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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

Presented below are the assumptions, principles, and constraints used in this chapter.(a) Economic entity assumption (f) Revenue recognition principle (b) Going concern assumption (g) Matching
The adjusted trial balance of North Shore Outfitters Inc., as of October 31, 1997 (its year-end) contains the following information:\section*{Instructions}(a) Prepare in good form a classified
The ledgers of Inigo Jones Galleries Inc. contain the following balances as of December 31, 1997:Income taxes are calculated at 30 percent of income; the galleries had 90,000 shares of common stock
Internal control is used in a business to enhance the accuracy and reliability of its accounting records and to:a. safeguard its assets.b. prevent fraud.c. produce correct financial statements.d.
Which of the following items in a cash drawer at November 30 is not cash?a. Money orders.b. Coins and currency.c. A customer check dated December 1.d. A customer check dated November 28.(SO3)
Permitting only designated personnel such as cashiers to handle cash receipts is an application of the principle of:a. segregation of duties.b. establishment of responsibility.c. independent check.d.
J. Duma is reviewing the principle of segregation of duties. What are the two common applications of this principle?
The management of Cobo Company asks you, as the company accountant, to explain (a) the concept of reasonable assurance in internal control and (b) the importance of the human factor in internal
Midwest Inc. owns the following assets at the balance sheet date:What amount should be reported as cash in the balance sheet? Cash in bank-savings account Cash on hand Cash refund due from the IRS
In Allen Wholesale Company, two mail clerks open all mail receipts. How does this strengthen internal control?
Handy Company's internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriter after comparing the check with the approved invoice. Identify the
How do the principles of (a) physical, mechanical, and electronic controls and (b) other controls apply to cash disbursements?
Paul Pascal is confused about the lack of agreement between the cash balance per books and the balance per the bank. Explain the causes for the lack of agreement to Paul, and give an example of each
Mary Mora asks your help concerning an NSF check. Explain to Mary (a) what an NSF check is, (b) how it is treated in a bank reconciliation, and (c) whether it will require an adjusting entry per bank.
Gina Milan is the new owner of Liberty Parking. She has heard about internal control but is not clear about its importance for her business. Explain to Gina the two purposes of internal control and
The internal control procedures in Marion Company provide that:(a) Employees who have physical custody of assets do not have access to the accounting records.(b) Each month the assets on hand are
The Tene Company has the following internal control procedures over cash receipts. Identify the internal control principle that is applicable to each procedure.1. All over-the-counter receipts are
On March 20, Gimbal's petty cash fund of \(\$ 100\) is replenished when the fund contains \(\$ 12\) in cash and receipts for postage \(\$ 52\), freight-in \(\$ 26\), and travel expense \(\$ 10\).
T. J. Boad is uncertain about the control features of a bank account. Explain the control benefits of (a) a signature card, (b) a check, and (c) a bank statement.
The following reconciling items are applicable to the bank reconciliation for Ashley Company: (1) outstanding checks, (2) bank debit memorandum for service charge, (3) bank credit memorandum for
At August 31, Kahn Company has a cash balance per books of \(\$ 9,200\) and the following additional data from the bank statement: charge for printing Kahn Company checks \(\$ 35\), interest earned
Tijuana Company has the following cash balances: Cash in Bank \(\$ 12,742\), Payroll Bank Account \(\$ 6,000\), and Plant Expansion Fund Cash \(\$ 25,000\). Explain how each balance should be
At July 31, Dana Company has the following bank information: cash balance per bank, \(\$ 7,420\), outstanding checks \(\$ 762\), deposits in transit \(\$ 1,700\), and a bank service charge \(\$ 20\).
Joe Marino is the owner of Marino's Pizza. Marino's is operated strictly on a carryout basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for cash. While at the
The following control procedures are used in the Tolan Company for over-the-counter cash receipts.1. Cashiers are experienced; thus they are not bonded.2. All over-the-counter receipts are registered
The following control procedures are used in Ann's Botique Shoppe for cash disbursements.1. Each week, Ann leaves 100 company checks in an unmarked envelope on a shelf behind the cash register.2. The
In the O'Malley Company, checks are not prenumbered because both the purchasing agent and the treasurer are authorized to issue checks. Each signer has access to unissued checks kept in an unlocked
Ramona Company uses an imprest petty cash system. The fund was established on March 1 with a balance of \(\$ 100\). During March the following petty cash receipts were found Prepare journal entries
Ono LoKo is unable to reconcile the bank balance at January 31. Ono's reconciliation is as follows:\section*{Instructions}(a) Prepare a correct bank reconciliation.(b) Journalize the entries required
On April 30, the bank reconciliation of Drofo Company shows three outstanding checks: No. \(254 \$ 650\), No. \(255 \$ 820\), and No. \(257 \$ 410\). The May bank statement and the May cash payments
The following information pertains to Mohammed Company.1. Cash balance per bank, July \(31, \$ 7,463\).2. July bank service charge not recorded by the depositor \(\$ 15\).3. Cash balance per books,
The information below relates to the Cash account in the ledger of Reston
The cash records of Kuwait Company show the following:1. The June 30 bank reconciliation indicated that deposits in transit total \(\$ 850\). During July the general ledger account Cash shows
Red River Theater is located in the Red River Mall. A cashier's booth is located near the entrance to the theater. Two cashiers are employed. One works from 1-5 P.M., the other from 5-9 P.M. Each
MTR Company maintains a petty cash fund for small expenditures. The following transartions occurred over a 2-month period:July 1 Established petty cash fund by writing a check on Metro Bank for \(\$
On July 31, 1996, Lori Company had a cash balance per books of \(\$ 6,815.00\). The statement from Tri-County Bank on that date showed a balance of \(\$ 7,076.00\). A comparison of the bank statement
The bank portion of the bank reconciliation for London Company at October 31, 1996, was as follows:The November bank statement showed the following checks and deposits:The cash records per books for
Mayo Company's bank statement from Lane National Bank at August 31, 1996, shows the following information:A summary of the Cash account in the ledger for August shows: Balance, August 1, \(\$
Segal Office Supply Company recently changed its system of internal control over cash disbursements. The system includes the following features.Instead of being unnumbered and manually prepared, all
Dockers Company maintains a petty cash fund for small expenditures. The following transactions occurred over a 2-month period:July 1 Established petty cash fund by writing a check on Metro Bank for
On May 31, 1996, Maloney Company had a cash balance per books of \(\$ 5,781.00\). The bank statement from Community Bank on that date showed a balance of \(\$ 6,806.00\). A comparison of the
The bank portion of the bank reconciliation for Sandra Company at November 30, 1996, was as follows:The December bank statement showed the following checks and deposits:The cash records per books for
Palmeiro Company maintains a checking account at the Marine City Bank. At July 31, selected data from the ledger balance and the bank statement are as follows:Analysis of the bank data reveals that
Acura Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep clerical and office expenses to a minimum, the
Jones Company on June 15 sells merchandise on account to Bullock Co. for \(\$ 1,000\) terms 2/10, \(\mathrm{n} / 30\). On June 20, Bullock Co. returns merchandise worth \(\$ 300\) to Jones Company.
Net credit sales for the month are \(\$ 800,000\) and bad debts are expected to be \(1.5 \%\) of net credit sales. The company uses the percentage of sales basis. If the Allowance for Doubtful
In 1996, D. H. Lawrence Company had net credit sales of \(\$ 750,000\). On January 1, 1996, Allowance for Doubtful Accounts had a credit balance of \(\$ 18,000\). During 1996, \(\$ 30,000\) of
An analysis and aging of the accounts receivable of Machiavelli Company at December 31 reveals the following data:Accounts Receivable\(\$ 800,000\)Allowance for Doubtful Accounts per books before
Which of the following statements about VISA credit card sales is incorrect?a. The credit card issuer makes the credit investigation of the customer.b. The retailer is not involved in the collection
Morgan Retailers accepted \(\$ 50,000\) 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
Sorenson Co. accepts a \(\$ 1,000,3\)-month, \(12 \%\) promissory note in settlement of an account with Parton Co. The entry to record this transaction is as follows: a. Notes Receivable 1,030
Schlicht Co. holds Osgrove Inc.'s \(\$ 10,000,120\)-day, \(9 \%\) note. The entry made by Schlicht Co. when the note is collected, assuming no interest has been accrued, is a. Cash 10,300 Noles
Soo Eng cannot understand why cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Soo Eng.
Kersee Company has a credit balance of \(\$ 3,200\) in Allowance for Doubtful Accounts. The estimated bad debts expense under the percentage of sales basis is \(\$ 4,100\), and the total estimated
Allmar Company accepts both its own credit cards and national credit cards. What are the advantages of accepting both types of cards?
Southern Textiles decides to sell \(\$ 700,000\) of its accounts receivable to First Central Factors Inc. First Central Factors assesses a service charge of \(2 \%\) of the amount of receivables
In determining interest revenue, some financial institutions use 365 days per year whereas others use 360 days. Why might a financial institution use 360 days?
May Company dishonors a note at maturity. What actions by May may occur with the dishonoring of the note?
Paula Company has accounts receivable and notes receivable. How should the receivables be reported on the balance sheet?
If the receivables turnover ratio is 7.15 and average net receivables during the period is \(\$ 210,000\), what is the amount of net credit sales for the period?
Presented below are three receivable transactions. Indicate whether these receivables are reported as accounts receivable, notes receivable, or other receivables on a balance sheet.1. Advanced \(\$
Record the following transactions on the books of Essex Co.1. On July 1, Essex Co. sold merchandise on account to Cambridge Inc. for \(\$ 14,000\), terms \(2 / 10, n / 30\)2. On July 8, Cambridge
During its first year of operations, Wendy Company had credit sales of \(\$ 3,000,000\), of which \(\$ 600,000\) remained uncollected at year-end. The credit manager estimates that \(\$ 40,000\) of
At the end of 1996 , Searcy Co. has accounts receivable of \(\$ 700,000\) and an allowance for doubtful accounts of \(\$ 54,000\). On January 24,1997 , it is learned that the company's receivable
Assume the same information as BE8-4 and that on March 4, 1997, Searcy Co. receives payment of \(\$ 8,000\) in full from Hutley Co. Prepare the journal entries to record this transaction.
Alex Co. elects to use the percentage of sales basis in 1996 to record bad debts expense and concludes that \(2 \%\) of net credit sales will become uncollectible. Credit sales are \(\$ 700,000\) for
Massey Co. uses the percentage of accounts receivable basis to record bad debt expense, and concludes that \(1 \%\) of accounts receivable will become uncollectible. Accounts receivable are \(\$
Presented below are the following transactions.1. St. Pierre Restaurant accepted a Visa card in payment of a \(\$ 100\) lunch bill. The bank charges a \(3 \%\) fee. What entry should St. Pierre
On January 10, 1995, Raja Co. sold merchandise on account to R. Opal for \(\$ 12,000\), n/30. On February 9, R. Opal gave Raja Co. a \(10 \%\) promissory note in settlement of this account. Prepare
Presented below are two independent situations that occurred during the year.1. On January 6, Nicklaus Co. sells merchandise on account to Watson Inc. for \(\$ 4,000\), terms \(2 / 10, \mathrm{n} /
The ledger of the Patillo Company at the end of the current year shows Accounts Receivable \(\$ 80,000\), Credit Sales \(\$ 940,000\), and Sales Returns and Allowances \(\$
Grevina Company has accounts receivable of \(\$ 92,500\) at March 31. An analysis of the accounts shows the following:Credit terms are \(2 / 10, n / 30\). At March 31, there is a \(\$ 1,600\) credit
On December 31,1996, Lisa Ceja Co. estimates that \(2 \%\) of its net credit sales of \(\$ 300,000\) will become uncollectible and records this amount as an addition to Allowance for Doubtful
Presented below are two independent situations:1. On March 3, Soyka Appliances sells \(\$ 900,000\) of its receivables to Potter Factors Inc. Potter Factors Inc. assesses a finance charge of \(3 \%\)
Presented below are two independent situations that occurred during the year.1. On April 2, P. Zachos uses her J. C. Penney credit card to purchase merchandise from a J. C. Penney store for \(\$
Kasko Stores accepts both its own and national credit cards. During the year the following selected summary transactions occurred.Jan. 15 Made Kasko credit card sales totaling \(\$ 16,000\).20 Made
Indiana Supply Co. has the following transactions related to notes receivable during the last 2 months of the year.Nov. 1 Loaned \(\$ 24,000\) cash to A. Gomez on a 1 -year, \(10 \%\) note.Dec. 11
Record the following transactions for the Rather Co. in the general journal:1996 May 1 Received a \(\$ 6,000\), 1-year, \(10 \%\) note on account from T. Jones.Dec. 31 Accrued interest on the Jones'
On May 2, P. Brey Company lends \(\$ 4,000\) to Feingold Inc., issuing a 6-month, \(10 \%\) note. At the maturity date, November 2, Feingold indicates that it cannot pay.\section*{Instructions}(a)
At December 31, 1996, Trisha Underwood Imports reported the following information on its balance sheet:During 1997, the company had the following transactions related to
Information related to Aris Company for 1996 is summarized below:\section*{Instructions}- (a) What amount of bad debts expense will Aris Company report if it uses the direct write-off method of
Presented below is an aging schedule for Boitano Company.At December 31, 1996, the unadjusted balance in Allowance for Doubtful Accounts is a credit of \(\$ 9,000\).\section*{Instructions}(a)
Carlo Fassi Co. uses \(2 \%\) of net sales to determine its bad debts expense for the period. At the beginning of the current period, Fassi had Allowance for Doubtful Accounts of \(\$ 10,000\)
The Bon Ton Company closes its books on July 31. On June 30, the Notes Receivable account balance is \(\$ 19,800\). Notes Receivable include the following:During July, the following transactions were
On January 1, 1996, Comaneci Company had Accounts Receivable \(\$ 54,200\) and Allowance for Doubtful Accounts \(\$ 4,700\). Comaneci Company prepares financial statements an-Prepare entries for
At December 31, 1996, Bordeaux Inc. reported the following information on its balance sheet.During 1997, the company had the following transactions related to receivables.\section*{Instructions}(a)
Information related to Volkov Company for 1996 is summarized below:\section*{Instructions}(a) What amount of bad debts expense will Volkov Company report if it uses the direct write-off method of
Presented below is an aging schedule for Deep Canyon Company.At December 31, 1996, the unadjusted balance in Allowance for Doubtful Accounts is a credit of \(\$ 10,000\).\section*{Instructions}(a)
Huang Co. uses \(3 \%\) of net credit sales to determine its bad debts expense for the period. At the beginning of the current period, Huang had Allowance for Doubtful Accountsof \(\$ 9,000\)
Selica Company closes its books on October 31. On September 30, the Notes Receivable account balance is \(\$ 23,400\). Notes Receivable include the following:Interest is computed using a 360-day
On January 1, 1996, Ricardo Company had Accounts Receivable \(\$ 146,000\), Notes Receivable \(\$ 15,000\), and Allowance for Doubtful Accounts \(\$ 13,200\). The note receivable is from the
When goods are purchased for resale by a company using a periodic inventory system:purchases on account are debited to Merchandise Inventory.b. purchases on account are debited to Purchases.c.
In determining cost of goods sold:a. purchases discounts are deducted from net purchases.b. freight-out is added to net purchases.c. purchase returns and allowances are deducted from net purchases.d.
Kam Company has the following:If 9,000 units are on hand at December 31, the cost of the ending inventory under FIFO is:a. \(\$ 99,000\).b. \(\$ 108,000\).c. \(\$ 113,000\).d. \(\$ 117,000\). Units
Using the data in (6) above, the cost of the ending inventory under LIFO is:a. \(\$ 113,000\).b. \(\$ 108,000\).c. \(\$ 99,000\).d. \(\$ 100,000\).
The lower of cost or market basis may be applied to:a. categories of inventories.b. individual items of inventories.c. total inventory.d. all of the above.
Somers Company has sales of \(\$ 150,000\) and cost of goods available for sale of \(\$ 135,000\). If the gross profit rate is \(30 \%\), the estimated cost of the ending inventory under the gross
In Fran Company, ending inventory is understated \(\$ 4,000\). The effects of this error on the current year's cost of goods sold and net income, respectively, are:a. understated, overstated.b.
Goods costing \(\$ 1,600\) are purchased on account on July 15 with credit terms of \(2 / 10, n / 30\). On July 18 a \(\$ 100\) credit memo is received from the supplier for damaged goods. Give the
Identify the accounts that are added to or deducted from purchases to determine the cost of goods purchased. For each account, indicate (a) whether it is added or deducted and (b) its normal balance.

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