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Accounting 400C Exam #2

Terms in this set (51)

Which of the following methods of determining annual bad debt expense violates the expense recognition concept?


A. Percentage of ending accounts receivable
B. Percentage of average accounts receivable
C. Direct write-off
D. Percentage of sales
C. Direct write-off
The percentage-of-receivables method for estimating uncollectible accounts is often referred to as the:
A. direct write-off method.
B. income statement approach.
C. aging method.
D. balance sheet approach.
D. balance sheet approach.
What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet?

A. As offsets to capital.
B. By means of footnotes only.
C. As assets but separately from other receivables.
D. As trade notes and accounts receivable if they otherwise qualify as current assets
C. As assets but separately from other receivables.
Why is the allowance method preferred over the direct write-off method of accounting for bad debts?

A. Estimates are used.
B. Determining worthless accounts under direct write-off method is difficult to do.
C. Improved matching of bad debt expense with revenue.
D. Allowance method is used for tax purposes.
C. Improved matching of bad debt expense with revenue.
Which of the following concepts relates to using the allowance method in accounting for accounts receivable?
A. Bad debt expense is based on the actual amounts determined to be uncollectible.
B. Bad debt expense is management's Etermination of which accounts will be sent to the attorney for collection.
C. Bad debt expense is an estimate that is based on historical and prospective information.
D. Bad debt expense is an estimate that is based only on an analysis of the receivables aging.
C. Bad debt expense is an estimate that is based on historical and prospective information.
How can accounting for bad debts be used for earnings management?

A. Using an aging of the accounts receivable balance to determine bad debt expense.
B. Determining which accounts to write-off.
C. Changing the percentage of sales recorded as bad debt expense.
D. Reversing previous write-offs.
C. Changing the percentage of sales recorded as bad debt expense.
What is the normal journal entry for recording bad debt expense under the allowance method?
A. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
B. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
C. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
D. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
A. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
What is the normal journal entry when writing-off an account as uncollectible under the allowance method?
A. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
B. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
C. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
D. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
B. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method?
A. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
B. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
C. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
D. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
A. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach
A. makes estimates of uncollectible accounts unnecessary.
B. best relates bad debt expense to the period of sale.
C. is the only generally accepted method for valuing accounts receivable.
D. gives a reasonably correct statement of receivables in the balance sheet.
D. gives a reasonably correct statement of receivables in the balance sheet.
The accounts receivable turnover ratio is computed by dividing
A. gross sales by average net receivables.
B. net sales by average net receivables.
C. net sales by ending net receivables.
D. gross sales by ending net receivables.
B. net sales by average net receivables.
Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account
A. has no effect on the allowance for uncollectible accounts.
B. has no effect on net income.
C. decreases net income.
D. increases the allowance for uncollectible accounts.
B. has no effect on net income.
Net cash flow from operating activities is determined by eliminating
A. noncash expenses and noncash revenues from net income.
B. earned revenues from net income.
C. incurred expenses from net income.
D. cash expenses and cash revenues from net income.
A. noncash expenses and noncash revenues from net income.
The method of calculating net cash flow from operating activities that adjusts net income for items that affected reported net income but not cash is the:
A. indirect method.
B. income statement method.
C. adjustment method.
D. direct method
A. indirect method.
To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by
A. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions.
B. re-recording all income statement transactions that directly affect cash in a separate cash flow journal.
C. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.
D. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.
C. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.
Which method adjusts net income for items that affected reported net income but did not affect cash?
A. Adjustment.
B. Direct.
C. Accrual.
D. Indirect.
B. Direct.
An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)
A. cash outflow from investing activities.
B. addition to net income in arriving at net cash flow from operating activities.
C. cash outflow from financing activities.
D. deduction from net income in arriving at net cash flow from operating activities.
D. deduction from net income in arriving at net cash flow from operating activities.
Manufacturing companies have two inventory accounts: Work in Process and Finished Goods.

TRUE or FALSE
FALSE.

they have three- work in process, finished goods, raw materials
A physical inventory is only required at year-end if the company has a periodic inventory system.

TRUE or FALSE
FALSE

at the end of the fiscal year, regardless of inventory system
If ending inventory is overstated, net income, retained earnings and working capital are overstated in that period as well.

TRUE or FALSE
TRUE
Which of the following is not considered an advantage of LIFO when prices are rising?
A. The more recent costs are matched against current revenues.
B. A company's future reported earnings will not be affected substantially by future price declines.
C. The inventory will be overstated.
D. There will be a deferral of income tax.
C. The inventory will be overstated.
If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

TRUE or FALSE
FALSE
If ending inventory is understated, then net income is understated.

TRUE or FALSE
TRUE
If both purchases and ending inventory are overstated by the same amount, net income is not affected.

TRUE or FALSE
TRUE
The cost flow assumption adopted must be consistent with the physical movement of the goods.

TRUE or FALSE
FALSE
The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial accounting purposes.

TRUE or FALSE
TRUE
Which of the following is a characteristic of a perpetual inventory system?

A. Cost of goods sold is determined as the amount of purchases less the change in inventory.
B. Inventory records are not kept for every item.
C. Cost of goods sold is recorded with each sale.
D. Inventory purchases are debited to a Purchases account.
C. Cost of goods sold is recorded with each sale.
Where should goods in transit that were recently purchased f.o.b. destination be included on the balance sheet?

A. Equipment.
B. Not on the balance sheet.
C. Accounts payable.
D. Inventory.
B. Not on the balance sheet.
What is consigned inventory?
\A. Goods that have been segregated for shipment to a customer.
B. Goods that are shipped, but title transfers to the receiver.
C. Goods that are sold, but payment is not required until the goods are sold.
D. Goods that are shipped, but title remains with the shipper.
D. Goods that are shipped, but title remains with the shipper.
When using a perpetual inventory system,
A. a Cost of Goods Sold account is used.
B. two entries are required to record a sale.
C. all of these answer choices are correct.
D. no Purchases account is used.
C. all of these answer choices are correct.
Goods in transit which are shipped f.o.b. shipping point should be
A. ncluded in the inventory of the seller.
B. none of these answer choices are correct.
C. included in the inventory of the buyer.
D. included in the inventory of the shipping company.
C. included in the inventory of the buyer.
Goods in transit which are shipped f.o.b. destination should be
A. none of these answers are correct.
B. included in the inventory of the seller.
C. included in the inventory of the shipping company.
D. included in the inventory of the buyer.
B. included in the inventory of the seller.
Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?
A. Last-in, first-out
B. Average cost
C. Base stock
D. First-in, first-out
D. First-in, first-out
In a period of rising prices, the inventory method which tends to give the highest reported net income and highest reported inventory is
A. base stock.
B. first-in, first-out.
C. last-in, first-out.
D. weighted-average.
B. first-in, first-out.
In a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is
A..Average cost.
B. FIFO.
C. LIFO.
D. None of these choices are correct.
C. LIFO.
Which of the following is a reason why the specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold?
A. The potential for manipulation of net income is reduced.
B. The cost flow matches the physical flow.
C. There is no arbitrary allocation of costs.
D. Able to use on all types of inventory.
B. The cost flow matches the physical flow.
What is a LIFO reserve?
A. The difference between the LIFO inventory and the amount used for internal reporting purposes.
B. The current effect of using LIFO on net income.
C. The tax savings attributed to using the LIFO method.
D. Change in the LIFO inventory during the year.
A. The difference between the LIFO inventory and the amount used for internal reporting purposes.
Select the correct statement concerning LIFO liquidations from the following.
A. LIFO liquidations seldom distort net income and do not result in substantial tax payments.
B. LIFO liquidations often distort net income and may result in substantial tax payments.
C. LIFO liquidations often distort net income and do not result in substantial tax payments.
D. LIFO liquidations seldom distort nets income and may result in substantial tax payments.
B. LIFO liquidations often distort net income and may result in substantial tax payments.
Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be
A. net income and current liabilities were overstated.
B. no effect.
C. net income was correct and current assets and current liabilities were overstated.
D. net income, current assets, and current liabilities were overstated.
C. net income was correct and current assets and current liabilities were overstated.
Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be
A. net income, current assets, and retained earnings were understated.
B. net income was correct and current assets were understated.
C. net income, current assets, and retained earnings were overstated.
D. net income and current assets were overstated and current liabilities were understated.
C. net income, current assets, and retained earnings were overstated.
Feine Co. accepted delivery of merchandise which it purchased on account. As of December 31, Feine had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be
A. net income was overstated and current assets were understated.
B. net income was correct and current assets were understated.
C. net income, current assets, and retained earnings were understated.
D. net income was understated and current liabilities were overstated.
C. net income, current assets, and retained earnings were understated.
On June 15, 2014, Wynne Corporation accepted delivery of merchandise which it pur-chased on account. As of June 30, Wynne had not recorded the transaction or included the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2014 would be
A. stockholders' equity was the only item affected by the omission.
B. assets and stockholders' equity were overstated but liabilities were not affected.
C. assets and liabilities were understated but stockholders' equity was not affected.
D. assets, liabilities, and stockholders' equity were understated.
C. assets and liabilities were understated but stockholders' equity was not affected.
The gross profit method of estimating ending inventory is not acceptable for:
A. None of these answer choices are correct.
B. annual financial statements.
C. insurance claims for destroyed inventory.
D. interim financial statements.
B. annual financial statements.
The cost of land includes all of the following except:

A. cost of leveling and grading.
B. cost of fencing and lighting.
C. purchase price.
D. payments to clear liens
B. cost of fencing and lighting.
Which of the following is not a capital expenditure with regard to a manufacturing facility?

A. Replacing the heating system with a more energy efficient model
B. Replacing the air conditioning system with a similar unit
C. Painting the exterior of the building
D. Expanding the building by adding a new wing
C. Painting the exterior of the building
If an asset is sold at a gain,
the proceeds from the sale are greater than the asset's cost.
A. the fair value of the asset is greater than the proceeds received from the sale.
B. the cost of the asset is greater than its book value.
C. the book value of the asset is less than the proceeds received from the sale.
C. the book value of the asset is less than the proceeds received from the sale.
Depreciation is a means of adjusting an asset's cost to its fair value.

TRUE or FALSE
FALSE
The rate of return on assets is computed by dividing:
A. net sales by average total assets.
B. net sales by ending total assets.
C. net income by average total assets.
D. net income by ending total assets.
C. net income by average total assets.
The depreciable base of an asset is its original cost:
A. plus salvage value.
B. less accumulated depreciation.
C. plus accumulated depreciation.
D. less salvage value.
B. less accumulated depreciation.
Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?
A. Associating cause and effect
B. Systematic and rational allocation
C. Partial recognition
D. Immediate recognition
B. Systematic and rational allocation
The major difference between the service life of an asset and its physical life is that
A. physical life is always longer than service life.
B. physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.
C. service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.
D. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
D. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
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