Question 1

All of the following are sections of a cash budget except:&#10;A) cash disbursements.&#10;B) cash receipts.&#10;C) financing.&#10;D) operating.

Accepted Answer

Operating is not a section of a cash budget. A cash budget typically includes sections for cash disbursements, cash receipts, and financing to track the inflows and outflows of cash and any external financing needed. Operating activities are reflected within the cash receipts and disbursements sections rather than being a separate section.

Question 2

A check correctly written and paid by the bank for $481 is incorrectly recorded on the company's books for $418. The appropriate adjustment on a bank reconciliation would be to:&#10;A) deduct $418 from the book's balance.&#10;B) deduct $63 from the book's balance.&#10;C) deduct $63 from the bank's balance.&#10;D) add $63 to the bank's balance.

Accepted Answer

The error in recording means the books show $63 less ($418 instead of $481) than what was actually paid. To correct this, you would need to add $63 to the book's balance, but since the question is about the appropriate adjustment on a bank reconciliation, which is done from the perspective of the books, you would need to adjust the book's balance to match the bank's. Therefore, the correct action is to recognize the underreported expense by deducting $63 from the book's balance to align it with the actual bank payment.

Question 3

A company just starting business purchased three merchandise inventory items at the following prices: first purchase $510; second purchase $550; third purchase $590. If two items were sold during the period and the company used the LIFO costing method, the gross profit for the period would be how much greater or less than if the FIFO costing method had been used?

A) Gross profit would be $80 greater.
B) Gross profit would be $80 less.
C) Gross profit would be the same.
D) Gross profit would be $40 greater.

B

Accepted Answer

Under LIFO (Last-In, First-Out) method of inventory costing, the last unit purchased is assumed to be the first one sold. Based on this assumption, the cost of goods sold will be calculated at the highest prices of the inventory items, which in this case would be the third purchase of $590 and the second purchase of $550. Thus, the cost of goods sold would be $590 + $550 = $1140.
Therefore, the gross profit would be calculated as:
Revenue - Cost of goods sold = Gross profit
Assuming the revenue from the sale of two items is $1000, the gross profit for the period under LIFO would be:
$1000 - $1140 = -$140
On the other hand, under FIFO (First-In, First-Out) method of inventory costing, the first unit purchased is assumed to be the first one sold. Based on this assumption, the cost of goods sold will be calculated at the lowest prices of the inventory items, which in this case would be the first purchase of $510 and the second purchase of $550. Thus, the cost of goods sold would be $510 + $550 = $1060.
Therefore, the gross profit under FIFO would be calculated as:
Revenue - Cost of goods sold = Gross profit
Assuming the revenue from the sale of two items is $1000, the gross profit for the period under FIFO would be:
$1000 - $1060 = -$60
Comparing the two methods, the gross profit under FIFO is $80 greater than under LIFO ($80 = -$60 - (-$140)). Thus, the answer is (B) Gross profit would be $80 less.

Question 4

Bad Debts Expense should be recorded:&#10;A) whenever an account is written off as uncollectible.&#10;B) each time a credit sale is made.&#10;C) whenever an account written off is recovered.&#10;D) at the end of each accounting period.

Accepted Answer

Bad Debts Expense is typically recorded at the end of each accounting period to adjust the allowance for doubtful accounts to the estimated uncollectible amount, reflecting expected future losses from accounts receivable.

Question 5

The basis of computing uncollectible accounts that provides a reasonable matching of expenses with revenues is the:&#10;A) percentage-of-receivables basis.&#10;B) percentage of doubtful accounts basis.&#10;C) lower of cost or market basis.&#10;D) direct write-off method.

Accepted Answer

The percentage-of-receivables basis estimates uncollectible accounts as a percentage of outstanding accounts receivable. This approach provides a reasonable matching of expenses with revenues because it recognizes expected uncollectible accounts at the same time revenues are recognized. Option B is incorrect because it refers to a similar approach, but it is not the most commonly used. Option C is incorrect because it relates to valuing inventory, not estimating uncollectible accounts. Option D is incorrect because it does not provide a reasonable matching of expenses with revenues, as it only recognizes bad debts when they are deemed uncollectible.

Question 6

Which of the following terms best describes the assumption made in applying the four inventory methods?&#10;A) Goods flow.&#10;B) Physical flow.&#10;C) Cost flow.&#10;D) Asset flow.

Accepted Answer

The assumption made in applying the four inventory methods is cost flow, which is the process of determining the cost assigned to inventory as it flows in and out of a business. The four inventory methods (FIFO, LIFO, weighted average, and specific identification) each assume a different cost flow pattern.

Question 7

The receivables turnover ratio is calculated by dividing:&#10;A) net credit sales by average receivables.&#10;B) net credit sales by ending receivables.&#10;C) total sales by average receivables.&#10;D) total sales by ending receivables.

Accepted Answer

The receivables turnover ratio is calculated by dividing net credit sales by average receivables. This ratio measures how efficiently a company is collecting its outstanding receivables.

Question 8

An error in the physical count of goods on hand at the end of the current period resulted in a $2,500 overstatement of the ending inventory. The effect of this error in the current period is to:&#10;A) overstate cost of goods sold.&#10;B) understate cost of goods available for sale.&#10;C) understate gross profit.&#10;D) overstate net income.

Accepted Answer

An overstatement of the ending inventory results in an understatement of the cost of goods sold (since ending inventory is subtracted in the calculation of cost of goods sold). This, in turn, leads to an overstatement of gross profit and thus an overstatement of net income, because less cost of goods sold means higher gross profit if sales remain constant. Choices A, B, and C are incorrect effects of overstating ending inventory.

Question 9

In a period of rising prices, the inventory method that will show the highest net income is:&#10;A) Average Cost.&#10;B) FIFO.&#10;C) LIFO.&#10;D) Specific Identification.

Accepted Answer

In a period of rising prices, the FIFO method will result in the highest net income because it assumes that the first items purchased are also the first items sold. Therefore, the cost of goods sold will include the lower costs of the earlier purchased inventory, resulting in a higher net income.

Question 10

The principles of internal control do not include:&#10;A) establishment of responsibility.&#10;B) documentation procedures.&#10;C) management responsibility.&#10;D) independent internal verification.

Accepted Answer

The principles of internal control include establishment of responsibility, documentation procedures, and independent internal verification. However, management responsibility is not specifically listed as one of the principles. Instead, management is responsible for implementing and maintaining effective internal control systems.

Deck 8: Reporting and Analyzing Receivables