Quiz Questions and Chapter 5
Which of the following activities is not a component of the operating cycle? A. sale of merchandise B. Payment of employees salaries C. collection of cash from merchandise sales D. Purchase of merchandise
B. Payment of employees salaries
How to find cost of goods for sale???
Beginning inventory plus the cost of goods purchased equals cost of goods available for sale.
Periodic 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 calculates cost of goods sold by subtracting ending inventory from the goods available for sale.
Sales discount
offer the customer a cash discount
Gross profit does not appear
on a single-step income statement. Only appears on a multistep format income statement that includes the subtotal gross profit.
the main factors that contribute to fraudulent activity
opportunity financial pressure rationalization
Purchase discounts
permit the buyer to claim a cash discount for prompt payment. purchaser saves money, and the seller is able to shorten the operating cycle by converting the accounts receivable into cash earlier. invoice is paid within the discount period, the amount of the discount decreases Inventory
sale of merchandise
referred to as sales revenue or sales. the primary source of revenues
At the beginning of the year, Wildcat Athletic had an inventory of $300,000. During the year, the company purchased goods costing $1,200,000. If Wildcat Athletic reported ending inventory of $450,000 and sales of $1,500,000, their cost of goods sold and gross profit rate would be
$1,050,000 and 30%. $300,000 BI + $1,200,000 Purchases - $450,000 EI = $1,050,000 COGS Gross Profit = $1,500,000 Sales - $1,050,000 COGS = $450,000 Gross Profit rate = $450,000 GP/$1,500,00 Sales = 30%
A company sells a plant asset that originally cost $375,000 for $125,000 on December 31, 2017. The accumulated depreciation account had a balance of $150,000 after the current year's depreciation of $37,500 had been recorded. The company should recognize a
$100,000 loss on disposal. Book value of plant asset = $375,000 cost - $150,000 A/D = $225,000. If sold for $125,000 we have a $100,000 loss to recognize.
A company purchased factory equipment for $450,000.It is estimated that the equipment will have a$45,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be
$108,000. Year one: $450,000 BV x 2/5 = $180,000 Year two: $270,000 BV x 2/5 = $108,000 Remember that we ignore salvage value when calculating depreciation expense under DDB
A physical count of merchandise inventory on July 30 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is July 1 Beginning Inventory: 30 units $19= $570 7 Purchases: 105 units $20 = $2,700 22 Purchases: 15 units $22 = $330 Total: $3000
$2,010 150 units available for sale - 48 in EI = 102 sold. (30 x $19) + (72 x $20) = $2,010
A physical count of merchandise inventory on July 30 reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is July 1 Beginning Inventory: 30 units $19= $570 7 Purchases: 105 units $20 = $2,700 22 Purchases: 15 units $22 = $330 Total: $3000
$2,070 150 units available for sale - 48 in EI = 102 sold. (15 x $22) + (87 x $20) = $2,070
A credit sale of $3,800 is made on April25, terms 2/10, n/30 ,on which a return of $200 is granted on April28. What amount is received as payment in full on May 2?
$3,528 Balance due after return = $3,600. If paid within discount period cash receipt = $3,600 x .98 = $3,528
Nilson Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, 8/31 (28000) Deposits in transit (1200) Notes receivable and interest collected by bank (6800) Bank charge for check printing(160) Outstanding checks(16000) NSF check(1360) The adjusted cash balance per books on August 31 is
$33,280 Cash per books + N/R collection - Bank charge - NSF check
on January15, NiftyCompany sells merchandise on account to MartinezAssociates for $5,000 with terms 3/10, n/30. On January 20, Martinez returns merchandise worth $1,000 to Nifty. On January 24, payment is received from Martinez for the balance due. What is the amount of cash received?
$3800 $5,000 - $1,000 return = $4,000 less 3% discount = $3,880
single-step statement, all data are classified into two categories:
(1) revenues, which include both operating revenues and nonoperating revenues and gains (for example, interest revenue and gain on sale of equipment) (2) expenses, which include cost of goods sold, operating expenses, and nonoperating expenses and losses (for example, interest expense, loss on sale of equipment, or income tax expense).
Tidwell Company's goods in transit at December 31 include sales made (1) FOB destination (2) FOB shipping point and purchases of inventory made (3) FOB destination (4) FOB shipping point. Which items should be included in Tidwell's ending inventory at December 31?
1 and 4 Goods sold FOB destination still belong to us if in transit at 12/31. Likewise, inventory we've bought that was shipped to us FOB shipping point belongs to us at 12/31
Steps to determine periodic system
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.
Young Company lends Dobson industries $40,000 on August 1, 2017, accepting a 9-month, 9% interest note. If Young accrued interest at its December 31, 2017 year-end, what entry must it make to record the collection of the note and interest at its maturity date?
Cash 42,700 Notes Receivable 40,000 Interest Receivable 1,500 Interest Revenue 1,200 Interest accrued at 12/31/17 = $40,000 x .09 x 5/12 (Aug - Dec) = $1,500 A receivable is also recognized for this amount and is collected at maturity along with the principal balance and the additional four months of interest in 2018. Interest revenue earned in 2018 = $40,000 x .09 x 4/12 = $1,200
Cav Company (CavCo) lends Hokie industries $40,000 on September 1, 2017, accepting a 9-month, 9% interest note. If CavCo accrued interest at its December 31, 2017 year-end, what entry must it make to record the collection of the note and interest at its maturity date?
Cash 42,700 Notes receivable 40,000 Interest receivable 1,200 Interest revenue 1,500 Interest earned in 2017: $40,000 x .09 x 4/12 = $1,200 Interest earned in 2018: $40,000 x .09 x 5/12 = $1,500 2017 interest revenue was recognized at 12/31/17 and a receivable was created (and collected on 5/1/18)
Which of the following bank reconciliation items would not result in a journal entry? a. Bank service charge. b. NSF check of customer. c. Collection of a note by the bank on or behalf. d. Deposits in transit.
D. deposits in transit Only adjustments to the book balance require a journal entry. We know about the deposit in transit and would have recorded that increase in the cash account already.
Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost?
FIFO
What does FIFO stand for
FIFO = Last-in, Still-here in inventory. So a FIFO-based inventory balance is composed of the most recently acquired goods.
A merchandiser will earn an operating income of exactly $0 when
Gross profit equals operating expenses Operating income = Net Sales Revenue - COGS - Operating Expenses Net Sales Revenue - COGS = Gross Profit. If Gross Profit equals Operating Expenses, Operating income will equal $-0-
Rains Company is a furniture retailer. On January 14, 2017, Rains purchased merchandise inventory at a cost of $60,000. Credit terms were 2/10, n/30. The inventory was sold on account for $100,000 on January 21, 2017. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2017 and the accounts receivables were settled on January 30, 2017. Which statement is correct?
On January 30, 2017, customers should remit cash in the amount of $99,000. Since the payments from customers occur within the discount period they are eligible for the 1% discount we've offered. They should pay $100,000 - 1% = $99,000.
Adams Company is a retailer and uses a perpetual inventory system. Which statement is correct?
Returns of merchandise by Adams Company to a manufacturer are credited to Inventory.
Purchase allowance
a deduction made to the selling price but the seller so the buyer will keep the goods
Purchase return
a return of goods from the buyer to the seller for cash or credit returned merchandise decreases (debits) Accounts Payable and decreases (credits) Inventory.
A check written by the company for $167 is incorrectly recorded by a company as $176. On the bank reconciliation, the $9 error should be
added to the balance per books. When we recorded the check we reduced our cash balance by $176--$9 too much. We need to add that $9 back to get to the correct cash balance.
Operating cycle has to do with?
amount of time it takes to buy inventory, sell it, and collect the receivable.
Perpetual System
companies maintain detailed records of the cost of each inventory purchase and sale. a company determines the cost of goods sold each time a sale occurs. good for high inventory places companies record purchases of merchandise for sale in the Inventory account
The account Allowance for Doubtful Accounts is classified as a(n)
contra account to Accounts Receivable. AFDA balance reduces A/R to Net Realizable Value (NRV).
An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 debit balance, the adjustment to record bad debts for the period will require a
debit to Bad Debt Expense for $11,400. Must adjust $2,400 debit balance to a $9,000 credit balance. This requires a credit to AFDA for $11,400, Debit is to Bad Debt Expense for this same amount.
An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 credit balance, the adjustment to record bad debts for the period will require a
debit to Bad Debt Expense for $6,600. Must increase AFDA balance by $6,600 (from $2,400 CR to $9,000 CR). The debit in the adjusting journal entry is to Bad Debt Expense.
A check written by Pack company for $176 is incorrectly recorded by Pack as $167.On the bank reconciliation, the $9 error should be
deducted from the balance per books. The check as actually written for $9 more than we recorded. That's an additional $9 we don't have and must deduct from our cash general ledger account balance.
Profit Margin
dividing net income by net sales (revenue) for the period. measures the extent by which selling price covers all expenses (including cost of goods sold)
Gross profit rate
dividing the amount of gross profit by net sales. measures the margin by which selling price exceeds cost of goods sold.
gross profit
excess of net sales over cost of goods sold determined by deducting cost of goods sold from net sales represents the merchandising profit of a company, not overall profit
operating expenses
firm determines its income from operations by subtracting operating expenses from gross profit.
The multiple-step income statement
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 determine net income.
When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded
in the same year as the credit sale. Using the allowance method achieves proper matching of revenue and expense recognition (in same accounting period).
how do companies record cash purchases
increase (debit) in Inventory and a decrease (credit) in Cash.
Having one person responsible for the related activities of ordering merchandise, receiving goods,and paying for them
increases the potential for errors and fraud. Segregation of duties is an essential component of a strong internal control system
Sales returns and allowances
seller either accepts goods back from a purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods. (1) an increase (debit) in Sales Returns and Allowances (a contra account to Sales Revenue) and a decrease (credit) in Accounts Receivable at the $300 selling price, and (2) an increase (debit) in Inventory (assume a $140 cost) and a decrease (credit) in Cost of Goods Sold allowance has no impact on Inventory or Cost of Goods Sold.
FOB destination
seller places the goods free on board to the buyer's place of business, and the seller pays the freight. an operating expense to the seller. increase an expense account titled Freight-Out (sometimes called Delivery Expense)
single-step income statement
subtracting total expenses from total revenues, is required in determining net income (or net loss).
FOB shipping point
the seller places the goods free on board the carrier, and the buyer pays the freight costs. these costs are considered part of the cost of purchasing inventory. account Inventory is increased (debited)
compressive income
unrealized gains and losses are not included in net income EX) adjustments to pension plan assets, gains and losses on foreign currency translation, and unrealized gains and losses on certain types of investments
nonoperating activities
various revenues and expenses and gains and losses that are unrelated to the company's main line of operations. When nonoperating items are included, the label "Income from operations" (or "Operating income") precedes them.
What happens when we return inventory to a supplier
we need to reduce the inventory account balance to reflect the fact that we no longer have that inventory.
