ACCT 1160E Exam #2 Study Guide

What is the Gross Profit for the following:

Sales = $100

Cost of Goods Sold = $75

Rent Expense = $10

$25

A retailer had $500,000 in Sales, $450,000 in Cost of Goods Sold, and $20,000 in Operating Expenses. What was the gross profit?

$50,000

If Apple sells a good that cost $200 to a customer for $800, which of the following is correct:

a. Sales Revenue increases by $600

b. Cost of Goods Sold is $800

c. Expenses increase by $600

d. Retained earnings increases by $600

d. Retained earnings increases by $600

A retailer sells a $200 good to a customer for $300 on account with credit terms stating a 2% discount if paid within 10 days. What should the retailer record upon making the sale?

a. Increase Acct Rec $300, Decrease Inventory $200, Increase Retained Earnings $100

b. Increase Acct Rec $294, Decrease Inventory $200, Increase Retained Earnings $94

c. Increase Acct Rec $200, Increase Retained Earnings $200

d. Increase Acct Rec $300, Decrease Inventory $300

b. Increase Acct Rec $294, Decrease Inventory $200, Increase Retained Earnings $94

A retailer purchased goods from its supplier for $400 on account with credit terms stating a 2% discount if the retailer pays within 10 days. Which of the following represents what the retailer will record for this purchase, assuming that it expects to pay within the discount period?

a. Increase Accounts Payable $400; Increase Inventory $400

b. Increase Accounts Payable $392; Increase Inventory $392

c. Increase Accounts Payable $392; Decrease Retained Earnings $392

d. Decrease Accounts Receivable $400; Decrease Retained Earnings $400

b. Increase Accounts Payable $392; Increase Inventory $392

A retailer purchased goods from its supplier for $400 on account with credit terms stating a 2% discount if the retailer pays within 10 days. At the time of purchase, the retailer assumed it would pay within the discount period. The retailer paid the account 8 days after purchase. Which of the following represents what the retailer will record upon paying the account?

a. Increase Accounts Payable $400; Increase Inventory $400

b. Decrease Cash $400; Decrease Accounts Payable $400

c. Decrease Cash $392; Decrease Accounts Payable $392

d. Decrease Cash $400; Increase Inventory $8; Decrease Accounts Payable $392

c. Decrease Cash $392; Decrease Accounts Payable $392

A retailer purchased goods from its supplier for $400 on account with credit terms stating a 2% discount if the retailer pays within 10 days. At the time of purchase, the retailer assumed it would pay within the discount period; however, it ultimately did not pay until 15 days after the purchase. Which of the following represents what the retailer will record upon paying the account?

a. Increase Accounts Payable $400; Increase Inventory $400

b. Decrease Cash $400; Decrease Accounts Payable $400

c. Decrease Cash $392; Decrease Accounts Payable $392

d. Decrease Cash $400; Increase Inventory $8; Decrease Accounts Payable $392

d. Decrease Cash $400; Increase Inventory $8; Decrease Accounts Payable $392

A retailer sold a good to a customer for $500 on account. The good cost the retailer $300.

What does the retailer record when the customer pays its account?

a. Increase Accounts Receivable $500; Decrease Inventory $300; Increase Retained

Earnings $200

b. Increase Cash $500; Increase Retained Earnings $500

c. Increase Accounts Receivable $300; Decrease Inventory $500; Decrease Retained

Earnings $200

d. Increase Cash $500; Decrease Accounts Receivable $500

d. Increase Cash $500; Decrease Accounts Receivable $500

A retailer sold a good costing $300 to a customer for $500 on account. The retailed offered the customer a 2% discount if the customer paid the account within 10 days. The retailer assumes the customer will take advantage of this. The customer paid its account 6 days after the purchase. What does the retailer record at the time of sale?

a. Increase Accounts Receivable $490; Decrease Inventory $300; Increase Retained

Earnings $190

b. Increase Cash $500; Decrease Accounts Receivable $490; Increase Retained Earnings

$10

c. Increase Accounts Receivable $500; Decrease Inventory $300; Increase Retained

Earnings $200

d. Increase Cash $490; Decrease Accounts Receivable $490

a. Increase Accounts Receivable $490; Decrease Inventory $300; Increase Retained

Earnings $190

A retailer sold a good costing $300 to a customer for $500 on account. The retailed offered the customer a 2% discount if the customer paid the account within 10 days. The retailer assumes the customer will take advantage of this. The customer paid its account 6 days after the purchase. What does the retailer record when the customer pays its account?

a. Increase Accounts Receivable $500; Decrease Inventory $300; Increase Retained

Earnings $200

b. Increase Cash $500; Decrease Accounts Receivable $490; Increase Retained Earnings

$10

c. Increase Cash $500; Decrease Accounts Receivable $500

d. Increase Cash $490; Decrease Accounts Receivable $490

d. Increase Cash $490; Decrease Accounts Receivable $490

A retailer sold a good costing $300 to a customer for $500 on account. The retailed offered the customer a 2% discount if the customer paid the account within 10 days. The retailer assumes the customer will take advantage of this. The customer paid its account 20 days after the purchase. What does the retailer record when the customer pays its account?

a. Increase Accounts Receivable $500; Decrease Inventory $300; Increase Retained

Earnings $200

b. Increase Cash $500; Decrease Accounts Receivable $490; Increase Retained

Earnings $10

c. Increase Cash $500; Decrease Accounts Receivable $500

d. Increase Cash $490; Decrease Accounts Receivable $490

b. Increase Cash $500; Decrease Accounts Receivable $490; Increase Retained

Earnings $10

A retailer purchase a good from its supplier for $300 on account. It then paid the account.

Later, it decided to return the good to the supplier for a full cash refund. What should the

retailer record on its balance sheet at the time of making the return?

a. Increase Cash, Decrease Inventory

b. Decrease Accounts Payable, Decrease Inventory

c. Increase Cash, Decrease Accounts Payable

d. Decrease Accounts Receivable, Increase Inventory

a. Increase Cash, Decrease Inventory

A retailer purchase a good from its supplier for $300 on account. Before it had paid the account, it decided to return the good to the supplier for a full refund on its account. What should the retailer record on its balance sheet at the time of making the return?

a. Increase Cash, Decrease Inventory

b. Decrease Accounts Payable, Decrease Inventory

c. Increase Cash, Decrease Accounts Payable

d. Decrease Accounts Receivable, Increase Inventory

b. Decrease Accounts Payable, Decrease Inventory

When a retailer provides a cash refund to its customer after accidentally shipping a

defective good, it should record:

a. Decrease Cash, Increase Retained Earnings (Sales Revenue)

b. Decrease Cash, Decrease Retained Earnings (COGS Expense)

c. Decrease Cash, Decrease Retained Earnings (Sales Revenue)

d. Decrease Cash, Increase Retained Earnings (COGS Expense)

c. Decrease Cash, Decrease Retained Earnings (Sales Revenue)

A retailer sold a good to a customer for $300 for cash. The good cost the retailer $100. The customer would like to return the good for a full cash refund. Which of the following represents what the retailer will record for this return?

a. Decrease Accounts Receivable $300; Increase Inventory $100; Decrease Retained

Earnings $200

b. Increase Inventory $100; Decrease Retained Earnings $100

c. Increase Inventory $300; Decrease Retained Earnings $300

d. Decrease Cash $300; Increase Inventory $100; Decrease Retained Earnings $200

d. Decrease Cash $300; Increase Inventory $100; Decrease Retained Earnings $200

A retailer sold a good to a customer for $300 for cash. The good cost the retailer $100. The customer is not satisfied with the quality of the item, so the retailer offers a $50 refund to the customer (no return of the good though). Which of the following represents the income statement impact for this refund?

a. COGS is recorded for $50

b. Sales Revenue is recorded for $100

c. Sales Revenue is decreased by $50

d. No impact

c. Sales Revenue is decreased by $50

A retailer sold a good to a customer for $300 for cash. The good cost the retailer $100. The customer is not satisfied with the quality of the item, so the retailer offers a $50 refund to the customer (no return of the good though). Which of the following represents what the retailer will record for this refund?

a. Decrease Accounts Receivable $50; Decrease Inventory $50

b. Increase Inventory $100; Decrease Retained Earnings $100

c. Decrease Cash $50; Increase Inventory $50

d. Decrease Cash $50; Decrease Retained Earnings $50

d. Decrease Cash $50; Decrease Retained Earnings $50

When a retailer experiences merchandise shrinkage, it should record:

a. Decrease Inventory, Increase Retained Earnings (Sales Revenue)

b. Decrease Inventory, Decrease Retained Earnings (COGS Expense)

c. Decrease Inventory, Decrease Accounts Receivable

d. Decrease Inventory, Decrease Cash

b. Decrease Inventory, Decrease Retained Earnings (COGS Expense)

A retailer counted its inventory at the end of the month and found that $50 of goods are

missing. What should the company record?

a. Decrease Accounts Receivable $50; Decrease Inventory $50

b. Decrease Inventory $50; Decrease Retained Earnings $50 (COGS Expense)

c. Decrease Cash $50; Decrease Inventory $50

d. Increase Cash $50; Decrease Retained Earnings $50 (Sales Revenue)

b. Decrease Inventory $50; Decrease Retained Earnings $50 (COGS Expense)

Which of the uncollectible accounts method generally overstates a company’s net realizable value of its account receivables?

Direct write off method

When a company estimates that some of its accounts receivables will be uncollectible under

the Direct Write-Off Method, it records:

a. An Increase to Allowance for Doubtful Accounts (increasingly negative) and a

decrease to Retained Earnings

b. An Increase to Accounts Receivable and an increase to Allowance for Doubtful

Accounts (increasingly negative)

c. An Increase to Accounts Receivable and an increase to Retained Earnings

d. Nothing – it doesn’t record anything until a specific account needs to be written off

d. Nothing – it doesn’t record anything until a specific account needs to be written of

When a company estimates that some of its accounts receivables will be uncollectible under

the Allowance Method, it records:

a. An Increase to Allowance for Doubtful Accounts (increasingly negative) and a

decrease to Retained Earnings

b. An Increase to Accounts Receivable and an increase to Allowance for Doubtful

Accounts (increasingly negative)

c. An Increase to Accounts Receivable and an increase to Retained Earnings

d. Nothing – it doesn’t record anything until a specific account needs to be written off

a. An Increase to Allowance for Doubtful Accounts (increasingly negative) and a

decrease to Retained Earnings

When a customer’s account is written off under the Direct Write-Off Method:

a. the accounts receivable account is decreased

b. bad debt expense is recorded

c. the net realizable value of accounts receivable remains unchanged

d. Both A and B

e. Both A and C

f. A, B, and C are all true

d. Both A and B

When a customer’s account is written off under the Allowance Method:

a. the accounts receivable account is decreased

b. bad debt expense is recorded

c. the net realizable value of accounts receivable remains unchanged

d. Both A and B

e. Both A and C

f. A, B, and C are all true

e. Both A and C

When a customer’s account that was previously written off is reinstated under the Direct

Write-Off Method:

a. To reinstate the receivable, accounts receivable is increased and allowance for

doubtful accounts is increased (increasingly negative). Then the collection is

recorded.

b. To reinstate the receivable, accounts receivable is decreased and allowance for

doubtful accounts is increased (increasingly negative). Then the collection is

recorded.

c. To reinstate the receivable, accounts receivable is increased and retained earnings is

increased. Then the collection is recorded.

d. Nothing is recorded

c. To reinstate the receivable, accounts receivable is increased and retained earnings is

increased. Then the collection is recorded.

When a customer’s account that was previously written off is reinstated and collected

under the Allowance Method:

a. To reinstate the receivable, accounts receivable is increased and allowance for

doubtful accounts is increased (increasingly negative). Then the collection is

recorded.

b. To reinstate the receivable, accounts receivable is decreased and allowance for

doubtful accounts is increased (increasingly negative). Then the collection is

recorded.

c. To reinstate the receivable, accounts receivable is increased and retained earnings is

increased. Then the collection is recorded.

d. Nothing is recorded

a. To reinstate the receivable, accounts receivable is increased and allowance for

doubtful accounts is increased (increasingly negative). Then the collection is

recorded.

Company B deems its receivable from Company X is entirely uncollectible and should be

written off. What should Company B record if it uses the Direct Write Off Method?

a. Decrease Accounts Receivable; Increase Retained Earnings

b. Decrease Accounts Receivable; Decrease Retained Earnings

c. Decrease Accounts Receivable; Decrease Allowance for Doubtful Accounts

d. Decrease Accounts Receivable; Increase Allowance for Doubtful Accounts

b. Decrease Accounts Receivable; Decrease Retained Earnings

Company B deems its receivable from Company X is entirely uncollectible and should be

written off. What should Company B record if it uses the Allowance Method? (We can

assume the company already made its bad debt expense estimate.)

a. Decrease Accounts Receivable; Increase Retained Earnings

b. Decrease Accounts Receivable; Decrease Retained Earnings

c. Decrease Accounts Receivable; Decrease Allowance for Doubtful Accounts

(closer to $0)

d. Decrease Accounts Receivable; Increase Allowance for Doubtful Accounts

(further from $0)

c. Decrease Accounts Receivable; Decrease Allowance for Doubtful Accounts

(closer to $0)

Alex Co provided services to Hart Co for $5,000 and provided Hart Co 30 days to pay. On day

30, Hart still has not paid. Six months later, Hart closes its business and files bankruptcy.

Alex Co decides this account receivable should be written off.

What should Alex Co record for this write-off if it uses the Direct Write-Off Method?

a. Increase allowance for doubtful accounts and decrease retained earnings

(related to bad debt expense)

b. Decrease accounts receivable and decrease retained earnings (related to bad

debt expense)

c. Decrease accounts receivable and decrease allowance for doubtful accounts

d. Increase accounts receivable and increase retained earnings (related to bad debt

expense)

b. Decrease accounts receivable and decrease retained earnings (related to bad

debt expense)

Alex Co provided services to Hart Co for $5,000 and provided Hart Co 30 days to pay. On

day 30, Hart still has not paid. Six months later, Hart closes its business and files

bankruptcy. Alex Co decides this account receivable should be written off. Then, a few

months after that, Hart’s bankruptcy negotiations are complete, and it is able to pay Alex

Co $3,000.

What should Alex record to reinstate the receivable just prior to the collection is Alex uses

the Direct Write-Off Method?

a. Increase allowance for doubtful accounts and decrease retained earnings

(related to bad debt expense)

b. Decrease accounts receivable and decrease retained earnings (related to bad

debt expense)

c. Decrease accounts receivable and decrease allowance for doubtful accounts

d. Increase accounts receivable and increase retained earnings (related to bad debt

expense)

d. Increase accounts receivable and increase retained earnings (related to bad debt

expense)

Alex Co provided services to Hart Co for $5,000 and provided Hart Co 30 days to pay. On day

30, Hart still has not paid. Six months later, Hart closes its business and files bankruptcy.

Alex Co decides this account receivable should be written off.

What should Alex Co record to write-off the receivable if it uses the Allowance Method

(assuming Alex Co has already performed an estimate of uncollectible accounts)?

a. Increase allowance for doubtful accounts and decrease retained earnings

(related to bad debt expense)

b. Decrease accounts receivable and decrease retained earnings (related to bad

debt expense)

c. Decrease accounts receivable and decrease allowance for doubtful accounts

d. Increase accounts receivable and increase retained earnings (related to bad debt

expense)

c. Decrease accounts receivable and decrease allowance for doubtful accounts

Alex Co provided services to Hart Co for $5,000 and provided Hart Co 30 days to pay. On day

30, Hart still has not paid. Six months later, Hart closes its business and files bankruptcy.

Alex Co decides this account receivable should be written off. Then, a few months after that,

Hart’s bankruptcy negotiations are complete and it is able to pay Alex Co $3,000.

What should Alex record to reinstate the receivable just prior to the collection if it uses the

Allowance Method?

a. Increase allowance for doubtful accounts and decrease retained earnings

(related to bad debt expense)

b. Decrease accounts receivable and decrease retained earnings (related to bad

debt expense)

c. Decrease accounts receivable and decrease allowance for doubtful accounts

d. Increase accounts receivable and increase allowance for doubtful accounts

d. Increase accounts receivable and increase allowance for doubtful accounts

Accounts Receivable has a balance of $250,000 and Allowance for Doubtful Accounts has a

balance of $50,000 (a negative $50,000 balance). What is the net realizable value of the

accounts receivable?

$200,000

At the beginning of the month, Allowance for Doubtful Accounts has a $10,000 balance. At

the end of the month, the Accounts Receivable balance is $1,000,000. Credit sales for the

month are $750,000. The company estimates that 3% of its accounts receivable will be

uncollectible. Assuming there is no other activity in the Allowance account for the month,

what should the ending balance of the Allowance for Doubtful Accounts be?

$30,000

Company X has $100,000 of sales this year, $50,000 of which were on account. Its current

Accounts Receivable balance is $80,000 and its ADA balance is $2,500. It estimates that 5%

of its accounts receivables will be uncollectible. What will the Allowance for Doubtful

Accounts balance be after accounting for this estimate?

$4,000

Company X has $100,000 of sales this year, $50,000 of which were on account. Its current

Accounts Receivable balance is $80,000 and its ADA balance is $2,500. It estimates that 5%

of its accounts receivables will be uncollectible. What should Company X record for bad

debt expense related to these accounts receivable?

$1,500

During a period of consistently increasing inventory costs, the method of inventory costing

that will result in lower Cost of Goods Sold is:

a. FIFO

b. Average cost

c. LIFO

d. Inventory costing method won’t affect COGS

a. FIFO

During a period of consistently rising inventory costs, the method of inventory costing that

will result in the highest Net Income is:

a. FIFO

b. Average cost

c. LIFO

d. Inventory costing method won’t affect Net Income

a. FIFO

Which inventory cost flow assumption most accurately reflects the actual flow of goods for

a grocery store?

a. FIFO

b. LIFO

c. Weighted average

d. Specific identification

a. FIFO

A retailer purchased goods from its supplier for $1,000 on account with credit terms stating a 5% discount if the retailer pays within 15 days.

Which of the following represents what the retailer will record for this purchase, assuming that it expects to pay within the discount period?

a. Increase Accounts Payable $1,050; Increase Inventory $1,050

b. Decrease Cash $950; Increase Inventory $950

c. Increase Accounts Payable $950; Increase Inventory $950

d. Increase Accounts Payable $1,000; Increase Inventory $950; Decrease Retained Earnings $50

e. Decrease Accounts Receivable $1,000; Decrease Retained Earnings $1,000

f. Increase Accounts Payable $1,000; Increase Inventory $1,000

g. Increase Accounts Payable $950; Decrease Retained Earnings $950

c. Increase Accounts Payable $950; Increase Inventory $950