Financial Accounting

Two categories of expenses for merchandising companies are

Cost of goods sold and operating expenses

 Sales revenue less cost of goods sold equals

 Gross profit

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit

 Inventory

 In a perpetual inventory system, the discount for paying within the discount period is credited to

: Inventory

Which of the following accounts has a normal credit balance?

Sales revenue

Which of the following is not a true statement about a multiple-step income statement?

Operating expenses are similar for merchandising and service companies

 Sales returns and allowances is classified as a(n)

Contra revenue account

 $6,400 sale, terms 2/10 n/30; $1,100 returned; paid within discount. Amount of check?

$5,194

 If goods in transit are FOB destination

 The seller has legal title until the goods are delivered

Inventory is

Reported as a current asset on the balance sheet

Beginning inventory plus cost of goods purchased equals

Cost of goods available for sale

 Cost of goods sold is computed as

 Beginning inventory + cost of goods purchased – ending inventory

 LIFO assumes the cost of the latest units purchased are

 The first to be allocated to cost of goods sold

 Which statement is correct with respect to inventories?

Under FIFO, the ending inventory is based on the latest units purchased

Same goods available; prices increased. Company using ______ will have the highest ending inventory

FIFO

 The lower-of-cost-or-net realizable value rule is an example of

Conservatism

Which is not an objective of internal control?

 Overstate liabilities in order to be conservative

 Which is not a result of the Sarbanes-Oxley Act?

Companies must file financial statements with the Internal Revenue Service

Reconciling a bank statement every month is an example of

Independent internal verification

The entry to replenish petty cash includes a credit to

Cash

Petty cash $65; on hand $5 cash + $55 receipts. Replenish entry would

 Debit Cash Over and Short for $5

 If a company fails to record estimated bad debt expense

 Expenses are understated

Aging estimates $15,200 uncollectible; Allowance has $1,220 credit. Adjustment?

Debit Bad Debt Expense $13,980 (and credit Allowance $13,980)

 A debit balance in Allowance for Doubtful Accounts

 Indicates actual write-offs have exceeded previous provisions

Two methods for accounting for uncollectible accounts are

Direct write-off method and the allowance method

 Adjusting entry to record estimated uncollectibles (allowance method) includes

Debit Bad Debt Expense; credit Allowance for Doubtful Accounts

The percentage-of-receivables method emphasizes

Cash realizable value

Allowance for Doubtful Accounts on the balance sheet

Is offset against Accounts Receivable (contra-asset)

Which is not one of the main factors that contribute to fraudulent activity?

Incompatible duties.

Different people post the A/R subledger and the A/R control account—this is

Segregation of duties.

Cash equivalents are highly liquid investments with maturities of

 3 months or less when purchased

 Income from operations will always result if

Gross profit exceeds operating expenses.

The gross profit rate is gross profit divided by

Net sales

For a merchandiser, gross profit = net sales minus

 Cost of goods sold

Net sales is sales revenue minus

Sales discounts and sales returns and allowances

Factor determining whether goods are included in the physical count

 Legal title

 Include which items in the physical inventory?

: Goods in transit from another company shipped FOB shipping point

 FOB shipping point means

The buyer must pay the freight costs

Which of the following is an adjustment when reconciling from balance per bank to balance per book?

 NSF checks

 Face value of note × annual interest rate × time =

Interest

 COGS ÷ Average Inventory

 Inventory turnover

When ending inventory is overstated

Net income is overstated

Which of the following is false?

Sales discounts has a normal balance of credit

Inventory can be valued using all of the following except

MACRS