ACC 556 Week 5 Midterm Exam – Strayer University NEW

ACC/556 Week 5 Midterm Exam – Strayer NEW

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Chapters 1 Through 8

CHAPTER 1

INTRODUCTION TO FINANCIAL STATEMENTS

TRUE-FALSE STATEMENTS
1. A business organized as a separate legal entity owned by stockholders is a partnership.

2. Corporate stockholders generally pay higher taxes but have no personal liability.

3. The liability of corporate stockholders is limited to the amount of their investment.

4. The majority of U.S. business is transacted by proprietorships.

5. Proprietorships in the United States generate more revenue than the other two forms of business enterprise.

6. Owners of business firms are the only people who need accounting information.

7. Management of a business enterprise is the major external user of information.

8. External users of accounting information are managers who plan, organize, and run a business.

9. The information needs and questions of external users vary considerably.

10. Accounting communicates financial information about a business to both internal and external users.

11. Two primary external users of accounting information are investors and creditors.

12. Financing activities for corporations include borrowing money and selling shares of their own stock.

13. Investing activities involve collecting the necessary funds to support the business.

14. The purchase of equipment is an example of a financing activity.

15. Assets are resources owned by a business and provide future services or benefits to the business.

16. Payments to owners are operating activities.

17. The economic resources that are owned by a business are called stockholders’ equity.

18. Operating activities involve putting the resources of the business into action to generate a profit.

19. A business is usually involved in two types of activity—financing and investing.

20. Net income for the period is determined by subtracting total expenses and dividends from revenues.

21. A different set of financial statements usually is prepared for each user.

22. The heading for the income statement might include the line “As of December 31, 20xx.”

23. Net income is another term for revenue.

24. Cash is another term for stockholders’ equity.

25. The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company for a specific period of time.

26. The balance sheet reports assets and claims to those assets at a specific point in time.

27. The basic accounting equation states that Assets = Liabilities.

28. One way of stating the accounting equation is: Assets + Liabilities = Stockholders’ Equity.

29. The accounting equation can be expressed as Assets – Stockholders’ Equity = Liabilities.

30. The accounting equation can be expressed as Assets – Liabilities = Stockholders’ Equity.

31. If the assets owned by a business total $150,000 and liabilities total $105,000, stockholders’ equity totals $45,000.

32. If the assets owned by a business total $100,000 and liabilities total $65,000, stockholders’ equity totals $25,000.

33. Claims of creditors and owners on the assets of a business are called liabilities.

34. Creditors’ rights to assets supersede owners’ rights to the assets.

35. All publicly traded U.S. companies must provide their stockholders with an annual report each year.

36. Information in the notes to the financial statements has to be quantifiable (numeric).

37. An auditor is an accounting professional who conducts an independent examination of the accounting data presented by a company.

38. The management discussion and analysis (MD & A) section of an annual report covers various financial aspects of a company.

39. Explanatory notes and supporting schedules are an optional part of an annual report.

40. Examples of notes are descriptions of the significant accounting policies and methods used in preparing the statements, explanations of contingencies, and various statistics.

MULTIPLE CHOICE QUESTIONS
41. The proprietorship form of business organization
a. must have at least two owners in most states.
b. generally receives favorable tax treatment relative to a corporation.
c. combines the records of the business with the personal records of the owner.
d. is classified as a separate legal entity.

42. A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. has tax advantages over a proprietorship or partnership.

43. The partnership form of business organization
a. is a separate legal entity.
b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.

44. Which of the following is not one of the three forms of business organization?
a. Corporations
b. Partnerships
c. Proprietorships
d. Investors

45. Most business enterprises in the United States are
a. proprietorships and partnerships.
b. partnerships.
c. corporations.
d. government units.

46. A business organized as a separate legal entity is a
a. corporation.
b. proprietor.
c. government unit.
d. partnership.

47. Which of the following is not an advantage of the corporate form of business organization?
a. No personal liability
b. Easy to transfer ownership
c. Favorable tax treatment
d. Easy to raise funds

48. An advantage of the corporate form of business is that
a. it has limited life.
b. its owner’s personal resources are at stake.
c. its ownership is easily transferable via the sale of shares of stock.
d. it is simple to establish.

49. Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?
a. Reduced legal liability for investors
b. Harder to transfer ownership
c. Lower taxes
d. Most common form of organization

50. A corporation has which of the following set of characteristics?
a. Shared control, tax advantages, increased skills and resources
b. Simple to set up and maintains control with founder
c. Easier to transfer ownership and raise funds, no personal liability
d. Harder to raise funds and gives owner control

51. A small neighborhood barber shop that is operated by its owner would likely be organized as a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.

52. A local retail shop has been operating as a sole proprietorship. The business is growing and now the owner wants to incorporate. Which of the following is not a reason for this owner to incorporate?
a. Ability to raise capital for expansion
b. Desire to limit the owner’s personal liability
c. The prestige of operating as a corporation
d. The ease in transferring shares of the corporation’s stock

53. All of the following are advantages for choosing a proprietorship for a business except
a. a proprietorship is a simple form of business to set up.
b. a proprietorship gives the owner control of the business.
c. proprietorship receive more favorable tax treatment.
d. transfer of ownership is easily achieved through stock sales.

54. Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii. During the time Jill is away from the business, Jack increases the debts of the business by $20,000. Which of the following statements is true regarding this debt?
a. Only Jack is personally liable for the debt, since he has been the managing partner during that time.
b. Only Jill is personally liable for the debt of the business, since Jack has been working and she has not.
c. Both Jack and Jill are personally liable for the business debt.
d. Neither Jack nor Jill is personally liable for the business debt, since the partnership is a separate legal entity.

55. Which one of the following questions is most likely asked by an internal human resources director for the company?
a. Which product line is most profitable?
b. What price for our product will maximize the company income?
c. What average pay raise is affordable for employees this year?
d. Should any product lines be eliminated?

56. Which of the following are internal reports that accounting provides to internal users?
a. Forecasts of cash needs for next year.
b. Financial comparisons of operating activity alternatives.
c. Both forecasts of cash needs and financial comparisons are internal reports.
d. Neither forecasts of cash needs or financial comparisons is an internal report.

57. Which of the following is the best definition of an internal user of accounting information?
a. Investors who use accounting information to decide whether to buy or sell stock.
b. Creditors like banks that use accounting information to evaluate the risk of lending money.
c. Labor unions who use accounting information to examine the ability of the company to pay increased wages and benefits.
d. Managers who use accounting information to plan, organize, and run a business.

58. External users of accounting information, like the Internal Revenue Service, are most commonly known as
a. taxing authorities.
b. labor unions.
c. customers.
d. regulatory agencies.

59. Which of the following statements is not true regarding the Sarbanes-Oxley Act (SOX)?
a. The Act calls for increased oversight responsibilities for boards of directors.
b. The Act has resulted in increased penalties for financial fraud by top management.
c. The Act calls for decreased independence of outside auditors reviewing corporate financial statements.
d. The Act is meant to decrease the likelihood of unethical corporate behavior.

60. Which of the following is not a step for solving an ethical dilemma?
a. Identifying the alternatives and weighing the impact of each alternative on various stakeholders.
b. Certifying the ethical accuracy of the financial information.
c. Identifying and analyzing the principal elements in the situation.
d. Recognizing the ethical situation and issues involved.

61. Which of the following is the most appropriate and modern definition of accounting?
a. The information system that identifies, records, and communicates the economic events of an organization to interested users.
b. A means of collecting information.
c. The interconnected network of subsystems necessary to operate a business.
d. Electronic collection, organization, and communication of vast amounts of information.

62. Which of the following would not be considered an internal user of accounting data for the Xanadu Company?
a. President of the company
b. Production manager
c. Merchandise inventory clerk
d. President of the employees’ labor union

63. Which of the following groups uses accounting information primarily to insure the entity is operating within prescribed rules?
a. Taxing authorities
b. Regulatory agencies
c. Labor Unions
d. Management

64. The group of users of accounting information charged with achieving the goals of the business is its
a. auditors.
b. investors.
c. managers.
d. creditors.

65. Which of the following groups uses accounting information to determine whether the company can pay its obligations?
a. Investors in common stock
b. Marketing managers
c. Creditors
d. Chief Financial Officer

66. Which of the following groups uses accounting information to determine whether the company’s net income will result in a stock price increase?
a. Investors in common stock
b. Marketing managers
c. Creditors
d. Chief Financial Officer

67. Which of the following groups uses accounting information to determine whether a marketing proposal will be cost effective?
a. Investors in common stock
b. Marketing managers
c. Creditors
d. Chief Financial Officer

68. Which of the following would not be considered an external user of accounting data for the Julian Company?
a. Internal Revenue Service agent
b. Management
c. Creditors
d. Customers

69. Which of the following would not be considered an internal user of accounting data for a company?
a. The president of a company
b. The controller of a company
c. Creditor of a company
d. Salesperson of a company

70. Which of the following is a primary user of accounting information with a direct financial interest in the business?
a. Taxing authority
b. Creditor
c. Regulatory agency
d. Labor union

71. Which of the following is a user of accounting information with an indirect financial interest in a business?
a. A financial adviser
b. Management
c. Investor
d. Creditor

72. Which type of corporate information is readily available to investors?
a. Financial comparison of operating alternatives
b. Marketing strategies for a product that will be introduced in eighteen months
c. Forecasts of cash needs for the upcoming year
d. Amount of net income retained in the business

73. Which of the following statements concerning users of accounting information is incorrect?
a. Management is considered an internal user.
b. Present creditors are considered external users.
c. Regulatory authorities are considered internal users.
d. Taxing authorities are considered external users.

74. External users want answers to all of the following questions except
a. Is the company earning satisfactory income?
b. Will the company be able to pay its debts as they come due?
c. Will the company be able to afford employee pay raises this year?
d. How does the company compare in profitability with competitors?

75. Which type of corporate information is not available to investors?
a. Dividend history
b. Forecast of cash needs for the upcoming year
c. Cash provided by investing activities
d. Beginning cash balance

76. The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n)
a. account payable.
b. account receivable.
c. revenue.
d. expense.

77. The right to receive money in the future is called a(n)
a. account payable.
b. account receivable.
c. liability.
d. revenue.

78. Which of the following is not a principal type of business activity?
a. Operating
b. Investing
c. Financing
d. Delivering

79. Borrowing money is an example of a(n)
a. delivering activity.
b. financing activity.
c. investing activity.
d. operating activity.

80. Issuing shares of stock in exchange for cash is an example of a(n)
a. delivering activity.
b. investing activity.
c. financing activity.
d. operating activity.

81. Debt securities sold to investors that must be repaid at a particular date some years in the future are called
a. accounts payable.
b. notes receivable.
c. taxes payable.
d. bonds payable.

82. Which of the following activities involves collecting the necessary funds to support the business?
a. Operating
b. Investing
c. Financing
d. Delivering

83. Buying assets needed to operate a business is an example of a(n)
a. delivering activity.
b. financing activity.
c. investing activity.
d. operating activity.

84. Which activities involve acquiring the resources to run the business?
a. Delivering
b. Financing
c. Investing
d. Operating

85. Which activities involve putting the resources of the business into action to generate a profit?
a. Delivering
b. Financing
c. Investing
d. Operating

86. The statement of cash flows would disclose the payment of a dividend
a. nowhere on the statement.
b. in the operating activities section.
c. in the investing activities section.
d. in the financing activities section.

87 Buying and selling products are examples of
a. operating activities.
b. investing activities.
c. financing activities.
d. delivering activities.

88. The common characteristic possessed by all assets is
a. long life.
b. great monetary value.
c. tangible nature.
d. future economic benefit.

89. Expenses are incurred
a. only on rare occasions.
b. to produce assets.
c. to produce liabilities.
d. to generate revenues.

90. The cost of assets consumed or services used is also known as
a. a revenue.
b. an expense.
c. a liability.
d. an asset.

91. Resources owned by a business are referred to as
a. stockholders’ equity.
b. liabilities.
c. assets.
d. revenues.

92. The best definition of assets is the
a. cash owned by the company.
b. collections of resources belonging to the company and the claims on these resources.
c. owners’ investment in the business.
d. resources belonging to a company that have future benefit to the company.

93. Debts and obligations of a business are referred to as
a. assets.
b. equities.
c. liabilities.
d. expenses.

94. Jackson Company recorded the following cash transactions for the year:
Paid $135,000 for salaries.
Paid $60,000 to purchase office equipment.
Paid $15,000 for utilities.
Paid $6,000 in dividends.
Collected $245,000 from customers.
What was Jackson’s net cash provided by operating activities?
a. $95,000
b. $35,000
c. $110,000
d. $89,000

95. Gibson Company recorded the following cash transactions for the year:
Paid $180,000 for salaries.
Paid $80,000 to purchase office equipment.
Paid $20,000 for utilities.
Paid $8,000 in dividends.
Collected $310,000 from customers.
What was Gibson’s net cash provided by operating activities?
a. $110,000
b. $30,000
c. $130,000
d. $102,000

96. When expenses exceed revenues, which of the following is true?
a. a net loss results
b. a net income results
c. assets equal liabilities
d. assets are increased

97. Which of the following is an asset?
a. Mortgage payable
b. Investments
c. Common stock
d. Retained earnings

98. Which of the following is not a liability?
a. Unearned Service Revenue
b. Accounts Payable
c. Accounts Receivable
d. Interest Payable

99. Which of the following financial statements is divided into major categories of operating, investing, and financing activities?
a. The income statement.
b. The balance sheet.
c. The retained earnings statement.
d. The statement of cash flows.

100. The retained earnings statement shows all of the following except
a. the amounts of changes in retained earnings during the period.
b. the causes of changes in retained earnings during the period.
c. the time period following the one shown for the income statement.
d. beginning retained earnings on the first line of the statement.

101. Ending retained earnings for a period is equal to beginning
a. Retained earnings + Net income + Dividends
b. Retained earnings – Net income – Dividends
c. Retained earnings + Net income – Dividends
d. Retained earnings – Net income + Dividends

102. Which of the following statements is true?
a. Amounts received from issuing stock are revenues.
b. Amounts paid out as dividends are not expenses.
c. Amounts paid out as dividends are reported on the income statement.
d. Amounts received from issued stock are reported on the income statement.

103. Dividends are reported on the
a. income statement.
b. retained earnings statement.
c. balance sheet.
d. income statement and balance sheet.

104. Dividends paid
a. increase assets.
b. increase expenses.
c. decrease revenues.
d. decrease retained earnings.

105. The financial statement that summarizes the changes in retained earnings for a specific period of time is the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. retained earnings statement.

106. To show how successfully your business performed during a period of time, you would report its revenues and expenses in the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. retained earnings statement.

107. Net income results when
a. Assets > Liabilities.
b. Revenues = Expenses.
c. Revenues > Expenses.
d. Revenues < Expenses.

108. Net income will result during a time period when
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.

109. Retained earnings at the end of the period is equal to
a. retained earnings at the beginning of the period plus net income minus liabilities.
b. retained earnings at the beginning of the period plus net income minus dividends.
c. net income.
d. assets plus liabilities.

110. Which of the following financial statements is concerned with the company at a point in time?
a. Balance sheet
b. Income statement
c. Retained earnings statement
d. Statement of cash flows

111. The company’s policy toward dividends and growth could best be determined by examining the
a. balance sheet.
b. income statement.
c. retained earnings statement.
d. statement of cash flows.

112. An income statement
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time.
c. reports the assets, liabilities, and stockholders’ equity at a specific date.
d. presents the revenues and expenses for a specific period of time.

113. If the retained earnings account increases from the beginning of the year to the end of the year, then
a. net income is less than dividends.
b. a net loss is less than dividends.
c. additional investments are less than net losses.
d. net income is greater than dividends.

114. The retained earnings statement would not show
a. the retained earnings beginning balance.
b. revenues and expenses.
c. dividends.
d. the ending retained earning balance.

115. If the retained earnings account decreases from the beginning of the year to the end of the year, then
a. net income is less than dividends.
b. there was a net income and no dividends.
c. additional investments are less than net losses.
d. net income is greater than dividends.

116. Which financial statement is prepared first?
a. Balance sheet
b. Income statement
c. Retained earnings statement
d. Statement of cash flows

117. An income statement shows
a. revenues, liabilities, and stockholders’ equity.
b. expenses, dividends, and stockholders’ equity.
c. revenues, expenses, and net income.
d. assets, liabilities, and stockholders’ equity.

118. In a study session, a classmate makes this statement “Dividends are listed as expenses on the income statement.” What is your best response to this statement?
a. I’ve been struggling with that concept and I feel that dividends should be shown on the balance sheet as assets.
b. You are right. Revenues and expenses are shown on the income statement. Dividends are a cost of generating revenues and that makes them an expense. Why else would a corporation pay dividends?
c. Dividends represent a portion of corporate profits that are paid to the shareholders. They belong on the retained earnings statement.
d. Dividends are deducted from retained earnings on the balance sheet.

119. Henson Company began the year with retained earnings of $330,000. During the year, the company recorded revenues of $500,000, expenses of $380,000, and paid dividends of $40,000. What was Henson’s retained earnings at the end of the year?
a. $490,000
b. $410,000
c. $790,000
d. $450,000

120. Pinson Company began the year with retained earnings of $570,000. During the year, the company recorded revenues of $600,000, expenses of $380,000, and paid dividends of $140,000. What was Pinson’s retained earnings at the end of the year?
a. $930,000
b. $650,000
c. $1,030,000
d. $500,000

121. Finney Company began the year by issuing $40,000 of common stock for cash. The company recorded revenues of $370,000, expenses of $320,000, and paid dividends of $20,000. What was Finney’s net income for the year?
a. $30,000
b. $70,000
c. $50,000
d. $90,000

122. Lankston Company began the year by issuing $90,000 of common stock for cash. The company recorded revenues of $825,000, expenses of $720,000, and paid dividends of $45,000. What was Lankston’s net income for the year?
a. $60,000
b. $150,000
c. $105,000
d. $195,000

123. Gilkey Corporation began the year with retained earnings of $465,000. During the year, the company issued $630,000 of common stock, recorded expenses of $1,800,000, and paid dividends of $120,000. If Gilkey’s ending retained earnings was $495,000, what was the company’s revenue for the year?
a. $1,830,000
b. $1,950,000
c. $2,460,000
d. $2,580,000

124. Kilmer Corporation began the year with retained earnings of $620,000. During the year, the company issued $840,000 of common stock, recorded expenses of $2,400,000, and paid dividends of $160,000. If Kilmer’s ending retained earnings was $660,000, what was the company’s revenue for the year?
a. $2,440,000
b. $2,600,000
c. $3,280,000
d. $33,440,000

125. A balance sheet shows
a. revenues, liabilities, and stockholders’ equity.
b. expenses, dividends, and stockholders’ equity.
c. revenues, expenses, and dividends.
d. assets, liabilities, and stockholders’ equity.

126. The accounting equation may be expressed as
a. Assets = Stockholders’ Equity – Liabilities.
b. Assets = Liabilities + Stockholders’ Equity.
c. Assets + Liabilities = Stockholders’ Equity.
d. Assets + Stockholders’ Equity = Liabilities.

127. Which of the following is not a satisfactory statement of the accounting equation?
a. Assets = Stockholders’ Equity – Liabilities
b. Assets = Liabilities + Stockholders’ Equity
c. Assets – Liabilities = Stockholders’ Equity
d. Assets – Stockholders’ Equity = Liabilities

128. Jimmy’s Repair Shop started the year with total assets of $200,000 and total liabilities of $160,000. During the year the business recorded $420,000 in revenues, $220,000 in expenses, and dividends of $40,000. Stockholders’ equity at the end of the year was
a. $240,000.
b. $200,000.
c. $160,000.
d. $180,000.

129. Jimmy’s Repair Shop started the year with total assets of $200,000 and total liabilities of $160,000. During the year the business recorded $420,000 in revenues, $220,000 in expenses, and dividends of $40,000. The net income reported by Jimmy’s Repair Shop for the year was
a. $160,000.
b. $200,000.
c. $120,000.
d. $380,000.

130. Ashley’s Accessory Shop started the year with total assets of $140,000 and total liabilities of $80,000. During the year the business recorded $220,000 in revenues, $110,000 in expenses, and dividends of $40,000. Stockholders’ equity at the end of the year was
a. $120,000.
b. $110,000.
c. $130,000.
d. $70,000.

131. Ashley’s Accessory Shop started the year with total assets of $140,000 and total liabilities of $80,000. During the year the business recorded $220,000 in revenues, $110,000 in expenses, and dividends of $40,000. The net income reported by Ashley’s Accessory Shop for the year was
a. $80,000.
b. $100,000.
c. $130,000.
d. $110,000.

132. If total liabilities increased by $75,000 and stockholders’ equity increased by $25,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $100,000 decrease
b. $100,000 increase
c. $125,000 increase
d. $150,000 increase

133. If total liabilities decreased by $75,000 and stockholders’ equity increased by $25,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $100,000 increase
b. $50,000 decrease
c. $50,000 increase
d. $75,000 decrease

134. If total liabilities decreased by $50,000 and stockholders’ equity increased by $10,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $40,000 decrease
b. $40,000 increase
c. $50,000 increase
d. $60,000 increase

135. If total liabilities decreased by $75,000 and stockholders’ equity decreased by $25,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $100,000 increase
b. $50,000 decrease
c. $100,000 decrease
d. $50,000 decrease

136. If total liabilities increased by $46,000 during a period of time and stockholders’ equity decreased by $18,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n)
a. $46,000 increase.
b. $64,000 increase.
c. $28,000 decrease.
d. $28,000 increase.

137. The balance sheet
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time.
c. reports the assets, liabilities, and stockholders’ equity at a specific date.
d. presents the revenues and expenses for a specific period of time.

138. The retained earnings statement
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time.
c. reports the assets, liabilities, and stockholders’ equity at a specific date.
d. presents the revenues and expenses for a specific period of time.

139. Liabilities
a. are future economic benefits.
b. are debts and obligations.
c. possess service potential.
d. are things of value owned by a business.

140. Liabilities of a company are owed to
a. debtors.
b. owners.
c. creditors.
d. stockholders.

141. Stockholders’ equity can be described as claims of
a. creditors on total assets.
b. owners on total assets.
c. customers on total assets.
d. debtors on total assets.

142. Payments to stockholders are called
a. expenses.
b. liabilities.
c. dividends.
d. distributions.

143. Common stock is reported on the
a. statement of cash flows.
b. retained earnings statement.
c. income statement.
d. balance sheet.

144. Stockholders’ equity is comprised of
a. common stock and dividends.
b. common stock and retained earnings.
c. dividends and retained earnings.
d. net income and retained earnings.

145. Stockholders’ equity
a. is usually equal to cash on hand.
b. is equal to liabilities and retained earnings.
c. includes retained earnings and common stock.
d. is shown on the income statement.

146. Retained earnings is
a. the stockholders’ claim on total assets.
b. equal to cash.
c. equal to revenues.
d. the amount of net income kept in the corporation for future use.

147. Which financial statement would best indicate whether the company relies on debt or stockholders’ equity to finance its assets?
a. Statement of cash flows
b. Retained earnings statement
c. Income statement
d. Balance sheet

148. The primary purpose of the statement of cash flows is to report
a. a company’s investing transactions.
b. a company’s financing transactions.
c. information about cash receipts and cash payments of a company.
d. the net increase or decrease in cash.

149. Claims of owners are called
a. dividends.
b. stockholders’ equity.
c. liabilities.
d. income payable.

150. Which of the following is not a common way that managers use the balance sheet?
a. To analyze the balances of assets, liabilities, and stockholders’ equity throughout the accounting period
b. To determine if the cash balance is sufficient for future needs
c. To analyze the balance between debt and common stock financing
d. To analyze the balance of accounts receivable on the last day of the accounting period

151. Why are financial statement users interested in the statement of cash flows?
a. It is the easiest financial statement to evaluate.
b. It provides information about an important company resource.
c. It is the first statement that is presented to users.
d. It helps users decide whether assets such as office equipment should be replaced.

152. Why should the income statement be prepared first?
a. The statement of cash flows should be prepared first because it determines the sources of cash. That information is then used in preparing the income statement.
b. Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet.
c. The income statement does not have to be prepared first. Financial statements can be prepared in any order.
d. None of these answer choices are correct.

153. Elston Company compiled the following financial information as of December 31, 2014:
Service revenue $700,000
Common stock 150,000
Equipment 200,000
Operating expenses 625,000
Cash 175,000
Dividends 50,000
Supplies 25,000
Accounts payable 100,000
Accounts receivable 75,000
Retained earnings, 1/1/14 375,000

Elston’s assets on December 31, 2014 are
a. $1,175,000.
b. $850,000.
c. $400,000.
d. $475,000.

154. Elston Company compiled the following financial information as of December 31, 2014:
Service revenue $700,000
Common stock 150,000
Equipment 200,000
Operating expenses 625,000
Cash 175,000
Dividends 50,000
Supplies 25,000
Accounts payable 100,000
Accounts receivable 75,000
Retained earnings, 1/1/14 375,000

Elston’s retained earnings on December 31, 2014 are
a. $375,000.
b. $450,000.
c. $400,000.
d. $ 25,000.

155. Elston Company compiled the following financial information as of December 31, 2014:
Service revenue $700,000
Common stock 150,000
Equipment 200,000
Operating expenses 625,000
Cash 175,000
Dividends 50,000
Supplies 25,000
Accounts payable 100,000
Accounts receivable 75,000
Retained earnings, 1/1/14 375,000

Elston’s stockholders’ equity on December 31, 2014 is
a. $525,000.
b. $550,000.
c. $400,000.
d. $600,000.

156. Benedict Company compiled the following financial information as of December 31, 2014:
Service revenue $560,000
Common stock 120,000
Equipment 160,000
Operating expenses 500,000
Cash 140,000
Dividends 40,000
Supplies 20,000
Accounts payable 80,000
Accounts receivable 60,000
Retained earnings, 1/1/14 300,000

Benedict’s assets on December 31, 2014 are
a. $940,000.
b. $680,000.
c. $320,000.
d. $380,000.

157. Benedict Company compiled the following financial information as of December 31, 2014:
Service revenue $560,000
Common stock 120,000
Equipment 160,000
Operating expenses 500,000
Cash 140,000
Dividends 40,000
Supplies 20,000
Accounts payable 80,000
Accounts receivable 60,000
Retained earnings, 1/1/14 300,000

Benedict’s retained earnings on December 31, 2014 are
a. $300,000.
b. $360,000.
c. $320,000.
d. $ 20,000.

158. Benedict Company compiled the following financial information as of December 31, 2014:
Service revenue $560,000
Common stock 120,000
Equipment 160,000
Operating expenses 500,000
Cash 140,000
Dividends 40,000
Supplies 20,000
Accounts payable 80,000
Accounts receivable 60,000
Retained earnings, 1/1/14 300,000

Benedict’s stockholders’ equity on December 31, 2014 is
a. $420,000.
b. $440,000.
c. $320,000.
d. $480,000.

159. The heading on the statement of cash flows identifies all of the following except
a. the preparer of the statement.
b. the company
c. the time period covered by the statement.
d. the type of statement.

160. All of the following are interrelationships that are important to understand when preparing financial statements except
a. the net income from the income statement is used in the retained earnings statement.
b. the ending retained earnings from the retained earnings statement is used in the stockholder’s equity section of the balance sheet.
c. the cash on the balance sheet should be equal to the cash at the end of the period on the statement of cash flows.
d. all of the payments on the balance sheet should be equal to the cash payments for operating activities on the statement of cash flows.

161. Marvin Services Corporation had the following accounts and balances:

Accounts payable $18,000 Equipment $21,000
Accounts receivable 3,000 Land 21,000
Buildings ? Unearned service revenue 6,000
Cash 9,000 Total stockholders’ equity ?

If the balance of the Buildings account was $42,000 and $3,000 of Accounts Payable were paid in cash, what would be the balance of the total stockholders’ equity?
a. $81,000
b. $72,000
c. $102,000
d. $78,000

162. Marvin Services Corporation had the following accounts and balances:

Accounts payable $18,000 Equipment $21,000
Accounts receivable 3,000 Land 21,000
Buildings ? Unearned service revenue 6,000
Cash 9,000 Total stockholders’ equity ?

If the balance of the Buildings account was $24,000 and $6,000 of Accounts Payable were paid in cash, what would be the total liabilities and stockholders’ equity?
a. $54,000
b. $78,000
c. $48,000
d. $72,000

163. Marvin Services Corporation had the following accounts and balances:

Accounts payable $18,000 Equipment $21,000
Accounts receivable 3,000 Land 21,000
Buildings ? Unearned service revenue 6,000
Cash 9,000 Total stockholders’ equity ?

If total stockholder’s equity was $57,000, what would be the balance of the Buildings Account?
a. $21,000
b. $81,000
c. $87,000
d. $27,000

164. Marvin Services Corporation had the following accounts and balances:

Accounts payable $18,000 Equipment $21,000
Accounts receivable 3,000 Land 21,000
Buildings ? Unearned service revenue 6,000
Cash 9,000 Total stockholders’ equity ?

If the balance of the Buildings account was $45,000 and the equipment was sold for $21,000, what would be the total of stockholders’ equity?
a. $39,000
b. $54,000
c. $69,000
d. $75,000

165. Marvin Services Corporation had the following accounts and balances:

Accounts payable $18,000 Equipment $21,000
Accounts receivable 3,000 Land 21,000
Buildings ? Unearned service revenue 6,000
Cash 9,000 Total stockholders’ equity ?

If the balance of the Buildings account was $51,000, what would be the total of liabilities and stockholders’ equity?
a. $102,000
b. $105,000
c. $81,000
d. $75,000

166. Notes to the financial statements include all of the following except
a. descriptions of significant accounting policies used.
b. explanations of uncertainties.
c. quantifiable accounting information.
d. statistics needed to understand the statements.

167. The management discussion and analysis (MD&A) section of the annual report covers all of the following aspects except the
a. ability of the company to pay near-term obligations.
b. certification criteria of the company’s auditors.
c. company’s ability to fund operations and expansion.
d. results of the company operations.

168. An annual report includes all of the following except
a. management discussion and analysis section.
b. notes to the financial statements.
c. an auditor’s report.
d. salary information for all the executives.

169. Which of the following clarifies information presented in the financial statements, as well as expanding upon it where additional detail is needed?
a. Auditor’s report
b. Management discussion and analysis section
c. Notes to the financial statements
d. President’s state of the company report

170. The information needed to determine whether a company is using accounting methods similar to those of its competitors would be found in the
a. auditor’s report.
b. balance sheet.
c. management discussion and analysis section.
d. notes to the financial statements.

171. In the annual report, where would a financial statement reader find out if the company’s financial statements give a fair depiction of its financial position and operating results?
a. Notes to the financial statements
b. Management discussion and analysis section
c. Balance sheet
d. Auditor’s report

172. Management’s views on the company’s short-term debt paying ability, expansion financing, and results of operations are found in the
a. auditor’s report.
b. management discussion and analysis section.
c. notes to the financial statements.
d. president’s state of the company report.

173. Which of the following statements is true?
a. Publicly traded U.S. companies must provide an annual report to their shareholders when operating conditions change significantly.
b. An unqualified independent auditor’s report must be included in the annual report.
c. Notes to the financial statements do not need to be included in the annual report because that information is only for internal users.
d. None of these answer choices are correct.

174. Notes to the financial statements
a. are optional.
b. help clarify information presented in the financial statements.
c. are generally brief and few in number.
d. need not be read in detail if an unqualified opinion accompanies the financial statements.

BRIEF EXERCISES
Be. 175
Indicate in the space by letter whether each statement below applies to a sole proprietorship (S), partnership (P), or corporation (C). More than one answer may be appropriate.

a. Simple to establish.
b. Shared control.
c. Easy to transfer ownership.
d. No personal liability.
e. Tax advantage.
f. Easier to raise funds.

Be. 176
Indicate in the space provided by each item whether it would appear on the statement of cash flows as a(n): (O) operating activity, (I) investing activity, or (F) financing activity.

a. Cash receipts from customers.
b. Issuance of common stock for cash.
c. Payment of cash dividends.
d. Cash purchase of equipment.
e. Cash payments to suppliers.
f. Sale of old machine for cash.

Be. 177
Use the following information to calculate for the year ended December 31, 2014 (a) net income (net loss), (b) ending retained earnings, and (c) total assets.

Supplies $ 1,500 Service revenue $19,000
Other operating expenses 10,000 Cash 15,000
Accounts payable 11,000 Dividends 6,000
Accounts receivable 4,000 Notes payable 1,000
Common stock 10,000 Equipment 9,500
Retained earnings (beginning) 5,000

Be. 178
Use the following information to calculate for the year ended December 31, 2014 (a) net income (net loss), (b) ending retained earnings, and (c) total assets.

Supplies $ 1,000 Service revenue $18,000
Other operating expenses 12,000 Cash 15,000
Accounts payable 9,000 Dividends 1,000
Accounts receivable 3,000 Notes payable 1,000
Common stock 9,000 Equipment 13,000
Retained earnings (beginning) 5,000

Be. 179
Listed below in alphabetical order are the balance sheet items of Nolan Company at December 31, 2014. Prepare a balance sheet and include a complete heading.

Accounts payable $ 11,000
Accounts receivable 15,000
Buildings 65,000
Cash 11,000
Common stock 80,000
Land 31,000
Equipment 10,000
Retained earnings 41,000

Be. 180
Indicate in the space provided by each item whether it would appear on the income statement (IS), balance sheet (BS), or retained earnings statement (RE):

a. Service Revenue g. Accounts Receivable

b. Utilities Expense h. Common Stock

c. Cash i. Equipment

d. Accounts Payable j. Advertising Expense

e. Supplies k. Dividends

f. Salaries and Wages Expense l. Notes Payable

Be. 181
Cesar Ruiz was reviewing his company’s activities at the end of the year (2014) and decided to prepare a retained earnings statement. At the beginning of the year his assets were $530,000, liabilities were $140,000, and common stock was $120,000. The net income for the year was $250,000. Dividends of $220,000 were paid during the year.

Prepare a retained earnings statement in good form.

Be. 182
From the following list of selected accounts taken from the records of Schmidt Clinic, identify those that would appear on the balance sheet.

a. Common Stock f. Accounts Payable
b. Service Revenue g. Cash
c. Land h. Advertising Expense
d. Salaries and Wages Expense i. Supplies
e. Notes Payable j. Utilities Expense

Be. 183
Determine the missing items.

Assets = Liabilities + Stockholders’ Equity

$80,000 $56,000 (a)
(b) $28,000 $34,000
$84,000 (c) $55,000

Be. 184
Determine the missing items.

Assets = Liabilities + Stockholders’ Equity

$66,000 $50,000 (a)
(b) $18,000 $30,000
$54,000 (c) $40,000

Be. 185
Identify which of the following accounts appear on a balance sheet.

(a) Service revenue
(b) Cash
(c) Common stock
(d) Accounts payable
(e) Rent expense
(f) Supplies
(g) Land

Be. 186
For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or stockholders’ equity item.
Code
Asset A
Liability L
Stockholders’ Equity SE

1. Rent Expense 6. Cash

2. Equipment 7. Accounts Receivable

3. Accounts Payable 8. Retained Earnings

4. Common Stock 9. Service Revenue

5. Insurance Expense 10. Notes Payable

Be. 187
Classify each of these items as an asset (A), liability (L), or stockholders’ equity (SE).

_____ 1. Accounts receivable
_____ 2. Accounts payable
_____ 3. Common stock
_____ 4. Supplies
_____ 5. Retained earnings
_____ 6. Cash
_____ 7. Notes payable
_____ 8. Equipment

Be. 188
At the beginning of the year, Gant Company had total assets of $660,000 and total liabilities of $300,000. Answer the following questions viewing each situation as being independent of the others.
(1) If total assets increased $225,000 during the year, and total liabilities decreased $100,000, what is the amount of stockholders’ equity at the end of the year?
(2) During the year, total liabilities increased $215,000 and stockholders’ equity decreased $130,000. What is the amount of total assets at the end of the year?
(3) If total assets decreased $60,000 and stockholders’ equity increased $150,000 during the year, what is the amount of total liabilities at the end of the year?

Be. 189
Reinhardt’s Carpet Cleaning has the following balance sheet items:

Buildings Notes Payable
Accounts Payable Common Stock
Cash Retained Earnings
Supplies Equipment
Accounts Receivable

Identify which items are (1) Assets
(2) Liabilities
(3) Stockholders’ Equity

Be. 190
On June 1, 2014, Shaw Company prepared a balance sheet that shows the following:

Assets (no cash) $125,000
Liabilities 75,000
Stockholders’ Equity 50,000

Shortly thereafter, all of the assets were sold for cash.

How would the balance sheet appear immediately after the sale of the assets for cash for each of the following cases?

Cash Received for Balances Immediately After Sale
the Assets Assets – Liabilities = Stockholders’ Equity
Cash A $135,000 $________ $________ $________

Cash B 120,000 ________ ________ ________

Cash C 105,000 ________ ________ ________

Be. 191
Compute the missing amount in each category of the accounting equation.

Assets Liabilities Stockholders’ Equity
(a) $243,000 $ ? $ 91,000
(b) $183,000 $ 75,000 $ ?
(c) $ ? $212,000 $310,000

EXERCISES
Ex. 192
Prepare an income statement and a retained earnings statement, for the month of October, 2014 and a balance sheet at October 31, 2014 for the medical practice of Linda Denny, MD, from the items listed below.

Retained earnings (October 1) $15,000
Common stock 30,000
Accounts payable 6,000
Equipment 29,000
Service revenue 23,000
Dividends 6,000
Insurance expense 3,500
Cash 11,000
Utilities expense 700
Supplies 2,800
Salaries and wages expense 9,000
Accounts receivable 10,000
Rent expense 2,000

LINDA DENNY, MD
Income Statement
For the Month Ended October 31, 2014

Revenues $

Expenses $

Total expenses

Net income $ t

Ex. 192 (Cont.)

LINDA DENNY, MD
Retained Earnings Statement
For the Month Ended October 31, 2014

Retained Earnings, October 1 $
Add:

Less:

$ t

LINDA DENNY, MD
Balance Sheet
October 31, 2014

Assets
$

Total assets
$ t

Liabilities and Stockholders’ Equity
Liabilities
$
Stockholders’ Equity
$

Total liabilities and stockholders’ equity $ t

Ex. 193
Use the following accounts and information to prepare, in good form, an income statement and a retained earnings statement, for the month of August and a balance sheet at August 31, 2014 for Pierce Industries.

Accounts payable $ 1,100 Dividends $ 3,000
Accounts receivable 5,400 Insurance expense 1,200
Buildings 63,000 Supplies 1,400
Cash 18,600 Notes payable 3,300
Service revenue 25,700 Rent expense 3,400
Common stock 52,000 Salaries and wages expense 12,000
Retained earnings (beginning) 25,900

PIERCE INDUSTRIES
Income Statement
For the Month Ended August 31, 2014

Revenues
$

Expenses
$

Total expenses
Net income $ t

PIERCE INDUSTRIES
Retained Earnings Statement
For the Month Ended August 31, 2014

Retained Earnings, August 1 $
Add:

Less:

Retained Earnings, August 31 $ t

Ex. 193 (Cont.)
PIERCE INDUSTRIES
Balance Sheet
August 31, 2014

Assets
$

Total assets

$ t

Liabilities and Stockholders’ Equity
Liabilities
$

$
Stockholders’ Equity
$

Total liabilities and stockholders’ equity $ t

Ex. 194
At September 1, the balance sheet accounts for Kiner’s Restaurant were as follows:

Accounts Payable $ 3,800 Land $33,000
Accounts Receivable 1,600 Common Stock ?
Buildings 66,000 Notes Payable 46,000
Cash 5,000 Supplies 3,600
Equipment 15,700 Retained Earnings 45,200
The following transactions occurred during the next two days:
Stockholders invested an additional $20,000 cash in the business. The accounts payable were paid in full. (No payment was made on the notes payable.)

Instructions
Prepare a balance sheet at September 3, 2014.

Ex. 195
This information relates to Connor Co. for the year 2014.

Retained earnings, January 1, 2014 $59,000
Advertising expense 1,800
Dividends paid during 2014 9,000
Rent expense 10,400
Service revenue 52,000
Utilities expense 2,400
Salaries and wages expense 25,000

Instructions
After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2014.

Ex. 196
Here are incomplete financial statements for Brandon, Inc.

BRANDON, INC.
Balance Sheet

Assets Liabilities and Stockholders’ Equity
Cash $ 5,000 Liabilities
Inventory 10,000 Accounts payable $ 5,000
Buildings 40,000 Stockholders’ equity
Total assets $55,000 Common stock (a)
Retained earnings (b)
Total liabilities and
stockholders’ equity $55,000

Ex. 196 (Cont.)
Income Statement
Revenues $80,000
Cost of goods sold (c)
Administrative expenses 10,000
Net income $ (d)

Retained Earnings Statement
Beginning retained earnings $10,000
Net income (e)
Dividends 5,000
Ending retained earnings $24,000

Instructions
Calculate the missing amounts.

Ex. 197
Sleep Cheap is a private camping ground near the Boulder Peak Recreation Area. It has compiled the following financial information as of December 31, 2014.

Services revenues (from camping fees) $132,000 Dividends $ 8,000
Sales revenues (from general store) 25,000 Notes payable 50,000
Accounts payable 13,000 Administrative expenses 133,000
Cash 13,500 Supplies 2,500
Equipment 108,000 Common stock 40,000
Retained earnings (1/1/2014) 5,000

Instructions
(a) Determine net income from Sleep Cheap for 2014.
(b) Prepare a retained earnings statement and a balance sheet for Sleep Cheap as of December 31, 2014.

Ex. 198
John Tate is the bookkeeper for Gabelli Company. John has been trying to get the balance sheet of Gabelli Company to balance. It finally balanced, but now he’s not sure it is correct.

GABELLI COMPANY
Balance Sheet
December 31, 2014

Assets Liabilities and Stockholders’ Equity
Cash $12,500 Accounts payable $18,000
Supplies 9,500 Accounts receivable (12,000)
Equipment 50,000 Common stock 40,000
Dividends 13,000 Retained earnings 39,000
Total assets $85,000 Total liabilities and
stockholders’ equity $85,000

Instructions
Prepare a correct balance sheet.

Ex. 199
The summaries of data from the balance sheet, income statement, and retained earnings statement for two corporations, Bates Corporation and Wilson Enterprises, are presented below for 2014.

Bates Corporation Wilson Enterprises
Beginning of year
Total assets $110,000 $130,000
Total liabilities 80,000 (d)
Total stockholders’ equity (a) 70,000
End of year
Total assets (b) 190,000
Total liabilities 120,000 65,000
Total stockholders’ equity 70,000 (e)
Changes during year in retained
earnings
Dividends (c) 5,000
Total revenues 225,000 (f)
Total expenses 165,000 80,000

Instructions
Determine the missing amounts. Assume all changes in stockholders’ equity are due to changes in retained earnings.

Ex. 200
This information is for Campo Corporation for the year ended December 31, 2014.

Cash received from lenders $20,000
Cash received from customers 65,000
Cash paid for new equipment 30,000
Cash dividends paid 9,000
Cash paid to suppliers 28,000
Cash balance 1/1/14 12,000

Instructions
Prepare the 2014 statement of cash flows for Campo Corporation.

Ex. 201
One item is omitted in each of the following summaries of balance sheet and income statement data for three different corporations, A, B, and C.

Determine the amounts of the missing items, identifying each corporation by letter.

Corporation
A B C
Beginning of the Year:
Assets $410,000 $150,000 $199,000
Liabilities 250,000 115,000 166,000
End of the Year:
Assets 460,000 195,000 205,000
Liabilities 280,000 95,000 169,000
During the Year:
Additional Investment by stockholders ? 79,000 78,000

Dividends 70,000 83,000 ?

Revenue 195,000 ? 187,000

Expenses 155,000 113,000 183,000

COMPLETION STATEMENTS
202. A business organized as a separate legal entity owned by stockholders is a ___________.

203. _______________ of accounting information are managers who plan, organize, and run a business.

204. _________________ activities involve collecting the necessary funds to start the business.

205. The ________________ reports the assets, liabilities, and stockholders’ equity of a business at a specific date.

206. The claims of owners on the assets of a corporation are known as ________________.

207. The basic accounting equation is Assets = ____________ + _______________.

208. The primary purpose of a ________________ is to provide financial information about the cash receipts and cash payments of a business.

209. The _________________ is prepared by an independent auditor stating the auditor’s opinion as to the fairness of the presentation of the financial statements.

MATCHING
210. Match the items below by entering the appropriate code letter in the space provided.

A. Internal users F. Corporation
B. Management discussion and analysis G. Assets
C. Annual report H. Liabilities
D. Sole proprietorship I. Expenses
E. Dividends J. Investing activities

1. Distributions of cash from a corporation to its stock holders.
2. Consumed assets or services.
3. Ownership is limited to one person.
4. Officers and others who manage the business.
5. Creditor claims against the assets of the business.
6. A separate legal entity under state laws.
7. A report prepared by management that presents financial information.
8. A section of the annual report that presents management’s views.
9. Future economic benefits.
10. Involves acquiring the resources necessary to run the business.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 211
What are the advantages to a business of being formed as a corporation? What are the disadvantages?

S-A E 212
Why would it be safer for a wealthy individual to set up his or her business as a corporation rather than as a proprietorship or partnership?

S-A E 213
Your friend, James, made this comment: “My major is biology and I plan to research for cures for major illnesses. Therefore, I have no need to study accounting.” What is your response to James?

S-A E 214
The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users.

S-A E 215
The statement of cash flows for Nyland Corporation reveals the following information:
Net cash used by operating activities ($150,000)

Net cash used by investing activities ($200,000)

Net cash provided by financing activities
Issuance of common stock $100,000
Issued note payable 250,000 $350,000
Net change in cash 0

Provide three comments about this information. Make your comments concise yet thorough.

S-A E 216
How are each of the following financial statements interrelated? (a) Retained earnings statement and income statement. (b) Retained earnings statement and balance sheet. (c) Balance sheet and statement of cash flows.

S-A E 217
Broadway Corporation’s stockholders’ equity equals one-fourth of the company’s total assets. The company’s liabilities are $270,000. What is the amount of the company’s stockholders’ equity?

S-A E 218
Which three items affect retained earnings, and how do they affect it?

S-A E 219
The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are financial statements related to the accounting equation?

S-A E 220
What types of information are presented in the notes to the financial statements?

S-A E 221 (Ethics)
Joe Laramie owns and operates Joe’s Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Joe’s Burgers began to have problems. Most of the problems were related to Joe’s expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Joe does not have the cash or financial backing to expand further. He has therefore decided to sell his business.
William Sheets is interested in purchasing the business. However, he is located in another city and is unfamiliar with Newton. He has asked Joe why he is selling Joe’s Burgers. Joe replies that his elderly mother requires extra care, and that his brother needs help in his manufacturing business. Both are true, but neither is his primary reason for selling. Joe reasons that William should not have asked him anyway, since profitable businesses don’t come up for sale.

Required:
1. Identify the stakeholders in this situation.
2. Did Joe act ethically in not revealing fully his reasons for selling the business? Why or why not?

S-A E 222 (Communication)
Mary Baroni is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients.

She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only $500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant.

Required:
Write a short letter to your friend. Use proper form. Answer her question completely, but briefly.

IFRS Questions
1. Which of the following is not a reason one set of international accounting standards are needed?
a. Multinational corporation.
b. Financial markets.
c. Information technology.
d. All of these answer choices are reasons one set of international accounting standards are needed.

2. International standards are referred to as
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

3. U.S. standards are referred to as
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

4. International standards are developed by the
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

5. U.S. standards are developed by the
a. IFRS.
b. GAAP.
c. IASB.
d. FASB.

6. The United States and the international standard-setting environment are primarily driven by meeting the needs of
a. investors and creditors.
b. tax authorities.
c. central government planners.
d. academic researchers.

7. The internal control standards applicable to Sarbanes-Oxley apply to?
a. all U.S.and international companies.
b. U.S. and international companies listed on U.S. exchange.
c. International companies listed on U.S. exchange.
d. U.S. companies listed on U.S. exchange.

8. The concern about international companies adopting SOX-type standards centers on
a. cost-benefit analysis.
b. ethics issues.
c. the governing authorities.
d. comparability.

9. Financial accounting ethics violations are
a. not a problem in the U.S or internationally.
b. much more common in the U.S than internationally.
c. much more common internationally than in the U.S.
d. a major problem both in the U.S and internationally.

10. IFRS, compared to GAAP, tends to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosure requirements.

11. GAAP, compared to IFRS, tends to be more
a. simple in accounting requirements.
b. rules-based.
c. principles-based.
d. simple in disclosure requirements.

12. The conceptual framework that underlines IFRS
a. is very similar to that used to develop GAAP.
b. does not define assets or liabilities.
c. does not define equity.
d. does not define income or expenses.

CHAPTER 2
A FURTHER LOOK AT FINANCIAL STATEMENTS

TRUE-FALSE STATEMENTS
1. Cash and supplies are both classified as current assets.

2. Long-term investments appear in the property, plant, and equipment section of the balance sheet.

3. A liability is classified as a current liability if it is to be paid within the coming year.

4. Stockholders’ equity is divided into two parts: common stock and retained earnings.

5. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year or the normal operating cycle.

6. The investment category on the balance sheet normally includes investments that are intended to be held for a short period of time (less than one year).

7. The main difference between intangible assets and property, plant and equipment is the length of the asset’s life.

8. Profitability means having enough funds on hand to pay debts when they fall due.

9. Earnings per share is calculated by dividing net income minus preferred stock dividends for the period by the average number of common shares outstanding during the period.

10. Earnings per share measures the net income earned on each share of common stock.

11. The retained earnings statement describes the changes in retained earnings during the period.

12. The retained earnings statement is more comprehensive than the statement of stockholders’ equity.

13. Revenues have the effect of increasing retained earnings.

14. Most companies use a retained earnings statement rather than a statement of stockholders’ equity.

15. The excess of current assets over current liabilities is called working capital.

16. The current ratio takes into account the composition of current assets.

17. Solvency ratios measure the short-term ability of the company to pay its maturing obligations.

18. The debt to assets ratio measures the percentage of assets financed by creditors.

19. Solvency is a company’s ability to pay interest as it comes due and to repay the balance of a debt due at its maturity.

20. Net cash provided by operating activities takes into account that a company must invest in capital expenditures just to maintain its current level of operations.

21. Both investors and creditors have an interest in a company’s ability to generate favorable cash flows.

22. Free cash flow is net cash provided by operating activities less capital expenditures.

23. In the statement of cash flows, Net cash provided by operating activities indicates the cash-generating capability of the company.

24. Free cash flow is Net cash provided by operating activities less dividends.

25. Long-term creditors consider a high free cash flow amount an indication of solvency.

26. The primary accounting standard-setting body in the United States is the Securities and Exchange Commission.

27. Generally accepted accounting principles are rules and practices that are recognized as a general guide for financial reporting purposes.

28. GAAP stands for generally accepted accounting procedures.

29. To be faithfully representative, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.

30. In order for information to be relevant, it must be reported on a monthly basis.

31. For information to be useful, it must be both relevant and faithfully representative.

32. Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.

33. A major function of management is to provide the accountant with relevant and useful information.

34. The advantage of accounting information is that it provides exact and completely reliable measures.

35. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.

36. The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.

37. The periodicity assumption states that the business will remain in operation for the foreseeable future.

38. If a building is offered for sale at $100,000 and the buyer pays $95,000 cash for it, the buyer would record the building at $100,000.

39. The most generally accepted value used in accounting is market value.

40. For accounting purposes, business transactions should be kept separate from the personal transactions of the stockholders of the business.

41. The economic entity assumption states that economic events can be identified with a particular unit of accountability.

42. The economic entity assumption states that assets should be recorded at their cost.

43. The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

44. The monetary unit assumption has led to an increase in the notes to financial statements.

45. The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.

46. When preparing financial statements, the accountant assumes that the business will stay in business for the foreseeable future.

47. Full disclosure of all important facts aids in overcoming the limitations of accounting information.

48. The economic entity assumption is that a company will remain in operations for the foreseeable future.

49. Materiality is a company-specific aspect of faithful representation.

50. Relevance and cost are two constraints in accounting.

51. Materiality relates to whether an item is large enough to likely influence the decision of an investor or creditor.

52. Cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.

53. In general, the FASB indicates that most assets must follow the fair value principle.

54. A material item is one that is likely to influence an investor’s decision.

55. The periodicity assumption states that every economic entity can be separately identified and accounted for.

MULTIPLE CHOICE QUESTIONS
56. In a classified balance sheet, assets are usually classified as
a. current assets; long-term assets; property, plant, and equipment; and intangible assets.
b. current assets; long-term investments; property, plant, and equipment; and common stocks.
c. current assets; long-term investments; tangible assets; and intangible assets.
d. current assets; long-term investments; property, plant, and equipment; and intangible assets.

57. On a classified balance sheet, short-term investments are classified as
a. an intangible asset.
b. property, plant, and equipment.
c. a current asset.
d. a long-term investment.

58. A current asset is
a. the last asset purchased by a business.
b. an asset which is currently being used to produce a product or service.
c. usually found as a separate classification in the income statement.
d. expected to be converted to cash or used in the business within a relatively short period of time.

59. Which of the following is not classified properly as a current asset?
a. Supplies
b. Debt investments
c. A fund to be used to purchase a building within the next year
d. A receivable from the sale of an asset to be collected in two years

60. An intangible asset
a. derives its value from the rights and privileges it provides the owner.
b. is worthless because it has no physical substance.
c. is converted into a tangible asset during the operating cycle.
d. cannot be classified on the balance sheet because it lacks physical substance.

61. Which of the following is not considered an asset?
a. Equipment
b. Dividends
c. Accounts receivable
d. Inventory

62. Trademarks would appear in which balance sheet section?
a. Intangible assets
b. Investments
c. Property, plant, and equipment
d. Current assets

63. Liabilities are generally classified on a balance sheet as
a. small liabilities and large liabilities.
b. present liabilities and future liabilities.
c. tangible liabilities and intangible liabilities.
d. current liabilities and long-term liabilities.

64. Which of the following would not be classified as a long-term liability?
a. Current maturities of long-term debt
b. Bonds payable
c. Mortgage payable
d. Lease liabilities

65. Which of the following is not a current liability?
a. Salaries and Wages Payable
b. Accounts Payable
c. Taxes Payable
d. Bonds Payable

66. Equipment is classified on the balance sheet as
a. a current asset.
b. property, plant, and equipment.
c. an intangible asset.
d. a long-term investment.

67. It is not true that current assets are resources that are expected to be
a. realized in cash within one year.
b. sold within one year.
c. consumed within one year.
d. acquired within one year.

68. The operating cycle of a company is the average time that is required to go from cash to
a. sales in producing revenues.
b. cash in producing revenues.
c. inventory in producing revenues.
d. accounts receivable in producing revenues.

69. On a classified balance sheet, companies usually list current assets
a. in alphabetical order.
b. with the largest dollar amounts first.
c. in the order in which they are expected to be converted into cash.
d. in the order of acquisition.

70. Intangible assets are
a. listed directly under current assets on the balance sheet.
b. not listed on the balance sheet because they do not have physical substance.
c. listed after property, plant, and equipment.
d. listed as a long-term investment on the balance sheet.

71. Which statement about long-term investments is not true?
a. They will be held for more than one year.
b. They are not currently used in the operation of the business.
c. They include investments in stock of other companies and land held for future use.
d. They do not include long-term notes receivable.

72. These are selected account balances on December 31, 2014.
Land $100,000
Land (held for future use) 150,000
Buildings 800,000
Inventory 200,000
Equipment 450,000
Furniture 100,000
Accumulated Depreciation 300,000

What is the total amount of property, plant, and equipment that will appear on the balance sheet?
a. $1,500,000
b. $1,300,000
c. $1,800,000
d. $1,150,000

73. What is the order in which assets are generally listed on a classified balance sheet?
a. Current and long-term
b. Current; property, plant and equipment; long-term investments; intangibles
c. Current; property, plant and equipment; intangibles; long-term investments
d. Current; long-term investments; property, plant and equipment, intangibles

74. Ratios that measure the income or operating success of a company for a given period of time are
a. liquidity ratios.
b. profitability ratios.
c. solvency ratios.
d. trending ratios.

75. Use the following data to determine the total dollar amount of assets to be classified as current assets.
Koonce Office Supplies
Balance Sheet
December 31, 2014

Cash $ 130,000 Accounts payable $ 140,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 110,000 Mortgage payable 160,000
Prepaid insurance 60,000 Total liabilities $320,000
Stock investments 170,000
Land 180,000
Buildings $210,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 170,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,060,000 stockholders’ equity $1,060,000

a. $570,000
b. $400,000
c. $340,000
d. $290,000

76. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment.
Koonce Office Supplies
Balance Sheet
December 31, 2014

Cash $ 130,000 Accounts payable $ 140,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 110,000 Mortgage payable 160,000
Prepaid insurance 60,000 Total liabilities $320,000
Stock investments 170,000
Land 180,000
Buildings $210,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 170,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,060,000 stockholders’ equity $1,060,000

a. $660,000
b. $350,000
c. $490,000
d. $390,000

77. Use the following data to determine the total dollar amount of assets to be classified as investments.
Koonce Office Supplies
Balance Sheet
December 31, 2014

Cash $ 130,000 Accounts payable $ 140,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 110,000 Mortgage payable 160,000
Prepaid insurance 60,000 Total liabilities $320,000
Stock investments 170,000
Land 180,000
Buildings $210,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 170,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,060,000 stockholders’ equity $1,060,000

a. $0
b. $350,000
c. $170,000
d. $310,000

78. Use the following data to determine the total amount of working capital.
Koonce Office Supplies
Balance Sheet
December 31, 2014

Cash $ 130,000 Accounts payable $ 140,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 110,000 Mortgage payable 160,000
Prepaid insurance 60,000 Total liabilities $320,000
Stock investments 170,000
Land 180,000
Buildings $210,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 170,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,060,000 stockholders’ equity $1,060,000

a. $240,000
b. $390,000
c. $130,000
d. $180,000

79. Use the following data to calculate the current ratio.
Koonce Office Supplies
Balance Sheet
December 31, 2014

Cash $ 130,000 Accounts payable $ 140,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 110,000 Mortgage payable 160,000
Prepaid insurance 60,000 Total liabilities $320,000
Stock investments 170,000
Land 180,000
Buildings $210,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 170,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,060,000 stockholders’ equity $1,060,000

a. 2.13 : 1
b. 1.44 : 1
c. 2.86 : 1
d. 2.50 : 1

80. Use the following data to determine the total dollar amount of assets to be classified as current assets.
Carne Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 35,000 Accounts payable $ 65,000
Accounts receivable 50,000 Salaries and wages payable 10,000
Inventory 70,000 Mortgage payable 90,000
Prepaid insurance 40,000 Total liabilities $165,000
Stock investments 90,000
Land 95,000
Buildings $115,000 Common stock $120,000
Less: Accumulated Retained earnings 250,000
depreciation (30,000) 85,000 Total stockholders’ equity $370,000
Trademarks 70,000 Total liabilities and
Total assets $535,000 stockholders’ equity $535,000

a. $195,000
b. $125,000
c. $285,000
d. $165,000

81. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment.
Carne Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 35,000 Accounts payable $ 65,000
Accounts receivable 50,000 Salaries and wages payable 10,000
Inventory 70,000 Mortgage payable 90,000
Prepaid insurance 40,000 Total liabilities $165,000
Stock investments 90,000
Land 95,000
Buildings $115,000 Common stock $120,000
Less: Accumulated Retained earnings 250,000
depreciation (30,000) 85,000 Total stockholders’ equity $370,000
Trademarks 70,000 Total liabilities and
Total assets $535,000 stockholders’ equity $535,000

a. $270,000
b. $250,000
c. $180,000
d. $210,000

82. Use the following data to determine the total dollar amount of assets to be classified as investments.
Carne Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 35,000 Accounts payable $ 65,000
Accounts receivable 50,000 Salaries and wages payable 10,000
Inventory 70,000 Mortgage payable 90,000
Prepaid insurance 40,000 Total liabilities $165,000
Stock investments 90,000
Land 95,000
Buildings $115,000 Common stock $120,000
Less: Accumulated Retained earnings 250,000
depreciation (30,000) 85,000 Total stockholders’ equity $370,000
Trademarks 70,000 Total liabilities and
Total assets $535,000 stockholders’ equity $535,000

a. $0
b. $160,000
c. $90,000
d. $140,000

83. Use the following data to determine the total amount of working capital.
Carne Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 35,000 Accounts payable $ 65,000
Accounts receivable 50,000 Salaries and wages payable 10,000
Inventory 70,000 Mortgage payable 90,000
Prepaid insurance 40,000 Total liabilities $165,000
Stock investments 90,000
Land 95,000
Buildings $115,000 Common stock $120,000
Less: Accumulated Retained earnings 250,000
depreciation (30,000) 85,000 Total stockholders’ equity $370,000
Trademarks 70,000 Total liabilities and
Total assets $535,000 stockholders’ equity $535,000

a. $130,000
b. $120,000
c. $80,000
d. $210,000

84. Use the following data to calculate the current ratio.
Carne Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 35,000 Accounts payable $ 65,000
Accounts receivable 50,000 Salaries and wages payable 10,000
Inventory 70,000 Mortgage payable 90,000
Prepaid insurance 40,000 Total liabilities $165,000
Stock investments 80,000
Land 95,000
Buildings $100,000 Common stock $120,000
Less: Accumulated Retained earnings 250,000
depreciation (30,000) 85,000 Total stockholders’ equity $370,000
Trademarks 70,000 Total liabilities and
Total assets $535,000 stockholders’ equity $535,000

a. 2.07 : 1
b. 1.67 : 1
c. 3.00 : 1
d. 2.60 : 1

85. N3 Corporation has assets of $3,000,000, common stock of $780,000, and retained earnings of $475,000. What are the creditors’ claims on their assets?
a. $2,695,000
b. $1,255,000
c. $1,745,000
d. $3,305,000

86. K2 Corporation has assets of $2,400,000, common stock of $624,000, and retained earnings of $380,000. What are the creditors’ claims on their assets?
a. $2,156,000
b. $1,004,000
c. $1,396,000
d. $2,644,000

87. Use the following data to determine the total dollar amount of assets to be classified as current assets.
Eddy Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 84,000 Accounts payable $ 110,000
Accounts receivable 80,000 Salaries and wages payable 20,000
Inventory 140,000 Mortgage payable 180,000
Prepaid insurance 60,000 Total liabilities $310,000
Stock investments 170,000
Land 190,000
Buildings $226,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 186,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,050,000 stockholders’ equity $1,050,000

a. $534,000
b. $224,000
c. $364,000
d. $304,000

88. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment.
Eddy Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 84,000 Accounts payable $ 110,000
Accounts receivable 80,000 Salaries and wages payable 20,000
Inventory 140,000 Mortgage payable 180,000
Prepaid insurance 60,000 Total liabilities $310,000
Stock investments 170,000
Land 190,000
Buildings $226,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 186,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,050,000 stockholders’ equity $1,050,000

a. $686,000
b. $516,000
c. $556,000
d. $376,000

89. Use the following data to determine the total dollar amount of assets to be classified as investments.
Eddy Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 84,000 Accounts payable $ 110,000
Accounts receivable 80,000 Salaries and wages payable 20,000
Inventory 140,000 Mortgage payable 180,000
Prepaid insurance 60,000 Total liabilities $310,000
Stock investments 170,000
Land 190,000
Buildings $226,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 186,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,050,000 stockholders’ equity $1,050,000

a. $0
b. $310,000
c. $170,000
d. $390,000

90. Use the following data to determine the total amount of working capital.
Eddy Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 84,000 Accounts payable $ 110,000
Accounts receivable 80,000 Salaries and wages payable 20,000
Inventory 140,000 Mortgage payable 180,000
Prepaid insurance 60,000 Total liabilities $310,000
Stock investments 170,000
Land 190,000
Buildings $226,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 186,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total liabilities and
Total assets $1,050,000 stockholders’ equity $1,050,000

a. $404,000
b. $234,000
c. $254,000
d. $174,000

91. Use the following data to calculate the current ratio.
Eddy Auto Supplies
Balance Sheet
December 31, 2014

Cash $ 84,000 Accounts payable $ 110,000
Accounts receivable 80,000 Salaries and wages payable 20,000
Inventory 140,000 Mortgage payable 180,000
Prepaid insurance 60,000 Total liabilities $310,000
Stock investments 170,000
Land 190,000
Buildings $226,000 Common stock $240,000
Less: Accumulated Retained earnings 500,000
depreciation (40,000) 186,000 Total stockholders’ equity $740,000
Trademarks 140,000 Total Liabilities and
Total assets $1,050,000 stockholders’ equity $1,050,000

a. 2.34 : 1
b. 2.80 : 1
c. 3.31 : 1
d. 1.26 : 1

92. A measure of profitability is the
a. current ratio.
b. debt to assets ratio.
c. earnings per share.
d. working capital.

93. For 2014 Kuhlman Corporation reported net income of $28,000; net sales $400,000; and average share outstanding 16,000. There were no preferred dividends. What was the 2014 earnings per share?
a. $1.75
b. $0.57
c. $25.00
d. $0.07

94. For 2014 Fielder Corporation reported net income of $30,000; net sales $400,000; and average share outstanding 16,000. There were no preferred dividends. What was the 2014 earnings per share?
a. $0.08
b. $0.53
c. $25.00
d. $1.88

95. Earnings per share are calculated by dividing
a. gross profit by average common shares outstanding.
b. (net income less preferred dividends) by average common shares outstanding.
c. net income by average common shares outstanding.
d. net sales by average common shares outstanding.

96. Earnings per share is a
a. profitability ratio.
b. liquidity ratio.
c. solvency ratio.
d. trending ratio.

97. Which of the following statements is true?
a. Earnings per share is an internal measure and is not used by stockholders.
b. The denominator used in computing earnings per share represents the shares of common stock outstanding on the last day of the accounting period.
c. Net income is not adjusted when computing earnings per share.
d. By comparing earnings per share of a single corporation over time, a stockholder can evaluate the corporation’s relative earnings performance.

98. Earnings available to common stockholders is equal to
a. total revenues
b. net income + preferred dividends.
c. preferred dividends – net income.
d. net income – preferred dividends.

99. The following information is available for Bradshaw Corporation and Newell Corporation:
(in millions) Bradshaw Corporation Newell Corporation
2014 2013 2014 2013
Preferred dividends 25 10 0 30
Net income 500 480 490 520
Shares outstanding at the end of the year 200 180 150 200
Shares outstanding at the beginning of the year 180 150 200 220

Based on this information, the earnings per share calculations (rounded to two decimals) suggest
a. lower performance in 2013 than in 2014 for Bradshaw Corporation.
b. higher performance in 2014 than in 2013 for Bradshaw Corporation.
c. fewer earnings available to Bradshaw’s common stockholders in 2014 than in 2013.
d. an increase in the average number of common shares outstanding between 2013 and 2014 for Bradshaw Corporation.

100. The following information is available for Bradshaw Corporation and Newell Corporation:

(in millions) Bradshaw Corporation Newell Corporation
2014 2013 2014 2013
Preferred dividends 25 10 0 30
Net income 500 480 490 520
Shares outstanding at the end of the year 200 180 150 200
Shares outstanding at the beginning of the year 180 150 200 220

Based on this information, which of the following is suggested by the earnings per share calculations (rounded to two decimals) and the information given?
a. There is lower performance in 2013 than in 2014 for Newell Corporation.
b. There is higher performance in 2013 than in 2014 for Newell Corporation.
c. There are fewer earnings available to Newell’s common stockholders in 2014 than in 2013.
d. There is a decrease in preferred shares of stock in 2014 as compared with 2013.

101. The following information is available for Bradshaw Corporation and Newell Corporation:
(in millions) Bradshaw Corporation Newell Corporation
2014 2013 2014 2013
Preferred dividends 25 10 0 30
Net income 500 480 490 520
Shares outstanding at the end of the year 200 180 150 200
Shares outstanding at the beginning of the year 180 150 200 220

Based on this information, what is the amount of Bradshaw’s earnings per share (rounded to two decimals) for 2014?
a. $2.76
b. $2.50
c. $1.25
d. $1.32

102. The following information is available for Bradshaw Corporation and Newell Corporation:
(in millions) Bradshaw Corporation Newell Corporation
2014 2013 2014 2013
Preferred dividends 25 10 0 30
Net income 500 480 490 520
Shares outstanding at the end of the year 200 180 150 200
Shares outstanding at the beginning of the year 180 150 200 220

Based on the information for both Bradshaw and Newell over the two-year period, the earnings per share calculations (rounded to two decimals) indicate that
a. Bradshaw is seeing a greater performance improvement than Newell.
b. the earnings available to common stockholders is decreasing for Newell and increasing for Bradshaw.
c. the earnings per share calculations for both companies assume that changes in shares between 2013 and 2014 occur in the middle of the year.
d. Newell is more financially stable than Bradshaw.

103 Dawson Corporation has the following information available for 2014:
(in millions)
Issued common stock $45
Retired common stock $65
Paid dividends $75
Net income $130
Beginning Common Stock balance $625
Beginning Retained Earnings balance $475

Based in this information, what is Dawson’s Common Stock balance at the end of the year?
a. $605
b. $735
c. $245
d. $680

104. Dawson Corporation has the following information available for 2014:
(in millions)
Issued common stock $45
Retired common stock $65
Paid dividends $75
Net income $130
Beginning Common Stock balance $625
Beginning Retained Earnings balance $475

Based on this information, what is Dawson’s Retained Earnings balance at the end of the year?
a. $680
b. $530
c. $420
d. $605

105. Which of the following is the least likely consideration that management uses when deciding whether to pay a dividend?
a. Does the company have more cash than it has opportunities?
b. Is the company’s average number of common shares outstanding decreasing?
c. Does the company have uses for cash that will increase its value?
d. What are the company’s cash needs?

106. Most companies use a(n) _________ rather than a retained earnings statement.
a. balance sheet
b. income statement
c. statement of cash flows
d. statement of stockholders’ equity

107. Dividends appear on
a. the retained earnings statement only.
b. the income statement only.
c. both the retained earnings statement and the balance sheet.
d. the balance sheet only.

108. Issuing new shares of common stock will
a. increase retained earnings.
b. decrease retained earnings.
c. increase common stock.
d. decrease common stock.

109. Declaring a cash dividend will
a. increase retained earnings.
b. decrease retained earnings.
c. increase common stock.
d. decrease common stock.

110. Reporting a net income of $95,000 will
a. increase retained earnings.
b. decrease retained earnings.
c. increase common stock.
d. decrease common stock.

111. McKinney Corporation had beginning retained earnings of $2,242,000 and ending retained earnings of $2,499,000. During the year they issued common stock totaling $141,000. No dividends were paid. What was their net income for the year?
a. $257,000
b. $116,000
c. $398,000
d. $323,000

112. Wilton Corporation had beginning retained earnings of $724,000 and ending retained earnings of $833,000. During the year they issued common stock totaling $47,000. No dividends were paid. What was Wilton’s net income for the year?
a. $109,000
b. $62,000
c. $156,000
d. $131,000

113. At December 31, 2014 Lowery Company had retained earnings of $2,384,000. During 2014 they issued stock for $98,000, and paid dividends of $34,000. Net income for 2014 was $402,000. The retained earnings balance at the beginning of 2014 was
a. $2,752,000.
b. $2,016,000.
c. $2,114,000.
d. $2,654,000.

114. At December 31, 2014 Keen Company had retained earnings of $1,292,000. During 2014 they issued stock for $49,000, and paid dividends of $17,000. Net income for 2014 was $201,000. The retained earnings balance at the beginning of 2014 was
a. $1,476,000.
b. $1,108,000.
c. $1,157,000.
d. $1,427,000.

115. The relationship between current assets and current liabilities is important in evaluating a company’s
a. profitability.
b. liquidity.
c. market value.
d. solvency.

116. Which of the following is a measure of liquidity?
a. Working capital
b. Profit margin
c. Earnings per share
d. Debt to assets ratio

117. Current assets divided by current liabilities is known as the
a. working capital.
b. current ratio.
c. profit margin.
d. capital structure.

118. The most important information needed to determine if companies can pay their current obligations is the
a. net income for this year.
b. projected net income for next year.
c. relationship between current assets and current liabilities.
d. relationship between short-term and long-term liabilities.

119. A short-term creditor is primarily interested in the __________ of the borrower.
a. liquidity
b. profitability
c. consistency
d. solvency

120. The current ratio is
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets times current liabilities.

121. Working capital is calculated by taking
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets times current liabilities.

122. Working capital is a measure of
a. consistency.
b. liquidity.
c. profitability.
d. solvency.

123. Long-term creditors are usually most interested in evaluating
a. liquidity and profitability.
b. consistency and profitability.
c. liquidity and solvency.
d. consistency and solvency.

124. A liquidity ratio measures the
a. income or operating success of a company over a period of time.
b. ability of a company to survive over a long period of time.
c. short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
d. percentage of total financing provided by creditors.

125. Working capital is
a. calculated by dividing current assets by current liabilities.
b. used to evaluate a company’s liquidity and short-term debt paying ability.
c. used to evaluate a company’s solvency and long-term debt paying ability.
d. calculated by subtracting current assets from current liabilities.

126. The ability of a business to pay obligations that are expected to become due within the next year or operating cycle is
a. leverage.
b. liquidity.
c. profitability.
d. wealth.

127. Based on the following data, what is the amount of current assets?
Accounts payable……………………………………………………….. $62,000
Accounts receivable…………………………………………………….. 100,000
Cash………………………………………………………………………. 50,000
Intangible assets………………………………………………………… 100,000
Inventory…………………………………………………………………. 138,000
Long-term investments…………………………………………………. 160,000
Long-term liabilities……………………………………………………… 200,000
Short-term investments…………………………………………………. 80,000
Notes payable……………………………………………………………. 56,000
Property, plant, and equipment…………………………………………… 1,340,000
Prepaid insurance……………………………………………………….. 2,000

a. $212,000
b. $370,000
c. $232,000
d. $230,000

128. Based on the following data, what is the amount of working capital?

Accounts payable……………………………………………………….. $64,000
Accounts receivable…………………………………………………….. 114,000
Cash………………………………………………………………………. 60,000
Intangible assets………………………………………………………… 100,000
Inventory…………………………………………………………………. 138,000
Long-term investments…………………………………………………. 160,000
Long-term liabilities……………………………… ……………………. 200,000
Short-term investments…………………………………………………. 80,000
Notes payable (short-term)……………………………………………… 56,000
Property, plant, and equipment…………………………………………… 1,340,000
Prepaid insurance……………………………………………………….. 2,000

a. $274,000
b. $322,000
c. $360,000
d. $316,000

129. Using the following balance sheet and income statement data, what is the total amount of working capital?
Current assets $ 16,000 Net income $ 21,000
Current liabilities 8,000 Stockholders’ equity 39,000
Average assets 80,000 Total liabilities 21,000
Total assets 60,000
Average common shares outstanding was 10,000.

a. $ 4,000
b. $16,000
c. $ 5,000
d. $ 8,000

130. Using the following balance sheet and income statement data, what is the current ratio?
Current assets $ 16,000 Net income $ 21,000
Current liabilities 8,000 Stockholders’ equity 39,000
Average assets 80,000 Total liabilities 21,000
Total assets 60,000
Average common shares outstanding was 10,000.

a. 2.0 : 1
b. 2.6 : 1
c. 0.5 : 1
d. 2.9 : 1

131. Using the following balance sheet and income statement data, what is the earnings per share?
Current assets $ 16,000 Net income $ 21,000
Current liabilities 8,000 Stockholders’ equity 39,000
Average assets 80,000 Total liabilities 21,000
Total assets 60,000
Average common shares outstanding was 10,000.

a. $3.90
b. $6.00
c. $2.10
d. $0.48

132. Using the following balance sheet and income statement data, what is the debt to assets ratio?
Current assets $ 14,000 Net income $ 21,000
Current liabilities 8,000 Stockholders’ equity 39,000
Average assets 80,000 Total liabilities 21,000
Total assets 60,000
Average common shares outstanding was 10,000.

a. 26 percent
b. 13 percent
c. 65 percent
d. 35 percent

133. Using the following balance sheet and income statement data, what is the total amount of working capital?
Current assets $ 7,000 Net income $ 15,000
Current liabilities 4,000 Stockholders’ equity 21,000
Average assets 44,000 Total liabilities 9,000
Total assets 30,000
Average common shares outstanding was 10,000.

a. $7,000
b. $5,000
c. $3,000
d. $2,000

134. Using the following balance sheet and income statement data, what is the current ratio?
Current assets $ 7,000 Net income $ 15,000
Current liabilities 4,000 Stockholders’ equity 21,000
Average assets 44,000 Total liabilities 9,000
Total assets 30,000
Average common shares outstanding was 10,000.

a. 0.78 : 1
b. 3.33 : 1
c. 0.57 : 1
d. 1.75: 1

135. Using the following balance sheet and income statement data, what is the earnings per share?
Current assets $ 7,000 Net income $ 15,000
Current liabilities 4,000 Stockholders’ equity 21,000
Average assets 44,000 Total liabilities 9,000
Total assets 30,000
Average common shares outstanding was 10,000.

a. $1.50
b. $2.50
c. $0.67
d. $0.55

136. Using the following balance sheet and income statement data, what is the debt to assets ratio?
Current assets $ 7,000 Net income $ 15,000
Current liabilities 4,000 Stockholders’ equity 21,000
Average assets 44,000 Total liabilities 9,000
Total assets 30,000
Average common shares outstanding was 10,000.

a. 20.5 percent
b. 30 percent
c. 33.3 percent
d. 40.9 percent

137. The debt to assets ratio is computed by dividing
a. long-term liabilities by total assets.
b. long-term liabilities by average assets.
c. total liabilities by total assets.
d. total liabilities by average assets.

138. A useful measure of solvency is the
a. current ratio.
b. earnings per share.
c. return on assets ratio.
d. debt to assets ratio.

139. Which of the following is not considered a measure of liquidity?
a. Current ratio
b. Working capital
c. Debt to assets ratio
d. Each of these answer choices are liquidity measures

140. Which measure would a long-term creditor be least interested in reviewing?
a. Free cash flow
b. Debt to assets ratio
c. Current ratio
d. Solvency measure

141. Bathlinks Corporation has a debt to assets ratio of 73%. This tells the user of Bathlinks’s financial statements that
a. Bathlinks is getting a 27% return on its assets.
b. there is a risk that Bathlinks cannot pay its debts as they come due.
c. 73% of the assets are financed by the stockholders.
d. based on this measure, the user should not invest in Bathlinks.

142. Ace Company is a retail store. Due to competition, it is having trouble selling its products. Thus, inventory has been building up. Ace’s current ratio has not changed for the past three years, in spite of the inventory build up. Which of the following statements is true?
a. As long as the current ratio remains constant, there is no need for concern.
b. The composition of current assets and current liabilities does not matter.
c. The management of Ace should consider the effect of slow moving inventory on its liquidity.
d. Since inventory is a current asset, any increases should automatically cause the current ratio to rise.

143. How can a company improve its current ratio?
a. Work with a creditor to reclassify some current debt into long-term debt
b. Use cash to reduce current liabilities
c. Nothing can ethically be done to improve the current ratio
d. Use excess cash to buy new equipment

144. Kingery Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they pay $250,000 of their accounts payable what will their new current ratio be?
a. 3.1:1
b. 2.4:1
c. 3.6:1
d. 2.0:1

145. Kingery Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they issue $100,000 of new stock what will their new current ratio be? (rounded)
a. 2.5:1
b. 2.1:1
c. 2.3:1
d. 2.4:1

146. Mitchell Corporation has current assets of $1,600,000 million and current liabilities of $750,000. If they pay $250,000 of their accounts payable what will their new current ratio be?
a. 2.7:1
b. 3.2:1
c. 1.69:1
d. 2.1:1

147. Mitchell Corporation has current assets of $1,600,000 and current liabilities of $750,000. If they issue $100,000 of new stock what will their new current ratio be? (rounded)
a. 2.27:1
b. 2.04:1
c. 1.88:1
d. 2.13:1

148. The debt to assets ratio is a
a. liquidity ratio.
b. profitability ratio.
c. solvency ratio.
d. None of the answer choices is correct.

149. Free cash flow provides an indication of a company’s ability to
a. generate cash to invest in new capital expenditures.
b. generate net income.
c. generate cash to pay dividends.
d. generate cash to invest in new capital expenditures and to pay dividends.

150. Free cash flow represents
a. cash provided by operations less adjustments for capital expenditures and dividends.
b. a measurement of a company’s cash generating ability.
c. a measure of solvency.
d. All of these answer choices are correct.

151. Free cash flow is Net cash provided by operating activities
a. less capital expenditures.
b. less cash dividends.
c. less capital expenditures and cash dividends.
d. less capital expenditures and salaries expense.

152. In 2014 Grider Corporation had cash receipts of $56,000 and cash disbursements of $32,000. Grider’s ending cash balance at December 31, 2014 was $88,000. What was Grider’s beginning cash balance?
a. $64,000
b. $80,000
c. $120,000
d. $112,000

153. In 2014 Grider Corporation had cash receipts of $35,000 and cash disbursements of $20,000. Grider’s ending cash balance at December 31, 2014 was $55,000. What was Grider’s beginning cash balance?
a. $40,000
b. $50,000
c. $75,000
d. $70,000

154. Suppose that Morgan Corporation produced and sold 4,800 laptop computers during 2014. It reported $150,000 cash provided by operating activities. In order to maintain production at 4,800 laptops, Morgan invested in $8,600 in equipment. Morgan paid $1,400 in dividends. What is Morgan’s free cash flow?
a. $140,000
b. $160,000
c. $157,000
d. $150,000

155. The following information is available for Cooke Corporation:

(in million)
Cash receipts from operating activities $980
Cash payments from operating activities $240
Net cash used by investing $210
Net cash provided by financing $750
Net increase in cash and equivalents ?
Cash and equivalents at start of year $550
Cash and equivalents at year-end ?

What is the net increase in cash and equivalents?
a. $1,700
b. $1,280
c. $730
d. $2,250

156. The following information is available for Cooke Corporation:

(in million)
Cash receipts from operating activities $980
Cash payments from operating activities $240
Net cash used by investing $210
Net cash provided by financing $750
Net increase in cash and equivalents ?
Cash and equivalents at start of year $550
Cash and equivalents at year-end ?

What is the cash and equivalents amount at year-end?
a. $1,290
b. $730
c. $1,830
d. $2,730

157. If Morris Corporation has a negative $131 million free cash flow, which of the following statements is most likely true?
a. Morris’ capital expenditures plus its cash dividends are less than its cash provided by operations.
b. This free cash flow indicates that Morris is in good shape to repay its long-term obligations when they come due.
c. This free cash flow indicates that Morris presents good cash generating ability to retire stock.
d. Morris’ cash provided by operations is less than its cash dividends plus capital expenditures.

158. Which of the following organizations issues accounting standards for countries outside the United States?
a. SEC
b. GAAP
c. IASB
d. FASB

159. Generally accepted accounting principles
a. are accounting rules formulated by the Internal Revenue Service.
b. are sound in theory but rarely used in real life.
c. are accounting rules that are recognized as a general guide for financial reporting.
d. have eliminated all errors in accounting.

160. The agency of the United States Government that oversees the U.S. financial markets is the
a. Internal Revenue Service.
b. Security Exchange Commission.
c. Financial Accounting Standards Board.
d. International Auditing Standards Committee.

161. What organization issues U.S. accounting standards?
a. Security Exchange Commission
b. International Accounting Standards Committee
c. International Auditing Standards Committee
d. Financial Accounting Standards Board

162. Which one of the following is not an enhancing quality of useful information?
a. Timeliness
b. Understandability
c. Materiality
d. Comparability

163. All of the following are qualities of useful information except
a. faithful representation.
b. materiality.
c. relevance.
d. flexibility.

164. The two fundamental qualities of useful information are
a. relevance and faithful representation.
b. verifiability and timeliness.
c. comparability and flexibility.
d. understandability and consistency.

165. The convention of consistency refers to consistent use of accounting principles
a. among firms.
b. among accounting periods.
c. throughout the accounting periods.
d. within industries.

166. The quality of consistency enhances
a. relevance.
b. materiality.
c. comparability.
d. faithful representation.

167. Information that is presented in a clear fashion, so that users of that information can interpret it is an example of
a. relevance.
b. faithful representation.
c. understandability.
d. comparability.

168. In order for accounting information to be relevant, it must
a. have very little cost.
b. help predict future events or confirm prior expectations.
c. not be reported to the public.
d. be used by a lot of different firms.

169. Accounting information should be verifiable in order to enhance
a. comparability.
b. faithful representation.
c. consistency.
d. relevance.

170. Accounting information is relevant to business decisions because it
a. has been verified by external audit.
b. is prepared on an annual basis.
c. confirms prior expectations.
d. is neutral in its representations.

171. If accounting information has relevance, it is useful in making predictions about
a. future IRS audits.
b. new accounting principles.
c. foreign currency exchange rates.
d. the future events of a company.

172. Relevant accounting information
a. is information that has been audited.
b. must be reported within the operating cycle or one year, whichever is longer.
c. has been objectively determined.
d. is information that is capable of making a difference in a business decision.

173. Which of the following is not a quality associated with faithful representation?
a. Complete
b. Materiality
c. Neutral
d. All of these answer choices are correct.

174. Accounting information should be neutral in order to enhance
a. faithful representation.
b. consistency.
c. comparability.
d. relevance.

175. Characteristics associated with relevant accounting information are
a. comparability and timeliness.
b. predictive value and confirmatory value.
c. neutral and verifiable.
d. consistency and understandability.

176. Characteristics associated with faithfully representative accounting information are
a. verifiable and timely.
b. verifiable and neutral.
c. complete and neutral.
d. relevance and verifiable.

177. Which of the following statements is not true?
a. Comparability means using the same accounting principles from year to year within a company.
b. Faithful representation is the quality of information that gives assurance that it is free of error.
c. Relevant accounting information must be capable of making a difference in the decision.
d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions.

178. A company can change to a new method of accounting if management can justify that the new method results in
a. more meaningful financial information.
b. a higher net income.
c. a lower net income for tax purposes.
d. less likelihood of clerical errors.

179. An item is considered material if
a. it doesn’t costs a lot of money.
b. it is of a tangible good.
c. its size is likely to influence the decision of an investor or creditor.
d. the cost of reporting the item is greater than its benefits.

180. Information presented in a clear and concise fashion so that users can comprehend its meaning is an application of
a. consistency.
b. timeliness.
c. verifiability.
d. understandability.

181. A company using the same accounting principles from year to year is an application of
a. timeliness.
b. consistency.
c. full disclosure.
d. materiality.

182. Information is _________ if independent measures, using the same methods, obtain similar results.
a. Verifiable
b. Consistent
c. Understandable
d. Relevant

183. Different companies using the same accounting principles is an application of
a. consistency.
b. materiality.
c. full disclosure.
d. comparability.

1 84. The assumption that requires only those things that can be expressed in money are included in the accounting records is the
a. economic entity assumption.
b. monetary unit assumption.
c. going concern assumption.
d. periodicity assumption.

185. Which of the following is a constraint in accounting?
a. Comparability
b. Cost
c. Consistency
d. Relevance

186. The accounting concept that indicates assets should be reported at the price received to sell an asset is the
a. economic entity assumption.
b. monetary unit assumption.
c. fair value principle.
d. historical cost principle.

187. For accounting information to have relevance, it must be
a. consistent.
b. timely.
c. verifiable.
d. understandable.

188. The periodicity assumption states that the economic life of a business can be divided into
a. equal time periods.
b. cyclical time periods.
c. artificial time periods.
d. perpetual time periods.

189. Which accounting assumption requires that only those things that can be expressed in dollar values are included in the accounting records?
a. monetary unit assumption.
b. historical cost principle.
c. periodicity assumption.
d. full disclosure principle.

190. The principle that indicates that assets should be reported at the price received to sell an asset is the
a. historical cost principle.
b. fair value principle.
c. full disclosure principle.
d. consistency principle.

191. Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments?
a. Monetary unit assumption
b. Economic entity assumption
c. Periodicity assumption
d. Going concern assumption

192. It is assumed that the activities of Ford Motor company can be distinguished from those of General Motors because of the
a. going concern assumption.
b. economic entity assumption.
c. monetary unit assumption.
d. periodicity assumption.

193. The going concern assumption assumes that the business
a. will be liquidated in the near future.
b. will be purchased by another business.
c. is in a growth industry.
d. will remain in operation for the foreseeable future.

194. The economic entity assumption states that economic events
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
d. of every entity can be separately identified and accounted for.

195. The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the
a. economic entity assumption.
b. monetary unit assumption.
c. periodicity assumption.
d. going concern assumption.

196. Which of the following is not an accounting assumption?
a. Integrity
b. Going concern
c. Periodicity
d. Economic entity

197. The periodicity assumption states
a. the business will remain in operation for the foreseeable future.
b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared.
c. every economic entity can be separately identified and accounted for.
d. only those things that can be expressed in money are included in the accounting records.

198. The TNT Company has five plants nationwide that cost $300 million. The current fair value of the plants is $500 million. The plants will be reported as assets at
a. $200 million.
b. $800 million.
c. $300 million.
d. $500 million.

199. The Mac Company has four plants nationwide that cost $350 million. The current fair value of the plants is $300 million. The plants will be reported as assets at
a. $350 million.
b. $700 million.
c. $300 million.
d. $600 million.

200. The historical cost principle requires that when assets are acquired, they be recorded at
a. market value.
b. the amount paid for them.
c. selling price.
d. list price.

201. Valuing assets at their fair value rather than at their cost is inconsistent with the
a. economic entity assumption.
b. historical cost principle.
c. periodicity assumption.
d. full disclosure principle.

202. Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Jackson most likely violated?
a. Comparability
b. Relevance
c. Faithful representation
d. Consistency

203. Connor Corporation hired a new accountant. Over the next four years, the accountant used four different accounting methods to depreciation for Connor’s equipment. Which of the following qualities of useful information has Connor most likely violated?
a. Comparability
b. Relevance
c. Faithful representation
d. Consistency

204. Garrison Company prepares quarterly reports, which it distributes to all stockholders and other entities that rely on its accounting information. Which of the following is the best term for the key assumption in financial reporting that Garrison is following?
a. Monetary unit assumption
b. Going concern assumption
c. Economic entity assumption
d. Periodicity assumption.

BRIEF EXERCISES
BE. 205
A list of financial statement items for Maloney Company includes the following:
Accounts receivable $19,500 Prepaid insurance $5,400
Cash $22,400 Supplies $1,800
Debt investments $ 6,200
Prepare the current assets section of the balance sheet listing the items in the proper sequence.

BE. 206
The following information (in millions of dollars) is available for Kline Sportswear for 2014:
Sales revenue $6,300 Net income $588.7
Stock price per share $18.45 Preferred stock dividend $0
Average shares outstanding 336.4 million

Compute the earnings per share for Kline Sportswear.

336.4

BE. 207
For each of the following events affecting the stockholders’ equity of Carney, indicate whether the event would: increase retained earnings (IRE), decrease retained earnings (DRE), increase common stock (ICS), or decrease common stock (DCS).
_____1. Declared a cash dividend.
_____2. Issued new shares of common stock.
_____3. Reported net loss of $40,000
_____4. Reported net income of $20,000.

BE. 208
These selected condensed data are taken from a recent balance sheet of Sanson Company (in millions of dollars).
Cash $ 7.2
Accounts receivable 14.4
Inventory 18.0
Other current assets 11.1
Total current liabilities $ 24.8

Additional information: Current liabilities at the beginning of the year were $35.6 million.

What are (a) the working capital, and (b) the current ratio?

BE. 209
Insert the qualitative characteristics listed below that are associated with relevance and faithful representation.

Confirmatory value Materiality
Free from error Complete
Neutral Predictive value

RELEVANCE FAITHFUL REPRESENTATION
1. 1.
2. 2.
3. 3.

BE. 210
The following terms relate to the fundamental qualities of useful information. Match the key letter of the correct term with the descriptive statement below.

a. Confirmatory value
b. Neutral
c. Predictive value
d. Relevant
e. Faithful representation
f. Timely
g. Verifiable

_____ 1. Accounting information that is not biased toward one position or another.

_____ 2. Providing information before it loses its capacity to influence decisions.

_____ 3. Providing information that is proven to be free from error.

_____ 4. Providing information that would make a difference in a business decision.

_____ 5. Provide information that accurately depicts what really happened.

_____ 6. Confirms or corrects prior decisions.

BE. 211
For each of the independent situations described below, list the fundamental or enhancing of quality or useful information that has been violated, if any. List only one term for each case.
1. Carrier Company is in its third year of operation and has yet to issue financial statements.
2. Larsen Corporation has selected the FIFO inventory costing method during the current year. Last year it used the LIFO method and next year it plans to change to the average cost method.
3. Reiser Company expenses some office equipment that is inexpensive even though it has a useful life that exceeds 1 year.

BE. 212
Each of the following statements is justified by an accounting concept. Write the letter in the blank next to each statement corresponding to the concept involved.

a. Consistency
b. Materiality
c. Full disclosure
d. Periodicity

1. The life of a business is divided into artificial time periods.

2. This characteristic best enhances comparability of financial statements between years.

3. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statement.

4. A large company rounds its financial statement figures to the nearest thousand.

BE. 213
Each of the following statements is justified by a fundamental quality or an enhancing of quality accounting. Write the letter in the blank next to each statement corresponding to the quality involved.

a. Comparability d. Consistency
b. Understandability e. Relevance
c. Verifiable f. Faithful representation

_____ 1. A company uses the same accounting principles from year to year.

_____ 2. Information that is free from error.

_____ 3. Information presented in a clear and concise fashion.

_____ 4. Information that makes a difference in a decision.

_____ 5. Information accurately depicts what really happened.

Be. 214
Presented below are the basic assumptions and principles underlying financial statements.

a. Historical cost principle d. Going concern assumption
b. Economic entity assumption e. Monetary unit assumption
c. Full disclosure principle f. Periodicity assumption

Identify the basic assumption or principle that is described below.

1. The economic life of a business can be divided into artificial time periods.

2. The business will continue in operation long enough to carry out its existing objectives.

3. Assets should be recorded at their cost.

4. Economic events can be identified with a particular unit of accountability.

5. Circumstances and events that make a difference to financial statement users should be disclosed.

6. Only transaction data that can be expressed in terms of money should be included in the accounting records.

EXERCISES
Ex. 215
The following information is available for Mullen Company for the year ended December 31, 2014:

Accounts payable 4,700
Stock investments 8,400
Accumulated depreciation, equipment 4,000
Retained earnings 16,000
Common stock 4,800
Intangible assets 2,500
Notes payable (due in 5 years) 6,000
Accounts receivable 1,500
Cash 2,600
Debt investments 3,000
Land 10,000
Equipment 7,500

Instructions
Use the above information to prepare a classified balance sheet for the year ended December 31, 2014.

Ex. 216
The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent data found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs.

A. Current assets
B. Investments
C. Property, plant, and equipment
D. Intangible assets
E. Current liabilities
F. Long-term liabilities
G. Stockholders’ equity
H. Not on the balance sheet

Ex. 217
These items are taken from the financial statements of Donovan Company. at December 31, 2014.

Buildings $95,800
Accounts receivable 15,600
Prepaid insurance 4,680
Cash 18,840
Equipment 79,400
Land 61,200
Insurance expense 780
Depreciation expense 7,300
Interest expense 2,600
Common stock 57,000
Retained earnings (January 1, 2014) 40,000
Accumulated depreciation—buildings 45,600
Accounts payable 15,500
Mortgage payable 88,600
Accumulated depreciation—equipment 18,720
Interest payable 3,600
Service revenue 17,180

Instructions
Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be paid in 2015.

Ex. 218
The following items are taken from the financial statements of Tracy Company for 2014:

Accounts payable $ 10,000
Accounts receivable 11,000
Accumulated depreciation—equipment 38,000
Advertising expense 21,000
Cash 14,000
Common stock 90,000
Depreciation expense 12,000
Dividends 15,000
Equipment 210,000
Insurance expense 3,000
Notes payable (due 2017) 70,000
Prepaid insurance 6,000
Rent expense 17,000
Retained earnings (beginning) 12,000
Salaries and wages expense 34,000
Salaries and wages payable 3,000
Service revenue 130,000
Supplies 4,000
Supplies expense 6,000

Ex. 218 (Cont.)

Instructions
(a) Calculate the net income.
(b) Calculate the retained earnings balance that would appear on a balance sheet at December 31, 2014
(c) Prepare a classified balance sheet for Tracy Company at December 31, 2014 assuming the note payable is a long-term liability.
(d) Compute the current ratio, debt to assets ratio, and earnings per share value. The average number of shares outstanding for 2014 was 10,000.

Ex. 219
The following items are taken from the financial statements of Grove Company for 2014:

Accounts payable $18,500
Accounts receivable 8,000
Accumulated depreciation-equipment 4,800
Bonds payable 18,000
Cash 24,000
Common stock 25,000
Cost of goods sold 27,000
Depreciation expense 4,800
Dividends 5,300
Equipment 44,000
Interest expense 2,500
Patents 7,500
Retained earnings, January 1 16,000
Salaries and wages expense 5,200
Sales revenue 50,500
Supplies 4,500

Instructions

(a) Prepare an income statement and a classified balance sheet for Grove Company.
(b) Compute the following ratios and values:
1. Current ratio
2. Debt to assets ratio
3. Working capital
4. Earnings per share (Grove’s average number of shares outstanding during the year was 5,000.)

Ex. 220
These financial statement items are for Snyder Corporation at year-end, July 31, 2014.

Salaries and wages payable $ 2,580
Salaries and wages expense 50,700
Utilities expense 22,600
Equipment 21,000
Accounts payable 4,100
Service revenue 62,100
Rent revenue 8,500
Notes payable (due 2016) 1,800
Common stock 16,000
Cash 20,200
Accounts receivable 12,780
Accumulated depreciation—equipment 6,000
Dividends 5,000
Depreciation expense 4,000
Retained earnings (beginning of the year) 35,200

Instructions
(a) Prepare an income statement and a retained earnings statement for the year ended July 31, 2014. Snyder Corporation did not issue any new stock during the year.
(b) Prepare a classified balance sheet at July 31, 2014.

Ex. 221
These items are taken from the financial statements of Drew Corporation for 2014.

Retained earnings (beginning of year) $33,000
Utilities expense 2,000
Equipment 56,000
Accounts payable 15,300
Cash 15,900
Salaries and wages payable 3,000
Common stock 13,000
Dividends 14,000
Service revenue 78,000
Prepaid insurance 3,500
Maintenance and repairs expense 1,800
Depreciation expense 3,300
Accounts receivable 14,200
Insurance expense 2,200
Salaries and wages expense 47,000
Accumulated depreciation—equipment 17,600

Ex. 221 (Cont.)

Instructions
Prepare an income statement and a retained earnings statement for the year ended December 31, 2014 and a classified balance sheet as of December 31, 2014.

Ex. 222
The Dobson Company gathered the following condensed data for the year ended December 31, 2014:
Cost of goods sold $ 720,000
Net sales 1,249,000
Administrative expenses 289,000
Interest expense 68,000
Dividends paid 38,000
Selling expenses 45,000
Instructions
Prepare an income statement for the year ended December 31, 2014.

Ex. 223
The following data are taken from the financial statements of Rosen, Inc. as of the end of the year 2014. The data are in alphabetical order.

Accounts payable $ 28,000 Net income $ 48,000
Accounts receivable 66,000 Other current liabilities 17,000
Cash 24,000 Salaries and wages payable 5,000
Gross profit 160,000 Total assets 250,000
Income before income taxes 54,000 Total liabilities 175,000

Additional information: The average common shares outstanding during the year was 40,000.

Instructions
Compute the following:
(a) Current ratio. (c) Earnings per share.
(b) Working capital. (d) Debts to assets ratio.

Ex. 224
Use the following data to calculate the liquidity and profitability ratios listed below.

Average common shares outstanding 10,000 Current liabilities $100,000
Capital expenditures $20,000 Net income 21,000
Cash provided by operating activities 32,000 Net sales 150,000
Dividends paid 5,000 Total liabilities 126,000
Current assets 190,000 Total assets 210,000

Instructions
Compute the following:
(a) Current ratio. (d) Debt to assets ratio.
(b) Working capital. (e) Free cash flow.
(c) Earnings per share.

Ex. 225
The following data are taken from the financial statements of Edington Company. The data are in alphabetical order.
Accounts payable $ 28,000 Net sales 500,000
Accounts receivable 65,000 Other current liabilities 20,000
Average common shares out. 20,000 Salaries and wages payable 7,000
Cash 56,000 Stockholders’ equity 135,000
Gross profit 190,000 Total assets 300,000
Net income 50,000
Instructions
Compute the following:
(a) Current ratio. (c) Earnings per share.
(b) Working capital. (d) Debt to assets ratio.

Ex. 226
Comparative financial statement data for Arthur Corporation and Lancelot Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2014.

Arthur Corporation Lancelot Corporation
2014 2014
Net sales $1,850,000 $620,000
Cost of goods sold 1,225,000 365,000
Operating expenses 303,000 98,000
Interest expense 9,000 3,800
Income tax expense 85,000 36,800
Current assets 427,200 130,336
Plant assets (net) 532,000 139,728
Current liabilities 66,325 35,348
Long-term liabilities 148,500 29,620
Additional Information:
Cash from operating activities $153,000 $44,000
Capital expenditures $90,000 $20,000
Dividends paid $36,000 $15,000
Average number of shares outstanding 100,000 50,000

Instructions
(a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2014.
(b) Comment on the relative solvency of the companies by computing the debt to assets ratio and the free cash flow for each company for 2014.

Ex. 227
For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio.

Code:
L = Liquidity ratio
P = Profitability ratio
S = Solvency ratio

1. Price-earnings ratio

2. Free cash flow

3. Debt to assets ratio

4. Earnings per share

5. Current ratio

Ex. 228
The following information is available from the annual reports of Marin Company and Nance Company.
(amounts in millions)
Marin Nance
Sales $26,510 $34,512
Gross profit 6,610 8,887
Net income 565 1,221
Current assets 13,712 28,447
Beginning total assets 17,102 33,130
Ending total assets 22,088 36,167
Current liabilities 7,966 13,950
Total liabilities 16,136 29,222
Average common shares outstanding 250 480
Preferred stock dividends paid -0- -0-

Instructions
(a) For each company, compute the following ratios:
1. Current ratio
2. Debt to assets ratio
3. Earnings per share

(b) Based on your calculations, discuss the relative liquidity, solvency, and profitability of the two companies.

Ex. 229
You are provide with the following information for Trent Company, effective as of its April 30, 2014, year-end.

Accounts payable $ 834
Accounts receivable 810
Buildings, net of accumulated depreciation 3,537
Cash 770
Common stock 900
Cost of goods sold 2,500
Current portion of long-term debt 450
Depreciation expense 335
Dividends paid during the year 475
Equipment, net of accumulated depreciation 1,220
Income tax expense 265
Income taxes payable 265
Interest expense 400
Inventory 967
Land 1,600
Long-term debt 3,500
Prepaid expenses 12
Retained earnings, beginning 1,600
Service revenue 9,600
Selling expenses 310
Debt investments 1,200
Salaries and wages expense 700
Salaries and wages payable 222

Instructions
Prepare an income statement and a retained earnings statement for Trent Company for the year ended April 30, 2014.

Ex. 230
The chief financial officer (CFO) of SuperClean Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2014, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ration of at least 2:1. The preliminary balance sheet is as follows.
SUPERCLEAN CORPORATION
Balance Sheet
December 30, 2014

Current assets Current liabilities
Cash $25,000 Accounts payable $ 20,000
Accounts receivable 20,000 Salaries and wages payable 10,000 $ 40,000
Prepaid insurance 15,000 $ 60,000 Long-term liabilities
Notes payable 90,000
Total liabilities 130,000
Property, plant, and equipment (net) 210,000 Stockholders’ equity
Total assets $270,000 Common stock 100,000
Retained earnings 40,000 140,000
Total liabilities and
stockholders equity $270,000

Instructions
(a) Calculate the current ratio and working capital based on the preliminary balance sheet.
(b) Based in the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2014. Calculate the new current ratio and working capital after the company takes these actions.

COMPLETION STATEMENTS
231. The rules and practices that are recognized as general guides for financial reporting are called ______________ _____________ _______________.

232. In accounting, ____________ results when different companies use the same accounting principles.

233. _______________ is a company-specific aspect of relevance where size is likely to influence the decision of an investor or creditor.

234. The _______________ constraint relates to the fact that providing information is costly.

235. The earnings per share value is calculated by dividing net income – preferred stock dividends by _______________ ______________ ______________.

236. Assets that are expected to be converted to cash or used in the business within a relatively short period of time are called ______________.

237. The ________________ is current assets divided by current liabilities.

238. A measurement to provide additional insight regarding a company’s cash-generating ability is _____________.

MATCHING
239. Match the items below by entering the appropriate code letter in the space provided.

A. Relevance G. Working capital
B. Liquidity ratios H. Current ratio
C. Comparability I. Earnings per share
D. Consistency J. Solvency ratios
E. Intangible assets K. Economic entity assumption
F. Free cash flow L. Materiality

1. Measures of the ability of the company to survive over a long period of time.
2. Current assets divided by current liabilities.
3. Information that has a bearing on a decision.
4. Economic events can be identified with a particular unit of accountability.
5. An item important enough to influence the decision of an investor or creditor.
6. Same accounting principles and methods used from year to year within a company.
7. Cash from operating activities less capital expenditures and cash dividends.
8. Noncurrent assets that do not have physical substance.
9. (Net income – preferred stock dividends) divided by average common shares outstanding.
10. Different companies using the same accounting principles.
11. Measures of the short-term ability of the enterprise to pay its maturing obligations.
12. The excess of current assets over current liabilities.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 240
Identify the two parts of stockholders’ equity in a corporation and indicate the purpose of each.

S-A E 241
What do these classes of ratios measure?
(a) Liquidity ratios.
(b) Profitability ratios.
(c) Solvency ratios.

S-A E 242
Give the definition of current assets, current liabilities and the current ratio.

S-A E 243
Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain.

S-A E 244
Relevance and faithful representation are the fundamental qualities of useful information.
(a) Briefly define each term.
(b) Why are these characteristics important to users of financial statements?

S-A E 245
You and the CEO of your company are waiting on an elevator. You are going to the 25th floor and the CEO is going to the 35th floor. The CEO says “What is the difference between consistency and comparability?” You have two minutes to respond. What will you say?

S-A E 246
Comparability and consistency are enhancing qualities that make accounting information useful for decision-making purposes. Briefly explain the difference between these two qualities and explain how they are related to each other.

S-A E 247
Identify and briefly explain the two fundamental qualities of useful information.

S-A E 248
What are three of the five enhancing qualities of useful information.

S-A E 249 (Ethics)
Many bonus plans are based upon the attainment of some specified short-term goal. For example, sales personnel at Metal Crafters are given a bonus of 5% of the amount by which their sales exceed $100,000. Sometimes the attainment of these goals is achieved by methods detrimental to the long-term needs of the company. Sales representative Sara Crown, for example, finds herself tempted to court certain customers that place large orders, even though she knows they may not be able to pay. She complains that the bonus system itself is unethical.

Required:
Is a bonus system like the one at Metal Crafters unethical? Explain.

S-A E 250 (Communication)
Sunshine Sugar grows sugar cane in Florida, California, and Hawaii. Its investment in land to grow sugar exceeds $2 million. Currently, land whose original cost was more than $300,000 in Florida is threatened by plans to flood the Everglades to reclaim the wetlands. Sunshine plans to fight vigorously to keep its land in production, particularly because most of the rest of its land is in California, which is threatened by water shortages. The land in Florida is also significantly more productive than that in California, and the wages paid to workers to process the sugar cane are substantially less. Current plans include litigation to prevent government seizure of the land, an extensive public education campaign, and intense lobbying efforts.

Required:
Sunshine has determined that a footnote disclosure should be made in the financial statements to alert the investors of the threat to the land. Carefully consider how much of the above information is appropriate for inclusion in the footnote. Write the footnote.

IFRS Questions
1. The classified balance sheet is
a. required under GAAP but not under IFRS.
b. required under IFRS in the same format as under GAAP.
c. required under IFRS but not under GAAP.
d. required under IFRS with certain variations in format as compared to GAAP.

2. IFRS requires the use of
a. the term balance sheet.
b. the term statement of financial position.
c. neither balance sheet nor statement of financial position, but recommends use of the term balance sheet.
d. neither balance sheet nor statement of financial position, but recommends use of the term statement of financial position.

3. IFRS
a. requires a specific format for the balance sheet (statement of financial position) that is identical to U.S. GAAP.
b. requires a specific format for the balance sheet (statement of financial position) that is different from U.S. GAAP.
c. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement identical to U.S. GAAP .
d. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement in a different format from U.S. GAAP.

4. Most companies that follow IFRS present balance sheet (statement of financial position) information in this order.
a. current assets; investments; property; plant and equipment; intangible assets; current liabilities; long term liabilities; owners’ equity.
b. intangible assets; property; plant and equipment; investments; current assets; current liabilities; owners’ equity; long term liabilities.
c. current assets; noncurrent assets; current liabilities; noncurrent liabilities; equity.
d. noncurrent assets; current assets; equity; noncurrent liabilities; current liabilities.

5. Under IFRS and under GAAP, current assets are listed in
IFRS GAAP
a. order of liquidity order of liquidity
b. reverse order of liquidity order of liquidity
c. order of liquidity reverse order of liquidity
d. reverse order of liquidity reverse order of liquidity

6. The subtotal net assets is used in
a. both GAAP and IFRS.
b. GAAP but not IFRS.
c. IFRS but not GAAP.
d. neither IFRS nor GAAP.

7. Both IFRS and GAAP require disclosure about
a. accounting policies followed.
b. judgements that management has made in the process of applying the entity’s accounting policies.
c. the key assumptions and estimation uncertainty.
d. all of the above.

8. Under IFRS
a. comparative prior-period information must be presented, but financial statements need not be provided annually.
b. comparative prior-period information must be presented, and financial statements must be provided annually.
c. comparative prior-period information is not required, but financial statements need not be provided annually.
d. comparative prior-period information is not required, but financial statements must be provided annually.

9. The use of fair value to report assets
a. is not allowed under GAAP or IFRS.
b. is required by GAAP and IFRS.
c. is increasing under GAAP and IFRS, but GAAP has adopted it more broadly.
d. is increasing under GAAP and IFRS, but IFRS has adopted it more broadly.

10 Under IFRS
a. companies can apply fair value to property, plant, and equipment and natural resources.
b. companies can apply fair value to property, plant, and equipment but not to natural resources.
c. companies can apply fair value to neither property, plant, and equipment nor natural resources.
d. companies can apply fair value to natural resources but not to property, plant, and equipment.

CHAPTER 3

THE ACCOUNTING INFORMATION SYSTEM
TRUE-FALSE STATEMENTS
1. Economic events that require recording in the financial statements are called accounting transactions.

2. Revenue increases stockholders’ equity and should be recorded whenever cash is received from customers.

3. Collection on an account receivable will increase both cash and accounts receivable.

4. The payment of a liability decreases both cash and accounts payable.

5. If total assets are increased, there must be a corresponding increase in liabilities or a decrease in stockholders’ equity.

6. A new account is opened for each transaction entered into by a business firm.

7. The recording process becomes more efficient and informative if all transactions are recorded in one account.

8. An account consists of two parts: (1) a left or debit side and (2) a right or credit side.

9. For a T account, an account balance is the difference in total dollars between total debit amounts and total credit amounts.

10. An account is often referred to as a T-account because of the way it is constructed.

11. A debit to an account always indicates an increase in that account.

12. If a revenue account is credited, the revenue account is increased.

13. The normal balance of all accounts is a debit.

14. Debit and credit can be interpreted to mean “bad” and “good”, respectively.

15. A credit means that an account has been increased.

16. A decrease in a liability account is recorded by a debit.

17. An increase in an asset is recorded by a debit.

18. The double-entry system of accounting refers to the placement of a double line at the end of a column of figures.

19. A credit balance in a liability account indicates that an error in recording has occurred.

20. The normal balance of an asset is a credit.

21. The normal balance of the dividend account is a credit.

22. Assets are decreased with a credit.

23. A debit means that an account has been decreased.

24. A decrease in a liability is recorded by a debit.

25. An increase in an asset is recorded by a debit.

26. Liabilities are increased with debits and decreased with credits.

27. The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement.

28. Revenues are a subdivision of stockholders’ equity.

29. Under the double-entry system, revenues must always equal expenses.

30. Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts.

31. Source documents can provide evidence that a transaction has occurred.

32. Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal.

33. Transactions are entered in the ledger accounts and then transferred to journals.

34. All business transactions must be entered first in the general ledger.

35. Transactions are recorded in alphabetical order in a journal.

36. The journal is a chronological record of all transactions.

37. A journal is an accounting record in which transactions are initially recorded.

38. The complete effect of a transaction on the accounts is disclosed in the journal.

39. The account titles used in journalizing transactions need not be identical to the account titles in the ledger.

40. The chart of accounts is a special ledger used in accounting systems.

41. A general ledger should be arranged in financial statement order beginning with the balance sheet accounts.

42. The entire group of accounts maintained by a company is referred to collectively as the journal.

43. Prepaid expenses are assets.

44. Salaries and wages payable is a type of expense.

45. Dividends are classified as an expense.

46. Unearned Service Revenue is classified as a liability on the balance sheet.

47. Posting is the process of proving the equality of debits and credits in the trial balance.

48. Entering transactions into the journal is called posting.

49. A trial balance is prepared at the beginning of an accounting period.

50. A trial balance does not prove that all transactions have been recorded or that the ledger is correct.

51. In a trial balance, all debits are listed before all credits.

52. When the columns of the trial balance equal each other, it means that no errors have occurred in the recording and posting the transactions.

53. Operating activities are the types of activities the company performs to generate profits.

54. Financing activities include the purchase or sale of long-lived assets or the purchase or sale of investment securities.

MULTIPLE CHOICE QUESTIONS
55. If total liabilities decreased by $4,000, then
a. stockholders’ equity must have decreased by $4,000.
b. assets must have decreased by $4,000, or stockholders’ equity must have increased by $4,000.
c. assets and stockholders’ equity each increased by $2,000.
d. assets must have increased by $4,000.

56. Collection of a $600 Accounts Receivable
a. increases an asset $600; decreases an asset $600.
b. increases an asset $600; decreases a liability $600.
c. decreases a liability $600; increases stockholders’ equity $600.
d. decreases an asset $600; decreases a liability $600.

57. If an individual asset is increased, then
a. there could be an equal decrease in a specific liability.
b. there could be an equal decrease in stockholders’ equity.
c. there could be an equal decrease in another asset.
d. None of these answer choices are correct.

58. If services are rendered on account, then
a. assets will decrease.
b. liabilities will increase.
c. stockholders’ equity will increase.
d. liabilities will decrease.

59. If services are rendered for cash, then
a. assets will increase.
b. liabilities will increase.
c. stockholders’ equity will decrease.
d. liabilities will decrease.

60. If expenses are paid in cash, then
a. assets will increase.
b. liabilities will decrease.
c. stockholders’ equity will increase.
d. assets will decrease.

61. An investment by the stockholders in a business increases
a. assets and stockholders’ equity.
b. assets and liabilities.
c. liabilities and stockholders’ equity.
d. assets only.

62. The purchase of an asset for cash
a. increases assets and stockholders’ equity.
b. increases assets and liabilities.
c. decreases assets and increases liabilities.
d. leaves total assets unchanged.

63. The purchase of an asset on credit
a. increases assets and stockholders’ equity.
b. increases assets and liabilities.
c. decreases assets and increases liabilities.
d. leaves total assets unchanged.

64. The payment of a liability
a. decreases assets and stockholders’ equity.
b. increases assets and decreases liabilities.
c. decreases assets and increases liabilities.
d. decreases assets and liabilities.

65. The sale of an asset on credit for what it cost
a. increases assets and liabilities.
b. decreases assets and liabilities.
c. leaves total assets unchanged.
d. decreases assets and increases liabilities.

66. When collection is made on Accounts Receivable,
a. total assets will remain the same.
b. stockholders equity will increase.
c. total assets will increase.
d. total assets will decrease.

67. A revenue generally
a. increases assets and liabilities.
b. increases assets and stockholders’ equity.
c. increases assets and decreases stockholders’ equity.
d. leaves total assets unchanged.

68. A paid dividend
a. decreases assets and stockholders’ equity.
b. increases assets and stockholders’ equity.
c. increases assets and decreases stockholders’ equity.
d. decreases assets and increases stockholders’ equity.

69. Receiving payment of a portion of an accounts receivable will
a. not affect total assets.
b. increase liabilities.
c. increase stockholders’ equity.
d. decrease net income.

70. An expense
a. decreases assets and liabilities.
b. decreases stockholders’ equity.
c. leaves stockholders’ equity unchanged.
d. is basically the same as a liability.

71. Which of the following items has no effect on retained earnings?
a. Expense
b. Dividends
c. Land purchase
d. Revenue

72. If a company buys a $700 machine on credit, this transaction will affect the
a. income statement and retained earnings statement only.
b. income statement only.
c. income statement, retained earnings statement, and balance sheet.
d. balance sheet only.

73. A payment of a portion of an accounts payable will
a. not affect total assets.
b. increase liabilities.
c. not affect stockholders’ equity.
d. decrease net income.

74. Powers Corporation received a cash advance of $500 from a customer. As a result of this event,
a. assets increased by $500.
b. equity increased by $500.
c. liabilities decreased by $500.
d. Both assets and equity increased by $500.

75. Courtney Company purchased equipment for $1,800 cash. As a result of this event,
a. equity decreased by $1,800.
b. assets increased by $1,800.
c. total assets remained unchanged.
d. Both assets and equity decreased by $1,800.

76. Comstock Company provided consulting services and billed the client $2,500. As a result of this event
a. assets remained unchanged.
b. assets increased by $2,500.
c. equity increased by $2,500
d. Both assets and equity increased by $2,500.

77. Budke Corporation paid dividends of $5,000. As a result of this event, the
a. Dividends account was increased by $5,000.
b. Dividends account was decreased by $5,000.
c. Cash account was increased by $5,000.
d. Cash was increased and the Dividends account was decreased by $5,000.

78. If a company pays dividends of $10,000,
a. stockholders’ equity will be reduced by $10,000.
b. net income will be reduced by $10,000.
c. retained earnings will be reduced by $10,000.
d. Both retained earnings and stockholders’ equity will be reduced by $10,000.

79. If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck,
a. assets will be increased by $10,000.
b. equity will be reduced by $40,000.
c. assets will be increased by $40,000.
d. assets will be unchanged.

80. Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not?
a. Yes, they are treated as revenue at the time of receipt because the company has access to the cash.
b. No, the amount of revenue cannot be adequately determined until the company completes the work.
c. Yes, The intent of the company is to perform the work and the customer is confident that the services will be completed.
d. No, revenue cannot be recognized until the work is performed.

81. The receipt of cash in advance from a customer
a. increases assets and stockholders’ equity.
b. increases assets and decreases stockholders’ equity.
c. increases assets and liabilities.
d. none of these answer choices are correct.

82. On March 1, 2014, Freeze Company hires a new employee who will start to work on March 6. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not?
a. Yes, the company is now obligated to pay the employee, thus that event must be recorded.
b. No, hiring an employee is an important event; however it is not an economic event that should be recorded.
c. Yes, failure to record the event would cause the financial statements to be misleading.
d. No, the financial position of the company has been changed, however, the dollar amount of the transaction is not yet known.

83. Howard Company had a transaction that caused a $5,000 increase in both assets and total liabilities. This transaction could have been a(n)
a. purchase of office equipment for $12,000, paying $7,000 cash and issuing a note payable for the balance.
b. investment of $5,000 cash in the business by the stockholders.
c. purchase of office equipment for $5,000 cash.
d. repayment of a $5,000 bank loan.

84. Jamal Company began the year with $84,000 in its Common Stock account and a debit balance in Retained Earnings of $36,000. During the year, the company earned net income of $18,000 and declared and paid $6,000 of dividends. In addition, the company sold additional common stock amounting to $22,000. Based on this information, what should the transaction analysis show for the ending total of all stockholders’ equity accounts?
a. $154,000
b. $166,000
c. $82,000
d. $110,000

85. Crawford Company started the year with $30,000 in its Common Stock account and a credit balance in Retained Earnings of $22,000. During the year, the company earned net income of $24,000 and declared and paid $10,000 of dividends. In addition, the company sold additional common stock amounting to $14,000. As a result, the amount of its retained earnings at the end of the year would be
a. $80,000.
b. $36,000.
c. $66,000.
d. $50,000.

86. All of the following are characteristics of every accounting information system except it is a system
a. that collects transaction data.
b. that processes transaction data.
c. that communicates financial information to decision makers.
d. of data storage hardware for the chart of accounts.

87. The left side of an account is
a. blank.
b. a description of the account.
c. the debit side.
d. the balance of the account.

88. Which one of the following is not a part of an account?
a. Credit side
b. Trial balance
c. Debit side
d. Title

89. An account is a part of the financial information system and is described by each one of the following except
a. an account has a debit and credit side.
b. an account is a source document.
c. an account consists of three parts.
d. an account has a title.

90. The right side of an account
a. is the correct side.
b. reflects all transactions for the accounting period.
c. shows all the balances of the accounts in the system.
d. is the credit side.

91. An account consists of
a. a title, a debit balance, and a credit balance.
b. a title, a left side, and a debit balance.
c. a title, a debit side, and a credit side.
d. a title, a right side, and a debit balance.

92. A T-account is
a. a way of depicting the basic form of an account.
b. a special account used instead of a journal.
c. a special account used instead of a trial balance.
d. used for accounts that have both a debit and credit balance.

93. Which statement about an account is true?
a. In its simplest form, an account consists of two parts.
b. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items.
c. There are separate account for specific assets and liabilities but only one account for stockholders’ equity items.
d. The left side of an account is the credit or decrease side.

94. In its simplest form, an account consists of all of the following except
a. right (credit) side.
b. account title.
c. left side.
d. explanation column.

95. A debit to an asset account indicates a(n)
a. error.
b. credit was made to a liability account.
c. decrease in the asset.
d. increase in the asset.

96. Debits
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.

97. The normal balance of any account is the
a. left side.
b. right side.
c. side which increases that account.
d. side which decreases that account.

98. The double-entry system requires that each transaction must be recorded
a. in at least two different accounts.
b. in two sets of books.
c. in a journal and in a ledger.
d. first as a revenue and then as an expense.

99. A credit is not the normal balance for which account listed below?
a. Common Stock account
b. Revenue account
c. Liability account
d. Dividends account

100. The classification and normal balance of the Dividends account is
a. revenue with a credit balance.
b. an expense with a debit balance.
c. a liability with a credit balance.
d. stockholders’ equity with a debit balance.

101. Which of the following describes the classification and normal balance of the Retained Earnings account?
a. Asset, debit
b. Stockholders’ equity, credit
c. Revenues, credit
d. Expense, debit

102. Which of the following describes the classification and normal balance of the Unearned Rent Revenue account?
a. Asset, debit
b. Liability, credit
c. Revenues, credit
d. Expense, debit

103. A revenue account
a. is increased by debits.
b. is decreased by credits.
c. has a normal balance of a debit.
d. is increased by credits.

104. Which one of the following represents the expanded basic accounting equation?
a. Assets = Liabilities + Common Stock + Dividends – Revenue – Expenses
b. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues
c. Assets – Liabilities – Dividends = Common Stock + Revenues – Expenses
d. Assets = Revenues + Expenses – Liabilities

105. Which of the following correctly identifies normal balances of accounts?
a. Assets Debit
Liabilities Credit
Common Stock Credit
Revenues Debit
Expenses Credit

b. Assets Debit
Liabilities Credit
Common Stock Credit
Revenues Credit
Expenses Credit

c. Assets Credit
Liabilities Debit
Common Stock Debit
Revenues Credit
Expenses Debit

d. Assets Debit
Liabilities Credit
Common Stock Credit
Revenues Credit
Expenses Debit

106. Which accounts normally have debit balances?
a. Assets, expenses, and revenues
b. Assets, expense, and retained earnings
c. Assets, liabilities, and dividends
d. Assets, expenses, and dividends

107. Which accounts normally have credit balances?
a. Revenues, liabilities, and dividends
b. Revenues, liabilities, and assets
c. Revenues, liabilities, and retained earnings
d. Revenues, liabilities, and expenses

108. The best interpretation of the word “credit” is the
a. offset side of an account.
b. increase side of an account.
c. right side of an account.
d. decrease side of an account.

109. In recording an accounting transaction in a double-entry system
a. the number of debit accounts must equal the number of credit accounts.
b. there must always be entries made on both sides of the accounting equation.
c. the amount of the debits must equal the amount of the credits.
d. there must only be two accounts affected by any transaction.

110. A debit is not the normal balance for which account listed below?
a. Dividends
b. Cash
c. Accounts Receivable
d. Service Revenue

111. An accountant has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction?
a. Nothing further must be done.
b. Debit a stockholders’ equity account for $500.
c. Debit another asset account for $500.
d. Credit a different asset account for $500.

112. An accountant has debited an asset account for $800 and credited a liability account for $700. Which of the following would be an incorrect way to complete the recording of the transaction?
a. Credit an asset account for $100.
b. Credit another liability account for $100.
c. Credit a stockholders’ equity account for $100.
d. Debit a stockholders’ equity account for $100.

113. An accountant has debited an asset account for $900 and credited a liability account for $600. What can be done to complete the recording of the transaction?
a Debit a stockholders’ equity account for $300.
b. Debit another asset account for $300.
c. Credit a different asset account for $300.
d. Nothing further must be done.

114. Which of the following accounts is increased with a debit?
a. Dividends
b. Service Revenue
c. Interest Payable
d. Common Stock

115. Which of the following accounts is increased with a credit?
a. Supplies Expense
b. Supplies
c. Sales Revenue
d. Dividends

116. Which pair of accounts follows the rules of debit and credit in relation to increases and decreases in the same manner?
a. Dividends Payable and Rent Expense
b. Utilities Expense and Notes Payable
c. Prepaid Insurance and Advertising Expense
d. Service Revenue and Equipment

117. Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner?
a. Prepaid Insurance and Dividends
b. Dividends and Interest Revenue
c. Interest Payable and Common Stock
d. Advertising Expense and Land

118. Which of the following is not true of the terms debit and credit?
a. They can be abbreviated as Dr. and Cr.
b. They can be interpreted to mean increase and decrease.
c. They can be used to describe the balance of an account.
d. They can be interpreted to mean left and right.

119. An account will have a credit balance if the
a. credits exceed the debits.
b. first transaction entered was a credit.
c. debits exceed the credits.
d. last transaction entered was a credit.

120. For the basic accounting equation to stay in balance, each transaction recorded must
a. affect two or less accounts.
b. affect two or more accounts.
c. always affect exactly two accounts.
d. affect the same number of asset and liability accounts.

121. Which of the following statements is true?
a. Debits increase assets and increase liabilities.
b. Credits decrease assets and decrease liabilities.
c. Credits decrease assets and increase liabilities.
d. Debits increase liabilities and decrease assets.

122. Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the same manner?
a. Salaries and Wages Expense and Notes Payable
b. Common Stock and Rent Expense
c. Prepaid Rent and Advertising Expense
d. Service Revenue and Equipment

123. Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the opposite manner?
a. Salaries and Wages Expense and Notes Payable
b. Common Stock and Unearned Rent Revenue
c. Prepaid Rent and Advertising Expense
d. Service Revenue and Notes Payable

124. A company that receives money in advance of performing a service
a. debits Cash and credits Unearned Service Revenue.
b. debits Unearned Service Revenue and credits Accounts Payable
c. debits Cash and credits Prepaid Insurance.
d. debits Cash and credits Accounts Receivable.

125. When a company performs a service but has not yet received payment, it
a. debits Service Revenue and credits Accounts Receivable.
b. debits Accounts Receivable and credits Service Revenue.
c. debits Service Revenue and credits Accounts Payable.
d. makes no entry until cash is received.

126. Assets normally show
a. credit balances.
b. debit balances.
c. debit and credit balances.
d. debit or credit balances.

127. An awareness of the normal balances of accounts would help you spot which of the following as an error in recording?
a. A debit balance in the Dividends account
b. A credit balance in an expense account
c. A credit balance in a liabilities account
d. A credit balance in a revenue account

128. If a company has overdrawn its bank balance, then
a. its Cash account will show a debit balance.
b. its Cash account will show a credit balance.
c. the Cash account debits will exceed the cash account credits.
d. it cannot be detected by observing the balance of the Cash account.

129. Which account below is not a subdivision of stockholders’ equity?
a. Dividends
b. Revenues
c. Expenses
d. Liabilities

130. When a corporation distributes a dividend the
a. most common form of distribution is a cash dividend.
b. Dividends account will be increased with a credit.
c. Retained Earnings account will be directly increased with a debit.
d. Dividends account will be decreased with a debit.

131. The Dividends account
a. appears on the income statement along with the expenses of the business.
b. must show transactions every accounting period.
c. is increased with debits and decreased with credits.
d. is not a proper subdivision of stockholders’ equity.

132. A revenue account
a. is increased with a debit.
b. is decreased with a credit.
c. is increased with a credit.
d. has a normal balance of a debit.

133. Which of the following statements is not true?
a. Expenses increase stockholders’ equity.
b. Expenses have normal debit balances.
c. Expenses decrease stockholders’ equity.
d. Expenses are a negative factor in the computation of net income.

134. A credit to a liability account
a. indicates an increase in the amount owed to creditors.
b. indicates a decrease in the amount owed to creditors.
c. is an error.
d. must be accompanied by a debit to an asset account.

135. In the first month of operations, the total of the debit entries to the Cash account amounted to $1,400 and the total of the credit entries to the Cash account amounted to $800. The Cash account has a
a. $800 credit balance.
b. $1,400 debit balance.
c. $600 debit balance.
d. $600 credit balance.

136. In the first month of operations, the total of the debit entries to the Cash account amounted to $1,200 and the total of the credit entries to the Cash account amounted to $900. The Cash account has a
a. $900 credit balance.
b. $300 debit balance.
c. $1,200 debit balance.
d. $300 credit balance.

137. In the first month of operations, the total of the debit entries to the Cash account amounted to $1,000 and the total of the credit entries to the Cash account amounted to $600. The Cash account has a
a. $600 credit balance.
b. $1,000 debit balance.
c. $400 debit balance.
d. $600 credit balance.

138. The Cash account has a credit balance. Which statement is true?
a. This is the normal balance for cash.
b. An error has occurred and must be corrected before financial statements can be prepared.
c. The account needs to be analyzed to determine the reason for the credit balance.
d. Debit postings exceed the credit postings for the accounting period.

139. Which statement is incorrect?
a. Dividends represent a distribution by a corporation to its stockholders.
b. Dividends are shown on the income statement.
c. Dividends reduce stockholders’ equity, thus the Dividends account increases on the left side.
d. The Dividends account has a normal debit balance.

140. Why are expenses increased with a debit?
a. They are always paid by cash, which is credited. Thus expenses are debited.
b. They decrease stockholders’ equity thus they increase with a debit.
c. They have the same rules of debits and credits as the retained earnings account.
d. None of the statements are correct.

141. Barnes Company showed the following balances at the end of its first year:
Cash $14,000
Prepaid insurance 700
Accounts receivable 3,500
Accounts payable 2,800
Notes payable 4,200
Common stock 5,400
Dividends 700
Revenues 24,000
Expenses 17,500

Mc. 141 (count)
What did Barnes Company show as total credits on its trial balance?
a. $37,100
b. $36,400
c. $35,700
d. $37,800

142. Winrow Company showed the following balances at the end of its first year:
Cash $11,000
Prepaid insurance 500
Accounts receivable 2,500
Accounts payable 2,000
Notes payable 3,000
Common stock 5,000
Dividends 500
Revenues 17,000
Expenses 12,500

What did Winrow Company show as total credits on its trial balance?
a. $27,500
b. $27,000
c. $26,500
d. $28,000

143. During January 2014, its first month of operation, Osborn Enterprises earned net income of $1,700 and paid dividends to the owners of $500. At January 31, the balance in Retained Earnings will be
a. $0.
b. $1,700 credit.
c. $1,200 credit.
d. $500 debit.

144. On June 1, 2014, England Inc. reported a cash balance of $21,000. During June, England made deposits of $8,000 and made disbursements totaling $24,000. What is the cash balance at the end of June?
a. $5,000 credit balance
b. $29,000 debit balance
c. $5,000 debit balance
d. $3,000 credit balance

145. At January 1, 2014, Troyer Industries reported Retained Earnings of $280,000. During 2014, Troyer had a net loss of $60,000 and paid dividends to the stockholders of $40,000. At December 31, 2014, the balance in Retained Earnings is
a. $280,000 debit.
b. $240,000 credit.
c. $220,000 debit.
d. $180,000 credit.

146. During January 2014, Carey Services Inc. paid a cash dividends of $2,000. This transaction
a. reduces stockholders’ equity by $2,000.
b. increases stockholders’ equity by $2,000.
c. reduces net income by $2,000.
d. increases expenses by $2,000.

147. During February 2014, its first month of operations, the owner of Schwenn Enterprises invested cash of $40,000. Schwenn had cash sales of $8,000 and paid expenses of $14,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28?
a. $6,000 credit
b. $34,000 debit
c. $48,000 debit
d. $26,000 credit

148. At September 1, 2014, Kern Enterprises reported a cash balance of $70,000. During the month, Kern collected cash of $30,000 and made disbursements of $50,000. At September 30, 2014, the cash balance is
a. $20,000 credit.
b. $50,000 credit.
c. $100,000 debit.
d. $50,000 debit.

149. All of the following statements regarding the double-entry system are true except
a. a two-sided effect of each transaction is recorded in appropriate accounts when using the double-entry system.
b. the double-entry system provides a logical method for recording transactions.
c. both sides of the accounting equation must be affected when recording a transaction using the double-entry system.
d. when using the double-entry system, the sum of all debits to the accounts must equal the sum of all credits.

150. Which of the following accounts has a normal debit balance?
a. Accounts Payable
b. Prepaid Rent
c. Retained Earnings
d. Common Stock

151. Which of the following accounts has a normal credit balance?
a. Prepaid Rent
b. Notes Receivable
c. Rent Revenue
d. Rent Expense

152. During 2014, its first year of operations, Jane’s Bakery had revenues of $65,000 and expenses of $33,000. The business paid cash dividends of $18,000. What is the balance in Retained Earnings at December 31, 2014?
a. $0
b. $18,000 debit
c. $14,000 credit
d. $32,000 credit

153. At January 31, 2014, the balance in Goebel Inc.’s supplies account was $700. During February. Goebel purchased supplies of $600 and used supplies of $800. At the end of February, the balance in the Supplies account should be
a. $700 debit.
b. $900 credit.
c. $2,100 debit.
d. $500 debit.

154. At December 1, 2014, Orear Company’s Accounts Receivable balance was $5,600. During December, Orear had credit sales of $15,000 and collected accounts receivable of $12,000. At December 31, 2014, the Accounts Receivable balance is
a. $5,600 debit
b. $8,600 debit
c. $20,600 debit
d. $8,600 credit

155. At October 1, 2014, Metz Industries had an Accounts Payable balance of $70,000. During the month, the company made purchases on account of $50,000 and made payments on account of $80,000. At October 31, 2014, the Accounts Payable balance is
a. $70,000 debit
b. $10,000 credit
c. $40,000 credit
d. $80,000 credit

156. At September 1, 2014, Baxter Inc. reported Retained Earnings of $282,000. During the month, Baxter generated revenues of $40,000, incurred expenses of $24,000, purchased equipment for $10,000 and paid dividends of $4,000. What is the balance in Retained Earnings at September 30, 2014?
a. $282,000 debit
b. $16,000 credit
c. $284,000 credit
d. $294,000 credit

157. The usual sequence of steps in the transaction recording process is
a. journalize, analyze, post to the ledger.
b. analyze, journalize, post to the ledger.
c. journalize, post to the ledger, analyze.
d. post to the ledger, journalize, analyze.

158. In recording accounting transactions, evidence that a transaction has taken place is obtained from
a. source documents.
b. the Internal Revenue Service.
c. the public relations department.
d. the Securities and Exchange Commission.

159. After a business transaction has been analyzed and entered in the book of original entry, the next step in the recording process is to transfer the information to
a. the company’s bank.
b. stockholders’ equity.
c. ledger accounts.
d. financial statements.

160. The first step in the recording process is to
a. prepare financial statements.
b. analyze the transaction in terms of its effect on the accounts.
c. post to a journal.
d. prepare a trial balance.

161. Which of the following is not part of the recording process?
a. Analyzing transactions
b. Preparing a trial balance
c. Entering transactions in a journal
d. Posting journal entries

162. Evidence that would not help with determining the effects of a transaction on the accounts would be a(n)
a. cash register sales tape.
b. bill.
c. advertising brochure.
d. check.

163. After transaction information has been recorded in the journal, it is transferred to the
a. trial balance.
b. income statement.
c. general journal.
d. ledger.

164. The usual sequence of steps in the recording process is to
a. analyze each transaction, enter the transaction in the journal, and transfer the information to the ledger accounts.
b. analyze each transaction, enter the transaction in the ledger, and transfer the information to the journal.
c. analyze each transaction, enter the transaction in the book of accounts, and transfer the information to the journal.
d. analyze each transaction, enter the transaction in the book of original entry, and transfer the information to the journal.

165. The final step in the recording process is to transfer the journal information to the
a. trial balance.
b. financial statements.
c. ledger.
d. file cabinets.

166. The recording process occurs
a. once a year.
b. once a month.
c. repeatedly during the accounting period.
d. infrequently in a manual accounting system.

167. Which of the following is not an example of a source document that provides evidence of a transaction?
a. A cancelled check
b. A sales slip
c. A trial balance
d. A cash register tape

168. All of the following are significant contributions that the journal makes to the recording process except the journal
a. discloses the complete effect of a transaction in one place.
b. helps prevent or locate errors because debits and credits can be readily compared.
c. keeps complete information about changes in a specific account balance in one place.
d. provides a chronological record of transactions.

169. A journal provides
a. the balances for each account.
b. information about a transaction in several different places.
c. a list of all accounts used in the business.
d. a chronological record of transactions.

170. The basic format of a journal would not include a(n)
a. brief explanation.
b. account title column.
c. T-account.
d. date column.

171. Transactions in a journal are initially recorded in
a. account number order.
b. dollar amount order.
c. alphabetical order.
d. chronological order.

172. A journal is not useful for
a. disclosing in one place the complete effect of a transaction.
b. preparing financial statements.
c. providing a record of transactions.
d. locating and preventing errors.

173. A complete journal entry does not show
a. the date of the transaction.
b. the new balance in the accounts affected by the transaction.
c. a brief explanation of the transaction.
d. the accounts and amounts to be debited and credited.

174. The name given to entering transaction data in the journal is
a. chronicling.
b. listing.
c. posting.
d. journalizing.

175. The basic form of a journal entry has the
a. debit account entered first and indented.
b. credit account entered first and indented.
c. debit account entered first at the extreme left margin.
d. credit account entered first at the extreme left margin.

176. Which of the following journal entries is recorded correctly and in the basic format?
a. Salaries and Wages Expense 550
Cash 1,500
Advertising Expense 950

b. Salaries and Wages Expense 550
Advertising Expense 950
Cash 1,600

c. Cash 1,500
Salaries and Wages Expense 550
Advertising Expense 950

d. Salaries and Wages Expense 550
Advertising Expense 950
Cash 1,500

177. When a company has performed a service but has not yet received payment, it
a. debits accounts receivable and credits service revenue.
b. debits revenue from services and credits accounts receivable.
c. debits revenue from services and credits accounts payable.
d. makes no entry until the cash is received.

178. A company that receives money in advance of performing a service
a. debits cash and credits prepaid services.
b. debits unearned fees and credits accounts payable.
c. debits cash and credits unearned service revenue.
d. debits cash and credits accounts receivable.

179. When a company receives a utility bill but will not pay it right away, it should
a. debit Utilities Expense and credit Accounts Receivable.
b. debit Utilities Expense and credit Accounts Payable.
c. debit Accounts Payable and credit Utilities Expense.
d. make no entry until the bill is paid.

180. When a service has been performed, but no cash has been received, which of the following statements is true?
a. No journal entry is made.
b. The entry includes a debit to accounts payable.
c. The entry includes a credit to unearned revenue.
d. The entry includes a debit to accounts receivable.

181. Equipment costing $20,000 machine is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry should include a
a. credit to Notes Payable.
b. debit to Cash.
c. credit to Notes Receivable.
d. credit to Equipment.

182. Equipment costing $20,000 is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry should include a
a. debit to Notes Payable.
b. credit to Cash.
c. credit to Notes Receivable.
d. credit to Equipment.

183. An accounting record that includes a list of accounts and their balances at a given time is called a
a. trial balance.
b. general journal.
c. general ledger.
d. chart of accounts.

184. Typically the chart of accounts begins with
a. asset accounts.
b. liability accounts.
c. revenue accounts.
d. expense accounts.

185. The purpose of the ledger is to
a. record chronologically the day’s transactions.
b. keep a record of documentation to support each transaction.
c. keep in one place all information about changes in specific account balances.
d. make sure that all assets, liabilities, etc., have normal balances at all times.

186. Which of the following accounts probably would be listed before the others in a chart of accounts?
a. Accumulated Depreciation—Buildings
b. Insurance Expense
c. Dividends
d. Notes Payable

187. Which of the following accounts probably would be listed after the others in a chart of accounts?
a. Accumulated Depreciation—Buildings
b. Insurance Expense
c. Dividends
d. Notes Payable

188. The Unearned Service Revenue account is classified as a(n)
a. asset.
b. revenue.
c. expense.
d. liability.

189. A ledger
a. contains only asset and liability accounts.
b. is a collection of the entire group of accounts maintained by a company.
c. provides a chronological record of transactions.
d. should show accounts in alphabetical order.

190. Which of the following is an asset?
a. Service Revenue
b. Notes Payable
c. Supplies Expense
d. Prepaid Rent

191. A person who wants to determine the balance of a particular account should refer to the
a. ledger.
b. source document.
c. chart of accounts.
d. journal.

192. A journal
a. contains only asset and liability accounts.
b. is a collection of the entire group of accounts maintained by a company.
c. provides a chronological record of transactions.
d. should show accounts in alphabetical order.

193. The usual ordering of accounts in the general ledger is
a. assets, liabilities, stockholders’ equity, revenues, and expenses.
b. assets, liabilities, stockholders’ equity, expenses, and revenues.
c. liabilities, assets, stockholders’ equity, revenues, and expenses.
d. stockholders’ equity, assets, liabilities, expenses, and revenues.

194. Management could determine the amounts due from customers by examining which ledger account?
a. Service Revenue
b. Accounts Payable
c. Accounts Receivable
d. Supplies

195. The ledger accounts are typically arranged in
a. chronological order.
b. alphabetical order.
c. financial statement order.
d. order of appearance in the journal.

196. Which statement is incorrect?
a. A chart of accounts is a listing of accounts used by a business.
b. New accounts can be added to the chart of accounts.
c. Stockholders’ Equity is an account that is included in the chart of accounts.
d. Account titles for the chart of accounts are used in general journal entries.

197. The procedure of transferring journal entries to the ledger accounts is called
a. journalizing.
b. analyzing.
c. reporting.
d. posting.

198. A chart of accounts for a business firm
a. is a graph.
b. indicates the amount of profit or loss for the period.
c. lists the accounts in the ledger.
d. shows the balance of each account in the general ledger.

199. Posting
a. should be performed in account number order.
b. accumulates the effects of journalized transactions in the individual accounts.
c. involves transferring all debits and credits on a journal page to the trial balance.
d. is accomplished by examining ledger accounts and seeing which ones need updating.

200. The principal purpose of posting is to
a. help identify errors made in the journal.
b. accumulate the effects of journalized transactions in the individual accounts.
c. enter transactions directly into the ledger.
d. help determine if the financial statements are ready to be prepared.

201. Posting is performed by transferring information from the
a. source documents to the journal.
b. ledger to the journal.
c. source documents to the ledger.
d. journal to the ledger.

202. Posting
a. transfers journal entries to ledger accounts.
b. transfers ledger transaction data to the journal.
c. involves transferring all debits and credits on a journal page to the trial balance.
d. provides a chronological record of transactions.

203. Posting
a. transfers ledger transaction data to the journal.
b. normally occurs before journalizing.
c. accumulates the effects of journalized transactions in the individual accounts.
d. enters transaction data in the journal.

204. A list of accounts and their balances at a given time is called a(n)
a. journal.
b. posting.
c. trial balance.
d. income statement.

205. On January 14, Decker industries purchased supplies of $500 on account. The entry to record the purchase will include
a. a debit to Supplies and a credit to Accounts Payable.
b. a debit to Supplies Expense and a credit to Accounts Receivable.
c. a debit to Supplies and a credit to Cash.
d. a debit to Accounts Receivable and a credit to Supplies.

206. On July 7, 2014, Shireman Enterprises received cash $1,400 for services rendered. The entry to record this transaction will include
a. a debit to Service Revenue of $1,400.
b. a credit to Accounts Receivable of $1,400.
c. a debit to Cash of $1,400.
d. a credit to Accounts Payable of $1,400.

207. The primary purpose of the trial balance is to
a. disclose the complete effect of a transaction in one place.
b. make sure a journal entry is not posted twice.
c. transfer journal entries to the ledger accounts.
d. prove the equality of the debit and credit amounts after posting.

208. The accountant for Mega Stores, Inc. should have recorded the following correct entry:
Jan. 15 Notes Receivable 243
Equipment 243
Instead, he misunderstood the transaction and recorded an incorrect entry. Which of the following wrong entries pertaining to this transaction could have been detected as erroneous when using a trial balance?
a. Jan 15 Notes Payable 243
Cash 243
b. Jan 15 Notes Receivable 234
Equipment 234
c. Jan 15 Equipment 243
Notes Receivable 243
d. Jan 15 Notes Receivable 243
Equipment 234

209. If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates
a. no errors have been made.
b. no errors can be discovered.
c. that all accounts reflect correct balances.
d. the mathematical equality of the accounting equation.

210. A trial balance is a listing of
a. transactions in a journal.
b. the chart of accounts.
c. general ledger accounts and balances.
d. the totals from the journal pages.

211. Customarily, a trial balance is prepared
a. at the end of each day.
b. after each journal entry is posted.
c. at the end of an accounting period.
d. only at the inception of the business.

212. A trial balance would only help in detecting which one of the following errors?
a. A transaction that is not journalized
b. A journal entry that is posted twice
c. Offsetting errors made in recording the transaction
d. A transposition error when transferring the debit side of journal entry to the ledger

213. A trial balance proves
a. the mathematical equality of debits and credits after the posting process.
b. the ledger is posted correctly.
c. that all transactions have been recorded correctly.
d. that all transactions have been posted.

214. A trial balance
a. is a list of accounts with their balances at a given point in time.
b. will not balance if a correct journal entry is posted twice.
c. will tell you if a transaction is not posted at all.
d. proves the factual accuracy of journalized transactions.

215. A trial balance will not balance if
a. a correcting journal entry is posted twice.
b. a $50 cash dividend is debited to dividends for $500 and credit to cash for $50.
c. a $300 payment on accounts payable is debited to accounts payable for $30 and credited to cash for $30.
d. a transaction is not posted at all.

216. Which of the following errors, each considered individually, would cause the trial balance to be out of balance?
a. A payment of $148 to a creditor was posted as a debit to Accounts Payable and a debit of $148 to Cash.
b. Cash of $530 received from a customer on account was posted as a debit of $350 to Cash and as a credit of $350 to Accounts Payable.
c. A payment of $59 for supplies was posted as a debit of $95 to Supplies and a credit of $95 to Cash.
d. A transaction was not posted.

217. Borrowing money and issuing shares of stock are
a. operating activities.
b. investing activities.
c. financing activities.
d. None of these answer choices are correct.

218. The purchase or sale of long-lived assets used in operating the business is
a. an operating activity.
b. an investing activity.
c. a financing activity.
d. None of these answer choices are correct.

BRIEF EXERCISES
Be. 219
Presented here are five economic events. For each item, indicate whether the event increased (+), decreased (–), or had no effect (NE) on assets, liabilities, and stockholders’ equity.

Stockholders’
Assets = Liabilities + Equity
1. Received cash for services rendered.
2. Purchased supplies on account.
3. Paid employees’ salaries.
4. Dividends paid in cash.
5. Expenses paid in cash.

– NE –
Be. 220
At June 1, 2014, Massoth Industries had an Accounts Receivable balance of $18,000. During the month, the company had credit sales of $25,000 and collected Accounts Receivable of $27,000. What is the balance in Accounts Receivable at June 30, 2014?

Be. 221
For each item below, indicate whether a debit or credit applies.

1. Increase in Accounts Payable ____ __
2. Increase in Accounts Receivable ____ __
3. Increase in Retained Earnings ____ __
4. Decrease in Unearned Service Revenue ____ __
5. Decrease in Interest Payable ____ __

Be. 222
For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–).

Debit _Credit_ Normal Balance
1. Salaries and Wages Expense.
2. Accounts Receivable.
3. Service Revenue.
4. Dividends
5. Retained Earnings.

Be. 223
Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction.

1. Owner invested $60,000 in exchange for common stock of the corporation.
2. Hired an employee to be paid $400 per week, starting tomorrow.
3. Paid two years’ rent in advance, $7,200.
4. Paid the worker’s weekly wage.
5. Recorded service revenue earned and received for the week, $1,500.

Be 224
Prepare a corrected trial balance for Shafer Company. All accounts should have a normal balance
Shafer Company
Trial Balance
For the Quarter Ended March 31, 2014
Debit Credit
Cash $28,000
Accounts Receivable $32,000
Prepaid Insurance 2,500
Equipment 60,000
Accounts Payable 15,000
Unearned Service Revenue 10,000
Notes Payable 20,000
Common Stock 30,000
Retained Earnings 27,000
Dividends 1,500
Service Revenue 52,000
Salaries and Wages Expense 15,000
Utilities Expense 5,000
Rent Expense 10,000
$157,500 $150,500

Be. 225
For each of the following transactions of Woods Inc., identify the account to be debited and the account to be credited.

1. Purchased 18-month insurance policy for cash.
2. Paid weekly payroll.
3. Purchased supplies on account.
4. Received utility bill to be paid at later date.

Be. 226
Identify the impact on the accounting equation of the following transactions.

1. Purchased 24-month insurance policy for cash.
2. Purchased supplies on account.
3. Received utility bill to be paid at later date.
4. Paid utility bill previously accrued.

Be. 227
The transactions of the Stormont Store are recorded in the general journal below. You are to post the journal entries to T-accounts and compute the August 31, 2014 balances.

General Journal

Date Account Titles and Explanation Debit Credit

2014
Aug. 5 Accounts Receivable 2,500
Service Revenue 2,500
10 Cash 3,000
Service Revenue 3,000
19 Rent Expense 1,000
Cash 1,000
25 Cash 1,400
Accounts Receivable 1,400

Be. 227 (Cont.)
General Ledger

Cash Accounts Receivable

Service Revenue Rent Expense

Be. 228
Prepare a trial balance from the ledger accounts of Swisher Company as of January 31, 2014.

Accounts Payable 1,500 Rent Expense $ 500
Accounts Receivable 2,500 Service Revenue 3,500
Cash 1,600 Supplies 200
Common Stock 2,200 Salaries and Wages Expense 1,000
Dividends 1,400

Exercises
Ex. 229
Selected transactions for the Sleezer Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and stockholders’ equity.

Sample: Made initial cash investment in the business.
The answer would be—Increase in assets and increase in stockholders’ equity.

1. Paid monthly utility bill.
2. Purchased new display case for cash.
3. Paid cash for repair work on security system.
4. Billed customers for services performed.
5. Received cash from customers billed in transaction 4.
6. Dividends paid to owners.
7. Incurred advertising expenses on account.
8. Paid monthly rent.
9. Received cash from customers when service was rendered.

Ex. 230
Selected accounts from the ledger of McDaniel Corporation appear below. For each account, indicate the following:

(a) In the first column at the right, indicate the nature of each account, using the following abbreviations:

Asset – A Liability – L None of the above – N
Expense – E Revenues – R

(b) In the second column, indicate the normal balance by inserting Dr. or Cr.

Type of Normal
Account Balance
1. Supplies ………………………………..
2. Notes Payable ………………………….
3. Service Revenue……………………….
4. Dividends……………………………….
5. Accounts Payable……………………..
6. Salaries and Wages Expense…………
7. Common Stock…………………………
8. Accounts Receivable…………………..
9. Equipment……………………………..
10. Notes Receivable………………………

Ex. 231
Analyze the transactions of a business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease.
Stockholders’
Assets = Liabilities + Equity
1. Received cash for services rendered.
2. Purchased office equipment on credit.
3. Paid employees’ salaries.
4. Received cash from customer in payment
on account.
5. Paid telephone bill for the month.
6. Paid for office equipment purchased in
transaction 2.
7. Purchased office supplies on credit.
8. Dividends were paid.
9. Obtained a loan from the bank.
10. Billed customers for services rendered.

Ex. 232
Sara Obermeyer decides to open a pizza parlor near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in stockholders’ equity.
Transactions
(1) Sara Obermeyer invests $25,000 cash in exchange for common stock to start a pizza parlor business on June 1.
(2) Purchased equipment for $4,000 paying $2,000 in cash and the remainder due in 30 days.
(3) Purchased supplies for $1,200 cash.
(4) Received a bill from Campus News for $200 for advertising in the campus newspaper.
(5) Cash receipts from customers for pizza sales amounted to $1,500.
(6) Paid salaries of $200 to student workers.
(7) Billed the Tiger Football Team $300 for pizzas ordered.
(8) Paid $200 to Campus News for advertising that was previously billed in Transaction 4.
(9) Sara Obermeyer was paid dividends of $1,200.
(10) Incurred utility expenses for month on account, $100.

Trans- Accounts Accounts Common Retained
action Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings
(1)

Balance
(2)

Balance
(3)

Balance
(4)

Balance
(5)

Balance
(6)

Balance
(7)

Balance
(8)

Balance
(9)

Balance
(10)

Totals

Ex. 233
Analyze the following transactions in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded.

(1) Issued stock to investors for $20,000 in cash.
(2) Purchased supplies on credit for $700.
(3) Billed customers $1,000 for services provided.
(4) Paid for supplies purchased in transaction 2.
(5) Paid dividends of $300 cash to stockholders.
(6) Received half from customers billed in transaction 3.
(7) Received and paid utility bill for $100.

Trans- Accounts Accounts Common Retained
action Cash + Receivable + Supplies = Payable + Stock + Earnings
(1)

Balance
(2)

Balance
(3)

Balance
(4)

Balance
(5)

Balance
(6)

Balance
(7)

Totals

Ex. 234
A tabular analysis of the transactions made during August 2014 by Baxter Company during its first month of operations is shown below. Each increase and decrease in stockholders’ equity is explained.

Assets = Liab.+ Stockholders’ Equity
Retained Earnings
Cash + A/R + Supp. + Equip = Accts Pay Com. Stock + Rev. – Exp. – Div.
1. +$30,000 +$30,000 Com. Stock
2. –1,000 +$5,000 +$4,000
3. –750 +$750
4. +2,400 +$5,900 +8,300 Serv. Rev.
5. –1,500 – 1,500
6. –1,000 –1,000 Div.
7. –800 –800 Rent Exp.
8. +450 –450
9. –4,000 –4,000 Sal. Exp.
10. +500 –500 Util. Exp.

Instructions
(a) Determine how much stockholders’ equity increased for the month.
(b) Compute the net income for the month.

Ex. 235
The tabular analysis of transactions for Baxter Company is presented below.

Assets = Liab. + Stockholders’ Equity
Retained Earnings
Accts
Cash + A/R + Supp. + Equip. = Payable + C/S + Rev. – Exp. – Div.
1. +$30,000 +$30,000 Com. Stock
2. –1,000 +$11,000 +$10,000
3. –950 +$950
4. +2,400 +$5,900 +8,300 Serv. Rev.
5. –1,500 –1,500
6. –1,000 –1,000 Div.
7. –800 –800 Rent Exp.
8. +450 –450
9. –4,000 –4,000 Sal. Exp.
10. +500 –500 Util. Exp.

Instructions
Prepare a retained earnings statement for August and a classified balance sheet at August 31, 2014.

Ex. 236
The accounts in the ledger of Dependable Delivery Service contain the following balances on July 31, 2014.

Accounts Receivable $11,400 Prepaid Insurance $ 1,800
Accounts Payable 7,400 Maintenance and Repairs Expense 1,200
Cash 15,940 Service Revenue 15,500
Equipment 59,360 Dividends 800
Utilities Expense 950 Common Stock 40,000
Insurance Expense 600 Salaries and Wages Expense 8,400
Notes Payable, due 2017 31,450 Salaries and Wages Payable 900
Retained Earnings 5,200
(July 1, 2014)

Instructions
Prepare an income statement and a retained earnings statement for the month of July 2014, and a classified balance sheet for July 31.

Ex. 237
Selected transactions for Stockton Corporation during its first month in business are presented below:

Sept. 1 Issued common stock in exchange for $30,000 cash received from investors.
5 Purchased equipment for $20,000, paying $2,000 in cash and the balance on account.
25 Paid $6,000 cash on balance owed for equipment.
30 Paid $1,000 cash dividend.

Stockton’s chart of accounts shows: Cash, Equipment, Accounts Payable, Common Stock, and Dividends.

Instructions
(a) Prepare a tabular analysis of the September transactions. The column headings should be: Cash + Equipment = Accounts Payable + Stockholders’ Equity. For transactions affecting stockholders’ equity, provide explanations in the right margin.
(b) Journalize the transactions. Do not provide explanations.
(c) Post the transactions to T-accounts.

Ex. 238
For each item below, indicate whether a debit or credit applies.

1. Decrease in Notes Payable ____ __
2. Increase in Dividends ____ __
3. Increase in Common Stock ____ __
4. Increase in Unearned Rent Revenue ____ __
5. Decrease in Interest Payable ____ __
6. Increase in Prepaid Insurance ____ __
7. Decrease in Salaries and Wages Expense ____ __
8. Decrease in Supplies ____ __
9. Increase in Revenues ____ __
10. Decrease in Accounts Receivable ____ __

Ex. 239
For each item below, indicate whether a debit or credit applies.

1. Decrease in Prepaid Rent ____ __
2. Increase in Service Revenue ____ __
3. Decrease in Unearned Rent Revenue ____ __
4. Increase in Dividends ____ __
5. Decrease in Interest Receivable ____ __
6. Increase in Depreciation Expense ____ __
7. Decrease in Accounts Payable ____ __
8. Increase in Supplies ____ __
9. Increase in Salaries and Wages Expense ____ __
10. Decrease in Accounts Receivable ____ __

Ex. 240
The chart of accounts used by Norton Printing Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes.

CHART OF ACCOUNTS

1 Cash 8 Common Stock
2 Accounts Receivable 9 Retained Earnings
3 Supplies 10 Dividends
4 Equipment 11 Service Revenue
5 Accounts Payable 12 Advertising Expense
6 Notes Payable 13 Rent Expense
7 Unearned Service Revenue

Number(s) Number(s)
of account(s) of account(s)
debited credited
1. Stockholders invest $90,000 cash to start the business.

2. Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 6% note for the remainder.

3. Purchased $5,000 paper supplies on credit.

4. Cash received for photocopy services amounted to $7,000.

5. Paid $500 cash for radio advertising.

6. Paid $800 on account for paper supplies purchased in transaction 3.

7. Dividends of $1,500 were paid to stockholders.

8. Paid $1,200 cash for rent for the current month.

9. Received $2,000 cash advance from a customer for future copying.

10. Billed a customer for $450 for photocopy services completed.

Ex. 241
Under a double-entry system, show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account.

Debit or Credit

1. An increase in Salaries and Wages Expense.

2. An increase in Accounts Payable.

3. An increase in Prepaid Insurance.

4. An increase in Common Stock.

5. A increase in Supplies.

6. An increase in Dividends.

7. An increase in Service Revenue.

8. A decrease in Accounts Receivable.

9. An increase in Rent Expense.

10. A decrease in Equipment.

Ex. 242
For the accounts listed below, indicate if the normal balance of the account is a debit or credit.
Normal Balance
Accounts Debit or Credit
1. Service Revenue
2. Rent Expense
3. Accounts Receivable
4. Accounts Payable
5. Common Stock
6. Supplies
7. Insurance Expense
8. Dividends
9. Buildings
10. Notes Payable

Ex. 243
During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries.

(1) Advertising Expense (6) Dividends
(2) Service Revenue (7) Cash
(3) Accounts Payable (8) Salaries and wages Expense
(4) Accounts Receivable (9) Notes Payable
(5) Common Stock (10) Insurance Expense

Ex. 244
Eight transactions are recorded in the following T-accounts:

Cash Accounts Receivable
(1) 35,000 (2) 3,500 (5) 27,500 (7) 22,500
(7) 22,500 (3) 1,950
(4) 2,225
(6) 8,000
(8) 4,500

Supplies Equipment
(3) 1,950 (2) 13,500

Common Stock Service Revenue
(1) 35,000 (5) 27,500

Accounts Payable Dividends
(6) 8,000 (2) 10,000 (8) 4,500

Salaries and Wages Expense
(4) 2,225

Indicate for each debit and each credit: (a) whether an asset, liability, common stock, dividends, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form:

Transaction Account Debited Account Credited
No. Type Effect Type Effect

(1) (Example) Asset + Common Stock +

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Ex. 245
For each of the following accounts indicate (a) the type of account (Asset, Liability, Stockholders’ Equity, Revenue, and Expense), (b) the debit and credit effects, and (c) the normal account balance.

Example
0. Cash a. Asset account
b. Debit increases, credit decreases
c. Normal balance – debit

Accounts
1. Accounts Payable 5. Service Revenue
2. Accounts Receivable 6. Insurance Expense
3. Common Stock 7. Notes Payable
4. Dividends 8. Equipment

Ex. 246
Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions.
1. Stockholders invest $40,000 in cash in starting a real estate office operating as a corporation.
2. Purchased $500 of supplies on credit.
3. Purchased equipment for $25,000, paying $3,500 in cash and signed a 30-day, $21,500, note payable.
4. Real estate commissions billed to clients amount to $4,000.
5. Paid $700 in cash for the current month’s rent.
6. Paid $250 cash on account for office supplies purchased in transaction 2.
7. Received a bill for $800 for advertising for the current month.
8. Paid $2,500 cash for office salaries.
9. Paid $1,200 cash dividends to stockholders.
10. Received a check for $2,000 from a client in payment on account for commissions billed in transaction 4.

Ex. 247
Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions.

1. Received $50,000 from stockholders.
2. Purchased equipment for $75,000, paying $15,000 in cash and giving a note payable for the remainder.
3. Paid $3,000 rent for the month.
4. Recorded $12,500 of services provided on account.
5. Paid wages of $9,500.
6. Received $7,000 in cash for services provided.
7. Collected $2,000 from customers on account.

Ex. 248
Transactions for the Hartman Company for the month of November are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations.
1. Stockholders invested an additional $40,000 cash in the business.
2. Purchased land costing $18,000 for cash.
3. Purchased equipment costing $45,000 for $4,500 cash and the remainder on credit.
4. Purchased supplies on account for $800.
5. Paid $3,000 for a one-year insurance policy.
6. Received $2,000 cash for services performed.
7. Received $5,000 for services previously performed on account.
8. Paid wages to employees for $2,500.
9. Paid dividends to stockholders of $400.

Ex. 249
This information relates to Hanshew Real Estate Agency.

Oct. 1 Stockholders invested $35,000 in exchange for common stock of the corporation.
2 Hires an administrative assistant at an annual salary of $36,000.
3 Buys equipment for $3,500 on account.
6 Sells a house and lot for M Springer; commissions due from Springer, $10,000 (not paid by Springer at this time).
10 Receives cash of $140 as commission for acting as rental agent renting an apartment.
27 Pays $700 on account for the equipment purchased on October 3.
30 Pays the administrative assistant $3,000 in salary for October.

Instructions
(a) Journalize the transactions. Do not provide explanations.
(b) Post the transactions to T accounts.

Ex. 250
These T accounts summarize the ledger of Garner Gardening Company Inc. at the end of the first month of operations, April 2014.

Cash Unearned Service Revenue
Apr. 1 20,000 Apr. 15 1,200 Apr. 30 900
12 700 25 3,500
29 800
30 900

Accounts Receivable Common Stock
Apr. 7 3,400 Apr. 29 800 Apr. 1 20,000

Supplies Service Revenue
Apr. 4 5,700 Apr. 7 3,400
12 700

Account Payable Salaries and Wages Expense
Apr. 25 3,500 Apr. 4 5,700 Apr. 15 1,200
Ex. 250 (Cont.)

Instructions
(a) Prepare in the order they occurred the journal entries (including explanations) that resulted in the amounts posted to the accounts.
(b) Prepare a trial balance at April 30, 2014.

Ex. 251
The transactions of the Speedy Delivery Service are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided.

General Journal

Date Account Titles and Explanation Debit Credit

2014
Sept. 1 Cash 25,000
Common Stock 25,000
(Stockholders invested cash in business)

4 Equipment 60,000
Cash 10,000
Notes Payable 50,000
(Paid cash and issued 2-year, 6%, note for
delivery trucks)

8 Rent Expense 1,000
Cash 1,000
(Paid September rent)

15 Prepaid Insurance 1,400
Cash 1,400
(Paid one-year liability insurance)

18 Cash 4,500
Service Revenue 4,500
(Received cash for delivery services)

Ex. 251 (Cont.)

20 Salaries and Wages Expense 500
Cash 500
(Paid salaries for current period)

25 Utilities Expense 100
Accounts Payable 100
(Received a bill for September utilities)

30 Dividends 750
Cash 750
(Paid dividends)

30 Accounts Receivable 1,000
Service Revenue 1,000
(Billed customer for delivery service)

General Ledger

Cash Accounts Receivable

Prepaid Insurance Equipment

Accounts Payable Notes Payable

Ex. 251 (Cont.)

Common Stock Dividends

Service Revenue Rent Expense

Salaries and Wages Expense Utilities Expense

SPEEDY DELIVERY SERVICE
Trial Balance
September 30, 2014
Accounts Credit Debit

Ex. 252
Selected transactions from the journal of Giambi Inc. during its first month of operations are presented here.

Date Account Titles Debit Credit
Aug. 1 Cash 10,000
Common Stock 10,000
10 Cash 1,700
Service Revenue 1,700
12 Equipment 12,200
Cash 1,200
Notes Payable 11,000
25 Accounts Receivable 2,500
Service Revenue 2,500
31 Cash 600
Accounts Receivable 600

Ex. 252 (Cont.)

Instructions
(a) Post the transactions to T-accounts.
(b) Prepare a trial balance at August 31, 2014.

Ex. 253
The accounts in the ledger of Dependable Delivery Service contain the following balances on July 31, 2014.

Accounts Receivable $16,400 Prepaid Insurance $ 1,800
Accounts Payable 12,400 Maintenance and Repairs Expense 1,200
Cash ? Service Revenue 13,500
Equipment 59,360 Dividends 800
Gasoline Expense 950 Common Stock 50,000
Insurance Expense 600 Salaries and Wages Expense 6,400
Notes Payable, due 2017 28,450 Salaries and Wages Payable 900
Retained Earnings 5,200
(July 1, 2014)

Instructions
Prepare a trial balance with the accounts arranged as illustrated in the chapter, and fill in the missing amount for Cash.

Ex. 254
The trial balance of the Gavin Company shown below does not balance.

GAVIN COMPANY
Trial Balance
June 30, 2014

Debit Credit
Cash $ 5,600
Accounts Receivable 7,600
Supplies 600
Equipment 8,300
Accounts Payable $ 12,766
Common Stock 1,941
Dividends 1,500
Service Revenue 15,200
Salaries and Wages Expense 3,800
Maintenance and Repairs Expense 1,600
Totals $29,000 $29,907

An examination of the ledger and journal reveals the following errors:
1. Each of the above listed accounts has a normal balance per the general ledger.
2. Cash of $350 received from a customer on account was debited to Cash $530 and credited to Accounts Receivable $530.
3. Dividends of $300 paid to stockholders were posted as a credit to Dividends, $300, and a credit to Cash $300.
4. Salaries and Wages Expense of $300 was omitted from the trial balance.
5. The purchase of equipment on account for $700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for $700.
6. Services were performed on account for a customer, $510, for which Accounts Receivable was debited $510 and Service Revenue was credited $51.
7. A payment on account for $215 was credited to Cash for $215 and credited to Accounts Payable for $251.

Instructions
Prepare a correct trial balance.

Ex. 255
Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others.
1. A payment of $700 to a creditor was recorded by a debit to Accounts Payable of $70 and a credit to Cash of $700.
2. A $340 payment for a printer was recorded by a debit to Equipment of $34 and a credit to Cash for $34.
3. An account receivable in the amount of $2,000 was collected in full. The collection was recorded by a debit to Cash for $2,000 and a debit to Accounts Payable for $2,000.
4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800.

Ex. 256
Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others.

1. A collection on account of $400 was journalized and posted as a debit to Cash $400 and a credit to Service Revenue $400.
2. A $950 purchase of supplies on account was recorded as a debit of $950 to Equipment and a credit of $950 to Accounts Payable.
3. A purchase of equipment for $3,500 on account was not recorded.
4. A $270 receipt on account was recorded as a $720 debit to Cash and a $270 credit to Accounts Receivable.

Ex. 257
Sue Sloan and Associates is a financial planning service. The account balances at December 31, 2014 are shown by the following alphabetical list:

Accounts Payable $34,000
Accounts Receivable 16,000
Buildings 120,000
Cash 24,500
Common Stock 167,700
Equipment 79,300
Land 47,000
Notes Payable 95,000
Notes Receivable 9,100
Supplies 800

Instructions
Prepare a trial balance with the accounts arranged in financial statement order.

Ex. 258
The ledger accounts of the Get Fit Gym at July 31, 2014 are shown below:

Accounts Payable $ 12,100
Accounts Receivable 1,050
Buildings 55,400
Common Stock 65,100
Cash 9,000
Equipment 45,900
Notes Payable 45,000
Supplies 350
Dividends 10,500

Instructions

Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading.

COMPLETION STATEMENTS
259. An _______________ is an individual accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items.

260. The act of entering an amount on the left side of an account is called _______________ the account, and making an entry on the right side is called _________________ the account.

261. _____________, ______________, and _______________ have debit normal account balances whereas _______________, ______________, ______________, and ________________ have credit normal account balances.

262. The five subdivisions of stockholders’ equity are ______________, _______________, _________________, __________________, and _________________.

263. The basic steps in the recording process are: _______________ each transaction, enter the transaction in a ______________, and transfer the _______________ information to appropriate accounts in the ________________.

264. A sales slip, a check, and a cash register tape are examples of ________________ used as evidence that a transaction has taken place.

265. An accounting record where transactions are initially recorded in chronological order is called a ________________.

266. Posting is the procedure of transferring journal entries to ________________.

267. The entire group of accounts and their balances maintained by a company is called the ________________.

268. A two column list of all accounts and their balances at a given time is a ______________.

MATCHING
269. Match the items below by entering the appropriate code letter in the space provided.

A. Account F. Journal
B. Normal account balance G. Posting
C. Debit H. Chart of accounts
D. Revenue account I. Trial balance
E. Ledger J. Source document
1. The entire group of accounts maintained by a company.
2. Transferring journal entries to ledger accounts.
3. The side which increases an account.
4. A list of all the accounts used by a company.
5. An accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items.
6. Left side of an account.
7. Evidence that a transaction has taken place.
8. Shows the debit and credit effects of specific transactions.
9. A list of accounts and their balances at a given time.
10. Has a credit normal balance

SHORT-ANSWER ESSAY QUESTIONS

S-A E 270
Describe the accounting information system and the steps in the recording process.

S-A E 271
A student is considering dropping his accounting class because he cannot understand the rules of debits and credits.

Can the student be successful in the course without an understanding of the rules of debits and credits? Explain the rules of debits and credits in a way that will help him understand them.

S-A E 272
During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts.
What is your response to this statement? Be brief, yet concise.

S-A E 273
An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance.

S-A E 274
Why is the Dividends account increased by a debit? Explain in terms of its relationship to stockholders’ equity.

S-A E 275
Steve Rondelli, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Steve correct? Explain.

S-A E 276
(a) Can accounting transaction debits and credits be recorded directly in the ledger accounts?
(b) What are the advantages of first recording transactions in the journal and then posting to the ledger?

S-A E 277
Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain.

S-A E 278 (Ethics)
Robert Harder, Jr. was appointed the manager of Westbrook Properties, a recently formed company that manages residential rental properties. Maria Valdez is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. One of the largest expense categories is Travel and Entertainment. Mr. Harder believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Robert Harder, Sr. the elder Mr. Harder has set up Westbrook Properties in order to test his son’s management skills before allowing him to manage a more lucrative commercial property business. Mr. Harder, Sr. provided the capital for Westbrook, and maintains close contact with the company. He allowed his son, however, to hire his own employees.

Mr. Harder has asked Ms. Valdez to name the Travel and Entertainment account Property Development. He hopes to deflect his father’s attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Valdez resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired.

Required:
1. Who are the stakeholders in this situation?
2. Should Ms. Valdez agree to the change in the Travel and Entertainment account to Property Development? Explain.

S-A E 279 (Communication)
The following trial balance was obtained from Gentry Company’s computer system.

RPT TR BAL
DPT ACC MGR
PRIORITY 2
RUN BY R.HAMES
SEQUENCE 997411

ACCOUNT BAL
CASH 18700
SUPPLIES 5600
ACC PAY 7500-
NOTE PAY 1200-
COMMON STOCK 10000-
DIVIDENDS 500
SERVICE REVENUE 11000-
SAL AND WAG EXP 3500
RENT EXP 900
OTHER EXP 500
BAL 0
***TRIAL BALANCE IS IN BALANCE***

Required:
1. What features make this trial balance difficult to read?
2. Prepare an improved trial balance.

IFRS QUESTIONS

1. Which of the following are the same under both GAAP and IFRS?
a. The account.
b. Debit and credit rules.
c. Steps in the recording process.
d. All of these answer choices are correct.

2. Which of the following are the same under both GAAP and IFRS?
a. The journal.
b. The ledger.
c. The chart of accounts.
d. All of these answer choices are correct.

3. Which of the following is true?
a. Transaction analysis is completely different under IFRS and GAAP.
b. Most transaction are recorded differently under IFRS and GAAP.
c. Transaction analysis is the same under IFRS and GAAP, but some transactions are recorded differently.
d. All transaction are recorded the same under IFRS and GAAP.

4. European companies rely
a. less on historical cost and more on fair values than U.S companies.
b. less on fair values and more on historical cost than U.S companies.
c. completely on fair values for financial reporting.
d. completely on historical cost for financial reporting.

5. The double-entry accounting system is the basis of accounting systems
a. worldwide.
b. worldwide, except for the U.S.
c. in the U.S. only
d. neither internationally nor in the U.S.

6. Under IFRS, the trial balance
a. follow the same format as under GAAP.
b. shows credits on the left and debits on the right.
c. include less accounts than under GAAP.
d. include more accounts than under GAAP.

7. In deciding whether the U.S. should adopt IFRS, the issue the SEC said should be considered is
a. whether IFRS is sufficiently developed and consistent in application.
b. whether the IFRS is established for the benefit of investors.
c. the impact of a switch to IFRS on U.S. laws and regulation.
d. all of these answer choices are correct.

8. Which of the following statements is true regarding the recording process?
a. Because IFRS (International Financial Reporting Standards) rely more on fair value and less on historical cost than U.S. GAAP, the double-entry accounting system is not widely used by companies who use IFRS.
b. Both IFRS (International Financial Reporting Standards) and U.S. GAAP use the same general rules of debits and credits and the steps in the recording process.
c. A trial balance using IFRS (International Financial Reporting Standards) is organized by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order.
d. All of these answer choices are correct.

9. Under U.S. GAAP
a. currency signs are generally used in the journal, ledger, trial balance, and financial statements.
b. share Capital – Ordinary is referred to as Retained Earnings.
c. the statement of financial position is often called the statement of changes in financial position.
d. the rules of debits and credits, and the steps in the recording process are the same as under IFRS (International Financial Reporting Standards).

CHAPTER 4

ACCRUAL ACCOUNTING CONCEPTS
TRUE-FALSE STATEMENTS
1. The periodicity assumption states that the economic life of a business entity can be divided into artificial time periods.

2. The periodicity assumption is often referred to as the expense recognition principle.

3. The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.

4. Expense recognition is tied to revenue recognition.

5. The revenue recognition principle and the expense recognition principle are helpful guides used in determining net income or net loss for a period.

6. The expense recognition principle requires that efforts be related to accomplishments.

7. Recognizing when an expense contributes to the production of revenue is critical.

8. The expense recognition principle is frequently referred to as the matching principle.

9. Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

10. The cash basis of accounting is not in accordance with generally accepted accounting principles.

11. Adjusting entries are often made because some business events are not recorded as they occur.

12. Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

13. Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.

14. An adjusting entry would be made to the revenue account only when cash is received.

15. An adjusting entry to a prepaid expense is required to recognize expired expenses.

16. An adjusting entry always involves two balance sheet accounts.

17. An adjusting entry always involves a balance sheet account and an income statement account.

18. Revenue received before it is recognized and expenses paid before being used or consumed are both initially recorded as liabilities.

19. Revenue received before it is recognized and expenses used or consumed before being paid are both initially recorded as liabilities.

20. Accrued revenues are revenues that have been received but not yet recognized.

21. Accrued revenues are revenues that have been recognized but not yet recorded.

22. The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded.

23. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

24. The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

25. The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

26. Accumulated Depreciation is a liability account and has a credit normal account balance.

27. A liability—revenue account relationship exists with an unearned rent revenue adjusting entry.

28. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

29. Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

30. The adjusting entry for unearned revenue results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account.

31. Asset prepayments become expenses when they expire.

32. A contra asset account is subtracted from a related account in the balance sheet.

33. Accrued revenues are revenues that have been recognized but cash has not been received before financial statements have been prepared.

34. The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable.

35. The accrued interest for a three month note payable of $10,000 dated December 1, 2013 at an interest rate of 6% is $150 on December 31, 2013.

36. Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders’ equity are overstated.

37. Financial statements can be prepared from the information provided by an adjusted trial balance.

38. An adjusted trial balance must be prepared before the adjusting entries can be recorded.

39. Closing entries deal primarily with the balances of permanent accounts.

40. The only accounts that are closed are temporary accounts.

41. When closing entries are prepared, each income statement account is closed directly to retained earnings.

42. Cash is a temporary account.

43. The post-closing trial balance will contain only permanent—balance sheet—accounts.

44. Accounts receivable is a permanent account.

45. The Dividends account is closed to the Income Summary account at the end of each year.

46. A revenue account is closed with a credit to the revenue account and a debit to Income Summary.

47. An expense account is closed with a credit to the expense account and a debit to the Income Summary account.

48. Financial statements must be prepared before the closing entries are made.

49. In the accounting cycle, closing entries are prepared before adjusting entries.

50. Closing entries result in the transfer of net income or net loss into the Retained Earnings account.

51. The post closing trial balance will have fewer accounts than the adjusted trial balance.

52. The accounting cycle begins with the journalizing of the transactions.

*53. A 10-column worksheet is a permanent accounting record.

MULTIPLE CHOICE QUESTIONS
54. The periodicity assumption states that:
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the enterprise’s accounts can only be made in the time period when the business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.

55. One of the accounting concepts upon which adjustments for prepayments and accruals are based is:
a. expense recognition.
b. cost.
c. monetary unit.
d. economic entity.

56. An accounting time period that is one year in length is called:
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.

57. Adjustments would not be necessary if financial statements were prepared to reflect net income from:
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.

58. Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns.
a. annual, annual
b. monthly, annual
c. quarterly, monthly
d. monthly, monthly

59. Expenses are recognized when:
a. they contribute to the production of revenue.
b. they are paid.
c. they are billed by the supplier.
d. the invoice is received.

60. Which of the following is not generally an accounting time period?
a. A week.
b. A month.
c. A quarter.
d. A year.

61. The revenue recognition principle dictates that revenue should be recognized in the accounting records:
a. when cash is received.
b. when the performance obligation is satisfied.
c. at the end of the month.
d. in the period that income taxes are paid.

62. In a service-type business, revenue is recognized:
a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.

63. The expense recognition principle matches:
a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.

64. Otto’s Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized?
a. August 31
b. August 1
c. September 5
d. September 6

65. A company spends $20 million dollars for an office building. Over what period should the cost be written off?
a. When the $20 million is expended in cash.
b. All in the first year.
c. After $20 million in revenue is earned.
d. None of these answer choices are correct.

66. The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that:
a. assets should be matched with liabilities.
b. efforts should be matched with accomplishments.
c. dividends should be matched with stockholder investments.
d. cash payments should be matched with cash receipts.

67. Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)?
a. Cost principle.
b. Periodicity principle.
c. Revenue recognition principle.
d. Expense recognition principle.

68. A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized?
a. December 5
b. December 10
c. November 30
d. December 1

69. A furniture factory’s employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in:
a. January.
b. February.
c. the period when the workers receive their checks.
d. either January or February depending on when the pay period ends.

70. Which is not an application of revenue recognition?
a. Recording revenue as an adjusting entry on the last day of the accounting period.
b. Accepting cash from an established customer for services to be performed over the next three months.
c. Billing customers on June 30 for services completed during June.
d. Receiving cash for services performed.

71. Why do generally accepted accounting principles require the application of the revenue recognition principle?
a. Failure to apply the revenue recognition principle could lead to a misstatement of revenue.
b. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve.
c. Recording revenue when cash is received is an objective application of the revenue recognition principle.
d. Accounting software has made the revenue recognition easy to apply.

72. On April 1, 2013, nPropel Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. nPropel records depreciation expense of $48,000 for the calendar year ending December 31, 2013. Which accounting principle has been violated?
a. Depreciation principle.
b. No principle has been violated.
c. Cash principle.
d. Expense recognition principle.

73. Under the cash basis of accounting:
a. revenue is recognized when services are performed.
b. expenses are matched with the revenue that is produced.
c. cash must be received before revenue is recognized.
d. a promise to pay is sufficient to recognize revenue.

74. Under the accrual basis of accounting:
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company’s financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

75. Using accrual accounting, expenses are recorded and reported only:
a. when they are incurred whether or not cash is paid.
b. when they are incurred and paid at the same time.
c. if they are paid before they are incurred.
d. if they are paid after they are incurred.

76. A small company may be able to justify using a cash basis of accounting if they have:
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.

77. Which statement is correct?
a. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.
c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the cash basis of accounting.

78. The following is selected information from L Corporation for the fiscal year ending October 31, 2014.

Cash received from customers $300,000
Revenue earned 390,000
Cash paid for expenses 170,000
Cash paid for computers on November 1, 2013 that will
be used for 3 years
48,000
Expenses incurred including any depreciation 216,000
Proceeds from a bank loan, part of which was used to
pay for the computers
100,000

Based on the accrual basis of accounting, what is L Corporation’s net income for the year ending October 31, 2014?
a. $204,000
b. $174,000
c. $158,000
d. $220,000

79. The following is selected information from C Corporation for the fiscal year ending October 31, 2014.

Cash received from customers $150,000
Revenue earned 195,000
Cash paid for expenses 85,000
Cash paid for computers on November 1, 2013 that
will be used for 3 years
24,000
Expenses incurred including any depreciation 119,000
Proceeds from a bank loan, part of which was used to
pay for the computers
50,000

Based on the accrual basis of accounting, what is C Corporation’s net income for the year ending October 31, 2014?
a. $102,000
b. $86,000
c. $76,000
d. $110,000

80. La More Company had the following transactions during 2013:
• Sales of $4,500 on account
• Collected $2,000 for services to be performed in 2014
• Paid $1,875 cash in salaries for 2013
• Purchased airline tickets for $250 in December for a trip to take place in 2014

What is La More’s 2013 net income using accrual accounting?
a. $2,875
b. $4,875
c. $4,625
d. $2,625

81. La More Company had the following transactions during 2013.
• Sales of $4,500 on account
• Collected $2,000 for services to be performed in 2014
• Paid $1,325 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2014

What is La More’s 2013 net income using cash basis accounting?
a. $5,175
b. $675
c. $4,925
d. $425

82. Wang Company had the following transactions during 2013:
• Sales of $10,800 on account
• Collected $4,800 for services to be performed in 2014
• Paid $3,100 cash in salaries for 2013
• Purchased airline tickets for $600 in December for a trip to take place in 2014

What is Wang’s 2013 net income using accrual accounting?
a. $8,300
b. $13,100
c. $12,500
d. $7,700

83. Wang Company had the following transactions during 2013:
• Sales of $10,800 on account
• Collected $4,800 for services to be performed in 2014
• Paid $3,100 cash in salaries
• Purchased airline tickets for $600 in December for a trip to take place in 2014

What is Wang’s 2013 net income using cash basis accounting?
a. $1,100
b. $2,300
c. $12,500
d. $1,700

84. Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting.
Revenue earned $16,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased with cash 1,800
a. $6,500
b. $11,000
c. $4,700
d. $6,950

85. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting.
Revenue earned $16,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased with cash 1,800
a. $8,750
b. $11,000
c. $6,500
d. $9,200

86. Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting.
Cash received from customers $48,000
Accounts receivable 12,000
Cash paid for expenses 26,000
Accounts payable (related to expenses) 3,000
Prepaid rent for next period 7,000
a. $22,000
b. $31,000
c. $24,000
d. $15,000

87. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting.
Cash received from customers $48,000
Accounts receivable 12,000
Cash paid for expenses 26,000
Accounts payable (related to expenses) 3,000
Prepaid rent for next period 7,000
a. $22,000
b. $31,000
c. $24,000
d. $15,000

88. Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n):
a. revenue.
b. liability.
c. expense.
d. prepaid expense.

89. Which of the following would be unethical?
a. Recording accrued salaries and wages expense.
b. Recording accrued interest revenue.
c. Recording backdated revenue.
d. Recording prepaid expense adjustments.

90. Why was Apple required to spread their iPhone revenues over a two year period?
a. Because of its newness, their returns might exceed the normal level of returns.
b. Because they were required to provide software updates over that two year period.
c. Because that was the estimated life of the iPhone.
d. Because they needed to defer revenue recognition since they had a swap program available for future models.

91. According to some U.S. companies what gives foreign firms a competitive advantage in the capital market?
a. The foreign companies don’t have standards similar to GAAP.
b. The foreign companies don’t have strict ethical codes.
c. The Sarbanes-Oxley Act which requires more stringent internal controls on U.S. firms.
d. The foreign companies don’t have to be audited.

92. The primary difference between prepaid and accrued expenses is that prepaid expenses have:
a. been incurred and accrued expenses have not.
b. not been paid and accrued expenses have.
c. been recorded and accrued expenses have not.
d. not been recorded and accrued expenses have.

93. The primary difference between accrued revenues and unearned revenues is that accrued revenues have:
a. not been recognized and accrued revenues have been.
b. been paid and unearned revenues have not.
c. been recorded and unearned revenues have not.
d. not been recorded and unearned revenues have.

94. The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is:
a. contra asset.
b. prepayment.
c. asset.
d. accrued.

95. Accounts often need to be adjusted because:
a. there are never enough accounts to record all the transactions.
b. many transactions affect more than one time period.
c. there are always errors made in recording transactions.
d. management can’t decide what they want to report.

96. Adjusting entries are made to ensure that:
a. expense are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which the performance obligation is satisfied.
c. balance sheet and income statement accounts have correct balances at the end of an accounting period.
d. All of these answer choices are correct.

97. Adjusting entries are:
a. not necessary if the accounting system is operating properly.
b. usually required before financial statements are prepared.
c. made whenever management desires to change an account balance.
d. made to balance sheet accounts only.

98. Each of the following is a major type (or category) of adjusting entry except:
a. earned expenses.
b. prepaid expenses.
c. accrued expenses.
d. accrued revenues.

99. Adjusting entries are required:
a. because some costs expire with the passage of time and have not yet been journalized.
b. when the company’s profits are below the budget.
c. when expenses are recorded in the period in which they are earned.
d. None of these answer choices are correct.

100. Which one of the following is not a justification for adjusting entries?
a. Adjusting entries are necessary to ensure that the revenue recognition principle is followed.
b. Adjusting entries are necessary to ensure that the expense recognition principle is followed.
c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.
d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

101. An adjusting entry:
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.

102. Adjusting entries are:
a. the same as correcting entries.
b. needed to ensure that the expense recognition principle is followed.
c. optional.
d. rarely needed.

103. The preparation of adjusting entries is:
a. straightforward because the accounts that need adjustment will be out of balance.
b. needed to ensure that the expense recognition principle is followed.
c. only required for accounts that do not have a normal balance.
d. optional when financial statements are prepared.

104. If a resource has been consumed but a bill has not been received at the end of the accounting period, then:
a. an expense should be recorded when the bill is received.
b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.

105. An asset–expense relationship exists with:
a. liability accounts.
b. revenue accounts.
c. prepaid expense adjusting entries.
d. accrued expense adjusting entries.

106. A liability–revenue relationship exists with:
a. asset accounts.
b. revenue accounts.
c. unearned revenue adjusting entries.
d. accrued expense adjusting entries.

107. Adjusting entries can be classified as:
a. postponements and advances.
b. accruals and deferrals.
c. deferrals and postponements.
d. accruals and advances.

108. Adjusting entries can be classified as:
a. postponements and advances.
b. accruals and advances.
c. deferrals and postponements.
d. accruals and deferrals.

109. Accrued expenses are:
a. incurred but not yet paid or recorded.
b. paid and recorded in an asset account after they are used or consumed.
c. paid and recorded in an asset account before they are used or consumed.
d. incurred and already paid or recorded.

110. Accrued revenues are:
a. received and recorded as liabilities before they are recognized.
b. recognized and recorded as liabilities before they are received.
c. recognized but not yet received or recorded.
d. recognized and already received and recorded.

111. Prepaid expenses are:
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

112. Goods purchased for future use in the business, such as supplies, are called:
a. prepaid expenses.
b. revenues.
c. stockholders’ equity.
d. liabilities.

113. Accrued expenses are:
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

114. Unearned revenues are:
a. received and recorded as liabilities before they are recognized.
b. recognized and recorded as liabilities before they are received.
c. recognized but not yet received or recorded.
d. recognized and already received and recorded.

115. Adjusting entries affect at least:
a. one revenue and one expense account.
b. one asset and one liability account.
c. one revenue and one balance sheet account.
d. one income statement account and one balance sheet account.

116. An architecture firm earned $2,000 for architecture services provided with the fee to be paid in the future. No entry was made at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause:
a. revenues to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.

117. An adjusting entry can include a:
a. debit to an asset and a credit to a liability.
b. debit to a revenue and a credit to an asset.
c. debit to a liability and a credit to a revenue.
d. debit to an expense and a credit to a revenue.

118. A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause:
a. expenses to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.

119. On January 1, 2013, M. Johanson Company purchased equipment for $36,000. The company is depreciating the equipment at the rate of $500 per month. The book value of the equipment at December 31, 2013 is:
a. $0.
b. $6,000.
c. $30,000.
d. $36,000.

120. The Vintage Laundry Company purchased $6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1,000 on hand. The adjusting entry that should be made by the company on June 30 is:
a. debit Supplies Expense, $1,000; credit Supplies, $1,000.
b. debit Supplies, $5,500; credit Supplies Expense, $5,500.
c. debit Supplies, $1,000; credit Supplies Expense, $1,000.
d. debit Supplies Expense, $5,500; credit Supplies, $5,500.

121. Greese Company purchased office supplies costing $4,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,500 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:
a. debit Supplies Expense, $1,500; credit Supplies, $1,500.
b. debit Supplies, $2,500; credit Supplies Expense, $2,500.
c. debit Supplies Expense, $2,500; credit Supplies, $2,500.
d. debit Supplies, $1,500; credit Supplies Expense, $1,500.

122. A company purchased office supplies costing $3,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:
a. debit Supplies Expense, $3,900; credit Supplies, $3,900.
b. debit Supplies, $900; credit Supplies Expense, $900.
c. debit Supplies Expense, $2,100; credit Supplies, $2,100.
d. debit Supplies, $2,100; credit Supplies Expense, $2,100.

123. Unearned revenue is classified as a(n):
a. asset account.
b. revenue account.
c. contra revenue account.
d. liability.

124. Boyce Company purchased office supplies costing $5,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,800 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:
a. debit Supplies Expense, $3,200; credit Supplies, $3,200.
b. debit Supplies, $1,800; credit Supplies Expense, $1,800.
c. debit Supplies Expense, $1,800; credit Supplies, $1,800.
d. debit Supplies, $3,200; credit Supplies Expense, $3,200.

125. On July 1 the Fisher Shoe Store paid $18,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Fisher Shoe Store is:
a. debit Rent Expense, $18,000; credit Prepaid Rent, $3,000.
b. debit Prepaid Rent, $3,000; credit Rent Expense, $3,000.
c. debit Rent Expense, $3,000; credit Prepaid Rent, $3,000.
d. debit Rent Expense, $18,000; credit Prepaid Rent, $15,000.

126. The balance in the prepaid rent account before adjustment at the end of the year is $15,000 and represents three months rent paid on December 1. The adjusting entry required on December 31 is:
a. debit Prepaid Rent, $5,000; credit Rent Expense $5,000.
b. debit Prepaid Rent, $10,000; credit Rent Expense, $10,000.
c. debit Rent Expense, $15,000; credit Prepaid Rent, $15,000.
d. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000.

127. If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be:
a. debit Unearned Service Revenue and credit Cash.
b. debit Unearned Service Revenue and credit Service Revenue.
c. debit Unearned Service Revenue and credit Prepaid Expense.
d. debit Unearned Service Revenue and credit Accounts Receivable.

128. Accumulated Depreciation is a(n):
a. expense account.
b. stockholders’ equity account.
c. liability account.
d. contra asset account.

129. The Harris Company purchased equipment for $9,000 on December 1. It is estimated that annual depreciation on the computer will be $1,800. If financial statements are to be prepared on December 31, the company should make the following adjusting entry:
a. debit Depreciation Expense, $1,800; credit Accumulated Depreciation, $1,800.
b. debit Depreciation Expense, $150; credit Accumulated Depreciation, $150.
c. debit Depreciation Expense, $7,200; credit Accumulated Depreciation, $7,200.
d. debit Equipment, $9,000; credit Accumulated Depreciation, $9,000.

130. Adjustments for unearned revenue:
a. decrease liabilities and increase revenues.
b. increase liabilities and increase revenues.
c. increase assets and increase revenues.
d. decrease revenues and decrease assets.

131. Leyland Realty Company received a check for $15,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $15,000. Financial statements will be prepared on July 31. Leyland Realty should make the following adjusting entry on July 31:
a. debit Unearned Rent Revenue, $2,500; credit Rent Revenue, $2,500.
b. debit Rent Revenue, $2,500; credit Unearned Rent Revenue, $2,500.
c. debit Unearned Rent Revenue, $15,000; credit Rent Revenue, $15,000.
d. debit Cash, $15,000; credit Rent Revenue, $15,000.

132. As prepaid expenses expire with the passage of time, the correct adjusting entry will be a:
a. debit to an asset account and a credit to an expense account.
b. debit to an expense account and a credit to an asset account.
c. debit to an asset account and a credit to an asset account.
d. debit to an expense account and a credit to an expense account.

133. Adjustments for unearned revenue:
a. decrease liabilities and increase revenues.
b. increase liabilities and increase revenues.
c. increase assets and increase revenues.
d. decrease revenues and decrease assets.

134. Payments of expenses that will benefit more than one accounting period are identified as:
a. expenses.
b. revenues.
c. prepaid expenses.
d. liabilities.

135. A company usually determines the amount of supplies used during a period by:
a. adding the supplies on hand to the balance of the Supplies account.
b. summing the amount of supplies purchased during the period.
c. taking the difference between the supplies purchased and the supplies paid for during the period.
d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.

136. If a company fails to make an adjusting entry to record supplies expense, then:
a. stockholders’ equity will be understated.
b. expense will be understated.
c. assets will be understated.
d. net income will be understated.

137. Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting entry is for the amount of supplies:
a. remaining.
b. purchased.
c. used.
d. either used or remaining.

138. If a company fails to adjust for accrued revenues:
a. liabilities will be understated and revenues will be understated.
b. liabilities will be overstated and revenues will be understated.
c. assets will be overstated and revenues will be understated.
d. assets will be understated and revenues will be understated.

139. If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month’s financial statements?
a. Failure to make an adjustment does not affect the financial statements.
b. Expenses will be overstated and net income and stockholders’ equity will be under- stated.
c. Assets will be overstated and net income and stockholders’ equity will be understated.
d. Assets will be overstated and net income and stockholders’ equity will be overstated.

140. If a company fails to adjust an Unearned Rent Revenue account for rent that has been earned, what effect will this have on that month’s financial statements?
a. Assets will be understated and revenues will be understated.
b. Liabilities will be understated and revenues will be understated.
c. Liabilities will be overstated and revenues will be understated.
d. Assets will be overstated and revenues will be understated.

141. If a company fails to adjust for accrued expenses, what effect will this have on that month’s financial statements?
a. Failure to make an adjustment does not affect the financial statements.
b. Expenses will be understated and net income and stockholders’ equity will be over- stated.
c. Assets will be overstated and net income and stockholders’ equity will be under-stated.
d. Assets will be overstated and net income and stockholders’ equity will be overstated.

142. On January 1, 2013, Leardon Inc. purchased equipment for $60,000. The company is depreciating the equipment at the rate of $800 per month. At January 31, 2014, the balance in Accumulated Depreciation is:
a. $800 debit.
b. $9,600 credit.
c. $10,400 credit.
d. $53,200 debit.

143. At December 31, 2014, before any year-end adjustments, Dallis Company’s Prepaid Insurance account had a balance of $2,900. It was determined that $1,300 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be:
a. $1,300.
b. $1,600.
c. $2,900.
d. $1,400.

144. At December 31, 2014, before any year-end adjustments, Janus Company’s Prepaid Insurance account had a balance of $2,800. It was determined that $1,200 of the Prepaid Insurance had expired. The adjusted balance for Prepaid Insurance for the year would be:
a. $1,200.
b. $1,600.
c. $3,800.
d. $2,800.

145. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following statements is true?
a. Net income will be overstated for the current year.
b. Total assets will be understated at the end of the current year.
c. The balance sheet and income statement will be misstated but the Retained Earnings statement will be correct for the current year.
d. Total expenses will be overstated at the end of the current year.

146. The trial balance for Greenway Corporation appears as follows:

Greenway Corporation
Trial Balance
December 31, 2014

Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500

If, on December 31, 2014, supplies on hand were $20, the adjusting entry would contain a:
a. debit to Supplies for $20.
b. credit to Supplies for $20.
c. debit to Supplies Expense for $120.
d. credit to Supplies Expense for $120.

147. The trial balance for Greenway Corporation appears as follows:

Greenway Corporation
Trial Balance
December 31, 2014

Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500

If, on December 31, 2014, the insurance still unexpired amounted to $10, the adjusting entry would contain a:
a. debit to Prepaid Insurance for $50.
b. credit to Prepaid Insurance for $10.
c. debit to Insurance Expense for $50.
d. debit to Prepaid Insurance for $10.

148. The trial balance for Greenway Corporation appears as follows:

Greenway Corporation
Trial Balance
December 31, 2014

Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500

If the estimated depreciation for equipment were $800, the adjusting entry would contain a:
a. credit to Accumulated Depreciation, Equipment for $800.
b. credit to Depreciation Expense, Equipment for $800.
c. debit to Accumulated Depreciation, Equipment for $800.
d. credit to Equipment for $800.

149. The trial balance for Greenway Corporation appears as follows:

Greenway Corporation
Trial Balance
December 31, 2014

Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500

If as of December 31, 2014, rent of $120 for December had not been recorded or paid, the adjusting entry would include a:
a. credit to Accumulated Rent for $120.
b. credit to Cash for $120.
c. debit to Rent Payable for $120
d. debit to Rent Expense for $120

150. The trial balance for Greenway Corporation appears as follows:

Greenway Corporation
Trial Balance
December 31, 2014

Cash $ 300
Accounts Receivable 500
Prepaid Insurance 60
Supplies 140
Equipment 4,000
Accumulated Depreciation, Equipment $ 800
Accounts Payable 300
Common Stock 1,000
Retained Earnings 1,400
Service Revenue 3,000
Salaries and Wages Expense 1,000
Rent Expense 500 0
$6,500 $6,500

If service for $125 had been performed but not billed, the adjusting entry to record this would include a:
a. debit to Service Revenue for $125.
b. credit to Unearned Service Revenue for $125.
c. credit for Service Revenue for $125.
d. debit to Unearned Revenue for $125.

151. Depreciation is the process of:
a. valuing an asset at its fair value.
b. increasing the value of an asset over its useful life in a rational and systematic manner.
c. allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
d. writing down an asset to its real value each accounting period.

152. The difference between the balance of a plant asset account and the related accumulated depreciation account is termed:
a. market value.
b. contra asset.
c. book value.
d. liability.

153. A new accountant working for Metcalf Company records $800 Depreciation Expense on store equipment as follows:
Dr. Cr.
Depreciation Expense …………………….. 800
Cash 800

The effect of this entry is to:
a. adjust the accounts to their proper amounts on December 31.
b. understate total assets on the balance sheet as of December 31.
c. overstate the book value of the depreciable assets at December 31.
d. understate the book value of the depreciable assets as of December 31.

154. From an accounting standpoint, the acquisition of long-lived assets is essentially a(n):
a. accrual of expense.
b. accrual of revenue.
c. accrual of unearned revenue.
d. prepaid expense.

155. If a business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit:
a. cash.
b. prepaid rent.
c. unearned rent revenue.
d. accrued rent revenue.

156. An accumulated depreciation account:
a. is a contra liability account.
b. increases on the debit side.
c. is offset against total assets on the balance sheet.
d. has a normal credit balance.

157. The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the:
a. market value of the asset.
b. blue book value of the asset.
c. book value of the asset.
d. depreciated difference of the asset.

158. Which of the following would not result in unearned revenue?
a. Rent collected in advance from tenants.
b. Services performed on account.
c. Sale of season tickets to football games.
d. Sale of two-year magazine subscriptions.

159. The policy at Adler Corporation is to expense all office supplies at the time of purchase. On the last day of the accounting period, there are $1,100 of unused office supplies on hand and the balance of supplies expense is $3,500. What should the accountant do?
a. Debit Supplies and credit Supplies Expense for $1,100.
b. Nothing, company policy says to expense supplies when purchased.
c. Convince management to change its policy to avoid problems in the future.
d. Debit Supplies Expense for $2,400 and credit Supplies for $2,400.

160. Which statement is correct?
a. Accumulated Depreciation should always have a debit balance in the adjusted trial
balance.
b. Accumulated Depreciation is added to the long-term liabilities on the balance sheet.
c. Accumulated Depreciation, Equipment represents the total cost of equipment that has expired up to the date of the balance sheet.
d. Accumulated Depreciation is used to reveal the value of the related asset on the date of the balance sheet.

161. Walton Company collected $9,600 in May of 2013 for 4 months of service which would take place from October of 2013 through January of 2014. The revenue reported from this transaction during 2013 would be:
a. $0.
b. $7,200.
c. $9,600.
d. $2,400.

162. Skypress Company collected $8,400 in May of 2013 for 4 months of service which would take place from October of 2013 through January of 2014. The revenue reported from this transaction during 2013 would be:
a. $0.
b. $6,300.
c. $8,400.
d. $2,100.

163. Masterfalls Corporation purchased a one-year insurance policy in January 2013 for $30,000. The insurance policy is in effect from March 2013 through February 2014. If the company neglects to make the proper year-end adjustment for the expired insurance:
a. net income and assets will be understated by $25,000.
b. net income and assets will be overstated by $25,000.
c. net income and assets will be understated by $5,000.
d. net income and assets will be overstated by $5,000.

164. James & Younger Corporation purchased a one-year insurance policy in January 2013 for $48,000. The insurance policy is in effect from March 2013 through February 2014. If the company neglects to make the proper year-end adjustment for the expired insurance:
a. net income and assets will be understated by $40,000.
b. net income and assets will be overstated by $40,000.
c. net income and assets will be understated by $8,000.
d. net income and assets will be overstated by $8,000.

165. At March 1, 2014, Candy Inc. had supplies on hand of $1,500. During the month, Candy purchased supplies of $2,900 and used supplies of $2,800. The March 31 balance sheet should report what balance in the supplies account?
a. $1,500
b. $1,600
c. $2,800
d. $2,900

166. Darting Company purchased a computer system for $7,200 on January 1, 2014. The company expects to use the computer system for 3 years. It has no salvage value. Monthly depreciation expense on the asset is:
a. $0.
b. $200.
c. $2,400.
d. $7,200.

167. Fleet Services Company purchased equipment for $9,000 on January 1, 2014. The company expects to use the equipment for 5 years. It has no salvage value. What balance would be reported on the December 31, 2014 balance sheet for Accumulated Depreciation?
a. $0 because Accumulated Depreciation is reported on the Income Statement.
b. $1,800
c. $7,200
d. $9,000

168. Green Realty Company received a check for $30,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $30,000. Financial statements will be prepared on July 31. Green Realty should make the following adjusting entry on July 31:
a. debit Unearned Rent Revenue, $5,000; credit Rent Revenue, $5,000.
b. debit Rent Revenue, $5,000; credit Unearned Rent Revenue, $5,000.
c. debit Unearned Rent Revenue, $30,000; credit Rent Revenue, $30,000.
d. debit Cash, $30,000; credit Rent Revenue, $30,000.

169. Oakville Inc. purchased a 12-month insurance policy on March 1, 2014 for $1,800. At March 31, 2014, the adjusting journal entry to record expiration of this asset will include:
a. a debit to Prepaid Insurance and a credit to Cash for $1,800.
b. a debit to Prepaid Insurance and a credit to Insurance Expense for $180.
c. a debit to Insurance Expense and a credit to Prepaid Insurance for $150.
d. a debit to Insurance Expense and a credit to Cash for $150.

170. Hoosher Enterprises purchased an 18-month insurance policy on May 31, 2014 for $7,200. The December 31, 2014 balance sheet would report Prepaid Insurance of:
a. $0 because Prepaid Insurance is reported on the Income Statement.
b. $2,800.
c. $4,400.
d. $7,200.

171. At March 1, I. Repo Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $950 and consumed supplies of $700. If no adjusting entry is made for supplies:
a. stockholders’ equity will be overstated by $700.
b. expenses will be understated by $950.
c. assets will be understated by $450.
d. net income will be understated by $700.

172. Regions Inc. pays its rent of $48,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true?
a. Failure to make the adjustment does not affect the February financial statements.
b. Expenses will be overstated by $4,000 and net income and stockholders’ equity will be understated by $4,000.
c. Assets will be overstated by $8,000 and net income and stockholders’ equity will be understated by $8,000.
d. Assets will be overstated by $4,000 and net income and stockholders’ equity will be overstated by $4,000.

173. An adjusting entry can include a:
a. debit to an asset and a credit to a revenue.
b. debit to a revenue and a credit to an asset.
c. credit to an expense and a debit to a revenue.
d. debit to an expense and a credit to a revenue.

174. A revenue–asset relationship exists with:
a. prepaid expense adjusting entries.
b. accrued expense adjusting entries.
c. unearned revenue adjusting entries.
d. accrued revenue adjusting entries.

175. The accounts of a business before an adjusting entry is made to record accrued revenue reflect an:
a. understated liability and an overstated revenue.
b. overstated asset and an understated revenue.
c. understated expense and an overstated revenue.
d. understated asset and an understated revenue.

176. Adjustments for accrued revenues:
a. increase assets and increase revenues.
b. increase assets and increase liabilities.
c. decrease assets and increase revenues.
d. decrease liabilities and increase revenues.

177. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause:
a. net income to be understated.
b. an overstatement of assets and an overstatement of liabilities.
c. an understatement of expenses and an understatement of liabilities.
d. an overstatement of expenses and an overstatement of liabilities.

178. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause:
a. net income to be overstated.
b. an understatement of assets and an understatement of revenues.
c. an understatement of revenues and an understatement of liabilities.
d. an understatement of revenues and an overstatement of liabilities.

179. An adjusting entry made to record accrued interest on a note receivable due next year consists of a:
a. debit to Interest Expense and a credit to Interest Payable.
b. debit to Interest Receivable and a credit to Interest Revenue.
c. debit to Interest Expense and a credit to Notes Payable.
d. debit to Interest Expense and a credit to Cash.

180. Raxon Company borrowed $40,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be:
a. debit Interest Expense, $2,400; credit Interest Payable, $2,400.
b. debit Interest Expense, $200; credit Interest Payable, $200.
c. debit Note Payable, $2,400; credit Cash, $2,400.
d. debit Cash, $600; credit Interest Payable, $600.

181. Nacron Company borrowed $10,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be:
a. debit Interest Expense, $50; credit Interest Payable, $50.
b. debit Interest Expense, $600; credit Interest Payable, $600.
c. debit Note Payable, $600; credit Cash, $600.
d. debit Cash, $50; credit Interest Payable, $50.

182. Mary Richardo has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Mary make?
a. Debit Cash and credit Unearned Service Revenue
b. Debit Accounts Receivable and credit Unearned Service Revenue
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Unearned Service Revenue and credit Service Revenue

183. Mary Richardo, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will she make upon receipt of the payments?
a. Debit Unearned Service Revenue and credit Service Revenue
b. Debit Cash and credit Accounts Receivable
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Cash and credit Service Revenue

184. Amos Real Estate signed a four-month note payable in the amount of $16,000 on September 1. The note requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of September is:
a. $480.
b. $120.
c. $1,440.
d. $160.

185. DeNova Real Estate signed a four-month note payable in the amount of $8,000 on September 1. The note requires interest at an annual rate of 6%. The amount of interest to be accrued at the end of September is:
a. $480.
b. $120.
c. $40.
d. $90.

186. A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $30,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?
a. Interest Expense 300
Interest Payable 300
b. Interest Expense 450
Interest Payable 450
c. Interest Expense 300
Cash 300
d. Interest Expense 450
Note Payable 450

187. Ye Olde Christmas shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on October 1 in the amount of $20,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?
a. Interest Expense 100
Interest Payable 100
b. Interest Expense 200
Interest Payable 200
c. Interest Expense 300
Interest Payable 300
d. Interest Expense 1,200
Note Payable 1,200

188. Snelling Tables paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $900 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January?
a. Salaries and Wages Expense 900
Salaries and Wages Payable 900
b. Salaries and Wages Expense 4,500
Salaries and Wages Payable 4,500
c. Salaries and Wages Expense 2,700
Salaries and Wages Payable 2,700
d. No adjusting entry is required.

189. Jill Clown earned a salary of $500 for the last week of October. She will be paid on November 1. The adjusting entry for Jill’s employer October 31 is:
a. No entry is required.
b. Salaries and Wages Expense 500
Salaries and Wages payable 500
c. Salaries and Wages Expense 500
Cash 500
d. Salaries and Wages Payable 500
Cash 500

190. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true?
a. Salaries and Wages Expense for the year is overstated.
b. Liabilities at the end of the year are understated.
c. Assets at the end of the year are understated.
d. Stockholders’ equity at the end of the year is understated.

191. A company shows a balance in Salaries and Wages Payable of $40,000 at the end of the month. The next payroll amounting to $60,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?
a. Salaries and Wages Expense 60,000
Salaries and Wages Payable 60,000
b. Salaries and Wages Expense 60,000
Cash 60,000
c. Salaries and Wages Expense 20,000
Cash 20,000
d. Salaries and Wages Payable 40,000
Salaries and Wages Expense 20,000
Cash 60,000

192. De Meaning Corporation issued a one-year 6% $300,000 note on April 30, 2014. Interest expense for the year ended December 31, 2014 was:
a. $18,000.
b. $13,500.
c. $12,000.
d. $10,500.

193. Bluing Corporation issued a one-year 9% $300,000 note on April 30, 2014. Interest expense for the year ended December 31, 2014 was:
a. $27,000.
b. $20,250.
c. $18,000.
d. $15,750.

194. Employees at Biquell Corporation are paid $9,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salaries and wages expense should be recorded two days later on January 2?
a. $9,000
b. $5,400
c. None, expense recognition requires the weekly salary to be accrued on December 31.
d. $3,600

195. An adjusted trial balance:
a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting principles.
d. cannot be used to prepare financial statements.

196. Which of the statements below is not true?
a. An adjusted trial balance should show ledger account balances.
b. An adjusted trial balance can be used to prepare financial statements.
c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger.
d. An adjusted trial balance is prepared before all transactions have been journalized.

197. Which statement is incorrect concerning the adjusted trial balance?
a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the preparation of financial statements.
c. The adjusted trial balance lists the account balances in order of their magnitude.
d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.

198. Can financial statements be prepared directly from the adjusted trial balance?
a. They cannot. The general ledger must be used.
b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts.
c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose.
d. They can because that is the only reason that an adjusted trial balance is prepared.

199. The primary source used in the preparation of the financial statements is the:
a. trial balance.
b. post-closing trial balance.
c. general trial balance.
d. adjusted trial balance.

200. Which of the following accounts will reflect the account’s beginning balance on the adjusted trial balance?
a. Prepaid rent
b. Retained earnings
c. Prepaid insurance
d. Unearned revenue

201. The following accounts show balances on the adjusted trial balance. Which of these account balances will not appear the same on the balance sheet?
a. Retained earnings
b. Accounts receivable
c. Common stock
d. Notes payable

202. Which trial balance will consist of the greatest number of accounts?
a. Post-closing trial balance
b. Trial balance
c. Adjusted trial balance
d. All of the above will contain the same number of accounts.

203. Based on the account balances below, what is the total of the debit and credit columns of the adjusted trial balance?
Service revenue $4,300 Equipment $7,400
Cash 1,525 Prepaid insurance 1,225
Unearned service rev. 5,320 Depreciation expense 640
Salaries and wages expense 1,050 Accum. depreciation 1,280
Common stock 390 Retained earnings 550
a. $10,150
b. $11,840
c. $10,560
d. $11,430

204. Given the following adjusted trial balance:
Debit Credit
Cash $1,562
Accounts receivable 2,098
Inventory 3,124
Prepaid rent 86
Equipment 300
Accumulated depreciation-equipment 52
Accounts payable 82
Unearned service revenue 122
Common stock 206
Retained earnings 6,610
Service revenue 268
Interest revenue 56
Salaries and wages expense 160
Travel expense 66
Total $7,396 $7,396
Net income for the year is:
a. $98.
b. $270.
c. $324.
d. $496.

205. Given the following adjusted trial balance:
Debit Credit
Cash $1,562
Accounts receivable 2,098
Inventory 3,124
Prepaid rent 86
Equipment 300
Accumulated depreciation-equipment 52
Accounts payable 82
Unearned service revenue 122
Common stock 206
Retained earnings 6,610
Service revenue 268
Interest revenue 56
Salaries and wages expense 160
Travel expense 66
Total $7,396 $7,396
After closing entries have been posted, the balance in retained earnings will be:
a. $6,340.
b. $6,512.
c. $6,880.
d. $6,708.

206. Given the following adjusted trial balance:
Debit Credit
Cash $781
Accounts receivable 1,049
Inventory 1,562
Prepaid rent 43
Equipment 150
Accumulated depreciation-equipment 26
Accounts payable 41
Unearned service revenue 61
Common stock 103
Retained earnings 3,305
Service revenue 134
Interest revenue 28
Salaries and wages expense 80
Travel expense 33
Total $3,698 $3,698
Net income for the year is:
a. $49.
b. $135.
c. $162.
d. $248.

207. Given the following adjusted trial balance:
Debit Credit
Cash $781
Accounts receivable 1,049
Inventory 1,562
Prepaid rent 43
Equipment 150
Accumulated depreciation-equipment 26
Accounts payable 41
Unearned service revenue 61
Common stock 103
Retained earnings 3,305
Service revenue 134
Interest revenue 28
Salaries and wages expense 80
Travel expense 33
Total $3,698 $3,698
After closing entries have been posted, the balance in retained earnings will be:
a. $3,256.
b. $3,170.
c. $3,440.
d. $3,354.

208. Which statement is correct concerning the adjusted trial balance?
a. An adjusted trail balance eliminates the need for the preparation of financial statements.
b. The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger.
c. An adjusted trial balance will contain only permanent—balance sheet—accounts.
d. The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted.

209. Which of the following is a true statement about closing the books of a corporation?
a. Expenses are closed to the Expense Summary account.
b. Only revenues are closed to the Income Summary account.
c. Revenues and expenses are closed to the Income Summary account.
d. Revenues, expenses, and the Dividends account are closed to the Income Summary account.

210. The closing entry process consists of closing:
a. all asset and liability accounts.
b. out the Retained Earnings account.
c. all permanent accounts.
d. all temporary accounts.

211. Which account will have a zero balance after closing entries have been journalized and posted?
a. Service revenue.
b. Supplies.
c. Prepaid Insurance.
d. Accumulated Depreciation.

212. A post-closing trial balance will show:
a. zero balances for all accounts.
b. zero balances for balance sheet accounts.
c. only balance sheet accounts.
d. only income statement accounts.

213. Which types of accounts will appear in the post-closing trial balance?
a. Permanent accounts.
b. Temporary accounts.
c. Accounts shown in the income statement columns of a work sheet.
d. None of these answer choices are correct.

214. The purpose of the post-closing trial balance is to:
a. prove that no mistakes were made.
b. prove the equality of the permanent account balances that are carried forward into the next accounting period.
c. prove the equality of the temporary account balances that are carried forward into the next accounting period.
d. list all the balance sheet accounts in alphabetical order for easy reference.

215. Closing entries:
a. are prepared before the financial statements.
b. reduce the number of permanent accounts.
c. cause the revenue and expense accounts to have zero balances.
d. summarize the activity in every account.

216. Which of the following account’s balance will change between the adjusted trial balance and the post-closing trial balance?
a. Common stock
b. Prepaid rent
c. Unearned service revenue
d. Retained earnings

217. Which type of accounts will not appear in the post-closing trial balance?
a. Asset accounts
b. Permanent accounts
c. Liability accounts
d. Temporary accounts

218. There are usually how many closing journal entries?
a. 5
b. 4
c. 3
d. 2

219. Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance?

Debit Credit
Cash $1,562
Accounts receivable 2,098
Inventory 3,124
Prepaid rent 86
Equipment 300
Accumulated depreciation-equipment $ 52
Accounts payable 82
Unearned service revenue 172
Common stock 206
Retained earnings 6,610
Service revenue 218
Interest revenue 56
Salaries and wages expense 160
Travel expense 66
Totals $7,396 $7,396

a. $7,396
b. $7,118
c. $7,344
d. $7,170

220. Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance?

Debit Credit
Cash $ 781
Accounts receivable 1,049
Inventory 1,562
Prepaid rent 43
Equipment 150
Accumulated depreciation-equipment $ 26
Accounts payable 41
Unearned service revenue 86
Common stock 103
Retained earnings 3,305
Service revenue 109
Interest revenue 28
Salaries and wages expense 80
Travel expense 33
Totals $3,698 $3,698

a. $3,585
b. $3,559
c. $3,698
d. $3,672

221. The following information is from the Income Statement of the Dirt Poor Laundry Service:

Revenues
Service Revenue $5,500
Expenses
Salaries and wages expense $ 1,950
Advertising expense 500
Rent expense 300
Supplies expense 200
Insurance expense 100
Total expenses 3,050
Net Income $2,450
The entry to close the Service Revenue account includes a:
a. debit to Service Revenue for $5,500.
b. credit to Service Revenue for $5,500.
c. debit to Income Summary for $5,500.
d. debit to Retained Earnings for $5,500.

222. The following information is from the Income Statement of the Dirt Poor Laundry Service:

Revenues
Service Revenue $5,500
Expenses
Salaries and Wages expense $ 1,950
Advertising expense 500
Rent expense 300
Supplies expense 200
Insurance expense 100
Total expenses 3,050
Net Income $2,450
The entry to close the expense accounts includes a:
a. credit to Income Summary for $3,050.
b. debit to Income Summary for $3,050.
c. debit to Salaries and Wages Expense for $1,950.
d. credit to Retained Earnings for $3,050.

223. The following information is from the Income Statement of the Dirt Poor Laundry Service:

Revenues
Service Revenue $5,500
Expenses
Salaries and Wages expense $ 1,950
Advertising expense 500
Rent expense 300
Supplies expense 200
Insurance expense 100
Total expenses 3,050
Net Income $2,450
The entry to close the Income Summary includes a:
a. credit to Income Summary for $2,450.
b. debit to Income Summary for $2,450.
c. debit to Retained Earnings for $2,450.
d. credit to Common Stock for $2,450.

224. The final step in the accounting cycle is to prepare:
a. closing entries.
b. financial statements.
c. a post-closing trial balance.
d. adjusting entries.

225. All of the following are required steps in the accounting cycle except:
a. journalizing and posting closing entries.
b. preparing an adjusted trial balance.
c. preparing a post-closing trial balance.
d. preparing a work sheet.

226. The first required step in the accounting cycle is:
a. adjusting entries.
b. journalizing transactions.
c. analyzing transactions.
d. posting transactions.

227. How many required steps are there in the accounting cycle?
a. 11
b. 9
c. 7
d. 5

228. Which of the following steps in the accounting cycle usually occurs only at the end of a company’s annual accounting period?
a. Step 3: Post to the ledger accounts.
b. Step 7: Prepare financial statements.
c. Step 6: Prepare adjusting trial balance.
d. Step 9: Prepare a post-closing trial balance.

229. The Accounts Receivable account has a beginning balance of $52,000 and an ending balance of $69,000. If $42,000 was sold on account during the year, what were the total collections on account?
a. $25,000
b. $59,000
c. $69,000
d. $79,000

*230. The worksheet is:
a. part of the journal.
b. a financial statement.
c. part of the ledger.
d. none of these answer choices are correct.

*231. The worksheet starts with two columns for the:
a. adjustments.
b. financial statements.
c. trial balance.
d. adjusted trial balance.

*232. The worksheet does not contain columns for the:
a. income statement.
b. statement of retained earnings.
c. balance sheet.
d. adjusted trial balance.

*233. The worksheet contains columns for the:
a. statement of retained earnings.
b. statement of cash flows.
c. post-closing trial balance.
d. balance sheet.

*234. Net income is recorded on the worksheet under the:
a. debit column of the adjusted trial balance and the credit column of retained earnings.
b. debit column of the income statement and the credit column of the balance sheet.
c. credit column of the adjusted trial balance and the debit column of retained earnings.
d. credit column of the income statement and the debit column of the balance sheet.

BRIEF EXERCISES
Be. 235
Identify the effect, if any, that each of the following transactions would have upon cash and retained earnings. Show the dollar amount and the effect (+, –, N).
Retained
_Cash__ Earnings

1. Purchases capital asset for $3,000 _______ _______
2. Purchased $200 of supplies for cash _______ _______
3. Recorded an adjusting entry to record use of
$110 of the above supplies. _______ _______
4. Received $600 from customers in payment of
their accounts _______ _______
5. Recorded depreciation of equipment for period
used, $900. _______ _______

Be. 236
Before month-end adjustments are made, the February 28 trial balance of Cole’s Enterprise contains revenue of $11,000 and expenses of $8,900. Adjustments are necessary for the following items:

 Depreciation for February is $1,200.
 Revenue earned but not yet billed is $2,800.
 Accrued interest expense is $900.
 Revenue collected in advance that is now earned is $2,500.
 Portion of prepaid insurance expired during February is $500.

Instructions:
Calculate the correct net income for Cole’s Enterprise for February 3.

Be. 237
Before month-end adjustments are made, the September 30 trial balance of Horton Enterprise contains revenue of $9,200 and expenses of $6,500. Adjustments are necessary for the following items:

 Depreciation for September is $300.
 Revenue earned but not yet billed is $2,100.
 Accrued interest expense is $800.
 Revenue collected in advance that is now earned is $3,400.
 Portion of prepaid insurance expired during September is $300.

Instructions:
Calculate the correct net income for Horton’s Enterprise for September.

Be. 238
For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA).

_____ 1. Failure to record revenue recognized but not yet received.
_____ 2. Failure to record expired prepaid rent.
_____ 3. Failure to record accrued interest on the bank savings account.
_____ 4. Failure to record depreciation.
_____ 5. Failure to record accrued wages.
_____ 6. Failure to record the recognized portion of unearned revenues.

Be. 239
State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE).

1. Unrecorded interest on savings bonds is $245.
2. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300.
3. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned.
4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still unexpired.
5. Unpaid salaries earned by year end but not yet paid or recorded amounted to $1,200.

Be. 240
Identify the impact on the balance sheet for that month if the following information is not used to adjust the accounts.

1. Supplies consumed during the month totalled $3,000.
2. Interest accrues on notes payable at the rate of $200 per month.
3. Insurance of $450 expired during the month.
4. Plant and equipment are depreciated at the rate of $1,200 per month.

Be. 241
On January 1, the Biddle & Biddle, CPAs received a $7,500 cash retainer for accounting services to be provided rateably over the next 3 months. The full amount was credited to the liability account Service Unearned Revenue. Assuming that the revenue is recognized rateably over the 3 month period, what adjusting journal entry should be made at January 31?

Be. 242

On February 1, the Acts Tax Service received a $3,600 cash retainer for tax preparation services to be provided rateably over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized rateably over the 4 month period, what balance would be reported on the February 28 balance sheet for Unearned Service Revenue?

Be. 243

Better Publications, sold annual subscriptions to their magazine for $42,000 in December, 2013. The magazine is published monthly. The new subscribers received their first magazine in January, 2014.

1. What adjusting entry should be made in January if the subscriptions were originally recorded as a liability?
2. What amount will be reported on the January 2014 balance sheet for Unearned Subscription Revenue?

Be. 244
River Ridge Music School borrowed $30,000 from the bank signing a 6%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)?
Be. 245
Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided.
TERMS:
A. Prepaid Expenses
B. Unearned Revenues
C. Accrued Revenues
D. Accrued Expenses
STATEMENTS:

1. A revenue not yet recognized; collected in advance.

2. An expense incurred; not yet paid or recorded.

3. A revenue recognized; not yet collected or recorded.

4. An expense not yet incurred; paid in advance.

Be. 246
Prepare adjusting entries for the following transactions. Omit explanations.

1. Depreciation on equipment is $800 for the accounting period.
2. There was no beginning balance of supplies and purchased $600 of office supplies during the period. At the end of the period $120 of supplies were on hand.
3. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $300 was unexpired.

Be. 247
Prepare adjusting entries for the following transactions. Omit explanations.

1. Unrecorded interest accrued on savings bonds is $200.
2. Property taxes incurred but not paid or recorded amount to $900.
3. Salaries incurred by year end but not yet paid or recorded amounted to $600.

Be. 248
The adjusted trial balance of Warbocks Corporation at December 31, 2014 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare an income statement for the year ended December 31, 2014.

Be. 249
The adjusted trial balance of Warbocks Corporation at December 31, 2014 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year.

Be. 250
The following selected accounts appear in the adjusted trial balance for Blender Company. Identify the accounts that would be included in the post-closing trial balance.

1. Accumulated Depreciation 5. Supplies
2. Depreciation Expense 6. Accounts Payable
3. Retained Earnings 7. Service Revenue
4. Dividends

EXERCISES
Ex. 251
The balance sheets of Palle’ Company include the following:
12/31/14 12/31/13
Interest Receivable $4,300 $ -0-
Supplies 5,000 3,900
Salaries and Wages Payable 3,700 3,800
Unearned Service Revenue -0- 4,000

The income statement for 2014 shows the following:
Interest Revenue $17,500
Service Revenue 78,700
Supplies Expense 10,700
Salaries and Wages Expense 48,000

Instructions:
Calculate the following for 2014:
1. Cash received for interest.
2. Cash paid for supplies.
3. Cash paid for salaries and wages.
4. Cash received for service revenue.

Ex. 252
The 2014 income statement for Moring Company showed rent expense of $9,500 and wages expense of $8,600. The related balance sheet account balance at year-end last year and this year were as follows:
2014 2013
Prepaid Rent $900 $300
Salaries and Wages Payable 500 400

Calculate the following for 2014:
1. Cash paid for rent.
2. Cash paid for wages.

Ex. 253
A company using the cash basis of accounting reports net income for 2014 of $45,460. If the company had used the accrual basis of accounting it would have reported the following year-end balances:

2014 2013
Accounts receivable $3,850 $5,100
Supplies 1,740 1,950
Salaries and wages payable 3,600 2,250
Other unpaid amounts 2,400 2,100

Instructions:
Determine the company’s net income under the accrual basis of accounting. Show your calculations. Use the column headings shown below.

Explanation Amount

Ex. 254

Double-entry Accounting Services begin operations on July 1. It allows its clients 90 days to pay for services received. On the other hand, the company’s suppliers require payment for their goods and services within 30 days. Double-entry prepaid its office rent for 12 months on July 1. At the end of the year, December 31, the company had yet to pay its last month’s utility bill.

Instructions:
Explain how cash and accrual basis accounting would handle each of the events described above. Use the column heading s shown below.
Event Cash Basis Accrual Basis

Ex. 255
Hooper Company prepared the following income statement using the cash basis of accounting:

HOOPER COMPANY
Income Statement, Cash Basis
For the Year Ended December 31, 2013

Service revenue (does not include $40,000 of services rendered on account
because the collection will not be until 2014) $380,000
Expenses (does not include $20,000 of expenses on account because
payment will not be made until 2014) 220,000
Net income $160,000

Additional data:
1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above.
2. On January 1, 2013, paid for a two-year insurance policy on the automobile amounting to $1,600. This amount is included in the expenses above.

Instructions:
(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of income.

Ex. 256
On December 31, 2014, Çolski Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $40,000. The balance sheet showed total assets, $130,000; total liabilities, $60,000; and stockholders’ equity, $70,000.
The data for the three adjusting entries were:
(1) Depreciation of $9,000 was not recorded on equipment.
(2) Salaries and Wages amounting to $10,000 for the last two days in December were not paid and not recorded. The next payroll will be in January.
(3) Rent of $8,000 was paid for two months in advance on December 1. The entire amount was debited to Prepaid Rent when paid.

Instructions:
Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses):

Item Net Income Total Assets Total Liabilities Stockholders’ Equity
Incorrect balances $ 40,000 $130,000 $ 60,000 $ 70,000
Effects of:
Depreciation

Salaries and Wages

Rent

Correct Balances

Ex. 257
The Downtown Company accumulates the following adjustment data at December 31.
1. Revenue of $1,100 collected in advance has been recognized.
2. Salaries of $600 are unpaid.
3. Prepaid rent totaling $400 has expired.
4. Supplies of $550 have been used.
5. Revenue recognized but unbilled totals $750.
6. Utility expenses of $300 are unpaid.
7. Interest of $250 has accrued on a note payable.

Instructions:
(a) For each of the above items indicate:
1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense).
2. The account relationship (asset/liability, liability/revenue, etc.).
3. The status of account balances before adjustment (understatement or overstatement).
4. The adjusting entry.

(b) Assume net income before the adjustments listed above was $22,500. What is the adjusted net income?

Prepare your answer in the tabular form presented below.

Account Balances
Before Adjustment Income Effect
Type of Account (Understatement Increase
Adjustment Relationship or Overstatement) Adjusting Entry (Decrease)

Ex. 258
The adjusted trial balance of Masters Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry.
(a) (b)
Balance Sheet Account Type of Adjusting Entry Related Account
1. Supplies
2. Accounts Receivable
3. Prepaid Insurance
4. Accumulated Depreciation—
Equipment
5. Interest Payable
6. Salaries and Wages Payable
7. Unearned Service Revenue

Ex. 259
Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided.
TERMS:
A. Prepaid Expenses
B. Unearned Revenues
C. Accrued Revenues
D. Accrued Expenses

STATEMENTS:

1. A revenue not yet recognized; collected in advance.

2. Office supplies on hand that will be used in the next period.

3. Subscription revenue collected; not yet recognized.

4. Rent not yet collected; already recognized.

5. An expense incurred; not yet paid or recorded.

6. A revenue recognized; not yet collected or recorded.

7. An expense not yet incurred; paid in advance.

8. Interest expense incurred; not yet paid.

Ex. 260
A review of the ledger of Wilde Co. at December 31, 2014, produces the following data pertaining to the preparation of annual adjusting entries:

(a) Salaries and Wages Payable $0: Salaries are paid every Friday for the current week. Five employees receive a weekly salary of $800, and three employees earn a weekly salary of $700. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December.

(b) Unearned Rent Revenue $58,000: The company had several lease contracts during the year as shown below:
Rent
Term per Number of
Date (in months) lease leases
Oct. 1 12 $ 8,000 3
Dec. 1 12 18,000 2

(c) Notes Receivable $90,000: This is a 6-month note, dated November 1, 2014, with a 6% interest rate.

Instructions:
Prepare the adjusting entries at December 31, 2014. Show all computations.

Ex. 261
A review of the ledger of Weakly Service Co. at December 31, 2014, produces the following data pertaining to the preparation of annual adjusting entries:

(a) Notes Payable $80,000: This is a 9-month note, dated September 1, 2014, with a 9% interest rate.

(b) Prepaid Rent $648,000. The company rents offices throughout the Midwest. During 2014 it signed 10 leases as shown below:

Term Monthly Number of
Date (in months) Rent Leases
Sept. 1 8 $ 4,500 4
Nov. 1 12 7,000 6

(c) Unearned Service Revenue $171,000. During 2014 the company entered into 13 monthly service contracts with clients. The clients prepaid for the services to be provided over the contract period in an even manner.

Service Period Amount Number of
Date (in months) Per Contract Contracts
Aug. 1 9 $12,600 8
Oct. 1 6 15,000 5

Instructions:
Prepare the adjusting entries at December 31, 2014. Show all computations.

Ex. 262
The Scarlet Pages, a semi-professional hockey team, prepare financial statements on a monthly basis. Their season begins in October, but in September the team engaged in the following transactions:
(a) Paid $150,000 to Oklahoma City as advance rent for use of Oklahoma City Arena for the six-month period October 1 through March 31.

(b) Collected $450,000 cash from sales of season tickets for the team’s 30 home games. This amount was credited to Unearned Ticket Revenue.

(c) During the month of October, the Scarlet Pages played five home games.

Instructions:
Prepare the adjusting entries required at October 31 for the transactions above.

Ex. 263
The Jacquers, a semi-professional baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions:
(a) Paid $120,000 to Lawrence City as advance rent for use of Lawrence City Stadium for the six-month period April 1 through September 30.
(b) Collected $600,000 cash from sales of season tickets for the team’s 20 home games. This amount was credited to Unearned Ticket Revenue.

(c) During the month of April, the Jacquers played four home games and five road games.

Instructions:
Prepare the adjusting entries required at April 30 for the transactions above.

Ex. 264
Prepare adjusting entries for the following transactions. Omit explanations.

1. Depreciation on equipment is $1,340 for the accounting period.
2. Interest owed on a loan but not paid or recorded is $275.
3. There was no beginning balance of supplies and $550 of office supplies were purchased during the period. At the end of the period $100 of supplies were on hand.
4. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $700 had expired.
5. Accrued salaries at the end of the period amounted to $900.

Ex. 265
Prepare adjusting entries for the following transactions. Omit explanations.

1. Unrecorded interest accrued on savings bonds is $410.
2. Property taxes incurred but not paid or recorded amount to $800.
3. Unearned service revenue of $4,000 was collected in advance. By year end $700 was still unearned.
4. Prepaid insurance had a $750 debit balance prior to adjustment. By year end, 60 percent was still unexpired.
5. Salaries incurred by year end but not yet paid or recorded amounted to $650.

Ex. 266
Prepare year-end adjustments for the following transactions. Omit explanations.

1. Accrued interest on notes receivable is $30.
2. $1,000 of unearned service revenue has been recognized.
3. Three years’ rent, totaling $45,000, was paid in advance at the beginning of the year.
4. Services totaling $2,900 had been performed but not yet billed at the end of the year.
5. Depreciation on equipment totaled $6,500 for the year.
6. Supplies purchased totaled $850. By year end, only $250 of supplies remained.
7. Salaries owed to employees at the end of the year total $960

Ex. 267

Janus Coat Company purchased a delivery truck on June 1 for $30,000, paying $10,000 cash and signing a 6%, 2-month note for the remaining balance. The truck is expected to depreciate $6,000 each year. Janus Coat Company prepares monthly financial statements.

Instructions:
(a) Prepare the general journal entry to record the acquisition of the delivery truck on June 1st.
(b) Prepare any adjusting journal entries that should be made on June 30th.
(c) Show how the delivery truck will be reflected on Janus Coat Company’s balance sheet on June 30th.

Ex. 268
Sunkan Company prepares monthly financial statements. Below are listed some selected accounts and their balances on the September 30 trial balance before any adjustments have been made for the month of September.

SUNKAN COMPANY
Trial Balance (Selected Accounts)
September 30, 2014

Debit Credit
Supplies $ 2,700
Prepaid Insurance 4,800
Equipment 16,200
Accumulated Depreciation—Equipment $ 1,000
Unearned Rent Revenue 1,200

(Note: Debit column does not equal credit column because this is a partial listing of selected account balances.)

An analysis of the account balances by the company’s accountant provided the following additional information:
1. A physical count of office supplies revealed $1,000 on hand on September 30.
2. A two-year life insurance policy was purchased on June 1 for $4,800.
3. Office equipment depreciates $3,000 per year.
4. The amount of rent received in advance that remains unearned at September 30 is $300.
Instructions:
Using the information given, prepare the adjusting entries that should be made by Sunkan Company on September 30.

Ex. 269
Prepare the required end-of-period adjusting entries for each independent case listed below.

Case 1
The Thoma Company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $8,300 worth of supplies had been used during the year. No adjusting entry has been made until year end.

Case 2
The Leno Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $200 each month. No adjusting entry has been made until year end.

Case 3
Yeats Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 2 tenants in $900 per month apartments and one tenant in the $1,000 per month apartment had not paid their December rent as of December 31st.

Ex. 270
Greenstream Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered.

GREENSTREAM INSURANCE AGENCY
Income Statement
For the Month Ended June 30

Revenues
Service Revenue $40,000
Expenses
Salaries and Wages Expense $12,000
Advertising Expense 800
Rent Expense 4,200
Depreciation Expense 2,800
Total Expenses 19,800
Net Income $20,200

Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information:

1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for the month of June.
2. A company insurance salesman sold a life insurance policy to a client for a premium of $10,000. The agency billed the client for the policy and is entitled to a commission of 20%.
3. Supplies on hand at the beginning of the month were $2,500. The agency purchased additional supplies during the month for $1,500 in cash and $1,200 of supplies were on hand at June 30.
4. The agency purchased a new car at the beginning of the month for $24,000 cash. The car will depreciate $6,000 per year.
5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5.

Instructions:
Prepare a corrected income statement.

Ex. 271
One part of an adjusting entry is given below.

Instructions:
Indicate the account title for the other part of the entry.
1. Unearned Service Revenue is debited.
2. Prepaid Rent is credited.
3. Accounts Receivable is debited.
4. Depreciation Expense on equipment is debited.
5. Utilities Expense is debited.
6. Interest Payable is credited.
7. Service Revenue is credited (give two possible debit accounts).
8. Interest Receivable is debited.

Ex. 272
The following ledger accounts are used by the Heartland Race Track:

Accounts Receivable
Prepaid Advertising
Prepaid Rent
Unearned Sales Revenue
Sales Revenue
Advertising Expense
Rent Expense

Instructions:
For each of the following transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on November 30, the end of the fiscal year.
(a) On November 1, paid rent on the track facility for three months, $150,000.
(b) On November 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $960,000.
(c) On November 1, borrowed $250,000 from First National Bank by issuing a 6% note payable due in three months.
(d) On November 5, programs for 20 racing days in November, 25 racing days in December and 15 racing days in January were printed for $3,000.
(e) The accountant for the concessions company reported that gross receipts for November were $140,000. Ten percent is due to Heartland and will be remitted by December 10.

Ex. 273
Dallison Company has an accounting fiscal year, which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred.
Date Amount
Monday June 28 $3,200
Tuesday June 29 2,800
Wednesday June 30 2,900
Thursday July 1 3,000
Friday July 2 2,600

Instructions:
(a) Prepare any necessary adjusting journal entries that should be made at year end on June 30.
(b) Prepare the journal entry to record the payment of the weekly payroll on July 2.

Ex. 274
On Friday of each week, Prawn Company pays its personnel weekly wages amounting to $45,000 for a five-day work week.

Instructions:
(a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday.
(b) Prepare the journal entry for payment of the week’s wages on the payday which is Friday, January 2 of the next year.

Ex. 275
Presented below is the Trial Balance and Adjusted Trial Balance for Stabler Company on December 31.
STABLER COMPANY
Trial Balance
December 31

Before Adjustment After Adjustment
Dr. Cr. Dr. Cr.
Cash $ 3,000 $ 3,000
Accounts Receivable 2,800 3,700
Prepaid Rent 2,100 1,500
Supplies 1,200 700
Equipment 18,000 18,000
Accumulated Depreciation—
Equipment $ 1,300 $ 1,500
Accounts Payable 2,700 3,000
Notes Payable 10,000 10,000
Interest Payable 120
Salaries and Wages Payable 800
Unearned Service Revenue 4,460 4,060
Common Stock 8,200 8,200
Dividends 3,200 3,200
Service Revenue 8,000 9,300
Salaries and Wages Expense 2,060 2,860
Utilities Expense 1,800 2,100
Rent Expense 500 1,100
Supplies Expense 500
Depreciation Expense 200
Interest Expense 120
Totals $34,660 $34,660 $36,980 $36,980

Instructions:
Prepare in journal form, with explanations, the adjusting entries that explain the changes in the
balances from the trial balance to the adjusted trial balance.

Ex. 276
The Golden Petting Zoo operates a drive-through tourist attraction in Colorado. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following:
Prepaid Rent $ 18,000
Buildings 42,000
Accumulated Depreciation—Buildings 5,500
Unearned Ticket Revenue 600

Other data:
1. Three months’ rent had been prepaid on April 1.
2. The buildings are being depreciated at $6,000 per year.
3. The unearned ticket revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers.

Instructions:
(a) Calculate the following:
1. Monthly rent expense.
2. The age of the fencing in months.
3. The number of tickets sold on April 1.
(b) Prepare the adjusting entries that were made by the Golden Petting Zoo on April 30.

Ex. 277
The adjusted trial balance of Nicks Financial Planners appears below and using the information from the adjusted trial balance, you are to prepare for the month ending December 31:
1. an income statement;
2. a retained earnings statement; and
3. a balance sheet.
NICKS FINANCIAL PLANNERS
Adjusted Trial Balance
December 31, 2014

Debit Credit
Cash $ 15,400
Accounts Receivable 2,200
Supplies 1,800
Equipment 15,500
Accumulated Depreciation—Equipment $ 4,000
Accounts Payable 3,000
Unearned Service Revenue 5,000
Common Stock 15,000
Retained Earnings 7,400
Dividends 3,500
Service Revenue 9,500
Supplies Expense 1,100
Depreciation Expense 2,500
Rent Expense 1,900
$43,900 $43,900

Ex. 278
The adjusted trial balance shown below is for Rich Company at the end of its fiscal year:

RICH COMPANY
Trial Balance
March 31, 2014

Debit Credit
Cash $ 12,900
Accounts Receivable 9,400
Supplies 700
Prepaid Insurance 2,500
Equipment 16,000
Accumulated Depreciation—Equipment $ 4,800
Accounts Payable 5,800
Salaries and Wages Payable 1,100
Unearned Rent Revenue 600
Common Stock 15,000
Retained Earnings 5,600
Dividends 5,800
Service Revenue 34,600
Rent Revenue 14,400
Salaries and Wages Expense 18,100
Supplies Expense 1,800
Rent Expense 12,000
Insurance Expense 1,500
Depreciation Expense 1,200
$81,900 $81,900

Instructions:

Prepare the closing entries for the temporary accounts at March 31.

COMPLETION STATEMENTS
279. The ______________ assumption states that the economic life of a business can be divided into artificial time periods.

280. The ______________ principle gives accountants guidance as to when revenue is to be
recorded.

281. In a service company, revenue is earned when the service is _______________.

282. The expense recognition principle attempts to match ______________ with ______________.

283. Expenses paid and recorded in an asset account before they are used or consumed are called _______________. Revenue received and recorded as a liability before it is earned is referred to as _________________.

284. Failure to adjust a prepaid expense account for the amount expired will cause _______________ to be understated and ________________ to be overstated.

285. Depreciation is an __________________ concept, not a ________________ concept.

286. An adjusting entry recording accrued salaries for a period indicates that Salaries and Wages Expense has been ________________ but has not yet been ________________ or recorded.

287. An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made.

288. In addition to updating Retained Earnings, ______________ entries produce a zero balance in each ______________ account.

289. After all closing entries are journalized and posted, a _________________ trial balance is prepared from the ledger.

MATCHING
290. Match the items below by entering the appropriate code letter in the space provided.

A. Periodicity assumption F. Accrued revenues
B. Cash basis G. Depreciation
C. Revenue recognition principle H. Post-closing trial balance
D. Prepaid expenses I. Accrued expenses
E. Expense recognition principle J. Book value

1. Events recorded only in periods the company receives or pays cash
2. Expenses paid before they are incurred
3. Cost less accumulated depreciation
4. The economic life of a business can be divided into artificial time periods
5. Efforts are related to accomplishments
6. Includes only permanent—balance sheet—accounts
7. Revenue is recognized when the performance obligation is satisfied.
8. Revenues earned but not yet received
9. Expenses incurred but not yet paid
10. A cost allocation process

SHORT-ANSWER ESSAY QUESTIONS
S-A E 291
You are part of a group of individuals (incorporators) who want to form a new corporation. During discussions on forming the business, Mark Adams makes this statement:
Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting?

Prepare a response for Mark and the other incorporators.

S-A E 292
The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the periodicity assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement.

S-A E 293
As a recent graduate in accounting, and the financial director of a political candidate in a current election, you have been asked to explain many questions concerning how governmental accounting differs from corporate accounting.

Required:
(a) Discuss the differences between cash basis and accrual−basis accounting.
(b) Prepare a memo to your candidate explaining why governmental entities favor the cash basis of accounting.

S-A E 294
The long-term liability section of Alpha Corporation’s Balance Sheet includes the following accounts
Notes Payable $100,000
Mortgage Payable 250,000
Salaries and Wages Payable 75,000
Accumulated Depreciation 125,000
Total Long-Term Liabilities $550,000

Alpha Corporation is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as long-term liabilities.

S-A E 295
What is the purpose of the preparation of adjusting entries?

S-A E 296
Briefly distinguish between a deferral and an accrual.

S-A E 297
In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each.

S-A E 298
Companies are continually under pressure to “Make the Numbers” – to have earnings that are in line with expectations. Explain the terms earnings management and quality of earnings.

S-A E 299 (Ethics)
Benson and Jencks is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Benson and Jencks introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success.
The success of the product has Fern Donald, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results.
Top management, however, declined the tests. Ms. Donald then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable.

Required:
1. Describe the alternatives that you as an accountant would have in this situation.
2. Indicate which alternative is best.

S-A E 300 (Communication)
A new sales representative, Eddy Wherli, has just received his copy of the month-end financial reports. He is puzzled by the term “unearned revenue.” He left the following e-mail message for you on the company’s bulletin board system:

What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn’t . . . Right??! Is this how you guys lower our commissions? Reply to e.wherli@sbd

Required:
Write a response to send to Eddy. (Since the answer is being prepared for a “bulletin board” type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is.)

International Financial Reporting Standards

True-False Statements

1. The cash basis of accounting is not in accordance with IFRS.

2. The expense recognition principle requires that efforts be matched with accomplishments.

3. Adjusting entries are needed to enable financial statements to conform to International Financial Reporting Standards (IFRS).

Multiple Choice Questions

4. Which of the following are in accordance with IFRS?
a. Accrual basis accounting
b. Cash basis accounting
c. Both accrual basis and cash basis accounting
d. Neither accrual basis nor cash basis accounting

5. Wong Ho Company had the following transactions during 2013:
• Sales of ¥11,000 on account
• Collected ¥4,000 for services to be performed in 2014
• Paid ¥1,250 cash in salaries
• Purchased airline tickets for ¥500 in December for a trip to take place in 2014

What is Wong Ho’s 2013 net income using accrual accounting?
a. ¥9,750.
b. ¥13,750.
c. ¥13,250.
d. ¥9,250.

6. Under International Financial Reporting Standards (IFRS)
a. The cash-basis method of accounting is accepted.
b. Events are recorded in the period in which the event occurs.
c. Interim period financial statements are either a calendar year or a fiscal year.
d. A fiscal year is an accounting time period encompassing less than 12 months.

7. What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, € 20,500, and unexpired amounts per analysis of policies of €4,000?
a. Debit Insurance Expense, € 4,000; Credit Prepaid Insurance, € 4,000.
b. Debit Insurance Expense, € 20,500; Credit Prepaid Insurance, € 20,500.
c. Debit Prepaid Insurance, € 16,500; Credit Insurance Expense, € 16,500.
d. Debit Insurance Expense, € 16,500; Credit Prepaid Insurance, € 16,500.

8. Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2014 and recorded the transaction by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. How will the adjusting entry impact Karcan, Inc.’s statement of financial position at December 31, 2014?
a. Decreased assets ₤ 1,100.
b. Increased equity ₤ 1,100.
c. Increased liabilities ₤ 1,400.
d. Decreased assets ₤ 1,400.

9. Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2014 and recorded the transaction by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. If Karcan, Inc. does not make the appropriate adjusting entry, what is the impact on its statement of financial position at December 31, 2014?
a. Assets overstated by ₤ 1,400.
b. Equity understated by ₤ 1,400.
c. Equity overstated by ₤ 1,100.
d. Assets overstated by ₤ 1,100.

10. Similarities between International Financial Reporting Standards (IFRS) and U.S. GAAP include all of the following except
a. Cash-basis accounting is not in accordance with either IFRS or U.S. GAAP.
b. Both IFRS and U.S. GAAP allow revaluation of items such as land and buildings to fair value.
c. Both IFRS and U.S. GAAP divide the economic life of companies into artificial time periods.
d. The form and content of financial statements are very similar under IFRS and U.S. GAAP.

Brief Exercises
11. The statements of financial position of Rocky Acre Spread Ltd. include the following:
12/31/14 12/31/13
Interest Receivable €4,300 € -0-
Supplies 5,000 3,000
Salaries and Wages Payable 3,600 3,800
Unearned Service Revenue -0- 4,000

The income statement for 2014 shows the following:
Interest Revenue €14,400
Service Revenue 75,700
Supplies Expense 8,700
Salaries and Wages Expense 36,000

Instructions
Calculate the following for 2014:
1. Cash received for interest.
2. Cash paid for supplies.
3. Cash paid for salaries and wages.
4. Cash received for service revenue.

CHAPTER 5

MERCHANDISING OPERATIONS

TRUE-FALSE STATEMENTS

1. Retailers and wholesalers are both considered merchandising enterprises.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2. The operating cycle of a merchandising company ordinarily is shorter than that of a service company.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3. Sales revenue minus operating expenses equals gross profit.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

5. A periodic inventory system does not require a detailed record of inventory items.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

6. The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.

LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

7. The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company.

LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

8. Under the periodic inventory system, cost of goods sold is treated as an account.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

9. An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system.

LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10. The periodic inventory system provides an up to date amount of inventory on hand.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

11. A very small business most likely would have to use the perpetual inventory system.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

12. The computer has increased greatly the use of the periodic inventory system.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Economics

13. Cost of Goods Sold is considered an expense of a merchandising firm.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14. Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15. Net sales minus cost of goods sold is called gross profit.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16. Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

17. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18. The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

19. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

20. Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

21. If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.

LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

22. When an invoice is paid within the discount period, the amount of the discount decreases Inventory.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

23. Sales revenues are only earned during the period cash is collected from the buyer.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

24. Cash register tapes provide evidence of credit sales.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

25. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26. The revenue recognition principle applies to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27. Sales allowances and Sales discounts are both designed to encourage customers to pay their accounts promptly.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

28. Sales Discounts is a contra revenue account to Sales Revenue.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29. The normal balance of Sales Returns and Allowances is a credit.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30. When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

31. Sales Discounts and Sales Returns and Allowances both have normal debit balances.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32. Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

33. The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over 10 but before 30 days after the invoice date.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Quantitative Methods

34. The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.

LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

35. In a single-step income only one step is required in determining net income.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

36. Freight-out appears as an operating expense in the income statement.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37. Gross profit appears on both the single-step and multiple-step forms of an income statement.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

38. Nonoperating activities include revenues and expenses that are related to the company’s main line of operations.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

39. Operating expenses include interest expense and income tax expense.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40. Income from operations appears on both the single-step and multiple-step forms of an income statement.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

41. A merchandising company’s net income is determined by subtracting operating expenses from gross profit.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42. Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company’s income statement not commonly found on the income statement of a service company.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

43. The income statement for a merchandising company presents only two amounts not shown on a service company income statement.

LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

44. Under the periodic system, the purchases account is used to accumulate all purchases of merchandise for resale.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

45. With the periodic inventory system, goods available for sale must be calculated before cost of goods sold.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

46. If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

47. The gross profit amount is generally considered to be more informative than the gross profit rate.

LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48. Gross profit rate is computed by dividing cost of goods sold by net sales.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

49. The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50. A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*51. Under the periodic system, when a customer returns goods, Purchases Returns and Allowances is debited.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*52. Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

MULTIPLE CHOICE QUESTIONS

53. Merchandising companies that sell to retailers are known as
a. brokers.
b. corporations.
c. wholesalers.
d. service firms.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

54. Which of the following would not be considered a merchandising operation?
a. Retailer
b. Wholesaler
c. Service firm
d. Merchandising company

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

55. Which of the following activities is not a component of the operating cycle?
a. Sale of merchandise
b. Payment of employees’ salaries
c. Collection of cash from merchandise sales
d. Purchase of merchandise

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

56. Which of the following companies would be most likely to use a perpetual inventory system?
a. Grain company
b. Beauty salon
c. Clothing store
d. Fur dealer

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

57. Gross profit equals the difference between
a. net income and operating expenses.
b. sales revenue and cost of goods sold.
c. sales revenue and operating expenses.
d. sales revenue and cost of goods sold plus operating expenses.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58. Each of the following companies is a merchandising company except a
a. wholesale parts company.
b. candy store.
c. moving company.
d. furniture store.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

59. Net income will result if gross profit exceeds
a. cost of goods sold.
b. operating expenses.
c. purchases.
d. cost of goods sold plus operating expenses.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60. A merchandiser will earn an operating income of exactly $0 when
a. net sales equals cost of goods sold.
b. cost of goods sold equals gross margin.
c. operating expenses equal net sales.
d. gross profit equals operating expenses.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

61. A merchandiser that sells directly to consumers is a
a. retailer.
b. wholesaler.
c. broker.
d. service enterprise.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

62. Two categories of expenses in merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. other expenses and cost of goods sold.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63. The primary source of revenue for a wholesaler is
a. investment income.
b. service revenue.
c. the sale of merchandise.
d. the sale of plant assets the company owns.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

64. Generally, the revenue account for a merchandising enterprise is called
a. Sales Revenue or Sales.
b. Investment Income.
c. Gross Profit.
d. Net Sales.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65. Under a perpetual inventory system
a. accounting records continuously disclose the amount of inventory.
b. increases in inventory resulting from purchases are debited to purchases.
c. there is no need for a year-end physical count.
d. the account purchase returns and allowances is credited when goods are returned to vendors.

LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

66. The operating cycle of a merchandising company is
a. always one year in length.
b. ordinarily longer than that of a service company.
c. about the same as that of a service company.
d. ordinarily shorter than that of a service company.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

67. Sales revenue less cost of goods sold is called
a. gross profit.
b. net profit.
c. net income.
d. marginal income.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

68. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

69. Which of the following expressions is incorrect?
a. Gross profit – Operating expenses = Net income
b. Sales revenue – cost of goods sold – Operating expenses = Net income
c. Net income + Operating expenses = Gross profit
d. Operating expenses – Cost of goods sold = Gross profit

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

71. A perpetual inventory system would most likely be used by a(n)
a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

72. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting period.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

73. The figure for which of the following items is determined at a different time under the perpetual inventory method than under the periodic method?
a. Sales Revenue
b. Cost of Goods Sold
c. Purchases
d. Accounts Receivable

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

74. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. each time a sale occurs.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

75. The primary difference between a periodic and perpetual inventory system is that a periodic system
a. keeps a record showing the inventory on hand at all time.
b. provides better control over inventories.
c. records the cost of the sale on the date the sale is made.
d. determines the inventory on hand only at the end of the accounting period.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

76. When using the periodic system the physical inventory count is used to determine
a. only the sales value of goods in the ending inventory.
b. both the cost of the goods in ending inventory and the sales value of goods sold during the period.
c. both the cost of the goods sold and the cost of ending inventory.
d. only the cost of merchandise sold during the period.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

77. Inventory becomes part of cost of goods sold when a company
a. pays for the inventory.
b. purchases the inventory.
c. sells the inventory.
d. receives payment from the customer.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78. Which statement is incorrect?
a. Periodic inventory systems provide better control over inventories than perpetual inventory systems.
b. Computers and electronic scanners allow more companies to use a perpetual inventory system.
c. Freight-in is debited to Inventory when a perpetual inventory system is used.
d. Regardless of the inventory system that is used, companies should take a physical inventory count.

LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

79. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

80. The periodic inventory system is used most commonly by companies that sell
a. low-priced, high-volume merchandise.
b. high-priced, high-volume merchandise.
c. high-priced, low-volume merchandise.
d. high-priced, low and high-volume merchandise.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

81. What is a difference between merchandising companies and service enterprises?
a. Merchandising companies must prepare multiple-step income statements and service enterprises must prepare single-step income statements.
b. Merchandising companies generally have a longer operating cycle than service enterprises.
c. Cost of goods sold is an expense for service enterprises but not for merchandising companies.
d. All are differences.

LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

82. Under the perpetual inventory system, which of the following accounts would not be used?
a. Sales Revenue
b. Purchases
c. Cost of Goods Sold
d. Inventory

LO: 2 , Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83. Under a perpetual inventory system, acquisition of merchandise for resale is debited to
a. the Inventory account.
b. the Purchases account.
c. the Supplies account.
d. the Cost of Goods Sold account.

LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

84. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales Revenue.
d. Inventory.

LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

85. Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system?
a. A purchase of merchandise.
b. A return of merchandise inventory to the supplier
c. Payment of freight costs for goods shipped to a customer
d. Payment of freight costs for goods received from a supplier

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

86. A company using a perpetual inventory system that returns goods previously purchased on credit would
a. debit Accounts Payable and credit Inventory.
b. debit Sales and credit Accounts Payable.
c. debit Cash and credit Accounts Payable.
d. debit Accounts Payable and credit Purchases.

LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

87. If a purchaser using a perpetual inventory system pays the transportation costs, then the
a. Inventory account is increased.
b. Inventory account is not affected.
c. Freight-Out account is increased.
d. Delivery Expense account is increased.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

88. Freight costs incurred by a seller on merchandise sold to customers will cause an increase
a. in the selling expenses of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

89. Conway Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays within the discount period?
a. $9,000
b. $8,820
c. $8,100
d. $8,280

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

90. A buyer borrows money at 6% interest to pay a $6,000 invoice with terms 1/10, n/30 on the 10th day of the discount period. The loan is repaid on the 30th day of the invoice. What is the buyer’s net savings for this total event?
a. $0
b. $40.00
c. $40.80
d. $80.00

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

91. In the credit terms of 1/10, n/30, the “1” represents the
a. number of days in the discount period.
b. full amount of the invoice.
c. number of days when the entire amount is due.
d. percent of the cash discount.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

92. Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
a. 2%
b. 12%
c. 18%
d. 36%

LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

93. Davies Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Davies Company pays within the discount period?
a. $9,000
b. $8,856
c. $8,820
d $7,200

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

94. A credit sale of $1,900 is made on April 25, terms 2/10, net/30, on which a return of $100 is granted on April 28. What amount is received as payment in full on May 4?
a. $1,764
b. $1,862
c. $1,900
d $1,800

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

95. Grayson Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
a. 2%
b. 12%
c. 24%
d 36%

LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

96. A credit sale of $700 is made on July 15, terms 2/10, net/30, on which a return of $50 is granted on July 18. What amount is received as payment in full on July 24?
a. $700
b. $637
c. $650
d $686

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

97. If a company is given credit terms of 2/10, n/30, it should
a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

98. A purchase invoice is a document that
a. provides support for goods purchased for cash.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit purchases.
d. serves only as a customer receipt.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

99. Adams Company is a retailer and uses a perpetual inventory system. Which statement is correct?
a. Returns of merchandise by Adams Company to a manufacturer are credited to Inventory.
b. Freight paid to get merchandise to Adams Company’s store is debited to Freight Expense.
c. A return of merchandise by one of Adams Company’s customers is credited to Inventory.
d. Discounts taken by Adams Company’s customers are credited to Inventory.

LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

100. As the president of Harter Company, you notice that no discounts have been taken when settling accounts payables. What would be an acceptable explanation?
a. All invoices have credit terms of n/30.
b. There is not sufficient cash to pay within the discount period.
c. Discounts are missed because no one knows how to enter them in the new accounting software.
d. The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

101. When using a perpetual inventory system, why are discounts credited to Inventory?
a. The discounts are debited to discount expense and thus the credit has to be made to merchandise inventory.
b. The discounts reduce the cost of the inventory.
c. The discounts are a reduction of business expenses.
d. None of these answers choices are correct.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

102. Tony’s Market recorded the following events involving a recent purchase of inventory:
Received goods for $40,000, terms 2/10, n/30.
Returned $800 of the shipment for credit.
Paid $200 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $38,416.
b. increased by $39,400.
c. increased by $38,612.
d. increased by $38,616.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

103. Stan’s Market recorded the following events involving a recent purchase of inventory:
Received goods for $90,000, terms 2/10, n/30.
Returned $1,800 of the shipment for credit.
Paid $450 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $86,436.
b. increased by $88,650.
c. increased by $86,877.
d. increased by $86,886.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

104. Assets purchased for resale are recorded in which of the following accounts?
a. Supplies
b. Inventory
c. Equipment
d. More than one of these answer choices is correct.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account?
a. Freight Expense
b. Freight-In
c. Inventory
d. Freight-Out

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

106. Which of the following accounts is classified as a contra revenue account?
a. Sales Revenue
b. Cost of Goods Sold
c. Sales Returns and Allowances
d. Purchase Discounts

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107. Sales revenues are usually considered earned when
a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108. Sales revenue
a. may be recorded before cash is collected.
b. will always equal cash collections in a month.
c. only results from credit sales.
d. is only recorded after cash is collected.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

109. The journal entry to record a credit sale ignoring cost of goods sold is
a. Cash
Sales Revenue
b. Cash
Service Revenue
c. Accounts Receivable
Sales Returns and Allowances
d. Accounts Receivable
Sales Revenue

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

110. Under the perpetual inventory system, in addition to making the entry to record a sale, a company would
a. debit Inventory and credit Cost of Goods Sold.
b. debit Cost of Goods Sold and credit Purchases.
c. debit Cost of Goods sold and credit Inventory.
d. make no additional entry until the end of the period.

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

111. When sales of merchandise are made for cash, the transaction may be recorded by the following entry:
a. Debit Sales Revenue, credit Cash
b. Debit Cash, credit Sales Revenue
c. Debit Sales Revenue, credit Cash Discounts
d. Debit Sales Revenue, credit Sales Returns and Allowances

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

112. The entry to record a sale of $1,200 with terms of 2/10, n/30 will include a
a. debit to Sales Discounts for $24.
b. debit to Sales Revenue for $1,176.
c. credit to Accounts Receivable for $1,200.
d. credit to Sales Revenue for $1,200.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

113. A sales invoice is prepared when goods
a. are sold for cash.
b. are sold on credit.
c. sold on credit are returned.
d. are sold on credit or for cash.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

114. The Sales Returns and Allowances account is classified as a(n)
a. asset account.
b. contra asset account.
c. expense account.
d. contra revenue account.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

115. The entry to record the return of goods from a customer would include a
a. debit to Sales Revenue.
b. credit to Sales Revenue.
c. debit to Sales Returns and Allowances.
d. credit to Sales Returns and Allowances.

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

116. The entry to record the receipt of payment within the discount period on a sale of $700 with terms of 2/10, n/30 will include a
a. credit to Sales Discounts for $14.
b. debit to Sales Revenue for $686.
c. credit to Accounts Receivable for $700.
d. credit to Sales Revenue for $700.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

117. The entry to record a sale of $700 with terms of 2/10, n/30 will include a
a. credit to Sales Discounts for $14.
b. debit to Cash for $686.
c. credit to Accounts Receivable for $700.
d. credit to Sales Revenue for $700.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

118. The collection of an $900 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $18.
b. debit to Accounts Receivable for $882.
c. credit to Cash for $882.
d. credit to Accounts Receivable for $882.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

119. A sales invoice is used as documentation for a journal entry that requires a debit to
a. Cash and a credit to Sales Revenue.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to Sales Revenue.
d. Cash and a credit to Sales Returns and Allowances.

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

120. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
a. discount.
b. return.
c. contra asset.
d. allowance.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

121. When goods are returned that relate to a prior cash sale
a. the Sales Returns and Allowances account should not be used.
b. the Cash account will be credited.
c. Sales Returns and Allowances will be credited.
d. Accounts Receivable will be credited.

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

122. The Sales Returns and Allowances account does not provide information to management about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in filling customers.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

123. A Sales Returns and Allowances account is not debited if a customer
a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

124. As an incentive for customers to pay their accounts promptly, a business may offer its customers
a. a sales discount.
b. free delivery.
c. a sales allowance.
d. a sales return.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

125. The credit terms offered to a customer by a business firm were 2/10, n/30, which means
a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

126. A sales discount does not
a. provide the purchaser with a cash saving.
b. reduce the amount of cash received from a credit sale.
c. increase a contra revenue account.
d. increase an operating expense account.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

127. Anderson Inc. sells $900 of merchandise on account to Baltic Company with credit terms of 2/10, n/30. If Baltic Company remits a check taking advantage of the discount offered, what is the amount of Baltic Company’s check?
a. $882
b. $900
c. $810
d. $840

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

128. Aber Company sells merchandise on account for $1,800 to Borth Company with credit terms of 2/10, n/30. Borth Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $1,464
b. $1,476
c. $1,470
d. $1,350

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

129. Casin Company sells $700 of merchandise on account to Delta Exploration with credit terms of 2/10, n/30. If Delta Exploration remits a check taking advantage of the discount offered, what is the amount of Delta Exploration’s check?
a. $490
b. $686
c. $630
d. $560

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

130. Which sales accounts normally have a debit balance?
a. Sales Discounts
b. Sales Returns and Allowances.
c. Both Sales Discounts and Sales Returns and Allowances have debit balances.
d. Neither Sales Discounts or Sales Returns and Allowances have debit balances.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131. Fehr Company sells merchandise on account for $5,000 to Kelly Company with credit terms of 2/10, n/30. Kelly Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $4,900
b. $4,920
c. $4,000
d. $3,920

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

132. Piper Company sells merchandise on account for $1,500 to Morton Company with credit terms of 2/10, n/30. Morton Company returns $500 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Piper Company make upon receipt of the check?
a. Cash 1,000
Accounts Receivable 1,000

b. Cash 980
Sales Returns and Allowances 520
Accounts Receivable . 1,500

c. Cash 980
Sales Returns and Allowances 500
Sales Discounts 20
Accounts Receivable 1,500

d. Cash 1,470
Sales Discounts 30
Sales Returns and Allowances 500
Accounts Receivable 1,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

133. The collection of a $600 account beyond the 2 percent discount period will result in a
a. debit to Cash for $588.
b. debit to Accounts Receivable for $600.
c. debit to Cash for $600.
d. debit to Sales Discounts for $12.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

134. The collection of a $700 account beyond the 2 percent discount period will result in a
a. debit to Cash for $686.
b. credit to Accounts Receivable for $700.
c. credit to Cash for $700.
d. debit to Sales Discounts for $14.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

135. Which of the following would not be classified as a contra account?
a. Sales Revenue
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales Discounts

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136. Which of the following accounts has a normal credit balance?
a. Sales Returns and Allowances
b. Sales Discounts
c. Sales Revenue
d. Cost of Goods Sold

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137. With respect to the income statement
a. contra revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

138. When a seller records a return of goods, the account that is credited is
a. Sales Revenue.
b. Sales Returns and Allowances.
c. Inventory.
d. Accounts Receivable.

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

139. The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

140. Rains Company is a furniture retailer. On January 14, 2014, Rains purchased merchandise inventory at a cost of $48,000. Credit terms were 2/10, n/30. The inventory was sold on account for $80,000 on January 21, 2014. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2014 and the accounts receivables were settled on January 30, 2014. Which statement is correct?
a. Cash flows were affected on January 14 and January 21.
b. Gross profit percentage is 60%.
c. On January 30, 2014, customers should remit cash in the amount of $79,200.
d. There is not enough information available to answer this question.

LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

141. Which statement is incorrect?
a. The sales revenue account is used to record the sales of goods held for resale to customers.
b. Sales discounts are recorded as debits to the sales revenue account.
c. The sales revenue account is a revenue account.
d. The sales revenue account has a normal credit balance and is closed at the end of the accounting period.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

142. Indicate which one of the following would not appear on both a single-step income statement and a multiple-step income statement.
a. Gross profit
b. Operating expenses
c. Sales revenue
d. Cost of goods sold

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

143. The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a
a. multiple-step statement.
b. revenue statement.
c. report-form statement.
d. single-step statement.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

144. Gross profit does not appear
a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandising company.
d. on either a multiple-step or single-step income statement.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

145. Gross profit equals the difference between net sales and
a. operating expenses.
b. cost of goods sold.
c. net income.
d. cost of goods sold plus operating expenses.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

146. Positive operating income will result if gross profit exceeds
a. costs of goods sold.
b. salaries and wages expense.
c. cost of goods sold plus operating expenses.
d. operating expenses.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

147. What is the term applied to the excess of net sales over the cost of goods sold?
a. Income before income taxes
b. Income from operations
c. Net income
d. Gross profit

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

148. Operating expenses would include
a. interest expense.
b. income tax expense.
c. freight-out.
d. freight-out and interest.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

149. Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses do not include income tax expense.
b. There may be a section for non-operating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

150. An advantage of the single-step income statement over the multiple-step form is
a. the amount of information it provides.
b. its comprehensiveness.
c. its simplicity.
d. its use in computing ratios.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151. Income from operations appears on
a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

152. Income from operations is gross profit less
1. operating expenses and other expenses and losses.
2. operating expenses plus other revenues and gains.
3. operating expenses.
a. 1
b. 2
c. 3
d. both 1 and 2

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

153. Multiple-step income statements show
a. gross profit but not income from operations.
b. neither gross profit nor income from operations.
c. both income from operations and gross profit.
d. income from operations but not gross profit.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

154. Interest expense would be classified on a multiple-step income statement under the heading
a. Other expenses and losses.
b. Other revenues and gains.
c. Operating expenses.
d. Cost of goods sold.

Ans: A , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

155. Gross profit for a merchandising company is net sales minus
a. operating expenses.
b. cost of goods sold.
c. sales discounts.
d. cost of goods available for sale.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

156. The sales section of an income statement for a retailer would not include
a. Sales discounts.
b. Sales revenue.
c. Net sales.
d. Cost of goods sold.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

157. The operating expenses section of an income statement for a merchandising company would not include
a. Freight-out.
b. Utilities expense.
c. Cost of goods sold.
d. Insurance expense.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

158. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.
a. Gross profit
b. Operating expenses
c. Sales revenue
d. Cost of goods sold

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

159. Gross profit does not appear
a. on a merchandising company income statement.
b. on a service company income statement.
c. to be relevant in analyzing the operation of a merchandising company.
d. on the income statement if the periodic inventory system is used because it cannot be calculated.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

160. Financial information is presented below:
Operating expenses $ 36,000
Sales revenue 150,000
Cost of goods sold 105,000
Gross profit would be
a. $114,000.
b. $ 36,000.
c. $ 45,000.
d. $ 24,000.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

161. Financial information is presented below:
Operating expenses $ 36,000
Sales revenue 150,000
Cost of goods sold 105,000
The gross profit rate would be
a. .70.
b. .24
c. .06.
d. .30.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

162. Financial information is presented below:
Operating expenses $ 36,000
Sales revenue 150,000
Cost of goods sold 105,000
The profit margin would be
a. .70.
b. .06.
c. .30.
d. .94.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

163. Financial information is presented below:
Operating expenses $ 28,000
Sales returns and allowances 7,000
Sales discounts 3,000
Sales revenue 150,000
Cost of goods sold 91,000
Gross profit would be
a. $56,000.
b. $49,000.
c. $52,000.
d. $59,000.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

164. Financial information is presented below:
Operating expenses $ 28,000
Sales returns and allowances 7,000
Sales discounts 3,000
Sales revenue 150,000
Cost of goods sold 91,000
The gross profit rate would be
a. .33.
b. .35.
c. .65.
d. .27.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

165. Financial information is presented below:
Operating expenses $ 28,000
Sales returns and allowances 7,000
Sales discounts 3,000
Sales revenue 150,000
Cost of goods sold 91,000
The profit margin would be
a. .21.
b. .14.
c. .35.
d. .15.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

166. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 4,000
Sales discounts 6,000
Sales revenue 160,000
Cost of goods sold 90,000
The amount of net sales on the income statement would be
a. $154,000.
b. $150,000.
c. $160,000.
d. $156,000.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

167. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 14,000
Sales discounts 6,000
Sales revenue 160,000
Cost of goods sold 90,000
Gross profit would be
a. $90,000.
b. $70,000.
c. $60,000.
d. $66,000.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

168. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 4,000
Sales discounts 6,000
Sales revenue 160,000
Cost of goods sold 90,000
The gross profit rate would be
a. .40.
b. .60.
c. .44.
d. .45.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

169. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 4,000
Sales discounts 6,000
Sales revenue 160,000
Cost of goods sold 90,000
The profit margin would be
a. .40.
b. .09.
c. .16.
d. .10.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

170. Financial information is presented below:
Operating expenses $ 35,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 140,000
Cost of goods sold 85,000
The amount of net sales on the income statement would be
a. $128,000.
b. $125,000.
c. $140,000.
d. $137,000.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

171. Financial information is presented below:
Operating expenses $ 35,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 140,000
Cost of goods sold 85,000
Gross profit would be
a. $40,000.
b. $43,000.
c. $55,000.
d. $52,000.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

172. Financial information is presented below:
Operating expenses $ 35,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 140,000
Cost of goods sold 85,000
The gross profit rate would be
a. .68.
b. .39.
c. .32.
d. .34.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

173. Financial information is presented below:
Operating expenses $ 35,000
Sales returns and allowances 12,000
Sales discounts 3,000
Sales revenue 140,000
Cost of goods sold 85,000
The profit margin would be
a. .32.
b. .16.
c. .03.
d. .04.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

174. What is an advantage of using the multiple-step income statement?
a. It highlights the components of net income.
b. Gross profit is not a separate item.
c. It is easier to prepare than the single-step income statement.
d. Net income will be higher than net income computed using the single-step income statement.

LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

175. For a jewelry retailer, which is an example of Other Revenues and Gains?
a. Repair revenue
b. Unearned revenue
c. Gain on sale of display cases
d. Discount received for paying for merchandise inventory within the discount period

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176. When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct?
a. The amount of ending inventory is determined on the last day of the accounting period.
b. Cost of goods available for sale includes net purchases plus the ending inventory.
c. Purchases represent cash paid for purchases during the accounting period.
d. Freight-in is ignored.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

177. When using the periodic inventory system, which of the following is not a step in determining cost of goods purchased?
a. Add freight-in
b. Subtract purchase returns and allowances
c. Subtract cost of ending inventory
d. All of these are necessary steps

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

178. At the beginning of the year, Uptown Athletic had an inventory of $400,000. During the year, the company purchased goods costing $1,500,000. If Uptown Athletic reported ending inventory of $500,000 and sales of $2,000,000, their cost of goods sold and gross profit rate would be
a. $1,000,000 and 70%.
b. $1,400,000 and 30%.
c. $1,000,000 and 30%.
d. $1,400,000 and 70%.

LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

179. At the beginning of the year, Wildcat Athletic had an inventory of $200,000. During the year, the company purchased goods costing $800,000. If Wildcat Athletic reported ending inventory of $300,000 and sales of $1,000,000, their cost of goods sold and gross profit rate would be
a. $500,000 and 70%
b. $700,000 and 30%.
c. $500,000 and 30%.
d. $700,000 and 70%.

LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

180. During the year, Megan’s Pet Shop’s merchandise inventory decreased by $60,000. If the company’s cost of goods sold for the year was $900,000, purchases would have been
a. $960,000.
b. $840,000.
c. $780,000.
d. Unable to determine.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

181. During the year, Sarah’s Pet Shop’s merchandise inventory decreased by $40,000. If the company’s cost of goods sold for the year was $600,000, purchases would have been
a. $640,000.
b. $560,000.
c. $520,000.
d. Unable to determine.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

182. The amount of cost of good available for sale during the year depends on the amounts of
a. beginning merchandise inventory and cost of goods sold.
b. beginning merchandise inventory, net cost of purchases, and ending merchandise inventory.
c. beginning merchandise inventory, cost of goods sold, and ending merchandise inventory.
d. beginning merchandise inventory and net costs of purchases.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

183. Which of the following is not considered in computing net cost of purchases?
a. Purchases returns and allowances
b. Purchases
c. Freight paid on purchased goods
d. Freight paid on goods shipped to customers

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

184. Assume Grammar Company uses the periodic inventory system and has a beginning inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Grammar closes its records once a year on December 31. In the accounting records, the inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was
a. equal to $5,000.
b. more than $5,000.
c. less than $5,000.
d. indeterminate.

LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

185. All of the following statements are true regarding the periodic inventory system except
a. Under the periodic inventory system, the balance of cost of goods sold is calculated at the end of the period.
b. Under the periodic inventory system, the balance in ending inventory is calculated at the end of the period.
c. Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used.
d. Under the periodic system, a company uses separate accounts to record freight costs, returns, and discounts.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

186. Sampson Company’s accounting records show the following for the year ending on December 31, 2014.
Purchase Discounts $ 5,600
Freight-In 7,800
Purchases 350,010
Beginning Inventory 23,500
Ending Inventory 28,800
Purchase Returns and Allowances 6,400

Using the periodic system, the cost of goods purchased is
a. $330,210.
b. $354,210.
c. $358,610.
d. $345,810.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

187. Sampson Company’s accounting records show the following at the year ending on December 31, 2014.
Purchase Discounts $ 5,600
Freight-In 7,800
Purchases 350,010
Beginning Inventory 23,500
Ending Inventory 28,800
Purchase Returns and Allowances 6,400

Using the periodic system, the cost of goods sold is
a. $351,110.
b. $348,910.
c. $340,510.
d. $359,510.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

188. Which of the following provides the best rationale regarding analysts’ views about the information value of the gross profit rate versus the gross profit amount?
a. The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio.
b. The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales.
c. The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used.
d. The gross profit amount is more informative than the gross profit rate because high volume operations are able to calculate the gross profit rate but not the gross profit amount.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

189. Bolton Company’s gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate?
a. Bolton must pay higher prices to suppliers without passing these costs on to customers.
b. Bolton may have begun selling products with a higher markup.
c. Bolton’s average margin between selling price and inventory cost is decreasing.
d. Bolton may have seen a decline in total gross profit while maintaining net sales.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

190. Haverty Industries increased its gross profit rate from 18.4% in 2013 to 23.7% in 2014. Which of the following would be a possible explanation for this change?
a. Haverty’s global sourcing efforts at the beginning of 2014 resulted in a lower cost of merchandise sold.
b. Haverty’s new profit lines with lower margins in 2014 became a larger component of their sales.
c. Haverty increased its product markdowns in 2014.
d. Haverty’s average margin between the selling price and the inventory cost decreased over this two-year period.

LO: 6, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
191. Which of the following statements is true regarding profit margin?
a. Profit margin can be improved by decreasing the gross profit rate and/or controlling operating expenses and other costs
b. Profit margin does not vary across industries.
c. Discount stores with high merchandise turnover generally have higher profit margins.
d. If the profit margin has a higher value, this suggests favorable return on each dollar of sales.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

192. The gross profit rate is computed by dividing gross profit by
a. sales revenue.
b. cost of goods sold.
c. net sales.
d. operating expenses.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

193. A decline in a company’s gross profit could be caused by all of the following except
a. selling products with a lower markup.
b. clearance of discontinued inventory.
c. paying lower prices to its suppliers.
d. increasing competition resulting in a lower selling price.

LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

194. If Hostell Company has net sales of $500,000 and cost of goods sold of $325,000, Hostell’s gross profit rate is
a. 50%.
b. 35%.
c. 54%.
d. 100%.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

195. If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $300,000, Indiana Ink’s gross profit rate is
a. 75%.
b. 33%
c. 25%.
d. 100%.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

196. A company shows the following balances:
Sales Revenue $1,000,000
Sales Returns and Allowances 175,000
Sales Discounts 25,000
Cost of Goods Sold 560,000

What is the gross profit rate?
a. 56%
b. 70%
c. 44%
d. 30%

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

197. A company shows the following balances:
Sales Revenue $ 800,000
Sales Returns and Allowances 75,000
Sales Discounts 25,000
Cost of Goods Sold 420,000
What is the gross profit rate?
a. 53%
b. 60%
c. 40%
d. 47%

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

198. What is a difference between the profit margin and the gross profit rate?
a. None, these are interchangeable terms.
b. The gross profit rate is computed by dividing net sales by gross profit and the profit margin is computed by dividing net sales by net income.
c. The gross profit rate will normally be higher than the profit margin ratio.
d. A profit margin of 7% means that 7 cents of each net sales dollar ends up in net income and a gross profit rate of 7% means that the cost of the goods were 7% of the selling price.

LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

199. Andrea’s Fashions sold merchandise for $95,000 cash during the month of July. Returns that month totaled $2,000. If the company’s gross profit rate is 40%, Andrea’s will report monthly net sales revenue and cost of goods sold of
a. $95,000 and $57,000.
b. $93,000 and $37,200.
c. $93,000 and $55,800.
d. $95,000 and $55,800.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

200. Betty’s Fabrics sold merchandise for $114,000 cash during the month of July. Returns that month totaled $2,400. If the company’s gross profit rate is 40%, Betty will report monthly net sales revenue and cost of goods sold of
a. $114,000 and $68,400.
b. $111,600 and $44,640.
c. $111,600 and $66,960.
d. $114,000 and $66,960.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

201. American Importers reports net income of $50,000 and cost of goods sold of $450,000. If the company’s gross profit rate was 40%, net sales were
a. $750,000.
b. $1,125,000.
c. $1,175,000.
d. $825,000.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

202. United Services and Supplies reports net income of $60,000 and cost of goods sold of $360,000. US&S’s gross profit rate was 40%, net sales were
a. $600,000.
b. $900,000.
c. $960,000.
d. $660,000.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*203. Erin Corporation purchases $500 of merchandise on credit. Using the periodic inventory approach, Erin would record this transaction as:
a. Inventory 500
Accounts Payable 500
b. Accounts Payable 500
Purchases 500
c. Purchases 500
Accounts Payable 500
d. Accounts Payable 500
Inventory 500

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*204. Crowder Corporation recorded the return of $200 of goods originally sold on credit to Discount Industries. Using the periodic inventory approach, Crowder would record this transaction as:
a. Inventory 200
Accounts Receivable 200
b. Sales Returns and Allowances 200
Accounts Receivable 200
c. Accounts Payable 200
Sales Returns and Allowances 200
d. Accounts Receivable 200
Sales Returns and Allowances 200

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*205. Turner Corporation returned $150 of goods originally purchased on credit from Morgan Industries. Using the periodic Inventory approach, Turner would record this transaction as:
a. Inventory 150
Accounts Payable 150
b. Accounts Payable 150
Inventory 150
c. Purchase Returns and Allowances 150
Accounts Payable 150
d. Accounts Payable 150
Purchase Returns and Allowances 150

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*206. Ramos Company receives a payment on account from Martinez Industries. Based on the original sale of $8,000 using the periodic inventory approach, Ramos honors the 3% cash discount and records the payment. Which of the following is the correct entry for Ramos to record?
a. Cash 7,760
Sales Discounts 240
Inventory 8,000
b. Accounts Receivable 8,000
Cash 7,840
Purchase Discounts 160
c. Cash 7,760
Sales Discounts 240
Accounts Receivable 8,000
d. Cash 7,760
Purchase Discounts 240
Accounts Payable 8,000

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

BRIEF EXERCISES

Be. 207

Presented here are the components in Rowland Company’s income statement. Determine the missing amounts.

Sales Cost of Gross Operating Net
Revenue_ Goods Sold _Profit Expenses Income
$75,000 (a) $35,000 (b) $17,000
(c) $56,000 $59,000 $48,000 (d)

Be. 208

On September 4, Roberta’s Knickknacks buys merchandise on account from Dolan Company. The selling price of the goods is $900 and the cost of goods is $600. Both companies use the perpetual inventory systems Journalize the transactions on the books of both companies.

Be. 209

Menke Company is a furniture retailer and uses the perpetual inventory system. On January 14, 2014, Menke purchased merchandise inventory at a cost of $45,000. Credit terms were 2/10, n/30. The inventory was sold on account for $60,000 on January 21, 2014. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2014, and the accounts receivables were settled on January 30, 2014. Prepare journal entries to record each of these transactions.

Be. 210

Prepare the journal entries to record the following transactions on Markowitz Company’s books using a perpetual inventory system. On February 6, Markowitz Company sold $105,000 of merchandise to the Lyman Company, terms 2/10, net /30. The cost of the merchandise sold was $70,000. On February 8, the Lyman Company returned $14,000 of the merchandise purchased on February 6. The cost of the merchandise returned was $7,000. On February 16 Markowitz Company received the balance due from the Lyman Company.

Be. 211

Lovett Company provides this information for the month of November, 2014: sales on credit $140,000; cash sales $50,000; sales discount $2,000; and sales returns and allowances $8,000. Prepare the sales revenues section of the income statement based on this information.

Be. 212

Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $570,000; Purchase Returns and Allowances $14,000; Purchases Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased.

Be. 213

Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $620,000; Purchase Returns and Allowances $25,000; Purchases Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the amounts to be reported for cost of goods sold and gross profit.

Be. 214

Horner Corporation reported net sales of $150,000, cost of goods sold of $96,000, operating expenses of $35,000, other expenses of $10,000, net income of $9,000. Calculate the following values. 1. Profit margin. 2. Gross profit rate.

EXERCISES

Ex. 215

Sue Cole is a new accountant with Simon Company. Simon purchased merchandise on account for $9,000. The credit terms are 1/10, n/30. Sue has talked with the company’s banker and knows that she could earn 6% on any money invested in the company’s savings account.

Instructions
(a) Should Sue pay the invoice within the discount period or should she keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.
(b) If Sue forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.

Ex. 216

This information relates to Sherper Co.

1. On April 5 purchased merchandise from Newport Company for $22,000, terms 2/10, n/10.
2. On April 6 paid freight costs of $900 on merchandise purchased from Newport.
3. On April 7 purchased equipment on account for $26,000.

Ex. 216 (Cont.)

4. On April 8 returned some of April 5 merchandise to Newport Company which cost $2,000.
5. On April 15 paid the amount due to Newport Company in full.

Instructions
(a) Prepare the journal entries to record the transactions listed above on the books of Sherper Co. Sherper Co. uses a perpetual inventory system.
(b) Assume that Sherper Co. paid the balance due to Newport Company on May 4 instead of April 15. Prepare the journal entry to record this payment.

Ex. 217

(a) Bazil Company purchased merchandise on account from Office Suppliers for $62,000, with terms of 1/10, n/30. During the discount period, Bazil returned some merchandise and paid $59,400 as payment in full. Bazil uses a perpetual inventory system. Prepare the journal entries that Bazil Company made to record the:
(1) purchase of merchandise.
(2) return of merchandise.
(3) payment on account.

(b) Weaver Company sold merchandise to Moore Company on account for $84,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $63,000. During the discount period, Moore Company returned $4,000 of merchandise and paid its account in full (minus the discount) by remitting $78,400 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Weaver Company made to record the:
(1) sale of merchandise.
(2) return of merchandise.
(3) collection on account.

Ex. 218

June 4 Black Company purchased $9,000 worth of merchandise, terms n/30 from Hayes Company. The cost of the merchandise was $6,300.
12 Black returned $500 worth of goods to Hayes for full credit. The goods had a cost of $350 to Hayes.
12 Black paid the account in full.

Ex. 218 (Cont.)

Instructions
Prepare the journal entries to record these transactions in (a) Black’s records and (b) Hayes’ records. Assume use of the perpetual inventory system for both companies.

Ex. 219

On October 1, the Kile Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $150 each. During the month of October the following transactions occurred. Assume Kile uses a perpetual inventory system.

Oct. 4 Purchased 180 bicycles at a cost of $145 each from the Nixon Bicycle Company, terms 2/10, n/30.
5 Paid freight of $1,000 on the October 4 purchase.
6 Sold 10 bicycles from the October 1 inventory to Team America for $250 each, terms 2/10, n/30.
7 Received credit from the Nixon Bicycle Company for the return of 8 defective bicycles.
13 Issued a credit memo to Team America for the return of a defective bicycle.
14 Paid Nixon Bicycle Company in full, less discount.

Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

Ex. 220

On September 1, Pennington Supply had an inventory of 20 backpacks at a cost of $25 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 50 backpacks at $25 each from Sievert, terms 2/10, n/30.

6 Received credit of $100 for the return of 4 backpacks purchased on September 4 that were defective.

9 Sold 25 backpacks for $40 each to Lilly Books, terms 2/10, n/30.

13 Sold 15 backpacks for $40 each to Stoner Office Supply, terms n/30.

14 Paid Sievert in full, less discount.

Instructions
Journalize the September transactions for Pennington Supply.

Ex. 221

Petersen Book Store entered into the transactions listed below. In the journal provided, prepare Petersen’s necessary entries, assuming use of the perpetual inventory system.

July 6 Purchased $1,600 of merchandise on credit, terms n/30.

8 Returned $100 of the items purchased on July 6.

9 Paid freight charges of $90 on the items purchased July 6.

19 Sold merchandise on credit for $4,400, terms 1/10, n/30. The merchandise had an inventory cost of $2,700.

22 Of the merchandise sold on July 19, $300 of it was returned. The items had cost the store $150.

28 Received payment in full from the customer of July 19.

31 Paid for the merchandise purchased on July 6.

Ex. 222

Presented here are selected transactions for the Leiss Company during April. Leiss uses the perpetual inventory system.

April 1 Sold merchandise to Mann Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,500.

2. Purchased merchandise from Wild Corporation for $8,000, terms 1/10, n/30.

4 Purchased merchandise from Ryan Company for $1,000, n/30.

10 Received payment from Mann Company for purchase of April 1 less appropriate discount.

11 Paid Wild Corporation for April 2 purchase.

Instructions
Journalize the April transactions for Leiss Company.

Ex. 223

Norman Company completed the following transactions in October: Norman uses a perpetual inventory system.

Credit Sales Sales Returns Date of
Date Amount Terms Date Amount Collection
Oct. 3 $ 800 2/10, n/30 Oct. 8
Oct. 11 1,500 3/10, n/30 Oct. 14 $ 300 Oct. 16
Oct. 17 5,000 1/10, n/30 Oct. 20 1,200 Oct. 29
Oct. 21 1,700 2/10, n/60 Oct. 23 400 Oct. 27
Oct. 23 6,000 2/10, n/30 Oct. 27 500 Oct. 28

Instructions
(a) Indicate the cash received for each collection. Show your calculations.
(b) Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,000.
(2) Oct. 23 sales return. The merchandise returned had a cost of $200.
(3) Oct. 28 collection.

Ex. 224

The following transactions are for Kale Company.

(1) On December 3 Kale Company sold $500,000 of merchandise to Thomson Co., terms 1/10, n/10. The cost of the merchandise sold was $320,000.
(2) On December 8 Thomson Co. was granted an allowance of $20,000 for merchandise purchased on December 3.
(3) On December 13 Kale Company received the balance due from Thomson Co.

Instructions
(a) Prepare the journal entries to record these transactions on the books of Kale Company. Kale uses a perpetual inventory system.
(b) Assume that Kale Company received the balance due from Thomson Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.

480,000

Ex. 225

Instructions
State the missing items identified by ?.

1. Gross profit – Operating expenses = ?
2. Cost of goods sold + Gross profit = ?
3. Sales revenue – (? + ?) = Net sales
4. Income from operations + ? – ? = Net income
5. Net sales – Cost of goods sold = ?

Ex. 226

Financial information is presented here for two companies.

King Company Queen Company

Sales revenue $56,000 ?
Sales returns and allowances ? 5,000
Net sales 50,000 80,000
Cost of goods sold 33,000 ?
Gross profit ? 32,000
Operating expenses 12,000 ?
Net income ? 14,000

Instructions
(a) Compute the missing amounts.
(b) Calculate the profit margin and the gross profit rate for each company.

Ex. 227

The following information is available for Quayle Company:

Sales revenue $618,000
Sales returns and allowances 20,000
Cost of goods sold 398,000
Operating expenses 114,000
Interest expense 19,000
Interest revenue 20,000

Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014.
2. Compute the profit margin.

Ex. 228

The adjusted trial balance of McCoy Company included the following selected accounts:
Debit Credit
Sales Revenue $645,000
Sales Returns and Allowances $ 50,000
Sales Discounts 9,500
Cost of Goods Sold 396,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Salaries and Wages Expense 84,000
Utilities Expense 23,000
Depreciation Expense 3,500
Interest Revenue 25,000

Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014.
2. Calculate the profit margin and gross profit rate.

Ex. 229

Presented below is information for Zales Company for the month of January 2014.

Cost of goods sold $280,000 Rent expense $35,000
Freight-out 7,000 Sales discounts 8,000
Insurance expense 12,000 Sales returns and allowances 13,000
Salaries and wages expense 42,000 Sales revenue 421,000

Instructions
(a) Prepare a multiple-step income statement.
(b) Calculate the profit margin and the gross profit rate.

Ex. 230

The trial balance of Rachel Company at the end of its fiscal year, August 31, 2014, includes these accounts: Inventory $29,200; Purchases $144,000; Sales Revenue $190,000; Freight-In $8,000; Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchases Returns and Allowances $5,000. The ending inventory is $25,000.

Instructions
Prepare a cost of goods sold section for the year ending August 31.

Ex. 231

Below is a series of cost of goods sold sections for Mikey Inc., Nancie Co., and Oscar Inc.

Mikey Nancie Oscar
Beginning inventory $ 250 $ 120 $ (g)
Purchases 1,700 1,080 43,590
Purchase returns and allowances 40 (d) (h)
Net purchases (a) 1,020 41,590
Freight-in 130 (e) 2,740
Cost of goods purchased (b) 1,230 (i)
Cost of goods available for sale 2,240 1,350 49,530
Ending inventory 310 (f) 6,230
Cost of goods sold (c) 1,130 43,300

Instructions
Fill in the lettered blanks to complete the cost of goods sold sections.

Ex. 232

The following information is available from the annual reports of Flynn Company and Tolan Inc.

(Amounts in millions)
Flynn Tolan
Sales revenue $32,622 $40,457
Cost of goods sold 20,739 24,431
Operating expenses 7,428 9,188
Income before taxes 4,455 6,838
Net income 2,594 4,072

Instructions
1. Calculate the profit margin and gross profit rate for each company.
2. What conclusion concerning the relative profitability of the two companies can be drawn from these data?

*Ex. 233

June 4 Deere Company purchased $3,500 worth of merchandise, terms n/30 from Gilbert Company. The cost of the merchandise was $2,500.
13 Deere returned $600 worth of goods to Gilbert for full credit. The goods had a cost of $400 to Johnson.
13 Deere paid the account in full.

Instructions
Prepare the journal entries to record these transactions in (a) Deere’s records and (b) Gilbert’s records. Assume use of the periodic inventory system for both companies.

*Ex. 234

On September 1, Hendricks Supply had an inventory of 18 backpacks at a cost of $20 each. The company uses a periodic inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 50 backpacks at $20 each from Neufeld, terms 2/10, n/30.

6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective.

9 Sold 30 backpacks for $30 each to Brewer Books, terms 2/10, n/30.

13 Sold 10 backpacks for $30 each to Stoner Office Supply, terms n/30.

14 Paid Neufeld in full, less discount.

Instructions
Journalize the September transactions for Hendricks Supply.

*Ex. 235

Presented here are selected transactions for the Foyle Company during April. Foyle uses the periodic inventory system.

April 1 Sold merchandise to Land Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,000.

2 Purchased merchandise from Webb Corporation for $6,000, terms 1/10, n/30.

4 Purchased merchandise from Ryan Company for $2,000, n/30.

10 Received payment from Land Company for purchase of April 1 less appropriate discount.

11 Paid Webb Corporation for April 2 purchase.

Instructions
Journalize the April transactions for Foyle Company.

*Ex. 236
This information relates to Tandi Co.

1. On April 5 purchased merchandise from Buehler Company for $33,000, terms 2/10, net/30.
2. On April 6 paid freight costs of $900 on merchandise purchased from Buehler Company.
3. On April 7 purchased equipment on account for $26,000.
4. On April 8 returned some of the April 5 merchandise to Buehler Company which cost $3,000.
5. On April 15 paid the amount due to Buehler Company in full.

Instructions
(a) Prepare the journal entries to record these transactions on the books of Tandi Co. using a periodic inventory system.
(b) Assume that Tandi Co. paid the balance due to Buehler Company on May 4 instead of April 15. Prepare the journal entry to record this payment.

COMPLETION STATEMENTS
237. A _________________ buys and sells inventory rather than performing services as their primary source of revenue.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

238. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

239. Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

240. The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

241. The freight costs incurred by a seller on outgoing inventory are an ________________ to the seller.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

242. When a customer returns inventory previously purchased on credit, the entry to record the credit granted to the customer requires a debit to the ___________________ account and a credit to the ________________ account.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

243. Every credit sales transaction should be supported by a _________________ that provides written evidence of the sale.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

244. Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have normal _______________ balances.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

245. Gross profit is obtained by subtracting ________________ from ________________.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

246. A useful measure of profitability is the ratio of net income to _____________.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MATCHING

247. Match the items below by entering the appropriate code letter in the space provided.

A. Net sales F. Contra revenue
B. Sales discount G. Freight-out
C. Credit terms H. Gross profit
D. Periodic inventory system I. Sales invoice
E. Gross profit rate J. Purchase discount

1. A reduction given by the seller for prompt payment of a credit sale.
2. Provides support for a credit sale.
3. Gross profit divided by net sales.
4. Sales less sales returns and allowances and sales discounts.
5. Specifies the amount of cash discount and time period during which it is offered.
6. Net sales less cost of goods sold.
7. Freight cost to deliver goods to customers reported as an operating expense.
8. Requires a physical count of goods on hand to compute cost of goods sold.
9. A cash discount claimed by a buyer for prompt payment of a balance due.
10. An account that is offset against a revenue account on the income statement.

SHORT-ANSWER ESSAY QUESTIONS

S-A-E 248

You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks?

S-A E 249

A merchandising company frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.

S-A E 250

Alice Gray believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain.

S-A E 251

To encourage bookstores to buy a broader range of book titles many publishers allow bookstores to return unsold books to the publisher. This results in very significant returns each year. To ensure proper recognition of revenues, how should publishing companies account for these returns?

S-A E 252

In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?

S-A-E 253

Distinguish between cost of goods sold and operating expenses, describe the nature of these two items and their placement on the income statement.

S-A E 254

The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.

S-A E 255

What factors affect a company’s gross profit rate—that is, what can cause the gross profit rate to increase and what can cause it to decrease?

S-A E 256

The following are the gross profit percentages for Naylor Company:

Year Gross Profit
Percentage
2012 33%
2013 34%
2014 36%
2015 13%

List four possible explanations for the low gross profit percentage in 2015.

S-A E 257 (Ethics)

Hiller Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.

Because of this situation, Hiller never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.

Donna Gordon, a new accountant, was asked to record about $50,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Donna to check the shipping terms. She did so, and found the notation “FOB (free on board) shipper’s dock” on the document. She hadn’t seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Hiller should consider it received when it reached Hiller’s dock. She did not record the sale until after month end.

Required:
1. Why are accountants concerned with the timing in the recording of purchases?
2. Was there a violation of ethical standards here? Explain.

S-A E 258 (Communication)

Sandy Lang and Mandy Starr, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On May 30, 2014, each made a large sale. Both orders were shipped on May 31, 2014, the last day of the month, and both were received by the customers on June 5, 2014. Sandy’s sale was FOB shipping point (ownership passes to buyer at time of shipping), and Mandy’s was FOB destination (ownership passes to buyer at time of receipt). The printed policy of the company states that sales “count” for purposes of calculating bonuses on the date that ownership passes to the purchaser. Sandy’s sale was therefore counted in her May monthly total of sales while Mandy’s sale was not. Mandy is quite upset. She has asked you to just include it, or to take Sandy’s off as well. She also has told you that you are being unethical for allowing Sandy to get a bonus just for choosing a particular shipping method.

S-A E 258 (Cont.)

As the accounting manager write a memo to Mandy on June 15, 2014, and explain your position.

IFRS QUESTIONS

1. The Income statement is
a. required under GAAP but not under IFRS.
b. required under IFRS in the same format as under GAAP.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

2. The basic accounting entries for merchandising are
a. the same under GAAP and under IFRS.
b. required under GAAP but not under IFRS.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

3. Under GAAP, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

4. Under IFRS, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

5. Companies cannot use the
a. periodic inventory system under GAAP.
b. periodic inventory system under IFRS.
c. perpetual system under IFRS.
d. None of these answer choices are correct.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

6. Inventories are defined by IFRS as
a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the providing of services.
d. All of these answer choices are correct.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

7. Under GAAP, companies generally classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

8. Under IFRS, companies must classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

9. Under GAAP, income statement items are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

10. Under IFRS, income statement items classified by nature are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

11. For the income statement, IFRS requires
a. single-step approach.
b. multiple-step approach.
c. single-step approach or multiple-step approach.
d. no specific income statement approach.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

12. Under IFRS, companies can apply revaluation to
a. land, buildings, and intangible assets.
b. land, buildings, but not intangible assets.
c. intangible assets, but not land.
d. no assets.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

13. The use of IFRS results in more transactions affecting
a. net income but not other comprehensive income.
b. other comprehensive income, but not net income.
c. net income and other comprehensive income.
d. neither net income nor other comprehensive income.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
14. Comprehensive income under IFRS
a. includes unrealized gains and losses included in net income, in contrast to GAAP.
b. includes unrealized gains and losses included in net income, similar to GAAP.
c. excludes unrealized gains and losses included in net income, in contrast to GAAP.
d. excludes unrealized gains and losses included in net income, similar to GAAP.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

15. The number of years of income statement information to be presented is
a. 2 years under both GAAP and IFRS.
b. 3 years under both GAAP and IFRS.
c. 2 years under GAAP and 3 years under IFRS.
d. 3 years under GAAP and 2 years under IFRS.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

CHAPTER 6

REPORTING AND ANALYZING INVENTORY
TRUE-FALSE STATEMENTS
1. Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2. A manufacturer’s inventory consists of raw materials, work in process, and finished goods.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3. When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

4. Goods in transit shipped FOB shipping point should be included in the buyer’s ending inventory.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6. If the ownership of merchandise passes to the buyer when the seller ships the merchandise, the terms are stated as FOB destination.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

7. Under the periodic inventory system, both the sales amount and the cost of goods sold amount are recorded when each item of merchandise is sold.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

8. Under a periodic inventory system, the merchandise on hand at the end of the period is determined by a physical count of the inventory.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

9. Consigned goods are held for sale by one party although ownership of the goods is retained by another party.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10. Goods held on consignment should be included in the consignor’s ending inventory.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11. In accounting for inventory, the assumed flow of costs must match the physical flow of goods.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

12. Inventory methods such as FIFO and LIFO deal more with flow of costs than with flow of goods.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

13. The average cost inventory method relies on a simple average calculation.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

14. If prices never changed there would be no need for alternative inventory methods.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

15. The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

16. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

17. The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

18. The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

20. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21. If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23. A company may use more than one inventory cost flow method at the same time.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25. The LIFO inventory method agrees with the actual physical movement of goods in most businesses.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26. In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

27. In periods of falling prices, FIFO will result in a larger net income than the LIFO method.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

28. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29. A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30. The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

31. The LIFO inventory method tends to smooth out the peaks and valleys of a business cycle.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

32. Computers has made the periodic inventory system more popular and easier to apply.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

33. When the market value of inventory is lower than its cost, the inventory is written down to its market value.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

34. The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

35. Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

36. Under the LCM basis, market is defined as selling price, not current replacement cost.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37. The inventory turnover is calculated as cost of goods sold divided by ending inventory.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

38. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

39. The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40. The FIFO reserve is a required disclosure for companies that use FIFO.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*41. When the average cost method is applied in a perpetual inventory system, the sale of goods will change the unit cost that remains in inventory.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*42. When the average cost method is applied to a perpetual inventory system, a moving average cost per unit is computed with each purchase.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*43. An error in the ending inventory of the current period will have a similar effect on net income of the next accounting period.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*44. An error that overstates the ending inventory will also cause net income for the period to be overstated.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS
45. Manufactured inventory that has begun the production process but is not yet completed is
a. work in process.
b. raw materials.
c. merchandise inventory.
d. finished goods.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

46. The factor which determines whether or not goods should be included in a physical count of inventory is
a. physical possession.
b. legal title.
c. management’s judgment.
d. whether or not the purchase price has been paid.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47. If goods in transit are shipped FOB destination
a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit.
d. no one has legal title to the goods until they are delivered.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48. Independent internal verification of the physical inventory process occurs when
a. the employee is required to count all items twice for sake of verification.
b. the items counted are compared to the inventory account balance.
c. a second employee counts the inventory and compares the result to the count made by the first employee.
d. all prenumbered inventory tags are accounted for.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

49. An employee assigned to counting computer monitors in boxes should
a. estimate the number if there is a large quantity to be counted.
b. read each box and rely on the box description for the contents.
c. determine that the box contains a monitor.
d. rely on the warehouse records of the number of computer monitors.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

50. After the physical inventory is completed,
a. quantities are listed on inventory summary sheets.
b. quantities are entered into various general ledger inventory accounts.
c. the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets.
d. unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

51. When is a physical inventory usually taken?
a. When goods are not being sold or received.
b. When the company has its greatest amount of inventory.
c. At the end of the company’s fiscal year.
d. When the company has its greatest amount of inventory and at the end of the company’s fiscal year.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

52. Which of the following should not be included in the physical inventory of a company?
a. Goods held on consignment from another company.
b. Goods in transit from another company shipped FOB shipping point.
c. Goods shipped on consignment to another company.
d. All of these answer choices should be included.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53. Tidwell Company’s goods in transit at December 31 include sales made
(1) FOB destination
(2) FOB shipping point
and purchases made
(3) FOB destination
(4) FOB shipping point.
Which items should be included in Tidwell’s inventory at December 31?
a. Sales made FOB shipping point and purchase made FOB destination
b. (1) and (4)
c. (1) and (3)
d. (2) and (4)

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

54. The term “FOB” denotes
a. free on board.
b. freight on board.
c. free only (to) buyer.
d. freight charge on buyer.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

55. Goods held on consignment are
a. never owned by the consignee.
b. included in the consignee’s ending inventory.
c. kept for sale on the premises of the consignor.
d. included as part of no one’s ending inventory.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

56. Many companies use just-in-time inventory methods. Which of the following is not an advantage of this method?
a. It limits the risk of having obsolete items in inventory.
b. Companies may not have quantities to meet customer demand.
c. It lowers inventory levels and costs.
d. Companies can respond to individual customer requests.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

57. When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory?
a. To check the accuracy of the perpetual inventory records
b. To determine cost of goods sold for the accounting period
c. To compute inventory ratios
d. All are a purpose of taking a physical inventory when a perpetual inventory system is used.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58. Which statement is false?
a. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand.
b. No matter whether a periodic or perpetual inventory system is used, all companies need to determine inventory quantities at the end of each accounting period.
c. An inventory count is generally more accurate when goods are not being sold or received during the counting.
d. Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

59. Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count?
a. Goods in transit to Reeves, FOB destination
b. Goods that Reeves is holding on consignment for Parker Company
c. Goods in transit that Reeves has sold to Smith Company, FOB shipping point
d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60. At December 31, 2014 Mohling Company’s inventory records indicated a balance of $602,000. Upon further investigation it was determined that this amount included the following:
• $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd
• $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th.
• $6,000 of goods received on consignment from Dollywood Company

What is Mohling’s correct ending inventory balance at December 31, 2014?
a. $490,000
b. $596,000
c. $410,000
d. $484,000

LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

61. At December 31, 2014 Howell Company’s inventory records indicated a balance of $858,000. Upon further investigation it was determined that this amount included the following:
• $168,000 in inventory purchases made by Howell shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd
• $111,000 in goods sold by Howell with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th.
• $9,000 of goods received on consignment from Westwood Company
What is Howell’s correct ending inventory balance at December 31, 2014?
a. $690,000
b. $849,000
c. $570,000
d. $681,000

LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

62. Manufacturers usually classify inventory into all the following general categories except:
a. work in process
b. finished goods
c. merchandise inventory
d. raw materials

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63. For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except to:
a. check the accuracy of the records.
b. determine the amount of wasted raw materials.
c. determine losses due to employee theft.
d. determine ownership of the goods.

LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

64. Inventory costing methods place primary reliance on assumptions about the flow of
a. goods.
b. costs.
c. resale prices.
d. values.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65. The LIFO inventory method assumes that the cost of the latest units purchased are
a. the last to be allocated to cost of goods sold.
b. the first to be allocated to ending inventory.
c. the first to be allocated to cost of goods sold.
d. not allocated to cost of goods sold or ending inventory.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

66. Alpha First Company just began business and made the following four inventory purchases in June:
June 1 150 units $ 780
June 10 200 units 1,170
June 15 200 units 1,260
June 28 150 units 990
$4,200

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is
a. $1,092
b. $1,131
c. $1,386
d. $1,368

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

67. Baker Bakery Company just began business and made the following four inventory purchases in June:
June 1 150 units $ 780
June 10 200 units 1,170
June 15 200 units 1,260
June 28 150 units 990
$4,200

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is
a. $1,092
b. $1,131
c. $1,368
d. $1,386

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

68. Charlene Cosmetics Company just began business and made the following four inventory purchases in June:
June 1 150 units $ 780
June 10 200 units 1,170
June 15 200 units 1,260
June 28 150 units 990
$4,200

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average cost method, the amount allocated to the ending inventory on June 30 is
a. $1,229.
b. $1,368.
c. $1,323.
d. $1,260.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

69. Echo Sound Company just began business and made the following four inventory purchases in June:
June 1 150 units $ 780
June 10 200 units 1,170
June 15 200 units 1,260
June 28 150 units 990
$4,200

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is
a. the FIFO method.
b. the LIFO method.
c. the average cost method.
d. not determinable.

LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

70. Atom Company just began business and made the following four inventory purchases in June:
June 1 150 units $ 825
June 10 200 units 1,120
June 15 200 units 1,140
June 28 150 units 885
$3,970

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is
a. $1,105.
b. $1,100.
c. $1,170.
d. $1,180.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

71. Quark Inc. just began business and made the following four inventory purchases in June:
June 1 150 units $ 825
June 10 200 units 1,120
June 15 200 units 1,140
June 28 150 units 885
$3,970

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is
a. $1,105.
b. $1,100.
c. $1,170.
d. $1,180.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

72. A company just began business and made the following four inventory purchases in June:
June 1 150 units $ 825
June 10 200 units 1,120
June 15 200 units 1,140
June 28 150 units 885
$3,970

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is
a. $1,134.
b. $1,180.
c. $1,100.
d. $1,120.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

73. A company purchased inventory as follows:
200 units at $5.00
300 units at $5.50
The average unit cost for inventory is
a. $5.00.
b. $5.25.
c. $5.30.
d. $5.50.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

74. Noise Makers Inc has the following inventory data:
July 1 Beginning inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
$2,000
A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the average cost method, the value of ending inventory is
a. $620.
b. $640.
c. $651.
d. $660.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

75. Olympus Climbers Company has the following inventory data:
July 1 Beginning inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
$2,000
A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is
a. $620.
b. $660.
c. $1,340.
d. $1,380.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

76. Pop-up Party Favors Inc has the following inventory data:
July 1 Beginning inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
$2,000
A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is
a. $620.
b. $660.
c. $640.
d. $704.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

77. Quiet Phones Company has the following inventory data:
July 1 Beginning inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
$2,000
A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is
a. $620.
b. $660.
c. $1,340.
d. $1,380.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

78. Radical Radials Company has the following inventory data:
July 1 Beginning inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
$2,000
A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is
a. $620
b. $608
c. $640
d. $704.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

79. Orange-Aide Company has the following inventory data:
July 1 Beginning inventory 20 units at $20 $ 400
7 Purchases 70 units at $21 1,470
22 Purchases 10 units at $22 220
$2,090
A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the average cost method, the value of ending inventory is
a. $535
b. $523
c $525
d $550

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

80. Peach Pink Inc. has the following inventory data:
July 1 Beginning inventory 20 units at $20 $ 400
7 Purchases 70 units at $21 1,470
22 Purchases 10 units at $22 220
$2,090
A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is
a. $1,555
b. $1,585
c. $1,505.
d. $1,540.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

81. Grape Gratuities Company has the following inventory data:
July 1 Beginning inventory 20 units at $20 $ 400
7 Purchases 70 units at $21 1,470
22 Purchases 10 units at $22 220
$2,090
A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is
a. $585.
b. $505.
c. $535.
d. $550.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

82. Apple-A-Day Company has the following inventory data:
July 1 Beginning inventory 20 units at $20 $ 400
7 Purchases 70 units at $21 1,470
22 Purchases 10 units at $22 220
$2,090
A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is
a. $1,585
b. $1,540
c. $1,555.
d. $1,540.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

83. Bonkers Bananas has the following inventory data:
July 1 Beginning inventory 20 units at $20 $ 400
7 Purchases 70 units at $21 1,470
22 Purchases 10 units at $22 220
$2,090
A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is
a. $550
b. $505
c. $535
d. $500.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

84. Which of the following is an inventory costing method?
a. Periodic
b. Specific identification
c. Perpetual
d. Lower of cost or market

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

85. Inventory costing methods place primary reliance on assumptions about the flow of
a. good.
b. costs.
c. resale prices.
d. values.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

86. Which of the following terms best describes the assumption made in applying the four inventory methods?
a. Goods flow
b. Cost flow
c. Asset flow
d. Physical flow

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

87. An assumption about cost flow is necessary
a. because it is required by the income tax regulation.
b. even when there is no change in the purchase price on inventory.
c. only when the flow of goods cannot be determined.
d. because prices usually change, and tracking which units have been sold is difficult.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

88. Piper Pipes has the following inventory data:
July 1 Beginning inventory 30 units at $120
5 Purchases 180 units at $112
14 Sale 120 units
21 Purchases 90 units at $115
30 Sale 84 units

Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis.
a. $10,992
b. $11,022
c. $23,088.
d. $23,118

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

89. Trumpeting Trumpets has the following inventory data:
July 1 Beginning inventory 30 units at $120
5 Purchases 180 units at $112
14 Sale 120 units
21 Purchases 90 units at $115
30 Sale 84 units

Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis.
a. $10,992
b. $11,022
c. $23,088.
d. $23,118

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

90. Sassy Saxophones has the following inventory data:
July 1 Beginning inventory 30 units at $120
5 Purchases 180 units at $112
14 Sale 120 units
21 Purchases 90 units at $115
30 Sale 84 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis.
a. $10,992
b. $11,022
c. $23,088.
d. $23,118

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

91. Clear Clarinets has the following inventory data:
July 1 Beginning inventory 30 units at $120
5 Purchases 180 units at $112
14 Sale 120 units
21 Purchases 90 units at $115
30 Sale 84 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis.
a. $10,932
b. $11,022
c. $23,088.
d. $23,118

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

92. Which of the following items will increase inventoriable costs for the buyer of goods?
a. Purchase returns and allowances granted by the seller
b. Purchase discounts taken by the purchaser
c. Freight charges paid by the seller
d. Freight charges paid by the purchaser

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

93. Of the following companies, which one would not likely employ the specific identification method for inventory costing?
a. Music store specializing in organ sales
b. Farm implement dealership
c. Antique shop
d. Hardware store

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

94. A problem with the specific identification method is that
a. inventories can be reported at actual costs.
b. management can manipulate income.
c. matching is not achieved.
d. the lower of cost or market basis cannot be applied.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

95. The selection of an appropriate inventory cost flow assumption for an individual company is made by
a. the external auditors.
b. the SEC.
c. the internal auditors.
d. management.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

96. Which of the following is not a common cost flow assumption used in costing inventory?
a. First-in, first-out
b. Middle-in, first-out
c. Last-in, first-out
d. Average cost

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

97. The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is
a. called the matching principle.
b. called the consistency principle.
c. nonexistent; that is, there is no such accounting requirement.
d. called the physical flow assumption.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

98. Which of the following statements is true regarding inventory cost flow assumptions?
a. A company may use more than one costing method concurrently.
b. A company must comply with the method specified by industry standards.
c. A company must use the same method for domestic and foreign operations.
d. A company may never change its inventory costing method once it has chosen a method.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

99. Which of the following statements is correct with respect to inventories?
a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
b. It is generally good business management to sell the most recently acquired goods first.
c. Under FIFO, the ending inventory is based on the latest units purchased.
d. FIFO seldom coincides with the actual physical flow of inventory.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

100. Given equal circumstances, which inventory method would probably be the most time consuming?
a. FIFO
b. LIFO
c. Average cost
d. Specific identification.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

101. Serene Stereos has the following inventory data:
Nov. 1 Inventory 30 units @ $4.00 each
8 Purchase 120 units @ $4.30 each
17 Purchase 60 units @ $4.20 each
25 Purchase 90 units @ $4.40 each
A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO is
a. $438
b. $846
c. $421
d. $863

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

102. Automobile Audio has the following inventory data:
Nov. 1 Inventory 30 units @ $4.00 each
8 Purchase 120 units @ $4.30 each
17 Purchase 60 units @ $4.20 each
25 Purchase 90 units @ $4.40 each
A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO is
a. $438
b. $846
c. $421
d. $863

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

103. Carryable CDs has the following inventory data:
Nov. 1 Inventory 30 units @ $4.00 each
8 Purchase 120 units @ $4.30 each
17 Purchase 60 units @ $4.20 each
25 Purchase 90 units @ $4.40 each
A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under LIFO is
a. $438
b. $846
c. $421
d. $863

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

104. Delightful Discs has the following inventory data:
Nov. 1 Inventory 30 units @ $4.00 each
8 Purchase 120 units @ $4.30 each
17 Purchase 60 units @ $4.20 each
25 Purchase 90 units @ $4.40 each
A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO is
a. $438
b. $421
c. $846
d. $863

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

105. Laser Listening has the following inventory data:
Nov. 1 Inventory 30 units @ $4.00 each
8 Purchase 120 units @ $4.30 each
17 Purchase 60 units @ $4.20 each
25 Purchase 90 units @ $4.40 each
A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Assuming that the specific identification method is used and that ending inventory consists of 30 units from each of the three purchases and 10 units from the November 1 inventory, cost of goods sold is
a. $427.
b. $857.
c. $854.
d. $836.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

106. Which inventory costing method should a gasoline retailer use?
a. Average cost
b. LIFO
c. FIFO
d. Either LIFO or FIFO.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107. In periods of rising prices, which is an advantage of using the LIFO inventory costing method?
a. Ending inventory will include latest (most recent) costs and thus be more realistic.
b. Cost of goods sold will include latest (most recent) costs and thus will be more realistic.
c. Net income will be the highest and thus reflect the prosperity of the company.
d. Phantom profits are reported.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108. Hogan Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 36 $45
Mar. 14, 2014 Purchase 62 $47
May 1, 2014 Purchase 44 $49

The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars)
a. $4,882
b. $4,730
c. $1,696
d. $1,544

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

109. Hogan Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 36 $45
Mar. 14, 2014 Purchase 62 $47
May 1, 2014 Purchase 44 $49

The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $600, what is the company’s after-tax income using LIFO? (rounded to whole dollars)
a. $944
b. $1,096
c. $767
d. $661

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

110. Hogan Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 36 $45
Mar. 14, 2014 Purchase 62 $47
May 1, 2014 Purchase 44 $49

The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars)
a. $4,882
b. $4,730
c. $1,696
d. $1,544

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

111. Hogan Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 36 $45
Mar. 14, 2014 Purchase 62 $47
May 1, 2014 Purchase 44 $49

The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $600, what is the company’s after-tax income using FIFO? (rounded to whole dollars)
a. $944
b. $1,096
c. $767
d. $661

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

112. Dole Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 72 $90
Mar. 14, 2014 Purchase 124 $94
May 1, 2014 Purchase 88 $98

The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars)
a. $19,528
b. $18,920
c. $6,784
d. $6,176

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

113. Dole Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 72 $90
Mar. 14, 2014 Purchase 124 $94
May 1, 2014 Purchase 88 $98

The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,000, what is the company’s after-tax income using LIFO? (rounded to whole dollars)
a. $4,176
b. $4,323
c. $3,349
d. $2,923

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

114. Dole Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 72 $90
Mar. 14, 2014 Purchase 124 $94
May 1, 2014 Purchase 88 $98

The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars)
a. $19,528
b. $18,920
c. $6,784
d. $6,176

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

115 Dole Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 72 $90
Mar. 14, 2014 Purchase 124 $94
May 1, 2014 Purchase 88 $98

The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $2,000, what is the company’s after-tax income using FIFO? (rounded to whole dollars)
a. $4,176
b. $4,784
c. $3,349
d. $2,923

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

116. Hoover Company had beginning inventory of $15,000 at March 1, 2014. During the month, the company made purchases of $55,000. The inventory at the end of the month is $17,300. What is cost of goods sold for the month of March?
a. $52,700
b. $55,000
c. $70,000
d. $72,300

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

117. A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $290 and used FIFO costing, the gross profit for the period would be
a. $115.
b. $125.
c. $110.
d. $100.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

118. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:
400 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. The average cost per unit for May is
a. $7.00.
b. $7.50.
c. $7.60.
d. $8.00.

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

119. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:
400 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. Heineken’s gross profit for the month of May is
a. $4,500
b. $7,500
c. $9,000
d. $12,000

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

120. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:
400 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. The value of Heineken’s inventory at May 31, 2014 is
a. $1,400
b. $1,500
c. $1,600
d. $9,000

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

121. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows:
Units Per unit price Total
Balance, 1/1/2014 200 $5.00 $1,000
Purchase, 1/15/2014 100 5.30 530
Purchase, 1/28/2014 100 5.50 550

An end of the month (1/31/2014) inventory showed that 160 units were on hand. How many units did the company sell during January 2014?
a. 60
b. 160
c. 200
d. 240

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

122. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows:
Units Per unit price Total
Balance, 1/1/2014 200 $5.00 $1,000
Purchase, 1/15/2014 100 5.30 530
Purchase, 1/28/2014 100 5.50 550

An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses FIFO, what is the value of the ending inventory?
a. $880
b. $800
c. $868
d. $1,212

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

123. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows:
Units Per unit price Total
Balance, 1/1/2014 200 $5.00 $1,000
Purchase, 1/15/2014 100 5.30 530
Purchase, 1/28/2014 100 5.50 550

An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses LIFO, what is the value of the ending inventory?
a. $843
b. $800
c. $868
d. $1,280

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

124. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows:

Units Per unit price Total
Balance, 1/1/2014 200 $5.00 $1,000
Purchase, 1/15/2014 100 5.30 530
Purchase, 1/28/2014 100 5.50 550

An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month?
a. $1,188
b. $1,212
c. $2,400
d. $1,600

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

125. In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. tax method.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

126. In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory?
a. Average cost method
b. LIFO method
c. FIFO method
d. Need more information to answer

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

127. In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure?
a. Average cost method
b. LIFO method
c. FIFO method
d. Need more information to answer

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

128. Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost?
a. LIFO
b. FIFO
c. Average cost method
d. Whichever method that produces the highest ending inventory figure

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

129. Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using
a. LIFO will have the highest ending inventory.
b. FIFO will have the highest cost of goods sold.
c. FIFO will have the highest ending inventory.
d. LIFO will have the lowest cost of goods sold.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

130. If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the
a. cost of goods sold of the companies will be identical.
b. cost of goods purchased during the year will be identical.
c. ending inventory of the companies will be identical.
d. net income of the companies will be identical.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131. In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?
a. FIFO
b. LIFO
c. Average cost method
d. Income tax expense for the period will be the same under all assumptions.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

132. Given equal circumstances and generally rising costs, which inventory method will increase the tax expense the most?
a. FIFO
b. LIFO
c. Average cost
d. Income tax expense for the period will be the same under all assumptions.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

133. The specific identification method of costing inventories is used when the
a. physical flow of units cannot be determined.
b. company sells large quantities of relatively low cost homogeneous items.
c. company sells large quantities of relatively low cost heterogeneous items.
d. company sells a limited quantity of high-unit cost items.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

134. The specific identification method of inventory costing
a. always maximizes a company’s net income.
b. always minimizes a company’s net income.
c. has no effect on a company’s net income.
d. may enable management to manipulate net income.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

135. The managers of Hong Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices?
a. LIFO
b. Average Cost
c. FIFO
d. Physical inventory method

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136. In periods of inflation, phantom or paper profits may be reported as a result of using the
a. perpetual inventory method.
b. FIFO costing assumption.
c. LIFO costing assumption.
d. periodic inventory method.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137. Selection of an inventory costing method by management does not usually depend on
a. the fiscal year end.
b. income statement effects.
c. balance sheet effects.
d. tax effects.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

138. The accountant at Landry Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $8,740. The LIFO method will result in income before taxes of $8,100. What is the difference in tax that would be paid between the two methods?
a. $640
b. $448
c. $192
d. Cannot be determined from the information provided.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

139. The accountant at Patton Company has determined that income before income taxes amounted to $11,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $600 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption?
a. $11,600
b. $13,000
c. $9,000
d. $10,400

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

140. The manager of Weiser is given a bonus based on net income before taxes. The net income after taxes is $35,700 for FIFO and $29,400 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager’s bonus if FIFO is adopted instead of LIFO?
a. $9,000
b. $12,600
c. $1,800
d. $6,300

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

141. The consistent application of an inventory costing method enhances
a. conservatism.
b. accuracy.
c. comparability.
d. efficiency.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

142. Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants to maintain a high current ratio. Which inventory costing method should Ace consider using?
a. LIFO
b. Average
c. FIFO
d. No inventory costing method directly affects the current ratio.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

143. Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic cost of goods sold. Which inventory costing method should Ace consider using?
a. Average because all inventory costs will then represent an average amount.
b. Specific identification is the most realistic method because it involves the actual costs.
c. LIFO because cost of goods sold represents the latest costs.
d. FIFO because cost of goods sold represents the earliest costs.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

144. Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic ending inventory. Which inventory costing method should Ace consider using?
a. Average because all inventory costs will then represent an average amount.
b. Specific identification is the most realistic method because it involves the actual costs.
c. LIFO because ending inventory represents the earliest costs.
d. FIFO because ending inventory represents the latest costs.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

145. The lower of cost or market basis of valuing inventories is an example of
a. comparability.
b. the historical cost principle.
c. conservatism.
d. consistency.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

146. When applying the lower of cost or market rule to inventory valuation, market generally means
a. current replacement cost.
b. original cost.
c. resale value.
d. original cost, less physical deterioration.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

147. The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by
a. a decline in the value of the inventory.
b. an increase in selling price.
c. an increase in the value of the inventory.
d. a desire for more profit.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

148. Which statement concerning lower of cost or market (LCM) is incorrect?
a. LCM is an example of a company choosing the accounting method that will be least likely to overstate assets and income.
b. Under the LCM basis, market does not apply because assets are always recorded and maintained at cost.
c. The LCM basis uses current replacement cost because a decline in this cost usually leads to a decline in the selling price of the inventory item.
d. LCM is applied after one of the cost flow assumptions has been applied.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

149. Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories:
Product Cost Market
A $57,000 $60,000
B 40,000 38,000
C 80,000 81,000

If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be
a. $177,000.
b. $179,000.
c. $175,000.
d. $181,000.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

150. Nelson Corporation sells three different products. The following information is available on December 31:

Inventory Item Units Cost per unit Market value per unit
X 150 $4.00 $3.50
Y 300 $2.00 $1.50
Z 750 $3.00 $4.00

When applying the lower of cost or market rule to each item, what will Nelson’s total ending inventory balance be?

a. $3,450
b. $3,225
c. $3,975
d. $3,300

LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

151. Whitman Corporation sells six different products. The following information is available on December 31:

Inventory Item Units Cost per unit Market value per unit Estimated Selling Price
Tin 30 $ 500 $ 505 $ 515
Titanium 10 5,000 4,950 5,100
Stainless Steel 40 2,000 1,910 1,985
Aluminum 40 350 285 290
Iron 20 400 410 425
Fiberglass 20 300 295 310

When applying the lower of cost or market rule to each item, what will Whitman’s total ending inventory balance be?

a. $173,000
b. $166,200
c. $166,550
d. $166,400

LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

152. Johnson Company has a high inventory turnover that has increased over the last year. All of the following statements are true regarding this situation except Johnson County:
a. is minimizing funds tied up in inventory.
b. is increasing the amount of inventory on hand relative to sales.
c. may be losing sales due to inventory shortages.
d. has a cost of goods sold that is increasing relative to its average inventory.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

153. Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Black Company’s “days in inventory” for 2014 (to the closest decimal place)?”

Year Inventory Turnover Ending Inventory
Black Company 2012 $26,340
2013 10.7 $29,890
2014 10.4 $30,100

Red Company 2012 $25,860
2013 9.0 $24,750
2014 9.5 $22,530

a. 35.1 days
b. 34.1 days
c. 82.5 days
d. 29.5 days

LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

154. Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Red Company’s “days in inventory” for 2013 (to the closest decimal place)?”

Year Inventory Turnover Ending Inventory
Black Company 2012 $26,340
2013 10.7 $29,890
2014 10.4 $30,100

Red Company 2012 $25,860
2013 9.0 $24,750
2014 9.5 $22,530

a. 67.8 days
b. 38.4 days
c. 28.1 days
d. 40.6 days

LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

155. Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Black Company’s “cost of goods sold” for 2013 (to the closest dollar)?”

Year Inventory Turnover Ending Inventory
Black Company 2012 $26,340
2013 10.7 $29,890
2014 10.4 $30,100

Red Company 2012 $25,860
2013 8.8 $24,750
2014 9.5 $22,530

a. $300,830
b. $281,838
c. $319,823
d. $320,946

LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

156. Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Red Company’s “cost of goods sold” for 2014 (to the closest dollar)?”

Year Inventory Turnover Ratio Ending Inventory
Black Company 2012 $26,340
2013 10.7 $29,890
2014 10.2 $30,100

Red Company 2012 $25,860
2013 9.0 $24,750
2014 9.5 $22,530

a. $222,684
b. $235,125
c. $224,580
d. $214,035

LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

157. Which of the following companies would most likely have the highest inventory turnover?
a. An art gallery.
b. An automobile manufacturer.
c. A piano manufacturer.
d. A bakery.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

158. An aircraft company would most likely have a
a. high inventory turnover.
b. low profit margin.
c. high volume.
d. low inventory turnover.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

159. The inventory turnover is calculated by dividing cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. 365 days.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

160. Days in inventory is calculated by dividing 365 days by
a. average inventory.
b. beginning inventory.
c. ending inventory.
d. the inventory turnover.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

161. Which of these would cause the inventory turnover ratio to increase the most?
a. Increasing the amount of inventory on hand.
b. Keeping the amount of inventory on hand constant but increasing sales.
c. Keeping the amount of inventory on hand constant but decreasing sales.
d. Decreasing the amount of inventory on hand and increasing sales.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

162. The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara’s inventory turnover in 2014 was
a. 8.0 times.
b. 6.7 times.
c. 5.6 times.
d. 4.7 times.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

163. The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara’s days in inventory in 2014 was
a. 45.6 days.
b. 54.5 days.
c. 65.2 days.
d. 77.7 days.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

164. The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer’s inventory turnover in 2014 was
a. 15.0 times.
b. 11.0 times.
c. 12.6 times.
d. 9.8 times.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

165. The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer’s days in inventory in 2014 was
a. 24.3 days.
b. 33.2 days.
c. 29 days.
d. 37.2 days.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

166. A low number of days in inventory may indicate all of the following except
a. Sales opportunities may be lost because of inventory shortages.
b. There is less chance of having obsolete inventory items.
c. The company has fewer funds tied up in inventory.
d. Management has achieved the best balance between too much and too little inventory levels.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

167. Redeker Company had the following records:
2014 2013 2012
Ending inventory $34,580 $32,650 $30,490
Cost of goods sold 182,000 178,000 174,200

What is Redeker’s inventory turnover for 2013? (rounded)
a. 5.6 times
b. 5.5 times
c. 0.2 times
d. 5.3 times

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

168. Redeker Company had the following records:
2014 2013 2012
Ending inventory $34,580 $32,650 $30,490
Cost of goods sold 182,000 163,500 174,200

What is Redeker’s average days in inventory for 2014? (rounded)
a. 67.6 days
b. 66.4 days
c. 68.9 days
d. 68.25 days

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

169. Barnett Company had the following records:
2014 2013 2012
Ending inventory $34,580 $32,650 $30,490
Cost of goods sold 273,000 255,250 261,300

What is Barnett’s inventory turnover for 2013? (rounded)
a. 7.6 times
b. 8.1 times
c. 0.1 times
d. 7.8 times

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

170. Barnett Company had the following records:
2014 2013 2012
Ending inventory $34,580 $37,650 $30,490
Cost of goods sold 273,000 255,250 261,300

What is Barnett’s average days in inventory for 2013? (rounded)
a. 45.1 days
b. 48.0 days
c. 46.8 days
d. 365 days

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

171. The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the
a. FIFO reserve.
b. inventory reserve.
c. LIFO reserve.
d. periodic reserve.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

172. The LIFO reserve is
a. the difference between the value of the inventory under LIFO and the value under FIFO.
b. an amount used to adjust inventory to the lower of cost or market.
c. the difference between the value of the inventory under LIFO and the value under average cost.
d. the amount used to adjust inventory to history cost.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

173. Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?
a. FIFO reserve
b. Inventory turnover
c. LIFO reserve
d. Current replacement cost

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

174. Butler Company reported ending inventory at December 31, 2014 of $1,200,000 under LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2014, and $300,000 at December 31, 2014. Cost of goods sold for 2014 was $4,600,000. If Butler Company had used FIFO during 2014, its cost of goods sold for 2014 would have been
a. $4,900,000.
b. $4,690,000.
c. $4,510,000.
d. $4,300,000.

LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

175. To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold
a. the ending LIFO reserve is added to LIFO cost of goods sold.
b. the ending LIFO reserve is subtracted from LIFO cost of goods sold.
c. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold.
d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold.

LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176. All of the following statements are true regarding the LIFO reserve except:
a. Companies using LIFO are required to report the LIFO reserve.
b. The equation (LIFO inventory – LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO.
c. The financial statement differences of using LIFO normally increase the longer a company uses LIFO.
d. Current ratios and the inventory turnover can be significantly affected if a company has material LIFO reserves.

LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

177. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “What is Danforth’s LIFO reserve for 2013?”

(amounts in $ millions) Boxter Clifford Danforth Evans
Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO
2013 Ending inventory assuming LIFO $324 N/A $225 N/A
2013 Ending inventory assuming FIFO $427 $535 $310 $663
2014 Ending inventory assuming LIFO $436 N/A $167 N/A
2014 Ending inventory assuming FIFO $578 $612 $209 $542
2013 Current assets
(reported on balance sheet) $1,677 $2,031 $1,308 $2,748
2013 Current liabilities $987 $1,209 $545 $1,200
2014 Current assets
(reported on balance sheet) $2,225 $2,605 $1,100 $2,390
2014 Current liabilities $1,306 $1,410 $465 $1,000
2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000

a. $535
b. $85
c. $42
d. $58

LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

178. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO reserve adjustment, which company would has the strongest liquidity position for 2014 as expressed by the current ratio?”

(amounts in $ millions) Boxter Clifford Danforth Evans
Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO
2013 Ending inventory assuming LIFO $324 N/A $225 N/A
2013 Ending inventory assuming FIFO $427 $535 $310 $663
2014 Ending inventory assuming LIFO $436 N/A $167 N/A
2014 Ending inventory assuming FIFO $578 $612 $209 $542
2013 Current assets
(reported on balance sheet) $1,677 $2,031 $1,308 $2,748
2013 Current liabilities $987 $1,209 $545 $1,200
2014 Current assets
(reported on balance sheet) $2,225 $2,605 $1,100 $2,390
2014 Current liabilities $1,306 $1,410 $465 $1,000
2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000

a. Boxter
b. Clifford
c. Danforth
d. Evans

LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

179. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, what is Boxter’s inventory turnover ratio for 2014 (to the closest decimal place)?”

(amounts in $ millions) Boxter Clifford Danforth Evans
Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO
2013 Ending inventory assuming LIFO $324 N/A $225 N/A
2013 Ending inventory assuming FIFO $427 $535 $310 $663
2014 Ending inventory assuming LIFO $436 N/A $167 N/A
2014 Ending inventory assuming FIFO $578 $612 $209 $542
2013 Current assets
(reported on balance sheet) $1,677 $2,031 $1,308 $2,748
2013 Current liabilities $987 $1,209 $545 $1,200
2014 Current assets
(reported on balance sheet) $2,225 $2,605 $1,100 $2,390
2014 Current liabilities $1,306 $1,410 $465 $1,000
2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000

a. 12.3 times
b. 9.3 times
c. 7.5 times
d. 6.4 times

LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

180. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, which company shows the greatest improvement in its current ratio from 2013 to 2014?”

(amounts in $ millions) Boxter Clifford Danforth Evans
Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO
2013 Ending inventory assuming LIFO $324 N/A $225 N/A
2013 Ending inventory assuming FIFO $427 $535 $310 $663
2014 Ending inventory assuming LIFO $436 N/A $167 N/A
2014 Ending inventory assuming FIFO $578 $612 $209 $542
2013 Current assets
(reported on balance sheet) $1,677 $2,031 $1,308 $2,748
2013 Current liabilities $987 $1,209 $545 $1,200
2014 Current assets
(reported on balance sheet) $2,225 $2,605 $1,100 $2,390
2014 Current liabilities $1,306 $1,410 $465 $1,000
2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000

a. Boxter
b. Clifford
c. Danforth
d. Evans

LO: 6, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*181. In a perpetual inventory system,
a. LIFO cost of goods sold will be the same as in a periodic inventory system.
b. average costs are based entirely on unit cost simple averages.
c. a new average is computed under the average cost method after each sale.
d. FIFO cost of goods sold will be the same as in a periodic inventory system.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*182. Classic Floors has the following inventory data:
July 1 Beginning inventory 15 units at $6.00
5 Purchases 60 units at $6.60
14 Sale 40 units
21 Purchases 30 units at $7.20
30 Sale 28 units

Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July?
a. $465.60
b. $236.40
c. $702.00
d. $348.00

LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*183. Classic Floors has the following inventory data:
July 1 Beginning inventory 15 units at $6.00
5 Purchases 60 units at $6.60
14 Sale 40 units
21 Purchases 30 units at $7.20
30 Sale 28 units

Assuming that a perpetual inventory system is used, what is the value of ending inventory on a LIFO basis for July?
a. $465.60
b. $702.00
c. $354.00
d. $236.40

LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*184. Snug-As-A-Bug Blankets has the following inventory data:
July 1 Beginning inventory 15 units at $60
5 Purchases 90 units at $56
14 Sale 60 units
21 Purchases 45 units at $58
30 Sale 42 units

Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July?
a. $5,802
b. $5,772
c. $5,796.
d. $5,916

LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*185. Snug-As-A-Bug Blankets has the following inventory data:
July 1 Beginning inventory 15 units at $60
5 Purchases 90 units at $56
14 Sale 60 units
21 Purchases 45 units at $58
30 Sale 42 units

Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for July?
a. $2,748
b. $2,754
c. $2,772.
d. $5,796

LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*186. Snug-As-A-Bug Blankets has the following inventory data:
July 1 Beginning inventory 15 units at $60
5 Purchases 90 units at $56
14 Sale 60 units
21 Purchases 45 units at $58
30 Sale 42 units

Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average cost method for July?
a. $2,750
b. $2,784
c. $2,406.
d. $2,772

LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*187. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated

LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*188. If beginning inventory is understated by $10,000, the effect of this error in the current period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated

LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*189. A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are
Asset Stockholders’ Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct

LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*190. An overstatement of the beginning inventory results in
a. no effect on the period’s net income.
b. an overstatement of net income.
c. an understatement of net income.
d. a need to adjust purchases.

LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*191. An overstatement of ending inventory in one period results in
a. no effect on net income of the next period.
b. an overstatement of net income of the next period.
c. an understatement of net income of the next period.
d. an overstatement of the ending inventory of the next period.

LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

BRIEF EXERCISES
Be. 192
Shellan Kamp Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking.
1. Goods shipped on consignment by Shellan Kamp to another company.
2. Goods in transit from a supplier shipped FOB destination.
3. Goods shipped via common carrier to a customer with terms FOB shipping point.
4. Goods held on consignment from another company.

Be. 193
In the first month of operations, Dieker Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming there are 250 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. Dieker uses a periodic inventory system.

Be. 194
Hess Company’s inventory records show the following data for the month of September:

Units Unit Cost
Inventory, September 1 100 $3.00
Purchases: September 8 450 3.50
September 18 300 3.70

A physical inventory on September 30 shows 150 units on hand.

Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system.

Be. 195
Hess Company’s inventory records show the following data for the month of September:

Units Unit Cost
Inventory, September 1 100 $3.00
Purchases: September 8 450 3.50
September 18 300 3.70

A physical inventory on September 30 shows 150 units on hand.

Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system.

Be. 196
The management of Otto Corp. is considering the effects of various inventory costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will:
1. result in the lowest income tax expense?
2. provide the highest net income?
3. provide the highest ending inventory?
4. result in the most stable earnings over a number of years?

Be. 197
The Entertainment Center accumulates the following cost and market data at December 31.

Inventory Cost Market
Categories Data _ _ Data_
Camera $11,000 $10,200
Camcorders 8,000 8,500
DVDs 14,000 12,600

What is the lower-of-cost-or-market value of the inventory?

Be. 198
At December 31, 2014, the following information (in thousands) was available for Kitselman Inc.: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $198,000; and sales revenue $430,000. Calculate the inventory turnover and days in inventory for Kitselman.

EXERCISES
Ex. 199
The Cain Company has just completed a physical inventory count at year end, December 31, 2014. Only the items on the shelves, in storage, and in the receiving area were counted and costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent CPA discovered the following additional information:
(a) There were goods in transit on December 31, 2014, from a supplier with terms FOB destination, costing $10,000. Because the goods had not arrived, they were excluded from the physical inventory count.
(b) On December 27, 2014, a regular customer purchased goods for cash amounting to $1,000 and had them shipped to a bonded warehouse for temporary storage on December 28, 2014. The goods were shipped via common carrier with terms FOB shipping point. The customer picked the goods up from the warehouse on January 4, 2015. Cain Company had paid $500 for the goods and, because they were in storage, Cain included them in the physical inventory count.
(c) Cain Company, on the date of the inventory, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2014; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2014, it was excluded from the physical inventory.
(d) On December 31, 2014, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2015). Because the goods had been shipped, they were excluded from the physical inventory count.
(e) On December 31, 2014, Cain Company shipped $2,500 worth of goods to a customer, FOB destination. The goods arrived on January 5, 2014. Because the goods were not on hand, they were not included in the physical inventory count.
(f) Cain Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, 2014, they were included in the physical inventory count.

Instructions
Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

Ex. 200
Dalton Company was undergoing an end of year audit of its financial records. The auditors were in the process of reviewing Dalton’s inventory for year end, December 31, 2014. They completed an end of year inventory. The value of the ending inventory prior to any adjustments was $185,000, but before finishing up they had a few questions. Discussion with Dalton’s accountant revealed the following:
(a) Dalton sold goods costing $60,000 to Summey Company FOB shipping point on December 28. The goods are not expected to reach Summey until January 12. The goods were not included in the physical inventory because they were not in the warehouse.
(b) The physical count of the inventory did not include goods costing $95,000 that were shipped to Dalton FOB destination on December 27 and were still in transit at year-end.
(c) Dalton received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Strong Company. The goods were not included in the physical count.
(d) Dalton sold goods costing $40,000 to Hampton Company FOB destination on December 30. The goods were received by Hampton Company on January 8. Because the goods had been shipped, they were excluded from the physical inventory count.
(e) Dalton received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was suppose to arrive December 31. This purchase was included in the ending inventory of $192,000.
(f) Dalton Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, they were included in the physical inventory count.

Instructions
Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

Ex. 201
Dennis Lee, an auditor with Knapp CPAs, is performing a review of Dobson Company’s inventory account. Dobson did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $640,000. However, the following information was not considered when determining that amount.

1. Included in the company’s count were goods with a cost of $200,000 that the company is holding on consignment. The goods belong to Agler Corporation.
2. The physical count did not include goods purchased by Dobson with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Dobson’s warehouse until January 3.
3. Included in the inventory account was $22,000 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year.
4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock.
5. On December 29, Dobson shipped goods with a selling price of $90,000 and a cost of $70,000 to Central Sales Corporation FOB shipping point. The goods arrived on January 3. Central Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Dobson had authorized the shipment and said that if Central wanted to ship the goods back next week, it could.
6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Dobson’s products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, “since that is what we paid for them, after all.”

Ex. 201 (Cont.)
Instructions
Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item.

Ex. 202
Grother Company uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 100 $4 $ 400
1/20 Purchase 500 $5 2,500
7/25 Purchase 100 $7 700
10/20 Purchase 300 $8 2,400
1,000 $6,000

A physical count of inventory on December 31 revealed that there were 350 units on hand.

Ex. 202 (Cont.)

Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ex. 203
Hansen Company uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 100 $3 $ 300
1/20 Purchase 500 $4 2,000
7/25 Purchase 100 $5 500
10/20 Purchase 300 $6 1,800
1,000 $4,600

A physical count of inventory on December 31 revealed that there were 380 units on hand.

Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ex. 204
Faster Company uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 15 $8.00 $ 120
1/20 Purchase 60 $8.80 528
7/25 Purchase 30 $8.40 252
10/20 Purchase 45 $9.60 432
150 $1,332

A physical count of inventory on December 31 revealed that there were 55 units on hand.

Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.
2. Assume that the company uses the Average Cost method. The value of the ending inventory on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.
4. Assume that the company uses the FIFO method. The value of the cost of goods sold at December 31 is $__________.

Ex. 205
Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year.

January 1 Beginning Inventory 150 items @ $4 = $ 600
May 1 Purchases 450 items @ $6 = 2,700
Total Available 600 items $3,300
Total Sales 430 items
December 31 Ending Inventory 170

Cost assigned on an average cost basis $__________

Cost assigned on a FIFO basis $__________

Costs assigned on a LIFO basis $__________

Ex. 206
Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year.

January 1 Beginning Inventory 100 items @ $7 = $ 700
May 1 Purchases 400 items @ $8 = 3,200
Total Available 500 items $3,900
Total Sales 360 items
December 31 Ending Inventory 140

Cost assigned on an average cost basis $__________

Cost assigned on a FIFO basis $__________

Costs assigned on a LIFO basis $__________

Ex. 207
Wooderson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Wooderson Company uses the periodic inventory system.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 60 $80
3/10 Purchase 200 $55
3/16 Sales 70 $90
3/19 Sales 90 $90
3/25 Sales 60 $90
3/30 Purchase 40 $60

Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)
(b) Using the weighted-average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
(c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Ex. 208
Torrey Company uses the periodic inventory system to account for inventories. Information related to Torrey Company’s inventory at October 31 is given below:

October 1 Beginning inventory 400 units @ $10.00 = $ 4,000
8 Purchase 800 units @ $10.40 = 8,320
16 Purchase 600 units @ $10.80 = 6,480
24 Purchase 200 units @ $11.60 = 2,320
Total units and cost 2,000 units $21,120

Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 500 units remain on hand at October 31.
2. Show computations to value the ending inventory using the weighted-average cost method if 500 units remain on hand at October 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 500 units remain on hand at October 31.

Ex. 209
Hanlin Company uses the periodic inventory system to account for inventories. Information related to Hanlin Company’s inventory at January 31 is given below:

January 1 Beginning inventory 400 units @ $12.00 = $ 4,800
8 Purchase 800 units @ $12.40 = 9,920
16 Purchase 600 units @ $12.80 = 7,680
24 Purchase 200 units @ $13.20 = 2,640
Total units and cost 2,000 units $25,040

Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 600 units remain on hand at January 31.
2. Show computations to value the ending inventory using the weighted-average cost method if 600 units remain on hand at January 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 600 units remain on hand at January 31.

Ex. 210
Johnson Company reports the following for the month of June.

Date Explanation Units Unit Cost Total Cost
June 1 Inventory 225 $5 $1,125
12 Purchase 525 6 3,150
23 Purchase 750 7 5,250
30 Inventory 280

(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3) average cost.
(b) Which costing method gives the highest ending inventory? The highest cost of goods sold? Why?
(c) How do the average-cost values for ending inventory and cost of goods sold relate to ending inventory and cost of goods sold for FIFO and LIFO?

Ex. 211
Wolf Camera Shop Inc. uses the lower-of-cost-or-market basis for its inventory. The following data are available at December 31.

Market
Units Cost/Unit Value/Unit
Cameras
Minolta 5 $175 $168
Canon 7 148 152
Light Meters
Vivitar 15 125 119
Kodak 10 120 135

Instructions
What amount should be reported on Wolf Camera Shop’s financial statements, assuming the lower-of-cost-or-market rule is applied?

Ex. 212
This information is available for Groneman, Inc. for 2013 and 2014.

(in millions) 2013 2014
Beginning inventory $ 2,290 $ 2,522
Ending inventory 2,522 2,618
Cost of goods sold 24,351 23,099
Sales 43,251 43,232
Instructions
Calculate the inventory turnover, days in inventory, and gross profit rate for Groneman., Inc. for 2013 and 2014. Comment on any trends.

Ex. 213
Burnham Company reported the following summarized annual data at the end of 2014:

Sales revenue $1,600,000
Cost of goods sold* 900,000
Gross margin 700,000
Operating expenses 400,000
Income before income taxes $ 300,000

*Based on an ending FIFO inventory of $250,000.

The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $205,000.

Instructions
(a) Restate the summary information on a LIFO basis.
(b) What effect, if any, would the proposed change have on Burnham’s income tax expense, net income, and cash flows?
(c) If you were an owner of this business, what would your reaction be to this proposed change?

Ex. 214
The following information is available from the annual reports of Young and Olde:

(Amounts in millions)
Young Olde
2014 ending Inventory $ 6,031 $ 4,816
2013 ending inventory 6,162 5,044
Cost of goods sold 25,937 31,983
Sales revenue 29,656 36,704
2014 LIFO reserve 227 —
2013 LIFO reserve 225 —

Instructions
(a) Calculate the inventory turnover and days in inventory for both companies.
(b) Calculate Young’s inventory turnover after adjusting for the LIFO reserve. Young uses the LIFO inventory method.
(c) What conclusion concerning the management of inventory can be drawn from these data?

Ex. 215
The following information is available for Wallace Company for 2014. Wallace uses the LIFO inventory method.

Beginning inventory $ 600,000
Ending inventory 700,000
Beginning LIFO reserve 200,000
Ending LIFO reserve 300,000
Cost of goods sold 5,980,000
Sales 8,000,000

Instructions
(a) Calculate the inventory turnover and days in inventory for Wallace Company based on LIFO.
(b) Calculate the inventory turnover and days in inventory after adjusting for the LIFO reserve.

*Ex. 216
Woodson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Woodson Company uses the perpetual inventory system.

Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 60 $80
3/10 Purchase 200 $55
3/16 Sales 90 $90
3/19 Sales 70 $90
3/25 Sales 60 $90
3/30 Purchase 40 $60

Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)
(b) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

*Ex. 217
Grayson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Grayson Company uses the perpetual inventory system.

Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $55
3/3 Purchase 60 $60
3/4 Sales 60 $120
3/10 Purchase 200 $65
3/16 Sales 90 $130
3/19 Sales 70 $130
3/25 Sales 50 $130
3/30 Purchase 40 $75

Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)
(b) Using the FIFO assumption, calculate the value of ending inventory for March.
(c) Using the moving average cost method, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
(d) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
(e) Using the LIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

*Ex. 218
Plato Company reports the following for the month of June.

Date Explanation Units Unit Cost Total Cost
June 1 Inventory 225 $5 $1,125
12 Purchase 525 6 3,150
23 Purchase 750 7 5,250
30 Inventory 330

Instructions
(a) Calculate the cost of the ending inventory and the cost of goods sold for each cost flow assumption, using a perpetual inventory system. Assume a sale of 570 units occurred on June 15 for a selling price of $8 and a sale of 600 units on June 27 for $9. (Note: For the average-cost method, round unit cost to three decimal places.)
(b) Why is the average unit cost not $6 [($5 + $6 + $7) ÷ 3 = $6]?

*Ex. 219
Carter Company reported these income statement data for a 2-year period.

2014 2013
Sales $250,000 $210,000
Beginning inventory 40,000 30,000
Cost of goods purchased 202,000 173,000
Cost of goods available for sale 242,000 203,000
Ending inventory 50,000 40,000
Cost of goods sold 192,000 163,000
Gross profit $ 58,000 $ 47,000

Carter Company uses a periodic inventory system. The inventories at January 1, 2013, and December 31, 2014, are correct. However, the ending inventory at December 31, 2013, is overstated by $4,000.

Instructions
(a) Prepare correct income statement data for the 2 years.
(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

*Ex. 220
For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.
Code: O = item is overstated
U = item is understated
NA = item is not affected
Items
Stockholders’ Cost of Net
Events Assets Equity Goods Sold Income
1. The ending inventory in the previous period was overstated.

2. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.

3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

*Ex. 220 (Cont.)
5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000.

*Ex. 221
Condensed income statements for Swift Corporation are shown below for two years.

2013 2014

Sales $75,000 $90,000
Cost of Goods Sold 45,000 54,000
Gross Profit $30,000 $36,000
Operating Expense 15,000 15,000
Net Income $15,000 $21,000

Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end of 2013 was mistakenly understated by $7,000.

2013 $ __________ 2014 $__________

*Ex. 222
Condensed income statements for Werly Corporation are shown below for two years.

2013 2014

Sales $75,000 $90,000
Cost of Goods Sold 45,000 54,000
Gross Profit $30,000 $36,000
Operating Expense 15,000 15,000
Net Income $15,000 $21,000

Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end of 2013 was mistakenly overstated by $5,000.

2013 $ __________ 2014 $__________

*Ex. 223
Arnold Pharmacy reported cost of goods sold as follows:

2013 2014
Beginning inventory $ 54,000 $ 64,000
Cost of goods purchased 847,000 891,000
Cost of goods available for sale 901,000 955,000
Ending inventory 64,000 55,000
Cost of goods sold $837,000 $900,000

Arnold made two errors:
(1) 2013 ending inventory was overstated by $6,000.
(2) 2014 ending inventory was understated by $11,000.

*Ex. 223 (Cont.)

Instructions
Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U).
2013 2014
Overstated/ Overstated/
Amount Understated Amount Understated
Total assets $_________ _______ $_________ _______

Stockholders’ equity $_________ _______ $_________ _______

Cost of goods sold $_________ _______ $_________ _______

Net income $_________ _______ $_________ _______

COMPLETION STATEMENTS
224. In a manufacturing company, goods that are ready to be sold to customers are referred to as ________________, whereas in a merchandising company they are generally referred to as _______________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

225. In a manufacturing company, there are three categories of inventory: they are _____________________, _________________, and _________________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

226. When the terms of sale are FOB ______________, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

227. The two inventory costing systems used are the ______________ and ______________.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

228. When a business holds goods of other parties without taking ownership, and tries to sell them for a fee, the goods are called ____________ goods.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

229. Cost of goods available for sale must be allocated between cost of goods ___________ and ______________.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

230. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

231. If the unit cost of inventory has continuously increased, the ______________, first-out inventory valuation method will result in a higher valued ending inventory than if the ______________, first-out method had been used.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

232. Under the LCM basis, market is defined as current ______________ cost.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

233. The ______________ is calculated as cost of goods sold divided by average inventory.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

234. The _____________ is a required disclosure for companies that use LIFO.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MATCHING
235. Match the items below by entering the appropriate code letter in the space provided.

A. Merchandise Inventory F. First-in, first-out (FIFO) method
B. Work in process G. Last-in, first-out (LIFO) method
C. FOB shipping point H. Average cost method
D. FOB destination I. LIFO reserve
E. Specific identification method J. Inventory turnover ratio

1. The difference between inventory reported using LIFO and inventory using FIFO.
2. Tracks the actual physical flow for each inventory item available for sale.
3. Goods that are only partially completed in a manufacturing company.
4. Cost of goods sold consists of the most recent inventory purchases.
5. Goods ready for sale to customers by retailers and wholesalers.
6. Title to the goods transfers when the public carrier accepts the goods from the
seller.
7. Ending inventory valuation consists of the most recent inventory purchases.
8. The same unit cost is used to value ending inventory and cost of goods sold.
9. Title to goods transfers when the goods are delivered to the buyer.
10. Measures the number of times the inventory sold during the period.

Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

SHORT-ANSWER ESSAY QUESTIONS
S-A E 236
The periodic and the perpetual inventory systems are two methods that companies use to account for inventories. Briefly describe the major features of each system and explain why a physical inventory is necessary under both systems.

S-A E 237
What is the primary basis of accounting for inventories? What is the major objective in accounting for inventories?

S-A E 238
A survey of major U.S. companies revealed that 77% of those companies used either LIFO or FIFO cost flow methods, while 19% used average cost, and only 4% used other methods.

Requirement
Provide brief, yet concise responses to the following questions.

a. Why are LIFO and FIFO so popular?

b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification?

S-A E 239
Your office is on the 68th floor of your building. The CEO’s office is on the 77th floor. The two of you are waiting for an elevator one morning. The CEO states “Our prices are rising and I want the lowest net income for tax purposes and the highest ending inventory for external reporting purposes. Which inventory method should we use?

Requirement
You have three minutes to respond to the CEO. What is your response?

S-A E 240
Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?”

What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO.

S-A E 241
FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.

S-A E 242
Glenda Carson is studying for the next accounting midterm examination. What should Glenda know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of “market” in the lower-of-cost-or-market method?

S-A E 243
What is the LIFO reserve? What are the consequences of ignoring a large LIFO reserve when analyzing a company?

S-A E 244 (Ethics)
Angie and Neal Fry are department managers in the housewares and shoe departments, respectively, for Calhouns, a large department store. Neal has observed Angie taking inventory from her own department home, apparently without paying for it. He hesitates confronting Angie because he is due to be promoted, and needs Angie’s recommendation. He also does not want to notify the company management directly, because he doesn’t want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Angie tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning.

Calhouns recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Neal relaxes. “The system will catch Angie now,” he says to himself.

Required:
1. Is Neal’s attitude justified? Why or why not?
2. What, if any, action should Neal take now?

S-A E 245 (Communication)
Al Bodkin, a new employee of Crafter’s Paradise, recorded $1,000 in consigned goods received as part of the firm’s inventory. The goods were received one day after the end of the fiscal period, but Al reasoned that the goods should be included in inventory sooner because Crafter’s paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Crafter’s inventory at all. Al told Sid Goza, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Al’s opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sid Goza has reported the problem to the accounting department.

Required:
You are Al’s supervisor. Write a memo to Al explaining why the error should have been corrected.

IFRS QUESTIONS
1. The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosure requirements.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

2. The major IFRS requirements related to accounting for and reporting inventories are
a. the same as GAAP.
b. the same as GAAP with a couple of exceptions.
c. completely different fom GAAP.
d. not comparable to GAAP.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

3. Inventory accounting under IFRS differs from GAAP in regard to
a. neither the use of LIFO nor lower-of-cost-or-market.
b. the use of LIFO but not lower-of-cost-or-market.
c. the use of lower-of-cost-or-market but not LIFO.
d. the use of LIFO and lower-of-cost-or-market.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

4. Under GAAP, companies can choose which inventory system?
LIFO FIFO
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

5. Under IFRS, companies can choose which inventory system?
LIFO FIFO
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

6. Inventories are defined by IFRS as
a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the providing of services.
d. All of these answer choices are correct.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

7. Specific Identification can be used for inventory valuation under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

8. Specific Identification must be used for inventory valuation where the inventory items are not interchangeable under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

9. GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well as which costs to include in inventory, as compared to IFRS are:
Ownership of goods Costs to include in inventory
a. essentially similar essentially similar
b. essentially different essentially different
c. essentially similar essentially different
d. essentially different essentially similar

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

10. The only acceptable cost flow assumptions under IFRS are
a. FIFO and LIFO.
b. FIFO and average.
c. LIFO and average.
d. FIFO, LIFO and average.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

11. LIFO can be used
a. under neither GAAP nor IFRS.
b. under IFRS but not GAAP.
c. under GAAP but not IFRS.
d. under both GAAP and IFRS.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

12. The requirement that companies use the same cost flow assumption of all goods of a similar nature is found in
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

13. IFRS defines market for lower-of-cost-or market as
a. net realizable value.
b. estimated selling price in the ordinary course of business.
c. replacement cost.
d. replacement cost less costs of disposal.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

14. GAAP defines market for lower-of-cost-or market essentially as
a. net realizable value.
b. estimated selling price in the ordinary course of business.
c. replacement cost.
d. replacement cost less costs of disposal.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

16. Inventory written down under lower-of-cost-or market may be written back up to original cost in a subsequent period under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

17. The option to value inventory at fair value exists under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

18. Certain agricultural and mineral products can be reported at net realizable value under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

19. The convergence issue that will be most difficult to resolve in the area of inventory accounting is:
a. FIFO.
b. LIFO.
c. ownership of goods.
d. costs to include in inventory.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

CHAPTER 7

TRUE-FALSE STATEMENTS

1. The most important element of the fraud triangle is rationalization.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

2. Employees sometimes commit fraud because of personal financial problems caused by too much debt.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

3. The safeguarding of assets is an objective of a company’s system of internal control.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

4. When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

5. Internal control is most effective when several people are responsible for a given task.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

6. An effective system of internal control centralizes functions in a single capable individual.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls

7. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

8. Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

9. The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

10. Bonding means insuring a company against theft by employees.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

11. It is unlikely that a company would want to bond its employees who handle cash or inventory.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

12. An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

13. A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

14. A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

15. Only large companies need to be concerned with a system of internal control.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

16. Under an effective system of internal control, errors occur only as a result of fraud or dishonesty.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

17. The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

18. The separation of duties feature of internal control can be negated when several employees are involved in a scheme.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

19. In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

20. Segregation of duties among employees eliminates the possibility of collusion.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

21. For efficiency of operations and better control over cash, a company should maintain only one bank account.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

22. Checks received in the mail should be immediately stamped “NSF” to prevent unauthorized cashing of the check.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

23. The treasurer should prepare and sign a check only after authorization to issue a check has been provided.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

24. Control over cash disbursements is improved if major expenditures are paid by check.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

25. An example of segregation of duties is having a check signer recording cash disbursements.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

26. Electronic funds transfer (EFT) is a disbursement system that uses a telephone or a computer to transfer cash from one location to another.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: None

27. One example of a periodic independent verification is the bank reconciliation.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

28. To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the employee authorized to sign checks.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

29. All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the cash account.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

30. A bank reconciliation is generally prepared by the bank and sent to the depositor along with canceled checks.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

31. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32. Cash equivalents include money market accounts, commercial paper, and U.S. treasury bills held for ninety days or less.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

33. Cash restricted in use should be separately reported on the balance sheet.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

34. Sound internal control activities dictate that the amount of cash on hand should be kept to a maximum.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

35. A basic principle of cash management is to increase the speed of paying liabilities.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

36. If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Business Economics

37. A cash budget contributes to more effective cash management.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

*38. A petty cash fund is used to pay relatively large amounts.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

*39. The petty cash fund eliminates the need for a bank checking account.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

MULTIPLE CHOICE QUESTIONS
40. Which of the following is not one of the main factors that contribute to fraudulent activity?
a. Opportunity.
b. Incompatible duties.
c. Financial pressure.
d. Rationalization.

LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

41. All of the following requirements about internal controls were enacted under the Sarbanes Oxley Act except
a. independent outside auditors must attest to the level of internal control.
b. companies must develop sound internal controls over financial reporting.
c. companies must continually assess the functionality of internal controls.
d. independent outside auditors must eliminate redundant internal controls.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

42. Which one of the following is not an objective of a system of internal controls?
a. Safeguard company assets.
b. Overstate liabilities in order to be conservative.
c. Enhance the accuracy and reliability of accounting records.
d. Reduce the risks of errors.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

43. Which one of the following is not an objective of a system of internal controls?
a. Safeguard company assets.
b. Enhance the accuracy and reliability of accounting records.
c. Fairness of the financial statements.
d. Reduce the risks of errors.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

44. All of the following are examples of internal control procedures except
a. using prenumbered documents.
b. reconciling the bank statement.
c. customer satisfaction surveys.
d. insistence that employees take vacations.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

45. Each of the following is a feature of internal control except
a. an extensive marketing plan.
b. bonding of employees.
c. separation of duties.
d. recording of all transactions.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

46. Each of the following is a feature of internal control except
a. limited access to assets.
b. independent internal verifications.
c. authorization of transactions.
d. generic design of documents.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

47. Which of the following is not a limitation of internal control?
a. Cost of establishing control procedures should not exceed their benefit.
b. The human element.
c. Collusion.
d. The size of the company.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

48. Internal controls are concerned with
a. only manual systems of accounting.
b. the extent of government regulations.
c. safeguarding assets.
d. preparing income tax returns.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

49. Internal control is defined, in part, as a plan that safeguards
a. all balance sheet accounts.
b. assets.
c. liabilities.
d. capital stock.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

50. Under the concept of establishment of responsibility, how many people should have the ultimate responsibility?
a. Everyone in the organization.
b. An individual and his/her supervisor.
c. Only one individual.
d. The CEO.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

51. Internal controls are not designed to safeguard assets from
a. natural disasters.
b. employee theft.
c. robbery.
d. unauthorized use.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

52. Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them
a. increases the potential for errors and fraud.
b. decreases the potential for errors and fraud.
c. is an example of good internal control.
d. is a good example of safeguarding the company’s assets.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

53. The custodian of a company asset should
a. have access to the accounting records for that asset.
b. be someone outside the company.
c. not have access to the accounting records for that asset.
d. be an accountant.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

54. Internal auditors
a. are hired by CPA firms to audit business firms.
b. are employees of the IRS who evaluate the internal controls of companies filing tax returns.
c. evaluate the system of internal controls for the companies that employ them.
d. cannot evaluate the system of internal controls of the company that employs them because they are not independent.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

55. When two or more people get together for the purpose of circumventing prescribed controls, it is called
a. a fraud committee.
b. collusion.
c. a division of duties.
d. bonding of employees.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

56. From an internal control standpoint, the asset most susceptible to improper diversion and use is
a. prepaid insurance.
b. cash.
c. buildings.
d. land.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

57. A traditional definition of internal control specifically includes all of the following features except
a. adherence to prescribed managerial policies.
b. promotion of operational efficiency.
c. reliability of accounting data.
d. insistence that employees not take earned vacations.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

58. A consequence of separation of duties is that
a. theft by employees becomes impossible.
b. operations become extremely inefficient because of constant training of employees.
c. more employees will need to be bonded.
d. theft is still possible when several employees are involved.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

59. A very small company would have the most difficulty in implementing which of the following internal control activities?
a. Separation of duties.
b. Limited access to assets.
c. Periodic independent verification.
d. Sound personnel procedures.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

60. The principle of establishing responsibility does not include
a. one person being responsible for one task.
b. authorization of transactions.
c. independent internal verification.
d. approval of transactions.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

61. The control principle related to not having the same person authorize and pay for goods is known as
a. establishment of responsibility.
b. independent internal verification.
c. separation of duties.
d. rotation of duties.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

62. Two individuals at a retail store work the same cash register. You evaluate this situation as
a. a violation of establishment of responsibility.
b. a violation of separation of duties.
c. supporting the establishment of responsibility.
d. supporting internal independent verification.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

63. An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of
a. establishment of responsibility is violated.
b. independent internal verification is violated.
c. documentation procedures is violated.
d. separation of duties is violated.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

64. Related selling activities do not include
a. ordering the merchandise.
b. making a sale.
c. shipping the goods.
d. billing the customer.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

65. Related purchasing activities include
a. ordering, receiving, paying.
b. ordering, selling, paying.
c. ordering, shipping, billing.
d. selling, shipping, paying.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

66. Joe is a warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates
a. documentation procedures are violated.
b. independent internal verification is violated.
c. segregation of duties is violated.
d. establishment of responsibility is violated.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

67. Physical controls to safeguard assets do not include
a. cashier department supervisors.
b. vaults.
c. safety deposit boxes.
d. locked warehouses.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

68. In large companies, the independent internal verification procedure is often assigned to
a. computer operators.
b. management.
c. internal auditors.
d. outside CPAs.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

69. Maximum benefit from independent internal verification is obtained when
a. it is made on a pre-announced basis.
b. it is done by the employee possessing custody of the asset.
c. discrepancies are reported to management.
d. it is done at the time of the audit.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

70. If employees are bonded
a. it means that they are not allowed to handle cash.
b. they have worked for the company for at least 10 years.
c. they have been insured against misappropriation of assets.
d. it is impossible for them to steal from the company.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

71. In a small business, the lack of certain separations of duties can best be overcome by
a. bonding the employees.
b. getting the owner actively involved.
c. hiring only honest employees.
d. holding one person responsible for a given set of transactions.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

72. Mrs. Smith has worked for Bosco Inc. for 20 years without taking a vacation. An internal control feature that would address this situation would be
a. human resource controls.
b. establishment of responsibility.
c. physical controls.
d. documentation procedures.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

73. A system of internal control
a. is infallible.
b. can be rendered ineffective by employee collusion.
c. invariably will have costs exceeding benefits.
d. is premised on the concept of absolute assurance.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

74. Which of the following statements is correct?
a. Due to its liquid nature, cash is the easiest asset to steal.
b. A good system of internal control will ensure that employees will not be able to steal cash.
c. It takes two or more employees working together to be able to steal cash.
d. All of these answer choices are correct.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

75. Internal control measures
a. only apply to publicly traded companies.
b. are in place to safeguard assets.
c. can eliminate all irregularities in the accounting process.
d. All of these answer choices are correct.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

76. Sam’s Grocery Store has the following policy. ‘Only one cashier can have access to a cash drawer.’ Which internal control principle supports this policy?
a. Documentation procedures.
b. Segregation of duties.
c. Physical controls.
d. Establishment of responsibilities.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

77. Ron Jones has been a trusted employee for over 10 years. He is responsible for ordering merchandise inventory, receiving the inventory items, and authorizing the payment for these items. Which internal control principle, if any, is being violated?
a. None, Ron has proven to be trustworthy and has enough experience to do a good job.
b. Documentation procedures.
c. Establishment of responsibilities.
d. Segregation of duties.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

78. What is the rationale for the internal control principle, segregation of duties?
a. History has shown that employees are generally dishonest and thus cannot be entrusted with performing related duties.
b. The work of one employee should, without duplication of effort, provide a reliable basis for evaluating the work of another employee.
c. Control is most effective when only one person is responsible for a give task.
d. Segregation of duties causes companies to hire more employees and thus it supports the economy.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

79. Bonding involves all of the following except
a. The company obtains insurance protection against misappropriation of assets by a dishonest employee.
b. The insurance company screens employees before they are added to the policy.
c. The company informs employees that the insurance company will vigorously prosecute all offenders.
d. Employees do not commit inappropriate acts because of the threat of prosecution and their loyalty to the employer.

LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

80. Which of the following would not be included in the definition of cash?
a. Money on deposit in a bank.
b. Coins.
c. NSF checks.
d. Petty cash.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

81. At Emerson Company, one bookkeeper prepares the cash deposits while the other bookkeeper enters the collections in the journal and ledger. Which of the following is the best explanation of this type of internal control principle over cash receipts?
a. Physical controls.
b. Documentation procedures.
c. Segregation of duties.
d. Mechanical controls.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

82. Which one of the following items would not be considered cash?
a. Coins.
b. Money orders.
c. Currency.
d. Postdated checks.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83. The reconciliation of the cash register tape with the cash in the register is an example of
a. other controls.
b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

84. Which of the following is not an internal control procedure for cash?
a. Payments should be made with cash.
b. There should be limited access to cash.
c. The amount of cash on hand should be kept to a minimum.
d. Cash should be deposited daily.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

85. Which of the following is not an internal control activity for cash?
a. The number of persons who have access to cash should be limited.
b. The functions of record keeping and maintaining custody of cash should be combined.
c. Surprise audits of cash on hand should be made occasionally.
d. All cash receipts should be recorded promptly.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

86. Supervisors counting cash receipts daily is an example of
a. human resource controls.
b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

87. Which of the following is not an internal control procedure for cash?
a. Only designated personnel are authorized to handle cash.
b. The same individual receives the cash and pays the bills.
c. Surprise audits of cash on hand should be made occasionally.
d. Access to cash is limited.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

88. Which of the following is not an internal control activity for cash?
a. All payments should be made with currency, not checks.
b. Banking facilities should be used as much as possible.
c. The amount of cash on hand should be kept to a minimum.
d. Employees who have access to cash should be bonded.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

89. Control over cash disbursements is generally more effective when
a. all bills are paid in cash.
b. disbursements are made by the accounts payable subsidiary clerk.
c. payments are made by check.
d. all purchases are made on credit.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

90. Which of the following is not a suggested procedure to establish internal control over cash disbursements?
a. Anyone can sign the checks.
b. Different individuals approve and make the payments.
c. Blank checks are stored with limited access.
d. The bank statement is reconciled monthly.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

91. The use of prenumbered checks is an example of
a. documentation procedures.
b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

92. Before a check authorization is issued, the following documents must be in agreement, except for the
a. invoice.
b. remittance advice.
c. receiving report.
d. purchase order.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

93. Which of the following is an appropriate internal control activity for cash?
a. Record keeping and custodianship over cash should be performed by the same person.
b. Banking facilities should be used as little as possible.
c. All payments should be made with currency, not checks.
d. The amount of cash on hand should be kept to a minimum.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

94. An exception to disbursements being made by check is acceptable when cash is paid
a. to an owner.
b. to employees as wages.
c. from petty cash.
d. to employees as loans.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

95. Allowing only the treasurer to sign checks is an example of
a. documentation procedures.
b. separation of duties.
c. other controls.
d. establishment of responsibility.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

96. Blank checks
a. should be safeguarded.
b. should be pre-signed.
c. do not need to be safeguarded since they must be signed to be valid.
d. should not be pre-numbered.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

97. An employee authorized to sign checks should not record
a. owner cash contributions.
b. mail receipts.
c. cash disbursement transactions.
d. sales transactions.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

98. Electronic funds transfer (EFT) is a disbursement system that transfers cash from one location to another using
a. a telephone.
b. a telegraph.
c. a computer.
d. a telephone, telegraph, or computer.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Leverage Technology, AICPA PC: Leverage Technology, IMA: Business Applications

99. A bank statement
a. lets a depositor know the financial position of the bank as of a certain date.
b. is a credit reference letter written by the depositor’s bank.
c. is a bill from the bank for services rendered.
d. shows the activities that increased or decreased the depositor’s account balance.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

100. Which one of the following would not cause a bank to debit a depositor’s account?
a. Bank service charge.
b. Collection of a note receivable.
c. Wiring of funds to other locations.
d. Checks marked NSF.

LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

101. A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a reciprocal account that is
a. a contra asset account.
b. a liability account.
c. also an asset account.
d. a stockholders’ equity account.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

102. A deposit made by a company will appear on the bank statement as a
a. debit.
b. credit.
c. debit memorandum.
d. credit memorandum.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

103. All of the following are items that would most likely be paid from a petty cash fund except
a. postage due.
b. taxi fares.
c. administrative wages.
d. freight-out.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

104. All of the following are true regarding bank statements except
a. the bank statement will show a credit for deposits received from a company.
b. the bank statement balance will always agree with the company recorded balance.
c. the bank statement is a copy of the bank’s records sent to the customer for periodic review.
d. the bank statement will show a debit if a check is paid for a company issuing the check.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105. Which of the following controls would best help detect the removal of a blank check by an employee from the back of a company’s checkbook for subsequent misappropriation of funds?
a. An accounting policies manual.
b. Tracing any debit memorandums from the bank to the company’s records.
c. The use of prenumbered checks.
d. A review of the cash budget.

LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

106. On a bank statement, paid checks are shown as
a. credits.
b. debits
c. assets.
d. liabilities.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107. A NSF check should appear in which section of the bank reconciliation?
a. Addition to the balance per books.
b. Deduction from the balance per bank.
c. Addition to the balance per bank.
d. Deduction from the balance per books.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108. Which of the following would be deducted from the balance per books on a bank reconciliation?
a. Outstanding checks.
b. Deposits in transit.
c. Notes collected by the bank.
d. Service charges.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

109. Which of the following would be added to the balance per books on a bank reconciliation?
a. Outstanding checks.
b. Deposits in transit.
c. Notes collected by the bank.
d. NSF check.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

110. Which of the following would not be subtracted from the balance per books on a bank reconciliation?
a. Outstanding checks.
b. NSF checks.
c. Check printing charge.
d. Service charges.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

111. Which of the following would be deducted from the balance per bank on a bank reconciliation?
a. Outstanding checks.
b. Deposits in transit.
c. Notes collected by the bank.
d. Service charges.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

112. Which of the following would be added to the balance per bank on a bank reconciliation?
a. Outstanding checks.
b. Deposits in transit.
c. Notes collected by the bank.
d. Service charges.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

113. A check returned by the bank marked “NSF” means
a. no service fee.
b. no signature found.
c. not satisfactorily filled out.
d. not sufficient funds.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

114. A debit memorandum would not be issued by the bank for
a. a bank service charge.
b. the issuance of traveler’s checks.
c. the wiring of funds.
d. the collection of a notes receivable.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

115. A bank reconciliation should be prepared
a. whenever the bank refuses to lend the company money.
b. when an employee is suspected of fraud.
c. to explain any difference between the depositor’s balance per books with the balance per bank.
d. by the person who is authorized to sign checks.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

116. Deposits in transit
a. have been recorded on the company’s books but not yet by the bank.
b. have been recorded by the bank but not yet by the company.
c. have not been recorded by the bank or the company.
d. are customers’ checks that have not yet been received by the company.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

117. In preparing a bank reconciliation, outstanding checks are
a. added to the balance per bank.
b. deducted from the balance per books.
c. added to the balance per books.
d. deducted from the balance per bank.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

118. If a check correctly written and paid by the bank for $628 is incorrectly recorded on the company’s books for $682, the appropriate treatment on the bank reconciliation would be to
a. add $54 to the book’s balance.
b. subtract $54 from the book’s balance.
c. deduct $54 from the bank’s balance.
d. deduct $628 from the book’s balance.

LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

119. A check written by the company for $167 is incorrectly recorded by a company as $176. On the bank reconciliation, the $9 error should be
a. added to the balance per books.
b. deducted from the balance per books.
c. added to the balance per bank.
d. deducted from the balance per bank.

LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

120. For which of the following errors should the appropriate amount be added to the balance per bank on a bank reconciliation?
a. Check for $63 recorded as $36.
b. Deposit of $600 recorded by bank as $60.
c. A returned $300 check recorded by bank as $30.
d. Check for $75 recorded as $57.

LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

121. For which of the following errors should the appropriate amount be subtracted from the balance per bank on a bank reconciliation?
a. Check for $63 recorded as $36.
b. Deposit of $600 recorded by bank as $60.
c. A returned $300 check recorded by bank as $30.
d. Check for $75 recorded as $57.

LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

122. For which of the following errors should the appropriate amount be added to the balance per books on a bank reconciliation?
a. Check written for $63, but recorded as $36.
b. Deposit of $600 recorded by bank as $60.
c. A returned $300 check recorded by bank as $30.
d. Check written for $57, but recorded as $75.

LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

123. For which of the following errors should the appropriate amount be subtracted from the balance per books on a bank reconciliation?
a. Check written for $63, but recorded as $36.
b. Deposit of $600 recorded by bank as $60.
c. A returned $300 check recorded by bank as $30.
d. Check written for $57, but recorded as $75.

LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

124. Which of the following bank reconciliation items would not result in an adjusting entry?
a. Service charge.
b. Deposits in transit.
c. NSF check of customer.
d. Collection of a note by the bank.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

125. Which of the following items on a bank reconciliation would require an adjusting entry on the company’s books?
a. An error by the bank.
b. Outstanding checks.
c. A bank service charge.
d. A deposit in transit.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

126. All of the following bank reconciliation items would result in an adjusting entry on the company’s books except
a. interest earned.
b. deposits in transit.
c. fee for collection of note by bank.
d. NSF check of customer.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

127. Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry:
a. Accounts Receivable
Cash
b. Cash
Accounts Receivable
c. Miscellaneous Expense
Accounts Receivable
d. No adjusting entry is necessary.

LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

128. James Company had checks outstanding totaling $21,600 on its June bank reconciliation. In July, James Company issued checks totaling $155,600. The July bank statement shows that $105,200 in checks cleared the bank in July. A check from one of James Company’s customers in the amount of $1,200 was also returned marked “NSF.” The amount of outstanding checks on James Company’s July bank reconciliation should be
a. $50,400.
b. $72,000.
c. $70,800.
d. $28,800.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

129. Dekin Company had checks outstanding totaling $17,000 on its May bank reconciliation. In June, Dekin Company issued checks totaling $106,400. The July bank statement shows that $79,200 in checks cleared the bank in July. A check from one of Dekin Company’s customers in the amount of $800 was also returned marked “NSF.” The amount of outstanding checks on Dekin Company’s July bank reconciliation should be
a. $43,400.
b. $27,200.
c. $44,200.
d. $10,200.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

130. Nilson Company gathered the following reconciling information in preparing its August bank reconciliation:
Cash balance per books, 8/31 $21,000
Deposits in transit 900
Notes receivable and interest collected by bank 5,100
Bank charge for check printing 120
Outstanding checks 12,000
NSF check 1,020
The adjusted cash balance per books on August 31 is
a. $24,960.
b. $24,060.
c. $13,800.
d. $14,760.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

131. Karlin Company gathered the following reconciling information in preparing its April bank reconciliation:
Cash balance per books, 4/30 $13,200
Deposits in transit 1,800
Notes receivable and interest collected by bank 4,440
Bank charge for check printing 150
Outstanding checks 9,000
NSF check 840
The adjusted cash balance per books on April 30 is
a. $18,450.
b. $17,640.
c. $16,650.
d. $18,330.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

132. Clark Company developed the following reconciling information in preparing its September bank reconciliation:
Cash balance per bank, 9/30 $30,800
Note receivable collected by bank 16,800
Outstanding checks 25,200
Deposits in transit 12,600
Bank service charge 210
NSF check 3,360
Using the above information, determine the cash balance per books (before adjustments) for the Clark Company.
a. $27,370.
b. $43,400.
c. $4,970.
d. $42,000.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

133. Bank errors
a. occur because of time lags.
b. must be corrected by debits.
c. are infrequent in occurrence.
d. are corrected by making an adjusting entry on the depositor’s books.

LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

134. Higgins Company gathered the following reconciling information in preparing its October bank reconciliation:
Cash balance per books, 10/31 $12,600
Deposits in transit 450
Notes receivable and interest collected by bank 2,550
Bank charge for check printing 60
Outstanding checks 6,000
NSF check 510
The adjusted cash balance per books on October 31 is
a. $14,130.
b. $12,030.
c. $8,580.
d. $14,580.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

135. Dobler Company gathered the following reconciling information in preparing its June bank reconciliation:
Cash balance per books, 6/30 $8,400
Deposits in transit 600
Notes receivable and interest collected by bank 1,480
Bank charge for check printing 50
Outstanding checks 3,000
NSF check 280
The adjusted cash balance per books on June 30 is
a. $10,150.
b. $9,880.
c. $9,550.
d. $10,110.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

136. Adler Company developed the following reconciling information in preparing its December bank reconciliation:
Cash balance per bank, 12/31 $20,000
Note receivable collected by bank 10,000
Outstanding checks 15,000
Deposits in transit 7,500
Bank service charge 125
NSF check 2,000
Using the above information, determine the cash balance per books (before adjustments) for the Adler Company.
a. $4,625.
b. $27,500.
c. $14,625.
d. $20,000.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

137. An adjusting entry is not required for
a. outstanding checks.
b. collection of a note by the bank.
c. NSF checks.
d. bank service charges.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

138. In the month of November Gavin Company Inc. wrote checks in the amount of $37,000. In December, checks in the amount of $50,632 were written. In November, $33,872 of these checks were presented to the bank for payment, and $43,532 in December. What is the amount of outstanding checks at the end of December?
a. $7,100.
b. $10,228.
c. $3,128.
d. $14,200.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

139. In the month of November Gavin Company Inc. wrote checks in the amount of $27,750. In December, checks in the amount of $37,974 were written. In November, $25,404 of these checks were presented to the bank for payment, and $32,649 in December. What is the amount of outstanding checks at the end of December?
a. $5,325.
b. $2,346.
c. $7,671.
d. $10,650.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

140. What causes the balance on the bank statement to differ from the cash balance in the general ledger?
a. Time lags.
b. Errors by the bank.
c. Errors by the company.
d. All of these answer choices are correct.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

141. Of the following employees, who should prepare the bank reconciliation?
a. Anne, the bookkeeper, because she is aware of all transactions that affected cash.
b. Michael, the treasurer, because he has control of the checkbook and has taken more accounting courses than any other employee.
c. Mary, the cashier, because she does not pay bills.
d. Frank, the purchasing agent, because he does not work in the accounting department.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

142. While preparing the bank reconciliation, you notice that a check, written by the company for $750, has been outstanding for 5 months. What is the best action for you to take?
a. Void the check. If it has not been cashed in 5 months, it will never be cashed.
b. Issue a replacement check because you assume the original check has been lost.
c. Wait 3 more months to give the bank more time to clear the check.
d. Investigate to determine why the check has not cleared.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

143. Which of the following is an example of a bank reconciliation item that requires an adjusting entry?
a. NSF check.
b. Deposit in transit.
c. Bank error.
d. None of these items requires an adjusting entry.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

144. At April 30, Kessler Company has the following bank information:
Cash balance per bank $11,500
Outstanding checks $700
Deposits in transit $1,375
Credit memo for interest $25
Bank service charge $50
What is Kessler’s adjusted cash balance on April 30?
a. $12,150.
b. $12,200.
c. $10,825.
d. $12,175.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

145. At April 30, Mendoza Company has the following bank information:
Cash balance per bank $7,200
Outstanding checks $560
Deposits in transit $1,100
Credit memo for interest $20
Bank service charge $40
What is Mendoza’s adjusted cash balance on April 30?
a. $7,720.
b. $7,760.
c. $6,660.
d. $7,740.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

146. Lackey Company wrote checks totaling $25,620 during October and $27,976 during November. $24,360 of these checks cleared the bank in October, and $27,330 cleared the bank in November. What was the amount of outstanding checks on November 30?
a. $1,906.
b. $346.
c. $916.
d. $2,970.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

147. Bishop Company wrote checks totaling $34,160 during October and $37,300 during November. $32,480 of these checks cleared the bank in October, and $36,440 cleared the bank in November. What was the amount of outstanding checks on November 30?
a. $2,540.
b. $460.
c. $1,220.
d. $3,960.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

148. Russel Company assembled the following information in completing its March bank reconciliation:
Balance per bank $11,460
Outstanding checks $2,325
Deposits in transit $3,750
NSF check $240
Bank service charge $75
Cash balance per books $13,200
As a result of this reconciliation, Russel will
a. reduce its cash account by $1,425.
b. reduce its cash account by $75.
c. increase its cash account by $165.
d. reduce its cash account by $315.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

149. Schwinn Company assembled the following information in completing its March bank reconciliation:
Balance per bank $15,280
Outstanding checks $3,100
Deposits in transit $5,000
NSF check $320
Bank service charge $100
Cash balance per books $17,600
As a result of this reconciliation, Schwinn will
a. reduce its cash account by $1,900.
b. reduce its cash account by $100.
c. increase its cash account by $220.
d. reduce its cash account by $420.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

150. If a check correctly written and paid by the bank for $491 is incorrectly recorded on the company’s books for $419, the appropriate treatment on the bank reconciliation would be to
a. add $72 to the book’s balance.
b. subtract $72 from the book’s balance.
c. deduct $72 from the bank’s balance.
d. deduct $491 from the book’s balance.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

151. A check written by the company for $275 is incorrectly recorded by a company as $257. On the bank reconciliation, the $18 error should be
a. added to the balance per books.
b. deducted from the balance per books.
c. added to the balance per bank.
d. deducted from the balance per bank.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

152. In the month of May, Lopat Company Inc. wrote checks in the amount of $55,500. In June, checks in the amount of $75,948 were written. In May, $50,808 of these checks were presented to the bank for payment, and $65,298 in June. What is the amount of outstanding checks at the end of May?
a. $10,650.
b. $4,692.
c. $15,342.
d. $21,300.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

153. In the month of May, Lopat Company Inc. wrote checks in the amount of $46,250. In June, checks in the amount of $63,290 were written. In May, $42,340 of these checks were presented to the bank for payment, and $54,415 in June. What is the amount of outstanding checks at the end of June?
a. $8,875.
b. $3,910.
c. $12,785.
d. $17,750.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

154. Which statement regarding negative cash balances is true?
a. The amount is offset against other current assets because users need to know net current assets.
b. The amount is shown as a current liability because a company cannot have a cash balance below zero.
c. The company must obtain a loan to bring the cash balance to zero before financial statements are prepared.
d. The negative cash balance is included as a current asset and discussed in a footnote to the financial statements.

LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

155. Which item is a current asset?
a. Cash – regardless of whether it has a positive or negative balance.
b. Cash equivalents.
c. Cash that will be used to close a plant in eighteen months.
d. Restricted cash that will not be used within the upcoming year.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

156. Which of the following would not be reported on the balance sheet as a cash equivalent?
a. Money market fund.
b. Commercial paper.
c. Treasury bill.
d. Restricted cash.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

157. Cash equivalents do not include
a. money market accounts.
b. commercial paper.
c. U.S. Treasury bills.
d. long-term investment.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

158. Restricted cash should be reported
a. always as a noncurrent asset.
b. separately on the income statement.
c. separately on the balance sheet.
d. always as a current asset.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

159. All of the following are true regarding the management and monitoring of cash except
a. companies may have plenty of sales, but insufficient cash to support operations.
b. the cash to cash operating cycle for a manufacturer is generally shorter than that of a merchandising company.
c. manufacturers may experience a significant lag between the purchase of raw materials and the receipt of cash from customers.
d. companies should have sufficient cash to meet payments but minimize the amount of non-revenue-generating cash on hand.

LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

160. Collier Company has implemented a just-in-time system, which relies on suppliers to deliver goods for resale as needed. This implementation is most consistent with which of the following basic principles of cash management?
a. Increasing the speed of receivables collection.
b. Planning the timing of major expenditures.
c. Keeping inventory levels low.
d. Delaying the payment of liabilities.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Economics

161. Management of cash is the responsibility of the company
a. accountant.
b. president.
c. treasurer.
d. vice-president.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

162. Which of the following is not a basic principle of cash management?
a. Increase the speed of collection on receivables.
b. Maintain idle cash.
c. Keep inventory levels low.
d. Delay payment of liabilities.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

163. Which of the following is not a basic principle of cash management?
a. Increase collection of receivables.
b. Keep inventory levels high.
c. Delay payment of liabilities.
d. Invest idle cash.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

164. Which of the following is not a basic principle of cash management?
a. Increase collection of receivables.
b. Keep inventory levels low.
c. Pay all liabilities early.
d. Invest idle cash.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

165. Which of the following does not appear as a separate section on the cash budget?
a. Cash receipts.
b. Cash disbursements.
c. Cash sales.
d. Financing.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

166. The following information was taken from Mitchell Company cash budget for the month of July:
Beginning cash balance $100,000
Cash receipts 96,000
Cash disbursements 136,000
If the company has a policy of maintaining end of the month cash balance of $100,000, the amount the company would have to borrow is
a. $40,000.
b. $20,000.
c. $60,000.
d. $24,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

167. The following information was taken from Hurlbert Company cash budget for the month June
Beginning cash balance $46,000
Cash receipts 62,000
Cash disbursements 78,000
If the company has a policy of maintaining end of the month cash balance of $40,000, the amount the company would have to borrow is
a. $24,000.
b. $10,000.
c. $16,000.
d. $0.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

168. The following information was taken from Niland Company cash budget for the month of April
Beginning cash balance $90,000
Cash receipts 81,000
Cash disbursements 102,000
If the company has a policy of maintaining end of the month cash balance of $75,000, the amount the company would have to borrow is
a. $87,000.
b. $21,000.
c. $6,000.
d. $0.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

169. Which one of the following sections would not appear on a cash budget?
a. Cash receipts.
b. Financing needed.
c. Investing.
d. Cash disbursements.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

170. The following information was taken from Hobson Company cash budget for the month of June
Beginning cash balance $150,000
Cash receipts 145,000
Cash disbursements 170,000
If the company has a policy of maintaining end-of-the-month cash balance of $125,000, the amount the company would have to borrow is
a. $50,000.
b. $25,000.
c. $0
d. $75,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

171. The following information was taken from Molina Company cash budget for the month of November:
Beginning cash balance $96,000
Cash receipts 116,000
Cash disbursements 160,000
If the company has a policy of maintaining an end-of-the-month cash balance of $80,000, the amount the company would have to borrow is
a. $44,000.
b. $0.
c. $28,000.
d. $80,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

172. The following credit sales are budgeted by Garcia Company:
January $255,000
February 375,000
March 525,000
April 450,000
The company’s past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of March is
a. $462,900.
b. $420,000.
c. $450,000.
d. $441,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

173. The cash receipts section of a cash budget includes all of the following except
a. cash sales.
b. collections from customers.
c. receipts of interest and dividends.
d. expected borrowings.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

174. Which of the following is not included in the cash disbursements section of a cash budget?
a. Payments for materials.
b. Payments for income taxes.
c. Repayments of borrowed funds.
d. All of these answer choices are included.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

175. The following credit sales are budgeted by Gonzalez Company:
February 150,000
March 210,000
April 180,000
The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale, 20% in the month following the sale. The anticipated cash inflow for the month of April is
a. $144,000.
b. $168,000.
c. $180,000.
d. $186,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

176. The following credit sales are budgeted by Gonzalez Company:
January $102,000
February 150,000
March 210,000
The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale, 20% in the month following the sale. The anticipated cash inflow for the month of March is
a. $198,000.
b. $168,000.
c. $210,000.
d. $204,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

177. If the cash budget showed a projected cash shortage, the company would most likely
a. make fewer purchases of inventory so they could control costs.
b. lay off workers for that period.
c. arrange to borrow the necessary cash for that period.
d. cut salaries for that period.

LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

178. Ferguson Company is preparing a cash budget for September. The company’s cash balance on September 1 is $23,200. The company anticipates cash receipts of $111,800 and cash disbursements of $117,320. If Ferguson desires a cash balance of $24,000, it must
a. acquire financing of $800.
b. acquire financing of $6,320.
c. acquire financing of $4,720.
d. acquire financing of $18,480.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

179. Petersen Company is preparing a cash budget for September. The company’s cash balance on September 1 is $17,400. The company anticipates cash receipts of $83,850 and cash disbursements of $87,990. If Petersen desires a cash balance of $18,000, it must
a. acquire financing of $600.
b. acquire financing of $4,740.
c. acquire financing of $3,540.
d. acquire financing of $13,860.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

180. The following credit sales are budgeted by Milford Company:
May $357,000
June 525,000
July 735,000
August 630,000
The company’s past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of August is
a. $648,060.
b. $588,000.
c. $630,000.
d. $617,400.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

181. A company’s past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were:
April $ 200,000
May 120,000
June 300,000
The cash inflow in the month of June is expected to be
a. $226,000.
b. $171,000.
c. $180,000.
d. $216,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

182. A company’s past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were:
July $240,000
August 144,000
September 360,000
The cash inflow in the month of September is expected to be
a. $271,200.
b. $205,200.
c. $216,000.
d. $259,200.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

183. Which one of the following items would never appear on a cash budget?
a. Office salaries expense.
b. Interest expense.
c. Depreciation expense.
d. Travel expense.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

184. Expected direct materials purchases in Rees Company are $140,000 in the first quarter and $180,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are:
a. $192,000.
b. $180,000.
c. $156,000.
d. $144,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

185. Expected direct materials purchases in Wade Company are $525,000 in the first quarter and $675,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are:
a. $720,000.
b. $675,000.
c. $585,000.
d. $540,000.

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

*186. A credit balance in Cash Over and Short account is shown as
a. an asset.
b. a liability.
c. a revenue.
d. an expense.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*187. All of the following activities occur at the time of a cash disbursement from petty cash except
a. the petty cash custodian signs the voucher.
b. available supporting documents are attached to the voucher.
c. a journal entry is made for each cash distribution.
d. the individual receiving payment signs the voucher.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

*188. All of the following actions would strengthen internal control over a petty cash fund except
a. surprise counts by a supervisor.
b. cancellation of paid vouchers.
c. submission of supporting documents.
d. multiple petty cash custodians.

LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

*189. Which of the following is not a necessary internal control procedure for the replenishment of the petty cash fund?
a. Segregation of duties.
b. Documentation procedures.
c. Independent internal verification.
d. Employee background check.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

*190. The entry to replenish a petty cash fund includes a credit to
a. Petty Cash.
b. Cash.
c. Freight-In.
d. Postage Expense.

LO: 9, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*191. A debit balance in Cash Over and Short is reported as a
a. contra asset.
b. miscellaneous asset.
c. miscellaneous expense.
d. miscellaneous revenue.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*192. A $100 petty cash fund has cash of $10 and receipts of $80. The journal entry to replenish the account would include a credit to
a. Cash for $90.
b. Petty Cash for $90.
c. Cash Over and Short for $10.
d. Cash for $80.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*193. A $200 petty cash fund has cash of $37 and receipts of $160. The journal entry to replenish the account would include a
a. debit to Cash for $160.
b. credit to Petty Cash for $163.
c. debit to Cash Over and Short for $3.
d. credit to Cash for $160.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*194. A $100 petty cash fund has cash of $16 and receipts of $86. The journal entry to replenish the account would include a
a. debit to Cash for $84.
b. credit to Petty Cash for $84.
c. credit to Cash Over and Short for $2.
d. credit to Cash for $86.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*195. A $200 petty cash fund has cash of $26 and receipts of $170. The journal entry to replenish the account would include
a. debit to Cash for $170.
b. credit to Petty Cash for $170.
c. debit to Petty Cash for $174.
d. credit to Cash for $174.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*196. A $100 petty cash fund has cash of $14 and receipts of $84. The journal entry to replenish the account would include a
a. debit to Cash for $84.
b. credit to Petty Cash for $84.
c. credit to Cash Over and Short for $2.
d. credit to Cash for $86.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*197. A $200 petty cash fund has cash of $32 and receipts of $171. The journal entry to replenish the account would include
a. debit to Cash for $171.
b. credit to Petty Cash for $171.
c. credit to Cash over and Short for $3.
d. credit to Cash for $171.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*198. A petty cash fund of $200 is replenished when the fund contains $12 in cash and receipts for $184. The entry to replenish the fund would
a. credit Cash Over and Short for $4.
b. credit Miscellaneous Revenue for $4.
c. debit Cash Over and Short for $4.
d. debit Miscellaneous Expense for $4.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

*199. A petty cash fund should be replenished
a. every day.
b. at the end of every accounting period.
c. once a year.
d. as soon as an expense is paid from the fund.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

*200. Entries are made to the Petty Cash account when
a. establishing the fund.
b. making payments out of the fund.
c. recording shortages in the fund.
d. replenishing the fund.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

BRIEF EXERCISES
Be. 201
Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control principle that is related to the problem described.

Internal Control Principles
A. Establishment of responsibility
B. Segregation of duties
C. Physical control devices
D. Documentation procedures
E. Independent internal verification
F. Human resource controls

1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.

2. Three people handle cash sales from the same cash register drawer.

3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.

4. The person who is authorized to sign checks approves purchase orders for payment.

5. Some cash payments are not recorded because checks are not prenumbered.

6. Cash shortages are not discovered because there are no daily cash counts by supervisors.

7. The treasurer of the company has not taken a vacation for over 20 years.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Be. 202
Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a company’s system of internal control.

____ a. Cashiers are not bonded.

____ b. All payments are made with checks.

____ c. Discouraging employees from taking paid vacations.

____ d. Two people handle cash sales from the same cash register drawer.

____ e. Using prenumbered sales tickets.

Be. 203
Identify the internal control procedures applicable to cash receipts for Colorado Company in each of the following situations.
1. All cashiers are bonded.
2. The treasurer compares the total cash receipts to the bank deposit daily.
3. The bookkeeper records cash receipts which are held by the treasurer.
4. Only the treasurer holds cash receipts.
5. Deposit slips are completed for each deposit.

Be. 204
Identify the internal control procedures applicable to cash disbursements followed by Tolan Company in each of the following cases.
1. Company checks are pre-numbered.
2. Only the treasurer is authorized to sign checks.
3. Bonding of employees that handle cash.
4. Blank checks are stored in a locked safe.
5. The bookkeeper, not the treasurer, records cash disbursements.

Be. 205
Identify whether each of the following items would be (a) added to the book balance, or (b) deducted from the book balance in a bank reconciliation.
1. EFT transfer to a supplier.
2. Bank service charge.
3. Check printing charge.
4. Error recording check # 214 which was written for $230 but recorded for $320.
5. Collection of note and interest by bank on company’s behalf.

Be. 206
Identify which of the following reconciling items would require an adjusting entry to be made by Costello Company.
1. Deposits in transit totaled $2,000.
2. A check written to the company for $350 by Grover Company was returned NSF.
3. The bank charged the company $46 for printing checks.
4. Outstanding checks totaled $1,667.
5. A debit memorandum reported an EFT of $178 to Paco Utilities.

Be. 207
Foyle Company needs to make adjusting entries for each of the following reconciling items. Identify the account to be debited and the account to be credited in each case.
1. A check for $59 written to the company by J. Hammond was returned NSF.
2. The monthly service charge by the bank was $34.
3. The bank collected a $1,000 note plus interest of $60 on the company’s
behalf. The company had not accrued the interest.

Be. 208
The following reconciling items are applicable to the bank reconciliation for the Gunselman Company. Indicate how each item should be shown on a bank reconciliation.

a. Outstanding checks.
b. Bank credit memorandum for collecting a note for the depositor.
c. Bank debit memorandum for service charge.
d. Deposit in transit.

Be. 209
At August 31 Kiner Company has this bank information: cash balance per bank $9,450; outstanding checks $762; deposits in transit $1,700; and a bank service charge $20. Determine the adjusted cash balance per bank at August 31, 2014.

Be. 210
Given the following information, determine the adjusted cash balance per books;
Balance per books as of June 30 $8,800
Outstanding checks $600
NSF check returned with bank statement $130
Deposit mailed the afternoon of June 30 $300
Check printing charges $30
Interest earned on checking account $40

Be. 211
The following information is available for Nichols Company for the month of February: expected cash receipts $40,000; expected cash disbursements $44,000; cash balance February 1, $11,000. Management wishes to maintain a minimum cash balance of $10,000. Prepare a basic cash budget for the month of February.

Exercises
Ex. 212
Jim Gant has worked for Dr. Ken Flood for several years. Jim demonstrates a loyalty that is rare among employees. He hasn’t taken a vacation in the last three years. One of Jim’s primary duties at the medical office is to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Jim doesn’t bother with giving patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office Jim offers to help Lisa post the payments to the patients’ accounts receivable. She is always happy to receive his help, because he is a very conscientious worker.

Instructions
Identify any principles of internal control that may be violated in this medical office situation.

Ex. 213
Listed below are seven errors or problems that might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write “None.” If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems
1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise.
2. A small fire destroys 3 days of cash receipts.
3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection.
4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer.
5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the balance kept on hand.
6. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor.
7. Cashiers with over 5-years experience are not bonded.

Internal Control Principles
a. Establishment of responsibility
b. Segregation of duties
c. Physical control devices
d. Documentation procedures
e. Independent internal verification
f. Human resource controls

Ex. 214
Using the following information, prepare a bank reconciliation for Hintz Company for July 31, 2014.

a. The bank statement balance is $3,506.
b. The cash account balance is $3,930
c. Outstanding checks totaled $1,285.
d. Deposits in transit are $1,670.
e. The bank service charge is $30.
f. A check for $98 for supplies was recorded as $89 in the ledger.

Ex. 215
Using the following information, prepare a bank reconciliation for Munoz Company for May 31, 2014.

a. The bank statement balance is $8,300.
b. The cash account balance is $6,562
c. Outstanding checks totaled $1,950.
d. Deposits in transit are $600.
e. The bank service charge is $12.
f. Collection of note by bank, $400.

Ex. 216
Using the following information, prepare a bank reconciliation for Hammond Company for June 30, 2014.
a. The bank statement balance is $7,650.
b. The cash account balance is $6,422
c. Outstanding checks totaled $1,650.
d. Deposits in transit are $900.
e. The bank service charge is $22.
f. Collection of note by bank, $500.

Ex. 217
The Hartman Boat Company’s bank statement for the month of November showed a balance per bank of $7,000. The company’s Cash account in the general ledger had a balance of $5,659 at November 30. Other information is as follows:
(1) Cash receipts for November 30 recorded on the company’s books were $6,000 but this amount does not appear on the bank statement.
(2) The bank statement shows a debit memorandum for $40 for check printing charges.
(3) Check No. 119 payable to Maris Company was recorded in the cash payments journal and cleared the bank for $248. A review of the accounts payable subsidiary ledger shows a $36 credit balance in the account of Maris Company and that the payment to them should have been for $284.
(4) The total amount of checks still outstanding at November 30 amounted to $5,800.
(5) Check No. 138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for $490.
(6) The bank returned an NSF check from a customer for $560.
(7) The bank included a credit memorandum for $2,060 which represents collection of a customer’s note by the bank for the company; principal amount of the note was $2,000 and interest was $60. Interest has not been accrued.
Instructions
(a) Prepare a bank reconciliation for the Hartman Boat Company at November 30.
(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

Ex. 218
The bank statement for Cates Company indicates a balance of $1,730 on June 30. The cash balance per books had a balance of $799 on this date. The following information pertains to the bank transactions for the company.

1. Deposit of $760, representing cash receipts of June 30, did not appear on the bank statement.
2. Outstanding checks totaled $340.
3. Bank service charges for June amounted to $25
4. The bank collected a note receivable for the company for $1,400 plus $56 interest revenue.
5. An NSF check for $80 from a customer was returned with the statement.

Instructions
a. Prepare a bank reconciliation for June 30.
b. Prepare any adjusting entries necessary as a result of the bank reconciliation.

Ex. 219
The bank statement for Adcock Company indicates a balance of $830 on July 31. The cash balance per books had a balance of $390 on this date. The following information pertains to the bank transactions for the company.

1. Deposit of $840, representing cash receipts of July 31, did not appear on the bank statement.
2. Outstanding checks totaled $390.
3. Bank service charges for June amounted to $30.
4. The bank collected a note receivable for the company for $1,200 plus $48 interest revenue.
5. A NSF check for $328 from a customer was returned with the statement.

Instructions
a. Prepare a bank reconciliation for July 31.
b. Prepare any adjusting entries necessary as a result of the bank reconciliation.

Ex. 220
Grier Food Store used the following information in recording its bank reconciliation for the month of April.
Balance per books April 30 $ 905
Balance per bank statement April 30 $11,300

(1) Checks written in April but still outstanding $6,300.
(2) Checks written in March but still outstanding $2,800.
(3) Deposits of April 30 not yet recorded by bank $4,900.
(4) NSF check of customer returned by bank $500.
(5) Check No. 210 for $594 was correctly issued and paid by bank but incorrectly entered in the cash payments journal as payment on account for $549.
(6) Bank service charge for April was $40.
(7) A payment on account was incorrectly entered in the cash payments journal and posted to the accounts payable subsidiary ledger for $824 when Check No. 318 was correctly prepared for $284. The check cleared the bank in April.
(8) The bank collected a note receivable for the company of $6,000 plus $240 interest revenue.

Ex. 220 (Cont.)
Instructions
Prepare a bank reconciliation at April 30.

Ex. 221
Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item.

Code
A Add to cash balance per books
B Deduct from cash balance per books
C Add to cash balance per bank
D Deduct from cash balance per bank
E Does not affect the bank reconciliation

Items:
1. Outstanding checks

2. Bank service charge

3. Check for $320 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $230

4. Deposit in transit

5. Bank returns customer deposited check marked NSF

6. Bank collects notes receivable and interest for depositor

7. Bank debit memorandum for check printing fees

8. Petty cash custodian has $86 in paid petty cash vouchers that have not been reimbursed.

Ex. 221 (Cont.)

9. Bank charged a check against the company, which should have been charged to
another company.

10. A check for $236 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $263

Ex. 222
The cash balance per books for Wellmeyer Company on November 30, 2014, is $10,740.93. The following checks and receipts were recorded for the month of December 2014:

Checks Receipts
No. Amount No. Amount Amount Date
17 $372.96 22 $ 578.84 $ 843.86 12/5
18 780.62 23 1,687.50 941.54 12/21
19 157.00 24 921.30 808.58 12/27
20 587.50 25 246.03 1,367.00 12/31
21 234.15

In addition, the bank statement for the month of December is presented below:

Balance Deposits and Credits Checks and Debits Balance
Last Statement No. Total Amount No. Total Amount This Statement

$5,404.84 5 $9,578.36 10 $3,632.19 $11,351.01

Checks and other debits Deposits Date Balance

No. Amount No. Amount No. Amount

14 148.29 17 372.96 22 578.84 5,484.38 12/1 $9,875.13
18 708.62 24 921.30 843.86 12/8 $9,219.03
19 157.00 25 246.03 941.54 12/23 $9,541.58
21 234.15 15.00 SC 808.58 12/29 $10,101.01
250.00 NSF 1,500.00 CM 12/31 $11,351.01

Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo)

Ex. 222 (Cont.)

Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. Gill, a customer, in settlement of an account receivable. An entry has not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 that has not been accrued. The bank service charge is $15.00.

Instructions
(a) Prepare a bank reconciliation at December 31.
(b) Prepare the adjusting journal entries required by the bank reconciliation.

Ex. 223
Seaver Company received a notice with its bank statement that the bank had collected a note receivable for $18,000 plus $600 of interest. The bank had credited these amounts to Seaver’s account less a collection fee of $30. Seaver Company had already accrued the interest for this note on its books.
(a) How will these items affect Seaver Company’s bank reconciliation?
(b) Prepare the journal entry that Seaver Company will make to record this information on its books.

Ex. 224
The cash records of the Dillon Company show the following:
1. The July 31 bank reconciliation indicated that deposits in transit totaled $390. During August the general ledger account, Cash shows deposits of $11,800, but the bank statement indicates that only $9,540 in deposits were received during the month.
2. The July 31 bank reconciliation also reported outstanding checks of $850. During the month of August, the Dillon Company books show that $11,670 of checks were issued, yet the bank statement showed that $10,500 of checks cleared the bank in August.

There were no bank debit or credit memoranda and no errors were made by either the bank or the Dillon Company.

Answer the following questions:
(a) What were the deposits in transit at August 31?
(b) What were the outstanding checks at August 31?

Ex. 225
The cash records of Grayson Company show the following:
1. In February, deposits per the bank statement totaled $37,700; deposits per books $38,000; and deposits in transit at February 28 were $3,550.
2. In February cash disbursements per books were $37,500; checks clearing the bank were $37,300; and outstanding checks at February 28 were $2,500.

There were no bank debit or credit memoranda and no errors were made by either the bank or Grayson Company.

Answer the following questions:
(a) What were the deposits in transit at January 31?
(b) What were the outstanding checks at January 31?

Ex. 226
Listed below are items that may be useful in preparing the March 2014, bank reconciliation for the Carrinton Machine Works.

Using the code letters below, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process.

Code Located or Treated
A Add to the cash balance per books
B Deduct from the cash balance per books
C Add to the cash balance per bank
D Deduct from the cash balance per bank
E Does not affect the bank reconciliation
1. Included with the bank statement materials was a check from Joe Terrell for $40 stamped “account closed”.
2. A personal deposit by Ron Carrinton to his personal account in the amount of $300 for dividends on his General Electric common stock was credited to the company account.
3. The bank statement included a debit memorandum for $22.00 for four books of blank checks for Carrinton Machine Works.
4. The bank statement contains a credit memorandum for $42.75 interest on the average checking account balance.
5. The daily deposits of March 30 and March 31 for $3,362 and $3,125, respectively, were not included in the bank statement postings.
6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.
7. The bank statement included a credit memorandum dated March 28, 2014, for $62.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns.
8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March.
9. On March 24, 2014, Carrinton Machine Works delivered to the bank for collection a $3,400, 3-month note from Tom Jacobs. A credit memorandum dated March 29, 2014, indicated the collection of the note and $102.00 of interest.
10. The bank statement included a debit memorandum for $20.00 for the collection service on the above note and interest.

Ex. 227
On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354, $650, no. 355, $920, and no. 357, $615. The May bank statement and the May cash payments journal show the following.

Bank Statement Cash Payments Journal
Checks Paid Checks Paid
Date Check No. Amount Date Check No. Amount
5/4 354 650 5/2 358 159
5/2 357 615 5/5 359 275
5/17 358 159 5/10 360 890
5/12 359 275 5/15 361 800
5/20 360 890 5/22 362 750
5/29 363 480 5/24 363 480
5/30 362 750 5/29 364 840

Instructions
Using step 2 in the reconciliation procedure, list the outstanding checks at May 31.

Ex. 228
The information below relates to the Cash account in the ledger of Remington Company.
Balance September 1—$25,720 Cash deposited—$96,000.
Balance September 30—$26,100 Checks written—$95,620.

The September bank statement shows a balance of $24,635 on September 30 and the following memoranda.

Credits Debits
Collection of $3,750 note plus interest $50 $3,800 NSF check: J. E. Hoover $635
Interest earned on checking account $65 Safety deposit box rent $75

At September 30, deposits in transit were $7,195, and outstanding checks totaled $2,575.

Instructions
Prepare the bank reconciliation at September 30.

Ex. 229
The cash records of Landis Company show the following four situations.

1. The June 30 bank reconciliation indicated that deposits in transit total $1,080. During July the general ledger account Cash shows deposits of $24,820, but the bank statement indicates that only $23,400 in deposits were received during the month.
2. The June 30 bank reconciliation also reported outstanding checks of $1,020. During the month of July, Landis Company books show that $25,800 of checks were issued. The bank statement showed that $24,600 of checks cleared the bank in July.
3. In September, deposits per the bank statement totaled $40,100, deposits per books were $38,100, and deposits in transit at September 30 were $3,150.
4. In September, cash disbursements per books were $35,550, checks clearing the bank were $37,500, and outstanding checks at September 30 were $2,150.

There were no bank debit or credit memoranda. No errors were made by either the bank or Landis Company.

Instructions
Answer the following questions.
(a) In situation (1), what were the deposits in transit at July 31?
(b) In situation (2), what were the outstanding checks at July 31?
(c) In situation (3), what were the deposits in transit at August 31?
(d) In situation (4), what were the outstanding checks at August 31?

Ex. 230
Lowe Inc.’s bank statement from Western Bank at August 31, 2014, gives the following information.

Balance, August 1 $18,600 Bank debit memorandum:
August deposits 71,000 Safety deposit box fee $ 25
Checks cleared in August 66,678 Service charge 30
Bank credit memorandum: Balance, August 31 22,912
Interest earned 45

A summary of the Cash account in the ledger for August shows the following: balance, August 1, $21,100, receipts $81,000; disbursements $73,570; and balance, August 31, $28,530. Analysis reveals that the only reconciling items on the July 31 bank reconciliation were a deposit in transit for $7,000 and outstanding checks of $4,500. In addition, you determine that there was an error involving a company check drawn in August: A check for $400 to a creditor on account that cleared the bank in August was journalized and posted for $40.

Instructions
(a) Determine deposits in transit.
(b) Determine outstanding checks.
(c) Prepare a bank reconciliation at August 31.

Ex. 231
Holcomb Company expects to have a cash balance of $43,000 on January 1, 2014. These are the relevant monthly budget data for the first two months of 2014.
1. Collections from customers: January $85,000, February $132,000
2. Payments to suppliers: January $40,000, February $50,000
3. Wages: January $34,000, February $40,000. Wages are paid in the month they are incurred.
4. Administrative expenses: January $24,000, February $31,000. These costs include depreciation of $1,000 per month. All other costs are paid as incurred.
5. Selling expenses: January $15,000, February $20,000. These costs are exclusive of
depreciation. They are paid as incurred.
6. Sales of short-term investments in January are expected to realize $12,000 in cash.
Holcomb has a line of credit at a local bank that enables it to borrow up to $40,000. The company wants to maintain a minimum monthly cash balance of $25,000.

Instructions
Prepare a cash budget for January and February.

Ex. 232
Shatner Company has budgeted sales revenue as follows:

Budgeted Sales Revenues
January $55,000
February 80,000
March 90,000
April 65,000
May 50,000
June 15,000

Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible.

Instructions
Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June.

Ex. 233 (Cont.)
Other budgeted cash disbursements: (a) selling and administrative expenses of $7,000 each month, (b) dividends of $19,000 will be paid in July, and (c) purchase of a computer in August for $6,000 cash.

The company wishes to maintain a minimum cash balance of $10,000 at the end of each month. The company borrows money from the bank at 9% interest, if necessary, to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $10,000. Assume that borrowed money in this case is for one month.

Instructions
Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory.

Ex. 234
The management of Morton Company estimates that credit sales for August, September, October, and November will be $180,000, $200,000, $230,000, and $160,000, respectively. Experience has shown that collections are made as follows:

In month of sale 25%
In first month after sale 60%
In second month after sale 10%

Instructions
Determine the collections from customers in October and November. Show all computations.

Ex. *235
On October 1, 2014, Finley Company establishes a petty cash fund by issuing a check for $200 to Sara Mead, the custodian of the petty cash fund. On October 31, 2014, Sara Mead submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is $7 cash in the fund:

Freight-in $70
Office Supplies Expense 35
Entertainment of Clients 60
Postage Expense 23

Ex. *235 (Cont.)

Instructions
Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31.

Ex. *236
On September 1, 2014, Watkins Company establishes a petty cash fund by issuing a check for $250 to Mike Martz, the custodian of the petty cash fund. On September 30, 2014, Mike Martz submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is $35 cash in the fund:

Freight-in $25
Office Supplies Expense 75
Entertainment of Clients 37
Postage Expense 80

Instructions
Prepare the journal entries required to establish the petty cash fund on September 1 and the
replenishment of the fund on September 30.

Ex. *237
The petty cash fund of $200 for Tomkins Company appeared as follows on December 31, 2014

Cash $50.60
Petty cash vouchers
Freight-in $58.40
Postage 40.00
Balloons for a special occasion 20.00
Meals 25.00

Instructions
1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain.
2. Prepare the general journal entry to replenish the fund.
3. On December 31, the office manager gives instructions to increase the petty cash fund by $50. Make the appropriate journal entry.

Ex. *238
During October, Guiding Light Company experiences the following transactions in establishing a petty cash fund.

Oct. 1 A petty cash fund is established with a check for $150 issued to the petty cash custodian.
31 A count of the petty cash fund disclosed the following items:
Currency $19.00
Coins 0.40
Expenditure receipts (vouchers):
Office supplies $28.10
Telephone, Internet, and fax 16.40
Postage 75.00
Freight-out 6.80
31 A check was written to reimburse the fund and increase the fund to $200.

Ex. *238 (Cont.)

Instructions
Journalize the entries in October that pertain to the petty cash fund.

COMPLETION STATEMENTS
239. Internal control consists of the related methods and measures adopted within a business to ____________ its assets and enhance the ______________ and ______________ of its accounting records.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

240. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is ______________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

241. The ______________ of an asset should not have access to the accounting records of that asset.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

242. Employees of a company who evaluate the effectiveness of the company’s system of internal controls on a year-round basis are called ______________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

243. Using _______________ documents is a control measure that helps to prevent a transaction from being recorded more than once or to prevent the transactions from not being recorded.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

244. Employees who handle cash should be ______________ in order to protect against misappropriation of assets by dishonest employees.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

245. Two limitations of systems of internal control are the concept of ______________ and the ______________.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

246. Internal control over cash disbursements is more effective when payments are made by ______________, rather than by ______________.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls

247. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from one location to another is referred to as ______________.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Leverage Technology, AICPA PC: Leverage Technology, IMA: Business Economics

248. A debit memorandum issued by the bank ______________ the cash balance in the depositor’s account.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

249. The difference between the cash in bank balance shown on the company’s books and the cash balance shown on the bank statement may be caused by ______________ and by ______________ in recording transactions by either party.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

250. In preparing a bank reconciliation, outstanding checks are ______________ from the cash balance per ______________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

251. A check correctly written for $370 was incorrectly entered in the cash payments journal for $730. In preparing a bank reconciliation, $____________ must be ______________ the cash balance per ______________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

252. A basic principle of cash management is to delay payment of _____________.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

253. Three major sections of a cash budget are: (1)________________, (2)_______________, and (3)______________.

Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*254. A __________________ fund is used to pay relatively small expenditures.

Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*255. A debit balance in Cash Over and Short is reported in the income statement as ______________.

Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MATCHING
256. Match the items below by entering the appropriate code letter in the space provided.

A. Prenumbered documents G. Cash budget
B. Custody of an asset should be kept H. Restricted cash
separate from the record-keeping I. Invest idle cash
for that asset J. Canceled checks
C. Television monitors, garment sensors K. NSF checks
and burglar alarms are examples L. Outstanding checks
D. Bonding employees M. Petty cash receipt
E. Collusion N. Cash equivalents
F. Cash

1. Segregation of duties.
2. Cash that is not available for general use, but instead is restricted for a particular
purpose.
3. Two or more employees circumventing prescribed procedures.
4. Prevent a transaction from being recorded more than once.
5. Checks which have been returned by the maker’s bank for lack of funds.
6. Checks which have been paid by the depositor’s bank.
7. A projection of anticipated cash flows.
8. Anything that a bank will accept for deposit.

256. (Cont.)
9. Physical control devices.
10. A basic principle of cash management.
11. Insurance protection against misappropriation of assets.
12. Document indicating the purpose of a petty cash expenditure.
13. Issued checks that have not been paid by the bank.
14. Highly liquid investments.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 257
Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each.

S-A E 258
(a) Explain the control principle of independent internal verification?
(b) What practices are important in applying this principle?

S-A E 259
Your friend, Jeff, has opened a movie theater. Jeff states that he does not have time to develop and implement a system of internal controls.
a. Provide Jeff with the objectives of a system of internal control.
b. Explain to Jeff why he should develop a system of internal control.

S-A E 260
One of your accounting professors has alerted you about a job opportunity as an internal auditor.
a. What is the role of an internal auditor?
b. Is this position justified? Why or Why not?

S-A E 261
Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business affect the implementation of a system of internal controls.

S-A E 262
How do these principles apply to cash disbursements:
(a) Physical controls?
(b) Human resource controls?

S-A E 263
The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank.

S-A E 264
A basic principle of cash management involves the investment of idle cash.
a. Explain why this should be done.
b. What type of investment is appropriate for the idle cash?

S-A E 265 (Ethics)
Samson Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company’s management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them.

Required:
“Internal controls exist because most people can’t be trusted.” Is this true? Explain.

S-A E 266 (Communication)
Clinix is a medical office management franchise. There are currently twenty-five medical offices managed by a Clinix franchisee. One of the services provided to franchisees is assistance in training various staff members.

Clinix is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls.

Required:

Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee.

IFRS QUESTIONS
1. The principles of internal control activities are used
a. in the U.S. but not globally.
b. internationally but not in the U.S.
c. in the U.S. and Canada but not globally.
d. globally.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2. Sarbanes Oxley applies to
a. U.S companies but not international companies.
b. international companies but not U.S. companies.
c. U.S. and Canadian companies but not other international companies.
d. U.S and international companies.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3. The fraud triangle applies to
a. U.S companies but not international companies.
b. international companies but not U.S. companies.
c. U.S. and Canadian companies but not other international companies.
d. U.S and international companies.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

4. What percentage of companies worldwide have experienced fraud in the last two years?
a. 1%
b. 10%
c. 50%
d. 100%

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5. Tangible frauds include
a. asset misappropriation.
b. false pretenses.
c. counterfeiting.
d. all of these answer choices are correct.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6. IFRS, compared to GAAP, tends to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosures requirements.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

7. GAAP, compared to IFRS, tends to be more
a. simple in accounting requirements.
b. rules-based.
c. principles-based.
d. simple in disclosures requirements.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

8. GAAP’s, accounting and internal control procedures related to cash and the definition of cash equivalents, as compared to IFRS are:
Accounting and internal
control procedures Definition of cash equivalents
a. essentially similar essentially similar
b. essentially different essentially similar
c. essentially similar essentially different
d. essentially different essentially different

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

9. Cash is defined by IFRS as
a. cash on hand.
b. demand deposits.
c. cash on hand and demand deposits.
d. cash on hand, demand deposits, and highly liquid investments.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10. Cash equivalents are defined by IFRS as
a. cash on hand.
b. demand deposits.
c. cash on hand and demand deposits.
d. short-term, highly liquid investments that are readily convertible into known amounts of cash.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 8

REPORTING AND ANALYZING RECEIVABLES

TRUE-FALSE STATEMENTS
1. Trade receivables occur when two companies trade or exchange notes receivables.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

2. Trade receivables can be an account receivable or a note receivable.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

3. Other receivables include non-trade receivables such as loans to company officers.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

4. Advances to employees are referred to as accounts receivable.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

5. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

6. Accounts receivable are one of a company’s least liquid assets.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

7. Accounts receivable are the result of cash and credit sales.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

8. The two accounting problems with accounts receivable are: (1) recognizing and (2) disposing.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

9. Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10. An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

11. The allowance method of accounting for bad debts violates the matching principle.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

12. When using the allowance method bad debt expense is recorded when an individual customer defaults.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13. Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14. If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15. The percentage of receivables basis of estimating uncollectible accounts ignores the existing balance in the allowance account when the bad debt adjusting entry is recorded.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16. Under the accounts receivable aging method, the balance in Allowance for Doubtful Accounts must be considered carefully prior to adjusting for estimated uncollectible accounts.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

17. Under the direct write-off method, no attempt is made to match bad debt expense to sales revenues in the same accounting period.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18. Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

19. When the allowance method is used, the write-off of an account receivable results in an expense at the time of write-off.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

20. Allowance for Doubtful Accounts is a contra account that is deducted from Accounts Receivable on the balance sheet.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

21. The Allowance for Doubtful Accounts is a liability account.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22. Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23. If bad debt losses are significant, the direct write-off method is acceptable for financial reporting purposes.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24. Bad debt losses are a cost of selling on credit.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

25. The allowance method of handling bad debts violates the matching principle.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

26. The allowance for doubtful accounts is similar to accumulated depreciation in that it shows the total of all accounts written off over the years.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27. The direct write-off method of recognizing uncollectible accounts is not in accordance with good accounting practice.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

28. When using the direct write-off method year-end adjustments for bad debt expense must be made.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

29. When using the allowance method year-end adjustments for bad debt expense must be made.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

30. Under the allowance method, Bad Debt Expense is debited when an account is deemed uncollectible and must be written off.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

31. Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32. An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

33. When an account receivable that was previously written off is collected, it is first necessary to reverse the entry to reinstate the customer’s account before recording the collection.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

34. A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

35. The two key parties to a note are the maker and the payee.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

36. In a promissory note, the party to whom payment is to be made is called the maker.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

37. In computing the maturity date of a note, the date the note is issued is included but the due date is omitted.

LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

38. When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

39. There is only one way to calculate interest correctly.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

40. Interest on a 6-month, 10 percent, $10,000 note is calculated by multiplying $10,000 × 0.10 × 6/12.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

41. The basic formula for computing interest on an interest-bearing note is face value of note x annual interest rate x time in terms of one year = interest.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

42. When a note is written to settle an open account no entry is necessary.

LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

43. A dishonored note is a note that is not paid in full at maturity.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

44. If a promissory note is dishonored, the payee should not record interest income.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

45. The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Revenue.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

46. Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the balance sheet.

LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47. Bad debt expense and interest revenue are reported in the income statement under other revenues and expenses.

LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48. If a company has a significant concentration of credit risk, it is not required to discuss that in its notes to its financial statements as that could increase the related risk.

LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

49. A concentration of credit risk is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

50. If a company has significant concentrations of credit risk, it must discuss this risk in the notes to its financial statements.

LO: 7, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

51. The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

52. The average collection period is frequently used to assess the effectiveness of a company’s credit and collection policies.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

53. A factor buys receivables from businesses for a fee and collects the payment directly from customers.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

54. A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

55. If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

MULTIPLE CHOICE QUESTIONS
56. Interest is usually associated with
a. accounts receivable.
b. notes receivable.
c. doubtful accounts.
d. bad debts.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

57. The receivable that is usually evidenced by a formal instrument of credit is a(n)
a. trade receivable.
b. note receivable.
c. accounts receivable.
d. income tax receivable.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

58. Which of the following receivables would not be classified as an “other receivable”?
a. Advance to an employee
b. Refundable income tax
c. Notes receivable
d. Interest receivable

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

59. Notes or accounts receivables that result from sales transactions are often called
a. sales receivables.
b. non-trade receivables.
c. trade receivables.
d. merchandise receivables.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60. The term “receivables” refers to
a. amounts due from individuals or companies.
b. merchandise to be collected from individuals or companies.
c. cash to be paid to creditors.
d. cash to be paid to debtors.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

61. Receivables are
a. one of the most liquid assets and thus are always considered current assets.
b. claims that are expected to be collected in cash.
c. shown on the income statement at cash realizable value.
d. always the result of revenue recognition.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

62. Non-trade receivables should be reported separately from trade receivables. Why is this statement either true or false?
a. It is true because trade receivables are current assets and non-trade receivables are long term.
b. It is false because all current receivables must be grouped together in one account.
c. It is true because non-trade receivables do not result from business operations and should not be included with accounts receivable.
d. It is false because management can decide how to report receivables.

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63. M. Cornett is a corporation that sells breakfast cereal. Based on the accounts listed below, what are M. Cornett’s total trade receivables?
Income tax refund due $ 500
Advance due to the company from
the company president 300
3-month note due from M. Cornett’s main customer 2,000
Interest due this month on the above note 100
Due and unpaid from this month’s sales 7,000
Due and unpaid from last month’s sales 1,000

a. $8,000
b. $10,000
c. $9,000
d. $10,900

LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

64. Which of the following would probably be the most significant type of a claim held by a company?
a. notes receivable
b. non-trade receivables
c. accounts receivable
d. interest receivable

LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

65. Dorman Company had the following items to report on its balance sheet:
Employee advances $ 1,580
Amounts owed by customers for the sale of services (due in 30 days) 3,050
Refundable income taxes 1,120
Interest receivable 950
Accepted a formal instrument of credit for services (due in 18 months) 2,220
A loan to company president 8,000
Dishonored a note for principal and interest which will eventually be collected 1,380

Based on this information, what amount should appear in the “Other Receivables” category?
a. $18,300
b. $11,650
c. $13,030
d. $15,250

LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

66. On January 15, Nifty Company sells merchandise on account to Martinez Associates for $3,000 with terms 3/10, n/30. On January 20, Martinez returns merchandise worth $600 to Nifty. On January 24, payment is received from Martinez for the balance due. What is the amount of cash received?
a. $2,400
b. $2,328
c. $2,310
d. $1,680

LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

67. Wilton sells softball equipment. On November 14, they shipped $3,000 worth of softball uniforms to Paola Middle School, terms 2/10, n/30. On November 21, they received an order from Douglas High School for $1,800 worth of custom printed bats to be produced in December. On November 30, Paola Middle School returned $300 of defective merchandise. Wilton has received no payments from either school as of month end. What amount will be recognized as net accounts receivable on the balance sheet as of November 30?
a. $4,800
b. $4,500
c. $3,000
d. $2,700

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

68. Which one of the following is not an accounting problem (issue) associated with accounts receivable?
a. Depreciating accounts receivable
b. Recognizing accounts receivable
c. Valuing accounts receivable
d. Accelerating cash receipts from accounts receivable

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

69. Accounts receivable are valued and reported on the balance sheet
a. in the investments section.
b. at gross amounts less sales returns and allowances.
c. at cash realizable value.
d. only if they are not past due.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70. Three accounting issues associated with accounts receivable are
a. depreciating, returns, and valuing.
b. depreciating, valuing, and collecting.
c. recognizing, valuing, and accelerating collections.
d. accrual, bad debts, and accelerating collections.

LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

71. Carson Company on July 15 sells merchandise on account to Tayler Co. for $2,000, terms 2/10, n/30. On July 20 Tayler Co. returns merchandise worth $800 to Carson Company. On July 24 payment is received from Tayler Co. for the balance due. What is the amount of cash received?
a. $1,200
b. $1,176
c. $1,160
d. $2,000

LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

72. The Allowance for Doubtful Accounts is necessary because
a. when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay.
b. uncollectible accounts that are written off must be accumulated in a separate account.
c. a liability results when a credit sale is made.
d. management needs to accumulate all the credit losses over the years.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

73. The account Allowance for Doubtful Accounts is classified as a(n)
a. liability.
b. contra account of Bad Debt Expense.
c. expense.
d. contra account to Accounts Receivable.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

74. Under the allowance method, Bad Debt Expense is recorded
a. when an individual account is written off.
b. when the loss amount is known.
c. for an amount that the company estimates it will not collect.
d. several times during the accounting period.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

75. The expense recognition
a. requires that all credit losses be recorded when an individual customer cannot pay.
b. necessitates the recording of an estimated amount for bad debts.
c. results in the recording of a known amount for bad debt losses.
d. is not involved in the decision of when to expense a credit loss.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

76. Under the allowance method, writing off an uncollectible account
a. affects only balance sheet accounts.
b. affects both balance sheet and income statement accounts.
c. affects only income statement accounts.
d. is not acceptable practice.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

77. The net amount expected to be received in cash from receivables is termed the
a. cash realizable value.
b. cash-good value.
c. gross cash value.
d. cash-equivalent value.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78. If a company fails to record estimated bad debts expense,
a. cash realizable value is understated.
b. expenses are understated.
c. revenues are understated.
d. receivables are understated.

LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

79. If the amount of uncollectible account expense is understated at year end
a. net income will be understated.
b. stockholders’ equity will be understated.
c. Allowance for Doubtful accounts will be overstated.
d. net Accounts Receivable will be overstated.

LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

80. If the amount of uncollectible account expense is overstated at year end
a. net income will be overstated.
b. stockholders’ equity will be overstated.
c. Allowance for Doubtful accounts will be understated.
d. net Accounts Receivable will be understated.

LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

81. The expense recognition principle relates to credit losses by stating that bad debt expense should be recorded
a. in the same period as allowed for tax purposes.
b. in the period of the sale.
c. for an exact amount.
d. in the period of the loss.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

82. When the allowance method is used to account for uncollectible accounts, Bad Debts Expense is debited when
a. a sale is made.
b. an account becomes bad and is written off.
c. management estimates the amount of uncollectibles.
d. a customer’s account becomes past due.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83. When an account becomes uncollectible and must be written off
a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited.
c. Bad Debt Expense should be credited.
d. Sales Revenue should be debited.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

84. The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles
a. will increase income in the period it is collected.
b. will decrease income in the period it is collected.
c. requires a correcting entry for the period in which the account was written off.
d. does not affect income in the period it is collected.

LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

85. The direct write-off method of accounting for uncollectible accounts
a. emphasizes the matching of expenses with revenues.
b. emphasizes balance sheet relationships.
c. emphasizes cash realizable value.
d. is not generally accepted as a basis for estimating bad debts.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

86. An aging of a company’s accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $4,500.
b. debit to Allowance for Doubtful Accounts for $3,300.
c. debit to Bad Debt Expense for $3,300.
d. credit to Allowance for Doubtful Accounts for $4,500.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

87. An aging of a company’s accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 debit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $4,500.
b. debit to Bad Debt Expense for $6,100.
c. debit to Bad Debt Expense for $2,900.
d. credit to Allowance for Doubtful Accounts for $4,500.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

88. An aging of a company’s accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $4,500.
b. debit to Allowance for Doubtful Accounts for $2,900.
c. debit to Bad Debt Expense for $2,900.
d. credit to Allowance for Doubtful Accounts for $4,500.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

89. An aging of a company’s accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $4,500.
b. debit to Allowance for Doubtful Accounts for $5,700.
c. debit to Bad Debt Expense for $5,700.
d. credit to Allowance for Doubtful Accounts for $4,500.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

90. A debit balance in the Allowance for Doubtful Accounts
a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts.
c. indicates that actual bad debt write-offs have been less than what was estimated.
d. cannot occur if the percentage of receivables method of estimating bad debts is used.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

91. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited
a. when a credit sale is past due.
b. at the end of each accounting period.
c. whenever a pre-determined amount of credit sales have been made.
d. when an account is determined to be uncollectible.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

92. An alternative name for Bad Debt Expense is
a. Deadbeat Expense.
b. Uncollectible Accounts Expense.
c. Collection Expense.
d. Credit Loss Expense.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

93. Bad Debt Expense is considered
a. an avoidable cost in doing business on a credit basis.
b. an internal control weakness.
c. a necessary risk of doing business on a credit basis.
d. avoidable unless there is a recession.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

94. Two methods of accounting for uncollectible accounts are the
a. allowance method and the accrual method.
b. allowance method and the net realizable method.
c. direct write-off method and the accrual method.
d. direct write-off method and the allowance method.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

95. The allowance method of accounting for uncollectible accounts is required if
a. the company makes any credit sales.
b. bad debts are significant in amount.
c. the company is a retailer.
d. the company charges interest on accounts receivable.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

96. Bad Debt Expense is reported on the income statement as
a. part of cost of goods sold.
b. an expense subtracted from net sales to determine gross profit.
c. an operating expense.
d. a contra revenue account.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

97. When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded
a. in the year after the credit sale is made.
b. in the same year as the credit sale.
c. as each credit sale is made.
d. when an account is written off as uncollectible.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

98. To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a
a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
b. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
d. debit to Loss on Credit Sales and a credit to Accounts Receivable.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

99. Under the allowance method of accounting for uncollectible accounts,
a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off.
b. Bad Debt Expense is debited when a specific account is written off as uncollectible.
c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
d. Allowance for Doubtful Accounts is closed each year to Income Summary.

LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

100. When using the balance sheet approach, the balance in Allowance for Doubtful Accounts must be considered prior to the end of period adjustment when using which of the following methods?
a. Net realizable method
b. Direct write-off method
c. Accrual method
d. Allowance method

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

101. Allowance for Doubtful Accounts on the balance sheet
a. is offset against total current assets.
b. increases the cash realizable value of accounts receivable.
c. appears under the heading “Other Assets.”
d. is deducted from accounts receivable.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

102. When an account is written off using the allowance method, the
a. cash realizable value of total accounts receivable will increase.
b. net accounts receivable will decrease.
c. allowance account will increase.
d. net accounts receivable will stay the same.

LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

103. If an account is collected after having been previously written off
a. the allowance account should be debited.
b. only the control account needs to be credited.
c. both income statement and balance sheet accounts will be affected.
d. there will be both a debit and a credit to accounts receivable.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

104. You have just received notice that a customer of yours with an account receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to
a. debit Allowance for Doubtful Accounts and credit Bad Debt Expense.
b. debit Allowance for Doubtful Accounts and credit Accounts Receivable.
c. debit Bad Debt Expense and credit Allowance for Doubtful Accounts.
d. debit Bad Debt Expense and credit Accounts Receivable.

LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
105. When an account is written off using the allowance method, accounts receivable
a. is unchanged and the allowance account increases.
b. increases and the allowance account increases.
c. decreases and the allowance account decreases.
d. decreases and the allowance account increases.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

106. Under the allowance method, when a specific account is written off
a. total assets will be unchanged.
b. net income will decrease.
c. total assets will decrease.
d. total assets will increase.

LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

107. The percentage of receivables basis for estimating uncollectible accounts emphasizes
a. cash realizable value.
b. the relationship between accounts receivable and bad debts expense.
c. income statement relationships.
d. the relationship between sales and accounts receivable.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108. Nichols Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Nichols Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?
a. Bad Debt Expense 8,000
Allowance for Doubtful Accounts 8,000
b. Bad Debt Expense 6,000
Allowance for Doubtful Accounts 6,000
c. Bad Debt Expense 6,000
Accounts Receivable 6,000
d. Bad Debt Expense 8,000
Accounts Receivable 8,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

109. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $11,000 debit before adjustment what is the balance after adjustment?
a. $45,000
b. $11,000
c. $56,000
d. $34,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

110. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $11,000 debit before adjustment what is the amount of bad debt expense for that period?
a. $45,000
b. $11,000
c. $56,000
d. $34,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

111. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $30,000. If the balance of the Allowance for Doubtful Accounts is $4,000 credit before adjustment what is the amount of bad debt expense for that period?
a. $30,000
b. $26,000
c. $34,000
d. $4,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

112. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $30,000. If the balance of the Allowance for Doubtful Accounts is $4,000 debit before adjustment what is the balance after adjustment?
a. $30,000
b. $34,000
c. $26,000
d. $4,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

113. Kinsler Company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will Kinsler Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?
a. Bad Debt Expense 14,000
Allowance for Doubtful Accounts 14,000
b. Bad Debt Expense 12,000
Allowance for Doubtful Accounts 12,000
c. Bad Debt Expense 10,000
Allowance for Doubtful Accounts 10,000
d. Bad Debt Expense 8,000
Accounts Receivable 8,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

114. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $34,000. If the balance of the Allowance for Doubtful Accounts is $9,000 debit before adjustment what is the amount of bad debt expense for that period?
a. $34,000
b. $ 9,000
c. $43,000
d. $25,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

115. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts
a. total assets decrease.
b. total assets are unchanged.
c. net income is unchanged.
d. liabilities decrease.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

116. One might infer from a debit balance in Allowance for Doubtful Accounts that
a. a posting error has been made.
b. more accounts have been written off than had been estimated.
c. the direct method is being used.
d. Bad Debt Expense has been overestimated.

LO: 3, Bloom: CC, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

117. Using the allowance method, the uncollectible accounts for the year are estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 credit before adjustment, what is the balance after adjustment?
a. $9,000
b. $31,000
c. $40,000
d. $49,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

118. Using the allowance method, the uncollectible accounts for the year is estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 credit before adjustment, what is the amount of bad debt expense for the period?
a. $9,000
b. $31,000
c. $40,000
d. $49,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

119. Using the allowance method, the uncollectible accounts for the year is estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 debit before adjustment, what is the amount of bad debt expense for the period?
a. $9,000
b. $31,000
c. $40,000
d. $49,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

120. In reviewing the accounts receivable, the cash receivable value is $21,000 before the write-off of a $1,500 account. What is the cash receivable value after the write-off?
a. $21,000
b. $1,500
c. $22,500
d. $19,500

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

121. In 2014 the Golic Co. had net credit sales of $600,000. On January 1, 2014, the Allowance for Doubtful Accounts had a credit balance of $15,000. During 2014, $24,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 was $160,000 what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014?
a. $16,000.
b. $25,000.
c. $31,000.
d. $24,000.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

122. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record Bad Debt Expense
a. is relevant when using the percentage-of-receivables basis.
b. is relevant when using the direct write-off method.
c. is relevant to both the percentage-of-receivables basis and the direct write-off method.
d. will never show a debit balance at this stage in the accounting cycle.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

123. The direct write-off method of accounting for bad debts
a. uses an allowance account.
b. uses a contra asset account.
c. does not require estimates of bad debt losses.
d. is the preferred method under generally accepted accounting principles.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

124. Under the direct write-off method of accounting for uncollectible accounts
a. the allowance account is increased for the actual amount of bad debt at the time of write-off.
b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off.
c. balance sheet relationships are emphasized.
d. bad debt expense is always recorded in the period in which the revenue was recorded.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

125. A company has an ending accounts receivable balance of $900,000 and it estimates that uncollectible accounts will be 2% of the receivable balance. If Allowance for Doubtful Accounts has a credit balance of $2,000 prior to adjustment, its balance after adjustment will be a credit of
a. $20,000.
b. $18,000.
c. $17,960.
d. $16,000.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

126. Net credit sales for the month are $750,000. The accounts receivable balance is $160,000. The allowance is calculated as 5% of the receivables balance using the percentage-of-receivables basis. If the Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment, what is the balance after adjustment?
a. $ 8,000
b. $ 3,000
c. $13,000
d. $ 8,250

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

127. In 2014 Wilkinson Company had net credit sales of $1,500,000. On January 1, 2014, Allowance for Doubtful Accounts had a credit balance of $36,000. During 2014, $60,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $400,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014?
a. $ 40,000
b. $150,000
c. $ 64,000
d. $ 60,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

128. An analysis and aging of the accounts receivable of Watts Company at December 31 reveal these data:
Accounts receivable $ 2,400,000
Allowance for doubtful accounts per books before adjustment (credit) 150,000
Amounts expected to become uncollectible 195,000

What is the cash realizable value of the accounts receivable at December 31 after adjustment?
a. $2,055,000
b. $2,250,000
c. $2,400,000
d. $2,205,000

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

129. The bookkeeper recorded the following journal entry
Allowance for Doubtful Accounts 1,000
Accounts Receivable – Richard James 1,000

Which one of the following statements is false?
a. This entry is only prepared on the last day of the accounting period.
b. There should be written authorization for this transaction from someone who does not have responsibilities related to recording cash.
c. There could be a violation of internal control policies.
d. James’ account was written off because it was determined to be uncollectible.

LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

130. The following information is related to December 31, 2013 balances.
• Accounts receivable $700,000
• Allowance for doubtful accounts (credit) (60,000)
• Cash realizable value 640,000

During 2014 sales on account were $195,000 and collections on account were $115,000. Also, during 2014 the company wrote off $11,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $72,000. The change in the cash realizable value from the balance at 12/31/13 to 12/31/14 was
a. $68,000 increase.
b. $80,000 increase.
c. $57,000 increase.
d. $69,000 increase.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

131. The following information is related to December 31, 2013 balances.
• Accounts receivable $700,000
• Allowance for doubtful accounts (credit) (60,000)
• Cash realizable value 640,000

During 2014 sales on account were $195,000 and collections on account were $115,000. Also, during 2014 the company wrote off $11,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $72,000. Bad debt expense for 2014 is:
a. $23,000.
b. $12,000.
c. $72,000.
d. $ 1,000.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

132. During 2014 Sedgewick Inc. had sales on account of $264,000, cash sales of $108,000, and collections on account of $168,000. In addition, they collected $2,900 which had been written off as uncollectible in 2013. As a result of these transactions the change in the accounts receivable balance indicates a
a. $201,100 increase.
b. $ 96,000 increase.
c. $ 93,100 increase.
d. $204,000 increase.

LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

133. Thompson Corporation’s unadjusted trial balance includes the following balances (assume normal balances):
• Accounts receivable $1,492,000
• Allowance for doubtful accounts $ 28,400

Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record?
a. $89,520
b. $61,120
c. $59,416
d. $91,224

LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

134. The following information is related to December 31, 2013 balances.
• Accounts receivable $2,100,000
• Allowance for doubtful accounts (credit) (180,000)
• Cash realizable value $1,920,000

During 2014 sales on account were $580,000 and collections on account were $344,000. Also during 2014 the company wrote off $32,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $216,000. The change in the cash realizable value from the balance at 12/31/13 to 12/31/14 was a
a. $200,000 increase.
b. $236,000 increase.
c. $168,000 increase.
d. $204,000 increase.

LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

135. The following information is related to December 31, 2013 balances.
• Accounts receivable $2,100,000
• Allowance for doubtful accounts (credit) (180,000)
• Cash realizable value $1,920,000

During 2014 sales on account were $580,000 and collections on account were $344,000. Also during 2014 the company wrote off $32,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $216,000. Bad debt expense for 2014 is
a. $ 68,000.
b. $ 36,000.
c. $216,000.
d. $ 4,000.

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

136. During 2014 Wheeler Inc. had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, they collected $5,800 which had been written off as uncollectible in 2013. As a result of these transactions the change in the accounts receivable indicates a
a. $402,200 increase.
b. $192,000 increase.
c. $186,200 increase.
d. $408,000 increase.

LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

137. Smithson Corporation’s unadjusted trial balance includes the following balances (assume normal balances):
• Accounts Receivable $3,357,000
• Allowances for Doubtful Accounts $ 63,900

Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record?
a. $201,420
b. $137,520
c. $133,686
d. $205,254

LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

138. A write off of a specific accounts receivable under the allowance method
a. increases bad debt expense for the accounting period.
b. should occur on the last day of the accounting period.
c. decreases the cash realizable value of accounts receivable.
d. should be formally approved by an authorized employee.

LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

139. The direct write-off method is acceptable for financial reporting purposes only if the bad debt losses are insignificant.
a. This is a false statement because the direct write-off method violates the matching principle.
b. This is a true statement based on the concept of materiality.
c. This is a false statement because the direct write-off method can only be used for tax reporting.
d. This is a true statement because companies can choose either the direct write-off or the allowance method for financial reporting, as long as they consistently apply the method.

LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

140. Under the allowance method of accounting for bad debts, why must uncollectible accounts receivable be estimated at the end of the accounting period?
a. To allow the collection department to schedule work for the next accounting period.
b. To determine the gross realizable value of accounts receivable.
c. The IRS rules require the company to make the estimate.
d. To match bad debt expense to the period in which the revenues were earned.

LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

141. A promissory note
a. is not a formal credit instrument.
b. may be used to settle an accounts receivable.
c. has the party to whom the money is due as the maker.
d. cannot be factored to another party.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
142. Which of the following is not true regarding a promissory note?
a. Promissory notes may not be transferred to another party by endorsement.
b. Promissory notes may be sold to another party.
c. Promissory notes give a stronger legal claim to the holder than accounts receivable.
d. Promissory notes may be bearer notes and not specifically identify the payee by name.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

143. The two key parties to a promissory note are the
a. maker and a bank.
b. debtor and the payee.
c. maker and the payee.
d. sender and the receiver.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

144. When calculating interest on a promissory note with the maturity date stated in terms of days, the
a. maker pays more interest if 365 days are used instead of 360.
b. maker pays the same interest regardless if 365 or 360 days are used.
c. payee receives more interest if 360 days are used instead of 365.
d. payee receives less interest if 360 days are used instead of 365.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

145. The interest on a $5,000, 10%, 1-year note receivable is
a. $5,000.
b. $500.
c. $5,500.
d. $5,450.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

146. The interest on a $10,000, 6%, 60-day note receivable is
a. $680.
b. $100.
c. $200.
d. $300.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

147. The interest on a $6,000, 6%, 90-day note receivable is
a. $360.
b. $180
c. $90.
d. $270.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

148. The interest on a $9,000, 10%, 1-year note receivable is
a. $9,000.
b. $75.
c. $900.
d. $9,900.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

149. The interest on a $7,000, 6%, 60-day note receivable is
a. $35.
b. $420
c. $210.
d. $70.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

150. The interest on a $4,000, 9%, 90-day note receivable is
a. $90.
b. $360.
c. $30.
d. $60.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

151. A note receivable is a negotiable instrument which
a. eliminates the need for a bad debts allowance.
b. can be transferred to another party by endorsement.
c. takes the place of checks in a business firm.
d. can only be collected by a bank.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

152. When a company receives an interest-bearing note receivable, it will
a. debit Notes Receivable for the maturity value of the note.
b. credit Notes Receivable for the maturity value of the note.
c. debit Notes Receivable for the face value of the note.
d. credit Notes Receivable for the face value of the note.

LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

153. The face value of a note refers to the amount
a. that can be received if sold to a factor.
b. borrowed plus interest received at maturity from the maker.
c. at which the note receivable is recorded.
d. remaining after a service charge has been deducted.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

154. Rosen Company receives a $5,000, 3-month, 6% promissory note from Bay Company in settlement of an open accounts receivable. What entry will Rosen Company make upon receiving the note?
a. Notes Receivable 5,075
Accounts Receivable—Bay Company 5,075
b. Notes Receivable 5,075
Accounts Receivable—Bay Company 5,000
Interest Revenue 75
c. Notes Receivable 5,000
Interest Receivable 75
Accounts Receivable—Bay Company 5,000
Interest Revenue 75
d. Notes Receivable 5,000
Accounts Receivable—Bay Company 5,000

LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

155. Doane Company receives a $7,000, 3-month, 6% promissory note from Ray Company in settlement of an open accounts receivable. What entry will Doane Company make upon receiving the note?
a. Notes Receivable 7,035
Accounts Receivable—Ray Company 7,035
b. Notes Receivable 7,105
Accounts Receivable—Ray Company 7,000
Interest Revenue 105
c. Notes Receivable 7,000
Interest Receivable 105
Accounts Receivable—Ray Company 7,000
Interest Revenue 105
d. Notes Receivable 7,000
Accounts Receivable—Ray Company 7,000

LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

156. Short-term notes receivable
a. have a related allowance account called Allowance for Doubtful Notes Receivable.
b. are reported at their gross realizable value.
c. use the same estimations and computations as accounts receivable to determine cash realizable value.
d. present the same valuation problems as long-term notes receivables.

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

157. A 90-day note dated June 30, 2014, would mature on:
a. September 30, 2014.
b. September 27, 2014.
c. September 28, 2014.
d. September 29, 2014.

LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

158. The interest rate for a three-month loan would normally be stated in terms of which of the following rates of interest?
a. Daily
b. Monthly
c. Quarterly
d. Annual

LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

159. Ramos Company has a 90-day note that carries an annual interest rate of 8%. If the amount of the total interest on the note is equal to $700, then what is the principal of the note?
a. $8,750
b. $35,000
c. $50,400
d. $22,400

LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

160. Douglas Company has a $51,000 note that carries an annual interest rate of 10%. If the amount of the total interest on the note is equal to $3,400, then what is the duration of the note in months?
a. 6 months
b. 4 months
c. 12 months
d. 8 months

LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

161. Young Company lends Dobson industries $40,000 on August 1, 2014, accepting a 9-month, 12% interest note. If Young prepares it financial statements as of December 31, 2014, what adjusting entry must it make?
a. Interest Receivable 2,000
Interest Revenue 2,000
b. Accounts Receivable 2,000
Interest Receivable 2,000
c. Cash 2,000
Interest Revenue 2,000
d. Notes Receivable 2,000
Interest Revenue 2,000

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

162. Young Company lends Dobson industries $40,000 on August 1, 2014, accepting a 9-month, 12% interest note. If Young accrued interest at its December 31, 2014 year-end, what entry must it make to record the collection of the note and interest at its maturity date?
a. Cash 43,600
Notes Receivable 40,000
Interest Revenue 3,600
b. Cash 43,600
Notes Receivable 43,600
c. Notes Receivable 40,000
Interest Receivable 2,000
Interest Revenue 1,600
Cash 43,600
d. Cash 43,600
Notes Receivable 40,000
Interest Receivable 2,000
Interest Revenue 1,600

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

163. Young Company lends Dobson industries $40,000 on January 1, 2014, accepting a 9-month, 12% interest note. If Dobson dishonors the note and does not pay it in full at maturity but Young expects that it will eventually be able to collect the debt, which of the following entries should most likely be made by Young Company?
a. Cash 40,000
Notes Receivable 40,000
b. Accounts Receivable 40,000
Notes Receivable 40,000
c. Accounts Receivable 43,600
Notes Receivable 40,000
Interest Revenue 3,600
d. Accounts Receivable 43,600
Notes Receivable 40,000
Interest Receivable 3,600

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

164. Which of the following is a way of disposing of a note receivable?
a. Honoring it on maturity date.
b. Selling it to receive cash before the maturity date.
c. Default by the maker.
d. All of these are ways to dispose of notes receivable.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

165. A dishonored note receivable
a. Is no longer negotiable.
b. Must be written off by the lender.
c. Creates a claim against the maker for the amount of principal only.
d. Is one that is not paid in full within 10 days of maturity.

LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

166. The maturity value of a $40,000, 9%, 40-day note receivable dated July 3 is
a. $40,000.
b. $44,000.
c. $43,600.
d. $40,400.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

167. Barber Company lends Monroe Company $30,000 on April 1, accepting a four-month, 6% interest note. Barber Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared?
a. Note Receivable 30,000
Cash 30,000
b. Interest Receivable 150
Interest Revenue 150
c. Cash 150
Interest Revenue 150
d. Interest Receivable 450
Interest Revenue 450

LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

168. The maturity value of a $5,000, 6%, 60-day note receivable dated February 10th is
a. $5,050.
b. $5,025.
c. $5,000.
d. $5,300.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

169. When a note is dishonored, the payee’s entry includes a
a. debit to Interest Revenue.
b. credit to Accounts Receivable.
c. debit to Interest Expense.
d. credit to Notes Receivable.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

170. A note receivable is executed in December. When the note is paid the following February, the payee’s entry includes (assuming a calendar-year accounting period and no reversing entries) a
a. credit to Interest Receivable.
b. credit to Cash.
c. debit to Notes Receivable.
d. debit to Interest Income.

LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

171. The maturity value of a $40,000, 12%, 3-month note receivable is
a. $41,200.
b. $40,480.
c. $44,800.
d. $40,400.

LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

172. Nance Co. holds Gant Inc.’s $25,000, 120 day, 9% note. The entry made by Nance Co. when the note is collected, assuming no interest has previously been accrued is:
a. Cash 25,000
Notes Receivable 25,000
b. Accounts Receivable 25,750
Notes Receivable 25,000
Interest Revenue 750
c. Cash 25,750
Notes Receivable 25,000
Interest Revenue 750
d. Accounts Receivable 25,750
Notes Revenue 25,000
Interest Revenue 700

LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

173. All of the following statements regarding the financial statement presentation of receivables are true except:
a. Short-term receivables are reported in the current assets section of the balance sheet.
b. The gross amount of receivables less the allowance for doubtful accounts is equal to the net receivables.
c. Short-term receivables are reported above the short-term investments in the balance sheet.
d. Companies report bad debts expense under “Selling Expenses” in the operating expenses section of the income statement.

LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

174. Which of the following is least likely to help a company minimize losses as credit standards are relaxed?
a. Require potential customers to provide bank guarantees.
b. Ask a potential customer for references regarding payment history.
c. Increase the estimate of uncollectible accounts at the end of each period.
d. Check a potential customer’s credit rating.

LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

175. Which one of the following is not a principle of sound accounts receivable management?
a. Determine to whom to extend credit.
b. Delay cash receipts from receivables if necessary.
c. Monitor collections.
d. Determine a payment period.

LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

176. The accounts receivable turnover is computed by dividing
a. total sales by average receivables.
b. total sales by ending receivables.
c. net credit sales by average receivables.
d. net credit sales by ending receivables.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

177. The accounts receivable turnover is used to analyze
a. profitability.
b. liquidity.
c. risk.
d. long-term solvency.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

178. A high accounts receivable turnover ratio indicates
a. the company’s sales are increasing.
b. a large proportion of the company’s sales are on credit.
c. customers are making payments very quickly.
d. customers are making payments slowly.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

179. The accounts receivable turnover is needed to calculate
a. the average collection period in days.
b. market risk.
c. return on assets.
d. current ratio.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

180. The average collection period for receivables is computed by dividing 365 days by
a. net credit sales.
b. average accounts receivable.
c. ending accounts receivable.
d. accounts receivable turnover.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

181. The financial statements of the Nelson Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Nelson?
a. 3.8 times
b. 6 times
c. 10.0 times
d. 7.5 times

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

182. The financial statements of the Melton Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?
a. 96.1
b. 48.7
c. 36.5
d. 60.8

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

183. The financial statements of the Phelps Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Phelps?
a. 8.3 times
b. 12.5 times
c. 6.3 times
d. 4.2 times

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

184. The financial statements of the Belfry Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?
a. 29.2 times
b. 86.9 times
c. 44.0 times
d. 57.9 times

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

185. A popular variation of the accounts receivable turnover is the
a. credit risk ratio.
b. concentration of credit risk.
c. bad debts ratio.
d. average collection period.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

186. The accounts receivable turnover
a. Is computed by dividing net credit sales for the accounting period by the cash realizable value of accounts receivable on the last day of the accounting period.
b. Can be used to compute the average collection period.
c. Is a method of evaluating the solvency of net accounts receivable.
d. Is only important to internal users of accounting information.

LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

187. Leary Corporation had net credit sales during the year of $900,000 and cost of goods sold of $540,000. The balance in receivables at the beginning of the year was $120,000 and at the end of the year was $180,000. What was the accounts receivable turnover?
a. 6.0
b. 7.5
c. 5.0
d. 3.6

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

188. Windsor Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 8. What is its average collection period (days)?
a. 80
b. 30
c. 46
d. 36

LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

189. All of the following statements are true regarding the average collection period except:
a. it is a popular variant of the accounts receivable turnover .
b. it is used to assess the effectiveness of a company’s credit and collection policies.
c. it should generally exceed the credit term period.
d. its increase may suggest a decline in the financial health of customers.

LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

190. In the table below the information for four companies is provided.
Company Accounts Receivable turnover Average collection period
Martin 13.9 26.3
Lewis 13.3 27.4
Danforth 10.4 35.1
Garner 14.5 25.2
Industry Average 13.0 28.1

If Garner’s net credit sales are $290,000, what are its average net accounts receivable?
a. $11,508
b. $20,000
c. $42,050
d. $73,080

LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

191. In the table below the information for four companies is provided.
Company Accounts Receivable turnover Average collection period
Martin 13.9 26.3
Lewis 13.3 27.4
Danforth 10.4 35.1
Garner 14.5 25.2
Industry Average 13.0 28.1

Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations?
a. Martin
b. Lewis
c. Danforth
d. Garner

LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

192. Simonic Retailers accepted $90,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Simonic Retailers will include a credit to Sales Revenue of $90,000 and a debit(s) to
a. Cash $86,400 and Service Charge Expense $3,600.
b. Accounts Receivable $86,400 and Service Charge Expense $3,600.
c. Cash $86,400 and Interest Expense $3,600.
d. Accounts Receivable $90,000.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

193. Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30
a. represent common business practices.
b. represent ways to accelerate receivables collections.
c. result in collections that are less than the gross accounts receivable.
d. All of these answer choices are correct.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

194. Factoring arrangements
a. are ways to accelerate receivable collections.
b. involve no commissions or service charges because the factor is guaranteed collections on the due date.
c. are generally used by businesses that are insolvent.
d. are mainly used in the textile and furniture industries.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

195. ABC Company accepted a national credit card for a $7,000 purchase. The cost of the goods sold is $5,600. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?
a. Increase by $1,358.
b. Increase by $1,400.
c. Increase by $1,190.
d. Increase by $6,790.

LO: 9, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

196. XYZ Company accepted a national credit card for a $7,500 purchase. The cost of the goods sold is $6,000. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?
a. Increase by $1,455.
b. Increase by $1,500.
c. Increase by $1,275.
d. Increase by $7,275.

LO: 9, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

197. A company sells $900,000 of accounts receivable to a factor for cash less a 2% service charge. The entry to record the sale should not include a
a. debit to Interest Expense for $18,000.
b. debit to Cash for $882,000.
c. debit to Service Charge Expense for $18,000.
d. credit to Accounts Receivable for $900,000.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

198. The sale of receivables by a business
a. indicates that the business is in financial difficulty.
b. is generally the major revenue item on its income statement.
c. is an indication that the business is owned by a captive finance company.
d. can be a quick way to generate cash for operating needs.

LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

199. If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n)
a. selling expense.
b. interest expense.
c. other expense.
d. contra asset.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

200. The sale or transfer of accounts receivable in order to raise funds is called
a. pledging.
b. factoring.
c. leasing.
d. collateralizing.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

201. If a company sells its accounts receivables to a factor
a. the seller pays a commission to the factor.
b. the factor pays a commission to the seller.
c. there is a gain on the sale of the receivables.
d. the seller defers recognition of sales revenue until the account is collected.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

202. A captive finance company refers to
a. a finance company that is owned by individuals who borrow money from the company.
b. finance companies that won’t allow early repayment of loans.
c. a company that is wholly owned by another company and provides financing to purchasers of its owner company’s goods.
d. any company that issues a major credit card.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

203. Receivables might be sold to
a. lengthen the cash-to-cash operating cycle.
b. take advantage of deep discounts on the cash realizable value of receivables.
c. generate cash quickly.
d. finance companies at an amount greater than cash realizable value.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

204. A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables?
a. The loss section of the income statement will increase each time receivables are sold.
b. The credit to Accounts Receivable is less than the debit to Cash when the accounts are sold.
c. Selling expenses will increase each time accounts are sold.
d. The other expenses section of the income statement will increase each time accounts are sold.

LO: 9, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

205. Gipson Furniture factors $500,000 of receivables to Kwik Factors, Inc. Kwik Factors assesses a 3% service charge on the amount of receivables sold. Gipson Furniture factors its receivables regularly with Kwik Factors. What journal entry does Gipson make when factoring these receivables?
a. Cash 485,000
Loss on Sale of Receivables 15,000
Accounts Receivable 500,000
b. Cash 485,000
Accounts Receivable 485,000
c. Cash 500,000
Accounts Receivable 485,000
Gain on Sale of Receivables 15,000
d. Cash 485,000
Service Charge Expense 15,000
Accounts Receivable 500,000

LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

206. When customers make purchases with a national credit card, the retailer
a. is responsible for maintaining customer accounts.
b. is not involved in the collection process.
c. absorbs any losses from uncollectible accounts.
d. receives cash equal to the full price of the merchandise sold from the credit card company.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

207. On April 5 Donna’s Boutique accepted a Visa card for a $600 purchase. Visa charges a 2% service fee. The entry to record this transaction would include a
a. credit to Cash of $588.
b. debit to Cash of $600.
c. debit to Service Charge Expense of $12.
d. credit to Service Charge Expense of $12.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

208. Schofield Retailers accepted $60,000 of Silver Bank MasterCard credit card charges for merchandise sold on August 1. Silver Bank charges 4% for its credit card use. The entry to record this transaction by Schofield Retailers will include a credit to Sales Revenue of $60,000 and a debit(s) to
a. Cash for $57,600 and Service Charge Expense for $2,400.
b. Accounts receivable for $57,600 and Service Charge Expense for $2,400.
c. Cash for $60,000.
d. Accounts Receivable for $60,000.

LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

209. The retailer considers Visa and MasterCard sales as
a. cash sales.
b. promissory sales.
c. credit sales.
d. contingent sales.

LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

BRIEF EXERCISES
Be. 210
Presented below are various receivable transactions entered into by Renner Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet.
a. Advanced $1,000 to a trusted employee.
b. Accepted a $2,000 promissory note from a customer as payment on account.
c. Determined that a $10,000 income tax refund is due from the IRS.
d. Sold goods to a customer on account for $5,000.
e. Recorded $500 accrued interest on a note receivable due next year.
f. Loaned a company officer $4,000.

Be. 211
Finney had the following transactions during March 2012.

1. Finney sold and delivered $14,000 of merchandise to LJ Enterprises, terms 2/10, n30.
2. LJ Enterprises also ordered an additional $5,000 worth of goods on the last day of the month.
3. Finney lent $1,000 to its company president who promised to repay the loan on the 15th day of the next month.
4. Finney sold old storage sheds to Alt Traders on 3/31. Alt Traders gave a $2,500 promissory note to Finney agreeing to pay for the sheds in 3 months.
5. Other current assets totaled $50,000.

Finney received no cash arising from the above transactions during March. Based only on the above transactions, and ingnoring beginning balances, compute the percentage Accounts Receivable is of the total current assets as of month end.

Be. 212
The following are sales of The Holiday Store during February. The Store sells seasonal holiday items.

2/3 Sold 50 heart balloons for $5 cash each.
2/8 Sold 100 boxes of chocolates at $10 each, terms 2/10, n/30. Collected within the
discount period.
2/10 Sold 50 heart necklaces for $25 each with no discount. Have not collected as of month end.
2/14 Sold 100 bouquets of roses at $30 per bouquet. Half the sales were on account. By month end, 75% of the credit sales were collected.
2/27 Sold 20 leftover heart necklaces to a discount store for $15 each on credit.
2/28 Sold a display cabinet at a swap meet for $100 on account.

Determine the balance in Accounts Receivable at 2/28.

Be. 213
Prepare journal entries to record the following transactions entered into by the Castagno Company:

2014
Nov. 1 Sold merchandise on account to Mercer, Inc., for $18,000, terms 2/10, n/30.

Nov. 5 Mercer, Inc., returned merchandise worth $1,000.

Nov. 9 Received payment in full from Mercer, Inc.

Be. 214
Assuming that the allowance method is being used, prepare general journal entries without explanations to record the following transactions.

January 1 Sold merchandise to Mary Baden for $500 on account.
February 1 Received $300 from Baden.
July 1 Wrote off Baden’s account as uncollectible.
September 1 Unexpectedly received payment in full from Baden.

Be. 215
The ledger of the Ramirez Company at the end of the current year shows Accounts Receivable of $200,000.
Instructions
(a) If Allowance for Doubtful Accounts has a credit balance of $3,000 in the trial
(b) Be. 217
Strickman Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions:

January 5 Sold merchandise to Sue Land for $1,800, terms n/15.

April 15 Received $400 from Sue Land on account.

August 21 Wrote off as uncollectible the balance of the Sue Land account when she declared bankruptcy.

October 5 Unexpectedly received a check for $650 from Sue Land.

Be. 218

Compute the maturity value as indicated for each of the following notes receivable.

1. A $9,000, 6%, 3-month note dated July 20.

Maturity value $____________.

2. A $16,000, 9%, 150-day note dated August 5.

Maturity value $____________.

Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 218 (5 – 8 min.)
1. Maturity value: $9,135
$9,000  6%  3  12 = $135 + $9,000 = $9,135

2. Maturity value: $11,198
$16,000  9%  150  360 = $600 + $16,000 = $16,600

Be. 219
Determine the interest on the following notes:

(a) $5,000 at 6% for 90 days.
(b) $800 at 9% for 5 months.
(c) $6,000 at 8% for 60 days
(d) $1,600 at 7% for 6 months

Be. 220
Trent Distributors has the following transactions related to notes receivable during the last two months of the year.

Dec. 1 Loaned $16,000 cash to E. Kinder on a 1-year, 6% note.

16 Sold goods to J. Jones, receiving a $4,800, 60-day, 7% note.

31 Accrued interest revenue on all notes receivable.

Instructions
Journalize the transactions for Trent Distributors.

Be. 221
Merry Co. sells Christmas angels. Merry determines that at the end of December, they have the following aging schedule of Accounts Receivable:
Customer Total Number of Days Past Due
Not yet due 1–30 31–60 61–90 Over 90

K. Brant $500 $300 $200
D. Eaton 300 100 200
S Klein 150 50 100
C. Sheen 200 200
? 300 300 250 200 100
% uncollectible 1% 5% 10% 25% 50%
Total Estimated Uncollectible
Amounts ? ? ? ? ? ?

Compute the net receivables based on the above information at the end of December (There was no beginning balance in the Allowance for Doubtful Accounts).

Be. 222
The following data exists for Mather Company.

2014 2013
Accounts Receivable $ 80,000 $ 70,000
Net Sales 560,000 410,000

Calculate the accounts receivable turnover and the average collection period for accounts receivable in days for 2014.

7.5

Be. 223
Donaldson Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred.

Oct. 15 Sold $30,000 of accounts receivable to Fast Factors, Inc. who assesses a 3% finance charge.

25 Made sales of $900 on Visa credit cards. The credit card service charge is 2%.
Instructions
Journalize the transactions.

EXERCISES
Ex. 224
On January 10 Donna Stark uses her Baver Co. credit card to purchase merchandise from Baver Co. for $2,600. On February 10, she is billed for the amount due of $2,600. On February 12 Stark pays $1,600 on the balance due. On March 10 Stark is billed for the amount due, including interest at 1% per month on the unpaid balance as of February 12.

Instructions
Prepare the entries on Baver Co.’s books related to the transactions that occurred on January 10, February 12, and March 10.

Ex. 225
At the beginning of the current period, Emler Corp. had balances in Accounts Receivable of $200,000 and in Allowance for Doubtful Accounts of $9,000 (credit). During the period, it had net credit sales of $650,000 and collections of $590,000. It wrote off as uncollectible accounts receivable of $5,000. However, a $3,000 account previously written off as uncollectible was recovered before the end of the current period. Uncollectible accounts are estimated to total $20,000 at the end of the period.

Instructions
(a) Prepare the entries to record sales and collections during the period.
(b) Prepare the entry to record the write-off of uncollectible accounts during the period.
(c) Prepare the entries to record the recovery of the uncollectible account during the period.
(d) Prepare the entry to record bad debts expense for the period.
(e) Determine the ending balances in Accounts Receivable and Allowance for Doubtful Accounts.
(f) Calculate the net realizable value of the receivables at the end of the period.

Ex. 226
The December 31, 2013, balance sheet of the Kramer Company had Accounts Receivable of $650,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During 2014, the following transactions occurred: sales on account $1,550,000; sales returns and allowances, $100,000; collections from customers, $1,250,000; accounts written off, $35,000; previously written off accounts of $8,000 were collected.

Instructions
(a) Journalize the 2014 transactions.
(b) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 6% of accounts receivable, what is the adjusting entry at December 31, 2014?

Ex. 227
An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct.

Dec. 17 Cash 2,940
Sales Discounts 60
Accounts Receivable 3,000
(To record collection of 12/4 sales, terms 2/10, n/30)

27 Cash 1,200
Bad Debt Expense 1,200
(Collection of account previously written off as
uncollectible under allowance method)

31 Bad Debt Expense 1,800
Allowance for Doubtful Accounts 1,800
(To recognize estimated bad debts based on 3% of
accounts receivable of $600,000)

Instructions
Prepare the correcting entries.

Ex. 228
Prepare journal entries to record the following transactions entered into by the Merando Company:

2013
June 1 Received a $10,000, 6%, 1-year note from Dan Gore as full payment on his account.

Nov. 1 Sold merchandise on account to Barlow, Inc., for $14,000, terms 2/10, n/30.

Nov. 5 Barlow, Inc., returned merchandise worth $1,000.

Nov. 9 Received payment in full from Barlow, Inc.

Dec. 31 Accrued interest on Gore’s note.

2014
June 1 Dan Gore honored his promissory note by sending the face amount plus interest.

Ex. 229
The Garvey Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 6% of accounts receivable will eventually be uncollectible. Selected account balances at December 31, 2013, and December 31, 2014, appear below:

12/31/2013 12/31/2014
Net Credit Sales $400,000 $500,000
Accounts Receivable 80,000 100,000
Allowance for Doubtful Accounts 4,000 ?

Instructions
(a) Record the following events in 2014.
Aug. 10 Determined that the account of Kurt West for $900 is uncollectible.
Sept. 12 Determined that the account of Jill Lynch for $3,000 is uncollectible.
Oct. 10 Received a check for $300 as payment on account from Kurt West, whose account had previously been written off as uncollectible.

(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2014.

(c) What is the balance of Allowance for Doubtful Accounts at December 31, 2014?

Ex. 230
Erickson Company had a $300 credit balance in Allowance for Doubtful Accounts at December 31, 2014, before the current year’s provision for uncollectible accounts. An aging of the accounts receivable revealed the following:
Estimated Percentage
Uncollectible
Current Accounts $170,000 1%
1–30 days past due 15,000 3%
31–60 days past due 12,000 6%
61–90 days past due 5,000 15%
Over 90 days past due 9,000 30%
Total Accounts Receivable $211,000
Instructions
(a) Prepare the adjusting entry on December 31, 2014, to recognize bad debts expense.
(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $300 debit balance before the current year’s provision for uncollectible accounts. Prepare the adjusting entry for the current year’s provision for uncollectible accounts.

Ex. 231
On December 31, 2013, when its Allowance for Doubtful Accounts had a credit balance of $1,500, Leeds Company estimates that 6% of its accounts receivable balance of $95,000 will become uncollectible. On March 3, 2014, Leeds Company determined that Megan Jost’s account of $950 was uncollectible. On May 15, 2014, Jost paid the amount previously written off.
Instructions
Prepare the journal entries for December 31, 2013, March 3, 2014 and May 15, 2014.

Ex. 232
The percentage of receivables approach to estimating bad debts expense is used by Hayes Company. On February 28, the firm had accounts receivable in the amount of $585,000 and Allowance for Doubtful Accounts had a credit balance of $370 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts would amount to 5% of accounts receivable. On March 10, an accounts receivable from Mark Dole for $2,100 was determined to be uncollectible and written off. However, on March 31, Dole received an inheritance and immediately paid his past due account in full.

(a) Prepare the journal entries made by Hayes Company on the following dates:
1. February 28
2. March 10
3. March 31

(b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31.

Ex. 233
Hess Computer Store has credit sales of $450,000 in 2013 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2013, $130,000 of accounts receivable remain uncollected. The credit manager of Hess prepared an aging schedule of accounts receivable and estimates that $7,800 will prove to be uncollectible.

On March 4, 2014 the credit manager authorizes a write-off of the $1,000 balance owed by A. Myers.
Instructions
(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2013.
(b) Show the balance sheet presentation of accounts receivable on December 31, 2013.
(c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $145,000 and the balance of Allowance for Doubtful Accounts is a credit of $5,000. Make the appropriate entry to record the write off of the Myers account. Also show the balance sheet presentation of accounts receivable before and after the write-off.

Ex. 234
Hachey Company has accounts receivable of $95,100 at March 31, 2014. An analysis of the accounts shows these amounts.

Balance, March 31
Month of Sale 2014 2013
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100
$95,100 $86,500

Credit terms are 2/10, n/30. At March 31, 2014, there is a $2,500 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company’s estimates of bad debts are as shown below
Estimated Percentage
Age of Accounts Uncollectible
Current 2%
1–30 days past due 7
31–90 days past due 25
Over 90 days past due 50

Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31, 2014, to record bad debts expense.

Ex. 235
Compute the missing amount for each of the following notes:

Principal Annual Interest Rate Time Total Interest

(a) $50,000 5% 2.5 years ?

(b) $120,000 ? 9 months $7,200

(c) ? 9% 90 days $1,350

(d) $60,000 6% ? $1,200

Ex. 236
Record the following transactions in general journal form for the Newell Company.

July 1 Received a $9,000, 8%, 3-month note, dated July 1, from Lois Patton in payment of her open account.

Oct. 1 Received notification from Lois Patton that she was unable to honor her note at this time. It is expected that Patton will pay at a later date.

Nov. 15 Received full payment from Lois Patton for note receivable previously dishonored.

Ex. 237
Grey Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Grey Boat Company.

Feb. 12 Accepted a $35,000, 6%, 60-day note from Bill Bazil for a 19-foot motorboat built to his specifications.

April 14 Received notification from Bill Bazil that he was unable to honor his promissory note but that he expects to pay the amount owed in May.

May 26 Received a check from Bill Bazil for the total amount owed.

June 10 Received notification by the bank that Bill Bazil’s check was being returned “NSF” and that Mr. Bazil had declared personal bankruptcy.

Ex. 238
Compute the maturity value as indicated for each of the following notes receivable.

1. An $8,000, 6%, 3-month note dated April 20.

Maturity value $____________.

2. A $20,000, 9%, 72-day note dated March 5.

Maturity value $____________.

3. A $12,000, 5%, 30-day note dated September 10.

Maturity value $____________.

4. A $9,000, 7%, 6-month note dated November 15.

Maturity value $____________.

Ex. 239
Great Plains Supply Co. has the following transactions related to notes receivable during the last 2 months of the year.

Nov. 1 Loaned $75,000 cash to B. Benson on a 1-year, 8% note.
Dec. 11 Sold goods to Roswell, Inc., receiving a $9,000, 90-day, 7% note.
16 Received a $20,000, 6-month, 9% note to settle an open account from M. Ling.
31 Accrued interest revenue on all notes receivable.

Instructions
Journalize the transactions for Great Plains Supply Co.

Ex. 240
These transaction took place for Sanders Co.

2013
May 1 Received a $15,000, 1-year, 9% note in exchange for an outstanding account receivable from T. Foley.
Dec. 31 Accrued interest revenue on the T. Foley note.
2014
May 1 Received principal plus interest on the T. Foley note. (No interest has been accrued since December 31, 2013.)

Instructions
Record the transactions in general journal.

Ex. 241
Presented here is basic financial information (in millions) from the annual reports of Nike and Adidas.

Nike Adidas
Sales $18,627 $10,299
Allowance for doubtful accounts, Jan. 1 71.5 112
Allowance for doubtful accounts, Dec. 31 78.4 111
Accounts receivable balance (gross), Jan 1 2,566.2 1,527
Accounts receivable balance (gross), Dec. 31 2,873.7 1,570

Instructions
Calculate the accounts receivable turnover and average collection period for both companies. Comment on the difference in their collection experiences.

Ex. 242
The following information is available from the annual reports of Nite and Day Companies.
(In millions)
Nite Day
Sales $112,500 $32,000
Beginning receivables, net 19,000 3,500
Ending receivables, net 18,500 4,400
Instructions
(a) Based on the preceding information, compute the following for each company:
1. Accounts receivable turnover. (Assume all sales were credit sales.)
2. Average collection period.
(b) What conclusion concerning the management of accounts receivable can be drawn from these data?

Ex. 243
Shafer Company has the following accounts in its general ledger at July 31: Accounts Receivable $49,000 and Allowance for Doubtful Accounts $3,400. During August, the following transactions occurred.

Aug. 15 Sold $30,000 of accounts receivable to More Factors, Inc. who assesses a 2% finance charge.

25 Made sales of $2,500 on Visa credit cards. The credit card service charge is 3%.

28 Made sales of $4,000 on Shafer credit cards.
Instructions
(a) Journalize the transactions.
(b) Indicate the statement presentation of service charges.

COMPLETION STATEMENTS
244. Notes and accounts receivable that result from sales transactions are often called ______________ receivables.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

245. Two accounting problems associated with accounts receivable are (1) ______________ and (2) ______________ accounts receivable.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

246. The net amount expected to be collected in cash from receivables is the _____________.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

247. When credit sales are made, _________________ Expense is considered a normal and necessary risk of doing business on a credit basis.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

248. The two methods used in accounting for uncollectible accounts are the ____________ method and the ______________ method.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

249. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the balance sheet.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

250. When the allowance method is used to account for uncollectible accounts, ____________ is debited when an account is determined to be uncollectible.

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

251. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value.

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

252. A 75-day note receivable dated July 5 would mature on ______________.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

253. Collection of a note receivable will result in a credit to ______________ for the face value of the note and a credit to ______________.

Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

254. A note that is not paid on the maturity date is said to be ______________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

255. A concentration of ______________ is a threat of nonpayment from a single customer or class of customers.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

256. The ratio used to assess the liquidity of accounts receivable is the ______________.

Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

257. A finance company or bank that purchases receivables from businesses is known as a ______________.

Ans: N/A, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

MATCHING
258. Match the items below by entering the appropriate code letter in the space provided.

A. Aging the accounts receivable F. Percentage of receivables basis
B. Direct write-off method G. Promissory note
C. Obligation due H. Dishonored note
D. Trade receivables I. Cash net realizable value
E. Accounts receivable turnover J. Credit card sales

1. A written promise to pay a specified amount on demand or at a definite time.
2. Sales that involve the customer, the retailer, and the credit card issuer.
3. A measure of the liquidity of receivables.
4. Notes and accounts receivable that result from sales transactions.
5. A note which is not paid in full at maturity.
6. Analysis of customer account balances by length of time they have been unpaid.
7. Emphasizes expected cash realizable value of accounts receivable.
8. Bad debt losses are not estimated and no allowance account is used.
9. The net amount expected to be received in cash.

SHORT-ANSWER ESSAY QUESTIONS
S-A E 259
a. List the characteristics of promissory notes.
b. List the reasons for obtaining promissory notes from customers.
c. What action relating to promissory notes must be taken at the end of the accounting period?

S-A E 260
Two methods can be used in accounting for uncollectible accounts. Identify and contrast the two methods. How do the methods differ regarding the time periods in which Bad Debt Expense is recognized?

S-A E 261
Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable.

S-A E 262
Jenkins Company dishonors a note at maturity. What are the options available to the lender?

S-A E 263
An article in the Wall Street Journal indicated that companies are selling receivables at a record rate. Why do companies sell their receivables?

S-A E 264
Your friend Mark has opened an office supply store. He will extend open credit to local businesses and is concerned about potential bad debts. What can Mark do to reduce potential bad debts?

S-A E 265
Company
Name Net Credit
Sales Beginning
Net Receivables Ending
Net Receivables
Brown $180,000 $ 5,000 $30,000
Pink $400,000 $52,000 $42,000
Yellow $ 75,000 $ 5,400 $ 5,800
(a) Which company is doing the best job of managing its accounts receivable? Why? Be sure to support your answer with computations.
(b) What are your concerns about these companies?

S-A E 266
Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees.

S-A E 267
Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards (e.g., Visa or MasterCard).

S-A E 268 (Ethics)
Two Brothers, a small book publishing company, wrote off the debt of The Learning Place, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Two Brothers simply stopped sending bills. Nearly a year later, The Learning Place was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Two Brothers, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational.

Required:
Did Two Brothers act ethically in reinstating the debt of one client, and not the other? Explain.

S-A E 269 (Communication)
Schmidt Company received a letter from Deborah Stine, a customer. Deborah had purchased $325 worth of clothing from Schmidt on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Schmidt. Her total debt presently, with interest and late fees, is $251.13.

Deborah sent a letter to Schmidt in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Schmidt certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn’t want to be embarrassed by bill collectors, either. She especially didn’t want her parents to find out that she had not paid her debts. Having Schmidt write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Schmidt were among the best she had ever owned, and that she “told everybody” that Schmidt was definitely the best place to get clothes.

S-A E 269 (Cont.)

Required:
You are the accounting manager for Schmidt. Write a short letter to Deborah explaining why her debt cannot be written off.

IFRS QUESTIONS
1. Which receivables accounting and reporting issue is not essentially the same for IFRS and GAAP?
a. The use of allowance accounts and the allowance method.
b. How to record discounts.
c. How to record factoring.
d. All of these answer choices are essentially the same for IFRS and GAAP.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

2. Which receivables accounting and reporting issue is essentially the same for IFRS and GAAP?
a. The use of allowance accounts and the allowance method.
b. How to record discounts.
c. How to record factoring.
d. All of these answer choices are essentially the same for IFRS and GAAP.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

3. IFRS requires loans and receivables to be recorded at
a. amortized cost.
b. amortized cost, adjusted for allowances for doubtful accounts.
c. unamortized cost.
d. unamortized cost, adjusted for allowances for doubtful accounts.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

4. IFRS sometimes refers to allowances as
a. revenues.
b. discounts.
c. provisions.
d. reserves.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

5. IFRS
a. implies that receivables with different characteristics should be reported separately.
b. requires that receivables with different characteristics should be reported separately.
c. implies that receivables with different characteristics should be reported as one unsegregated amount.
d. requires that receivables with different characteristics should be reported as one unsegregated amount.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

6. Which board(s) has(have) worked to implement fair value measurement for financial instruments?
a. FASB, but not IASB.
b. IASB, but not FASB.
c. both FASB and IASB.
d. neither FASB nor IASB.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

7. Which board(s) has(have) faced bitter opposition when working to implement fair value measurement for financial instruments?
a. FASB, but not IASB.
b. IASB, but not FASB.
c. Both FASB and IASB.
d. Neither FASB nor IASB.

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

8. Which is part of IFRS accounting for financial instruments?
Disclosure of fair value information Optional recording of some financial
for receivables in the notes instruments at fair value
a. Yes Yes
b. Yes No
c. No Yes
d. No No

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

9. Which requires a two-tiered approach to test whether the value of loans and receivables are impaired?
GAAP IFRS
a. yes no
b. yes yes
c. no no
d. no yes

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

10. What criteria are used to determine how to record a factoring transaction?
GAAP IFRS
a. risks and rewards, and loss of control risks and rewards, and loss of control
b. risks and rewards, and loss of control loss of control
c. loss of control loss of control
d. loss of control risks and rewards, and loss of control

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

11. Which permits partial derecognition of receivables?
GAAP IFRS
a. yes no
b. yes yes
c. no no
d. no yes

LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics