Solution: Acct 2210 Zeigler: Group Quiz #3 - Chp 4, 5, 6 (30 Pts)
Spring 2015 - Review for Exam #3
____ 1. Which of the following is not a “period” cost?
a. Advertising cost.
b. Salary of the company president.
c. Merchandise purchased for resale.
d. Interest paid to the bank on a note payable.
____ 2. Which of the following statements is true?
a. The cost(s) associated with inventory are expensed when the inventory is purchased.
b. Administrative salaries represent product costs.
c. All period costs are expensed in the period that they are paid for (i.e. in cash).
d. Product costs are initially recorded as assets.
____ 3. Shale & Devaudrevil, Inc. paid $300 cash, for freight costs, to ship merchandise it sold.
Which of the following illustrates how this event affects the company’s financial statements?
Assets / = / Liab. / + / Equity / Rev. / ─ / Exp. / = / Net Inc. / Cash Flowa. / ─ / NA / ─ / NA / + / ─ / ─ OA
b. / ─ / NA / ─ / NA / + / ─ / ─ FA
c. / + / NA / + / NA / NA / NA / ─ OA
d. / + / + / NA / NA / NA / NA / + FA
____ 4. Wood & Barber, Inc. purchased $12,000 of inventory on account. Assuming the company uses the perpetual inventory method, which of the following journal entries should be made?
a. Debit inventory / credit accounts payable
b. Debit accounts payable / credit purchases
c. Debit accounts payable / credit inventory
d. Debit purchases / credit accounts payable
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____ 5. Melchert & Wade, Inc. properly recorded the purchase of $1,000 of inventory with
terms 1/15, n/45 on January 1st. The company then paid for the goods on January 12th.
How would the company record the January 12th cash payment in their accounting
records assuming use of the perpetual inventory method?
a. Debit accounts payable for $1,000 and credit cash for $1,000.
b. Debit accounts payable for $1,000, credit cash for $990 and credit inventory for $10.
c. Credit accounts payable for $990 and debit cash for $990.
d. Debit accounts payable for $990, credit cash for $1,000 and debit discount expense for $10.
____ 6. For question #5, what would be the annualized interest rate earned by taking this discount assuming
a 360-day year? In other words, what is the maximum annualized interest rate the company could
borrow the money for and still be equal to or better off by taking the discount? Show all work:
PG 217: Earn 1% by paying 30 days early = 1% * (360/30days)
= 12% max interest rate to borrow.
____ 7. Jiao, Reisner & Swartz Co. sold inventory for $13,000 cash that had cost $11,000. Assuming the company uses the perpetual inventory method, the net effect of all entries required to properly record this transaction would:
a. increase assets by $13,000.
b. decrease equity by $11,000.
c. increase net income by $2,000.
d. increase expenses by $2,000.
_____ 8. Which term indicates that the buyer will be responsible for transportation charges for
goods purchased?
a. Freight-in
b. FOB shipping point (Pg 218 – see opposite situation on next question)
c. Transportation-in
d. FOB destination
_____9. Graham & Calkins, Inc. purchased (bought) goods on account. The goods were
purchased FOB destination for $500 and freight costs amounted to $55. How would the
freight charges be recorded in the buyer’s accounting records assuming use of the
perpetual inventory method?
a. Debit freight-expense, credit accounts payable
b. Debit freight-out, credit accounts payable
c. Debit inventory and credit accounts payable
d. The freight charges would not be recorded in the accounting records.
_____ 10. Hensley & Novak, Inc. reported the following information for December, 2014:
Sales $ 90,000 Beg. Inventory (Dec. 1) $8,000
Ending Inventory 6,000 Cost of Goods Sold 50,000
Based on the information provided, what was the company’s gross margin and what was the total amount of merchandise that was purchased during December?
Gross Margin Purchases
a. $40,000 $52,000
b. $34,000 $36,000
c. $40,000 $48,000
d. $34,000 $30,000
_____ 11. If a firm is using the lower-of-cost-or-market (LCM) rule, relating to inventory valuations,
and if a write-down entry is required for an individual inventory item, which of the
following would occur?
a.Net income will increase.
b.Gross margin will decrease. (Due to write-down of inventory – pg 278)
c.Assets will increase.
d.Liabilities will decrease.
_____ 12. The following information was taken from the records of Rui & Pease Company:
Cost / Market ValueItem / Quantity / per Unit / per Unit
A / 50 / $12 / $ 9
B / 20 / 20 / 21
C / 10 / 10 / 5
The company reports inventory at the lower of cost or market (applied individually).
After analysis, and pg 278 review, the necessary adjusting entry would:
a. reduce assets and equity by $200.
b. increase assets and equity by $1,100.
c. reduce assets and equity by $180.
d. reduce assets and increase liabilities by $200.
Use the following information to answer questions 13-15:
Cronin & Hankins, Inc. started operations July 1st and made the following inventory purchases. The company will update its inventory records at the end of each month.
July 1 200 units at $ 6.50 = 1300
7 175 units at $ 8.00 = 1400
23 225 units at $12.00 = 2700
29 150 units at $14.00 = 2100
COGAS ------750 7500
* For the month, the company sold 525 units of inventory *
_____ 13. Based on the information provided, if the company uses the weighted-average
inventory costing method, then the cost of goods sold that would appear on the income
statement for the month ending July 31 would be:
a. $4,500
b. $5,250 COGS =$7,500 / 750 (Total Units) = $10 avg cost per unit * 525 units sold
c. $6,000
d. $7,350
_____ 14. Based on the information provided, if the company uses the LIFO inventory
costing method, then the cost of goods sold that would appear on the income statement
for the month ending July 31 would be:
a. $4,500
b. $5,250
c. $6,000 COGS = 150(29th)+225(23rd)+150(7th) layers = $2100+2700+(150*8)=$6,000
d. $7,350
_____ 15. Based on the information provided, if the company chooses to use the FIFO
inventory costing method, then the cost of goods sold that would appear on the income
statement for the month ending July 31 would be:
a. $4,500 COGS = 200 (1st)+175(7th)+150(23rd) layers = $1300+1400+(150*12)=$4,500
b. $5,250
c. $6,000
d. $7,350
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_____ 16. In an inflationary environment, which inventory cost flow assumption would
produce the lowest ending inventory balance on the Balance Sheet?
a. LIFO
b. FIFO
c. Weighted Average
d. Specific Identification
_____ 17. In an inflationary environment, which inventory cost flow assumption would produce
the lowest Cost of Goods Sold on the Income Statement?
a. LIFO
b. FIFO
c. Weighted Average
d. Specific Identification
The Income Statement for Yaney, Studer & Childers, Inc. is provided below for #18 - 22:
* All amounts shown are in thousands of dollars *
____ 18. The company's “Gross Margin” (or “Gross Profit”) percentage is:
a. 15.625%
b. 40.625% Gross Margin = $1,600 - $950 = $650; GM percentage = $650/$1,600 = 40.625%
c. 59.375%
d.72.375%
____ 19. The company's “Net Profit” percentage is:
a. 15.625% Net Profit = $250 / $1,600 sales = 15.625%
b. 40.625%
c. 59.375%
d.72.375%
____ 20. Assume the average inventory balance for the year was $95. After reviewing pg 284,
what would be the companies’ “Inventory Turnover”? Show your work.
a. 20% b. 10 c. 40% d. 20 e. 950
(COGS / Inventory = $950 / $95 = 10 times avg turnover per year
____ 21. Assume the average inventory balance for the year was $95. After reviewing pg 284,
what would be the “average number of days to sell inventory”? Show your work.
a. ~ 10 days b. ~ 13 days c. ~16 days d. ~24 days e. ~ 36 days
365 days in year / 10 inventory “turns” = 36.5 days
____ 22. Using T-accounts and/or Debit/Credit analysis, the actual cash payment of an existing Accounts Payable, owed from a previous inventory purchase, would have no effect on a company’s Inventory Turnover. (Hint: Prepare a correct Dr/Cr entry and evaluate)
TRUE FALSE (Simply a payment = No impact on COGS or Inventory balances)
A/P xxx
Cash xxx
_____ 23. Mary Wilson is an accounting clerk for a large department store. Her husband
owns an office supply business. Mary paid her husband’s business for supplies
the department store never ordered or received. Which of the following practices would
allow Mary to perpetuate this fraud?
a. Keeping pre-numbered checks under lock and key.
b. Requiring a single person to approve disbursements, sign checks, and reconcile the checking account.
c. Requiring one employee to approve supporting documents and a different employee to sign checks.
d. Marking supporting documents “paid” when checks are signed.
24. The unadjusted cash account balance for Flanagan & Pohlkamp Skating, Inc. at December 31, 2014 was $21,242. The bank statement from Falcon Bank showed an ending balance of $26,950 at December 31, 2014. The following additional information is available:
Bank service charge / $ 19Outstanding checks / $7,300
NSF check returned by bank / $ 450
Deposit in transit / $1,321
Further, check #712 for the purchase of inventory was written correctly (and paid by the bank correctly)
for $234, but was recorded incorrectly on the company books at $432. Note that this represents a classic
“transposition error” as the difference between the two figures is equally divisible by 9.
Required (3 pts total): Consider reference to the page 324 example formatting
(A) CLEARLY prepare a Bank Reconciliation for December, 2014 in good form.
(B) CLEARLY prepare all necessary company Dr/Cr journal entries at December 31, 2014.
(A) SOLUTION:Unadjusted Balance Per Bank / $26,950
Add: Deposit in Transit / 1,321
Less: Outstanding Checks / (7,300 / )
“True” Cash Balance / $20,971
Unadjusted Balance Per Books / $21,242
Add: Transposition error (inventory) / 198
Less: NSF Check / (450 / )
Less: Bank Service Charge / (19 / )
“True” Cash Balance / $20,971
(B) Journal Entries Required:
(Required for book reconciling items only)
a) Cash / 198
Inventory / 198
b) Accounts Receivable / 450
Cash / 450
c) Bank Charges Expense / 19
Cash / 19
25. What is meant by “Internal Control”? Next, discuss which ONE of the nine “features” of an internal control system is the most important in the group’s opinion (see pg 315-317).
Internal control refers to the policies and procedures used to provide reasonable assurance that the objectives of an enterprise will be accomplished.
Administrative controls concern the evaluation of performance and the degree of compliance with company policies and public laws.
Accounting controls are composed of procedures designed to safeguard assets and ensure that the accounting records contain reliable information.
MOST IMPORTANT? Various responses accepted if reasonably supported (see pg 315-317).
26.What is meant by the term "materiality?" Discuss and provide a clear/concise example.
(Pg 331) While an exact answer to the materiality question is subjective, the term specifically relates to "importance." If something is important, then it is probably "material." A material error, for instance, is one that is of enough significance to likely influence the decisions of the average prudent investor. In accounting, an item is material if it is large enough in amount or percentage to make a difference, or would be of interest to, a prudent financial statement user.
27.What are the three types of audit opinions and what is the meaning of each? Which type of opinion is considered the “best”? Why?
(Pg 330-331) The first type of an opinion is an “Unqualified opinion”, which means that the auditor believes the financial statements are, without material exception, in compliance with GAAP. This is considered the best type of opinion to receive.
A second type of opinion is an “Adverse opinion”, which means that the auditor believes that something(s) in the financial statement is (are) not in compliance with GAAP, to the extent that the statements are materially misstated.
A third type of opinion is a “Qualified opinion”, which falls somewhere between the other two. For instance, a company may be following GAAP for the most part, but a specific area is not being followed in the opinion of the auditor.
*Note that ANY opinion listed above is in no way an endorsement of the company by the auditors for investment purposes. An auditor opinion relates to proper financial reporting under GAAP.
_____ 28. Falcon, Inc. prepared its financial statements for Year One and submitted them to its
independent auditing firm for examination. The company has a perpetual inventory
system and uses FIFO as its cost flow assumption. On December 27, Falcon ordered
$19,000 (a “material” amount) of inventory from a supplier. Falcon believed the goods
were shipped to them on January 2, Year Two so it made no entry in Year One. The
auditor discovered that the goods were actually shipped on December 30, Year One and
received by Falcon on January 4, Year Two. The purchase order and the invoice both
indicated freight terms as “FOB destination”. What adjusting entry, if any, will the
auditors recommend that Falcon make to its Year One financial statements?
a. No adjusting entry should be made.
b. Debit inventory $19,000 and credit accounts payable for the same amount.
c. Credit inventory $19,000 and debit accounts payable for the same amount.
d. Debit cost of goods sold $19,000 and credit accounts payable for the same amount.
This purchase was made FOB destination. The shipment did not get to Falcon (its destination) until January 4, Year Two. Until that day, the transfer of goods has not occurred and no journal entry or adjusting entry is required for Falcon in Year One.
Good review material for Examination #3 – See me, or our GA team, with questions.