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Test 3 5-7 Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. A customer returned damaged goods for credit. Which of the seller's accounts decreases? a. Purchase Returns c. Sales Returns b. Accounts Receivable d. Sales Revenue ____ 2. A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight-In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to a. $12,670 b. $9,070 c. $8,420 d. $17,230 Chen's Department Store Chen's Department Store is a merchandising company that uses the periodic inventory system. Selected account balances are listed below: Sales Purchases Inventory (beginning) Inventory (ending) Purchase returns and allowances Purchase discounts Transportation-in Sales discounts Sales returns and allowances ____ 3. Refer to the account information for Chen's Department Store. Calculate Chen's net sales. a. $162,000 b. $167,000 ____ c. $170,000 d. $175,000 4. Refer to the account information for Chen's Department Store Calculate Chen's cost of goods purchased a. $ 84,000 b. $ 90,000 ____ $175,000 90,000 23,000 17,000 3,000 7,000 4,000 8,000 5,000 c. $ 103,000 d. $ 117,000 5. Klein's Shoe Company uses a perpetual inventory system. The beginning balance in its inventory account is $1,500 and the ending balance is $1,000. Cost of goods sold is $6,500. What was the amount of inventory purchased during the year? a. $ 500 c. $7,000 b. $6,000 d. $7,500 ____ 6. Grout, Inc. offers terms of 2/10, n/30 to credit customers. Tile Mart Corp. purchased 100 tile cutters with a list price of $20 each on March 5, 2014, on account. If Tile Mart Corp. pays the amount of the invoice for its purchase on March 14, 2014, how much cash will Grout receive from Tile Mart Corp.? a. $1,764 c. $1,960 b. $1,800 d. $2,000 ____ 7. The following is from Silverstein Inc.'s 2014 income statement. Purchases Transportation-In Inventory, January 1, 2014 Inventory, December 31, 2014 Purchase Returns and Allowances $182,000 11,000 26,500 28,800 8,400 How much will Silverstein report as cost of goods purchased in its 2014 income statement? a. $184,600 c. $201,400 b. $193,000 d. $211,100 ____ 8. The following is from Silverstein Inc.'s 2014 income statement. Purchases Transportation-In Inventory, January 1, 2014 Inventory, December 31, 2014 Purchase Returns and Allowances $182,000 11,000 26,500 28,800 8,400 How much will Silverstein report as its cost of goods sold in its 2014 income statement? a. $179,900 c. $186,900 b. $182,300 d. $190,700 ____ 9. Sunset, Inc. purchased merchandise from Rumble Music Company on June 5, 2014. The goods were shipped the same day. The merchandise's selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Sunset received the merchandise on June 10, 2014. Sunset paid the amount due on June 13, 2014. Sunset uses a perpetual inventory system. When will the cost of merchandise sold be recorded as an expense? a. The date the merchandise was purchased. b. The date the merchandise is sold. c. The end of the accounting period d. Cannot be determined without further information. ____ 10. Which one of the following is not a contra account? a. Purchase Returns and Allowances c. Transportation-in b. Accumulated Depreciation d. Sales Discounts ____ 11. The Ramien Store held inventory items at the end of 2014. Which items should Ramien include as part of its total inventory cost? a. Freight incurred in shipping goods to customers. b. Annual income taxes paid for operations. c. Cost of storing inventory before it is sold. d. Cost of salaries of clerks that sell the inventory items. ____ 12. Which one of the following statements regarding changing inventory methods is true? a. A change in inventory methods can be justified if the change is made to better match profits with revenue. b. Changing inventory methods affects consistency. c. One place that the reader of an annual report would be able to identify that a company changed inventory methods is the statement of stockholders' equity. d. Tax advantages are valid justification for changing inventory methods. ____ 13. Zebra Company overstated its December 31, 2014 inventory by $5,200. Which statement is true concerning Zebra's financial statement amounts for 2014? a. Working capital is understated. c. Cost of goods sold is overstated. b. The current ratio is overstated. d. Net income is understated. ____ 14. If a company overstates its ending inventory balance for 2012 by $10,000, and understates its ending inventory balance for 2011 by $5,000 what are the effects on its net income for 2012 and 2011? a. b. c. d. ____ Effect on 2012 Net Income Overstated by $15,000 Understated by $5,000 Overstated by $15,000 Overstated by $10,000 Effect on 2011 Net Income Understated by $10,000 Overstated by $10,000 Understated by $5,000 Understated by$5,000 15. If a company overstates its ending inventory balance for 2012 by $10,000, and overstates its ending inventory balance for 2011 by $5,000 what are the effects on its net income for 2012 and 2011? a. b. c. d. Effect on 2012 Net Income Overstated by $15,000 Understated by $5,000 Overstated by $5,000 Overstated by $10,000 Effect on 2011 Net Income Overstated by $10,000 Overstated by $10,000 Overstated by $5,000 Overstated by $5,000 ____ 16. Which of the following statements is true when using the indirect method of preparing the operating activities section of the statement of cash flows? a. Inventory decreases are subtracted from net income. b. Inventory increases are subtracted from net income c. Inventory increases are added to net income. d. None of the above. ____ 17. Which one of the following procedures is not part of preparing a bank reconciliation of a checking account a. Tracing deposits listed on the bank statement to the books to identify deposits in transit b. Arranging canceled checks in numerical order and tracing them to the books to identify outstanding checks c. Identifying items added on the bank statement which have not been recorded as cash receipts by the company d. Preparing adjustments to reverse the transactions recorded for checks that are still outstanding ____ 18. Which of the following items would not be a reconciling item? a. Canceled checks c. Outstanding checks b. NSF checks d. Deposits in transit ____ 19. Which one of the following items would be added to the balance per bank statement in a bank reconciliation? a. Outstanding checks c. Service charge b. Deposits in transit d. Interest on customer note ____ 20. The accountant for Darden Corp. was preparing a bank reconciliation as of April 30, 2014. The following items were identified: Allan's book balance Outstanding checks Interest earned on checking account Customer's NSF check returned by the bank $46,200 1,100 50 500 In addition, Darden made an error in recording a customer's check; the amount was recorded in cash receipts as $150; the bank recorded the amount correctly as $510. What amount will Darden report as its adjusted cash balance at April 30, 2014? a. $44,650 c. $46,110 b. $45,890 d. $46,250 ____ 21. A credit memorandum appeared on Central Company's bank statement. How will Central treat this amount on its bank reconciliation? a. Add it to the bank balance c. Deduct from the bank balance b. Add it to the book balance d. Deduct from the book balance ____ 22. Gentech Corp. prepared a bank reconciliation as of June 30, 2014. The following items were identified: Gentech's bank balance Deposits in transit Outstanding checks Bank service charges Customer's NSF check returned by the bank $14,300 $1,000 1,300 50 150 Gentech's adjusted cash balance at June 30, 2014 is a. $13,800 c. $14,000 b. $14,100 d. $14,300 ____ 23. The documentation with the bank statement shows a debit memo for bank service charges. Based on this, what would be the effect of this transaction on the accounting equation? a. Increase Miscellaneous Administrative Expense; decrease Cash b. Increase Cash; increase Other Income c. Increase Cash; increase Accounts Payable d. Decrease Accounts Payable; decrease Cash ____ 24. Sarbanes-Oxley requires that the audit committee be composed of a. At least 50% of key officers who are on the board of directors b. A majority of all of the members of the board of directors c. The outside members of the board of directors and the external auditor d. Entirely of outside members of the board of directors ____ 25. Which internal control procedure is followed when a physical count of inventory is performed in a perpetual inventory system? a. Segregation of duties c. Independent verifications b. Safeguarding assets and records d. Proper authorizations ____ 26. Which one of the following documents is used in the control of cash receipts? a. Purchase requisitions c. Canceled checks from customers b. Receiving reports d. Bank deposit slips ____ 27. Each of the following documents is used in the control of cash receipts except: a. Cash register tapes c. Canceled checks from customers b. Check lists or prelists d. Bank deposit slips ____ 28. The following set of items describes activities completed by a company in purchasing and paying for merchandise. For each activity, identify whether or not the activity adheres to or violates sound internal control procedures. Checks are signed by designated officers in the finance department. a. Adheres to sound internal control procedures b. Violates sound internal control procedures c. Neither strengthens nor violates internal control ____ 29. Which of the following is another term for the invoice approval form? a. a receiving report. b. an invoice. c. a voucher. d. a remittance advice. ____ 30. On January 15, 2014, the accounts receivable balance was $7,000 and the balance in the allowance for doubtful accounts was $700. That morning a $200 uncollectible account was written-off. The net realizable value of accounts receivable immediately after the write-off is: a. $6,300 c. $7,200 b. $6,800 d. $7,900 ____ 31. If a company uses the allowance method to account for bad debts, when will the company's owners' equity decrease? a. At the date a customer's account is written off b. At the end of the accounting period when an adjusting entry for bad debts is recorded c. At the date a customer's account is determined to be uncollectible d. When the accounts receivable amount becomes past due ____ 32. Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching bad debts expense with revenue on the income statement? a. The percentage of accounts receivable approach b. The percentage of net credit sales approach c. The direct write-off method d. The uncollectible approach Americana Corporation The data below is for Americana Corporation for 2014. Accounts receivable - January 1, 2014 $236,000 Credit sales during 2014 Collections from credit customers during 2014 Customer accounts written off as uncollectible during 2014 Allowance for doubtful accounts - January 1, 2014 Estimated uncollectible accounts based on an aging analysis ____ 33. 820,000 590,000 8,000 8,700 9,600 Refer to the data for Americana Corporation. What is the balance of Accounts Receivable at December 31, 2014? a. $336,000 c. $458,000 b. $448,400 d. $466,000 Satin Corporation The data presented below is for Satin Corporation for the year ended December 31, 2014. Sales (100% on credit) Sales returns Accounts Receivable (December 31, 2014) Allowance for Doubtful Accounts (Before adjustment at December 31, 2014) Estimated amount of uncollectible accounts based on an aging analysis ____ 34. $1,500,000 60,000 250,000 3,000 31,000 Refer to the data for Satin Corporation If Satin estimates its bad debts at 2% of net credit sales, what amount will be reported as bad debt expense for 2014? a. $25,800 c. $28,800 b. $27,000 d. $30,000 ____ 35. On November 2, 2014, Quaint General Store concluded that a customer's $400 account receivable was uncollectible and that the account should be written off. What effect will this write-off have on Quaint's 2014 net income and balance sheet totals assuming the allowance method is used to account for bad debts? a. Decrease in net income; decrease in total assets b. Increase in net income; no effect on total assets c. No effect on net income; decrease in total assets d. No effect on net income; no effect on total assets ____ 36. What is the distinguishing characteristic between accounts receivable and notes receivable? a. Accounts receivable are usually current assets while notes receivable are usually long-term assets b. Accounts receivable require payment of interest if not paid within the usual credit terms c. Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable result from credit sale transactions for service companies d. Notes receivable result from a written promise to pay within a specified amount of time ____ 37. Spirit Corp. reported net sales (all on credit) of $1,600,000 and cost of goods sold of $1,100,000 for 2014. Its beginning balance of Accounts Receivable was $150,000. The accounts receivable balance decreased by $10,000 during 2014. Rounded to two decimal places, what is Spirit's accounts receivable turnover rate for 2014? a. 7.59 c. 10.67 b. 10.32 d. 11.03 ____ 38. Verilux Company sold merchandise to Flight Corp. on November 1, 2014, for $10,000. Verilux accepted a promissory note from Flight Corp. for $10,000. The note has a term of 5 months and a stated interest rate of 7%. Verilux's accounting period ends on December 31, 2014. What amount should Verilux recognize as interest revenue on the maturity date of the note? a. $ -0c. $ 291.67 b. $ 175.00 d. $ 420.00 ____ 39. When are consolidated financial statements prepared? a. At the option of an investee company b. At the option of an investor company c. If one company owns more than 50% of another company d. Only if one company owns 100% of another company ____ 40. Significant influence of one company over another has been defined by the accounting profession as the ownership of what minimum percent of the second company's stock? a. 30% b. 50% c. 100% d. 20% Problem 1. At Forrest Industries, all sales are on account. Sienna Marcos is responsible for mailing invoices to customers, recording the amount billed, opening mail, recording the payment, and making deposits to the bank. Sienna is very devoted to the family business and never takes off more than one or two days for a long weekend. The customers know Sienna and sometimes send personal notes with their payments. Another clerk handles all aspects of accounts payable. Sienna's brother, who is president of Forrest Industries, has hired an accountant to help with expansion. REQUIRED: 1. List some problems with the current accounts receivable system. 2. What suggestions would you make to improve internal control? 3. How would you explain to Sienna that she personally is not the problem? Sliders Company Sliders Company sells its merchandise only on credit. The following data is available at December 31, 2014: Sales Sales returns and allowances Accounts receivable at January 1, 2014 Allowance for doubtful accounts at January 1, 2014 Cash collections during 2014 Accounts written off as uncollectible during 2014 2. Refer to the data for Sliders Company. The firm estimates that bad debts could be 1% of their net sales. $375,000 12,000 60,600 3,200 362,500 2,400 A) What amount will Sliders Company recognize as bad debts expense for the year? B) Once this calculation is recorded, assume that the company has a balance of Accounts Receivable of $58,700, and an Allowance for Doubtful Accounts of $800. What will be the net realizable value once the adjustment from Part A) is made? 3. Refer to the data for Sliders Company. Assume the company estimates bad debts using an aging analysis and the aging schedule indicates that $3,600 of the end of the year Accounts Receivable will be uncollectible. A) What amount will Sliders Company recognize as bad debt expense for the year? B) If the ending balance of Accounts Receivables is $38,700, what is the net realizable value of Accounts Receivable reported on December 31, 2014? 4. Bagel Inc. reported net income of $105,000 for the year ended December 31, 2014. The following items were included on Bagel's balance sheets at December 31, 2014 and 2013: Cash Accounts receivable Notes receivable 12/31/14 $106,000 213,000 95,000 12/31/13 $113,000 93,000 103,000 Bagel uses the indirect method to prepare its statement of cash flows. Bagel does not have any other current assets or current liabilities and did not enter into any investing or financing activities during 2014. REQUIRED: 1. Prepare Bagel's 2014 statement of cash flows. 2. Draft a brief memo to the owner to explain why cash decreased during a profitable year