Ch 4,5,6 ACC

A periodic inventory system measures cost of goods sold by:

counting inventory at the end of the period.

The account "Allowance for Uncollectible Accounts" normally has a

credit

When a business provides services to a customer, and the customer promises to pay later, this is referred to as

credit sales.

Reconciliation Bank Statement set up

Comp Name BR Date Bank left Comp right

bank reconciliation

The process of matching your checkbook register with the bank statement

A trade discount is

a reduction in the list price granted to customers

Benefits of Extending Credit

sales and profits increase

errors

the unintentional misstatements or omissions of amounts or disclosures in financial statements

In a perpetual inventory system, when a company sells inventory on account, how many entries are required?

2

Average Collection Period Ratio

365/accounts receivable turnover

Average days in inventory

365/inventory turnover ratio

Which of the following steps are necessary to reconcile the bank balance and the cash account balance.

Adjust the company's cash balance for items not in company records Adjust bank's cash balance for items not in bank statement Record items that reconcile the company's cash balance

Accounts Receivable

Amounts to be received in the future due to the sale of goods or services, an asset.

When an account previously written off is collected in full, the entry to reverse the previous write-off would require which of the following?

Credit Allowance for Uncollectible Accounts. Debit Accounts Receivable.

Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?

Credit to Accounts Receivable Debit to Allowance for Uncollectible Accounts

Recording Notes Receivable with interest

Debit: Cash Credit: NR & Interest Rec

The amount of cash in the balance sheet reflects the

Ending cash on that date

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

Which of the following methods are available for costing inventory?

FIFO LIFO Specific identification Weighted-average

Communication (balance sheet): Interest Receivable is reported in the balance sheet and represents:

Interest earned (and not yet received) since the note was accepted.

Intrest calculation

Intrest = Face value x Rate x Fraction of year We calculate interest as the face value of the note multiplied by the stated annual interest rate multiplied by the appropriate fraction of the year that the note is outstanding.

Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:

Inventory

In a perpetual inventory system, when inventory is purchased, the blank Unavailable account is debited, whereas in a periodic system, the blank is debited

Inventory and Purchases

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the

LIFO Reserve

Who has final responsibility for internal controls?

Management

Total revenues less discounts, returns, and allowances are referred to as

Net Revenues

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming

Obsolete

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are:

Paid by the supplier

Which of the following inventory systems requires a physical count in order to determine cost of goods sold?

Periodic

Freight-in costs are debited to Inventory in this inventory system:

Perpetual

Which of the following are preventive controls?

Physical controls and separation of duties

When adjusting the company's cash account balance in a bank reconciliation, which items reduce the company's cash account balance? (Select all that apply.)

Service charges Charges for NSF checks

Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

a noncurrent asset

With the allowance method, bad debt expense is recorded

at the end of the period when bad debts are estimated.

Which of the following are detective controls?

audits; reconciliation; performance reviews

The estimated expense for accounts that may not be collected is referred to as

bad debt expense.

Margot, a prospective investor, wants to know how much cash Ziegler Inc. has on December 31. Margot can find the information in Ziegler's: (Select all that apply.)

balance sheet statement of cash flows

Weighted-Average Cost

cost of goods available for sale / # of units available for sale

Inventory turnover ratio

cost of goods sold/average inventory

Planters Corp. wrote off a customer's uncollectible account in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require a

credit to Allowance for Uncollectible Accounts.

Because cash is assumed to be available for spending, it is typically reported on the balance sheet as a(n)

current asset

Lindell sells $100 of goods to a customer. The customer pays with a personal check. Recording this transaction will include a

debit to Cash.

The two types of control procedures are preventive and

detective

When a person intentionally deceives another person or company for personal gain, this is referred to as

fraud

Which of the following are common controls over cash receipts? (Select all that apply.)

having two different employees take custody of the checks and make the deposit opening mail daily and making a detailed list of checks received

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory.

The direct write-off method is required for

income tax purposes.

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

increase an asset and increase revenue decrease an asset and increase an expense

Purchasing inventory on account:

increases assets and increases liabilities

A company's plans to safeguard company assets and enhance the reliability and accuracy of accounting information are referred to as

internal controls.

Inventory Purchase journal entry

inventory Debit ACC PAY credit

WorldCom

misclassified expenditures to overstate assets and profitability

Receivables not expected to be collected should

not be counted in assets of the company.

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable

When a sale occurs under the periodic inventory system, we record:

only the sale, but not the related cost of goods sold

Two types of control activities are

preventive and detective controls.

Internal control consists of plans to

provide accurate and reliable accounting information. safeguard company assets.

nontrade receivables

receivables that originate from sources other than customers

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

receivables turnover ratio average collection period

One of the most important internal controls for cash is the bank

reconciliation

Alexandra Inc. utilizes a periodic inventory system. Related to inventory, Alexandra Inc. must record period-end adjustments to:

record cost of goods sold for the period adjust the inventory balance to its proper ending balance close purchase-related temporary accounts

Accounts receivable are typically classified as current assets because

they will be converted to cash within 1 year.

Inventory

• is a current asset reported in the balance sheet and represents the cost of inventory not yet sold at the end of the period.

When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?

An entry to reinstate the account receivable and an entry to record payment.

Statement of Cash Flows Includes

Cash transactions

Cash disbursements that have been recorded in the company's accounting records but are not yet recorded by the bank are called

Checks outstanding

When adjusting the company's cash account balance in a bank reconciliation, which item must be added to the cash account balance?

Collections of funds by the bank

The framework for designing an internal control system is provided by the

Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

At the time of a Credit Sale

Company records: ACC Rec Debit and Service Rev Credit

Recording Notes Receivable

Debit: Notes Receivable Credit: Service Revenue

The balance of Bad Debt Expense from estimating future uncollectible accounts has what effect on the income statement in the current year?

Decreases net income

Effective internal control over cash requires segregation of duties. Which of the following duties should be segregated?

Depositing checks into the bank and recording receipts in the accounting records Opening the mail and deposit of checks in the bank

Internal Controls

Eliminate the opportunity for fraud

For internal record keeping, most companies carry their inventory using the

FIFO

True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

False

True or false: The entry for a sale to customers is different depending on whether the customer pays with cash or a check.

False

The allowance method is required by

GAAP

Decision Making (ratio analysis): A company that provides credit sales or services to customers and then more effectively collects cash from those credit customers would report a __________ receivables turnover ratio.

Higher

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be

Higher than cost of goods sold determined using the FIFO inventory assumption.

The Public Company Accounting Reform and Investor Protection Act of 2002 is known as the

Sarbanes-Oxley Act.

Control Activities

Separation Duties, Physical Controls, Physical Controls, Proper Authorization, Employee Management

Smith's operating cash flows in millions were $100, $150, $80 during the past three years; while Jones' operating cash flows in millions were $105, $115, $110 during the same period. From the perspective of operating cash flows, which company would likely be perceived as riskier?

Smith because its operating cash flows show more variability

Sales Returns and Allowances account

The account a seller uses to record the physical return of merchandise by customers or a reduction in a bill for an agreed-upon reason. Sales Returns and Allowances is treated as a deduction from Sales. This account is usually evidenced by a credit memorandum issued by the seller

The ending balance in cash is reported in which financial statement(s)?

The balance sheet and statement of cash flows

What would cause a bank statement not to agree with the cash balance in the accounting records?

The bank made an error in recording a deposit made by the company. The bank paid interest that the company has not recorded. Deposits outstanding that have been recorded on the company's records, but not on the bank's. The company made an error in recording a deposit.

FOB shipping point means title to the goods passes:

When it ships

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that (Select all that apply.)

all disbursements are made by check, debit card, or credit card. all expenditures are authorized. checks are signed by authorized individuals.

A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations is referred to as a sales

allowance

To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to

allowance for uncollectible accounts.

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the

allowance method

Bad Debt Expense

an expense account to record losses from extending credit

Accounts receivable should be classified as a(n)

asset

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

assets decrease by the cost of the inventory assets increase by the sales price of the inventory

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the benefits it provides.

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to

be more accurate

The asset that is most susceptible to employee fraud is

cash

The bank will show a customer's withdrawal as a

debit, because a withdrawal decreases its liability from the bank's point of view

Differences between the bank statement balance and the cash account balance in the accounting records are primarily caused by timing differences and

error or fraud

(Face value x annual interest rate x fraction of the annual period) is the formula for

interest on a note.

Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. The reported amounts for ending inventory and cost of goods sold will not be the same across inventory reporting methods because:

inventory costs generally change over time.

Cost of goods sold

is an expense reported in the income statement and represents the cost of inventory sold.

The Blank______ method of valuing inventory was developed to avoid reporting inventory at an amount that is Blank______ than the benefits it can provide.

lower of cost and net realizable value; greater

A formal, signed credit agreement between a lender and a borrower is called a(n)

note receivable by lender

Preparation of a bank ______ helps maintain control of cash accounts

reconciliation

Gross profit

•equals net revenues (or net sales) minus cost of goods sold.

Notes Receivable

A written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future. An Asset.

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

The cost of estimated accounts receivable that will not be collected is referred to as

bad debit expense

The receivables turnover ratio and the average collection period provide information about a company's

effectiveness in managing receivables

net income

equals all revenues minus all expenses

Components of the Total Cash Balance

-coins and currency -checks received -savings accounts -checking accounts -credit card sales -debit card sales -cash equivalents

Writing Off Uncollectible Accounts

Asset is unchanged

Meller purchases inventory on account. As a results, Meller's

Assets Increase

•Weighted-average cost

Assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items.

aging accounts

Olders are less likely to be collected

gross profit ratio

gross profit/net sales •Measures the amount by which the sale price of inventory exceeds its cost per dollar of sales

A multiple-step income statement reports multiple levels of

income

NSF

non-sufficient funds

direct write-off method

not GAAP

Purchase returns are recorded in a separate contra purchase account in a

periodic Inventory system

Merchandising and manufacturing companies

record revenues when selling inventory to customers.

Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)

sales on account. credit sales.

FOB destination means title to the goods passes

when they arrive at the destination.

Periodic Inventory System

••Does not continually record inventory amounts ••Calculates balance of inventory at end of period based on physical count ••Adjusts for purchases and sales of inventory

Perpetual Inventory System

••Maintains a continual record of inventory on hand and inventory purchased and sold ••Helps managers make good decisions ••Most often used in practice

During the year, a company provides services to customers on account and expects to receive cash in the future. The company records these services on account to which of the following accounts?

ACC REC

The allowance for uncollectible accounts is a contra account to

ACC REC

Which of the following items are not included in cash?

ACC REC

the legal right to receive cash from a credit sale and represents an asset of the company.

ACC REC

Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error

ASAP

In a bank reconciliation, which of the following will require a journal entry by the company?

Adjustments to the balance per books for items discovered on the bank reconciliation that were not yet recorded on the books

Which of the following is reported in the balance sheet as a contra (or negative) asset account equal to the amount of estimated future uncollectible accounts?

Allowance for Uncollectible Accounts.

•Last-in, first-out (LIFO)

Assumes last units purchased are first ones sold

Enron

Avoided reporting billions in debt and losses

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the

aging method of accounts receivable.

Internal control consists of plans to (Select all that apply.)

safeguard company assets. provide accurate and reliable accounting information.

Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?

$18,000Rationale:$20,000 - $2,000

A cash discount representing a reduction in the amount to be paid by a credit customer if the customer pays within a specified period of time is also referred to as

sales discount

Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?

sales discount

When a customer returns a product for a refund, in which account is the entry recorded?

sales return

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n)

sales return

collusion

secret agreement or cooperation especially for an illegal or deceitful purpose

A petty cash fund is used for

small amounts of cash needed for low-cost items.

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)

stockholders' equity increases net income increases total assets increase

writing off accounts receivable

A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.

fraud

A deliberate deception intended to secure an unfair or unlawful gain

allowance method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.

Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?

$93,000Rationale:$100,000 - $7,000

Company-issued debit and credit cards

-debit cards (and checks) captured in the bank reconciliation -credit card purchases need to be recorded

List the steps for a bank reconciliation in the correct order.

1. Adjust Bank 2. Adjust Company 3. Update

An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)

ACC REC

2/10, n/30

2% discount if paid within 10 days, otherwise net amount due within 30 days

Average Collection Period

365 / accounts receivable turnover ratio

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

40.6

Black Company has the following information: Receivable turnover 6 Inventory turnover 5 Asset turnover 3 Net credit sales $500,000 What is the average collection period?

60.8 365/receivables turnover = 365/6 = 60.8 days

Manufacturing company

A company that uses labor, equipment, supplies, and facilities to convert raw materials into finished products.

Which of the following items are included in cash?

Balance in checking accounts Currency and coins Checks from customers

Percentage of Credit Sales Method

Bases bad debt expenses on the historical percentage of credit sales that result in bad debts.

Measurement (end of the year): At the end of the year, an adjusting entry is used to record:

Both interest revenue and interest receivable for the amount of interest earned during the current year.

to record credit card sales

Cash Debit Service Charge Expense Debit Sales Revenue Credit

collection after discount period

Cash debit Acc rec credit

A bank reconciliation reconciles the bank statement with the company's

Cash in on Balance sheet

collection during the discount period journal entry

Cash sales discount debit Acc rec credit

Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit Blank______ and credit Blank______.

Cash; Accounts Receivable

uncollectible accounts

Credit and asset

uncollectible accounts

Customers' accounts that no longer are considered collectible

At the end of the year, an adjusting entry is recorded to estimate future uncollectible accounts. The adjusting entry involves:

Debit Bad Debt Expense; credit Allowance for Uncollectible Accounts.

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

Debit Inventory

Sales Returns and Allowances

Debit, reduction of revenue not expense

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

Communication (income statement): The balance of Interest Revenue from accruing interest to be received has what effect on the income statement in the current year?

Increases net income.

A major difference between companies that provide services and companies that manufacture or sell goods is that those that manufacture or sell goods must account for:

Inventory

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

Inventory Cost of Goods Sold

The definition of inventory includes which of the following items?

Items currently in production for future sale Materials used currently in the production of goods to be sold Items held for resale

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be

Lower than ending inventory determined using the FIFO inventory assumption.

What type of company purchases raw materials and makes goods to sell?

Manufacturers

specific identification method

Matches each unit of inventory with its actual cost

Percentage-of-receivables method

Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

Which of the following methods are not used for inventory costing?

NIFO Simple-average

Receivables Turnover Ratio

Net Credit Sales / Average Accounts Receivable

Measurement (during the year): During the year, a company accepts a note for services and expects to receive cash in the future. The note and interest are due in the following year. At the time the note is accepted, the company records an increase to:

Notes Receivable.

Which of the following items will require a journal entry following a bank reconciliation? (Select all that apply.)

Notes collected by the bank NSF checks

Net revenues is calculated as total revenues minus which of the following items?

Sales returns Sales discounts Sales allowances

Who is responsible for providing an opinion on management's assessment of internal control?

The company's auditors

cost of extending credit

The delay in collecting cash from customers, and as already discussed, some customers may end up not paying at all.

Fraud Triangle

The three factors that contribute to fraudulent activity by employees: opportunity, Motivation, and rationalization.

________ difference in cash occurs when a company records a transaction either before or after the bank records the same transaction.

Timing

Which of the following represent reasons why managers closely monitor inventory levels?

To ensure that sufficient units are available. To minimize costs of inventory write-downs due to obsolete inventory.

What is the primary purpose of a bank reconciliation?

To ensure the bank balance per reconciliation is equal to the company balance per reconciliation

Credit Sales

Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.

Notes Receivable

Written promise (as evidenced by a formal instrument) for amounts to be received.

The percentage-of-receivables approach to measuring bad debt expense is referred to as

a balance sheet method

petty cash fund

a cash fund used to pay relatively small amounts

Merchandising Company

a company that resells tangible products previously bought from suppliers

Net Revenue

a company's total revenues less any discounts, returns, and allowances

inventory

a complete list of items such as property, goods in stock, or the contents of a building. current asset

Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be

a separate freight-in account.

The percentage-of-receivables method of estimating bad debt applies

a single percentage to accounts receivable

A trade discount is a reduction from the list price, which is used to: (Select all that apply.)

change prices without publishing a new catalog disguise real prices from competitors give quantity discounts to customers

The Sarbanes-Oxley Act applies to

companies that are required to file with the SEC.

The account "Allowance for Uncollectible Accounts" is classified as

conta asset

allowance for uncollectible accounts

contra asset account representing the amount of accounts receivable that we do not expect to collect a credit

Allowance for Uncollectible Accounts has a credit balance because it is a(n)

contra-asset

Components of Internal Control

control environment, risk assessment, control activities, information and communication, monitoring

The journal entry to record bad debt expense includes: (Select all that apply.)

credit to allowance for uncollectible accounts debit to bad debt expense

The bank will show a customer's deposit on bank statements as a

credit, because a deposit is a liability from the bank's point of view

Inventory is classified as

current asset

Sarbanes-Oxley Act of 2002

established requirements for proper financial record keeping for public companies and penalties of as much as 25 years in prison for noncompliance

Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include

debit Allowance for Uncollectible Accounts.

Accrue Interest

debit interest receivable, credit interest revenue

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

decrease ACC REC

A sales allowance Blank______ the amount owed by the customer for merchandise that is Blank______ by the customer

decreases; retained

The Accounts Receivable account is reduced when the seller:

determines that a specific customer account will not be collectible

operating income

equals gross profit minus operating expenses.

Incorrect financial statements

errors, fraud, and occupational fraud

cash equivalents

safe and highly liquid assets that many firms list with their cash holdings on their balance sheet

Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record Blank______ bad debt expense Blank______.

estimated; at the end of the year

The formula for calculating interest on a note is

face value x annual rate x fraction of the annual period

True or false: Variability in operating cash flows is unimportant as long as the total cash flows over a three-year period is sufficiently positive.

false

Under the allowance method, companies estimate Blank______ uncollectible amounts and report those estimates in the Blank______ year.

future; current

When the allowance method is used, the write-off of an uncollectible account:

has no effect on net income

Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will

have no effect on net income

Statement of Cash Flows

operating activities, investing activities, financing activities

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

direct write-off method

recording uncollectible accounts expense only when an amount is actually known to be uncollectible

trade discount

reduction in the listed price of a product or service

Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a

reflect the proper ending balance in the inventory account close the temporary accounts relating to inventory purchases, discounts, and returns and allowances recognize cost of goods sold relating to sales during the period

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the LIFO

reserve

•First-in, first-out (FIFO)

the assumption that the stock that is purchased first will be sold first

Occupational Fraud

the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources

A non-sufficient funds check requiring an adjustment to the cash balance was written:

to the company preparing the bank reconciliation

The allowance method estimates

uncollectible accounts

When the direct write-off method is used, an entry for bad debt expense is required

when the account receivable is determined to be uncollectible.

Additional Inventory Transactions

•Freight charges q FOB shipping point means title passes when the seller ships the inventory. q FOB destination means title passes when the inventory reaches the buyer's destination. •Purchase discounts q Discount offered by seller to buyer for quick payment •Purchase returns q Buyer returns unwanted or defective inventory

Income before income taxes

•equals operating income plus nonoperating revenues and minus nonoperating expenses.

Service companies

•record revenues when providing services to customers.