When a company records the estimate of bad debts, the journal entry is a

debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts

_____ are amounts owed to the company by customers and other parties arising from the company's
operations

Receivables

In a secured borrowing, a company may assign its _____ as collateral for a loan

Accounts Receivable

In accounting for sales discounts, most companies use the

Gross Price

The policies and procedures a company uses to ensure that its financial reports are reliable and that
operations are effective, efficient, and legal are

internal control systems

In order to be classified as a cash equivalent, an investment must have a maturity date of

three months or less

Items classified as 'cash' on the balance sheet must:

be available to pay current obligations

The two basic forms of financing agreements that companies use to obtain cash from accounts
receivable are

secured borrowing and sale of receivables

A company can record uncollectible accounts by using the:

either the allowance method or the direct write-off method

One of the two issues related to the valuation of receivables is the estimation of the probability of
collection; the other is

the initial recording of the receivables.

Short-term noninterest-bearing notes receivable are usually recorded at their

maturity value.

An unconditional written agreement that gives the holder the right to collect a certain sum of money on
a specific date is a

note receivable

When preparing a bank reconciliation, outstanding checks would be

added to the balance per bank statement

Companies should use petty cash funds to

pay for minor business expenses

All of the following are nontrade receivables except

a. deposits paid to utility companies.

b. advances to executives.

c. accrued interest on investments.

d. accounts receivable.

B
Which is not a key element of internal control over cash receipts?

a. Daily deposit of all receipts in the company's bank account.

b. Making all payments by check so there is a record of every company expenditure.

c. Daily recording of all cash receipts in the accounting records.

d. Immediate counting of receipts by the person opening the mail and verification by an independent
person

Lavender Company accepts credit cards. The clearinghouse collection fee is 2.5%. If credit card sales are
$75,000 for the current month, the correct summary journal entry would include

The journal entry will debit Accounts Receivable for $72,750, debit Credit Card Expense for $2,250,
and credit Sales for $75,000.

Compensating balance agreements that do not legally restrict the amount of funds shown on the
balance sheet should be reported in the

notes to the financial statements

Revenue is recognized when

realization has occurred and revenue is earned.

The entry to replenish the petty cash fund for various minor expenditures would include a

The journal entry to replenish the petty cash fund would include a credit to Cash

When the net price method is used to record credit sales, the sales discounts not taken account is
reported as a(n)

addition to the Other Items section on the income statement.

Silver Corporation estimates bad debt expense using a percentage of credit sales (4%). Silver began its
current year with an $8,500 balance in the allowance account. During the current year, $10,500 of
accounts receivable were written off, and $1,200 of previously written off accounts were collected.
Credit sales for the year were $200,000. The bad debt expense for the year is

$8000

Greater emphasis is being placed on internal control systems as they apply to computer technology
because _____ physical source documents are available to verify cash inflows and outflows

Fewer

During 2013, a Blue Company wrote off $6,000 in uncollectible accounts receivable. At the end of the
year, Blue estimated bad debt expense using a percent of gross sales. In 2014, Blue Co. recovered a
$1,000 account that had been written off in 2013. Recording this recovery would first include a

credit to Allowance for Doubtful Accounts

When a company discounts its notes receivable at a bank, the common practice is to record the discount
on the notes in a(n)

Contra Asset Account

Cash includes all of the following except

a. coins and currency.

b. sinking funds.

c. foreign currencies on deposit in foreign banks.

d. demand deposits.

In order to improve the reporting of a company's risk, liquidity, and financial flexibility, companies are
required to disclose all of the following except
a. the fair value of all its financial instruments.

b. any valuation accounts as well as the methodology used to estimate these amounts.

c. any accounting policy related to receivables that might be helpful to internal users.

d. any receivables designated as collateral.

Which of the following is a key element of internal control over cash payments?

a. Authorizing and verifying that all cash received is recorded daily.

b. Making daily bank deposits.

c. Immediately counting receipts by the person opening the mail and verification by an independent
person.

d. Periodically reconciling the cash account balance on the company's books to the bank statement
balance

Receivables that arise from the sale of the company's products or services to customers are

Trade Receivables

Nontrade receivables, such as deposits with utility companies or advances to employees, should be

recorded in separate accounts and separately reported on the balance sheet.

Gold, Inc. is preparing its monthly bank reconciliation. Bank service charges will be

Deducted from the book balance

When receivable are sold with recourse,

the seller retains the risks of ownership and uncollectible accounts

Which of the following is not an advantage of a perpetual inventory system?

a. Requires less data processing effort than periodic systems.

b. Assists in the prevention of stockouts.

c. Maintains up-to-date inventory and cost of goods sold balances.

d. Provides evidence of inventory shrinkage

Purple Inc. purchased raw materials with a catalog price of $60,000. Credit terms of 3/15,n/60 apply. If
the net price method is used, Purple will record the purchase at

$58,200

Which of the following cost-flow assumptions produces the lowest cost of goods sold in a period of rising
prices?

a. LIFO perpetual

b. FIFO

c. Moving average

d. LIFO periodic

T/F: The LIFO conformity rule prevents a company from using FIFO for financial reporting and LIFO for
income taxes.

True

Which one of the following types of costs is most likely to be included in determining the cost of
inventory?
a. Freight-out costs

b. Freight-in costs

c. Interest cost for amounts borrowed to finance the purchase of inventory

d. Marketing costs

B Freight-In

Which inventory cost flow assumption is not allowed for financial reporting in many foreign countries?

LIFO

A retail firm would normally use an inventory account titled

Retail Inventory

T/F: The purpose of inventory pools is to maintain the benefits from using LIFO when fluctuations in the
physical quantities of similar inventory items occur and when technological change takes place.

True

The relationship between cost of goods sold and inventory is

Beginning Inventory + Purchases = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods
Sold

The dollar-value LIFO method follows the same cost flow assumption as the LIFO method, but it
overcomes three difficulties involved in applying the LIFO approach. Which is not one of the three
issues?

a. LIFO liquidations

b. Detailed record keeping

c. Technological change

d. Outdated inventory
D

A manufacturer may transfer goods to a retailer under a consignment arrangement. The company
delivering the goods is the

Consignor

If goods are shipped _____, control of (and legal title to) the goods is not transferred until the goods are
delivered to the buyer's destination

FOB Destination

The _____ requires a company that uses LIFO to disclose the amount that the LIFO valuation of inventory
differs from the valuation of inventory under FIFO

SEC

If a company uses _____ for annual reporting purposes, it must use _____ for interim reporting
purposes.

LIFO, LIFO

The cost of goods sold can be determined only after a physical count of inventory on hand under the

Periodic System

Which of the following cost-flow assumptions provides the lowest inventory value in periods of rising
prices?

LIFO

Which of the following statements is true regarding purchase discounts?

a. The net price method results in recording accounts payable at the maximum value of the liability that
the company may be required to pay out.
b. An advantage of the gross price method is that it isolates purchase discounts lost and thus highlights
inefficiencies.

c. Purchase discounts taken should be deducted from the acquisition cost of the inventory.

d. Purchase discounts lost should be included in the cost of inventory

Which one of the following statements is not true?

a. In the periodic system, the acquisition costs of inventory are debited directly to an inventory account.

b. When the perpetual system is used, a physical count still needs to be made.

c. A company using the periodic system does not maintain a continuous record of the physical quantities
(or costs) of inventory on hand.

d. In the perpetual inventory system, recording in detailed subsidiary records can be in units only, not in
total inventory dollar costs.

Which of the following statements is true?

a. FOB shipping point means the seller has legal title to the goods while they are in transit.

b. FOB shipping point means the buyer acquires legal title to the goods when they reach the seller's
place of business.

c. FOB destination means the buyer has legal title to the goods while they are in transit.

d. FOB destination means the seller has legal title to the goods until they reach the buyer's place of
business

During 2013, Charcoal Company purchased $90,000 of merchandise. To bring the merchandise to the
warehouse, Charcoal paid $3,200 in freight costs. By paying within the discount period, they were able to
take advantage of $4,500 of discounts offered. When the merchandise arrived, inspection revealed that
$1,400 of goods were not as ordered and were returned to the supplier. The net purchases of Charcoal
Company were
Net purchases = Purchases + Freight In - Purchases Discounts - Purchases Returns and Allowances.
90,000 + 3,200 - 4,500 - 1,400 = $87,300

Red Company began business in 2013. On December 31, 2013, Red's single pool of inventory was valued
at $300,000, using the dollar-value LIFO inventory method. On December 31, 2014, the value of Red's
inventory at current costs was $450,000. The 2014 year-end cost index was 120. What was the value of
Red's inventory at the end of 2014, using the dollar-value LIFO method?

450,000 x (100/120) = 375,000. 450,000 - 375,000 = 75,000. 75,000 x 120 = 90,000. $300,000 + 90,000 =
$390,000

T/F: If a company has a LIFO liquidation in an interim reporting period but expects to replace the
inventory by year-end, the impact of the liquidation is added to its interim financial statements.

False

IFRS does not allow the use of LIFO because it

is clearly inconsistent with any presumed physical flow of inventory.

A manufacturing firm would not normally have an account titled

Merchandise Inventory

T/F: LIFO liquidation brings units with a cost from previous years into cost of goods sold and produces an
unrealistically low income

False

The work in process inventory account would include all the following except

a. direct labor.

b. manufacturing overhead.

c. direct materials.

d. administrative costs
D

A company uses a LIFO reserve because

internal reporting is not the same as GAAP reporting and tax reporting

Black Corporation sells goods to Brown Company. The goods remain in the inventory of the seller (and
no revenue should be recognized) until delivery has occurred means that the companies are using a

Bill and Hold Sale

For companies that have little change in the characteristics of their inventory items, the most
appropriate method for computing a cost index for dollar value LIFO is the

Double-Extension Method

All of the following are period costs except

a. selling costs.

b. advertising costs.

c. general and administrative costs.

d. product costs

The gross profit method is most commonly used to:

estimate the cost of inventory from incomplete records

Generally, valuing inventory above cost is acceptable__________

only in selected industries and in certain circumstances

Which one of the following statements is not true with regard to the gross profit method of estimating
inventories?

a. The percentage used for the gross profit method is determined by using previous year's historical data.

b. The gross profit method may only be used with a perpetual inventory accounting system.

c. The gross profit method is not as accurate as the retail inventory method.

d. The gross profit method may be used to determine inventory for interim financial reporting purposes
without taking a physical count.

The _____ can be used to estimate the cost of inventory when there is a consistent pattern between the
cost of a company's purchases and its selling prices.

Retail Inventory Method

Which one of the following inventories may be valued for balance sheet purposes at the inventory's
selling price less distribution costs even if it is above the cost of the inventory?

a. Gold for a mining corporation

b. Athletic shoes for a retail store

c. Steel for a steel manufacturer

d. Automobiles for an automobile manufacturer

The application of the lower of cost or market rule to inventory valuation is an example of

Conservatism

T/F: If a company discovers an error in the same accounting period that the error was made, it treats the
correction as a prior period adjustment.
False

For valuation of inventory, the lower of cost or market rule may be applied to:

each item, the total of inventory, or major categories of inventory

T/F: Errors in the valuation of inventory or the recording of purchases can result in inaccurate values on
the company's balance sheet and income statement

True

Retail stores typically make changes in selling prices after setting the original price. The increase above
the original sales price is a(n) ________ while a decrease below the original selling price is a _____.

Additional Markup, Markdown

T/F: If a company discovers a material error after it has closed the books, it treats the correction as a
prior period adjustment.

True

With the retail inventory method, how is the total beginning inventory value used in the calculation of
the cost-to-retail ratio for the current period under the FIFO, Average Cost, and LIFO cost flow
assumptions?

FIFO - exclude; Average Cost - include; LIFO - exclude

Marmalade Company uses the lower of cost or market rule in valuing its inventory. The floor constraint
for one item in the inventory is $58.20. Additional information concerning this unit includes
transportation costs of $4.00; normal profit margin of $11.70; and packaging costs are $4.20. The selling
price for this item is

Selling price - packaging costs - transportation costs = Ceiling (also referred to as net realizable value).
Ceiling - normal profit margin = floor. Therefore:

X - $4.20 - $4.00 = $69.90; $69.90 - $11.70 = $58.20.

X = $78.10

Which one of the following inventories may not be valued for balance sheet purposes at the inventory's
selling price less distribution costs even if it is above the cost of the inventory?

a. Crude oil for an oil company

b. Laptops for a computer manufacturer

c. Gold for a mining corporation

d. Grain for an agricultural company

Under certain circumstances, GAAP allows a company to report its inventory above cost. Each of these
exceptions must be justified by all of the following except

a. immediate marketability of the inventory at a quoted market price.

b. an ability to determine appropriate costs.

c. the interchangeability of the units of inventory.

d. an inability to determine appropriate costs.

Which of the following statements regarding the gross profit method is not true?

a. The gross profit method is often used to estimate the year-end inventory for comparison to actual on-
hand inventory.

b. The gross profit method results in a less accurate inventory valuation than the retail inventory
method.

c. The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a
casualty.

d. The gross profit method is a complicated method to use in practice.

D
The major criticism of the lower of cost or market rule for valuation of inventory is that

holding losses are recognized, but holding gains are not