accounting exam 2 conceptual questions

1. What appears on a merchandising income statement but not a service company's?

Cost of Goods Sold (COGS) and Gross Profit.

2. What do credit terms such as 3/15, n/45 mean?

3% discount if paid within 15 days; full amount due within 45 days.

3. Who pays freight under FOB shipping point vs. FOB destination?

Shipping point: buyer. Destination: seller.

4. What type of account is Sales Discounts?

Contra-revenue; it reduces Sales Revenue.

5. What are the three steps that will always appear on a multistep income statement?

• Net Sales

• Gross Profit

• Operating Income

6. Where are expenses outside regular operations reported?

In the other revenues and expenses section, outside operating income.

7. What does Gross Profit Percentage measure?

Gross profit per dollar of net sales; Gross Profit ÷ Net Sales × 100.

8. How is a sale recorded under periodic inventory?

Record Sales Revenue, but do not record COGS or reduce Inventory until period-end.

16. What is materiality in accounting?

Information is material if omitting or misstating it could influence users' decisions.

17. What does conservatism mean in inventory accounting?

Under uncertainty, avoid overstating assets or income; use the applicable lower-value rule.

18. What are the four inventory costing methods?

Specific Identification, FIFO, LIFO, and Weighted-Average.

19. How do FIFO, LIFO, and weighted-average determine cost of goods sold?

FIFO uses oldest costs; LIFO uses newest costs; weighted-average uses average unit cost.

20. What is lower of cost or market (LCM)?

20. Report inventory at the lower of cost or applicable market value; traditional market is constrained replacement cost.

21. What happens when ending inventory is overstated?

21. Current-year COGS is understated and net income overstated; next-year net income is understated.

22. How do you calculate inventory turnover and days' sales in inventory?

22. Turnover = COGS ÷ Average Inventory; Days' Sales = 365 ÷ Turnover.

23. What stays the same under all periodic inventory costing methods?

23. Cost of Goods Available for Sale.

31. What phrase describes management's influence on the Control Environment?

31. Tone at the Top — upper management sets the organization's ethical tone.

32. What are limitations of internal control?

32. Human error, collusion, management override, and cost constraints.

33. What internal controls are important for cash register employees?

Separate cash handling and recordkeeping; use receipts and independent cash-count checks.

34. What is a lockbox system?

Customer payments go directly to a bank-controlled address for processing.

35. What three documents support paying a supplier?

Purchase Order, Receiving Report, and Vendor Invoice.

36. What is an NSF check?

A check returned because the payer has insufficient funds.

37. Why are journal entries needed for book-side bank reconciliation items?

To update the company's ledger for transactions or errors not yet recorded.

38. How is the cash ratio calculated?

Cash and Cash Equivalents ÷ Current Liabilities.