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ACCT 504 Week 4 Internal Control, Cash, and Receivables – Midterm

Week 4 : Internal Control, Cash, and Receivables – Midterm

Question 1. 1. (TCOs A, B, and C) Which of the following statements concerning users of accounting information is incorrect? (Points : 3)
        Management is considered an internal user.
        Present and prospective creditors are considered external users.
        Regulatory authorities, such as the SEC, are considered internal users.
        Taxing authorities are considered external users.

Question 2. 2. (TCO C) Issuing shares of stock in exchange for cash is an example of a(n) (Points : 3)
        delivering activity.
        investing activity.
        financing activity.
        operating activity.

Question 3. 3. (TCO C) Buying and selling products are examples of (Points : 3)
        operating activities.
        investing activities.
        financing activities.
        delivering activities.

Question 4. 4. (TCO A) The best definition of assets is the (Points : 3)
        cash owned by the company.
        collections of resources belonging to the company and the claims on these resources.
        owners’ investment in the business.
        resources belonging to a company that offer future benefits to the company.

Question 5. 5. (TCO C) Edwards Company recorded the following cash transactions for the year.

Paid $45,000 for salaries
Paid $20,000 to purchase office equipment
Paid $5,000 for utilities
Paid $2,000 in dividends
Collected $75,000 from customers

What was Edwards’ net cash provided by operating activities? (Points : 3)
        $25,000
        $5,000
        $30,000
        $23,000

Question 6. 6. (TCO A) In a classified balance sheet, assets are usually classified as (Points : 3)
        current assets; long-term assets; property, plant, and equipment; and tangible assets.
        current assets; long-term investments; property, plant, and equipment; and common stocks.
        current assets; long-term investments; and tangible assets.
        current assets; long-term investments; property, plant, and equipment; and intangible assets.

Question 7. 7. (TCO A) Which of the following should not be classified as a current asset? (Points : 3)
        Supplies
        Short-term marketable securities
        Prepaid insurance that will expire next year.
        A note receivable that will mature after 21 months

Question 8. 8. (TCO A) The following are selected account balances on December 31, 2010.

-Land (location of the corporation’s office building): $50,000
-Land (held for future use): 75,000
-Corporate Office Building: 300,000
-Inventory: 100,000
-Equipment: 225,000
-Office Furniture: 50,000
-Accumulated Depreciation: 150,000

What is the total NET amount of property, plant, and equipment that will appear on the balance sheet? (Points : 3)
        $650,000
        $550,000
        $475,000
        $800,000

Question 9. 9. (TCO B) For 2010, Mossland Corporation reported net income of $28,000; net sales $400,000; and average share outstanding 6,000. There were no preferred stock dividends. What was the 2010 earnings per share? (Points : 3)
        $4.67
        $0.25
        $66.67
        $14.86

Question 10. 10. (TCO B) Morten Corporation had beginning retained earnings of $764,000 and ending retained earnings of $833,000. During the year they issued common stock totaling $47,000. There were no dividends issued. What was their net income for the year? (Points : 3)
        $69,000
        $22,000
        $116,000
        $91,000

Question 11. 11. (TCO D) Is the purchase of equipment treated as an expense at the time of purchase? Why, or why not? (Points : 3)
        No, GAAP requires that 10% of the cost be expensed each year. This minimizes attempts to mislead financial statement users.
        Yes, the matching principle requires that the cost be expensed in the period of purchase.
        No, the cost needs to be allocated to the years of expected use.
        Yes, the actual life of the asset is not known, thus there is no acceptable way to allocate the cost.

Question 12. 12. (TCO D) An account is a part of the financial information system and is described by all except which one of the following? (Points : 3)
        An account has a debit and credit side.
        An account has to be in paper form.
        An account has a zero or nonzero balance.
        An account has a title.

Question 13. 13. (TCO D) The classification and normal balance of the dividend account is (Points : 3)
        a revenue, with a credit balance.
        an expense, with a debit balance.
        a liability, with a credit balance.
        under stockholders’ equity, with a debit balance.

Question 14. 14. (TCO D) A debit is the normal balance for which account listed below? (Points : 3)
        Furniture
        Accounts payable
        Rent revenue
        Capital stock issued

Question 15. 15. (TCO D) Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner? (Points : 3)
        Prepaid insurance and dividends
        Dividends and medical fees earned
        Interest payable and common stock
        Advertising expense and land

Question 16. 16. (TCO E) One of the accounting concepts upon which adjustments for prepayments and accruals are based is (Points : 3)
        matching.
        cost.
        monetary unit.
        economic entity.

Question 17. 17. (TCO E) In a service-type business, revenue is considered earned (Points : 3)
        at the end of the month.
        at the end of the year.
        when the service is performed.
        when cash is received.

Question 18. 18. (TCO E) Expenses sometimes make their contribution to revenue in a different period than when the expense is paid. When wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the first period? (Points : 3)
        Due from employees
        Due to employer
        Wages payable
        Wages expense

Question 19. 19. (TCO E) The following is selected information from M Corporation for the fiscal year ending October 31, 2010.

-Cash received from customers: $300,000
-Revenue earned: 350,000
-Cash paid for expenses: 170,000
-Expenses incurred: 200,000

Based on the accrual basis of accounting, what is M Corporation’s net income for the year ending October 31, 2010? (Points : 3)
        $140,000
        $114,000
        $82,000
        $150,000

Question 20. 20. (TCO E) Adjusting entries are made to ensure that (Points : 3)
        expenses are recognized in the period in which they are incurred.
        revenues are recorded in the period in which they are earned.
        balance sheet and income statement accounts have correct balances at the end of an accounting period.
        All of the above

Question 21. 21. (TCOs A and B) Which of the following expressions is incorrect? (Points : 3)
        Gross profit – operating expenses = net income
        Sales – cost of goods sold – operating expenses = net income
        Net income + operating expenses = gross profit
        Operating expenses – cost of goods sold = gross profit

Question 22. 22. (TCO B) Hunter Company purchased merchandise inventory with an invoice price of $3,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Hunter Company pays within the discount period? (Points : 3)
        $2,940
        $2,760
        $2,700
        $3,000

Question 23. 23. (TCOs A and B) Jake’s Market recorded the following events involving a recent purchase of merchandise.

-Received goods for $20,000, terms 2/10, n/30.
-Returned $400 of the shipment for credit.
-Paid $100 freight on the shipment.
-Paid the invoice within the discount period.

As a result of these events, the company’s merchandise inventory (Points : 3)
        increased by $19,208.
        increased by $19,700.
        increased by $19,306.
        increased by $19,308.

Question 24. 24. (TCO A) If goods in transit are shipped FOB destination (Points : 3)
        the seller has legal title to the goods until they are delivered.
        the buyer has legal title to the goods until they are delivered.
        the transportation company has legal title to the goods while the goods are in transit.
        no one has legal title to the goods until they are delivered.

Question 25. 25. (TCO A) When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory? (Points : 3)
        To check the accuracy of the perpetual inventory records
        To determine cost of goods sold for the accounting period
        To compute inventory ratios
        All are a purpose of taking a physical inventory when a perpetual inventory system is used.

Question 26. 26. (TCO A) A problem with the specific identification method is that (Points : 3)
        inventories can be reported at actual costs.
        management can manipulate income.
        matching is not achieved.
        the lower of cost or market basis cannot be applied.

Question 27. 27. (TCO A) The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is (Points : 3)
        called the matching principle.
        called the consistency principle.
        nonexistent; that is, there is no such accounting requirement.
        called the physical flow assumption.

Question 28. 28. (TCO A) In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the (Points : 3)
        FIFO method.
        LIFO method.
        average cost method.
        tax method.

Question 29. 29. (TCO B) Which of the following is a true statement about inventory systems? (Points : 3)
        Periodic inventory systems require more detailed inventory records.
        Perpetual inventory systems require more detailed inventory records.
        A periodic system requires cost of goods sold be determined after each sale.
        A perpetual system determines cost of goods sold only at the end of the accounting period.

Question 30. 30. (TCO B) The primary source of revenue for a retailer is (Points : 3)
        investment income.
        service revenue.
        the sale of merchandise.
        the sale of plant assets the company owns.

Question 31. 31. (TCO D) Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that ensure that the ledger accounts are correct? Explain. (Points : 25)
     
       

Question 32. 32. (TCOs B and E) The adjusted trial balance of Gertz Company included the following selected accounts.

                                                      Debit                  Credit
Sales                                                                       $575,000
Sales returns and allowances      $ 50,000
Sales discounts                               9,500
Cost of goods sold                       347,000
Freight-out                                       2,000
Advertising expense                       15,000
Interest expense                            19,000
Store salaries expense                   74,000
Utilities expense                             18,000
Depreciation expense                       3,500
Interest revenue                                                          25,000

Instructions:
1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2010.
2. Calculate the profit margin ratio and gross profit rate. To qualify for full credit, you must state the formula you are using, show your computations, and explain your findings.
(Points : 35)
     
       

Set 3
(TCO A) The factor which determines whether or not goods should be included in a physical count of inventory is (Points: 3)
physical possession.
legal title.
management’s judgment.
whether or not the purchase price has been paid.
 
15. (TCO D) Which pair of accounts follows the rules of debit and credit in relation to increases and decreases in the same manner? (Points: 3)
Dividends payable and rent expense
Repair expense and notes payable
Prepaid insurance and advertising expense
Service revenues and equipment
 
11. (TCO A) When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory? (Points: 3)
To check the accuracy of the perpetual inventory records
To determine cost of goods sold for the accounting period
To compute inventory ratios
All are a purpose of taking a physical inventory when a perpetual inventory system is used.
 
 
12. (TCO A) A problem with the specific identification method is that (Points: 3)
inventories can be reported at actual costs.
management can manipulate income.
matching is not achieved.
the lower of cost or market basis cannot be applied
 
 
13. (TCO A) Which of the following statements is correct with respect to inventories? (Points: 3)
The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
It is generally good business management to sell the most recently acquired goods first.
Under FIFO, the ending inventory is based on the latest units purchased.
FIFO seldom coincides with the actual physical flow of inventory.
 
 
14. TCO A — In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure? (Points: 3)
Average Cost Method
LIFO method
FIFO method
Need more information to answer
 
 
15. (TCO B) The figure for which of the following items is determined at a different time under the perpetual inventory method than under the periodic method? (Points: 3)
Sales 
Cost of Goods Sold
Purchases
Accounts Receivable
 
 
1. (TCO E) The time period assumption states that (Points: 3)
a transaction can only affect one period of time.
estimates should not be made if a transaction affects more than one time period.
adjustments to the enterprise’s accounts can only be made in the time period when the business terminates its operations.
the economic life of a business can be divided into artificial time periods.
 
 
2. (TCO E) In a service-type business, revenue is considered earned (Points: 3)
at the end of the month.
at the end of the year.
when the service is performed.
when cash is received.
 
 
3. (TCO E) On April 1, 2007, M Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years
and will have no residual value. M records depreciation expense of $9,000 for the calendar year ending December 31, 2007. Which accounting principle has been violated? (Points: 3)
Revenue recognition principle
No principle has been violated because M has correctly matched the expense for using the equipment to the period during which it generated revenue.
Matching principle because the cash was paid in 2007 and should be expensed in 2007.
Cost principle
 
 
4. The following is selected information from J Corporation for the fiscal year ending October 31, 2007.
 
Cash received from customers $75,000
Revenue earned 87,500
Cash paid for expenses 42,500
 
Expenses incurred 50,000
 
(TCO E) Based on the accrual basis of accounting, what is J Corporation’s net income for the year ending October 31, 2007?
(Points: 3)
$28,500 
$33,500 
$20,500 
$37,500
 
net income = revenue earned – expenses incurred
    = 87500 – 50,000
    = 37500
 
 
 
5. (TCO E) The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is (Points: 3)
contra asset.
prepayment.
asset. 
accrual. 
 
 
6. (TCO B) Two categories of expenses in merchandising companies are (Points: 3)
cost of goods sold and financing expenses.
operating expenses and financing expenses.
cost of goods sold and operating expenses.
sales and cost of goods sold.
 
 
7. (TCO A,B) Detailed records of movements in merchandise (each purchase and sale) are not maintained in the inventory account in a (Points: 3)
perpetual inventory system.
periodic inventory system.
double entry accounting system.
business that sells expensive merchandise.

 

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