Financial Accounting Exam 2

Jacobs Co. uses a percentage of credit sales to estimate bad debts. Past experience indicates that about 4% of credit sales will become uncollectible. Credit sales for the current month are $5,000,000. The Allowance for Uncollectible Account already has a $25,000 debit balance. For what amount should the account be adjusted (credited)?

$5,000,000 x .04 = %4 *200,000

Johnson Co. uses an aging schedule to estimate bad debts. An ading analysis shows that $80,000 in accounts are estimated to be uncollectible. The allowance for Uncollectible Accounts already has a $10,000 credit balance. For what amount should the account be adjusted (credited)?

$80,000 - $10,000 *$70,000

What are the four primary accounting principles?

1.) consistency 2.) materiality 3.) conservatism 4.) full disclosure

What are the 4 categories of assets on a classified balance sheet?

1.) current assets 2.) investments 3.) property, plant, and equipment 4.) intangible assets

What are the 9 accounts involved in calculating the numbers on a multi-step income statement?

1.) net sales 2.) costs of goods sold 3.) gross margin 4.) operating expenses 5.) income form operations 6.) other revenues and expenses 7.) income before income taxes 8.) tax expense 9.) net income

The maturity value of a $5,000, 60-days, 6 percent note would be?

5,000 x .06 = 300/365 x 60 = 49.32 *5,000 + 49.32 = 5,049.32

specific identification method

An actual physical-flow costing method in which particular items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory.

Gledhill Products had cost of goods available for sale in the amount of $600,000, and net sales of $700,000 during the year. If the company's products have an average gross of 25%, calculate the estimated cost of ending inventory, using the gross profit method.

Cost of Retail Ratio: 100% - 25% = 75% COGS: .75 x 700,000 = 525,000 *600,000 - 525,000 = 75,000

Johnson Co. has sales during the most recent accounting period of $120,000. The cost of goods available for sale during this period was $117,000, and the retail selling price for these same goods was $150,000. What is the estimated cost of ending inventory using the retail method?

Cost of Retail Ratio: 117,000/150,000 = 78% COGS: .78 X 120,000 = 93,600 *117,000-93,600 = 23,000

Assuming that prices are rising, which method will result in the highest net income?

FIFO

Perpetual Inventory System

Inventory is constantly updated for items sold.

Periodic Inventory System

Inventory is only updated at the end of the accounting period, either by estimating what was sold or by counting what is left.

A note made on January 4 and due in 90 days would mature on what date?

January 27 February 28 March 31 *April 4

Assuming that prices are rising, which method will result in the lowest net income?

LIFO

What are some example of consistency?

LIFO or FIFO if they choose to LIFO for inventory accounting, they must use LIFO every month

What is the Allowance for Uncollectible Accounts classified as?

a contra account, and is reduction in Account Receivable

What are some short term assets?

account receivable, inventory, supplies, short term notes receivable and short term investments

What all does the general and administrative expenses include?

all office salaries and wages; all costs of maintaining offices; costs related to office-use vehicles, office personnel travel and entertainment

When an account receivable is written off as uncollectible, the account to be charged (debited) is:

allowance for uncollectible accounts

Full Disclosure

anything about the company that would significantly affect an outside investor's opinion of the company must be disclosed in the notes to the financial statements

What is short term assets?

assets that will be gone within one year's time, though there can be an exception to the on year rule for companies with long operating cycles

What dose current assest include?

cash and short term assets (all within one year)

Costs of Goods Sold =

costs of goods sold + freight in

True or False: Price discrimination may not be achieved by negotiating.

false

True or False: The account "Allowance for Uncollectible Accounts" will have a debit balance when bad debts have previously been overestimated.

false

True or False: when ending inventory is overstates, the net income for that period will be understated.

false

FIFO

first in first out

Disclosing to stockholders that an officer of the company took an illegal bribe would be an application of the principle of ________________.

full disclosure

What are some example of physical company assets?

furniture, equipment, vehicles, land, building, etc.

What happens to price and quantity if the marginal cost curve shits slightly to the left in a kinked demand curve theory?

if it shifts to left slightly to the left, but still passes through the gap in the marginal revenue curve, the price and quantity will be unchanged

Materiality

if the company buys an asset that costs very little, they are allowed to expense the cost, rather than recording it as an asset

Conservatism

if the company spends money on research, design, a new venture, etc., and there is significant doubt about whether it will result in future sales, then they should expense the costs and not record the cost as an asset

Other Revenues and Expenses =

interest revenue + dividend revenue + grains (on sale of non-inventory assets) - interest expense - losses (on sales of non-inventory assets)

Zero economic profit:

is considered to be normal

LIFO

last in first out

What does investments include?

long term notes receivables and long term investments (stocks or bonds). also physical company assets that are not currently used by the company, and which are expected to be owned by the company for a year or more

Gross Margin =

net sales - costs of goods sold

What all includes in intangible assets?

non-physical rights used for purposes of operating the company and which are expected to benefit the company for a year or more

Interest revenue received from lending to other would be included in which section of the income statement?

office salaries expense

What are some examples of intangible assets?

patents, copyrights, franchises, and trademarks

What is included in property , plant, and equipment?

physical company assets that are currently in use by the company, and which are expected to be owned by the company for a year or more; these assets are all depreciated except for land

Equipment currently used in business operations that will not be sold for at least 5 years would appear in which balance sheet section?

property, plant, and equipment

Net Sales =

sales - sales returns and allowances - sales discounts

What all does selling expenses include?

sales salaries, wages, and commissions; advertising; freight out; all costs of maintaining stores and websites; costs related to sales vehicles, sales travel and entertainment

Operating Expenses =

selling expenses + general & administrative expenses

What happens when price falls below AVC?

the firm shuts down, limiting its loss to its fixed costs, it it continues to produce, it will lose even more

FOB Destination

the seller is responsible for getting the goods to the destination and owns goods that are in transit

FOB Shipping Point

the seller only has to get the goods to the shipper and does not own the goods that are in transit

True of False: Whether to classify stock held in another company as a 'current asset' or an 'investment' depends on the length of time the management of the company plans to hold stock.

true

True of False: the change in consistency must be noted in the financial statements and the justification for the change must be clearly explained.

true

True or False: A change in method is allowed if the company can justify the change.

true

Consistency

when a company has a choice of accounting, methods, they must use the same method every time for consistency