Test 2

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What is the periodicity assumption?

The economic life of a business can be divided into artificial time periods

hich principle dictates that efforts (expenses) be recorded with accomplishments (revenues)?

Expense recognition principle

The generally accepted accounting principle which dictates that revenue be recognized in the accounting period in which it is earned is the:

revenue recognition principle

If revenues are recognized only when a customer pays, what method of accounting is being used?

Cash basis

Which one of these statements about the accrual basis of accounting is false?

Companies record revenue only when they receive cash, and record expense only when they pay out cash

In 2011, Costello Company performs work for a customer and bills the customer $10,000; it also pays expenses of $3,000. The customer pays Costello in 2012. If Costello uses the accrual basis of accounting, then Costello will report

revenue of $10,000 in 2011

cash basis accounting

violates both the revenue recognition and expense recognition principles

Which of the following is not a type of adjusting entry

Earned revenues

Adjusting entries are made to ensure that

expenses are recognized in the period in which they are incurred;
revenues are recorded in the period in which they are earned; balance sheet and income statement accounts have correct balances at the end of an accounting period

Which one of the following is not a justification for adjusting entries

Adjusting entries are necessary to bring the general ledger accounts in line with the budget

Cash received which is recorded as a debit to a Cash account and a credit to a liability account before revenue is earned is called

an unearned revenue

Which of the following is not a typical example of a prepaid expense?

Wages

The difference between an asset's cost and its accumulated depreciation is called

book value

Payments received in advance of services provided are recorded as

liabilities

Adjustments for unearned revenues:

decrease liabilities and increase revenues

Ignatenko Company purchased office supplies costing $5,000 and debited Office Supplies for the full amount. Supplies on hand at the end of the accounting period were $1,300. The appropriate adjusting journal entry to be made would be

debit Office Supplies Expense $3,700; credit Office Supplies $3,700

On September 1 the Petite-Sizes Store paid $12,000 to the Mega-Mall Co. for 3 months rent beginning September 1. Prepaid Rent was debited for the payment. If Petite-Sizes Store prepares financial statements on September 30, the appropriate adjusting journal entry to make on September 30 would be

debit Rent Expense $4,000; credit Prepaid Rent $4,000

On July 1, Mesa Verde, Inc. purchased a 3-year insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be

debit Insurance Expense $2,100; credit Prepaid Insurance $2,100

At December 31, 2011, 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 adjusted balance for Insurance Expense for the year would be

$1,500

On August 1 the Darius Co. purchased a photocopy machine for $8,000. The estimated annual depreciation on the machine is $1,680. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 would be

debit Depreciation Expense $700; credit Accumulated Depreciation $700

Bonita Realty Management Co. received a check for $30,000 on October 1, which represents a one year advance payment of rent on an office it rents to a client. Unearned Rental Revenue was credited for the full $30,000. Financial statements are prepared on December 31. The appropriate adjusting journal entry to make on December 31 would be

debit Unearned Rental Revenue $7,500; credit Rental Revenue $7,500

Which of the following is not a typical example of an accrued expense?

Depreciation

If the adjusting entry is not made for unearned revenues the result will be to

overstate liabilities and understate revenues

During the adjusting process two transactions were missed. The first is for unearned rent revenue of which $450 was earned during the period, the second was for accrued interest payable of which $275 is owed due to the passage of time. As a result of these omissions

net income is understated by $175

Adjustments for accrued revenues:

increase assets and increase revenues

At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true?

Liabilities at the end of the year are understated

On August 1, Luang Corporation signed a $30,000, 14%, 2-year note to help finance renovations being made to the corporation headquarters. Assuming interest is accrued only when the year ends on December 31, the appropriate journal entry would be

debit Interest Expense $1,750; credit Interest Payable $1,750

Saira works for a sports franchise which 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?

Expenses understated; income overstated

Employees at the Waco Waffle House were paid on Friday, December 27 for the five days ending on December 27. The next payday is Friday, January 3. Employees work 5 days a week. The weekly payroll amounts to $3,800. The appropriate adjusting journal entry on December 31 would be to credit Wages Payable for

$1,520

A company lends $15,000 at 8% interest for 3 months on June 1. If adjusting entries are written on June 30, how much will be credited to Interest Revenue?

$100

Which statement is incorrect concerning the adjusted trial balance?

The adjusted trial balance lists the account balances segregated by assets and liabilities

Financial statements can be prepared directly from the:

adjusted trial balance

With the adjusted trial balance in hand you see that the debit totals of the real accounts is $18,250 and the credit totals of the real accounts is $14,550. The debit total of the nominal or temporary accounts is $3,475 while the credit total of the nominal or temporary accounts is $7,175. From this you know that:

net income is $3,700 for the fiscal period

In the closing process total revenues are determined to be $4,750 while total expenses are determined to be $3,875 and total dividends are $1,150. The retained earnings account will:

increase by $875 due to net income

Which account will have a zero balance after a company has journalized and posted closing entries?

Service Revenue

Which types of accounts will appear in the post-closing trial balance?

Permanent accounts

Which of the following correctly describes the closing process?

Net income or net loss is transferred to Retained Earnings

The closing entry process consists of closing

all temporary accounts

All of the following are required steps in the accounting cycle except:

preparing a worksheet

The final step in the accounting cycle is to prepare

a post-closing trial balance

Which is the correct order of steps in the accounting cycle?

Journalize and post transactions, journalize and post adjusting entries, journalize and post closing entries

Which of the following is not based on accrual accounting?

Net cash provided by operating activities

Which of the following is a merchandiser that sells directly to consumers?

Retailer

Which is true about a wholesaler?

It sells to another business, which will sell to a consuming customer

Which of the following statements about a periodic inventory system is true?

Companies determine cost of goods sold only at the end of the accounting period

The operating cycle of a merchandising company is ordinarily ___________________ that of a service firm

longer than

A perpetual inventory system

provides better control over inventories than does a periodic inventory system.

Jax Company uses a perpetual inventory system and on November 30 purchased merchandise for which it must pay the shipping charges. Which of the following is one part of the required journal entry when Jax pays the shipping charges of $200?

A debit to Inventory for $200

Cosmos Corporation, which uses a perpetual inventory system, purchased $2,000 of merchandise on July 5 on account. Credit terms were 2/10, n/30. It returned $400 of the merchandise on July 9. Which of the following is one effect when Cosmos pays its bill on July 21?

Credit to Cash for $1,600

Which inventory system will likely be used by a company with merchandise that has a high unit value?

Perpetual inventory system

When credit terms of 1/15, n/60 are offered, how long is the discount period?

15 days

Marsh, Inc. paid for freight costs on merchandise it shipped to a customer. In what account will Marsh record this cost in a perpetual inventory system?

Freight-out account

Martin Company purchases $4,200 of merchandise on March 1, with credit terms of 3/10, n/30. If Martin pays on March 11, what is the cost of this purchase?

$4,074

Which of the following items does not result in an entry to the Inventory account under a perpetual system?

Payment of freight costs for goods shipped to a customer

On what amount is a sales discount based?

Invoice price less returns and allowances

Myers and Company sold $1,800 of merchandise on account to Oscar, Inc. on March 1 with credit terms of 2/10, n/30. Oscar returned $500 of the merchandise due to poor quality on March 3. If Oscar pays for the purchase on March 11, what entry does Myers make to record receipt of the payment?

Cash 1,274
Sales Discounts 26
Accounts Receivable 1,300

In a perpetual inventory system, which accounts will the seller credit when merchandise is returned by a customer?

Accounts Receivable and Cost of Goods Sold

Which statement is true for the seller?

The Sales Returns and Allowances account is debited for defective merchandise returned by a customer

A retailer makes a $100 sale with terms of 2/10, n/30 on the first of the month. The customer returns $20 of merchandise for credit on account. What journal entry will the retailer record when payment is received within the discount period under a perpetual inventory system?

Cash 78.40
Sales Discounts 1.60
Accounts Receivable 80.00

Which of these accounts normally have a debit balance?

Sales discounts and sales returns and allowances

A credit sale of $750 is made on June 13, terms 2/10, n/30, on which a return of $50 is granted on June 16. What amount is received as payment in full on June 23?

$686

Which statement is true when recording the sale of goods for cash in a perpetual inventory system?

Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.

A company which uses a perpetual inventory system

needs two journal entries when it sells merchandise

What type of accounts are Sales Returns and Allowances and Sales Discounts?

Contra revenue accounts

Sales revenues total to $10,000. Sales returns and allowances are $500 and sales discounts are $1,000. How much is net sales?

$8500

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is cost of goods sold?

$40,000

Which of the following is classified in an income statement as a nonoperating activity?

Interest expense

Which of the following is classified in an income statement as a nonoperating activity?

Receiving dividend revenue from an investment

Assume that sales are $450,000, sales discounts are $10,000, net income is $35,000, and cost of goods sold is $320,000. How much are gross profit and operating expenses, respectively?

$120,000 and $85,000

Which of the following would appear on both a single-step and a multiple-step income statement?

Cost of goods sold

Which one of the following will result in the amount of gross profit?

Sales revenues less cost of goods sold

If sales revenues totals $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, how much is the gross profit?

$90,000

Which of the folowing will not be shown on the income statement for a merchandising company?

Gross profit; Cost of goods sold; A sales revenue section

If beginning inventory is $60,000, cost of goods purchased is $380,000, sales revenue is $800,000 and ending inventory is $50,000, how much is cost of goods sold under a periodic system?

$390,000

Arbor Corporation had reported the following amounts at December 31, 2011: Sales $184,000; ending inventory $11,600; beginning inventory $17,200; purchases $60,400; purchases discounts $3,000; purchase returns and allowances $1,100; freight-in $600; freight-out $900. Calculate the cost of goods available for sale.

$74,100

Under what system is cost of goods sold determined at the end of an accounting period?

Periodic inventory system

Beginning inventory is $12,000; purchases are $34,000; sales are $60,000; and cost of goods sold is $31,000. How much is ending inventory?

$15,000

A company has the following accounts balances: Sales $2,000,000; Sales Returns and Allowances $250,000; Sales Discounts $50,000; and Cost of Goods Sold $1,275,000. How much is the gross profit rate?

25%

Ending inventory is $10,000, beginning inventory is $20,000, and the cost of goods purchased is $25,000. How much is cost of goods sold?

$35,000

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is the gross profit rate?

46.7%

Net income is $15,000, operating expenses are $20,000, net sales total $75,000, and sales revenues total $95,000. How much is the profit margin ratio?

20%

A company has the following balances: Sales $312,000; Sales Returns and Allowances $2,000; Sales Discounts $4,000; Cost of Goods Sold $184,000; Operating Expenses $84,000. How much is the profit margin ratio?

12.4%

Which of the following would affect the gross profit rate if sales remain constant?

An increase in cost of goods sold

To what is the gross profit rate equal?

Net sales minus cost of goods sold, divided by net sales

Which factor would not affect the gross profit rate?

An increase in the cost of heating the store

During the year ended December 31, 2010, State Street Corporation had the following results: Sales $267,000; cost of goods sold $107,000; net income $92,400; operating expenses $55,400; net cash provided by operating activities $108,950. How much is the company's profit margin ratio?

34.6%

When is a physical inventory usually taken?

When goods are not being sold or received; At the end of the company's fiscal year

Which of the following should not be included in the physical inventory of a company?

Goods held on consignment from another company

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2010. This count did not take into consideration the following transactions:
• Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is $50,000.
• Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3.
Determine the correct amount of inventory that Railway should report.

$215,000

Which of the following is not an inventory account?

Equipment

Which of the following is not a legitimate business reason for taking a physical inventory?

To verify the profitability of individual inventory items

Ownership passes to the buyer when purchased goods are received from a public carrier if the goods are shipped

FOB destination

Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped

FOB shipping point

Which one of the following statements is true?

A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications

Ceil gives goods on consignment to Jerry who agrees to try to sell them for a 25% commission. At the end of the accounting period, which of the following parties includes in its inventory the consigned goods?

Ceil

At December 31, 2012, Sunrise Company's inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following:
• $112,000 in inventory purchases made by Sunrise shipped from the seller December 27, 2012 terms FOB destination, but not due to be received until January 2, 2013
• $74,000 in goods sold by Sunrise with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6, 2013
• $6,000 of goods received on consignment from Wallwood Company

What is Sunrise's correct ending inventory balance at December 31, 2012?

$746,000

Inventory costing methods place primary reliance on assumptions about the flow of

costs

Cost of goods purchased is $540,000, ending inventory is $20,000, and cost of goods sold is $560,000. How much is beginning inventory?

$40,000

Which of the following not an acceptable inventory costing method?

Last-in, last-out

Which of the following is true of the FIFO inventory method?

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold

Which of the following would most likely employ the specific identification method of inventory costing?

Jewelry store

Specific identification method inventory valuation requires

flow of goods to be representative of the cost flow

Company management selects

the method of inventory costing method a company will use

Units Unit Cost
Inventory, Jan. 1 8,000 $11
Purchase, June 19 13,000 $12
Purchase, Nov. 8 5,000 $13

If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

$113,000

Units Unit Cost
Inventory, Jan. 1 8,000 $11
Purchase, June 19 13,000 $12
Purchase, Nov. 8 5,000 $13

If 9,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic system?

$100,000

Units Unit Cost
Inventory, Jan. 1 5,000 $ 8
Purchase, April 2 15,000 $10
Purchase, Aug. 28 20,000 $12

If Davidson has 7,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$75,250

In periods of rising prices, what will LIFO produce?

Lower net income than FIFO

Which one of the following is not a consideration that affects the selection of an inventory costing method?

Perpetual versus periodic inventory system

A company just starting business made the following purchases in August:


August 1 300 units $1,560
August 12 400 units 2,340
August 24 400 units 2,520
August 30 300 units 1,980
1,400 units $8,400

A physical count of the inventory on August 31 reveals that there are 500 units on hand. What inventory method produces the lowest gross profit for August?

LIFO method

n a period of rising prices which inventory method will result in the greatest amount of income tax expense?

FIFO

With the assumption of costs and prices generally rising, which of the following is correct?

LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold

In a period of falling prices, which of the following methods will give the largest net income?

LIFO

Two companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, which statement is true?
The company using

The company using FIFO will have the highest ending inventory

Which situation requires a departure from the cost basis of accounting to the lower-of-cost-or-market basis in valuing inventory?

A decline in the value of the inventory

What accounting concept is employed when using the lower-of-cost-or-market valuation?

Conservatism

Cost Data Market Data
iPods $24,000 $20,400
Cell phones 18,000 19,000
DVD's 28,000 25,600
Using the lower-of-cost-or-market , how much is the value of the ending inventory?

$64,000

What is the underlying concept of the lower-of-cost-or-market rule?

The conservatism constraint

Which of these transactions would cause the inventory turnover ratio to increase the most?

Decreasing the amount of inventory on hand and increasing sales

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. How much is Carlos' days in inventory?

121.7 days

The following information came from the income statement of the Wilkens Company at December 31, 2012: sales $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. How much is Wilkens' inventory turnover ratio for 2012?

6.0 times

The following information came from the income statement of the Wilkens Company at December 31, 2012: sales $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. Inventory turnover is 6 times per year. How much is Wilkens' days in inventory for 2012?

60.8 days

Net sales are $2,000,000, cost of goods sold is $960,000, and average inventory is $30,000. How many days sales are in inventory?

11.4

The inventory turnover ratio is calculated by dividing cost of goods sold by

average inventory

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?

LIFO reserve

In 2012, a company shows inventory of $250,000 using LIFO. If the company had used FIFO, its inventories would have been higher by $40,000 and $30,000 in 2012 and 2011, respectively. How much is the company's LIFO reserve in 2012?

$40,000

What is the LIFO reserve?

The difference between the value of inventory under LIFO and the value under FIFO

Which is true if the ending inventory is overstated?

Net income will be overstated and the stockholders' equity will be overstated

If there is an error in the ending inventory affecting the net income of the current period, what will happen to the net income of the next accounting period?

It will have the reverse effect on the net income during the next accounting period

If the ending inventory is overstated, what occurs?

Assets are overstated and stockholders' equity is overstated

Fran Company's ending inventory is understated by $4,000. What are the effects of this error on the current year's cost of goods sold and net income, respectively?

Overstated and understated

Harold Company overstated its inventory by $15,000 at December 31, 2011. It did not correct the error in 2011 or 2012. As a result, what was the effect of Harold's owner's equity?

Overstated at December 31, 2011, and properly stated at December 31, 2012

Elements of fraud triangle

opportunity, rationalization, and financial pressure

Primary components of internal control system

information and communication, monitoring, and risk assessment

Reasons why an organization establishes a system for internal control

To safeguard its assets; To increase efficiency of operations; To ensure compliance with laws and regulations

The person who has custody of assets

should not perform the record keeping for the assets

Internal auditors

evaluate the system of internal controls for the companies that employ them

Principles of internal control

segregation of duties, documentation procedures, bonding of employees, establishment of responsibility, and independent internal verification

Under which of the following do computer programs that limit unauthorized access to certain files fall?

Physical, mechanical, and electronic controls

Of which of the following is obtaining insurance protection against dishonest employees an example?

bonding

Reasonable assurance rests on the premise that

the costs of establishing controls should not exceed their expected benefit

internal auditors are

company employees who evaluate the effectiveness of the company's system of internal control on a continuous basis

For what purpose are physical controls used in a business?

To enhance the accuracy and reliability of its accounting records and to safeguard its assets

Physical controls

Locked warehouses for inventories, bank safety deposit boxes for important papers, and safes and vaults to store cash

Which of the following was not a result of the Sarbanes-Oxley Act?

Companies must file financial statements with the Internal Revenue Service

Handly Inc. permits only designated personnel such as cashiers to handle cash receipts. What principle is being applied?

Establishment of responsibility

Aptara Construction Supplies has a cashier who is also the accounts receivable clerk for the company. Which internal control principle is violated?

Segregation of duties

Which internal control principle is most important in a control system for handling cash receipts?

Segregation of duties

Control procedures for over-the-counter receipts

Providing the customers with an itemized receipt, a cash register's tape is locked in the register and only a supervisor can access it, and use of a cash register where the amount rung up is clearly visible to the customer

Which of the following is an effective internal control over cash disbursements?

The use of prenumbered checks; The storage of blank checks in a secure place; The separation of authorization of checks and the actual writing of the checks

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