Exam 2 Review

The generally accepted accounting principle which dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied is the... a. revenue recognition principle b. expense recognition principle c. periodicity assumption d. accrued revenues principle

a. revenue recognition principle

(T/F) The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received.

False The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

At December 31, 2013, before any year-end adjustments, Macarty Company's Prepaid Insurance account had a balance of $2,700. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusting entry for Insurance Expense for the year would be... a. $1,500 b. $1,200 c. $2,700 d. $1,900

a. $1,500 Prepaid expenses are costs that expire either with the passage of time (rent and insurance) or through use (supplies) An adjusting entry for prepaid expenses results in an increase (debit) to an expense account and a decrease (credit) to an asset account.

A credit sale of $3,800 is made on April 25, terms 2/10, net/30, on which a return of $200 is granted on April 28. What amount is received as payment in full on May 4? a. $3,528 b. $3,724 c. $3,800 d. $3,600

a. $3,528 Explanation: The credit terms are 2/10 and n/30, which means that a 2% cash discount may be taken on the invoice price, less ("net of") any returns or allowances if payment is made within 10 days of the invoice date (the discount period). Return amount... (3,800 - 200) = $3,600 Sales discount... (3,600 x 2%) = $72 Payment received... 3,600 - 72 = $3,528

Which of the following should not be included in the physical inventory of a company? a. Goods held on consignment from another company. b. Goods in transit from another company shipped FOB shipping point. c. Goods shipped on consignment to another company. Ad. ll of these answer choices should be included.

a. Goods held on consignment from another company. FOB shipping point - ownership is passed to the buyer when the public carrier accepts the goods from the seller Ex: Once FedEx picks the package up from Macy's to deliver to my house, I have ownership of the goods FOB destination - ownership of the goods remains with the seller until the goods reach the buyer Ex: Once FedEx drops the package off at my door, I have ownership of the goods. Until then, ownership remains with Macy's Consigned goods - ownership always remains with the company that the goods originally belonged to Ex: I want to sell my used car, so I bring it to a Ford dealership and they put the car on their lot and charge me a commission if it is sold. The Ford dealership never has ownership of my car

Under a perpetual inventory system... a. accounting records continuously disclose the amount of inventory. b. increases in inventory resulting from purchases are debited to purchases. c. there is no need for a year-end physical count. d. the account purchase returns and allowances is credited when goods are returned to vendors.

a. accounting records continuously disclose the amount of inventory. Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs.

Adjustments for unearned revenues... a. decrease liabilities and increase revenues b. increase assets and increase revenues. c. decrease revenues and decrease assets. d. increase liabilities and increase revenues.

a. decrease liabilities and increase revenues The adjusting entry for unearned revenues results in a decrease (debit) to a liability account and an increase (credit) to a revenue account.

Expenses are recognized when... a. they contribute to the production of revenue. b. they are paid. c. they are billed by the supplier. d. the invoice is received.

a. they contribute to the production of revenue. In recognizing expenses, a simple rule is followed: "Let the expenses follow the revenues". Match expenses with revenues in the period when the company makes efforts to generate those revenues.

Bonkers Bananas has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 A physical count of merchandise inventory on July 30 reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is... a. $1,100. b. $1,010. c. $1,070. d. $1,000.

b. $1,010. LIFO (last-in, first-out) - assumes that the latest goods purchased are the first to be sold **TIP** another way of thinking about the LIFO ending inventory is the FISH assumption - first in, still here Explanation: Units on hand... - 40 units 7/1 @ $20 - 10 units 7/7 @ $21 (40 x 20) + (10 x 21) = $1,010

Serene Stereos has the following inventory data: Nov 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. The cost of goods sold under FIFO is... a. $657 b. $1,269 c. $632 d. $1,295

b. $1,269 FIFO (first-in, first-out) - assumes that the earliest goods purchased are the first to be sold **TIP** another way of thinking about the FIFO ending inventory is the LISH assumption - last in, still here Explanation: Units sold... - 30 units 11/1 @ $6 - 120 units 11/8 @ $6.45 - 50 units 11/17 @ $6.30 (30 x 6) + (120 x 6.45) + (50 x 6.30) = $1,269

Nelson Corporation sells three different products. The following information is available on December 31: Inventory Item Units Cost per Unit Mkt Value per Unit X 300 $4 $3.50 Y 600 $2 $1.50 Z 1,500 $3 $4.00 When applying the lower of cost or market rule to each item, what will Nelson's total ending inventory balance be? a. $6,900 b. $6,450 c. $7,950 d. $6,600

b. $6,450 Lower-of-cost-or-market - valuing the inventory in the period in which the price decline occurs Explanation: Inventory Item Units Cost / Unit Mkt Val / Unit X 300 $4 $3.50 Y 600 $2 $1.50 Z 1,500 $3 $4.00 LCM calculation... 1. (# of units x lowest price) 2. (X + Y + Z) X (300 x 3.5) = $1,050 Y (600 x 1.5) = $900 Z (1,500 x 3) = $4,500 (1,050 + 900 + 4,500) = $6,450

The following information was available for Bowyer Company at December 31, 2017: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $800,000; and sales $1,100,000. Bowyer's inventory turnover in 2017 was... a. 13.8 times. b. 10.0 times. c. 11.4 times. d. 8.9 times.

b. 10.0 times. Explanation- (cost of goods sold) / (average inventory) Cost of goods sold = $800,000 Average inventory = $80,000 (800,000 / 80,000) = 10.0

Which statement is correct concerning the adjusted trial balance? a. An adjusted trial balance eliminates the need for the preparation of financial statements. b. The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger. c. An adjusted trial balance will contain only permanent—balance sheet—accounts. d. The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted.

b. The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger.

Accounts often need to be adjusted because: a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report.

b. many transactions affect more than one time period. Adjusting entries are necessary because the trial balance--the first pulling together of the transaction data--may not contain up-to-date and complete data.

Gross profit equals the difference between: a. net income and operating expenses. b. sales revenue and cost of goods sold. c. sales revenue and operating expenses. d. sales revenue and cost of goods sold plus operating expenses.

b. sales revenue and cost of goods sold. Gross profit- the excess of net sales over cost of goods sold Ex- Net sales $460,000 Cost of goods sold 316,000 Gross profit $144,000

The revenue recognition principle dictates that revenue should be recognized in the accounting records: a. when cash is received. b. when the performance obligation is satisfied. c. at the end of the month. d. in the period that income taxes are paid.

b. when the performance obligation is satisfied. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

When is a physical inventory usually taken? a. When goods are not being sold or received. b. When the company has its greatest amount of inventory. c. At the end of the company's fiscal year. d. When the company has its greatest amount of inventory and at the end of the company's fiscal year.

c. At the end of the company's fiscal year. Explanation: Companies take the physical inventory at the end of the accounting period (fiscal year/12 months).

Which of the following is not a typical example of an accrued expense? a. Wages b. Interest c. Depreciation d. Taxes

c. Depreciation Accrued expenses - expenses incurred but not yet paid in cash or recorded

Saira works for a sports franchise that pays wages and salaries earned on a monthly basis. A new accountant was hired by the sports franchise in late May. Due to inexperience, the new accountant failed to accrue Saira's salary for May. What is the impact on the May 31 financial statements of the sports franchise? a. Revenues are overstated; income is understated. b. Assets are overstated; liabilities are understated. c. Income is overstated; expenses are understated. d. Liabilities are overstated; retained earnings are overstated.

c. Income is overstated; expenses are understated. The failure to accrue salaries and wages expense and a liability for salaries and wages payable results in understating expenses and liabilities and overstating net income and retained earnings; there is no impact on assets. Because she forgot to accrue Saira's salary for May, that means that she did not subtract the expense from Salaries & Wages, meaning an expense was left out making the expense number smaller on the income statement than it should be. Since the expenses should have been higher, that means that the revenues should've been divided by a bigger number, meaning that net income is more than it should be.

Which of the following is an example of a deferral adjusting entry? a. Accrued expense b. Accrued revenue c. Prepaid expense d. All of these choices are correct.

c. Prepaid expense Deferrals: 1. Prepaid expenses: Expenses paid in cash before they are used or consumed 2. Unearned revenues: Cash received before services are performed Accruals: 1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

Which of the following accounts is classified as a contra revenue account? a. Sales Revenue b. Cost of Goods Sold c. Sales Returns and Allowances d. Purchase Discounts

c. Sales Returns and Allowances Companies use a contra revenue account, instead of debiting Sales Revenue, to disclose in the accounts and in the income statement the amount of sales returns and allowances. Sales Returns and Allowances is a contra revenue account to Sales Revenue, which means it is offset against a revenue account on the income statement.

Which statement is correct? a. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. b. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use. c. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles. d. As long as management is ethical, there are no problems with using the cash basis of accounting.

c. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.

Depreciation is the process of: a. valuing an asset at its fair value. b. increasing the value of an asset over the periods in which it is used. c. allocating the cost of an asset to the periods in which it is used. d. writing down an asset to its real value each accounting period.

c. allocating the cost of an asset to the periods in which it is used.

Under the perpetual inventory system, in addition to making the entry to record a sale, a company would... a. debit Inventory and credit Cost of Goods Sold. b. debit Cost of Goods Sold and credit Purchases. c. debit Cost of Goods sold and credit Inventory. d. make no additional entry until the end of the period.

c. debit Cost of Goods sold and credit Inventory. Explanation: Companies record purchases by an increase (debit) in Inventory and a decrease (credit) in Cash Companies record a sale by an increase (debit) in Cash and a decrease (credit) in Inventory

On July 1 the Fisher Shoe Store paid $24,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Fisher Shoe Store is: a. debit Rent Expense, $24,000; credit Prepaid Rent, $4,000. b. debit Prepaid Rent, $4,000; credit Rent Expense, $4,000. c. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000. d. debit Rent Expense, $24,000; credit Prepaid Rent, $20,000.

c. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000. If they paid $24,000 for 6 months, that would be $4,000 per month. If a financial statement was prepared after one month, $4,000 would be the amount. Prepaid Expenses- expenses paid in cash before they are used or consumed An adjusting entry for prepaid expenses results in an increase (debit) to an expense account and a decrease (credit) to an asset account.

Greece Company purchased office supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $2,500 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Supplies Expense, $2,500; credit Supplies, $2,500. b. debit Supplies, $4,500; credit Supplies Expense, $4,500. c. debit Supplies Expense, $4,500; credit Supplies, $4,500. d. debit Supplies, $2,500; credit Supplies Expense, $2,500.

c. debit Supplies Expense, $4,500; credit Supplies, $4,500. The expense Supplies Expense is increased $2,500; the asset Supplied is decreased $2,500. It also decreases stockholders' equity by increasing an expense account, Supplies Expense. Assets = Liabilities + Stockholders' Equity Supplies Supplies Expense -$2,500 -$2,500 Oct 31 Supplies Expense 2,500 Supplies 2,500 The use of supplies decreases an asset, Supplies.

La More Company had the following transactions during 2016: -Sales of $9,000 on account -Collected $4,000 for services to be performed in 2017 -Paid $3,750 cash in salaries for 2016 -Purchased airline tickets for $500 in December for a trip to take place in 2017 What is La More's 2016 net income using accrual accounting? a. $5,750 b. $9,750 c. $9,250 d. $5,250

d. $5,250 Revenue - $9,000 Expense - 3,750 $5,250 Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged

On December 31, 2017, Mohling Company's inventory records indicated a balance of $632,000. Upon further investigation it was determined that this amount included the following: - $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/17 terms FOB destination, but not due to be received until January 2nd - $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th. - $6,000 of goods received on consignment from Dollywood Company What is Mohling's correct ending inventory balance at December 31, 2017? a. $520,000 b. $626,000 c. $440,000 d. $514,000

d. $514,000 Included Not Included Inventory was taken on 12/31 $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/17 terms FOB destination, but not due to be received until January 2nd $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th. $6,000 of goods received on consignment from Dollywood Company (632,000 - 112,000 - 6,000) = $514,000

Given the following adjusted trial balance: Debit Credit Cash $ 1,662 Accounts receivable 2,098 Inventory 3,124 Prepaid rent 86 Equipment 300 Acc dep-equipment 52 Accounts payable 82 Unearned service revenue 122 Common stock 206 Retained earnings 6,610 Service revenue 368 Interest revenue 56 Sal and wages expense 160 Travel expense 66 . Total $7,496 $7496 After closing entries have been posted, the balance in retained earnings will be: a. $6,440. b. $6,612. c. $6,980. d. $6,808.

d. $6,808. How to calculate- 1. Income Statement Revenues Service revenue $368 Interest revenue 56 Expenses Sal and wage expense $160 Travel expense 66 Total expenses 226 Net Income $198 2. Retained Earnings Statement Retained earnings, Oct 1 $ 6,610 Add: Net income 198 6,808 Less: Dividends 0 Retained earnings, Oct 31 $ 6,808

Which of the following companies would be most likely to use a perpetual inventory system? a. Grain company b. Beauty salon c. Clothing store d. Fur dealer

d. Fur dealer Perpetual inventory system- companies maintain detailed records of the cost of each inventory purchase and sale Companies that sell merchandise with high unit values (cars, furniture, appliances) use a perpetual system.

Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count? a. Goods in transit to Reeves, FOB destination b. Goods that Reeves is holding on consignment for Parker Company c. Goods in transit that Reeves has sold to Smith Company, FOB shipping point d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due Why? Goods in transit to Reeves, FOB destination The other company still has it until it gets to Reeves Goods that Reeves is holding on consignment for Parker Company Never ownership with consignment goods Goods in transit that Reeves has sold to Smith Company, FOB shipping point Transferred ownership when it left Reeves Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due Still holding in inventory

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit... a. Accounts Payable. b. Purchase Returns and Allowances. c. Sales Revenue. d. Inventory.

d. Inventory. Returned merchandise decreases (debits) Accounts Payable and decreases (credits) Inventory.

Tony's Market recorded the following events involving a recent purchase of inventory: - Received goods for $80,000, terms 2/10, n/30. - Returned $1,600 of the shipment for credit. Paid $400 freight on the shipment. - Paid the invoice within the discount period. As a result of these events, the company's inventory a. increased by $76,832. b. increased by $78,800. c. increased by $77,224. d. increased by $77,232.

d. increased by $77,232. Finding balance due... (gross invoice price - purchase returns) (80,000 - 1,600) = $78,400 Finding cash discount... (78,400 x 2%) = $1,568 (78,400 - 1,568) = $76,832 (76,832 + 400) = $77,232 Explanation: The credit terms are 2/10 and n/30, which means that a 2% cash discount may be taken on the invoice price, less ("net of") any returns or allowances if payment is made within 10 days of the invoice date (the discount period).