on December 31, Year 1, to recognize the partial expiration of the contract will

increase stockholders' equity by $2,000

Faust Company uses the perpetual inventory method. Faust sold goods that cost $2,300 for $3,600. If the sale was made on account, the net effect of the sale will: increase total assets by $2,300. increase total stockholders' equity by $3,600. increase total assets by $1,300. increase total assets by $3,600.

increase total assets by $1,300.

When a company extends credit for a long time or when the credit extended is large, the cost and the potential for disputes both _________

increase.

Land — Has an ________________ life and is not subject to depreciation.

infinite

Key Features of Internal Control Systems: The internal and external reporting process, and includes an assessment of the technology environment.

information and communication

Loans that require payments of principal and interest at regular intervals (amortizing loans) are typically represented by __________________, which typically have terms of two to five years.

installment notes

1. Separation of Duties 2. Quality of Employees 3. Bonded Employees 4. Required Absences 5. Procedures Manual 6. Authority and Responsibility 7. Prenumbered Documents 8. Physical Control 9. Performance Evaluations 10. Limitations

internal controls

Many companies borrow money directly from the public by selling bond certificates, called ____________. They describe a company's obligation to pay interest and to repay the principal.

issuing bonds

The last-in, first-out cost flow method requires that the cost of the items purchased _______ be assigned to cost of goods sold.

last

Most states require retail companies to collect sales tax on items sold to their customers. The retailer then remits the tax to the state at regular intervals. Sales tax is a ___________ to the retailer until paid to the state.

liability

A ______________ enables a company to borrow or repay funds as needed. Credit agreements usually specify a limit on the amount that can be borrowed.

line of credit

Bonds payable are usually classified on the balance sheet as: Multiple Choice current liabilities. long-term liabilities. investments and funds. other assets.

long-term liabilities.

The purpose of common size financial statements is to: compare the amount of common stock to other types of stock. make comparisons between firms of different sizes. make comparisons between different time periods. make comparisons between firms of different sizes and between different time periods.

make comparisons between firms of different sizes and between different time periods.

Auditors do not guarantee that financial statements are absolutely correct—only that they are __________ correct.

materially

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. Kincaid's entry to recognize the write-off of the uncollectible accounts will: increase total assets and stockholders' equity. increase total assets and decrease stockholders' equity. decrease total assets and stockholders' equity. not affect total assets or stockholders' equity.

not affect total assets or stockholders' equity.

From the issuer's point of view, a bond represents an _____________ to pay a sum of money, the face value, to the bondholder on the bond's maturity date.

obligation

Interest rates on lines of credit normally vary with fluctuations in some designated interest rate. Lines of credit typically have ______________terms.

one-year

Stannous Company earns $10,000 of revenue on account in Year 1. Cash collections of receivables amount to $3,500 in Year 1 with the remainder being collected in Year 2. Which of the following shows how the collection of cash will affect the company's accounting equation in Year 1? Balance SheetAssets=Liabilities+Stockholders' EquityCash+Accounts Receivable=Accounts Payable+Common Stock+Retained Earnings A.3,500 −3,500 B.3,500 3,500 C.10,000 10,000 −4,000 D. 10,000 10,000

option a

A __________opinion means that, for the most part, the company's financial statements are in compliance with GAAP, but the auditors have reservations about something in the statements.

qualified

A business is only as good as the people it employs. Employees should be properly trained to perform a variety of tasks.

quality of employees

On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would: increase total assets by $4,375. reduce total stockholders' equity by $4,375. reduce total assets by $4,625. increase total stockholders' equity by $4,625.

reduce total stockholders' equity by $4,375.

The likelihood of fraud or theft is ___________ if collusion is required to accomplish it.

reduced

A company that uses the allowance method to account for uncollectible accounts: records Uncollectible Accounts Expense when a receivable is written off. does not record uncollectible accounts until the amount becomes significant. reports the net realizable value of its accounts receivable on the balance sheet. None of these answer choices are correct.

reports the net realizable value of its accounts receivable on the balance sheet.

An employee may be able to cover up fraudulent activities if they are always present at work. All employees should be required to take regular vacations and their duties should be rotated periodically.

required absences

What are the 3 components of the integrity triangle

responsibility accountability authority

Issuing bonds payable when the market rate of interest is less than the stated interest rate: results in bonds being issued at a premium. results in bonds being issued at less than their face value. raises the effective interest rate above the stated rate of interest. results in bonds being issued at a premium and the effective interest rate is higher than the stated rate.

results in bonds being issued at a premium.

examples of temporary accounts:

revenues, expenses, dividends

Key Features of Internal Control Systems: Management's process of identifying potential risks that could result in misstated financial statements and addressing those risks.

risk assessment

examples of period costs

salaries of salespersons, advertising costs, transportation-out, Interest on a note payable, Salary of the company president, Insurance on the office building, Office supplies.

The expected market value of a fully depreciated asset is called its _______________

salvage value.

Intangible assets are rights or privileges. They cannot be __________________

seen or touched.

When duties are separated, the work of one employee can act as a check on the work of another employee.

separation of duties

On January 1, Year 1, Dinwiddie Company purchased a car that cost $45,000. The car had an expected useful life of 6 years and a $10,000 salvage value. Based on this information alone: the total amount of depreciation expense recognized over the six-year useful life will be greater under the double-declining-balance method than the straight-line method. the amount of depreciation expense recognized in Year 4 would be greater if Dinwiddie depreciates the car under the straight-line method than if the double-declining-balance method is used. at the end of Year 3, the amount in the accumulated depreciation account will be less if the double-declining-balance method is used than it would be if the straight-line method is used. None of these statements is true.

the amount of depreciation expense recognized in Year 4 would be greater if Dinwiddie depreciates the car under the straight-line method than if the double-declining-balance method is used.

Rationalization

the mindset the fraudster uses that justifies them committing fraud (i.e., the company owes me, I will pay the money back or it won't hurt anyone if I do this)

Motivation or pressure

the need for committing fraud (i.e., need for money, to meet a performance objective or to meet stakeholder expectations)

True or False: The Committee of Sponsoring Organizations' (COSO) framework recognizes five interrelated components of internal control including: control environment, risk assessment, control activities, information and communication, and monitoring.

true

True or False: The financial statement audit is a detailed examination of a company's financial statements and documents that support those statements.

true

True or False: The primary responsibility of the independent accounting firm is to the public.

true

True or False: The ultimate responsibility for the financial statements lies with management of the company rather than the independent accounting firm.

true

True or False: Under proper internal controls, those who are given authority should bear the corresponding responsibility.

true

true cash balance =

unadjusted bank balance + deposits in transit - outstanding checks

An ____________ opinion means the auditor believes the financial statements are in compliance with GAAP without qualification, reservation or exception.

unqualified

The most favorable audit opinion that a company can receive is a(n): adverse opinion. unqualified opinion. disclaimer of opinion. qualified opinion.

unqualified opinion.

Product costs are matched against sales revenue: in the period immediately following the purchase. in the period immediately following the sale. when the merchandise is purchased. when the merchandise is sold.

when the merchandise is sold.

Importance of Ethics

•The accountant's role requires trust and credibility. •Accounting information is worthless if the accountant is not trustworthy. •Therefore, the accounting profession requires high ethical standards.