Chapter 5,6,7 Exam 3

In a perpetual inventory system
A. accounting records continuously disclose the amount of inventory on hand
B. purchases of inventory are not recorded until a physical inventory is taken
C. there is no need for a physical inventory at the end of the accounting period
D. Cost of Goods Sold is recorded when a physical inventory is taken

A. accounting records continuously disclose the amount of inventory on hand

LB Company sells goods on account for $3800 on April 25, terms 2/10, net/30. If $200 of goods are returned on April 28, what amount will LB receive as payment in full if LB collects payment on May 4?
A. $3,528
B. $3,724
C. $3,800
D. $3,600

A. $3,528
3800-200= 3600 Accounts Receivable
Discount= 3600 times .02 = $72 Collection = 3600-72= 3528

Using a perpetual system, on Oct. 31, LL Company sells $1800 of goods with terms of 2/10, n/30. Cost of goods sold was $400. LL's Oct. 31 entry includes a (an)
A. $36 debit to Sales Discount
B. $1,764 debit to Sales Revenue
C. $1,800 credit to Accounts Receivable
D. $1,800 credit to Sales Revenue

D. $1,800 credit to Sales Revenue
Accounts Receivable 1800
Sales Revenue 1800
Cost of Goods Sold 400
Inventory 400

IM Company uses a perpetual system and purchases $50 of goods on account on Oct. 1. If IM returns $20 of the goods on Oct. 27, IM's Oct. 27 entry includes a $20
A. Debit to sales returns and allowances
B. Credit to Accounts Payable
C. Credit to Inventory
D. None of the above

C. Credit to Inventory
10/1 Purchase: Inventory 50
Accounts Payable 50
10/27 Accounts Payable 20
Inventory 20

A retail store may have gross profit, but a net loss
A. true
B. false

A. true

RG Company's goods in transit at December 31 include sales made (1) FOB destination and (2) FOB shipping point and purchases made (3) FOB destination and (4) FOB shipping point
Which items are included in inventory at Dec. 31?
A. (2) and (3)
B. (1) and (4)
C. (1) and (3)
D. (2) and (4)

B. (1) and (4)

HB Company uses a periodic inventory system. On October 1, the company's records showed beginning inventory of 300 tools with a unit cost of $7. During October, the company purchased 600 tools at $7 each and 900 tools at $8 each. The company sold 1,500 tools in October for $12 each.

If HB uses the average cost method and the net realizable value of inventory at October 31 is $2,300, HB's October 31 balance sheet will show inventory at
A. $2,100
B. $2,250
C. $2,400
D. $2,300

B. $2,250
Add Beginning Inventory and Purchases
2100 (7 times 300) + 4200 (600 times 7) + 7200 (900 times 8) = 13500
13500 is cost of goods available for sale. Cost of goods available for sale/total units for sale. 13500/1800= 7.5.
7.5 times 300(remaining units from 1800-1500 units purchased) = 2250
Since it is net realizable value, you pick the smallest amount

At December 31, 2021, Kara's Kitchen Supply company's records show: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $630,000; and sales $900,000. Kara's inventory turnover in 2021 was
A. 9.0 times
B. 7.9 times
C. 6.3 times
D. 5.3 times

C. 6.3 times

PG Company sells $5,000 of goods with terms FOB Shipping Point. The goods remain in transit at the end of the period. If PG includes the $5,000 of goods in its ending inventory,
A. This period's cost of goods sold will be correctly stated
B. This period's net income will be overstated
C. This period's net income will be understated
D. Next period's beginning inventory will be understated

B. This period's net income will be overstated

In a perpetual system: when inventory is purchased and item is sold, when should these be recorded? Is anything recorded at the end of the period?

Record purchase of inventory right away and item sold, record revenue and cost of goods sold right away. Nothing is recorded at the end of the period

Periodic system records inventory and item sold as:
Is anything recorded at the end of the period?

Inventory purchased is recorded as purchase of inventory, item sold you record revenue only. Cost of Goods Sold is recorded at the end of the period

Cost of Goods Available for Sale Equation

Beginning Inventory + Cost of Goods Purchased

Cost of Goods Sold Equation

beginning inventory + cost of goods purchased - ending inventory

Single-Step Income Statement Equation

Total expenses- total revenues

Why use a Single-Step Income Statement?

Shows whether company profitable based on net income/net loss
Single-Step Income Statement is simple

What is considered more useful? Single-Step Income Statement or Multiple-step income statement?

Multiple-step income statement because it is considered more useful because it highlights the components of net income

What systems take a physical inventory at the end of the period?
A. periodic system
B. perpetual system
C. Both periodic and perpetual

C. Both periodic and perpetual
Includes all owned goods that are fit to be sold

Operating Expenses Equation

gross profit - net income

Sales Revenue Equation

quantity sold times sales price per unit

Net Sales Equation

sales revenue - sales returns and allowances - sales discounts

Gross Profit Equation

net sales - cost of goods sold

Operating Income Equation

gross profit - operating expenses

Gross Profit Rate Equation

gross profit/net sales

Profit Margin Ratio Equation

Net Income/Net Sales

Who pays for FOB Shipping Point, the buyer or seller? Who owns the goods?

The buyer pays since they will own the goods once they are shipped

Who pays for FOB Destination shipping, the buyer or seller? Who owns the goods?

The seller pays for FOB Destination shipping since the seller will own the goods until the goods arrive at the buyer's business

Who owns cosigned goods?

original owner retains ownership

What goods are excluded from ending inventory?

exclude damaged goods from inventory

What is FIFO?

Sell goods 1st in- 1st out
LISH (last in, still here) for ending inventory
Whatever is purchased the latest is what you count first

What is LIFO?

Sell goods Last-in First Out
FISH- (1st in, still here) for ending inventory

What is average cost?

weighed average approach

Credit Memo

bank statement listing items that increase amount in a depositor's account
Ex: interest, collection of notes receivable

Debit Memo

bank statement listing items that decrease amount in a depositor's account
Ex: bank fees, NSF check

NSF (nonsufficient funds) check

bounced check. NSF reduces how much is in the depositor's account

Lower of cost or net-realizable value

if the value of inventory is lower than its cost, inventory is written down to net realizable value in the period in which the price decline occurs

What is net realizable value?

It is the net amount the company expects to receive from the sale of inventory

What are the terms in the fraud triangle?

Opportunity, Rationalization, and Pressure

Fraud triangle
Opportunity

ability to carry out misappropriation of cash or organizational assets

Fraud triangle
Rationalization

Justification of dishonest actions

Fraud triangle
Rationalization example

stupid people deserve to be cheated.

Fraud triangle
Pressure

Motivation or incentive to commit fraud

Fraud triangle
Pressure example

Greed and lust for power with little balance from moral principles and human empathy

Inventory turnover ratio

Cost of Goods Sold/Average Inventory

Days in Inventory Equation

365 days/inventory turnover ratio

Inventory turnover ratio definition

turnover shows number of time inventory is sold during the period

Days in inventory definition

shows average number of days inventory is held

What does a high inventory turnover mean?

few days in inventory

Which of the following is NOT an objective of an internal control system?
A. safeguard company assets from theft and unauthorized use
B. enhance the accuracy and reliability of accounting records
C. reduce the risk of errors and international misstatements/fraud
D. Enhance profitability

D. Enhance profitability

The Sarbanes Oxley Act (SOX) of 2022 does NOT
A. require publicly traded US companies to maintain internal control
B. Require management and external auditors to attest to the level of internal control
C. Establish the Public Company Accounting Oversight Board
D. Provide additional criminal penalties for corporate fraud
E. Provide a monetary award to companies with strong internal control systems

E. Provide a monetary award to companies with strong internal control systems

Six Internal Control Principles

Establish responsibility
Segregate Duties
Physical controls
Independent Internal Verification
Documentation
Human Resource Controls

Six Internal Control Principles
Establish responsibility

One person, one task
Everyone has their own cash drawer

Six Internal Control Principles
Segregate Duties

related tasks performed by different individuals

Six Internal Control Principles
Physical Controls

secure access to assets
Have security cameras

Six Internal Control Principles
Independent Internal Verification

reconcile recorded information with supporting documentation
daily cash counts by supervisors

Six Internal Control Principles
Documentation

paper trail
Prenumbering

Six Internal Control Principles
Human Resource Controls

personnel policies
Have to take vacations

Which item below is the best example of a strong system of internal control?
A. a company only allows the staff accountant to sign company checks
B. A company's staff accountant is required to take customer payments to the bank by the end of the day
C. A company has a mandatory vacation policy
D. A company only accepts cash from customers and does not accept credit cards

C. A company has a mandatory vacation policy

Cash Payments Journal

Depositor's log of outgoing checks (payments to creditors)

Cash Receipts Journal

Depositor's log of bank deposits

During the current month, a new boutique incorrectly records a $500 check as $50 in its cash payments journal. As a result, the boutique's bank reconciliation will include a $450
A. addition to the unadjusted cash balance per books
B. addition to the unadjusted cash balance per bank
C. subtraction from the unadjusted cash balance per books
D. subtractions from the unadjusted cash balance per bank

C. subtraction from the unadjusted cash balance per books

Simon Shoe Repair Shop prepares a bank reconciliation that includes outstanding checks (checks in transit). Outstanding checks result if
A. Simon records an outgoing check during the month, but the check does not appear on this month's bank statement
B. The bank recorded Simon's check, but the check has not yet been recorded in Simon's records
C. Simon recorded an incoming check during the month, but the check does not appear on the bank statement
D. none of the above

A. Simon records an outgoing check during the month, but the check does not appear on this month's bank statement

Carl's Car Wash prepares a bank reconciliation that accounts for outstanding checks, an NSF check, and a bank error. Which item below results in an adjusting entry for the car wash?
A. Outstanding checks
B. NSF check
C. Bank error
D. All of the above

B. NSF check

Sam's Ski Shop writes a $100 check to pay a supplier and the bank's debit memo incorrectly lists the check as $1,000. As a result, the shop's bank reconciliation includes a
A. $900 addition to the unadjusted cash balance per books
B. $900 subtraction from the unadjusted cash balance per books
C. $900 subtraction from the unadjusted cash balance per bank records
D. $900 addition to the unadjusted cash balance per bank records

D. $900 addition to the unadjusted cash balance per bank records

Where is deposits in transit recorded on the bank reconciliation? Is it added or subtracted?

Deposits in transit are on the cash balance per bank. They are added to the balance.

Where are outstanding checks recorded on the bank reconciliation? Are outstanding checks added or subtracted?

Outstanding checks are recorded on the cash balance per bank. Outstanding checks are subtracted from the cash balance per bank.

Where are bank service charges recorded on the bank reconciliation? Are bank service charges added or subtracted from the bank reconciliation?

Bank service charges are recorded on the cash balance per books. Bank service charges are subtracted from the cash balance per books.

Where are checks for supplies error recorded on the bank reconciliation? Are they added or subtracted?

checks for supplies error are recorded on the cash balance per books. Checks for supplies error are subtracted from the cash balance per books

Brandon Company uses a perpetual inventory system. On April 1, 2022, the
company records a $500 sales allowance. If the original sale was on account,
Brandon Company’s required entry on April 1, 2022, includes a $500
a. debit to Accounts Receivable.
b. credit to Sales Returns and Allowances.
c. debit to Sales Returns and Allowances.
d. credit to Accounts Payable.

c. debit to Sales Returns and Allowances.

What system records sales discounts?

Perpetual system

Deposits in transit

deposit recorded by the depositor that have not been recorded by the bank. Add to balance per bank

Collection of Electronic Funds Transfer Entry

debit cash, credit accounts receivable

Book Error Entry

Debit Cash, Credit Accounts Payable

NSF Check Entry

Debit Accounts Receivable, Credit Cash

Bank Charges Expense Entry

Debit Bank Charges Expense, Credit CashB

Balance sheet reports...

amount of cash available at a given point in time

Statement of cash flow shows...

sources and uses of cash during period of time

What kind of account is Sales Discounts?

Contra revenue account to Sales Revenue

What does gross profit measure?

Merchandising profit of a company

During a period of inflation, which cost flow assumption results in the highest dollar
amount of ending inventory?
A. FIFO
B. LIFO
C. Average-cost method

A. FIFO

Which cost flow assumption results in the lowest income taxes?
A. FIFO
B. LIFO
C. Average-cost method

B. LIFO

What is LIFO reserve?

FIFO-LIFO

What are the journal entries? Granted credit of $34 to Great Big Book Store for the return of one calculator that was not ordered. The calculator cost $23.

9/14 Sales Returns and Allowances: 34
Accounts Receivable: 34
Inventory: 23
Cost of Goods Sold: 23

What are the journal entries? Sold 41 calculators costing $23 for $34 each to Bush's Card Shop, terms n/31.

9/20 Accounts Receivable: 1394
Sales Revenue: 1394
Cost of Goods Sold: 943
Inventory: 943

What is another way to calculate gross profit?

Operating Expenses- Net Loss