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107 Cards in this Set

  • Front
  • Back
Revenues from a sale on account should be recorded at the date of sale rather than the date of cash collections from the customer when applying the matching principle.
False. The revenue recognition principle governs the timing of revenues. The matching principle governs the timing of expenses.
Assuming that all customer returns of merchandise are honored with a full cash reimbursement or full credit on account, a customer return of unused and resalable merchandise previously sold at a profit will reduce the merchandiser's net income by
the amount of the gross margin earned on the original sale of the merchandise
Assume a $1,000 sale is made on account to a customer with terms of 2/10,n/30 and is subsequently collected net of the discount within ten days of the sale. If the receivable had been originally recorded at the gross sales amount of $1,000, the journal entry to record the cash collection would include a debit to
Sales Discounts for $20.
Sales Returns and Allowances is a contra-revenue account and is a nominal account that typically has a debit balance before closing entries at the end of an accounting period.
True
Assume uncollectible accounts receivable are estimated at 5% of a $100,000 ending balance of accounts receivable and the allowance for uncollectible accounts receivable before any year-end adjustment amounted to a $1,500 debit balance. Given this information, determine the net realizable value of accounts receivable that should be reflected on the balance sheet at the end of the year.
$95,000
An overstatement of Bad Debt Expense in a particular year is typically corrected by
understating the expense in the following year.
Under GAAP, the expense associated with the uncollectibility of an account receivable is supposed to be recorded in the period in which the specific receivable is determined to be uncollectible and is written off.
False
As a merchandiser, would it affect your profits if a customer paid with a VISA credit card rather than with cash?
Yes
After the recording of adjusting entries at the end of the year the Allowance for Uncollectible Accounts Receivable may have a debit balance.
False. The Allowance for Uncollectible Accounts Receivable account is a contra-asset account designed to reduce the asset Accounts Receivable for that portion of receivables estimated to be uncollectible. Because its purpose is to reduce an asset it must have a credit balance at the end of an accounting.
A key characteristic of a perpetual inventory system is that cost of goods sold is NOT recorded at the time of an inventory sale.
False
If a company chooses a LIFO inventory cost flow method for financial reporting purposes, it must also use LIFO for the company's income tax reporting.
True
XYZ Corp. purchased inventory on account for $1,000 with terms of 2/10, n/30. Using perpetual inventory accounting, XYZ's journal entry to record payment within ten days, net of the discount, would include a credit for the $20 discount to
Inventory
Which of the following inventory cost flow methods would be most appropriate for Joe's Unique Antiques Furniture Store?
Specific Identification
In a period in which the cost of inventory purchases is increasing (inflation), which of the following inventory cost flow methods will yield the highest amount of cost of goods sold assuming there is a balance of inventory at the end of the period?
LIFO
A physical inventory refers to
A physical inventory refers to the performance of an actual count of inventory. In a perpetual inventory accounting system this must be done periodically to verify the accuracy of perpetual accounting records. If a difference exists, the accounting records must be adjusted to comply with the actual physical count.
In a period of declining costs in the per unit costs of inventory purchases (deflation), which inventory cost flow method will produce the highest net income assuming there is a balance of inventory at the end of the period?
LIFO
FIFO is
an inventory cost flow method used in the determination of cost of goods sold.
The implementation of internal controls for a business is the responsibility of
The company's management
Operating income or loss is equal to net sales revenues less cost of goods sold and operating expenses.
True
State sales taxes collected from customers should be accounted for as revenue.
False
Employer Payroll Tax Expense is equal to the amount of tax withholdings from employees' payroll checks plus any additional employer payroll taxes.
This statement is false. Employees' tax witholdings are the employees' taxes on their gross salary or wage. These withholdings are not a tax on the employer. The employer is merely withholding and remitting the employees' taxes on behalf of the employees. The cost of these withholding taxes are therefore included in and accounted for as part of the Salary or Wage Expense of the business. Employer's Payroll Tax Expense is limited to the amount of the employer's FICA contribution, plus payments of federal unemployment insurance and in some cases state unemployment insurance. These are taxes placed upon an employer for simple right to be an employer.
Internal controls are policies and procedures designed to
both safeguard a company's assets and ensure the accuracy of its accounting records.
Capitalized costs are costs that are accounted for as an asset or included in the costs of an asset.
True
Accumulated depreciation is a contra-asset account that typically has a credit balance at the end of an accounting period.
True
Costs incurred in installing manufacturing equipment should be included as part of the cost of the asset (Equipment) rather than as an expense when incurred.
True
Assuming a truck purchased for $50,000 on 7/1/X4 has an estimated useful life of ten years and an estimated salvage value at the end of those ten years equal to $5,000, calculate the amount of accumulated depreciation on the truck at 12/31/X5 under straight-line depreciation.
$6,750
The allocation of a coal mine's purchase price to expense over its productive life is referred to as amortization expense.
False
Normal recurring equipment repairs and maintenance costs are to be
Expensed as incurred
Goodwill is to be recorded as an asset on the balance sheet of a company when the fair market value of its assets exceed the book value of its assets.
False
A mortgage note payable typically reflects an obligation in which real estate is pledged as collateral.
True
With each monthly payment on a fully amortizing mortgage note payable the portion of the payment representing interest expense
decreases
XYZ Corp. borrowed $200,000 on 4/1/X3 executing a note bearing interest at an annual rate of 10% with all principal and interest due at maturity on 4/1/X4. An adjusting entry at 12/31/X3 to record 20X3 interest on the note would include a debit to Interest Expense for
$15,000
On 1/1/X1, XYZ Corp. borrowed $500,000 under a 30 year fully amortizing mortgage note payable bearing annual interest at a fixed rate of 8% compounding monthly. If the monthly payment under the note is $3,668.83 is to be made on the 1st of each month beginning on 2/1/X1, the amount of interest expense to be recorded with the second payment on 3/1/X1 would be (round to the nearest cent.)
$3,331.10
Monthly payments on an amortizing mortgage note payable typically build equity in real estate in an amount equal to
the principal portion of the payment
A bond that is unsecured is referred to as
a debenture
Assuming there are no declared and unpaid dividends in the current year, dividends in arrears on preferred stock will not be reflected as a liability on a company's balance sheet because a company's board of directors is never obligated to declare dividends.
True
In most cases, the amount of contributed capital at par value for common stock is greater than the amount of any paid in capital in excess of par on that common stock.
False
The issuance of preferred stock is a form of
equity financing
Assuming 10,000 shares of 10%, $50 par value, cumulative preferred stock is outstanding at a time when a $500,000 dividend is declared by a company's board of directors., how much of that dividend will be paid to preferred shareholders if there are $25,000 of dividends in arrears? Assume that no other dividends have been declared or paid during the year
$75,000
Methods of financial analysis and the calculation of financial ratios are governed by GAAP.
False
An increase in accounts receivable turnover means that the number of days sales in accounts receivable decreased.
This is a true statement. The higher the turnover, the shorter the period it takes on average to collect accounts receivable.
The debt to equity ratio is used to measure a company's
leverage
How is Operating Income different from Gross Margin and Net Income?
Operating income is greater than net income, but less than Gross Margin
What kind of account is the Allowance for Uncollectible A/R, real or nominal?
Uncollectible A/R is a real account. It’s a contra-asset account on the balance sheet, tied to A/R.
Will the Allowance account always have a credit balance after any year-end adjusting entry to record bad debt expense?
Yes, after the adjusting entry, the Allowance account will always have a credit balance… it is a contra-asset account and its only purpose is to reduce A/R for estimated uncollectibles.
What are internal controls? Provide examples. Who is responsible to establish and implement such controls for a company? Who benefits from these controls? What is the role of an external auditor (CPA) relative to a company’s internal controls?
Internal controls are policies and procedures implemented by a business that are designed to safeguard assets and ensure accurate accounting records. Management is responsible to establish and implement internal controls. Shareholders benefit from internal controls along with employees and customers who might be otherwise tempted and get into trouble. CPAs have expertise in the area of internal controls. The external auditor will test these controls to make sure that they are working and are reliable during the conduct of a financial statement audit. The quality of controls will affect the scope of an auditor’s work and any deficiencies are reported to management.
How are research and development costs incurred in the development of a patentable technology over a ten year period recorded under GAAP?
Under GAAP, Research and Development costs incurred in the development of patentable technology are all expensed in the period incurred.
How about $5,000 in legal fees incurred in actually applying for a successful patent and $100,000 in legal fees in the successful prosecution of a patent infringement case? The allocation of any capitalized costs of a patent or other intangible asset to expense over its useful life is referred to as what?
The $5,000 in legal fees and the successful prosecution of a patent infringement suit would be capitalized. The allocation of capitalized costs is known as amortization expense (for patents and other intangible assets).
Define “goodwill.” When is it recorded as an asset?
Goodwill is defined as a business being worth more than its net assets (total assets – total liabilities). It is only recorded when purchasing a business at a price above the fair market value of the assets purchased less any liabilities assumed. (Note: Goodwill is the one intangible asset that is not amortized to expense over time. Under current GAAP, the fair market value of any recorded goodwill is determined at the end of each year and a loss is recorded with any reduction in value. Gains on increasing values are never recorded.)
Are capitalized costs incurred in the acquisition and improvement of natural resources ever recorded as an expense?
Yes, as the resources are depleted:
What is a bond and a bond indenture?
A bond is a note payable arising from the borrowing of cash from the public. A bond indenture is the written contract that spells out the legal terms and conditions of the obligations of the bond issuer and the rights of the bondholders.
What are some of the common types of bonds?
Debentures, Secured or mortgage-backed bonds, Junk bonds, Subordinated bonds, Term bonds, Serial bonds—(Amortizing bonds), Convertible bonds
Is there an entry made at the date of record of a dividend?
No
What are dividends in arrears and how are they to be accounted for?
Companies are never obligated to declare dividends. In the event dividends are declared in a particular year, preferred shareholders have a right to receive those dividends before any common shareholders to the extent of their annual dividend preference. In the case of non-cumulative preferred stock, there are no carryover rights if insufficient dividends are declared to meet the current year dividend preference. If the preferred stock is cumulative, then the right to any unpaid preference in a particular year is carried over to future years and is referred to as dividend in arrears.
Debentures
Unsecured bonds
Secured or mortgage-backed bonds
—Bonds for which property or real estate are specified as collateral
Junk bonds
—Unsecured bonds issued by companies with low credit ratings
Subordinated bonds
—Typically unsecured bonds designated as having some subordinated rights to other unsecured creditors
Term bonds
—Bonds that require principal repayment in full at maturity
Serial bonds
—Bonds that require the payment of principal periodically over the term of the bond (Amortizing bonds)
Convertible bonds
—Bonds that can be converted into shares of stock at an agreed upon rate.
( T / F ) The contra-asset accounts of Sales Discounts and Sales Returns & Allowances are nominal (temporary) and increased with debits (left side) entries.
False
If Jarom buys TV’s for $100 each and marks them up 200%, what sales price does he charge?
$300
We use the contra-revenue accounts of Sales Discounts and Sales Returns & Allowances rather than just directly debiting (decreasing) Sales Revenues because:
a) It helps management determine how much revenue was lost through discounts, returns, and allowances.
c) It helps management decide whether or not to tighten up credit policies extended to customers.
( T / F ) Bad Debt Expense and the Allowance for Uncollectible Accounts Receivable are contra-asset accounts.
False. Bad Debt Expense is an expense account.
( T / F ) Net Realizable Value of Accounts Receivable equals Gross Accounts Receivable less any Allowance for Uncollectible Accounts Receivable.
True
( T / F ) The Allowance for Uncollectible Accounts Receivable account will always have a credit balance at year end following any adjustments for uncollectible AR.
True
( T / F ) Management’s estimate of Uncollectible AR at year end may not always equal the estimate of Bad Debt Expense for the year.
True
Current Ratio
Current Assets/Current Liabilities
Acid Test Ratio
Selected Current Assets/Current Liabilities
% Increase in Assets
(Assets @ end of year - assets @ beginning of year)/assets @ beginning of year
Debt Ratio
Total Liabilities/Total Assets
Debt to Equity Ratio
Total Liabilities/Total Owner's Equity
Accounts Receivable Turnover
Net Credit Sales Revenue/((A/R @ Beginning of year + A/R @ end of year)/2)
Days Sales in Accounts Receivable
365/Accounts Receivable Turnover
Inventory Turnover
COGS/((Inventory @ beginning of year + inventory @ end of year)/2)
Days Sales in Inventory
365/Inventory Turnover
Book Value per Share
Stockholders' Equity/ # shares stock
Price/Earnings Ratio
Market Price Per Share/ Earnings Per Share
Net Income as a % of Investment
EPS/ Market Price Per Share
( T / F ) Publicly traded companies are required to conduct a physical inventory count at the end of the period.
True
( T / F ) The most common cause of a discrepancy between the books and the physical inventory count is theft or pilferage.
True
( T / F ) A perpetual inventory accounting system will catch the differences caused by mistakes or pilferage.
False
( T / F ) GAAP allows use of whichever inventory valuation method a company prefers, regardless of the actual flow of inventory.
True
( T / F ) The IRS requires companies to use the moving weighted avg. method to value inventory regardless of the method they use for financial reporting purposes.
False
If the physical inventory count reveals a $5,000 overstatement per the books, the proper adjusting entry would include:
a debit to Pilferage Expense of $5,000
In a time of inflationary prices, which method would result in the lowest COGS assuming there is no remaining inventory balance?
All methods give the same result.
In a time of deflationary prices, which method would result in the lowest Net Income and therefore the lowest income tax liability, assuming there is an inventory balance at period end?
FIFO
In a time of stable prices, which method would result in the highest-valued inventory balance (hence lowest COGS, highest Net Income, highest income tax liability), assuming there is an inventory balance at period end?
All methods give the same result.
In a time of inflationary prices and holding sales price (and units sold) constant between methods, which method would result in the highest Gross Margin, assuming there is an inventory balance at period end?
FIFO
Employees are responsible for paying FICA (1/2), FUI, and SUI
False. Employers withhold tax money from payroll checks, paying only the net of tax wages to the employees, then remit the tax money to the government.
When must an employer remit employer payroll taxes to the government?
The true answer is: It depends! Dates for tax remission vary by case. There are very specific rules as to how these employer payroll taxes are to be calculated and when they are to be paid. Employers must request certain forms from the IRS, which usually specify how to calculate and when to remit taxes. If it’s a large amount of money, the IRS may want it quicker. Taxes could be due within days, weeks, or months.
Referring to the sales tax in the previous problem, the revenue is the ’s, and the expense is the ’s.
State's, Customer's
( T / F ) Design, implementation, and evaluation of internal controls are the Auditor’s (independent third party CPA) responsibility.
F—Auditors only evaluate them, Management is responsible for design and implementation.
Some of the key internal controls implemented to safeguard a company’s cash include:
proper authorization procedures
( T / F ) A publicly-traded company must record an expense for utilities used in an accounting period even if it has not yet received the bill from the utility company
T—Publicly-traded companies must comply with the matching principle; the company would need to estimate the amount of expense based on historical data (What was our expense last month?).
( T / F ) Goodwill can be recorded anytime an auditor suspects that the FMV of an asset increases relative to the cost of that asset.
F—Goodwill is only recorded when a business is purchased.
The allocation of a Copyright’s capitalized cost to expense over its anticipated useful life is referred to as:
amortization
(T / F ) A 30-yr, fixed rate, fully amortizing mortgage note payable requires an equal payment of principal with each monthly payment.
F-principal amounts increase over time as the interest expense decreases.
( T / F ) The only time dividends payable are credited is when dividends are declared.
True
( T / F ) There are never dividends in arrears on non-cumulative preferred stock.
True
( T / F ) The total yearly dividend preference on 50,000 shares of 5% $10 par value preferred stock issued at a price of $20 a share will be $25,000.
True
( T / F ) Investors interested in higher risks and rewards on their stock investments will want to invest in common rather than preferred stock.
True
A bond requiring principal repayment periodically throughout the term is called a:
serial bond
Why is it important to have separate accounts for Sales Returns and Allowances and Sales Discounts?
It would be an easy and accurate representation of the economic effect of these transactions to simply debit sales revenues. However, the use of these contra revenue accounts quickly distinguishes information useful to management.
contra-asset
reduction of an asset
% Markup
Gross Margin/COGS x 100%