Financial Accounting Quiz/Textbook Material (Ch. 4-7) Exam #2

Inventory

Items a company intends for sale to customers

operating income

Gross Profit minus Operating Expenses.

A multiple-step income provides the advantage

Separating revenues and expenses based on their different types of activities

Which cost flow assumption must be used for financial reporting if it is also used for tax reporting?

LIFO.

At the end of the year, Marline Corporation determines that its ending inventory has a cost of $2,000 and a net realizable value of $1,900. What would be the effect of the adjustment to write down inventory to net realizable value?

Decrease in net income.

A company's gross profit ratio measures:

The amount by which the sale of inventory exceeds its cost per dollar of sales.

Fan Company purchases inventory on account. The entry to record this purchase using a periodic inventory system would include a debit to

purchases

Fan Company sells inventory on account. The entry to record this sale using a periodic inventory system would include a:

Credit to Service Revenue.

If a company understates in ending inventory in the current period, what effect will this have on cost of goods sold in the following period?

Understate cost of goods sold.

If a company understates in ending inventory in the current period, what effect will this have on the balance of Retained Earnings at the end of the following period?

Have no effect on retained earnings.

Section 404 of the Sarbanes-Oxley Act requires companies to

Document and assess internal controls.

Who is ultimately responsible for the establishment and success of a company's internal control system?

The company's top executives.

Consistent with the COSO framework, an effective internal control system includes the control environment. The control environment refers to:

The ethical tone set by top management.

Which of the following is considered cash for financial reporting purposes?

Amounts held in savings and checking accounts.

Effective internal control over cash includes the requirement that:

The person who makes deposits should NOT record the deposits.

Which of the following adjusts the bank's balance of cash in a bank reconciliation?

Deposits outstanding.

Which of the following adjusts the company's balance of cash in a bank reconciliation?

Interest on bank deposit.

A company's petty cash refers to:

Cash on hand to pay for minor purchases.

When employee expenditures with company-issued credit cards are recorded

Accounts Payable is credited.

Financing cash flows include which of the following?

Cash received from the issuance of common stock.

A company provides services to a customer in the current year and then determines in the following year that the customer's account needs to be classified as uncollectible. If the company uses the direct write-off method, which of the following would be recorded in the following year at the time of the write-off?

Debit Bad Debt Expense.

Schmidt Company's Accounts Receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4,000, and its bad debt expense is $3,800. The net realizable value of accounts receivable is:

$96,000.

When a company provides services on account, which of the following accounts is debited?

Accounts Receivable.

On April 1, 20X1, Nelsen Inc. accepts a $100,000, 8% note. The note receivable and interest are due on March 31, 20X2 (one year later). On March 31, 20X2, Nelson Inc. will record interest revenue of:

$2,000.

The receivables turnover ratio is a measure of:

The number of times during a year that the average accounts receivable balance is collected.

A sales discount is recorded by the seller as a(n):

Contra revenue.

Use the information below to calculate the receivables turnover ratio:

Net Credit Sales$200,000 Beginning Accounts Receivable$40,000 Ending Accounts Receivable$10,000 Cash$20,000

8

A company has the following aging schedule of its accounts receivable with the estimated percent uncollectible:

Age Group Amount Receivable Estimated Percent Uncollectible Not yet due $175,000 4% 0-60 days past due $40,000 10% 61-120 days past due $10,000 30% More than 120 days past due $5,000 60%

Assuming the balance of Allowance for Uncollectible Accounts is $3,000 (credit) before adjustment, which of the following would be recorded in the year-end adjusting entry?

Debit Bad Debt Expense for $14,000.

Under the allowance method for uncollectible accounts, the balance of Allowance for Uncollectible Accounts increases when:

Future bad debts are estimated.

On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a debit of $500 and that the company estimates 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on December 31 will be

$6,100.

bank reconciliation

matches the balance of cash in the bank account with the balance of cash in the company's own records

NSF checks

these occur when customers' checks are written on "nonsufficient funds."

collusion

secret agreement or cooperation

Fraud Triangle

opportunity, pressure, rationalization

Fraudulent reporting by management could include: (LO4-1)

a.

Fictitious revenues from a fake customer.

b.

Improper asset valuation.

c.

Mismatching revenues and expenses.

d.

All of the above.

d

The Sarbanes-Oxley Act (SOX) mandates which of the following? (LO4-1)

a.

Increased regulations related to auditor-client relations.

b.

Increased regulations related to internal control.

c.

Increased regulations related to corporate executive accountability.

d.

All of the above.

d

What is the concept behind separation of duties in establishing internal control? (LO4-2)

a.

Employee fraud is less likely to occur when access to assets and access to accounting records are separated.

b.

The company's financial accountant should not share information with the company's tax accountant.

c.

Duties of middle-level managers of the company should be clearly separated from those of top executives.

d.

The external auditors of the company should have no contact with managers while the audit is taking place.

a

Which of the following is considered cash for financial reporting purposes? (LO4-3)

a.

Accounts receivable.

b.

Investments with maturity dates greater than three months.

c.

Checks received from customers.

d.

Accounts payable.

c

Which of the following generally would not be considered good internal control of cash receipts? (LO4-4)

a.

Allowing customers to pay with a debit card.

b.

Requiring the employee receiving the cash from the customer to also deposit the cash into the company's bank account.

c.

Recording cash receipts as soon as they are received.

d.

Allowing customers to pay with a credit card.

b

Which of the following adjusts the bank's balance of cash in a bank reconciliation? (LO4-5)

a.

NSF checks.

b.

Service fees.

c.

An error by the company.

d.

Checks outstanding.

d

Which of the following adjusts the company's balance of cash in a bank reconciliation? (LO4-5)

a.

Interest earned.

b.

Checks outstanding.

c.

Deposits outstanding.

d.

An error by the bank.

a

The purpose of a petty cash fund is to: (LO4-6)

a.

Provide a convenient form of payment for the company's customers.

b.

Pay employee salaries at the end of each period.

c.

Provide cash on hand for minor expenditures.

d.

Allow the company to save cash for major future purchases.

c

Operating cash flows would include which of the following? (LO4-7)

a.

Repayment of borrowed money.

b.

Payment for employee salaries.

c.

Services provided to customers on account.

d.

Payment for a new operating center.

b

Which of the following could cause a company to have a high ratio of cash to noncash assets? (LO4-8)

a.

Highly volatile operations.

b.

Low dividend payments.

c.

Significant foreign operations.

d.

All of these factors could contribute to a high ratio of cash to noncash assets.

d

Accounts receivable are best described as: (LO5-1)

a.

Liabilities of the company that represent the amount owed to suppliers.

b.

Amounts that have previously been received from customers.

c.

Assets of the company representing the amount owed by customers.

d.

Amounts that have previously been paid to suppliers.

c

On March 17, Fox Lumber sells materials to Whitney Construction for $12,000, terms 2/10, n/30. Whitney pays for the materials on March 23. What amount would Fox record as revenue on March 17? (LO5-2)

a.

$12,400.

b.

$11,760.

c.

$12,000.

d.

$12,240.

c

Refer to the information in the previous question. What is the amount of net revenues (sales minus sales discounts) as of March 23? (LO5-2)

a.

$0.

b.

$11,760.

c.

$12,000.

d.

$12,240.

b

Suppose the balance of Allowance for Uncollectible Accounts at the end of the current year is $400 (credit) before any adjustment. The company estimates future uncollectible accounts to be $3,200. At what amount would bad debt expense be reported in the current year's income statement? (LO5-3)

a.

$400.

b.

$2,800.

c.

$3,200.

d.

$3,600

b

Suppose the balance of Allowance for Uncollectible Accounts at the end of the current year is $400 (debit) before any adjustment. The company estimates future uncollectible accounts to be $3,200. At what amount would bad debt expense be reported in the current year's income statement? (LO5-3)

a.

$400.

b.

$2,800.

c.

$3,200.

d.

$3,600.

d

Kidz Incorporated reports the following aging schedule of its accounts receivable with the estimated percent uncollectible. What is the total estimate of uncollectible accounts using the aging method? (LO5-4)

Age Group

Amount Receivable

Estimated Percent Uncollectible

0-60 days

$20,000

2%

61-90 days

6,000

15%

More than 90 days past due

2,000

50%

Total

$28,000

a.

$1,150.

b.

$1,900.

c.

$2,300.

d.

$5,900.

c

Using the allowance method, the entry to record a write-off of accounts receivable will include: (LO5-5)

a.

A debit to Bad Debt Expense.

b.

A debit to Allowance for Uncollectible Accounts.

c.

No entry because an allowance for uncollectible accounts was established in an earlier period.

d.

A debit to Service Revenue.

b

The direct write-off method is generally not permitted for financial reporting purposes because: (LO5-6)

a.

Compared to the allowance method, it would allow greater flexibility to managers in manipulating reported net income.

b.

This method is primarily used for tax purposes.

c.

It is too difficult to accurately estimate future bad debts.

d.

Expenses (bad debts) are not properly matched with the revenues (credit sales) they help to generate.

d

On January 1, 2018, Roberson Supply borrows $10,000 from Nees Manufacturing by signing a 9% note due in eight months. Calculate the amount of interest revenue Nees will record on September 1, 2018, the date that the note is due. (LO5-7)

a.

$300.

b.

$600.

c.

$900.

d.

$1,000.

b

At the beginning of 2018, Clay Ventures has total accounts receivable of $100,000. By the end of 2018, Clay reports net credit sales of $900,000 and total accounts receivable of $200,000. What is the receivables turnover ratio for Clay Ventures? (LO5-8)

a.

2.0.

b.

4.5.

c.

6.0.

d.

9.0.

c

Which of following companies record revenues when selling inventory? (LO6-1)

a.

Service companies.

b.

Manufacturing companies.

c.

Merchandising companies.

d.

Both manufacturing and merchandising companies.

d

At the beginning of the year, Bennett Supply has inventory of $3,500. During the year, the company purchases an additional $12,000 of inventory. An inventory count at the end of the year reveals remaining inventory of $4,000. What amount will Bennett report for cost of goods sold? (LO6-2)

a.

$11,000.

b.

$11,500.

c.

$12,000.

d.

$12,500.

b

Which of the following levels of profitability in a multiple-step income statement represents revenues from the sale of inventory less the cost of that inventory? (LO6-2)

a.

Gross profit.

b.

Operating income.

c.

Income before income taxes.

d.

Net income.

a

Madison Outlet has the following inventory transactions for the year: (LO6-3)

Date

Transaction

Number of Units

Unit Cost

Total Cost

Jan. 1

Beginning inventory

10

$200

$2,000

Mar. 14

Purchase

15

300

4,500

$6,500

Jan. 1-Dec. 31

Total sales to customers

12

Page 302

What amount would Madison report for cost of goods sold using FIFO?

a.

$2,600.

b.

$2,900.

c.

$3,600.

d.

$3,900.

a

Which inventory cost flow assumption generally results in the lowest reported amount for cost of goods sold when inventory costs are rising? (LO6-4)

a.

Lower of cost and net realizable value.

b.

First-in, first-out (FIFO).

c.

Last-in, first-out (LIFO).

d.

Weighted-average cost.

b

Using a perpetual inventory system, the purchase of inventory on account would be recorded as: (LO6-5)

a.

Debit Cost of Goods Sold; credit Inventory.

b.

Debit Inventory; credit Sales Revenue.

c.

Debit Purchases; credit Accounts Payable.

d.

Debit Inventory; credit Accounts Payable.

d

At the end of a reporting period, Maxwell Corporation determines that its ending inventory has a cost of $1,000 and a net realizable value of $800. What would be the effect(s) of the adjustment to write down inventory to net realizable value? (LO6-6)

a.

Decrease total assets.

b.

Decrease net income.

c.

Decrease retained earnings.

d.

All of these answer choices are correct.

d

For the year, Simmons Incorporated reports net sales of $100,000, cost of goods sold of $80,000, and an average inventory balance of $40,000. What is Simmons' gross profit ratio? (LO6-7)

a.

20%.

b.

25%.

c.

40%.

d.

50%.

a

Using a periodic inventory system, the purchase of inventory on account would be recorded as: (LO6-8)

a.

Debit Cost of Goods Sold; credit Inventory.

b.

Debit Inventory; credit Sales Revenue.

c.

Debit Purchases; credit Accounts Payable.

d.

Debit Inventory; credit Accounts Payable.

c

Suppose Ajax Corporation overstates its ending inventory amount. What effect will this have on the reported amount of cost of goods sold in the year of the error? (LO6-9)

a.

Overstate cost of goods sold.

b.

Understate cost of goods sold.

c.

Have no effect on cost of goods sold.

d.

Not possible to determine with information given.

b

We normally record a long-term asset at the: (LO7-1)

a.

Cost of the asset only.

b.

Cost of the asset plus all costs necessary to get the asset ready for use.

c.

Appraised value.

d.

Cost of the asset, but subsequently adjust it up or down to appraised value.

b

Sandwich Express incurred the following costs related to its purchase of a bread machine. (LO7-1)

Cost of the equipment

$20,000

Sales tax (8%)

1,600

Shipping

2,200

Installation

1,400

Total costs

$25,200

At what amount should Sandwich Express record the bread machine?

a.

$20,000.

b.

$21,600.

c.

$23,800.

d.

$25,200.

d

Research and development costs generated internally: (LO7-2)

a.

Are recorded as research and development assets.

b.

Are capitalized and then amortized.

c.

Should be included in the cost of the patent they relate to.

d.

Should be expensed.

d

Which of the following expenditures should be recorded as an expense? (LO7-3)

a.

Repairs and maintenance that maintain current benefits.

b.

Adding a major new component to an existing asset.

c.

Replacing a major component of an existing asset.

d.

Successful legal defense of an intangible asset.

a

Which of the following will maximize net income by minimizing depreciation expense in the first year of the asset's life? (LO7-4)

a.

Short service life, high residual value, and straight-line depreciation.

b.

Long service life, high residual value, and straight-line depreciation.

c.

Short service life, low residual value, and double-declining-balance depreciation.

d.

Long service life, high residual value, and double-declining-balance depreciation.

b

The book value of an asset is equal to the: (LO7-4)

a.

Replacement cost.

b.

Asset's cost less accumulated depreciation.

c.

Asset's fair value less its historical cost.

d.

Historical cost plus accumulated depreciation.

b

The balance in the Accumulated Depreciation account represents: (LO7-4)

a.

The amount charged to expense in the current period.

b.

A contra expense account.

c.

A cash fund to be used to replace plant assets.

d.

The amount charged to depreciation expense since the acquisition of the plant asset.

d

Which of the following statements is true regarding the amortization of intangible assets? (LO7-5)

a.

Intangible assets with a limited useful life are not amortized.

b.

The service life of an intangible asset is always equal to its legal life.

c.

The expected residual value of most intangible assets is zero.

d.

In recording amortization, Accumulated Amortization is always credited.

c

Equipment originally costing $95,000 has accumulated depreciation of $30,000. If it sells the equipment for $55,000, the company should record: (LO7-6)

a.

No gain or loss.

b.

A gain of $10,000.

c.

A loss of $10,000.

d.

A loss of $40,000.

c

The return on assets is equal to the: (LO7-7)

a.

Profit margin plus asset turnover.

b.

Profit margin minus asset turnover.

c.

Profit margin times asset turnover.

d.

Profit margin divided by asset turnover.

c