Accounting Ch 5-11

The specific identification cost flow method is most likely to be used when:

Cost per unit inventory is high and sales volume is low

non-sufficient funds check

Customer's check deposited but returned by the bank on which it was drawn because the customer did not have enough money in its account to pay the check.

Which of the following items would cause a difference between the balance in a company's bank balance and the corresponding book balance of the company's cash account?

Debit memos, posting error in the amount of a check, outstanding checks

deposits in transit

Deposits added to a depositor's books but not received and recorded by the bank prior to the date of the bank statement.

financial statements audit

Detailed examination of a company's accounting records and the documents that support the information reported in the financial statements; includes testing the reliability of the underlying accounting system used to produce the financial reports.

petty cash voucher

Document that verifies a petty cash disbursement, signed by the person who received the money. Supporting documents, such as an invoice, restaurant bill, or parking fee receipt, should be attached to the petty cash voucher.

Fred's Fans purchased two identical fans for resale. Fan 1 was purchased in April and cost $76. Fan 2 was purchased in May and cost $80. One of the fans was sold in June for $100. Which inventory cost flow item would result in a $24 gross margin?

FIFO

Hersey Company purchased two identical inventory items. The item purchased first cost $50. The second item $55. If one of the items was sold, which cost flow method would produce the lowest amount of cost of goods sold?

FIFO

Which inventory cost flow method will produce the highest income and asset values in a inflationary environment?

FIFO

The physical flow of inventory items through a company is usually accomplished on a(n)_____(FIFO/LIFO) basis because that ethod leaves the _____(first/last) items purchased in inventory

FIFO, last

T/F Financial statement analysis is not affected by the inventory cost flow method used by a company

False

T/F Inventory must be shown on the balance sheet at its cost (price paid) regardless of its current value

False

T/F The ERM framework replaces the internal control framework

False

If the amount of ending inventory is overstated, the amount of:

Retained earnings will be overstated, net income will be overstated, and total assets will be overstated.

Other things being equal, a company would prefer that its inventory turnover ratio be____(higher/lower)

higher

Recognizing uncollectible accounts expense under the direct write-off method will affect which of the following statements?

income statement, balance sheet, statement of stockholders equity

An error, or other reporting problem, is material if knowing about it would

influence the decisions of an average prudent investor

Fidelity Bond

insurance policy that a company buys to insure itself against loss due to employee dishonesty

FIFO method

inventory cost flow method in which cost of goods sold is computed as if the earliest items purchased are the first items sold

LIFO method

inventory cost flow method in which cost of goods sold is computed as if the most recent items purchased are the first items sold

Specific Identification

inventory costing method in which cost of goods sold and ending inventory are computed using the actual costs of the specific goods sold

The goal of a financial audit is to determine if financial statements are ___________ correct.

materially

which method of estimating uncollectible accounts provides the best measure of net income

percent of revenue

internal controls

policies and procedures companies establish to provid reasonable assurance of reducing fraud, providing reliable accounting records, and accomplishing organization records

specific authorization

policies and procedures that apply to designated levels of management, such as the policy that only the plant manager can authorize overtime pay

administrative controls

procedures companies implement to evaluate performance and monitor compliance with company policies and public laws

accounting controls

procedures companies implement to safeguard assets and to ensure accurate and reliable accounting records and reports

bank reconciliation

schedule that identifies and explains differences between the cash balance reported by the bank and the cash balance in the company's accounting records

Management's Discussion and Analysis (MD&A)

section of a company's annual report in which management explains many different aspects of the company's past performance and future plans

petty cash fund

small amount of cash kept on hand to pay for minor purchases

What provides the regulatory authority for internal controls requirements?

Sarbanes-Oxley Act

gross margin method

Technique for estimating the ending inventory amount without a physical count; useful when the percentage of gross margin to sales remains relatively stable from one accounting period to the next.

Full Disclosure

The accounting principle that financial statements should include all information relevant to an entity's operations and financial condition. Full disclosure frequently requires adding footnotes to the financial statements.

Materiality

The point at which knowledge of information would influence a users decision; measured in absolute, percentage, quantitative, qualitative terms

T/F Companies that use LIFO for income tax reporting must use the same inventory cost flow method for their financial statements

True

T/F When sales and purchases occur intermittently, the cost of the items purchased is frequently unknown at the time sales occur. Even so, companies can still use the perpetual invetory method.

True

audit

detailed examination of some aspect of a companies accounting records or operating procedures in order to report the results to interested parties.

cost of goods available for sale is allocated between

ending inventory and cost of goods sold

When inventory is written-down to comply with the lower cost or market rule, the total amount of

equity decreases

GAAP Principle of Consistency

generally accepted accounting principle that a company should, in most circumstances, continually use the same accounting methods so that accounting periods are comparable throughout time

Which of the following statements about calculating the invetory turnover ratio are correct?

goos sold is numerator, inventory is denominator

bank statement

Record issued by a bank (usually monthly) of all activity in the bank account for that period.

Inventory item 101 purchased in October cost $100. Inventory iten 102 purchased in November cost $110. The two inventory items are identical in all respects, except the price paid to acquire them. The business uses LIFO cost flow method. If item 101 is sold to a customer, the ending balance in the inventory account is

$100

Inventory item 101 purchased in October cost $100. Inventory iten 102 purchased in November cost $110. The two inventory items are identical in all respects, except the price paid to acquire them. The business uses FIFO cost flow method. If item 101 is sold to a customer, the ending balance in the inventory account is

$110

Disclaimer of Opinion

Report on financial statements issued when the auditor is unable to obtain enough information to determine if the statements conform to GAAP; is neither positive nor negative.

At the beginning of Year 2, Benson Company had a beginning inventory of 150 units that cost $200 each. During Year 2, Benson made two inventory purchases. Purchase 1 consisted of 500 units at a cost of $210. The second purchase consisted of 350 units at $220. Assuming Benson uses LIFO and sells 700 units of inventory during Year 2, the amount of ending inventory would be

$61,500

At the beginning of Year 2, Benson Company had a beginning inventory of 150 units that cost $200 each. During Year 2, Benson made two inventory purchases. Purchase 1 consisted of 500 units at a cost of $210. The second purchase consisted of 350 units at $220. Assuming Benson uses weighted average cost flow and sells 700 units of inventory during Year 2, the amount of ending inventory would be

$63,600

At the beginning of Year 2, Benson Company had a beginning inventory of 150 units that cost $200 each. During Year 2, Benson made two inventory purchases. Purchase 1 consisted of 500 units at a cost of $210. The second purchase consisted of 350 units at $220. Assuming Benson uses FIFO and sells 700 units o finventory during Year 2, the amount of ending inventory would be

$66,000

Hector company purchased two identical items. The item purchased first cost less the item purchased last. If Hector uses the weighted cost flow system the: (select all that apply) 1. Cost of goods sold would be higher than FIFO used. 2. Cost of goods sold will be lower than if LIFO used. 3. Cost of goods sold will be lower than if FIFO used. 4. Cost of goods sold will be higher than if LIFO used.

1. Cost of goods sold would be higher than FIFO used. 2. Cost of goods sold will be lower than if LIFO used.

Theresa Company has cost of goods available for sale of $40,000. Which of the following is correct? 1. If cost of goods sold was $35,000 then ending inventory is $5,000 2. If ending inventory was $10,000 then cost of goods sold was $30,000 3. If beginning invetory was $8,000, cost of goods sold was $32,000 4. If cost of goods sold was $28,000 then ending inventory was $12,000

1. If cost of goods sold was $35,000 then ending inventory is $5,000 2. If ending inventory was $10,000 then cost of goods sold was $30,000

Features of a strong internal control system

1. compliance with applicable laws and regulations 2. safeguarding assets 3. reliable financial reporting

Financial Audits:

1.provide reasonable assurance that statements are free from material misstatments caused by unintentional errors 2. provide reasonable assurance that statements are free from material misstatments caused by fraud

Hector company purchased two identical items. The item purchased first cost less the item purchased last. If Hector uses the LIFO cost flow system the: (select all that apply) 1. cost of goods sold will be lower than if weighted average is used. 2.cost of goods sold will be higher than if weighted average is used. 3. Cost of goods sold will be higher than if FIFO used 4. cost of goods sold will be lower than if FIFO used

2.cost of goods sold will be higher than if weighted average is used. 3. Cost of goods sold will be higher than if FIFO used

If a company has an inventory turnover ratio of 5.5, ending inventory of $150,000, and average invetory of $140,000, what is its average days to sell inventory?

365/5.5=66.4

average number of days to sell inventory

365/inventory turnover

Certified Public Accountant (CPA)

Accountant who, by meeting certain educational and experiential requirements, is licensed by the state government to provide audit services to the public.

lower of cost or market rule

Accounting principle of reporting inventory at its replacement cost (market) if replacement cost has declined below the inventory's original cost, regardless of the cause.

inventory cost flow methods

Alternative ways to allocate the cost of goods available for sale between cost of goods sold and ending inventory.

Weighted Average Method

An inventory costing method based on the weighted-average cost per unit of inventory that is calculated after each purchase. Weighted-average cost per unit is determined by dividing the cost of goods available for sale by the number of units available.

signature card

Bank form that documents the bank account number and signatures of persons authorized to write checks on an account.

The GAAP principle of _______ generally requires that companies use the same inventory cost flow method from one accounting period to the next.

Consistency

physical flow of goods

Physical movement of goods through a business, normally on a FIFO basis so that the first goods purchased are the first goods delivered to customers, reducing the likelihood of inventory obsolescence.

Companies operating in which of the following industries are most likely to have the highest inventory turnover rates

Fast Food

Securities and Exchange Commission (SEC)

Federal agency authorized by Congress to establish financial reporting practices of public companies; requires companies that issue securities to the public to file audited financial statements with the government annually.

service charges

Fees charged by a bank for such things as services performed or penalties for overdrawn accounts or failure to maintain a specified minimum cash balance.

Segregation of Duties

Internal control feature of assigning the functions of authorization, recording, and custody to different individuals.

specific identification method

Items are sold for their own price

Which inventory cost flow method will produce the highest income and asset values in a deflationary environment?

LIFO

Which of the following statements is true? 1. GAAP requires consistency between the cost flow method used for financial reporting and that used for tax reporting 2. Companies that use FIFO for physical flow must use FIFO for cost flow, regardless of tax consequences 3. LIFO may be the preferred cost flow method even when it results in lower reported income and asset values

LIFO may be the preferred cost flow method even when it results in lower reported income and asset values

independent auditor

Licensed certified public accountant engaged to audit a company's financial statements; not an employee of the audited company.

imprest basis

Maintaining an account at a specified fixed amount, such as periodically replenishing a petty cash fund to its imprest amount.

Which is not an inventory cost flow method?

Next in First Out

Adverse Opinion

Opinion issued by a certified public accountant that means one or more departures from GAAP in a company's financial statements are so very material the auditors believe the financial statements do not fairly represent the company's status; contrast with unqualified opinion.

Qualified Opinion

Opinion issued by a certified public accountant that means the company's financial statements are, for the most part, in compliance with GAAP, but there is some circumstance (explained in the auditor's report) about which the auditor has reservations; contrast with unqualified opinion.

unqualified opinion

Opinion issued by a certified public accountant that means the company's financial statements are, in all material respects, in compliance with GAAP; the auditor has no reservations. Contrast with qualified opinion.

authority manual

Written documentation outlining levels of authority and responsibility. The authority manual provides specific guidelines, such as those for a personnel officer, as well as general guidelines, such as giving all vice presidents authorization to approve up to a designated spending limit.

certified check

a check that is guaranteed by a bank.

a financial audit includes

a detailed examination of the company's financial statements and the documents supporting that, test the reliablility of the accounting system

cash short and over

account used to record the amount of cash shortages or overages; shortages represent expenses and overages represent revenues

true cash balance

actual amount of cash owned by a company at the close of business on the date of the bank statement

The uncollectible accounts expense account appears on which of the following statements

balance sheet, income statement

bank statement debit memo

bank statement enclosure that describes a decrease in the account balance

bank statement credit memo

bank statement enclosure that describes an increase in the account balance

unadjusted book balance

cash account balance in the depositor's accounting records as of the date of the bank reconciliation before making any adjustments

When inventory is written-down to comply with the lower cost or market rule, the total amount of

cash flow from operating activities is not affected

outstanding checks

checks the depositor company has written and deducted from its cash account balance that have not yet been presented to its bank for payment

Confidentiality

code of ethics requirement prohibits CPAs from disclosing any information they acquire from clients

general authority

company guidelines that apply to various levels of a company's management, such as requiring everyone at that level to fly coach class

the allowance for doubtful accounts is a

contra asset account

The integrity and ethical values of the company, including its code of conduct, involvement of the board of directors, and other actions that set the tone of the organization are features of the _________ _______ component of internal controls

control environment

Transferring the cost of inventory from the inventory account to the cost of goods sold account is commonly called Inventory________

cost flow

When inventory is sold, inventory cost flow methods are used to determine how much cost to assign to

cost of goods sold

If the amount of ending inventory is overstated

cost of goods sold will be understated

Inventory Turnover

cost of goods sold/average inventory

The journal entry required to recognize a NSF check would include a _______ to the cash account and a ________ to the accounts recievable account

credit, debit

The journal entry to recognize the write-down of inventory to comply with the lower of cost market rule includes a ______(debit/credit) to the inventory account and a ______(debit/credit) to the cost of goods sold account.

credit, debit

Under the allowance method, the journal entry to recognize the reinstatement of an account receivable includes a __________ to allowance for doubtful accounts and a ________ to accounts receivable

credit, debit

The journal entry to recognize uncollectible accounts expense under the direct write-off method requires a _________ to the uncollectible accounts expense account and a _________ to the accounts receivable account

debit, credit

unadjusted bank balance

depositor's cash balance reported by the bank as of the date of the bank statement

CPA's who conduct financial audits are paid for by who?

the companies they audit

To avoid the risk of fraud associated with inventory manipulation

the employee in charge of counting inventory should be different from the employee in charge of recording inventory transactions

Blane Company maintains its inventory under the perpetual system and uses LIFO cost flow. The company purchases and sells inventory intermittently throughout its accounting cycle. Based on this information alone, the amount of cost os goods sold will be determined at

the end of the accounting period

Under the direct write-off method, uncollectible accounts expense is recognized

when an account is determined to be uncollectible

procedures manual

written documentation of a company's accounting policies and procedures

Notes to the financial statements

written explanations accompanying the financial statements that provide information about such items as estimates used and accounting methods chosen when GAAP permits alternatives