Cost of goods sold = Beginning inventory + Purchases – Ending inventory
You are pleasantly surprised to discover that a popular actress appears on The Tonight
Show wearing your company’s jeans. Later, your company’s sales increase by $500,000
as a result. When the actress appeared on TV, you would have recorded an asset because
the TV appearance was expected to bring future economic benefits to your company.
You paid $10,000 to buy 1% of the stock in a corporation that is now bankrupt. The
company owes $10 million dollars to its creditors. As a result of the bankruptcy, you are
responsible for paying $100,000 (or $10 million x 1%) of the amount owed to the
creditors.
If a contra account of $20,000 is mistakenly included in the same column of the trial
balance as the account it offsets, the error will cause the debit and credit column totals
to differ by $40,000.
A lower of cost or market write-down would be recorded with a debit to Inventory
Expense.
If the total of debits equals the total of credits on the trial balance, it means that the
accounting records do not contain any errors.
When preparing the operating activities section of the statement of cash flows using the
direct method, net income must be adjusted for gains or losses realized when property,
plant, and equipment is sold.
When a company routinely sells on credit, it is inevitable that some of its customers
will not pay the amount owed.
The aging of accounts receivable method is based upon the principle that the longer an
account is overdue, the higher the risk of nonpayment.
If a company decides to record an expenditure made this period as an expense, when it
should have been recorded as an asset, net income will be overstated in the current
period as a result.
When a periodic inventory system is in use, an entry is made at year-end to transfer
beginning inventory and net purchases to cost of goods sold.
Ending inventory = Beginning inventory + Purchases + Cost of goods sold
Under the indirect method, changes in current assets are used in determining cash flows
from operating activities and changes in current liabilities are used in determining cash
flows from financing activities.
The direct write-off method for uncollectible accounts is not allowed by GAAP because
it overstates the net realizable value of accounts receivable and violates the expense
recognition principle.
The reporting of financing activities is identical under the indirect and direct methods
for the statement of cash flows on the statement of cash flows.
Explain whether the following items should be included in the inventory of Simpson
Company.
Item a. Goods sold FOB shipping point by Simpson are in transit to its customer.
Item b. Goods sold FOB destination by Simpson are in transit to its customer.
On a common size income statement for this year, what is the percentage that would be
shown next to the dollar amount of cost of goods sold?
A) 76%
B) 24%
C) 31%
D) 18%
Use the information above to answer the following question. What is the adjusted
balance in the Accumulated Depreciation account at the end of 2017?
A) $3,200
B) $4,800
C) $9,600
D) $12,800
Which one of the following statements regarding sales discounts is correct?
A) If a company offers a discount to encourage prompt payment and the discount is
taken, the discount reduces the amount of net sales.
B) Credit terms of “2/10, n/30” mean that if payment is made in two days, a 10%
discount may be taken; if not paid within two days, the full invoice price will be due in
thirty days.
C) The terms ‘sales discounts” and ‘sales credits” are used interchangeably by a
company.
D) The Sales Discounts account is an expense account.
Which of the following statements is correct?
A) Depreciation allocates the cost of tangible assets over their useful lives.
B) Depreciation allocates the cost of intangible assets over their useful lives.
C) Amortization allocates the cost of tangible assets over their useful lives.
D) The term “depreciation” relates to all long-lived assets whereas “amortization”
relates only to intangible assets.
At the beginning of 2015, your company buys a $30,000 piece of equipment that it
expects to use for 4 years. The equipment has an estimated residual value of $2,000.
The company expects to produce a total of 200,000 units. Actual production is as
follows: 44,000 units in 2015, 53,000 units in 2016, 51,000 units in 2017, and 52,000
units in 2018.
Required:
Part a. Determine the depreciable cost.
Part b. Calculate the depreciation expense per year under the straight-line method.
Part c. Use the straight-line method to prepare a depreciation schedule (that shows the
Depreciation Expense, Accumulated Depreciation, and Net Book Value by year).
Part d. Calculate the depreciation rate per unit under the units-of-production method.
Part e. Use the units-of-production method to prepare a depreciation schedule (that
shows the Depreciation Expense, Accumulated Depreciation, and Net Book Value by
year).
Each account is assigned a number; this listing of all accounts is called a:
A) trial balance.
B) journal.
C) ledger.
D) chart of accounts.
Which of the following statements about the statement of cash flows is not correct?
A) It does not replace the income statement.
B) It provides details as to how cash changed during a period.
C) It provides information about cash receipts and cash payments over a period of time.
D) It measures profitability.
Equipment with a cost of $80,000 and accumulated depreciation of $75,000 is sold for
$12,000 cash.
Required:
Part a. Prepare the journal entry to record this transaction.
Part b. Explain how this transaction would be reported on the statement of cash flows
prepared using the indirect method.
Typically, a profitable company that pays relatively high dividends:
A) is an attractive investment for those seeking a steady income, like retired people.
B) will reinvest more profit which can lead to smaller growth potential.
C) will experience more growth in stock price over time.
D) is a bad investment.
Grossing Inc. receives $10,000 in advance this month for work to be performed next
month. This month, the company should record a journal entry that includes a debit to:
A) Cash and a credit to Service Revenue for $10,000.
B) Cash and a credit to Unearned Revenue for $10,000.
C) Cash and a credit to Accounts Receivable for $10,000.
D) Prepaid Services and a credit to Cash for $10,000.
For each of the independent cases below, identify and describe the principle of internal
control that is violated and recommend what should be done to remedy the violation.
Identify at least five reasons why the company’s records might differ from the bank’s
records. Describe the purpose of a bank reconciliation and discuss why it is a key
control.
Use the following Year 3 data to prepare the annual income statement for Kvass, Inc.
The following activities took place during the month of November at a corporation that
operates a clothing store.
1) Salaries and wages in the amount of $33,000 are paid to employees.
2) On the last day of November, the company acquires equipment on account of
$55,000.
3) Payment of $375 made on account to a consulting firm for services received from
that firm during October.
4) Payment of $12,000 made at the beginning of November for six months of rent; the
period covered by the payment begins in November.
5) Utility bills in the amount of $125 arrive in the mail; the bills will not be paid until
December.
Required:
For each activity, indicate the amount of expense that would be recorded in November.
Identify the purpose of a voucher system and describe a voucher.
On January 1, 2016, a company issues 3-year bonds with a face value of $200,000 and a
stated interest rate of 8%. Because the market interest rate is lower than the stated
interest rate, the company receives $209,000 for the bond.
Required:
Fill in the table assuming the company uses the straight-line bond amortization.
Match each account name with the category that it would be included under in
classified balance sheet.
ACCOUNT
______ (1) Equipment
______ (2) Common Stock
______ (3) Supplies
______ (4) Retained Earnings
______ (5) Accounts Receivable
______ (6) Accounts Payable
CATEGORY
CA – Current Asset
NCA – Noncurrent Asset
CL – Current Liability
NCL – Noncurrent Liability
SE – Stockholders’ Equity