If the Retained Earnings account is debited for $4,000 in the closing process, the
company had a net income of $4,000.
A merchandising company’s operating cycle begins with the sale of inventory and ends
with the cash collection from sales.
Internal controls include the policies and procedures a company implements to promote
efficient and effective operations, protect assets, enhance accounting information, and
adhere to laws and regulations.
The Sarbanes-Oxley Act (SOX) requires external auditors to test the company’s internal
control system.
The debt-to-assets ratio indicates financing risk by computing the proportion of total
assets financed by debt.
The incentive element of the fraud triangle includes reasons why top management may
commit fraud such as enhancing job security and obtaining bigger paychecks.
When a company issues bonds that include no periodic interest payments, the bonds are
referred to as “zero-coupon” bonds.
The period of time from buying goods and services to collecting cash from customers is
the accounting cycle.
The entry to record a bond retirement at maturity usually involves no gain or loss.
One of the purposes of the closing entries is to bring the balances in all asset, liability,
revenue, and expense accounts down to zero to start the next accounting period.
Accounts increase on the same side as they appear in the accounting equation: A = L +
SE.
If the likelihood of a loss is reasonably possible, a contingent liability is recorded by
making an appropriate journal entry.
On January 1, Kirk Corporation had total assets of $850,000. During the month, the
following activities occurred:
– Kirk Corporation acquired equipment costing $6,000, promising to pay cash for it in
60 days.
– Kirk Corporation purchased $3,500 of supplies for cash.
– Kirk Corporation sold land which it had acquired 2 years ago. The land had cost
$15,000 and it was sold for $15,000 cash.
– Kirk Corporation signed an agreement to rent additional storage space next month at a
charge of $1,000 per month.
What is the amount of total assets of Kirk Corporation at the end of the month?
A) $859,500.
B) $856,000.
C) $837,500.
D) $840,000.
At the end of last year, the company’s assets totaled $860,000 and its liabilities totaled
$740,000. During the current year, the company’s total assets increased by $58,000 and
its total liabilities increased by $24,000. At the end of the current year, stockholders’
equity was:
A) $154,000.
B) $120,000.
C) $34,000.
D) $178,000.
Cash equivalents would include:
A) a 30-day bank certificate of deposit.
B) the amount in the petty cash fund.
C) a 6-month U.S. treasury bill.
D) the balance in the company’s savings account.
A corporation had 50,000 shares of $20 par value common stock outstanding. The
board of directors declared and issued a 50% stock dividend. The market value of the
stock was $27 per share. What is the journal entry to record this stock dividend?
A) Debit Retained Earnings and credit Common Stock for $675,000
B) Debit Retained Earnings and credit Common Stock for $500,000
C) Debit Retained Earnings and credit Cash for $675,000
D) No entry is made to record the stock dividend.
Which of the following analysis techniques does notpertain to changes over time?
A) Trend analysis
B) Horizontal analysis
C) Time-series analysis
D) Vertical analysis
Cash flows from (used in) investing activities includes amounts:
A) received from a company’s stockholders for the sale of stock.
B) received from the sale of the company’s office building.
C) paid for dividends to the company’s stockholders.
D) paid for salaries of employees.
A contingent liability is:
A) always a specific amount.
B) an obligation arising from the purchase of goods or services on credit.
C) an obligation not requiring a future payment.
D) a potential obligation that depends on a future event.
Which of the following statements about the issuance of bonds at a discount is not
correct?
A) The contra liability account, Discount on Bonds Payable, is amortized each year by
shifting part of its balance to interest expense.
B) As the current date approaches the maturity date, the carrying value of the bond
approaches the face value of the bond.
C) At the date of issuance, the market interest rate was higher than the stated interest
rate.
D) The account used to record the discount is a normal credit balance account.
On October 1, Robertson Company sold inventory in the amount of $5,800 to Alberta,
Inc. with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses
a periodic inventory system. Alberta pays the invoice on October 8 and takes the
appropriate discount. What journal entry will be recorded by Robertson on October 8?
A) Debit Cash and credit Accounts Receivable for $5,800
B) Debit Cash and credit Accounts Receivable for $4,000
C) Debit Cash for $3,920, debit Sales Discounts for $80, and credit Accounts
Receivable for $4,000
D) Debit Cash for $5,684, debit Sales Discounts for $116, and credit Accounts
Receivable for $5,800
Which of the following statements regarding sales returns and allowances is correct?
A) Recording sales returns and allowances in a separate account is an important internal
control that allows management to evaluate the volume of returns and allowances as a
potential indicator of the quality of their products.
B) The Sales Returns & Allowances account balance should be added to the Sales
account balance when computing net sales.
C) The Sales Returns & Allowances account is an example of a contra-asset account.
D) Recording a sales allowance requires two entries.
A company using a perpetual inventory system made the following entry: Debit
Accounts Payable for $3,000, credit Inventory for $60, and credit Cash for $2,940.
What does this entry reflect?
A) A purchase of inventory at a discount.
B) A return of inventory for credit.
C) A sale of inventory on account.
D) A payment within the discount period for inventory previously purchased on credit.
Consider the scenarios listed in the table below.
Required:
For each scenario below, indicate related impact on revenues, expenses, and net income
in the current period by answering increase, decrease, or no effect.
Scenario Revenue Expenses Net Income
a. A customer makes a payment on account.
b. A company uses the aging of accounts receivable method to estimate Bad Debt
Expense in an adjusting entry.
c. A company that uses the allowance method writes off 10% more in uncollectible
accounts than expected.
d. A company recovers an account previously written off.
e. A company receives a note from a customer to settle an unpaid accounts receivable
owed by that customer.
f. Interest accrues on notes receivable but payment has not yet been made.
g. A company collects the interest due on a note at maturity.
The costs assigned to the individual assets acquired in a basket purchase are based on
their relative:
A) historical costs.
B) market values.
C) book values.
D) depreciable costs.
The Perry Company reported Accounts Receivable, Net of $66,600 at the beginning of
the year and $72,600 at the end of the year If the company’s net sales revenue during
the fourth year was $876,000, what are the days to collect during year? (Round all
calculations to one decimal place.)
A) 12.6
B) 29.0
C) 8.0
D) 34.0
On December 1, 2015, a company lends a new employee $20,000 to assist with her
relocation expenses. The employee signs a 6-month note, with interest of 9%. The
company prepares year-end financial statements at December 31. What is the required
adjusting entry at December 31 as a result of this note transaction?
A) Debit Interest Revenue and credit Interest Receivable for $900
B) Debit Interest Receivable and credit Interest Revenue for $900
C) Debit Interest Revenue and credit Interest Receivable for $150
D) Debit Interest Receivable and credit Interest Revenue for $150
The following activities took place during the month of July at a corporation that earns
service revenue as a law firm.
1) The law firm completes legal work relating to a real estate transaction and is paid
$5,500 when the papers are signed.
2) Legal work in the amount of $26,000 is performed on account for customers.
3) A customer makes a payment of $2,500 on account for legal services that were
performed last month.
4) A new client calls to request assistance in filing the documents for a patent; a fee of
$3,000 is paid and the parties agree that the work will commence next month.
5) A client pays a retainer (deposit) of $15,000 for legal work; one-third of the work is
performed in the current month and the remainder will be provided over the next two
months.
6) The law firm borrows $10,000 from a local bank.
Required:
For each activity, indicate the amount of revenue that would be recorded in July.
Axle Inc. purchases inventory from Nutria Company and then Axle sells it to Chang
Company. Inventory is in transit on the last day of the year. Indicate who owns the
inventory by placing an “X” in the proper column for each item that is described.
Greenies Inc. updates its inventory periodically. The company’s cost of goods sold was
$24,700 and purchases were $12,000 during the year. The company’s ending inventory
count was $3,500.
Required:
Determine the amount of beginning inventory.
Consider the following information:
Required:
Use the indirect method to compute the amount of net cash flows provided by (used in)
operating activities.
Friedman Company made the following purchases during the year:
On December 31, there were 28 units in ending inventory. These 28 units consisted of 1
from the January 10 purchase, 2 from the March 15 purchase, 5 from the April 25
purchase, 15 from the July 30 purchase, and 5 from the October 10 purchase. Using
specific identification, calculate the cost of the ending inventory.
Each December 31, Davis Company prepares an aging analysis of its accounts
receivable to determine the amount of its adjustment for bad debts. At the end of the
current year, management estimated that $16,900 of the accounts receivable balances
would be uncollectible. The Allowance for Doubtful Accounts account had a debit
balance of $3,200 before any year-end adjustment for bad debts.
Required:
Prepare the adjusting journal entry that Davis Company should make on December 31
of the current year to estimate Bad Debt Expense.
Indicate whether the Inventory account is debited (Dr), credited (Cr), or neither (N)
when using a perpetual inventory system to record each of the following transactions:
1) _____ The company purchases $3,000 of goods intending to sell them to customers.
2) _____ The company returns $200 of damaged goods to the supplier.
3) _____ The company pays a shipping firm $685 to ship an order of goods from the
supplier to the company.
4) _____ The company receives a purchase discount for prompt payment to a supplier.
5) _____ Customers return $550 of goods in excellent condition to the company.
6) _____ The company sells $4,600 of goods to consumers.
7) _____ The company purchases $1,600 of supplies intending to use them internally.
9) _____ The company does a physical count and finds three items missing due to
shrinkage.
Choose the appropriate letter to match the account balance change with the type of
adjustment made to net income when using the indirect method to determine net cash
flow provided by operating activities.
Account Balance Change
1) _____ Decrease in Property, Plant, and Equipment
2) _____ Increase in Accounts Receivable
3) _____ Decrease in Inventory
4) _____ Decrease in Prepaid Expenses
5) _____ Increase in Accounts Payable
6) _____ Decrease in Accrued Liabilities
7) _____ Decrease in Income Tax Payable
8) _____ Increase in Dividends Payable
9) _____ Gain on Sales of Property, Plant and Equipment
10) _____ Depreciation
Type of Adjustment
A – Add item to net income
S – Subtract item from net income
N – No adjustment necessary