Accounting Exam 2

A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, the purchased 10 units at $22 each. On November 6, they purchased 6 units at $25 each. On November 8, 8 units were sold for $55 each. Using LIFO perpetual inventory method, what was the value of the inventory on November 8 after the sale?

$276 (5x20)+(8x22) = E.I. 276

Gross margin ratio:

(net sales - costs of goods sold)/Net sales

Freeman Co. had a net sales of $4.2 million and ending accounts receivable of $0.8 million. It's days' sales uncollected equals:

0.8 million/4.2 million x 365 = 69.5 days

Garza Company made a $135,000 sale with terms 2/10, n/45: If the company uses the gross method of accounting for sales, the sale should be recorded with a debit to accounts receivable and a credit to sales for which of the following amounts?

135,000

The company records the following journal entry: debit cash $1,470, debit sales discounts $30, and credit accounts receivable $1,500. This means the customer has taken what percentage cash discount for early payment?

2% 30/1,500 = 2%

The credit terms 2/10, n/30 are interpreted as:

2% cash discount if the amount is paid within the 10 days, or the balance due in 30 days

Upon taking a physical count of its inventory, Damber Corp. determines that $5,500 of goods have become damaged due to a water leak in the warehouse. It decided that $2,300 of the goods are not sellable and the remainder can be sold at a reduced price of $2,750. The cost incurred to sell the good will be $800. The damaged goods should be included in inventory at the value of:

2,750-800 = 1,950

January: 10 units at $120 February: 20 units at $130 May: 15 units at $140 September: 12 units at $150 November: 10 units at $160 On December 31, there were 26 units remaining in ending inventory. These 26 units consisted of 2 from January, 4 from February, 6 from May, 4 from September and 10 from November. Using the specific identification method, what is the cost of the ending inventory?

3,800 (2x120)+(4x130)+(6x140)+(4x150)+(10x160)=3,800

KLM Corporation's quick assets are $5,888,000, it's current assets are $11,700,000 and it's current liabilities are $8,000,000. It's acid test ratio equals:

5,888,000/8,000,000 = 0.74

A company has sales of $695,000 and costs of goods sold of $278,000. It's gross profit equals:

695,000-278,000 = 417,000

Use the following information to estimate the third quarter ending inventory under the gross profit method. This company's gross profit ratio is 20%. Third quarter beginning inventory: $54,000 Net sales for third quarter: $85,000 Net purchases for third quarter: $21,000

? = 7,000 Sales - COGS 80% Gross profit 20% B.I. 54,000 Purchases +21,000 Average 75,000 Average 75,000 85,000 E.I. ? x .8 C.O.G.S. 68,000 = 68,000

The understatement of the ending inventory balance causes:

C.O.G.S to be overstated and net income to be understated

During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net income is:

LIFO method

The entry to establish a petty cash fund includes:

a debit to petty cash and a credit to cash

If a check correctly written and paid by the bank for $749 is incorrectly recorded in the company's books for $794, how should this error be treated on the bank reconciliation?

add 45 749-794 = -45 so you have to add 45

If a company made a bank deposit on September 30 that did not appear on the bank statement dated September 30, in preparing September 30 bank reconciliation, the company should:

add the deposit to the bank statement balance

Merchandise inventory includes

all goods a company owns and holds for sale

Goods on consignment:

are goods shipped by the owner to the consignee who sells the foods for the owner

Damaged and obsolete goods:

are included in inventory at their net realizable value

Cash equivalents:

are short term, highly liquid investment assests

Managers place a high priority on internal control systems because the systems assist managers in all of the following except:

assuring that no loss will occur

An analysis that explain differences between the checking account balance according to the depositors records and the balance reported on the bank statement is a:

bank reconciliation

An income statement account that is used to record cash overages and cash shortages arising from petty cash transactions or from errors in making change is titled:

cash over and short

Juniper Company uses a perpetual inventory system. The company purchased $9,750 of merchandise on August 7 with terms of 1/10, n/30. On August 11 it returned $1,500 worth of merchandise. On August 16 it paid the full amount due. The amount of cash paid on August 16 equals:

cash paid (9,750-1,500)x.99 = 8,167.50

On February 3, Smart Company, Inc. sold merchandise in the amount $5,800 to Truman Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Smart uses the gross method of accounting for sales and a perpetual inventory system. Truman pays the invoice of February 8, and takes the appropriate discount. The journal entry that Smart makes on February 8 is:

cash received: 5,800 - (5,800x.02) = 5,684 sales discount: 5,800x.02 = 116 cash 5,684 sales discounts 116 accounts receivable 5,800

Quick assets are defined as

cash, short term investments, and current receivables

Multiple-step income statements:

contain more detail than a simple listing of revenues and expenses

The inventory turn over ratio is calculated as

costs of goods sold divided by average merchandise inventory

The understatement of the beginning inventory balance causes:

costs of goods sold to be understated and net income to be overstated

A company had net sales of $21,500 and ending accounts receivable and ending accounts receivable of $2,700 for the current period. Its days' sales uncollected equals:

days' sales uncollected ratio 2,700/21,500 x 365 = 45.8 days

A company that uses the gross method of recording purchases and a perpetual inventory system purchased $1,800 of merchandise on July 5 with terms of 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct journal entry to record the merchandise return on July 7 is:

debit accounts payable $200; credit merchandise inventory $200

At the end of the day, the cash register tape shows $1,020 but the count of cash in each register is $1,035. The proper entry to record cash sales and its overage is:

debit cash 1,035; credit sales $1,020; credit cash over and short $15

At the end of the day the cashier's record shows $1,050, but the count of cash in the cash register is $1,055. The correct entry to record the cash sales and its overage is:

debit cash 1,055; credit cash over and short; credit sales 1,050

A company that uses the gross method of recording purchases and a perpetual inventory system purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct journal entry to record the purchase on July 5 is:

debit merchandise inventory 1,800; credit accounts payable 1,800

A company that uses the gross method of recording purchases and a perpetual inventory system made a purchase of $400 dollars with terms of 2/10, n/30. The entry to record the purchase would be

debit merchandise inventory 400, credit accounts payable 400

Ferguson Co. decides to establish a petty cash fund with a beginning balance of $200. The company decides that any purchase under $25 can be processed through petty cash instead of the voucher system. The journal entry record establishing the account is:

debit petty cash $200 and credit cash $200

A voucher system is a set of procedures and approvals:

designed to control cash disbursements and the acceptance of obligations

Days' sales uncollected ratio:

ending accounts receivable/net sales x 365

The voucher system of control:

establishes procedures for verifying, approving and recording obligations for eventual cash disbursement

The limitations of internal control policies and procedures do not include:

establishing responsibilities

A company's gross profit was $83,750 and its net sales were $347,800. It's gross margin equals:

gross profit/net sales 83,750/347,800 = 24.1%

Which of the following is NOT one of the polices and procedures that make up an internal control system?

guarantee a return to investors

The number of days' sales uncollected:

is used to evaluate the liquidity of receivables

The cash over and short account:

is used to record the income effects of errors in making change from a cash register and/or processing petty cash transactions

days' sales in inventory:

measures the adequacy of inventory to meet sales demand

Beginning inventory + net purchases =

merchandise available for sale

A company using the gross method of accounting for purchases and a perpetual inventory system recorded the following entry: Accounts payable: 2,500 Merchandise inventory: 50 Cash: 2,450 The entry reflects a:

payment of the account payable less a 2% cash discount taken 2,500 - 2450 = 50 cash discount 50/2,500 = .02 or 2%

Bank services do not include:

petty cash management

Meng Co. establishes a $250 petty cash fund on January 1. On January 8, the fund shows 68 dollars in cash along with receipts for the following expenditures: postage, $74; transportation-in, $49; and miscellaneous expenses, $59. Meng uses the perpetual in accounting for merchandise inventory. The journal entry to reimburse the fund on January 8, is:

postage expense 74 merchandise inventory 49 miscellaneous expense 59 cash 182

The full disclosure principle:

prescribes that the notes to the financial statements report when a change in inventory valuation method is made, its justification and its effect on net income

Acid test ratio:

quick assets/current liabilities

Internal control systems are:

required by SOX to be documented and certified if the company's stock is traded on an exchange

Gross margin:

sales - cost of goods sold

On July 1, Ferguson Company Inc, sold merchandise in the amount of $3,700 to Tracey Company with credit terms of 2/10, n/30. The cost of the items sold is $2,000. Ferguson uses the gross method of accounting for sales and a perpetual inventory system. On July 5, Tracey returns some of the merchandise. The selling price of the merchandise returned is $500 and the cost of merchandise returned is $350. The entry or entries that Ferguson must make on July 5 to record the return is:

sales returns and allowances 500 accounts receivable 500 merchandise inventory 350 costs of goods sold 350

The principles of internal control include:

separate record keeping from custody of assets

The inventory valuation method that identifies the invoice cost of each item in ending inventory to determine the cost assigned to that inventory is the:

specific identification method

A bank statement provided by the bank includes:

the beginning and the ending balance of the depositor's account

Costs of goods sold is:

the term used for the expense of buying and preparing merchandise for sale

A company's net sales were $676,600, it's costs of goods sold was $236,810 and its net income was $33,750. It's gross margin ratio equals:

use gross margin ratio (676,600 - 236,810)/676,600 = 65%

A voucher is an internal document or file:

used to accumulate information needed to control cash disbursements and to ensure that transactions are properly recorded

Goods in transit are included in purchaser's inventory:

when the purchaser becomes responsible for paying freight charges