Accounting final Chp 5-8

The operating cycle of a merchandising company ordinarily is longer than that of a ...

Service company The purchase of merchandise inventory and its eventual sale lengthen the cycle.

Bad debt expense=

The difference between the required balance and the existing balance in the allowance account

Direct write off vs allowance method

Under the direct write-off method, a bad debt is charged to expense as soon as it is apparent that an invoice will not be paid. Under the allowance method, an estimate of the future amount of bad debt is charged to a reserve account as soon as a sale is made. The exact amount of the bad debt expense is known under the direct write-off method, since a specific invoice is being written off, while only an estimate is being charged off under the allowance method

The petty cash receipt satisfies two internal control principles:

(1) establishment of responsibility (signature of custodian), and (2) documentation procedures.

Gross profit rate formula

(Profit / revenue) multiply 100

The basic principles of cash management include

(a) increase the speed of receivables collection, (b) keep inventory levels low, (c) monitor the timing of payment of liabilities, (d) plan timing of major expenditures, and (e) invest idle cash.

In periods of changing prices, the cost flow assumption can have significant impacts both on income and on evaluations of income:

1. In a period of inflation, FIFO produces a higher net income because lower unit costs of the first units purchased are matched against revenue. 2. In a period of inflation, LIFO produces a lower net income because higher unit costs of the last goods purchased are matched against revenue. 3. If prices are falling, the results from the use of FIFO and LIFO are reversed. FIFO will report the lowest net income and LIFO the highest. 4. Regardless of whether prices are rising or falling, average-cost produces net income between FIFO and LIFO.

Identify the internal control principle that is applicable to each procedure: 1. All over-the-counter receipts are entered in cash registers. 2. All cashiers are bonded. 3. Daily cash counts are made by cashier department supervisors. 4. Only cashiers may operate cash registers.

1. Physical control 2. Human resource control 3. Independent internal verification 4. Establishment of responsibilities

Indicate whether each of the following statements is true or false: 1. A company has the following assets at the end of the year: cash on hand $40,000, cash refund due from customer $30,000, and checking account balance $22,000. Cash and cash equivalents is therefore $62,000. 2. A company that has received NSF checks should report these checks as a current liability on the balance sheet. 3. A company has cash in the bank of $50,000, petty cash of $400, and stock investments of $100,000. Total cash and cash equivalents is therefore $50,400.

1. True 2. False 3. True. Petty cash is a cash fund used to pay relatively small amounts. Cash equivalents are highly liquid investments that can be readily converted to a specific amount of cash Cash and cash equivalents refers to the line item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately

When Inventory Error: What happens to COGS? Net income? 1. Understates beginning inventory 2. Overstates beginning inventory 3. Understates ending inventory 4. Overstates ending inventory

1. Understated, Overstated 2. Overstated, Understated 3. Overstated, Understated 4. Understated, Overstated

While preparing for the bank reconciliation for March, Oliver discovered that a $694 check in payment of an account payable had been entered incorrectly in the journal as $649. Which of the following statements is true? A. An adjusting entry must be made to debit accounts payable and credit cash for $45 B. An adjusting entry must be made to debit cash and credit accounts payable for $45 C. The bank should be notified and the bank balance corrected by adding $45 D. No adjusting entry is needed for this reconciling item because it appears on the bank side

A. An adjusting entry must be made to debit accounts payable and credit cash for $45 The bank does not make any entries for deposits in transit or outstanding checks. Only when these items reach the bank will the bank record these items

Which of the following would not be considered an operating expense? A. Cost of goods sold B. Rent expense C. Freight out D. Office expense

A. Cost of goods sold A price set at, rather expense Freight out is a selling expense

Jones has merchandise for sale on consignment with Smith. Which of the following statements is true? A. Jones owns the goods and must include the merchandise in ending inventory B. Jones doesn't own the goods and does not include the merchandise in ending inventory C. Smith owns the goods and must include the merchandise in ending inventory D. Neither Jones nor Smith should include the items in ending inventory

A. Jones owns the goods and must include the merchandise in ending inventory Consignment is just in a different location

Profit margin ratio is calculated as: A. Net income / net sales B. Gross profit / net sales C. Net sales / net income D. Net sales / gross profit

A. Net income / net sales

Horizon purchased merchandise on account. Subsequently, Horizon paid for the merchandise within the discount period. What journal entry would Horizon make using the perpetual method? A. Accounts payable Purchase discount Cash B. Accounts payable Cash Inventory C. Inventory Cash D. Accounts payable Cash

B. Accounts payable Cash Inventory Purchased merchandise, inventory

The due date on a 90 day promissory note dated June 1: A. Aug. 29 B. Aug. 30 C. Aug. 31 D. Sept. 1

B. Aug. 30 June 1 (+30) July 1 (+31) Aug 1 (+29)

Under the allowance method, the entry estimate uncollectible accounts is a debt to: A. Bad debt expense and a credit to accounts receivable B. Bad debt expense and a credit to allowance for doubtful accounts C. Allowance for doubtful accounts and a credit to bad debt expense D. Allowance for doubtful accounts and a credit to accounts receivable

B. Bad debt expense and a credit to allowance for doubtful accounts KEY WORD: estimate uncollectible account To illustrate the allowance method, assume that in its first year of operations, Hampson Furniture has credit sales of $1,200,000 in 2022. Of this amount, $200,000 of receivables remains uncollected at December 31. The credit manager estimates that $12,000 of these receivables will be uncollectible (keep in mind) When companies write off a specific account, they debit actual uncollectibles to Allowance for Doubtful Accounts and credit that amount to Accounts Receivable.

Which of the following is a primary concern of internal control? A. Promote training programs and control incentives B. Enhancing the accuracy and reliability of accounting data C. Ensuring fairness of the financial statements D. Encouraging adherence to prescribed managerial performance

B. Enhancing the accuracy and reliability of accounting data The purposes of internal control are to safeguard assets, enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations

When legal title of goods remains with the seller until the goods reach the buyer the terms are ______ and the ________ has legal title: A. Consigned goods, seller B. FOB destination, seller C. FOB shipping point, buyer D. None of the above

B. FOB destination, seller

To record accrued interest on a note receivable: A. Interest revenue Interest receivable B. Interest receivable Interest revenue C. Cash Interest revenue D. Interest receivable Cash

B. Interest receivable Interest revenue To reflect interest earned but not yet received Accrued interest refers to interest that has been incurred, as of a specific date, on a loan or other financial obligation but has not yet been paid out. Accrued interest can either be in the form of accrued interest revenue, for the lender, or accrued interest expense, for the borrower

Gross profit is: A. Gross margin less operating expense B. Net sales revenue less cost of goods sold C. Income from operations less other expenses D. Indication of company's overall profitability

B. Net sales revenue less cost of goods sold

Which of the following is not correct regarding the perpetual inventory system? A. Cost of goods sold is recorded at the time of each sales B. Sales are recorded only when cash is received C. Merchandise purchased for resale is debited to inventory D. Inventory is credited for damaged items returned to the seller

B. Sales are recorded only when cash is received

Which of the following is false? A. Allowance for doubtful accounts is an estimate of the uncollectible accounts B. The direct write off method conforms to the matching principle C. Bad debt expense is an operating expense on the income statement D. Allowance for doubtful accounts is a contra asset account

B. The direct write off method conforms to the matching principle Under the direct write-off method, when a company determines a particular account to be uncollectible, it charges the loss to Bad Debt Expense. Under the allowance method, companies debit every bad debt write-off to the allowance account rather than to Bad Debt Expense

When the allowance method is used, the entry to write off a customer's account: A. increase to bad debts B. has no effect on net accounts receivable C. decreases net accounts receivable D. increases the balance of the allowance for uncollectible accounts

B. has no effect on net accounts receivable Allowance method- A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period. The write-off of the account reduces both Accounts Receivable and Allowance for Doubtful Accounts (cash realizable stays the same) Both negative, no effect

COGS formula

Beginning inventory + purchases - ending inventory

FOB shipping point vs FOB destination

Buyer pays freight cost vs seller pays freight cost FOB shipping point means that the seller places the goods free on board the carrier, and the buyer pays the freight costs. Conversely, FOB destination means that the seller places the goods free on board to the buyer's place of business, and the seller pays the freight.

Net accounts receivable is calculated as: A. Sales less sales discounts B. Accounts receivable plus the allowance for doubtful accounts C. Accounts receivable less the allowance for doubtful accounts D. Accounts receivable less the bad debt expense

C. Accounts receivable less the allowance for doubtful accounts Allowance for doubtful accounts is a contra asset A higher net receivables % = a business has a greater ability to collect from its customers

When an account is written off under the allowance method: A. Bad debts expense account is debited B. Accounts receivable account is debited C. Allowance for doubtful accounts is debited D. Loss on accounts receivable account is debited

C. Allowance for doubtful accounts is debited To maintain segregation of duties, the employee authorized to write off accounts should not have daily responsibilities related to cash or receivables. ADA is contra asset to accounts receivable

Under the perpetual system when goods previously sold on account are returned to the seller, the seller should: A. Debit accounts receivable B. Debit accounts payable C. Debit sales returns and allowance D. Credit inventory

C. Debit sales returns and allowance In a perpetual inventory system, companies keep detailed records of the cost of each inventory purchase and sale. Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs. A perpetual inventory system provides better control over inventories than a periodic system. Companies that sell merchandise with high unit values, such as automobiles, furniture, and major home appliances, have traditionally used perpetual systems

A company issues a check for $75 but records it incorrectly as $57. On the bank reconciliation, the $18 should be: A. Deducted from the balance per bank B. Added to the balance per bank C. Deducted from the balance per books D. Deducted from the balance per books and added to the balance per bank

C. Deducted from the balance per books

Which of the following is correct about FIFO? A. Produces lowest net income in periods of rising prices B. Produces lowest income taxes in periods of rising price C. Ending inventory reflects most recent purchases and is closest to replacement cost D. Assumes the last units purchased are the first units sold

C. Ending inventory reflects most recent purchases and is closest to replacement cost The costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold. Under FIFO, companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed under LIFO, companies obtain the cost of the ending inventory by taking the unit cost of the earliest goods available for sale and working forward until all units of inventory have been costed

Which of the following is not correct regarding internal controls? A. Internal controls are based on reasonable assurance B. The purpose of internal controls is to safeguard assets and enhance the accuracy and reliability of the accounting records C. Internal controls are enhanced when one person is responsible for all related activities of a process such as the entire sales process D. Internal controls are limited by cost vs. benefit, human element such as collusion, and the size of the business

C. Internal controls are enhanced when one person is responsible for all related activities of a process such as the entire sales process A control environment, risk assessment, control activities (Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls), information and communication, monitoring

Under the perpetual inventory system, purchases of merchandise for sale are recorded in an account called: A. Purchases B. Cost of goods sold C. Inventory D. Finished goods

C. Inventory

An examination of the cash disbursements journal shows that check No. 443 was a payment on account to Andrea Company, a supplier. The correcting entry is as follows:

Cash Accounts Payable—Andrea Company

The cash budget contains three sections

Cash receipts, cash disbursements (expected payments for inventory, labor, overhead, and selling and administrative expenses), and financing (borrowings and repayments of borrowed funds plus interest)—and the beginning and ending cash balances The cash budget helps users determine if the company will be able to meet its projected cash needs

Periodic inventory system

Companies do not keep detailed inventory records of the goods on hand throughout the period. They determine the cost of goods sold only at the end of the accounting period 1. Determine the cost of goods on hand at the beginning of the accounting period. 2. Add to it the cost of goods purchased. 3. Subtract the cost of goods on hand as determined by the physical inventory count at the end of the accounting period.

Beginning inventory + purchases =

Cost of goods available for sale

Inventory turnover= how do you compute average number of days inventory was held?

Cost of goods sold / average inventory 365 / Inventory turnover A higher inventory turnover or lower average days in inventory suggests that management is reducing the amount of inventory on hand

Weighted average unit cost=

Cost of goods sold / total units available for sale

Which statement is false regarding the lower of cost or market (LCM) method of inventory? A. Market is defined as current replacement cost, not selling price B. LCM is an example of an accounting concept of conservatism C. Inventory is written down to its market value in the period in which the price decline occurs D. All the above are true

D. All the above are true The accounting concept of conservatism. Companies that use LIFO are not required to use lower-of-cost-or-net realizable value for inventory valuation

To ensure receivable are not overstated on the balance sheet, they are reported: A. At gross realizable value B. At their cash (net) realizable value C. Less estimated uncollectible receivables D. Both b and c

D. Both b and c Like accounts receivable, companies report short-term notes receivable at their cash (net) realizable value. The notes receivable allowance account is Allowance for Doubtful Accounts. Companies should identify in the balance sheet or in the notes to the financial statements each of the major types of receivables. If a company has significant risk of uncollectible accounts or other problems with its receivables, it is required to discuss this possibility in the notes to the financial statements. Nor does the direct write-off method show accounts receivable in the balance sheet at the amount the company actually expects to receive. Consequently, unless bad debt losses are insignificant, the direct write-off method is not acceptable for financial reporting purposes. Cash (net) realizable value is the net amount the company expects to receive in cash. It excludes amounts that the company estimates it will not collect. Thus, this method reduces receivables in the balance sheet by the amount of estimated uncollectible receivables.

Sales returns and allowances and sales discounts are: A. Sales accounts B. Liability accounts C. Expense accounts D. Contra revenue accounts

D. Contra revenue accounts Reflect a debit instead of a credit

Journal entries are required for all of the following except: A. Bank service charges such as check printing charges B. Customer payments returned NSF by the bank C. EFT customer payment by the bank D. Deposits in transit

D. Deposits in transit Per bank: (1) checks paid and other debits (such as debit card transactions or outstanding checks) that reduce the balance in the depositor's account, (2) deposits (by direct deposit) and other credits that increase the balance in the depositor's account, and (3) bank errors D. Deposits in transit is bank + Per book: (1) EFT collections + and other deposits (2) NFS check (a receivable) (3) service charges and other payments (4) company erros

Income from operations is: A. Gross profit - operating expense - income taxes B. Gross profit - income taxes C. Net sales - cost of goods sold D. Gross profit - operating expense

D. Gross profit - operating expense INCOME FROM OPERATIONS

Which of the following accounts has a normal credit balance? A. Sales discount B. Sales returns and allowances C. Freight out D. Sales

D. Sales Sales are revenue

Which of the following is not an example of a principle of internal controls? A. Each cashier has a seperate cash drawer B. Employees are required to use a time clock to record time worked C. One employee is responsible for ordering merchandise, another for receiving goods, and third for making payments D. The cost of establishing a control should not exceed its benefits

D. The cost of establishing a control should not exceed its benefits

Which of the following statements is true? A. Journal entries are required for every adjustment to the book balance B. Preparing a bank reconciliation changes the cash balance on the books C. A bank reconciliation has no effect on control over cash D. Two of the above are true

D. Two of the above are true (A and B) Bank reconciliation is the process of comparing the bank's balance with the company's balance. The use of a bank checking account minimizes the amount of currency that must be kept on hand. It also facilitates control of cash because a double record is maintained of all bank transactions—one by the business and the other by the bank

Interest=

Face value on note x annual interest rate x times in terms of one year

Select a factor Opportunity, Rationalization, Financial Pressure: 1. An employee's monthly credit card payments are nearly 75% of their monthly earnings. 2. An employee earns minimum wage at a firm that has reported record earnings for each of the last five years.

Financial pressure, rationalization

The multiple-step income statement has three important line items:

Gross profit, income from operations, and net income 1. Subtract cost of goods sold from net sales to determine gross profit. 2. Deduct operating expenses from gross profit to determine income from operations. 3. Add or subtract the results of activities not related to operations to income from operations to determine net income.

Merchandisers use one type of inventory classification to classify the items that make up total inventory. What is it? Manufacturers usually classify inventory into what three categories?

Merchandise inventory finished goods, work in process, and raw materials

Accounts receivable turnover= Average collection period=

Net credit sales / average net accounts receivable 365 / accounts receivable turnover

Note: Financial Statement Presentation of Receivables In the income statement, companies report bad debt expense under Selling expenses in the operating expenses section. They show interest revenue under Other revenues and gains in the nonoperating section of the income statement.

Note: Financial Statement Presentation of Receivables Short-term receivables are reported in the current assets section of the balance sheet, below short-term investments. Short-term investments appear before short-term receivables because these investments are nearer to cash.

The three main factors that contribute to fraudulent activity are

Opportunity, financial pressure, rationalization

Treasury bills, commercial paper (short-term corporate notes), and money market funds

are examples of Cash equivalents