ACC Exam 2

Cachet Co. has the following information: Adjusted balance in Allowance for Doubtful Accounts $3000 Bad debts estimated for the current year $8000 Unadjusted credit balance in Allowance for Doubtful Accounts $4000 No recoveries were recorded during the year. What was the amount of accounts written o during the year?

$9000

Urban Bloom, Inc.'s books show an ending cash balance of $18,000 before preparing the bank reconciliaon. Given the bank reconciliaon shows outstanding checks of $5,400, deposits in transit of $3,600, NSF check of $180, and interest earned on the bank account of $18, the company's up-to-date ending cash balance equals: A.$17,838. B. $12,438. C. $16,038. D. $18,198.

A

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense? A. Debit Bad Debt Expense and credit Allowance for Doubtful Accounts. B. Debit Allowance for Bad Debt Expense and credit Bad Debt Expense. C. Debit Bad Debt Expense and credit Sales Revenue. D.Debit Bad Debt Expense and credit Accounts Receivable.

A

While preparing the bank reconciliaon for March, the accountant for Bertran Industries discovered that a $649 check in payment of an account payable had been entered incorrectly in the journal as $694. Which of the following is true? A. An adjusting entry must be made to debit Cash and credit Accounts Payable for $45. B. An adjusng entry must be made to debit Accounts Payable and credit Cash for $45. C. The bank should be notied, and the bank should correct its records by adding $45 to the company's account. D. No entry is needed for the reconciling item because it appears on the bank's side of the reconciliaon.

A

Which element is part of the fraud triangle? A. Incentive B. Misappropriation C. Corruption D.Sustainability

A. Incentive

13. Merle Industries had been selling its product for $40 per unit, but recently lowered the selling price to $30 per unit. The company's current inventory consists of 200 units purchased at $32 per unit. The market value of this inventory is currently $26 per unit. At what amount should the company's inventory be reported on the balance sheet? A) $5,200 B) $6,400 C) $6,000 D) $8,000

Answer: A Explanation: Total lower of cost or market = Lower of cost or market per unit × Number of units in inventory = $26 × 200 units = $5,200

11. Generally, which inventory costing method approximates most closely the current cost for each of the following? Ending Inventory Cost of Goods Sold A) FIFO LIFO B) LIFO LIFO C) FIFO FIFO D) LIFO FIFO A) Option A B) Option B C) Option C D) Option D

Answer: A Explanation: When FIFO is used, the costs of the newer goods are included in the cost of the ending inventory. When LIFO is used, the costs of the last goods purchased (last in) are the costs of the first goods sold (first out).

9. Seasons has sales of $42,000, beginning inventory of $4,900, purchases of $24,500, and ending inventory of $3,500. The cost of goods sold is: A) $29,400. B) $25,900. C) $16,100. D) $23,100.

Answer: B Explanation: Cost of goods sold = Beginning inventory + Purchases − Ending inventory = $4,900 + $24,500 − $3,500 = $25,900

14. Sparks Furniture Company carries three lines of sofas. Information about the sofa inventory as of the end of its most recent fiscal year follows. If LCM/NRV is applied to each separate product line, what is the amount of the adjustment that must be made to the company's inventory? Product Line Cost per Unit Market Value per Unit Quantity Rustic $ 700 $ 725 190 Mediterranean 600 605 300 Contemporary 950 820 275 A) $6,250 B) ($35,750) C) ($25,500) D) ($29,500)

Answer: B Explanation: The LCM/NRV write-down is calculated as follows:

11. The perpetual inventory method of tracking inventory is considered superior to the periodic method because the perpetual method: A) makes calculations easier and less technology can be deployed. B) tells what inventory a company should have on hand at any point in time. C) saves a company from ever having to count the goods in inventory. D) is more consistent with how companies calculated inventory in the past.

Answer: B Explanation: The perpetual inventory method is considered superior to the periodic method because it provides an updated inventory account balance after every purchase, sale and return of inventory during the period.

12. A company uses a periodic inventory system. The company had beginning inventory of 3 units that cost $5 each. During the month, 17 units were purchased for $6 each. The company sold 15 units during the month and had 5 remaining in ending inventory. If the company uses FIFO instead of LIFO to calculate cost of goods sold, then cost of goods sold will be: A) higher using FIFO, leading to higher gross profit and higher income taxes. B) lower using FIFO, leading to higher gross profit and higher income taxes. C) lower using FIFO, leading to lower gross profit and lower income taxes. D) higher using FIFO, leading to lower gross profit and lower income taxes.

Answer: B Explanation: When costs are rising, as they are here, FIFO produces a higher inventory value and a lower cost of goods sold (resulting in a higher gross profit and higher income taxes).

13. On July 1, Darin Company sold inventory costing $5,000 to Dee Company for $6,000, terms 3/10, n/30. Both companies use the perpetual inventory system. Dee Company pays the invoice on July 8 and takes the appropriate discount. What journal entry will be recorded by Dee Company on July 8? A) Debit Accounts Payable and credit Cash for $6,000 B) Debit Accounts Payable for $5,820, credit Inventory for $180, and credit Cash for $6,000 C) Debit Accounts Payable for $6,000, credit Cash for $5,820, and credit Inventory for $180 D) Debit Cost of Goods Sold and credit Cash for $5,000

Answer: C Explanation: Debit Accounts Payable for $6,000, credit Inventory for $180 (or $6,000 × 0.03), and credit Cash for $5,820 (or $6,000 − $180).

12. Polk Company uses a perpetual inventory system and had the following transactions during November: November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30. November 8—Returned $1,200 of defective units and received full credit. November 15—Paid the amount due. What journal entry will be recorded by Polk Company on November 15? A) Debit Accounts Payable and credit Cash for $7,350 B) Debit Accounts Payable for $7,500, credit Purchase Discount for $150, and credit Cash for $7,350 C) Debit Accounts Payable for $7,500, credit Inventory for $150, and credit Cash for $7,350 D) Debit Accounts Payable for $7,350, credit Inventory for $150, and credit Cash for $7,200

Answer: C Explanation: Debit Accounts Payable for $7,500, credit Inventory for $150 (or $7,500 × 0.02), and credit Cash for $7,350 (or $7,500 − $150).

15. Barron Industries has the following information: Sales Revenue $ 300,000 Ending inventory 30,000 Cost of Goods Sold 200,000 Beginning inventory 25,000 What is Barron's number of days to sell? A) 33.5 days B) 36.5 days C) 50.2 days D) 54.8 days

Answer: C Explanation: Inventory turnover ratio = Cost of goods sold ÷ Average inventory = $200,000 ÷ [($25,000 + $30,000) ÷ 2] = 7.27 times Days to sell = 365 ÷ Inventory turnover ratio = 365 ÷ 7.27 = 50.2 days

15. The journal entry to record the payment within the discount period for goods previously purchased on account causes: A) equity to decrease. B) total stockholders' equity to increase. C) total assets to decrease. D) total assets to increase.

Answer: C Explanation: The journal entry includes a debit to Accounts Payable for the original cost (to decrease this liability account) and a credit to Cash for the discounted amount (to decrease this asset account) and Inventory for the amount of the discount (to decrease this asset account).

16. Mitchell uses a perpetual inventory system. Mitchell sells a computer from inventory for $1,198 on credit. Mitchell originally bought the computer from IBM for $790. What journal entry (entries) will Mitchell prepare to record the sale? A) Debit Cash and credit Sales Revenue for $1,198; debit Cost of Goods Sold and credit Inventory for $790. B) Debit Accounts Receivable for $1,198, credit Inventory for $790, and credit Gross Profit for $408. C) Debit Accounts Receivable and credit Sales Revenue for $1,198; debit Cost of Goods Sold and credit Inventory for $790. D) Debit Inventory for $790, debit Cost of Goods Sold for $408, and credit Accounts Receivable for $1,198.

Answer: C Explanation: Two entries are required to record a sale when a perpetual inventory system is in use. The first entry includes a debit to Accounts Receivable and a credit to Sales Revenue for $1,198, the selling price of the goods sold. The second entry includes a debit to Cost of Goods Sold and a credit to Inventory for $790, the cost of the goods that were sold.

10. Which of the following statements is correct? A) FIFO results in a lower net income than LIFO when costs are rising. B) LIFO results in a higher net income than FIFO when costs are rising. C) LIFO results in a higher net income than FIFO when costs are falling. D) LIFO results in the same net income as FIFO when costs are rising.

Answer: C Explanation: When unit costs are falling, FIFO produces a higher cost of goods sold (resulting in a lower gross profit and a lower net income) when compared to LIFO. On the other hand, when unit costs are rising, FIFO produces a lower cost of goods sold (resulting in a higher gross profit and a higher net income) when compared to LIFO.

10. Buckeye Co. had beginning inventory of $18,000, cost of goods sold of $42,000, and ending inventory of $24,000. Purchases were: A) $36,000. B) $30,000. C) $27,000. D) $48,000.

Answer: D Explanation: Cost of goods sold = Beginning inventory + Purchases − Ending inventory Purchases = Cost of goods sold − Beginning inventory + Ending inventory = $42,000 − $18,000 + $24,000 = $48,000

14. In a perpetual inventory system, paying transportation charges on goods purchased FOB shipping point would have which of the following effects? A) Decrease Operating Expenses B) Increase Selling, General, and Administrative Expenses C) Decrease Cost of Goods Sold D) Increase Inventory

Answer: D Explanation: Payment of the transportation charges would be debited to Inventory (assets increase) and credited to Cash (assets decrease).

6. Inventory levels increase by 10% at your company during the fourth quarter. Based on this increase, which of the following statements must be correct? A) This must be good news because inventories are an asset to the company. B) This could be good news if the company is ordering more goods because sales appear to be rising. C) This could be bad news if the company is ordering more goods because unit costs are falling. D) This must be bad news because higher inventories mean higher costs.

B

McKeel Publishing had outstanding checks totaling $7,560 on its June bank reconciliaon. In July, McKeel issued checks totaling $54,460. The July bank statement shows that $36,820 in checks cleared the bank in July. The amount of outstanding checks on McKeel's July bank reconciliaon should be: A.$17,640. B. $25,200. C.$7,560. D. $10,080.

B

Which one of the statements appearing below is incorrect regarding bank reconciliations? A. A bank reconciliation is an internal report prepared to report the cash balance to investors and creditors. B.If a company's records show a different cash balance from that shown on the company's bank statement, either the company or the bank has made an error. C.After preparing a bank reconciliaon, no journal entries need to be made for outstanding checks or deposits in transit. D. The up-to-date ending cash balance on the bank statement side will generally not equal the up-to-date ending cash balance on the book side.

B

9. Hardware Inc. has a periodic inventory system and uses the weighted average method. The company began the year with 150 large brass switch plates on hand at a cost of $4.00 each. Purchases of switch plates during the year were as follows: Date of Transaction Quantity Received Unit Cost May 7 200 $ 4.20 June 11 200 $ 4.40 November 22 250 $ 4.80 The switch plates sell for $7.00 each. If Hardware sells 570 switch plates during the year, what is the company's cost of goods sold? A) $3,990 B) $2,508 C) $2,480 D) $2,560

B Explanation: Weighted Average − Periodic Beginning inventory 150 units × $4.00 $ 600 May 7 purchase 200 units × $4.20 840 June 11 purchase 200 units × $4.40 880 November 22 purchase 250 units × $4.80 1,200 Goods available for sale 800 Units $ 3,520 Weighted average cost = Cost of goods available for sale ÷ Number of units available for sale = $3,520 ÷ 800 units = $4.40 per unit Cost of goods sold = Units sold × Weighted average cost per unit = 570 units × $4.40 = $2,508

Assigning responsibilies so that related acvies are assigned to two or more people is the goal of: A. Restricting Access B. Segregating duties C. Independently verifying D. Documenting procedures

B. Segregating duties

7. Which of the following is a merchandising company? A) General Motors B) H&R Block C) The Gap D) Proctor & Gamble

C

8. Cost of goods sold reports the: A) cost of merchandise available to sell. B) cost of merchandise purchased. C) cost times the quantity of goods sold. D) selling price times the quantity of goods sold.

C

Best, Inc. loaned $100,000 for three months on November 1 to one of its customers at the rate of 6%. The principal amount of the loan plus interest is due on the following February 1. Which of the following is the adjusting journal entry that will be recorded on December 31? A. Debit Cash and credit Interest Revenue for $4,000. B. Debit Interest Receivable and credit Interest Revenue for $4,000. C. Debit Interest Receivable and credit Interest Revenue for $1,000. D.Debit Interest Receivable and credit Interest Revenue for $500.

C

If the company's accountant mistakenly recorded an $85 deposit as $58, the error would be shown on the bank reconciliaon as a(n): A. $27 deducon from the book balance. B. $85 deducon from the book balance. C. $27 addition to the book balance. D. $85 addion to the book balance.

C

Which of the following situaons would cause the balance per bank to be more than the balance per books? A. Deposits in transit B. Service charges C. Outstanding checks D. Checks from customers returned as NSF

C

7. AAA Co. uses a periodic inventory system and has the following information in regard to its inventory: Beginning inventory 200 units @ $15 $ 3,000 Purchase on January 25 300 units @ $16 4,800 Purchase on March 15 200 units @ $17 3,400 Purchase on October 2 400 units @ $18 7,200 Goods available for sale $ 18,400 There are 500 units in ending inventory. What is the amount of the ending inventory using the FIFO method? A) $3,000 B) $7,200 C) $7,800 D) $8,900

D

8. Willow Company had no beginning inventory. The company purchases 900 units of inventory in January at $5 each, 1,500 units at $4 each in August, and 600 units at $6 each in November. The company sells 450 units during the year. Willow uses a periodic inventory system and the LIFO inventory costing method. What is the cost of goods sold? A) $1,800 B) $2,802 C) $2,250 D) $2,700

D

Establishing a note receivable by loaning cash to another company will have which of the following net effect on the accounting equation? A.Increase assets; No effect on liabilities; Increase stockholders' equity B. Increase assets; No effect on liabilities; No effect on stockholders' equity C.No effect on assets; No effect on liabilies; Decrease stockholders' equity D.No effect on assets; No effect on liabilies; No effect on stockholders' equity

D.

Phantom Inc. has an unadjusted debit balance of $5,250 in its Allowance for Doubtful Accounts. The company has experienced bad debt losses of 2% of credit sales in prior periods. Phantom reported net credit sales of $2,250,000 for the current period. To record the potential bad debts, Phantom would debit: A. Allowance for Doubtful Accounts for $45,000. B. Allowance for Doubtful Accounts for $50,250. C. Bad Debt Expense for $50,250. D. Bad Debt Expense for $45,000.

D.

Specialty Inc. converts an existing account receivable to a note receivable to allow an extended payment period. Specialty receives a $2,000, 3-month, 12% promissory note from its customer. What entry will Specialty make upon receipt of the note? A. Debit Notes Receivable and credit Accounts Receivable for $2,060. B. Debit Accounts Receivable and credit Notes Receivable for $2,000. C. Debit Notes Receivable for $2,000, debit Interest Receivable for $60, credit Accounts Receivable for $2,000, and credit Interest Revenue for $60. D. Debit Notes Receivable and credit Accounts Receivable for $2,000.

D.

Which of the following statements about the tradeos of extending credit is not correct? A. Extending credit to at least some customers is necessary in a compeve market to avoid losing sales to competors. B. Even if a company were to collect in full from customers, there would be other addional costs introduced by extending credit to customers. C. Even though addional costs are incurred if credit is extended, a company expects that the addional revenue will be more than sufficient to offset the addional costs. D. Even if there are no bad debts from credit sales, the delayed receipt of cash will always increase addional costs beyond the increased revenue from the credit sales.

D.

The main purposes of internal controls include all of the following except: A. prevention of error, the, and fraud. B. promotion of operaonal efficiency. C. ensuring compliance with laws and regulaons. D.providing more favorable financial information.

D. Providing more favorable financial information

6. T/F: The gross profit percentage is computed by dividing operating income by net sales.

False

T/F Cash equivalents are short-term, highly liquid investments purchased within one year of maturity.

False

T/F: 1. A retailer is a company that buys products from manufacturers and sells them to wholesalers.

False

T/F: 2. If inventory is sold with terms of FOB shipping point, the goods belong to the seller while in transit.

False

T/F: 5. An overstatement of ending inventory will cause an overstatement of assets and an understatement of stockholders' equity on the balance sheet.

False

IBM signs an agreement to lend one of its customers $200,000 to be repaid in one year at 5% interest. IBM would record this loan as:

Notes Receivable

4. T/F: FOB shipping point means that ownership of goods passes to the buyer when the goods leave the seller's place of business.

True

T/F The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts, whereas the percentage of credit sales method focuses on estimating Bad Debt Expense for the period.

True

T/F: 1. The primary goals of inventory managers are to maintain a sufficient quantity of inventory to meet customers' needs, ensure inventory quality meets customers' expectations and company standards, and minimize the cost of acquiring and carrying inventory.

True

T/F: 2. A merchandising company's operating cycle begins with the acquisition of inventory and ends with the cash collection from sales.

True

T/F: 3. Generally, a physical count of inventory is performed annually in both a perpetual inventory system and a periodic inventory system.

True

T/F: 3. When a company sells goods, it removes their cost from the Inventory account and reports the cost on the income statement as Cost of Goods Sold.

True

T/F: 4. When costs per unit are increasing, the inventory costing method that results in the lower income tax expense is the LIFO method.

True

T/F: 5. If a merchandiser offers a sales discount of 2/10, net/30 on a sale of $2,000, the amount due in 10 days is the net amount of $1,960.

True

T/F: Interest on a two-month, 7%, $1,000 note would be calculated as $1,000 × 0.07 × 2/12.

True