unit 2. chapter 6, 7, 8, 9
Warren Company's records reveal the following information regarding its inventory: Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Net markups were $10,000 and net markdowns, $20,000. Assuming the retail inventory method is used to approximate average costs, what is the cost to retail percentage?
61.54%
Another name for the LIFO reserve account is
LIFO allowance
What method(s) can be used to estimate progress toward completion for the purpose of recognizing revenue over time?
Output method Input method
Under which approach to financing with receivables does the borrower act like it borrowed money from the lender, with the receivables remaining on the borrowers balance sheet and serving as collateral?
Secured borrowing
Which of the following differs between revenue recognized over time and revenue recognized at completion?
The timing of recognition
True or false: For financial reporting purposes, the lower of cost and net realizable value method can be applied to individual inventory items, categories of inventory, or the entire inventory.
True
True or false: Most long-term contracts should be viewed as single performance obligations
True Reason: Most are viewed as single performance obligations because a single bundled product or service is delivered.
By overstating an inventory write-down, profits _____ in future periods as the inventory is sold
are increased
In a periodic inventory system, purchase returns
are recorded in a separate contra purchases account.
At the end of an accounting period, it is important to ensure proper inventory _____ to determine the ownership of goods in transit
cutoff
Malone Corp. properly recognizes revenue upon completion of a long-term construction project. Malone has the following information for a 3-year contract. Billings on contracts year 1 - 10,000 year 2 - 10,000 year 3 - 30,000 Construction costs year 1 - 8,000 year 2 - 8,000 year 3 - 8,000 The journal entry required at the end of the contract to recognize revenue and expenses will include
debit construction in progress $26,000. debit cost of construction $24,000. credit revenue from contracts $50,000.
An inventory _____ can occur due to a mistake in physical count or a mistake in pricing inventory quantities.
error or mistake
The gross profit method is useful in situations where _____ of inventory are desirable.
estimates
Net realizable value of inventory is determined by subtracting selling cost from the
expected sales price
A financial institution that buys receivables for cash and charges a fee for this service is referred to as a(n)
factor
In a(n) ______ arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections.
factor or factoring
The definition of inventory includes which of the following items?
items used currently in the production of goods to be sold items held for resale items currently in production for future sale
Reduction in selling price below the original selling price is known as ______.
markdown
True or false: Both U.S. GAAP and IFRS require inventory to be valued at the lower of cost and net realizable value.
true
The retail inventory method, unlike the gross profit method, is acceptable for financial reporting purposes because it
tends to be more accurate.
Berta Company recently lost its entire inventory in a fire. The following information is available from its accounting records: Beginning inventory: $1,000; purchases: $13,000; net sales: $20,000. The company's average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of cost of goods sold for this past period would be
$12,000.
Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that at the end of 2016, Pernell's ending inventory would have been
$150,000 higher if it had used FIFO.
Which inventory costing method assumes that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale?
Average cost
Which of the following require inventory to be valued at the lower of cost and net realizable value?
Both U.S. GAAP and IFRS
When does the actual write-off of a receivable occur?
When it is determined that all or a portion of the receivable will not be collected.
The construction in progress account is equivalent to which account in a manufacturing environment?
Work-in-process
Coins, balances in checking accounts, checks received from customers and money orders received are all included in the _____ account on the balance sheet.
cash
Goods or services that are not distinct are ____ and treated as a ____ performance obligation.
combined; single
The specific identification method of inventory costing matches each unit with
its actual cost.
The essential difference between revenue recognition over time and upon completion relates to the
pattern of recognition of the related gross profit.
Revenue is recognized when the _____ obligation is satisfied. (Enter one word.)
performance
The terms 5/15, n/45 mean what?
A 5% purchase discount if payment is made within 15 days.
What does a sales discount represent?
A reduction in the amount to be paid if paid within a specified period of time.
The billings on construction account is a contra account to
construction in progress.
A formal credit arrangement between a creditor and debtor is called a(n)
note receivable
When inventory is adjusted down to reflect net realizable value, which of the following can occur?
Credit inventory Debit cost of goods sold
The transaction price is the amount the seller expects to ______ from the customer in exchange for providing goods and services.
be entitled to receive Reason "receive in cash by the end of the contract period" is wrong: While cash is the common mode of payment, the contract price does not necessarily consist of cash payment; contract price may be prepaid or paid later. reason "realize" is not correct: ASC 2014-09 eliminated the realization principle as a criteria
Mueller Company sold merchandise costing $120,000 for $240,000. Mueller estimates that merchandise costing $5,000 will be returned for a refund of $10,000. Mueller should report net sales of:
$230,000 Reason: $240,000 - $10,000
Warren Company's records reveal the following information regarding its inventory: Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Net markups were $10,000 and net markdowns, $20,000. Assuming the retail inventory method is used to approximate average costs, what is the amount of goods available for sale at retail?
$650,000
Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?
$723,600 Reason: $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600
Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?
$758,200 Reason: $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200
A trade discount is a reduction from the list price, which is to
-disguise real prices from competitiors -give quantity discounts to customers -change prices without publishing a new catalog.
Which of the following is a contra account to accounts receivable?
Allowance for sales returns
Amber is in charge of preparing an annual budget for her company. As part of the budgeting process, she must estimate cost of goods sold and ending inventory. Which of the following statements is correct regarding the use of the gross profit method?
Amber may utilize the gross profit method to estimate ending inventory and cost of goods sold.
Assuming that prices rise over time, which inventory cost flow assumption will result in the highest cost of goods sold?
LIFO
The expense associated with the estimate of the amount of accounts receivable that may not be collected during the year is referred to as Multiple choice question.
bad debt expense.
The base year inventory for all future LIFO determinations is the
beginning inventory in the year the LIFO method is adopted.
For the purpose of allocating the transaction price to multiple performance obligations, the stand-alone selling price of a specific good or service may be estimated if it
cannot be directly observed. The stand-alone selling price is the amount at which the good or service is sold separately under similar circumstances. If a stand-alone selling price can't be directly observed, the seller should estimate it.8 Look at Illustration 6-9 to see how we allocate the transaction price to each of the performance obligations in our TrueTech example.
The dollar-value LIFO method extends the concept of inventory pools by allowing companies to
combine a large variety of goods in one pool.
For financial reporting, the lower of cost or net realizable value approach can be applied to
individual inventory items. groups of inventory items. the entire inventory.
The original amount a company adds to cost to determine the selling price is known as _____ ______.
initial markup
A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.
note receivable.
Receivables represent a company's claims to the future collection of
other assets services cash
Revenue recognition for services such as lending money and performing financial statement audits is typically
over time. Services such as lending money, performing audits, and providing consulting advice are performed over a period of time. Some construction contracts require construction over months or even years. In these situations, should a company recognize revenue continuously over time as a product or service is being provided, or wait to recognize revenue at the single point in time when the company has finished providing the product or service? As we'll see next, in most situations like these, companies should recognize revenue over time as the service or product is being provided.
Revenue recognized each period is determined by multiplying total estimated revenue by
percentage completed to date and subtracting revenue recognized in prior periods
A(n) _____ inventory system adjusts inventory at the end of each reporting period.
periodic
The potential that a good does not satisfy the original performance obligation is addressed through a customer's:
right of return
A cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay within a specified period of time is also referred to as a(n) discount
sales
The _____ - _____ selling price is the amount at which the good or service is sold separately under similar circumstance.
stand alone
The amount at which a good or service is sold separately under similar circumstances is referred to as the
stand-alone selling price.
A DVL pool is made up of items
that are likely to have similar cost change pressures.
Which of the following accounts would be found on the balance sheet of a manufacturing company?
work in process
The specific identification method
would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost
Related to long-term construction contracts, at the end of the period which accounts are netted?
Construction in progress and billings on construction contracts.
True or false: LIFO, FIFO, and the weighted average inventory costing methods are all allowed under U.S. GAAP.
True
Match the accounting standard with the appropriate treatment of receivables. U.S. GAAP IFRS Requires more disaggregation and disclosure of receivables. Recommends but does not require separate disclosure of receivables.
U.S. GAAP Requires more disaggregation and disclosure of receivables. IFRS Recommends but does not require separate disclosure of receivables.
What situations may make the contract price less apparent?
Variable consideration provisions Payment by the seller to the customer The time value of money Until now we've assumed that contracts indicate a fixed transaction price that will be paid at or soon after delivery. However, in some contracts the transaction price is less clear. Specific situations affecting the transaction price are (a) variable consideration and the constraint on its recognition, (b) sales with a right of return (a particular type of variable consideration), (c) identifying whether the seller is acting as a principal or an agent, (d) the time value of money, and (e) payments by the seller to the customer.
From a financial reporting perspective the "sales returns" account is a(n) _____ - _____ account.
contra revenue
An allowance for sales return account is classified as a(n)
contra account to sales revenue.
The billings on construction contract account is classified as a(n)
contra asset
From a financial reporting perspective the "sales returns" account is a:
contra revenue
At the end of the period, if construction in progress exceeds billings on construction contracts, it is recorded as a(n)
contract asset.
The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of _____.
control
The cost-to-retail percentage is found by dividing goods available for sale at _____ by goods available for sale at current selling price.
cost
In the retail inventory method, a _____-_____-______ percentage is used to estimate ending inventory and cost of goods sold.
cost to retail
For estimating variable consideration, if there are several possible outcomes, the ______ method will tend to be most appropriate; if there are two possible outcomes, the ______ method will tend to be most appropriate
expected value; most likely amount
Most changes in inventory method are accounted for prospectively.
false
Accounting principles should be applied consistently because this practice enhances
financial statement comparability.
The cost of inventory includes
freight in, sales tax, purchase price the cost to bring inventory to its desired location expenditures to acquire the inventory
Ownership of inventory at the end of the accounting period is determined for
goods shipped by suppliers. goods shipped to customers.
Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) _____ ______approach to measuring bad debts
income statement
For a particular contract, the timing of revenue recognition is determined
individually for each performance obligation. As we discussed earlier, performance obligations can be satisfied either at a point in time or over a period of time, and revenue with respect to a performance obligation is recognized when (or as) the performance obligation is satisfied. We determine the timing of revenue recognition for each performance obligation individually.
Methods that can be used to estimate progress toward completion are referred to as _____ -based and ______-based methods. (Enter one word per blank)
input or input-based output or output-based
When an inventory error is discovered in the period it occurred,
it is corrected in the current period.
The definition of inventory includes which of the following items?
items currently in production for future sale items used currently in the production of goods to be sold items held for resale
Typical costs included in a construction project include
labor, materials, overhead
Which of the following cost flow assumptions currently are acceptable under U.S. GAAP?
last-in, first-out first-in, first-out weighted average
If the retail inventory method is used, which of the following are included in the calculation of goods available for sale at retail to approximate average costs?
markups and markdowns
A _____ company resells goods while a _____ company produces goods.
merchandising and manufacturing
Accounting errors
must be corrected when they are discovered.
The two methods used for recording sales discounts are the
net method. gross method.
Purchase returns by the buyer lead to a reduction in
net purchases
Which inventory system allocates cost of goods available for sale only at the end of each reporting period?
periodic inventory system
A(n) _____ inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise.
perpetual
A _____ inventory system recognizes cost of goods sold each time a sale occurs; a _____ inventory system decreases inventory each time a sale occurs.
perpetual; perpetual
When a buyer returns goods to the seller, the buyer records a(n) ______ _______.
purchase return
A company's claims to the future collection of cash, other assets, or services is called a ________.
receivable
The lower of cost or market approach is _____ for companies that use _____.
required under GAAP; LIFO or the retail inventory
The lower of cost or net realizable value approach is _____ for companies that use _____.
required under GAAP; a method other than LIFO or retail inventory
When the retail inventory method is used to approximate average cost, the cost-to-retail percentage is calculated by dividing _____ by _____.
total cost of goods available for sale; total goods available for sale at retail
The amount the seller expects to be entitled to receive from the customer in exchange for providing goods or services is referred to as the
transaction price.
The ______ recognizes a note receivable in a secured borrowing agreement
transferee or lender
The core revenue recognition principle stipulates that companies recognize revenue when goods or services are
transferred to customers
True or false: With the effective interest method, interest revenue differs between periods.
true Reason: The net note receivable increases over time so the interest revenue differs between periods
The direct write-off method is used when
uncollectible accounts are not anticipated or are immaterial.
Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 31, 2017. Ignoring the tax effect, the effect on the 2017 financial statement includes an
understatement of cost of goods sold by $10,000. overstatement of net income by $10,000.
A contract is said to have ____ consideration if the price depends on the outcome of future events.
variable or varying
In a perpetual inventory system the inventory account is adjusted
when inventory is purchased. when inventory is sold.
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.
Under the allowance method, when is bad debt expense recognized?
when the allowance is created
Which of the following accounts are typically reported on the balance sheet of a manufacturing company?
work in process finished goods raw materials
Inventory related note disclosures _____ earnings quality.
enhance
Berta Company recently lost its entire inventory in a fire. The following information is available from its accounting records: Beginning inventory: $1,000; purchases: $13,000; net sales: $20,000. The company's average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of the lost inventory would be
$2,000
Western Company recently lost its entire inventory in an earthquake. The following information is available from its accounting records: Beginning inventory: $5,000; purchases: $18,000; net sales: $40,000. The company's average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of cost of goods sold for this past period would be
$24,000
Warren Company's records reveal the following information regarding its inventory: Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Net markups were $10,000 and net markdowns, $20,000. Assuming the retail inventory method is used to approximate average costs, what is the amount of goods available for sale at cost?
$400,000
Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's cost of goods sold for the 2016 fiscal year would have been
$50,000 lower if it had used FIFO.
Smith Company purchases merchandise for $10,000. The payment terms are stated as 2/10, n/30. If the company utilizes the net method to record purchases, the merchandise will be recorded at what amount?
$9,800.
Feather Company's inventory is recorded at its historical cost of $100,000. The replacement cost currently is $95,000; estimated selling price is $102,000; estimated selling cost is $5,000; normal profit is $10,000. The estimated net realizable value of the inventory is
$97,000
Jones Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $12. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at
$98
Jones Company's inventory cost is $100. The expected sales price is $110. The company estimates sales cost as 10% of the sales price. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at
$99
What situations may make the contract price less apparent?
(a) variable consideration and the constraint on its recognition, (b) sales with a right of return (a particular type of variable consideration), (c) identifying whether the seller is acting as a principal or an agent, (d) the time value of money, and (e) payments by the seller to the customer
What situations may make the contract price less apparent?
(a) variable consideration and the constraint on its recognition, (b) sales with a right of return (a particular type of variable consideration), (c) identifying whether the seller is acting as a principal or an agent, (d) the time value of money, and (e) payments by the seller to the customer.
On December 31, Salz Company sells 1,000 units of merchandise to Weiner Corp. and 2,000 units to Torr Corp. Shipping terms are f.o.b. destination for the 1,000-unit sale and f.o.b. shipping point for the 2,000-unit sale and the goods have shipped. If Salz still has 10,000 physical units in its inventory after these sales, how many units should Salz include in its ending inventory on December 31?
11,000 units
On December 31, Richard Company purchases 1,000 units of merchandise, f.o.b. destination, from Neumann Corp. and 2,000 units, f.o.b. shipping point from Smith Corp. The goods are shipped on December 31. How many units should Richard include in its ending inventory on December 31 from this purchase?
2,000 units
Adams Corp., a merchandising company, has 30,000 units in its inventory on December 31. Just before closing for the day, the company ships 2,000 units to a customer. The company also receives a notice from its supplier that an order of 10,000 units has been shipped. The terms for the sale and the purchase were f.o.b. shipping point. How many units of merchandise should be included in Adam's ending inventory?
38,000 units
Adams Corp., a merchandising company, has 30,000 units in its inventory on December 31. Just before closing for the day, the company ships 2,000 units to a customer. The company also receives a notice from its supplier that an order of 10,000 units has been shipped. The terms for the sale and the purchase were f.o.b. shipping point. How many units of merchandise should be included in Adam's ending inventory?
38,000 units Reason: 30,000 - 2,000 + 10,000
Which of the following statements is correct? Multiple choice question. A company must apply one cost flow assumption to at least 80% of the inventory. A company must apply the same cost flow assumption to all its inventory. A company can apply more than one inventory cost flow assumption.
A company can apply more than one inventory cost flow assumption
When a specific account receivable is determined to be uncollectible, which of the following occur?
Account receivable is reduced Allowance account is reduced
When a specific account receivable is determined to be uncollectible, which of the following occur?
Allowance account is reduced Account receivable is reduced
At what amount are accounts receivable recorded?
Amount expected to be collected.
Which of the following are key indicators that control of goods or services has been transferred to the customer?
An obligation to pay the seller. Legal title to the asset. Physical possession of the asset. Assumed the risks and rewards of ownership. Accepted the asset.
Which of the following likely will lead to revenue recognition at a point in time?
An obligation to pay the seller. Legal title to the asset. Physical possession of the asset. Assumed the risks and rewards of ownership. Accepted the asset.* *These indicators apply to both goods and services. It may seem strange to talk about the customer accepting an asset with respect to a service, but think of a service as an asset that is consumed as the customer receives it
When is gross profit recorded in the construction in progress account for a long-term contract accounted for upon completion?
At the completion of the contract.
Which of the following statements regarding inventory valuation is correct? Only U.S. GAAP requires that inventory is valued at the lower of cost or net realizable value. Both U.S. GAAP and IFRS require that inventory is valued at the lower of cost or net realizable value. Only IFRS requires that inventory is valued at the lower of cost or net realizable value.
Both U.S. GAAP and IFRS require that inventory is valued at the lower of cost or net realizable value.
Which of the following is correct regarding changes in accounting methods?
Changes are permitted if they are made in response to changes in the company's business environment.
Company A offers Company B discount terms of 2/10, n/30. What does this mean?
Company B will receive a 2% discount if payment is made within 10 days.
What costs are included in a long-term construction contract?
Construction costs include the labor, materials, and overhead costs directly related to the construction of the building
The concept or principle that states that companies should recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for goods and services is referred to as the:
Core revenue recognition principle
Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise and receives a refund. As of May 15, the customer has paid for all of the goods with cash. What will Adrian record on May 15?
Credit to Cash. Debit to Sales Returns.
What journal entry should be made to recognize accounts receivable for long-term construction projects?
Debit Accounts Receivable and Credit Billings on Construction Contract
What is the journal entry to recognize gross profit when revenue is recognized upon completion of a long-term construction project?
Debit Construction in Progress and Debit Cost of Construction; Credit Revenue from Long-Term Contracts
Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?
Debit Sales Returns; credit Accounts Receivable.
Warner Corp. sells goods on account for $10,000. The customer pays the invoice in full on April 15, but on April 20, the customer returns $3,000 of the merchandise and receives a refund. What is the entry Warner will make on April 20 when the goods are returned?
Debit Sales Returns; credit Cash.
When actual inventory returns occur in a perpetual inventory system, which of the following happens?
Debit the asset inventory account
Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise and receives a refund. As of May 15, the customer has paid for all of the goods with cash. What will Adrian record on May 15?
Debit to Sales Returns. Credit to Cash.
Kline Corp. recognizes revenue over time to account for long-term contracts. The contract price is $5 million, total construction costs are $3.75 million, actual costs incurred during the first year are $1.5 million, and the revenue recognized is $2 million. The journal entry to record revenue during year 1 is:
Debit: Cost of construction $1.5 million Debit: CIP $500,000 Credit: Revenue $2 million
An application where the interest rate stays the same over time, but interest revenue increases as the rate is multiplied by a receivable balance that increases is referred to as what?
Effective interest method
What type of expenditures should be included in the cost of inventory of a manufacturing company?
Expenditures necessary to acquire inventory. Expenditures necessary to bring inventory to sales location.
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?
FIFO
Which inventory costing method assumes that items in ending inventory are the most recently acquired?
FIFO
Which inventory costing method assumes that items sold are those that were acquired first?
FIFO
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?
FIFO Reason: In a period of rising prices, FIFO results in goods with the lowest cost being sold first resulting in the lowest cost of goods sold
What support(s) the conceptual basis for separating contractual promises into several performance obligations?
Financial statements better reflect timing of transfer of goods and services Promises that can be viewed on a stand-alone basis should be separated Sellers account for a promise to provide a good or service as a performance obligation if the good or service is distinct from other goods or services in the contract. The idea is to separate contracts into parts that can be viewed on a stand-alone basis. That way the financial statements can better reflect the timing of the transfer of separate goods and services and the profit generated on each one. Goods or services that are not distinct are combined and treated as a single performance obligation.
Which of the following are services performed by a factor? (Select all that apply.) Multiple select question. Perform credit checks for accounts payable. Sell accounts receivable for a fee. Handle billing and collection of accounts receivable. Buy accounts receivable
Handle billing and collection of accounts receivable. Buy accounts receivable.
Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?
How units of goods and their associated costs flow through the system.
Both IFRS and U.S. GAAP permit the fair value option for accounting for receivables. Which of the following is correct regarding the application of this option?
IFRS restricts the circumstances for applying the fair value option
Checks received from customers that have not been deposited yet are included where on a company's balance sheet?
In the current asset "cash" account.
The construction-in-progress account most closely relates to which type of account?
Inventory
In a perpetual inventory system, when inventory is returned which accounts will the purchaser adjust to reflect the effect of the return?
Inventory Accounts payable
Tom Company offers Jane Company discount terms of 5/15, n/45. What does this mean?
Jane Company must pay the full amount if payment is made after day 15.
If a company uses _____ to measure taxable income, they must use the same method for external financial reporting.
LIFO
When a company changes to the _____ inventory method from any other method, it usually is impossible to calculate the income effect on prior years.
LIFO
Which inventory costing method assumes that the units sold are the most recent units purchased?
LIFO
If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors.This is know as the
LIFO conformity rule.
Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?
LIFO only
What services are commonly performed over time?
Lending of money Financial statement audits Consulting engagements
What would give rise to a note receivable?
Loaning money to an affiliated company. A formal, written extension of the credit period to trade customers. Loaning money to stockholders.
What methods are appropriate for estimating variable consideration?
Most likely amount that will be received Expected value
Orange Co., a computer retailer, shows the following selected assets on its balance sheet. Indicate which account would be properly classified as inventory.
Mouse pads
Munch Inc. delivers various types of construction materials to a customer's building site. Over an 18-month period, Munch's employees utilize Munch's machinery and tools to construct a new office building for the customer. Munch identifies only one performance obligation related to this contract because
Munch combines the materials, labor, and use of machinery and tools to construct a single complete building. Step 2, "Identify the performance obligation(s) in the contract," is important because long-term contracts typically include many products and services that could be viewed as separate performance obligations. For example, constructing a building requires the builder to deliver many different materials and other products (concrete, lumber, furnace, bathroom fixtures, carpeting) and to provide many different services (surveying, excavating, construction, fixture installation, painting, landscaping). These products and services are capable of being distinct, but they are not separately identifiable, because the seller's role is to combine those products and services for purposes of delivering a completed building to the customer. Therefore, it's the bundle of products and services that comprise a single performance obligation. Most long-term contracts should be viewed as including a single performance obligation.
Cobalt Corp. uses the allowance method to account for bad debts. If Cobalt writes off an account for $3,000, what is the effect on the balance sheet?
No effect on total assets.
When a material inventory error is discovered in a period subsequent to when the error was made, which of the following must occur?
Previous year's financial statements are retrospectively restated. A correction of retained earnings is reported as a prior period adjustment. Incorrect balances are corrected.
Ziegler Company properly applies the lower of cost and net realizable value rule and determines that its inventory value has declined below cost. Which of the following methods may Ziegler use to adjust its inventory to market value?
Recognize the write-down as an addition to cost of goods sold. Recognize the write-down as a separate line item.
What account tracks the inflow of net assets that occurs when a business provides goods or services to its customers?
Revenues
How is inventory recorded related to returns?
The inventory account is increased when returns occur to include the returned items. Inventory expected to be returned is included as an asset on the balance sheet.
When merchandise is shipped f.o.b. shipping point, who includes the inventory on their balance sheet when the goods are with the common carrier?
The purchaser
Which of the following indicate surrender of control over the assets transferred? (Select all that apply.) Multiple select question. The transferor will have minimal continuing involvement. Receivables are sold with recourse. The transferor will have no continuing involvement. Receivables are sold without recourse.
The transferor will have no continuing involvement. Receivables are sold without recourse.
Identify the situations for which ending inventory and cost of goods sold may be estimated utilizing the gross profit method
To determine reasonableness of inventory amounts during an audit. For interim reporting periods. When inventory was lost, destroyed, or stolen.
Which of the following will not differ between revenue recognized over time and revenue recognized at completion?
Total revenue Total profit Total expense
match the type of company with the type of inventory purchased. Wholesale and retail companies Wholesale and retail companies drop zone empty. Manufacturing companies Manufacturing companies drop zone empty. Purchase goods that are primarily in completed form. Purchase goods that are used to produce another product.
Wholesale and retail companies: Purchase goods that are primarily in completed form. Manufacturing companies: Purchase goods that are used to produce another product
Match each scenario with the most logical accounting treatment for recognizing an inventory market adjustment. Instructions Write-downs are rare. Write-downs are common. Loss is recognized as a separate item in operating expense. Loss is included as part of cost of goods sold.
Write-downs are rare. matches Loss is recognized as a separate item in operating expense. Write-downs are common. matches Loss is included as part of cost of goods sold.
The average cost method assumes that ending inventory consists of
a mixture of all the goods available for sale.
A contra-asset account is used to reduce the carrying value of accounts receivable to the amount of cash expected to be received under the _____ method of accounting for bad debts.
allowance
If a company believes its sales returns will be material, an adjusting entry for expected returns should be made to which account?
allowance for sales returns
Which method of estimating bad debts is required by GAAP when the amount of bad debt is material?
allowance method
The dollar-value LIFO (DVL) inventory method
allows a broader range of goods to be included in pools.
When initially recorded, the typical accounts receivable is valued at the
amount expected to be received
Cost flow _____ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory.
assumptions or assumption
GAAP requires companies to report inventory
at the lower of cost and net realizable value for companies using FIFO. at the lower of cost or market value for companies using LIFO.
GAAP requires companies to report inventory
at the lower of cost or market value for companies using LIFO. at the lower of cost and net realizable value for companies using FIFO
The _____ method assumes that cost of goods sold and ending inventory each consist of a mixture of all the goods available for sale.
average cost
The lower of cost and net realizable value method was developed to
avoid reporting inventory at an amount that exceeds the benefits it provides.
The balance sheet approach estimates _____ ______ expense by determining the appropriate carrying value of accounts receivable.
bad debt or debts
Long-term contracts require careful consideration in identifying performance obligations because these type of contracts typically include many products and services that
could be viewed as separate performance obligations.
Western Company determines the cost of its inventory is $410,000 and net realizable value is $400,000. Western Company should
credit inventory $10,000 debit cost of goods sold $10,000
Malone Corp. properly recognizes revenue upon completion of a long-term construction project. Malone has the following information for a 3-year contract. Year 1 Year 2 Year 3 Billings on contracts 10,000 10,000 30,000 Construction costs 8,000 8,000 8,000 The journal entry required at the end of the contract to recognize revenue and expenses will include
credit revenue from contracts $50,000. debit construction in progress $26,000. debit cost of construction $24,000.
On March 31, Oscar Corp. changes from the LIFO to the FIFO method. Its financial statement notes indicate that beginning inventory would have been $50,000 higher if it had utilized FIFO during prior years. Oscar's journal entry should include a - credit
credit to retained earnings.
The retail inventory method tends to be more accurate than the gross profit method because it relies on the
current relationship between cost and selling prices
The income statement approach for estimating bad debts focuses on
current year's credit sales.
What are are included in the journal entry required to record the collection of cash from a customer related to a long-term construction contract?
debit cash credit accounts receivable
What is included in the journal entry required to record the collection of cash from a customer related to a long-term construction contract?
debit cash credit accounts receivable
When revenue related to a long-term construction contract is recognized over time, the journal entry to recognize revenue includes which of the following?
debit construction in progress debit cost of construction credit revenue from long-term contracts
Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 2016. If Omar discovers this error in 2017, it should
debit retained earnings and credit inventory.
Panther Company's bookkeeper debited supplies expense for the cost of goods sold during that month. The bookkeeper discovered the error prior to closing the books. The correcting entry would include
debit to cost of goods sold. credit to supplies expense.
On March 31, Oscar Corp. changes from the LIFO to the FIFO method. Its financial statement notes indicate that beginning inventory would have been $50,000 higher if it had utilized FIFO during prior years. Oscar's journal entry should include a - debit
debit to inventory.
When a company returns inventory to the seller, net purchases ______.
decrease
A transaction price may be uncertain because the price
depends on the outcome of future events.
The variety of inventory cost flow assumptions that can be utilized by companies typically does not impair earnings quality because
detail about the methods must be disclosed in the financial statement notes.
For a promise to provide a good or service to be accounted for as a separate performance obligation, the good or service must be
distinct from other goods and services in the contract
A periodic inventory system
does not continuously track the quantity of merchandise. does not continuously track the cost of merchandise sold.
A right of return ____ a separate performance obligation for the seller.
does not create
Werner Company's accountant discovered that the prior-year financial statements were misstated due to a material inventory-related error. Werner must
restate its prior-year financial statements. adjust account balances that are incorrect as a result of the error.
The method _____ ______uses the cost-to-retail percentage based on a current relationship between cost and selling price.
retail inventory
To use the _____ method, a company must maintain records of inventory and purchases at cost and at current selling price.
retail inventory
Which of the following estimation methods is acceptable for purposes of annual financial reporting?
retail inventory method
Changes in inventory methods, other than a change to LIFO, are treated
retrospectively.
Generally, voluntary changes in accounting principles are accounted for
retrospectively.
The formula: total estimated revenue times percentage completed to date less revenue recognized in prior periods is used to measure:
revenue recognized for the current period
The inflow of cash or other assets that a business receives when it provides goods or services to customers is referred to as
revenues
The gross method and the net method are two ways to record _____ discounts.
sales
A(n) _____ _____ occurs when a customer returns merchandise for a refund
sales return
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
The seller views returns as a reduction of net _____; the buyer views returns as a reduction of net _____.
sales; purchases
Assigning or pledging accounts receivable is used in a
secured borrowing
A(n) ______ borrowing occurs when accounts receivable are assigned or pledged as collateral for a loan.
secured or secure
The dollar-value LIFO (DVL) method
simplifies recordkeeping. reduces the risk of liquidation of layers.
The cost of inventory includes
the cost to bring inventory to its desired location expenditures to acquire the inventory
Daryl Corp. purchases 10,000 units of inventory on account for $50,000. Two days after receiving the inventory, Daryl discovers that 1,000 units are defective and returns the defective units to the vendor. The company utilizes a perpetual inventory system. As a result of this return,
the inventory balance decreases. the accounts payable balance decreases.
The lower of cost and net realizable value rule causes income to be reduced in the period when
the inventory value declines below cost.
The LIFO inventory method assumes that the units that remain in ending inventory are
the oldest units in inventory.
Arthur Inc. provides services to consulting clients. Arthur should recognize the related revenue when
the related performance obligation is satisfied.
As compared to revenue recognition over time, the total amount of gross profit recognized related to revenue upon completion is:
the same
A long-term contract that includes many products and services that are capable of being distinct, may be accounted for as a single performance obligation because
the seller's role is to combine those products and services prior to delivery or completion.
Accounts receivable are almost always considered current assets because
their normal collection, even if longer than a year, is part of the normal operating cycle.
When a company changes to the LIFO inventory method,
they do not restate prior year financial statements.
Accounts receivable are classified as current assets because
they will be converted to cash within 1 year or the normal operating cycle.
