ch6 (1)

ch6 Student: ___________________________________________________________________________

1.

When goods are shipped FOB shipping point, title passes to the buyer on the shipment date. True

2.

When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date. True

3.

False

The gross profit percentage is calculated by dividing net sales by gross profit. True

9.

False

A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the money because they will have a net savings of 19.2%. True

8.

False

Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; if not paid within two days, the full invoice price will be due in thirty days. True

7.

False

Sales returns and allowances is a contra-revenue account. True

6.

False

Sales discounts are deducted from sales in the calculation of net sales. True

5.

False

Credit card discounts are reported as operating expenses on an income statement. True

4.

False

False

The gross profit percentage decreases when operating expenses increase. True

False

10. The journal entry to record bad debt expense is made during the year that it is determined that a particular receivable is uncollectible. True

False

11. When a particular account receivable is determined to be uncollectible, the journal entry to write-off the account reduces net income. True

False

12. The allowance for doubtful accounts is reported as a contra-asset on the balance sheet. True

False

13. The journal entry to write-off an uncollectible account does not change the net realizable value (book value) of accounts receivable. True

False

14. The year-end journal entry to record bad debt expense reduces current assets and net income. True

False

15. Net sales multiplied by an historical percentage for bad debt expense, equals bad debt expense when using the percentage of credit sales method. True

False

16. The accounts receivable aging schedule determines the dollar amount of uncollectible accounts receivable at year-end; this dollar amount of uncollectible accounts receivable is the bad debt expense that is recorded for the year regardless of the allowance for doubtful accounts balance. True

False

17. Prior year financial statements are adjusted when it is determined that prior year bad debt expense was too low. True

False

18. If the accounts receivable turnover ratio increases, the number of days it takes to collect the receivables also increases. True

False

19. When preparing the statement of cash flows, the reason that we must adjust net sales revenue for the change in accounts receivables to convert net sales to cash collected from customers is that accounts receivable represents sales revenue not collected from customers at the beginning and end of the accounting year. True

False

20. Cash equivalents such as treasury bills are reported as investments on the balance sheet. True

False

21. Cash equivalents on the balance sheet include certificates of deposit with maturities of 60 days or more. True

False

22. Effective internal control of cash should include the separation of the duties for receiving and disbursing cash. True

False

23. If a check received from a customer that has been deposited by the seller is returned with the bank statement as a nonsufficient funds (NSF) check, it would appear on the seller's bank reconciliation as a deduction from the ending bank statement balance. True

False

24. Deposits in transit are deducted from the book balance when preparing the bank reconciliation. True

False

25. An objective of preparing the bank reconciliation is to reconcile the bank balance at the end of the period with the company's book balance at the end of the period. True

False

26. When completing the bank reconciliation, bank service charges should be deducted from the company's cash balance. True

False

27. Which of the following statements is correct? A. B. C. D.

Revenue is recognized at the time of shipment when goods are shipped FOB destination. Sales returns and allowances are reported as operating expenses on an income statement. Revenue is recorded when title and risks of ownership transfer to the buyer. Sales discounts are reported as operating expenses on an income statement.

28. A company sells magazines and collects subscription fees prior to the publication and distribution of the magazine. Which of the following correctly describes the impact on the financial statements when cash is received in advance from customers? A. B. C. D.

Current assets increase and gross profit increases. Current liabilities aren't affected and stockholders' equity isn't affected. Current assets increase and stockholders' equity increases. Current liabilities increase and gross profit is not affected.

29. Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much is Newark's cost of goods sold? A. B. C. D.

$307,000 $252,000 $440,000 $340,000

30. Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much is Newark's gross profit percentage? A. B. C. D.

75.5% 81.6% 53.7% 83.2%

31. Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much are Newark's net sales? A. B. C. D.

$1,634,000 $1,800,000 $1,667,000 $1,745,000

32. Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $490,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 How much is bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible? A. B. C. D.

$5,500 $6,700 $4,240 $4,300

33. Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $490,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 Flyer estimates bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded? A. B. C. D.

$5,500 $6,700 $4,240 $4,300

34. Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $290,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 Flyer estimates bad debt expense assuming that 1.5% of credit sales are uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded? A. B. C. D.

$7,950 $6,750 $5,550 $7,800

35. Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $290,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 How much is Flyer's bad debt expense assuming that 1.5% of credit sales have historically been uncollectible. A. B. C. D.

$7,950 $6,750 $5,550 $7,800

36. Which of the following is correct when bad debt expense is recorded at year-end? A. B. C. D.

Current assets are not affected. Gross profit will decrease. Income from operations will decrease. Current liabilities will increase.

37. Which of the following statements is false? A. B. C. D.

The journal entry to record bad debt expense decreases current assets. The journal entry to record bad debt expense decreases retained earnings. The journal entry to write-off an uncollectible account receivable decreases operating income. The journal entry to write-off an uncollectible account receivable does not affect current assets.

38. Which of the following journal entries correctly records bad debt expense?

A. B. C. D.

Option A Option B Option C Option D

39. Which of the following journal entries correctly records the write-off of an uncollectible account receivable?

A. B. C. D.

Option A Option B Option C Option D

40. The CHS Company has provided the following information: • Accounts receivable written-off as uncollectible during the year amounted to $11,500. • The accounts receivable balance at the beginning of the year was $150,000. • The accounts receivable balance at the end of the year was $210,000. • The allowance for doubtful accounts balance at the beginning of the year was $14,000. • The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900. • Credit sales during the year totaled $900,000. How much was CHS Company's bad debt expense? A. B. C. D.

$11,500 $12,900 $10,400 $14,000

41. The CHS Company has provided the following information: • Accounts receivable written-off as uncollectible during the year amounted to $11,500. • The accounts receivable balance at the beginning of the year was $150,000. • The accounts receivable balance at the end of the year was $210,000. • The allowance for doubtful accounts balance at the beginning of the year was $14,000. • The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900. • Credit sales during the year totaled $900,000. How much cash was received from collections of accounts receivable? A. B. C. D.

$888,500 $828,500 $690,000 $701,500

42. Which of the following statements is correct? A. The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to accounts receivable. B. The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to allowance for doubtful accounts. C The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad . debt expense and a credit to accounts receivable. D The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad . debt expense and a credit to allowance for doubtful accounts. 43. Clark Company estimated the net realizable value of their accounts receivable as of December 31, 2011, based on an aging schedule of accounts receivable, to be $165,000. Clark has also provided the following information: • The accounts receivable balance on December 31, 2011 was $175,000. • Uncollectible accounts receivable written-off during 2011 totaled $12,000. • The allowance for doubtful accounts balance on January 1, 2011 was $15,000. How much is Clark's 2011 bad debt expense? A. B. C. D.

$10,000 $7,000 $13,000 $3,000

44. Which of the following statements correctly describes the effect of recording the collection of a $10,000 account receivable for which a 2% sales discount was recorded at the time of collection? A. B. C. D.

Current assets will remain the same. Gross profit will decrease $200. Accounts receivable will decrease $9,800. Net sales will increase $9,800.

45. Which of the following journal entries correctly records the collection of an account receivable for which a 1% sales discount was recorded at the time of collection?

A. B. C. D.

Option A Option B Option C Option D

46. Which of the following correctly describes the effect of a journal entry involving the recording of a sales return? A. B. C. D.

Gross profit is not affected. Net sales increases. Current assets remain the same. Operating income decreases.

47. Which of the following doesn't correctly describe the effect of a journal entry involving the recording of a credit card discount? A. B. C. D.

Net sales decrease and gross profit decreases. Net sales decrease and operating income decreases. Operating expenses remain the same and operating income decreases. Neither operating expenses nor operating income is affected.

48. Which of the following correctly describes credit terms of 2/10, n/30? A A two percent discount for early payment is available if the invoice is paid before the tenth day of the . month following the month the sale. B. A two percent discount for early payment is available within ten days of the date of sale. C. A ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice. D A two percent discount for early payment is available if the invoice is paid after the tenth day, but before . the thirtieth day of the invoice date.

49. A customer purchased and received $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 30. Discount Paper Supply received the check on October 4. On which of the following dates should Discount Paper Supply record sales revenue? A. B. C. D.

September 1 September 13 September 30 October 4

50. When a credit sale is made with terms of 2/10, n/30 on May 10 and the customer's check is received on May 19, which of the following is true about the May 19 journal entry? A. The debit to cash will equal the credit to accounts receivable because the discount was recorded on May 10. B. There will be a debit to sales discounts on May 10. C. The debit to cash will be less than the credit to accounts receivable on May 19. D. There will be a credit to sales discounts on May 19. 51. A company had the following partial list of account balances at year-end:

How much is net sales revenue? A. B. C. D.

$91,900 $90,700 $89,900 $88,600

52. A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. Which of the following is the annual interest rate (rounded)? A. B. C. D.

56%. 38%. 25%. 18%.

53. When credit terms for a sale are 2/15, n/40, the customer saves by paying early. What percent (rounded) would this savings amount to on an annual basis? A. B. C. D.

18%. 20%. 30%. 37%.

54. Which of the following accounts is not a contra-revenue? A. B. C. D.

Sales discounts Credit card discounts Sales returns and allowances Allowance for doubtful accounts

55. Which of the following is the most likely cause of a decrease in a company's gross profit percentage? A. B. C. D.

The selling price decreased. The product cost as a percentage of sales decreased. The operating expenses increased. Fewer products were sold.

56. Dillon Company uses the allowance method to account for bad debts. The entry to write-off a bad account (one that will never be collected) should be:

A. B. C. D.

Option A Option B Option C Option D

57. When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this event will A. B. C. D.

decrease the net realizable value of the accounts receivable. have an effect that is not determinable from the information given. increase the net realizable value of the accounts receivable. have no effect on the net realizable value of the accounts receivable.

58. Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts of the $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000. The net realizable value of accounts receivable as shown by the accounting records before and after the write-off was as follows:

A. B. C. D.

Option A Option B Option C Option D

59. Woodland Company uses the allowance method to account for bad debts. During 2009, a customer became bankrupt and a receivable of $10,000 was deemed uncollectible. Which of the following journal entries records the uncollectible account write-off?

A. B. C. D.

Option A Option B Option C Option D

60. At year end, Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any yearend adjustments. Chief estimates that 1% of current accounts and 10% of accounts over thirty days are uncollectible. How much is bad debt expense? A. B. C. D.

$90 $190 $290 $100

61. Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works aged the accounts receivable and estimated that $5,000 of the $98,000 accounts receivable balance would be uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior to adjustment. How much is bad debt expense? A. B. C. D.

$5,000 $5,400 $4,600 $400

62. Which of the following statements does not correctly describe the allowance for doubtful accounts balance? A. B. C. D.

It is reported on the balance sheet as a component of current assets. It is a contra-asset account. It is reported on the balance sheet as a current liability. It is created as a result of the adjusting entry to record bad debt expense.

63. The Roscoe Company's March 1, 2010 bank statement balance was $70,000. As of March 1, outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March 1, 2010 cash balance on their books? A. B. C. D.

$63,000 $77,000 $70,000 $107,000

64. The Tanner Company's April 1, 2010 pre-reconciliation cash balance on their books was $35,000. While preparing the April 1 bank reconciliation, Tanner determined that outstanding checks total $11,000, deposits in transit total $7,000, and bank service charges are $50. How much was Tanner's April 1, 2010 cash balance per the bank statement? A. B. C. D.

$31,000 $30,950 $38,950 $39,000

65. The Conner Company's August 1, 2010 cash balance on their books was $90,000. As of August 1, outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August 1, 2010 cash balance on their bank statement? A. B. C. D.

$76,000 $90,000 $13,000 $104,000

66. Which of the following statements pertaining to bank reconciliations is false? A. Outstanding checks are deducted from the bank cash balance. B. Deposits in transit are added to the bank cash balance. C. Bank service charges are deducted from the bank cash balance. D.Non-sufficient funds checks identified in the bank statement are deducted from the book cash balance, not the bank cash balance. 67. When a depositor receives a bank statement indicating that there was a "NSF check", the depositor should do which of the following? A. B. C. D.

Reduce the cash account per the books for the amount of the "NSF check". Reduce the cash account per the bank statement for the amount of the "NSF check". Credit allowance for doubtful accounts for the amount of the check. Increase the sales returns and allowances account.

68. A deposit in transit on a bank reconciliation should be A. B. C. D.

added to the depositor's book cash balance. subtracted from the depositor's book cash balance. added to the bank statement balance. subtracted from the bank statement balance.

69. Linetech Company's bank statement showed an ending balance of $8,000. Items appearing in the bank reconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50; and Driver Company's $250 check erroneously deducted from Linetech's bank account by the bank. How much is the correct cash balance at the end of the month? A. B. C. D.

$10,600 $8,750 $8,500 $8,250

70. Which of the following demonstrates a poor internal control procedure? A.The bookkeeper makes cash deposits and records journal entries related to cash, while the treasurer prepares the bank reconciliation. B. The president, who does no bookkeeping, prepares the bank reconciliation each month. C. The treasurer signs all checks after the bookkeeper prepares the supporting documents. D. One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journal and ledger. 71. The cash records and the bank statement of Frankel Company showed the following at the end of February 2010: Outstanding checks as of the beginning of February 2010, $8,000; checks written by Frankel Company according to their books during February 2010, $50,000; and checks cleared by the bank during February 2010, $54,000. How much were the outstanding checks at the end of February 2010? A. B. C. D.

$2,000 $4,000 $6,000 $8,000

72. The cash account and the December bank statement of Gomez Company showed the following: deposits made by Gomez Company during December $90,000; deposits reflected on the December bank statement, $88,000; and deposits in transit on December 1, $5,000. How much were the deposits in transit at the end of December? A. B. C. D.

$10,000 $7,000 $5,000 $2,000

73. When preparing the monthly bank reconciliation, the accountant for Farris Corporation discovered that a check correctly written to one of Farris' suppliers for $159 had been incorrectly recorded in the books as $195. Which of the following statements is correct with respect to the bank reconciliation process? A. B. C. D.

The cash balance per the books will be decreased. The cash balance per the bank statement will be increased. The cash balance per the bank statement will be decreased. The cash balance per the books will be increased.

74. When preparing a bank reconciliation, which of the following would be deducted from the company's cash balance? A. B. C. D.

Interest income paid by the bank. The dollar amount of deposits in transit. The dollar amount of outstanding checks. The bank service charges included on the bank statement.

75. Merchandise was sold on credit for $10,000, terms 2/10, n/30. Which of the following journal entry descriptions correctly describes the cash collection? A. Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is within the discount period. B Cash is debited for $10,000, accounts receivable is credited for $9,800 and sales discounts is credited for . $200 if the collection is within the discount period. C Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is credited for . $200 if the collection is after the discount period. D. Cash is debited for $10,000, accounts receivable is credited for $10,000 if the collection is after the discount period. 76. Merchandise was sold on credit for $30,000, terms 3/15, n/30. Which of the following journal entry descriptions correctly describes the cash collection? A. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is within the discount period. B Cash is debited for $29,100, sales discounts is debited for $900, and accounts receivable is credited for . $30,000 if the collection is within the discount period. C Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales discounts is credited . for $900 if the collection is within the discount period. D. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is after the discount period. 77. Which of the following does not correctly describe the following journal entry?

A. B. C. D.

Current assets increase. Gross profit decreases. Net sales decreases. Operating income is not affected.

78. Which of the following correctly describes the following journal entry?

A. B. C. D.

The gross profit percentage remains the same. Operating income decreases. Current assets increase. Net sales increases.

79. Which of the following does not correctly describe the following journal entry?

A. B. C. D.

Current assets decrease. Gross profit decreases. Net sales decreases. Operating expenses increase.

80. The Ward Company has provided the following information: • Net sales totaled $750,000. • Beginning net accounts receivable was $65,000. • Ending net accounts receivable was $85,000. What was Ward's receivable turnover ratio? A. B. C. D.

10.0 8.8 11.54 5.0

81. The Ward Company has provided the following information: • Net sales totaled $750,000. • Beginning net accounts receivable was $65,000. • Ending net accounts receivable was $85,000. What was Ward's average collection period? A. B. C. D.

73 days 41.8 days 31.6 days 36.5 days

82. The Rye Corporation has provided the following information: • Total sales were $1,200,000. • Beginning net accounts receivable was $45,000. • Ending net accounts receivable was $65,000. Sales returns and allowances totaled $100,000. What was Rye's receivable turnover ratio? A. B. C. D.

21.8 18.5 10.0 20.0

83. The Rye Corporation has provided the following information: • Total sales were $1,200,000. • Beginning net accounts receivable was $45,000. • Ending net accounts receivable was $65,000. • Sales returns and allowances totaled $100,000. What was Rye's average collection period? A. B. C. D.

16.7 19.7 36.5 18.3

84. Which of the following transactions will result in a decrease in the receivable turnover ratio? A. B. C. D.

The journal entry to record bad debt expense. Writing off an uncollectible account receivable. Selling inventory on account. Collecting an account receivable.

85. Which of the following transactions will result in an increase in the receivable turnover ratio? A. B. C. D.

The journal entry to record bad debt expense. Writing off an uncollectible account receivable. Selling inventory on account. Purchasing inventory on account.

86. Which of the following statements is correct? A. A decrease in the accounts receivable balance means that credit sales exceeded cash collections from customers. B. The accounts receivable balance increases when cash collected from customers exceeds credit sales. C. A decrease in accounts receivable is deducted from net income when determining cash flow from operations. D. An increase in accounts receivable is deducted from net income when determining cash flow from operations. 87. Which of the following does not correctly describe the effect of recording a credit sale of inventory for a profit? A. B. C. D.

The receivables turnover ratio decreases. Current assets increase. Gross profit increases. Operating expenses increase.

88. The Soft Company has provided the following information: • Allowance for doubtful accounts increased $19,000 and accounts receivable increased • $390,000 during the year. • Accounts written off as uncollectible totaled $20,000. • Net sales totaled $2,700,000. • The gross profit percentage was 40%. • Sales discounts were $100,000. How much was Soft's bad debt expense? A. B. C. D.

$39,000 $1,000 $19,000 $20,000

89. The Soft Company has provided the following information: • Allowance for doubtful accounts increased $19,000 and accounts receivable increased $390,000 during the year. • Accounts written off as uncollectible totaled $20,000. • Net sales totaled $2,700,000. • The gross profit percentage was 40%. • Sales discounts were $100,000. How much was Soft's gross profit? A. B. C. D.

$1,040,000 $1,072,400 $1,032,400 $1,080,000

90. Redwing Company sold inventory costing $500 to a customer on account for $700. Which of the following correctly describes the collection of $686 cash when the customer takes advantage of a discount? A. B. C. D.

Operating expenses increase $14. Accounts receivable decreases $686. Current assets decrease $14. Gross profit is not affected.

91. Redwing Company sold inventory costing $500 to a customer on account for $700. Which of the following does not correctly describe the collection of $686 cash when the customer takes advantage of a discount? A. B. C. D.

Gross profit decreases $14. Accounts receivable decreases $700. Current assets decrease $14. Operating income is not affected.

92. Sabre Company sold inventory costing $600 to a customer on account for $900 with terms of 3/10, n/30. Which of the following is not correct? A. Gross profit increases $300 on the date of sale. B. Total current assets aren't affected on the date of cash collection if the customer pays 15 days after the date of sale. C. Total current assets increase $27 on the date of cash collection if the customer pays within 15 days of the date of sale. D.Gross profit and net sales both decrease $27 on the date of cash collection if the customer pays within 15 days of the date of sale. 93. One of Hawk Company's customers returned products that cost Hawk $300, which was sold on account for $450. Which of the following does not correctly describe the affect of the return on the financial statements? A. B. C. D.

Gross profit decreases $150. Total current assets decrease $150. Sales returns and allowances increase $150. Operating expenses increase $150.

94. One of Hawk Company's customers returned products that cost Hawk $500, which was sold on account for $800. Which of the following correctly describes the affect of the return on the financial statements? A. B. C. D.

Gross profit decreases $800. Total current assets decrease $300. Sales returns and allowances increase $300. Net sales increase $300.

95. Which of the following transactions does not affect gross profit? A. A customer returning merchandise that was sold for a profit. B. The collection of cash on an account receivable which was paid for by the customer within the discount period. C. The journal entry to record bad debt expense. D. Selling inventory for less than its cost.

96. Which of the following is not a component of the gross profit calculation? A. B. C. D.

Cost of goods sold Sales returns and allowances Allowance for doubtful accounts Credit card discounts

97. The following data were taken from the records of Lilo Corporation for the year ended December 31, 2010:

98. A portion of the income statement for Oscar Company is shown below. Provide the missing account titles and amounts.

99. A portion of the income statement for Lone Star Company is shown below. Provide the missing account titles and amounts.

100.Indicate whether each of the accounts listed below normally will have a debit or a credit balance. Record your answer to the left of each account by entering either Dr or Cr.

101.Anthony Inc. reported the following amounts on their 2011 and 2010 income statements:

Requirements: A. Compute the gross profit percentage for both years. B. Provide at least two potential causes for the change in Anthony's gross profit percentage.

102.Hill Company has reported the following information on their income statements for the years 2008 through 2012:

A. Compute the gross profit percentage for each year. B. Has the gross profit ratio for Hill improved over time or worsened? Explain your answer.

103.Hickory Corporation recorded sales revenue during the year of $350,000 of which $100,000 was on credit. The company has experienced an average loss rate of 2% of credit sales. Give the adjusting journal entry at the end of the year to record bad debt expense.

104.Prior to the year-end adjustment to record bad debt expense the ledger of Stickler Company included the following accounts and balances:

Cash collections on accounts receivable during 2010 amounted to $450,000. Sales revenue during 2010 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of the credit sales made in 2010 would ultimately become uncollectible. Determine the balances of the allowance for doubtful accounts and bad debt expense after the adjusting entry to record bad debt expense was made. The allowance for doubtful accounts has a credit balance prior to the adjusting entry.

105.On December 31, 2011, Colonial Corporation had the following account balances related to credit sales and receivables prior to recording adjusting entries:

Requirements: Present the necessary year-end adjusting entry related to uncollectible accounts for each of the following independent assumptions: A. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables outstanding at year-end will be uncollectible. B. It is estimated that 1% of credit sales for the year will prove to be uncollectible. C. Assume the same information presented in part A. Except that prior to adjustment, the allowance for doubtful accounts had a debit balance of $200 rather than a credit balance of $200.

106.On January 1, American Company's allowance for doubtful accounts had a credit balance of $3,000. The balance in the Accounts Receivable account on that date was $75,000. On January 2, prior to any credit sales, a $500 account from National Company was deemed to be uncollectible and written off. Required: A. Compute the net realizable value of American's receivables on January 1. B. Present the journal entry American would record on January 2 related to the write-off of National's account. C. Compute the net realizable value of American's receivables on January 2, immediately following the write-off of National's account.

107.Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Describe how the change in accounts receivable will affect the calculation of cash flow from operations for 2011 and 2010.

108.Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Calculate the accounts receivable turnover for 2011 and 2010: Answer: Answers will vary Feedback: 2011 = 9.01 ($717,422/$79,604.5) 2010 = 15.1 ($1,110,178/$73,507.5)

109.Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Calculate the days' sales in receivables for 2011 and 2010:

110.A recent annual report for Kirova Company contained the following data:

Requirements: A. Calculate the accounts receivable turnover ratio and average days' sales in receivables for 2011. B. Explain the meaning of each number.

111.During 2011, Charles Inc. recorded credit sales of $2,000,000. Based on prior experience, it estimates a 1 percent bad debt rate on credit sales. At the beginning of the year, the balance in net accounts receivable was $150,000. At the end of the year, but before the bad debt expense adjustment was recorded and before any bad debts had been written off, the balance in net accounts receivable was $125,000. A. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recorded for the year 2011 and accounts receivable totaling $10,000 were written off for the year, what was the receivables turnover ratio for the year? B. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recorded for the year 2011 and accounts receivable totaling $12,000 were written off for the year, what was the receivables turnover ratio for the year? C. Explain why the answers to parts 1 and 2 differ or do not differ.

112.Where, if at all, do items A through G (listed below) belong in the following bank reconciliation?

Items: A. Checks written during June that had not cleared the bank by June 30. B. Bank service charges for June which were not known until the June 30th bank statement arrived. C. Deposit made on June 30 that did not reach the bank until July 1. D. Upon reviewing the company's cash receipts book after June 30, it was discovered the accounting clerk had neglected to post one receipt to the cash account. E. The bank statement reported a "NSF check" during June. F. The bank incorrectly deducted the check of another company to the bank account during June. G. The company was paid interest on its account by the bank.

113.Why is the reconciliation of a company's cash account to the bank statement so important for effective internal control for cash?

114.Illinois Company prepared the following bank reconciliation at May 31:

Prepare the necessary journal entries for Illinois Company required by the May 31 bank reconciliation.

115.Chicago Company has hired you to reconcile its bank statement and cash account. For June, the Cash account showed the following:

There were neither outstanding checks nor deposits in transit at May 31. A. Prepare the bank reconciliation. B. Prepare the adjusting journal entries needed due to the bank reconciliation. C. What is the June 30 ending cash balance?

116.A comparison of the balance in Cottonwood Company's cash account (per its books) as of April 30, 2009, and the bank statement dated April 30, 2009, revealed the following information:

Required: Prepare a bank reconciliation using the format below. Indicate the proper handling of each of the items given above by listing the appropriate item code (letter) and amount under each section of the reconciliation statement form below. Then determine the correct cash balance. Note: If one or more of the items given above should not appear on the reconciliation statement, do not include the item(s).

117.Burke Company has just received its June 30 bank statement from Urban Bank. The bank statement and the cash account, summarized below, are to be reconciled for the month of June.

Required: A. Prepare the June 30 bank reconciliation. B. Prepare the journal entries that should be made in the accounts of Burke Company as a result of the bank reconciliation.

118.What are "cash equivalents"? Specifically where would they appear on the financial statements?

119.You are the new manager of West Coast Company. The company distributes goods throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within two weeks. You notice that one employee is responsible for opening all incoming payments, recording them in the accounting records, and depositing all receipts in the bank daily. When asked why this one person performed all of these duties, you were told that it was more efficient for one person to handle cash and to keep track of things. If any cash was missing, responsibility could be easily determined. Do you agree with this arrangement? What changes would you make, and why?

120.Asia Company sold $10,000 of goods to Euro Company on credit on May 1. At the time of the sale, Asia recorded a debit to Accounts Receivable and a credit to Sales Revenue for $10,000. Terms were 2/10, n/30. Required: Present the entries Asia Company would record for each of the following independent situations: A. Euro paid the balance due, less the discount, on May 10. B. Euro returned half of the goods for credit on May 4. Euro paid the balance due, less the discount, on May 10. C. Euro paid their bill on May 30 (there were no returns).

121.On July 10, 2010, Rex Company sold merchandise at an invoice price of $5,000 with terms of 2/10, n/30. Give the journal entries required below by indicating the account code of the appropriate account for each debit and credit and the amounts involved.

122.On June 1, 2010, Concorde Company sold merchandise on credit at an invoice price of $1,000; terms 2/10, n/30. Give the journal entries to record the following: A. To record the sale. B. Assumption A: To record collection on June 28, 2010. C. Assumption B: To record collection on June 9, 2010.

123.Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component. B. If the transaction results in a decrease in the financial statement component. C. If the transaction does not affect the financial statement component.

124.When goods are shipped FOB shipping point, title passes to the buyer on the shipment date. True

False

125.When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date. True

False

126.Credit card discounts are reported as operating expenses on an income statement. True

False

127.Sales discounts are deducted from sales in the calculation of net sales. True

False

128.Sales returns and allowances is a contra-revenue account. True

False

129.Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; if not paid within two days, the full invoice price will be due in thirty days. True

False

130.A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the money because they will have a net savings of 19.2%. True

False

131.The gross profit percentage is calculated by dividing net sales by gross profit. True

False

132.The gross profit percentage decreases when operating expenses increase. True

False

133.The journal entry to record bad debt expense is made during the year that it is determined that a particular receivable is uncollectible. True

False

134.When a particular account receivable is determined to be uncollectible, the journal entry to write-off the account reduces net income. True

False

135.The allowance for doubtful accounts is reported as a contra-asset on the balance sheet. True

False

136.The journal entry to write-off an uncollectible account does not change the net realizable value (book value) of accounts receivable. True

False

137.The year-end journal entry to record bad debt expense reduces current assets and net income. True

False

138.Net sales multiplied by an historical percentage for bad debt expense, equals bad debt expense when using the percentage of credit sales method. True

False

139.The accounts receivable aging schedule determines the dollar amount of uncollectible accounts receivable at year-end; this dollar amount of uncollectible accounts receivable is the bad debt expense that is recorded for the year regardless of the allowance for doubtful accounts balance. True

False

140.Prior year financial statements are adjusted when it is determined that prior year bad debt expense was too low. True

False

141.If the accounts receivable turnover ratio increases, the number of days it takes to collect the receivables also increases. True

False

142.When preparing the statement of cash flows, the reason that we must adjust net sales revenue for the change in accounts receivables to convert net sales to cash collected from customers is that accounts receivable represents sales revenue not collected from customers at the beginning and end of the accounting year. True

False

143.Cash equivalents such as treasury bills are reported as investments on the balance sheet. True

False

144.Cash equivalents on the balance sheet include certificates of deposit with maturities of 60 days or more. True

False

145.Effective internal control of cash should include the separation of the duties for receiving and disbursing cash. True

False

146.If a check received from a customer that has been deposited by the seller is returned with the bank statement as a nonsufficient funds (NSF) check, it would appear on the seller's bank reconciliation as a deduction from the ending bank statement balance. True

False

147.Deposits in transit are deducted from the book balance when preparing the bank reconciliation. True

False

148.An objective of preparing the bank reconciliation is to reconcile the bank balance at the end of the period with the company's book balance at the end of the period. True

False

149.When completing the bank reconciliation, bank service charges should be deducted from the company's cash balance. True

False

150.Which of the following statements is correct? A. B. C. D.

Revenue is recognized at the time of shipment when goods are shipped FOB destination. Sales returns and allowances are reported as operating expenses on an income statement. Revenue is recorded when title and risks of ownership transfer to the buyer. Sales discounts are reported as operating expenses on an income statement.

151.A company sells magazines and collects subscription fees prior to the publication and distribution of the magazine. Which of the following correctly describes the impact on the financial statements when cash is received in advance from customers? A. B. C. D.

Current assets increase and gross profit increases. Current liabilities aren't affected and stockholders' equity isn't affected. Current assets increase and stockholders' equity increases. Current liabilities increase and gross profit is not affected.

152.Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much is Newark's cost of goods sold? A. B. C. D.

$307,000 $252,000 $440,000 $340,000

153.Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much is Newark's gross profit percentage? A. B. C. D.

75.5% 81.6% 53.7% 83.2%

154.Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much are Newark's net sales? A. B. C. D.

$1,634,000 $1,800,000 $1,667,000 $1,745,000

155.Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $490,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 How much is bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible? A. B. C. D.

$5,500 $6,700 $4,240 $4,300

156.Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $490,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 Flyer estimates bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded? A. B. C. D.

$5,500 $6,700 $4,240 $4,300

157.Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $290,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 Flyer estimates bad debt expense assuming that 1.5% of credit sales are uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded? A. B. C. D.

$7,950 $6,750 $5,550 $7,800

158.Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $290,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 How much is Flyer's bad debt expense assuming that 1.5% of credit sales have historically been uncollectible. A. B. C. D.

$7,950 $6,750 $5,550 $7,800

159.Which of the following is correct when bad debt expense is recorded at year-end? A. B. C. D.

Current assets are not affected. Gross profit will decrease. Income from operations will decrease. Current liabilities will increase.

160.Which of the following statements is false? A. B. C. D.

The journal entry to record bad debt expense decreases current assets. The journal entry to record bad debt expense decreases retained earnings. The journal entry to write-off an uncollectible account receivable decreases operating income. The journal entry to write-off an uncollectible account receivable does not affect current assets.

161.Which of the following journal entries correctly records bad debt expense?

A. B. C. D.

Option A Option B Option C Option D

162.Which of the following journal entries correctly records the write-off of an uncollectible account receivable?

A. B. C. D.

Option A Option B Option C Option D

163.The CHS Company has provided the following information: • Accounts receivable written-off as uncollectible during the year amounted to $11,500. • The accounts receivable balance at the beginning of the year was $150,000. • The accounts receivable balance at the end of the year was $210,000. • The allowance for doubtful accounts balance at the beginning of the year was $14,000. • The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900. • Credit sales during the year totaled $900,000. How much was CHS Company's bad debt expense? A. B. C. D.

$11,500 $12,900 $10,400 $14,000

164.The CHS Company has provided the following information: • Accounts receivable written-off as uncollectible during the year amounted to $11,500. • The accounts receivable balance at the beginning of the year was $150,000. • The accounts receivable balance at the end of the year was $210,000. • The allowance for doubtful accounts balance at the beginning of the year was $14,000. • The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900. • Credit sales during the year totaled $900,000. How much cash was received from collections of accounts receivable? A. B. C. D.

$888,500 $828,500 $690,000 $701,500

165.Which of the following statements is correct? A. The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to accounts receivable. B. The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to allowance for doubtful accounts. C The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad . debt expense and a credit to accounts receivable. D The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad . debt expense and a credit to allowance for doubtful accounts. 166.Clark Company estimated the net realizable value of their accounts receivable as of December 31, 2011, based on an aging schedule of accounts receivable, to be $165,000. Clark has also provided the following information: • The accounts receivable balance on December 31, 2011 was $175,000. • Uncollectible accounts receivable written-off during 2011 totaled $12,000. • The allowance for doubtful accounts balance on January 1, 2011 was $15,000. How much is Clark's 2011 bad debt expense? A. B. C. D.

$10,000 $7,000 $13,000 $3,000

167.Which of the following statements correctly describes the effect of recording the collection of a $10,000 account receivable for which a 2% sales discount was recorded at the time of collection? A. B. C. D.

Current assets will remain the same. Gross profit will decrease $200. Accounts receivable will decrease $9,800. Net sales will increase $9,800.

168.Which of the following journal entries correctly records the collection of an account receivable for which a 1% sales discount was recorded at the time of collection?

A. B. C. D.

Option A Option B Option C Option D

169.Which of the following correctly describes the effect of a journal entry involving the recording of a sales return? A. B. C. D.

Gross profit is not affected. Net sales increases. Current assets remain the same. Operating income decreases.

170.Which of the following doesn't correctly describe the effect of a journal entry involving the recording of a credit card discount? A. B. C. D.

Net sales decrease and gross profit decreases. Net sales decrease and operating income decreases. Operating expenses remain the same and operating income decreases. Neither operating expenses nor operating income is affected.

171.Which of the following correctly describes credit terms of 2/10, n/30? A A two percent discount for early payment is available if the invoice is paid before the tenth day of the . month following the month the sale. B. A two percent discount for early payment is available within ten days of the date of sale. C. A ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice. D A two percent discount for early payment is available if the invoice is paid after the tenth day, but before . the thirtieth day of the invoice date. 172.A customer purchased and received $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 30. Discount Paper Supply received the check on October 4. On which of the following dates should Discount Paper Supply record sales revenue? A. B. C. D.

September 1 September 13 September 30 October 4

173.When a credit sale is made with terms of 2/10, n/30 on May 10 and the customer's check is received on May 19, which of the following is true about the May 19 journal entry? A. The debit to cash will equal the credit to accounts receivable because the discount was recorded on May 10. B. There will be a debit to sales discounts on May 10. C. The debit to cash will be less than the credit to accounts receivable on May 19. D. There will be a credit to sales discounts on May 19.

174.A company had the following partial list of account balances at year-end:

How much is net sales revenue? A. B. C. D.

$91,900 $90,700 $89,900 $88,600

175.A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. Which of the following is the annual interest rate (rounded)? A. B. C. D.

56%. 38%. 25%. 18%.

176.When credit terms for a sale are 2/15, n/40, the customer saves by paying early. What percent (rounded) would this savings amount to on an annual basis? A. B. C. D.

18%. 20%. 30%. 37%.

177.Which of the following accounts is not a contra-revenue? A. B. C. D.

Sales discounts Credit card discounts Sales returns and allowances Allowance for doubtful accounts

178.Which of the following is the most likely cause of a decrease in a company's gross profit percentage? A. B. C. D.

The selling price decreased. The product cost as a percentage of sales decreased. The operating expenses increased. Fewer products were sold.

179.Dillon Company uses the allowance method to account for bad debts. The entry to write-off a bad account (one that will never be collected) should be:

A. B. C. D.

Option A Option B Option C Option D

180.When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this event will A. B. C. D.

decrease the net realizable value of the accounts receivable. have an effect that is not determinable from the information given. increase the net realizable value of the accounts receivable. have no effect on the net realizable value of the accounts receivable.

181.Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts of the $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000. The net realizable value of accounts receivable as shown by the accounting records before and after the write-off was as follows:

A. B. C. D.

Option A Option B Option C Option D

182.Woodland Company uses the allowance method to account for bad debts. During 2009, a customer became bankrupt and a receivable of $10,000 was deemed uncollectible. Which of the following journal entries records the uncollectible account write-off?

A. B. C. D.

Option A Option B Option C Option D

183.At year end, Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any yearend adjustments. Chief estimates that 1% of current accounts and 10% of accounts over thirty days are uncollectible. How much is bad debt expense? A. B. C. D.

$90 $190 $290 $100

184.Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works aged the accounts receivable and estimated that $5,000 of the $98,000 accounts receivable balance would be uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior to adjustment. How much is bad debt expense? A. B. C. D.

$5,000 $5,400 $4,600 $400

185.Which of the following statements does not correctly describe the allowance for doubtful accounts balance? A. B. C. D.

It is reported on the balance sheet as a component of current assets. It is a contra-asset account. It is reported on the balance sheet as a current liability. It is created as a result of the adjusting entry to record bad debt expense.

186.The Roscoe Company's March 1, 2010 bank statement balance was $70,000. As of March 1, outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March 1, 2010 cash balance on their books? A. B. C. D.

$63,000 $77,000 $70,000 $107,000

187.The Tanner Company's April 1, 2010 pre-reconciliation cash balance on their books was $35,000. While preparing the April 1 bank reconciliation, Tanner determined that outstanding checks total $11,000, deposits in transit total $7,000, and bank service charges are $50. How much was Tanner's April 1, 2010 cash balance per the bank statement? A. B. C. D.

$31,000 $30,950 $38,950 $39,000

188.The Conner Company's August 1, 2010 cash balance on their books was $90,000. As of August 1, outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August 1, 2010 cash balance on their bank statement? A. B. C. D.

$76,000 $90,000 $13,000 $104,000

189.Which of the following statements pertaining to bank reconciliations is false? A. Outstanding checks are deducted from the bank cash balance. B. Deposits in transit are added to the bank cash balance. C. Bank service charges are deducted from the bank cash balance. D.Non-sufficient funds checks identified in the bank statement are deducted from the book cash balance, not the bank cash balance. 190.When a depositor receives a bank statement indicating that there was a "NSF check", the depositor should do which of the following? A. B. C. D.

Reduce the cash account per the books for the amount of the "NSF check". Reduce the cash account per the bank statement for the amount of the "NSF check". Credit allowance for doubtful accounts for the amount of the check. Increase the sales returns and allowances account.

191.A deposit in transit on a bank reconciliation should be A. B. C. D.

added to the depositor's book cash balance. subtracted from the depositor's book cash balance. added to the bank statement balance. subtracted from the bank statement balance.

192.Linetech Company's bank statement showed an ending balance of $8,000. Items appearing in the bank reconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50; and Driver Company's $250 check erroneously deducted from Linetech's bank account by the bank. How much is the correct cash balance at the end of the month? A. B. C. D.

$10,600 $8,750 $8,500 $8,250

193.Which of the following demonstrates a poor internal control procedure? A.The bookkeeper makes cash deposits and records journal entries related to cash, while the treasurer prepares the bank reconciliation. B. The president, who does no bookkeeping, prepares the bank reconciliation each month. C. The treasurer signs all checks after the bookkeeper prepares the supporting documents. D. One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journal and ledger. 194.The cash records and the bank statement of Frankel Company showed the following at the end of February 2010: Outstanding checks as of the beginning of February 2010, $8,000; checks written by Frankel Company according to their books during February 2010, $50,000; and checks cleared by the bank during February 2010, $54,000. How much were the outstanding checks at the end of February 2010? A. B. C. D.

$2,000 $4,000 $6,000 $8,000

195.The cash account and the December bank statement of Gomez Company showed the following: deposits made by Gomez Company during December $90,000; deposits reflected on the December bank statement, $88,000; and deposits in transit on December 1, $5,000. How much were the deposits in transit at the end of December? A. B. C. D.

$10,000 $7,000 $5,000 $2,000

196.When preparing the monthly bank reconciliation, the accountant for Farris Corporation discovered that a check correctly written to one of Farris' suppliers for $159 had been incorrectly recorded in the books as $195. Which of the following statements is correct with respect to the bank reconciliation process? A. B. C. D.

The cash balance per the books will be decreased. The cash balance per the bank statement will be increased. The cash balance per the bank statement will be decreased. The cash balance per the books will be increased.

197.When preparing a bank reconciliation, which of the following would be deducted from the company's cash balance? A. B. C. D.

Interest income paid by the bank. The dollar amount of deposits in transit. The dollar amount of outstanding checks. The bank service charges included on the bank statement.

198.Merchandise was sold on credit for $10,000, terms 2/10, n/30. Which of the following journal entry descriptions correctly describes the cash collection? A. Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is within the discount period. B Cash is debited for $10,000, accounts receivable is credited for $9,800 and sales discounts is credited for . $200 if the collection is within the discount period. C Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is credited for . $200 if the collection is after the discount period. D. Cash is debited for $10,000, accounts receivable is credited for $10,000 if the collection is after the discount period. 199.Merchandise was sold on credit for $30,000, terms 3/15, n/30. Which of the following journal entry descriptions correctly describes the cash collection? A. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is within the discount period. B Cash is debited for $29,100, sales discounts is debited for $900, and accounts receivable is credited for . $30,000 if the collection is within the discount period. C Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales discounts is credited . for $900 if the collection is within the discount period. D. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is after the discount period.

200.Which of the following does not correctly describe the following journal entry?

A. B. C. D.

Current assets increase. Gross profit decreases. Net sales decreases. Operating income is not affected.

201.Which of the following correctly describes the following journal entry?

A. B. C. D.

The gross profit percentage remains the same. Operating income decreases. Current assets increase. Net sales increases.

202.Which of the following does not correctly describe the following journal entry?

A. B. C. D.

Current assets decrease. Gross profit decreases. Net sales decreases. Operating expenses increase.

203.The Ward Company has provided the following information: • Net sales totaled $750,000. • Beginning net accounts receivable was $65,000. • Ending net accounts receivable was $85,000. What was Ward's receivable turnover ratio? A. B. C. D.

10.0 8.8 11.54 5.0

204.The Ward Company has provided the following information: • Net sales totaled $750,000. • Beginning net accounts receivable was $65,000. • Ending net accounts receivable was $85,000. What was Ward's average collection period? A. B. C. D.

73 days 41.8 days 31.6 days 36.5 days

205.The Rye Corporation has provided the following information: • Total sales were $1,200,000. • Beginning net accounts receivable was $45,000. • Ending net accounts receivable was $65,000. Sales returns and allowances totaled $100,000. What was Rye's receivable turnover ratio? A. B. C. D.

21.8 18.5 10.0 20.0

206.The Rye Corporation has provided the following information: • Total sales were $1,200,000. • Beginning net accounts receivable was $45,000. • Ending net accounts receivable was $65,000. • Sales returns and allowances totaled $100,000. What was Rye's average collection period? A. B. C. D.

16.7 19.7 36.5 18.3

207.Which of the following transactions will result in a decrease in the receivable turnover ratio? A. B. C. D.

The journal entry to record bad debt expense. Writing off an uncollectible account receivable. Selling inventory on account. Collecting an account receivable.

208.Which of the following transactions will result in an increase in the receivable turnover ratio? A. B. C. D.

The journal entry to record bad debt expense. Writing off an uncollectible account receivable. Selling inventory on account. Purchasing inventory on account.

209.Which of the following statements is correct? A. A decrease in the accounts receivable balance means that credit sales exceeded cash collections from customers. B. The accounts receivable balance increases when cash collected from customers exceeds credit sales. C. A decrease in accounts receivable is deducted from net income when determining cash flow from operations. D. An increase in accounts receivable is deducted from net income when determining cash flow from operations.

210.Which of the following does not correctly describe the effect of recording a credit sale of inventory for a profit? A. B. C. D.

The receivables turnover ratio decreases. Current assets increase. Gross profit increases. Operating expenses increase.

211.The Soft Company has provided the following information: • Allowance for doubtful accounts increased $19,000 and accounts receivable increased • $390,000 during the year. • Accounts written off as uncollectible totaled $20,000. • Net sales totaled $2,700,000. • The gross profit percentage was 40%. • Sales discounts were $100,000. How much was Soft's bad debt expense? A. B. C. D.

$39,000 $1,000 $19,000 $20,000

212.The Soft Company has provided the following information: • Allowance for doubtful accounts increased $19,000 and accounts receivable increased $390,000 during the year. • Accounts written off as uncollectible totaled $20,000. • Net sales totaled $2,700,000. • The gross profit percentage was 40%. • Sales discounts were $100,000. How much was Soft's gross profit? A. B. C. D.

$1,040,000 $1,072,400 $1,032,400 $1,080,000

213.Redwing Company sold inventory costing $500 to a customer on account for $700. Which of the following correctly describes the collection of $686 cash when the customer takes advantage of a discount? A. B. C. D.

Operating expenses increase $14. Accounts receivable decreases $686. Current assets decrease $14. Gross profit is not affected.

214.Redwing Company sold inventory costing $500 to a customer on account for $700. Which of the following does not correctly describe the collection of $686 cash when the customer takes advantage of a discount? A. B. C. D.

Gross profit decreases $14. Accounts receivable decreases $700. Current assets decrease $14. Operating income is not affected.

215.Sabre Company sold inventory costing $600 to a customer on account for $900 with terms of 3/10, n/30. Which of the following is not correct? A. Gross profit increases $300 on the date of sale. B. Total current assets aren't affected on the date of cash collection if the customer pays 15 days after the date of sale. C. Total current assets increase $27 on the date of cash collection if the customer pays within 15 days of the date of sale. D.Gross profit and net sales both decrease $27 on the date of cash collection if the customer pays within 15 days of the date of sale. 216.One of Hawk Company's customers returned products that cost Hawk $300, which was sold on account for $450. Which of the following does not correctly describe the affect of the return on the financial statements? A. B. C. D.

Gross profit decreases $150. Total current assets decrease $150. Sales returns and allowances increase $150. Operating expenses increase $150.

217.One of Hawk Company's customers returned products that cost Hawk $500, which was sold on account for $800. Which of the following correctly describes the affect of the return on the financial statements? A. B. C. D.

Gross profit decreases $800. Total current assets decrease $300. Sales returns and allowances increase $300. Net sales increase $300.

218.Which of the following transactions does not affect gross profit? A. A customer returning merchandise that was sold for a profit. B. The collection of cash on an account receivable which was paid for by the customer within the discount period. C. The journal entry to record bad debt expense. D. Selling inventory for less than its cost. 219.Which of the following is not a component of the gross profit calculation? A. B. C. D.

Cost of goods sold Sales returns and allowances Allowance for doubtful accounts Credit card discounts

220.The following data were taken from the records of Lilo Corporation for the year ended December 31, 2010:

221.A portion of the income statement for Oscar Company is shown below. Provide the missing account titles and amounts.

222.A portion of the income statement for Lone Star Company is shown below. Provide the missing account titles and amounts.

223.Indicate whether each of the accounts listed below normally will have a debit or a credit balance. Record your answer to the left of each account by entering either Dr or Cr.

224.Anthony Inc. reported the following amounts on their 2011 and 2010 income statements:

Requirements: A. Compute the gross profit percentage for both years. B. Provide at least two potential causes for the change in Anthony's gross profit percentage.

225.Hill Company has reported the following information on their income statements for the years 2008 through 2012:

A. Compute the gross profit percentage for each year. B. Has the gross profit ratio for Hill improved over time or worsened? Explain your answer.

226.Hickory Corporation recorded sales revenue during the year of $350,000 of which $100,000 was on credit. The company has experienced an average loss rate of 2% of credit sales. Give the adjusting journal entry at the end of the year to record bad debt expense.

227.Prior to the year-end adjustment to record bad debt expense the ledger of Stickler Company included the following accounts and balances:

Cash collections on accounts receivable during 2010 amounted to $450,000. Sales revenue during 2010 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of the credit sales made in 2010 would ultimately become uncollectible. Determine the balances of the allowance for doubtful accounts and bad debt expense after the adjusting entry to record bad debt expense was made. The allowance for doubtful accounts has a credit balance prior to the adjusting entry.

228.On December 31, 2011, Colonial Corporation had the following account balances related to credit sales and receivables prior to recording adjusting entries:

Requirements: Present the necessary year-end adjusting entry related to uncollectible accounts for each of the following independent assumptions: A. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables outstanding at year-end will be uncollectible. B. It is estimated that 1% of credit sales for the year will prove to be uncollectible. C. Assume the same information presented in part A. Except that prior to adjustment, the allowance for doubtful accounts had a debit balance of $200 rather than a credit balance of $200.

229.On January 1, American Company's allowance for doubtful accounts had a credit balance of $3,000. The balance in the Accounts Receivable account on that date was $75,000. On January 2, prior to any credit sales, a $500 account from National Company was deemed to be uncollectible and written off. Required: A. Compute the net realizable value of American's receivables on January 1. B. Present the journal entry American would record on January 2 related to the write-off of National's account. C. Compute the net realizable value of American's receivables on January 2, immediately following the write-off of National's account.

230.Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Describe how the change in accounts receivable will affect the calculation of cash flow from operations for 2011 and 2010.

231.Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Calculate the accounts receivable turnover for 2011 and 2010: Answer: Answers will vary Feedback: 2011 = 9.01 ($717,422/$79,604.5) 2010 = 15.1 ($1,110,178/$73,507.5)

232.Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Calculate the days' sales in receivables for 2011 and 2010:

233.A recent annual report for Kirova Company contained the following data:

Requirements: A. Calculate the accounts receivable turnover ratio and average days' sales in receivables for 2011. B. Explain the meaning of each number.

234.During 2011, Charles Inc. recorded credit sales of $2,000,000. Based on prior experience, it estimates a 1 percent bad debt rate on credit sales. At the beginning of the year, the balance in net accounts receivable was $150,000. At the end of the year, but before the bad debt expense adjustment was recorded and before any bad debts had been written off, the balance in net accounts receivable was $125,000. A. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recorded for the year 2011 and accounts receivable totaling $10,000 were written off for the year, what was the receivables turnover ratio for the year? B. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recorded for the year 2011 and accounts receivable totaling $12,000 were written off for the year, what was the receivables turnover ratio for the year? C. Explain why the answers to parts 1 and 2 differ or do not differ.

235.Where, if at all, do items A through G (listed below) belong in the following bank reconciliation?

Items: A. Checks written during June that had not cleared the bank by June 30. B. Bank service charges for June which were not known until the June 30th bank statement arrived. C. Deposit made on June 30 that did not reach the bank until July 1. D. Upon reviewing the company's cash receipts book after June 30, it was discovered the accounting clerk had neglected to post one receipt to the cash account. E. The bank statement reported a "NSF check" during June. F. The bank incorrectly deducted the check of another company to the bank account during June. G. The company was paid interest on its account by the bank.

236.Why is the reconciliation of a company's cash account to the bank statement so important for effective internal control for cash?

237.Illinois Company prepared the following bank reconciliation at May 31:

Prepare the necessary journal entries for Illinois Company required by the May 31 bank reconciliation.

238.Chicago Company has hired you to reconcile its bank statement and cash account. For June, the Cash account showed the following:

There were neither outstanding checks nor deposits in transit at May 31. A. Prepare the bank reconciliation. B. Prepare the adjusting journal entries needed due to the bank reconciliation. C. What is the June 30 ending cash balance?

239.A comparison of the balance in Cottonwood Company's cash account (per its books) as of April 30, 2009, and the bank statement dated April 30, 2009, revealed the following information:

Required: Prepare a bank reconciliation using the format below. Indicate the proper handling of each of the items given above by listing the appropriate item code (letter) and amount under each section of the reconciliation statement form below. Then determine the correct cash balance. Note: If one or more of the items given above should not appear on the reconciliation statement, do not include the item(s).

240.Burke Company has just received its June 30 bank statement from Urban Bank. The bank statement and the cash account, summarized below, are to be reconciled for the month of June.

Required: A. Prepare the June 30 bank reconciliation. B. Prepare the journal entries that should be made in the accounts of Burke Company as a result of the bank reconciliation.

241.What are "cash equivalents"? Specifically where would they appear on the financial statements?

242.You are the new manager of West Coast Company. The company distributes goods throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within two weeks. You notice that one employee is responsible for opening all incoming payments, recording them in the accounting records, and depositing all receipts in the bank daily. When asked why this one person performed all of these duties, you were told that it was more efficient for one person to handle cash and to keep track of things. If any cash was missing, responsibility could be easily determined. Do you agree with this arrangement? What changes would you make, and why?

243.Asia Company sold $10,000 of goods to Euro Company on credit on May 1. At the time of the sale, Asia recorded a debit to Accounts Receivable and a credit to Sales Revenue for $10,000. Terms were 2/10, n/30. Required: Present the entries Asia Company would record for each of the following independent situations: A. Euro paid the balance due, less the discount, on May 10. B. Euro returned half of the goods for credit on May 4. Euro paid the balance due, less the discount, on May 10. C. Euro paid their bill on May 30 (there were no returns).

244.On July 10, 2010, Rex Company sold merchandise at an invoice price of $5,000 with terms of 2/10, n/30. Give the journal entries required below by indicating the account code of the appropriate account for each debit and credit and the amounts involved.

245.On June 1, 2010, Concorde Company sold merchandise on credit at an invoice price of $1,000; terms 2/10, n/30. Give the journal entries to record the following: A. To record the sale. B. Assumption A: To record collection on June 28, 2010. C. Assumption B: To record collection on June 9, 2010.

246.Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component. B. If the transaction results in a decrease in the financial statement component. C. If the transaction does not affect the financial statement component.

ch6 Key 1.

When goods are shipped FOB shipping point, title passes to the buyer on the shipment date. TRUE When goods are shipped FOB shipping point, the title passes to the buyer when the goods are shipped. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; and service companies. Libby - Chapter 06 #1 Topic Area: Accounting For Sales Revenue

2.

When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date. FALSE When goods are shipped FOB destination, the revenue is recognized when the goods are delivered. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; and service companies. Libby - Chapter 06 #2 Topic Area: Accounting For Sales Revenue

3.

Credit card discounts are reported as operating expenses on an income statement. FALSE Credit card discounts are deducted from sales to calculate net sales. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #3 Topic Area: Accounting For Sales Revenue

4.

Sales discounts are deducted from sales in the calculation of net sales. TRUE Sales discounts are deducted from sales to calculate net sales. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #4 Topic Area: Accounting For Sales Revenue

5.

Sales returns and allowances is a contra-revenue account. TRUE Sales returns and allowances are deducted from sales to calculate net sales. They are therefore a contrarevenue account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #5 Topic Area: Accounting For Sales Revenue

6.

Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; if not paid within two days, the full invoice price will be due in thirty days. FALSE The "2/10" means that a 2% discount is given if the payment is made within 10 days. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #6 Topic Area: Accounting For Sales Revenue

7.

A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the money because they will have a net savings of 19.2%. TRUE The annual interest rate associated with the credit terms is 37.2% and is calculated by multiplying the 20-day interest rate ($600 ÷ $29,400) by the number of 20-day periods during a year (365 ÷ 20). Borrowing at 18% will save the company 19.2% (37.2% - 18%). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #7 Topic Area: Accounting For Sales Revenue

8.

The gross profit percentage is calculated by dividing net sales by gross profit. FALSE The gross profit percentage is calculated by dividing gross profit by net sales. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #8 Topic Area: Measuring And Reporting Receivables

9.

The gross profit percentage decreases when operating expenses increase. FALSE The gross profit percentage is calculated by dividing gross profit by net sales. Operating expenses do not affect either gross profit or net sales. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #9 Topic Area: Measuring And Reporting Receivables

10.

The journal entry to record bad debt expense is made during the year that it is determined that a particular receivable is uncollectible. FALSE Bad debt expense is recorded during the year of sale, not during the year the receivable is determined to be uncollectible. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #10 Topic Area: Measuring And Reporting Receivables

11.

When a particular account receivable is determined to be uncollectible, the journal entry to write-off the account reduces net income. FALSE The entry to write-off an account receivable includes a debit to the allowance for doubtful accounts and a credit to accounts receivable; this entry does not affect the income statement. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #11 Topic Area: Measuring And Reporting Receivables

12.

The allowance for doubtful accounts is reported as a contra-asset on the balance sheet. TRUE Allowance for doubtful accounts is deducted from accounts receivable on the balance sheet. It is therefore a contra-asset account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #12 Topic Area: Measuring And Reporting Receivables

13.

The journal entry to write-off an uncollectible account does not change the net realizable value (book value) of accounts receivable. TRUE The journal entry to write-off an account receivable includes a debit to allowance for doubtful accounts and a credit to accounts receivable; this entry reduces both accounts equally and therefore doesn't change net realizable value (accounts receivable minus allowance for doubtful accounts). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #13 Topic Area: Measuring And Reporting Receivables

14.

The year-end journal entry to record bad debt expense reduces current assets and net income. TRUE The journal entry increases the allowance for doubtful accounts balance which decreases current assets and the journal entry increases expenses which decreases net income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #14 Topic Area: Measuring And Reporting Receivables

15.

Net sales multiplied by an historical percentage for bad debt expense, equals bad debt expense when using the percentage of credit sales method. TRUE The percentage of credit sales method estimates bad debt expense by multiplying net credit sales times an historical bad debt percentage. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #15 Topic Area: Measuring And Reporting Receivables

16.

The accounts receivable aging schedule determines the dollar amount of uncollectible accounts receivable at year-end; this dollar amount of uncollectible accounts receivable is the bad debt expense that is recorded for the year regardless of the allowance for doubtful accounts balance. FALSE The bad debt expense for the year takes into consideration the existing allowance for doubtful accounts balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #16 Topic Area: Measuring And Reporting Receivables

17.

Prior year financial statements are adjusted when it is determined that prior year bad debt expense was too low. FALSE Prior year financial statements aren't adjusted; the current and/or future financial statements however will be adjusted. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #17 Topic Area: Measuring And Reporting Receivables

18.

If the accounts receivable turnover ratio increases, the number of days it takes to collect the receivables also increases. FALSE The average collection period is calculated by dividing 365 by the receivables turnover ratio. Therefore the higher the receivable turnover ratio, the lower the number of days to collect the receivable will be. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #18 Topic Area: Measuring And Reporting Receivables

19.

When preparing the statement of cash flows, the reason that we must adjust net sales revenue for the change in accounts receivables to convert net sales to cash collected from customers is that accounts receivable represents sales revenue not collected from customers at the beginning and end of the accounting year. TRUE The change in the accounts receivable balance represents the difference between cash collections and net sales revenue. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #19 Topic Area: Measuring And Reporting Receivables

20.

Cash equivalents such as treasury bills are reported as investments on the balance sheet. FALSE Cash and cash equivalents are combined and reported on the balance sheet as a current asset. Cash equivalents are not reported as an investment on the balance sheet. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #20 Topic Area: Reporting And Safeguarding Cash

21.

Cash equivalents on the balance sheet include certificates of deposit with maturities of 60 days or more. FALSE Cash equivalents have maturities of less than 90 days. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #21 Topic Area: Reporting And Safeguarding Cash

22.

Effective internal control of cash should include the separation of the duties for receiving and disbursing cash. TRUE Separation of the responsibilities for receiving and disbursing cash is a basic internal control for cash. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #22 Topic Area: Reporting And Safeguarding Cash

23.

If a check received from a customer that has been deposited by the seller is returned with the bank statement as a nonsufficient funds (NSF) check, it would appear on the seller's bank reconciliation as a deduction from the ending bank statement balance. FALSE The NSF check would be deducted from the book balance not the bank balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #23 Topic Area: Reporting And Safeguarding Cash

24.

Deposits in transit are deducted from the book balance when preparing the bank reconciliation. FALSE Deposits in transit are added to the bank balance when preparing the bank reconciliation. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #24 Topic Area: Reporting And Safeguarding Cash

25.

An objective of preparing the bank reconciliation is to reconcile the bank balance at the end of the period with the company's book balance at the end of the period. TRUE The bank reconciliation is an internal control device with the intent being to test the equality of the bank statement balance with the book balance after the applicable adjustments have been made to both balances. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #25 Topic Area: Reporting And Safeguarding Cash

26.

When completing the bank reconciliation, bank service charges should be deducted from the company's cash balance. TRUE Bank service charges are deducted from the book cash balance because they were unrecorded prior to receipt of the bank statement. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #26 Topic Area: Reporting And Safeguarding Cash

27.

Which of the following statements is correct? A. B. C. D.

Revenue is recognized at the time of shipment when goods are shipped FOB destination. Sales returns and allowances are reported as operating expenses on an income statement. Revenue is recorded when title and risks of ownership transfer to the buyer. Sales discounts are reported as operating expenses on an income statement.

Most businesses recognize revenue when the product is delivered and/or service is provided. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; and service companies. Libby - Chapter 06 #27 Topic Area: Accounting For Sales Revenue

28.

A company sells magazines and collects subscription fees prior to the publication and distribution of the magazine. Which of the following correctly describes the impact on the financial statements when cash is received in advance from customers? A. B. C. D.

Current assets increase and gross profit increases. Current liabilities aren't affected and stockholders' equity isn't affected. Current assets increase and stockholders' equity increases. Current liabilities increase and gross profit is not affected.

Receiving payments in advance of providing goods and/or services creates and liability and does not create revenue or gross profit. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #28 Topic Area: Accounting For Sales Revenue

29.

Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much is Newark's cost of goods sold? A. B. C. D.

$307,000 $252,000 $440,000 $340,000

Net sales ($450,000 + $1,350,000 - $90,000 - $43,000) minus cost of goods sold ($307,000) equals gross profit ($1,360,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #29 Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables.

30.

Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much is Newark's gross profit percentage? A. B. C. D.

75.5% 81.6% 53.7% 83.2%

The gross profit percentage (81.6%) equals gross profit ($1,360,000) divided by net sales ($450,000 + $1,350,000 - $90,000 - $43,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #30 Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables

31.

Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much are Newark's net sales? A. B. C. D.

$1,634,000 $1,800,000 $1,667,000 $1,745,000

Net sales ($1,667,000) equals ($450,000 + $1,350,000 - $90,000 - $43,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #31 Topic Area: Accounting For Sales Revenue

32.

Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $490,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 How much is bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible? A. B. C. D.

$5,500 $6,700 $4,240 $4,300

Bad debt expense ($4,300) = 5% of accounts of accounts receivable (5% × $110,000) - allowance for doubtful accounts credit balance ($1,200). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #32 Topic Area: Measuring And Reporting Receivables

33.

Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $490,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 Flyer estimates bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded? A. B. C. D.

$5,500 $6,700 $4,240 $4,300

The allowance for doubtful accounts balance ($5,500) equals 5% of accounts of accounts receivable (5% × $110,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #33 Topic Area: Measuring And Reporting Receivables

34.

Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $290,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 Flyer estimates bad debt expense assuming that 1.5% of credit sales are uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded? A. B. C. D.

$7,950 $6,750 $5,550 $7,800

The allowance for doubtful accounts ($7,950) = Bad debt expense (1.5% × $450,000) plus the allowance for doubtful accounts credit balance ($1,200). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #34 Topic Area: Measuring And Reporting Receivables

35.

Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $290,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 How much is Flyer's bad debt expense assuming that 1.5% of credit sales have historically been uncollectible. A. B. C. D.

$7,950 $6,750 $5,550 $7,800

Bad debt expense ($6,750) =1.5% × $450,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #35 Topic Area: Measuring And Reporting Receivables

36.

Which of the following is correct when bad debt expense is recorded at year-end? A. B. C. D.

Current assets are not affected. Gross profit will decrease. Income from operations will decrease. Current liabilities will increase.

Bad debt expense is an operating expense. An increase in operating expenses decreases income from operations. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #36 Topic Area: Measuring And Reporting Receivables

37.

Which of the following statements is false? A. B. C. D.

The journal entry to record bad debt expense decreases current assets. The journal entry to record bad debt expense decreases retained earnings. The journal entry to write-off an uncollectible account receivable decreases operating income. The journal entry to write-off an uncollectible account receivable does not affect current assets.

The journal entry to write-off an uncollectible account receivable decreases accounts receivable and the allowance for uncollectible accounts balances and does not affect operating income. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #37 Topic Area: Measuring And Reporting Receivables

38.

Which of the following journal entries correctly records bad debt expense?

A. B. C. D.

Option A Option B Option C Option D

The journal entry to record bad debt expense involves a debit to bad debt expense and a credit to allowance for doubtful accounts. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #38 Topic Area: Measuring And Reporting Receivables

39.

Which of the following journal entries correctly records the write-off of an uncollectible account receivable?

A. B. C. D.

Option A Option B Option C Option D

The journal entry to write-off an account receivable requires a debit to allowance for doubtful accounts and a credit to accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #39 Topic Area: Measuring And Reporting Receivables

40.

The CHS Company has provided the following information: • Accounts receivable written-off as uncollectible during the year amounted to $11,500. • The accounts receivable balance at the beginning of the year was $150,000. • The accounts receivable balance at the end of the year was $210,000. • The allowance for doubtful accounts balance at the beginning of the year was $14,000. • The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900. • Credit sales during the year totaled $900,000. How much was CHS Company's bad debt expense? A. B. C. D.

$11,500 $12,900 $10,400 $14,000

Ending allowance for doubtful accounts ($12,900) = Beginning allowance for doubtful accounts ($14,000) - Accounts receivable write-offs ($11,500) + Bad debt expense ($10,400). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #40 Topic Area: Measuring And Reporting Receivables

41.

The CHS Company has provided the following information: • Accounts receivable written-off as uncollectible during the year amounted to $11,500. • The accounts receivable balance at the beginning of the year was $150,000. • The accounts receivable balance at the end of the year was $210,000. • The allowance for doubtful accounts balance at the beginning of the year was $14,000. • The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900. • Credit sales during the year totaled $900,000. How much cash was received from collections of accounts receivable? A. B. C. D.

$888,500 $828,500 $690,000 $701,500

Ending accounts receivable ($210,000) = Beginning accounts receivable ($150,000) - Accounts receivable write-offs ($11,500) + Credit sales ($900,000) - Cash collections ($828,500). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #41 Topic Area: Measuring And Reporting Receivables

42.

Which of the following statements is correct? A. The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to accounts receivable. B. The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to allowance for doubtful accounts. C The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad . debt expense and a credit to accounts receivable. D The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad . debt expense and a credit to allowance for doubtful accounts. The journal entry to record bad debt expense requires a debit to bad debt expense (an operating expense) and a credit to allowance for doubtful accounts (a contra-asset account). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #42 Topic Area: Measuring And Reporting Receivables

43.

Clark Company estimated the net realizable value of their accounts receivable as of December 31, 2011, based on an aging schedule of accounts receivable, to be $165,000. Clark has also provided the following information: • The accounts receivable balance on December 31, 2011 was $175,000. • Uncollectible accounts receivable written-off during 2011 totaled $12,000. • The allowance for doubtful accounts balance on January 1, 2011 was $15,000. How much is Clark's 2011 bad debt expense? A. B. C. D.

$10,000 $7,000 $13,000 $3,000

The December 31, 2011 balance in allowance for uncollectible accounts ($10,000) equals the accounts receivable balance on December 31, 2011 ($175,000) minus the December 31, 2011 net realizable value of accounts receivable ($165,000). The December 31, 2011 balance in allowance for uncollectible accounts ($10,000) equals the balance in allowance for doubtful accounts on January 1, 2011 ($15,000) minus accounts receivable write-offs ($12,000) during 2011 plus the 2011bad debt expense ($7,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #43 Topic Area: Measuring And Reporting Receivables

44.

Which of the following statements correctly describes the effect of recording the collection of a $10,000 account receivable for which a 2% sales discount was recorded at the time of collection? A. B. C. D.

Current assets will remain the same. Gross profit will decrease $200. Accounts receivable will decrease $9,800. Net sales will increase $9,800.

The $200 sales discount ($10,000 x 2%) reduces net sales and therefore gross profit. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #44 Topic Area: Accounting For Sales Revenue

45.

Which of the following journal entries correctly records the collection of an account receivable for which a 1% sales discount was recorded at the time of collection?

A. B. C. D.

Option A Option B Option C Option D

The journal entry involves a debit to both cash and sales discounts and a credit to accounts receivable. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #45 Topic Area: Accounting For Sales Revenue

46.

Which of the following correctly describes the effect of a journal entry involving the recording of a sales return? A. B. C. D.

Gross profit is not affected. Net sales increases. Current assets remain the same. Operating income decreases.

The journal entry involves a debit to sales returns and allowances which reduces gross profit and therefore operating income. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #46 Topic Area: Accounting For Sales Revenue

47.

Which of the following doesn't correctly describe the effect of a journal entry involving the recording of a credit card discount? A. B. C. D.

Net sales decrease and gross profit decreases. Net sales decrease and operating income decreases. Operating expenses remain the same and operating income decreases. Neither operating expenses nor operating income is affected.

The credit card discount account is a contra-sales account which reduces net sales, gross profit, and therefore operating income. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #47 Topic Area: Accounting For Sales Revenue

48.

Which of the following correctly describes credit terms of 2/10, n/30? A A two percent discount for early payment is available if the invoice is paid before the tenth day of the . month following the month the sale. B. A two percent discount for early payment is available within ten days of the date of sale. C. A ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice. D A two percent discount for early payment is available if the invoice is paid after the tenth day, but . before the thirtieth day of the invoice date. The credit term 2/10 implies that a 2% discount is available within ten days of the date of sale and the term n/30 implies that the full sales price is due within 30 days of the sale. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #48 Topic Area: Accounting For Sales Revenue

49.

A customer purchased and received $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 30. Discount Paper Supply received the check on October 4. On which of the following dates should Discount Paper Supply record sales revenue? A. B. C. D.

September 1 September 13 September 30 October 4

Sales revenue should be recorded on the date of sale. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; and service companies. Libby - Chapter 06 #49 Topic Area: Accounting For Sales Revenue

50.

When a credit sale is made with terms of 2/10, n/30 on May 10 and the customer's check is received on May 19, which of the following is true about the May 19 journal entry? A. The debit to cash will equal the credit to accounts receivable because the discount was recorded on May 10. B. There will be a debit to sales discounts on May 10. C. The debit to cash will be less than the credit to accounts receivable on May 19. D. There will be a credit to sales discounts on May 19. The customer paid within the discount period so the discount is recognized on May 19. The discount reduces the cash received so therefore the debit to cash is less than the credit to accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #50 Topic Area: Accounting For Sales Revenue

51.

A company had the following partial list of account balances at year-end:

How much is net sales revenue? A. B. C. D.

$91,900 $90,700 $89,900 $88,600

Net sales revenue ($91,900) equals sales revenue ($95,000) minus both sales discounts ($2,100) and sales returns and allowances ($1,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #51 Topic Area: Accounting For Sales Revenue

52.

A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. Which of the following is the annual interest rate (rounded)? A. B. C. D.

56%. 38%. 25%. 18%.

30-day interest rate (.031) = Amount saved ($3) ÷ Amount paid ($97) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #52 Topic Area: Accounting For Sales Revenue

53.

When credit terms for a sale are 2/15, n/40, the customer saves by paying early. What percent (rounded) would this savings amount to on an annual basis? A. B. C. D.

18%. 20%. 30%. 37%.

25-day interest rate (.02) = Amount saved ($2) ÷ Amount paid ($98) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #53 Topic Area: Accounting For Sales Revenue

54.

Which of the following accounts is not a contra-revenue? A. B. C. D.

Sales discounts Credit card discounts Sales returns and allowances Allowance for doubtful accounts

Allowance for doubtful accounts is a contra-asset account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #54 Topic Area: Accounting For Sales Revenue

55.

Which of the following is the most likely cause of a decrease in a company's gross profit percentage? A. B. C. D.

The selling price decreased. The product cost as a percentage of sales decreased. The operating expenses increased. Fewer products were sold.

Net sales - Cost of goods sold = Gross profit. Gross profit divided by net sales equals the gross profit percentage. A decrease in the selling price results in a decrease in net sales, gross profit, and therefore the gross profit percentage. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #55 Topic Area: Accounting For Sales Revenue

56.

Dillon Company uses the allowance method to account for bad debts. The entry to write-off a bad account (one that will never be collected) should be:

A. B. C. D.

Option A Option B Option C Option D

Writing-off an uncollectible account involves a debit to allowance for doubtful accounts and a credit to accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #56 Topic Area: Measuring And Reporting Receivables

57.

When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this event will A. B. C. D.

decrease the net realizable value of the accounts receivable. have an effect that is not determinable from the information given. increase the net realizable value of the accounts receivable. have no effect on the net realizable value of the accounts receivable.

Writing-off an uncollectible account involves a debit to allowance for doubtful accounts (a contraasset account) and a credit to accounts receivable (an asset account). Therefore the net realizable value (accounts receivable minus allowance for doubtful accounts) does not change. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #57 Topic Area: Measuring And Reporting Receivables

58.

Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts of the $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000. The net realizable value of accounts receivable as shown by the accounting records before and after the write-off was as follows:

A. B. C. D.

Option A Option B Option C Option D

Writing-off an uncollectible account involves a debit to allowance for doubtful accounts (a contraasset account) and a credit to accounts receivable (an asset account). Therefore the net realizable value (accounts receivable minus allowance for doubtful accounts) does not change; it is $728,500 both before and after the write-off. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #58 Topic Area: Measuring And Reporting Receivables

59.

Woodland Company uses the allowance method to account for bad debts. During 2009, a customer became bankrupt and a receivable of $10,000 was deemed uncollectible. Which of the following journal entries records the uncollectible account write-off?

A. B. C. D.

Option A Option B Option C Option D

Writing-off an uncollectible account involves a debit to allowance for doubtful accounts (a contra-asset account) and a credit to accounts receivable (an asset account). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #59 Topic Area: Measuring And Reporting Receivables

60.

At year end, Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments. Chief estimates that 1% of current accounts and 10% of accounts over thirty days are uncollectible. How much is bad debt expense? A. B. C. D.

$90 $190 $290 $100

Allowance for doubtful accounts desired balance ($190) = ($1,000 × .10) + ($9,000 × .01). Bad debt expense ($90) = Allowance for doubtful accounts desired balance ($190) - Allowance for doubtful accounts current balance ($100). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #60 Topic Area: Measuring And Reporting Receivables

61.

Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works aged the accounts receivable and estimated that $5,000 of the $98,000 accounts receivable balance would be uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior to adjustment. How much is bad debt expense? A. B. C. D.

$5,000 $5,400 $4,600 $400

Bad debt expense ($5,400) = Allowance for doubtful accounts desired credit balance ($5,000) + Allowance for doubtful accounts current debit balance ($400). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #61 Topic Area: Measuring And Reporting Receivables

62.

Which of the following statements does not correctly describe the allowance for doubtful accounts balance? A. B. C. D.

It is reported on the balance sheet as a component of current assets. It is a contra-asset account. It is reported on the balance sheet as a current liability. It is created as a result of the adjusting entry to record bad debt expense.

Allowance for doubtful accounts is a contra-asset account and is not a current liability. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #62 Topic Area: Measuring And Reporting Receivables

63.

The Roscoe Company's March 1, 2010 bank statement balance was $70,000. As of March 1, outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March 1, 2010 cash balance on their books? A. B. C. D.

$63,000 $77,000 $70,000 $107,000

Book cash balance ($63,000) = Bank balance ($70,000) - Outstanding checks ($22,000) + Deposits in transit ($15,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #63 Topic Area: Reporting And Safeguarding Cash

64.

The Tanner Company's April 1, 2010 pre-reconciliation cash balance on their books was $35,000. While preparing the April 1 bank reconciliation, Tanner determined that outstanding checks total $11,000, deposits in transit total $7,000, and bank service charges are $50. How much was Tanner's April 1, 2010 cash balance per the bank statement? A. B. C. D.

$31,000 $30,950 $38,950 $39,000

Bank cash balance ($38,950) = Corrected book balance ($35,000 - $50) + Outstanding checks ($11,000) - Deposits in transit ($7,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #64 Topic Area: Reporting And Safeguarding Cash

65.

The Conner Company's August 1, 2010 cash balance on their books was $90,000. As of August 1, outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August 1, 2010 cash balance on their bank statement? A. B. C. D.

$76,000 $90,000 $13,000 $104,000

Bank cash balance ($104,000) = Book balance ($90,000) + Outstanding checks ($44,000) - Deposits in transit ($30,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #65 Topic Area: Reporting And Safeguarding Cash

66.

Which of the following statements pertaining to bank reconciliations is false? A. Outstanding checks are deducted from the bank cash balance. B. Deposits in transit are added to the bank cash balance. C. Bank service charges are deducted from the bank cash balance. D. Non-sufficient funds checks identified in the bank statement are deducted from the book cash balance, not the bank cash balance. Bank service charges are deducted from the book cash balance, not the bank cash balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #66 Topic Area: Reporting And Safeguarding Cash

67.

When a depositor receives a bank statement indicating that there was a "NSF check", the depositor should do which of the following? A. B. C. D.

Reduce the cash account per the books for the amount of the "NSF check". Reduce the cash account per the bank statement for the amount of the "NSF check". Credit allowance for doubtful accounts for the amount of the check. Increase the sales returns and allowances account.

NSF checks are deducted from the book cash balance when preparing a bank reconciliation. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #67 Topic Area: Reporting And Safeguarding Cash

68.

A deposit in transit on a bank reconciliation should be A. B. C. D.

added to the depositor's book cash balance. subtracted from the depositor's book cash balance. added to the bank statement balance. subtracted from the bank statement balance.

Deposits in transit represent deposits recorded on the books which have not yet been recorded on the bank statement. They are therefore added to the bank statement balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #68 Topic Area: Reporting And Safeguarding Cash

69.

Linetech Company's bank statement showed an ending balance of $8,000. Items appearing in the bank reconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50; and Driver Company's $250 check erroneously deducted from Linetech's bank account by the bank. How much is the correct cash balance at the end of the month? A. B. C. D.

$10,600 $8,750 $8,500 $8,250

Book cash balance ($8,750) = Bank balance ($8,000) - Outstanding checks ($500) + Deposits in transit ($1,000) + Bank error ($250). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #69 Topic Area: Reporting And Safeguarding Cash

70.

Which of the following demonstrates a poor internal control procedure? A.The bookkeeper makes cash deposits and records journal entries related to cash, while the treasurer prepares the bank reconciliation. B. The president, who does no bookkeeping, prepares the bank reconciliation each month. C. The treasurer signs all checks after the bookkeeper prepares the supporting documents. D. One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journal and ledger. The bookkeeper's cash record keeping and cash handling responsibilities need to be separated. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #70 Topic Area: Reporting And Safeguarding Cash

71.

The cash records and the bank statement of Frankel Company showed the following at the end of February 2010: Outstanding checks as of the beginning of February 2010, $8,000; checks written by Frankel Company according to their books during February 2010, $50,000; and checks cleared by the bank during February 2010, $54,000. How much were the outstanding checks at the end of February 2010? A. B. C. D.

$2,000 $4,000 $6,000 $8,000

Outstanding checks at the end of February ($4,000) = Outstanding checks at the beginning of February ($8,000) + Checks written per the books during February ($50,000) - Checks clearing the bank during February ($54,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #71 Topic Area: Reporting And Safeguarding Cash

72.

The cash account and the December bank statement of Gomez Company showed the following: deposits made by Gomez Company during December $90,000; deposits reflected on the December bank statement, $88,000; and deposits in transit on December 1, $5,000. How much were the deposits in transit at the end of December? A. B. C. D.

$10,000 $7,000 $5,000 $2,000

Deposits in transit at the end of December ($7,000) = Deposits made per the books during December ($90,000) - {Deposits per the December bank statement ($88,000) - December 1 deposits in transit ($5,000)}. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #72 Topic Area: Reporting And Safeguarding Cash

73.

When preparing the monthly bank reconciliation, the accountant for Farris Corporation discovered that a check correctly written to one of Farris' suppliers for $159 had been incorrectly recorded in the books as $195. Which of the following statements is correct with respect to the bank reconciliation process? A. B. C. D.

The cash balance per the books will be decreased. The cash balance per the bank statement will be increased. The cash balance per the bank statement will be decreased. The cash balance per the books will be increased.

The error incorrectly decreases the cash balance per the books. To correct the books, the difference ($195 - $159) is added back to the book balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #73 Topic Area: Reporting And Safeguarding Cash

74.

When preparing a bank reconciliation, which of the following would be deducted from the company's cash balance? A. B. C. D.

Interest income paid by the bank. The dollar amount of deposits in transit. The dollar amount of outstanding checks. The bank service charges included on the bank statement.

The bank service charges are recorded on the bank statement and need to be deducted from the book balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #74 Topic Area: Reporting And Safeguarding Cash

75.

Merchandise was sold on credit for $10,000, terms 2/10, n/30. Which of the following journal entry descriptions correctly describes the cash collection? A. Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is within the discount period. B Cash is debited for $10,000, accounts receivable is credited for $9,800 and sales discounts is credited . for $200 if the collection is within the discount period. C Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is credited . for $200 if the collection is after the discount period. D. Cash is debited for $10,000, accounts receivable is credited for $10,000 if the collection is after the discount period. When the payment is received after the discount period, a sales discount is not recorded and cash is debited and accounts receivable is credited for the selling price. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #75 Topic Area: Accounting For Sales Revenue

76.

Merchandise was sold on credit for $30,000, terms 3/15, n/30. Which of the following journal entry descriptions correctly describes the cash collection? A. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is within the discount period. B Cash is debited for $29,100, sales discounts is debited for $900, and accounts receivable is credited . for $30,000 if the collection is within the discount period. C Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales discounts is . credited for $900 if the collection is within the discount period. D. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is after the discount period. When the payment is received within the discount period, a sales discount ($900) is recorded via a debit and cash is debited for the selling price less the discount ($30,000 - $900) and accounts receivable is credited for the selling price ($30,000). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #76 Topic Area: Accounting For Sales Revenue

77.

Which of the following does not correctly describe the following journal entry?

A. B. C. D.

Current assets increase. Gross profit decreases. Net sales decreases. Operating income is not affected.

The debit to the credit card discount account is a contra-revenue account which reduces both gross profit and operating income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #77 Topic Area: Accounting For Sales Revenue

78.

Which of the following correctly describes the following journal entry?

A. B. C. D.

The gross profit percentage remains the same. Operating income decreases. Current assets increase. Net sales increases.

The debit to the credit card discount account is a contra-revenue account which reduces both gross profit and operating income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #78 Topic Area: Accounting For Sales Revenue

79.

Which of the following does not correctly describe the following journal entry?

A. B. C. D.

Current assets decrease. Gross profit decreases. Net sales decreases. Operating expenses increase.

The debit to the sales returns and allowances account is a contra-revenue account which reduces both gross profit and operating income. Sales returns and allowances is not an operating expense. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #79 Topic Area: Accounting For Sales Revenue

80.

The Ward Company has provided the following information: • Net sales totaled $750,000. • Beginning net accounts receivable was $65,000. • Ending net accounts receivable was $85,000. What was Ward's receivable turnover ratio? A. B. C. D.

10.0 8.8 11.54 5.0

Receivable turnover ratio (10) = Net sales ($750,000) ÷ Average accounts receivable ($75,000*). *Average net accounts receivable ($75,000) = [beginning net accounts receivable ($65,000) + ending net accounts receivable ($85,000)] ÷ 2 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #80 Topic Area: Measuring And Reporting Receivables

81.

The Ward Company has provided the following information: • Net sales totaled $750,000. • Beginning net accounts receivable was $65,000. • Ending net accounts receivable was $85,000. What was Ward's average collection period? A. B. C. D.

73 days 41.8 days 31.6 days 36.5 days

Receivable turnover ratio (10) = Net sales ($750,000) ÷ Average net accounts receivable ($75,000*). *Average accounts receivable ($75,000) = [beginning net accounts receivable ($65,000) + ending net accounts receivable ($85,000)] ÷ 2. Average collection period (36.5 days) = 365 ÷ receivables turnover (10). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #81 Topic Area: Measuring And Reporting Receivables

82.

The Rye Corporation has provided the following information: • Total sales were $1,200,000. • Beginning net accounts receivable was $45,000. • Ending net accounts receivable was $65,000. Sales returns and allowances totaled $100,000. What was Rye's receivable turnover ratio? A. B. C. D.

21.8 18.5 10.0 20.0

Receivable turnover ratio (20) = Net sales ($1,200,000 - $100,000) ÷ Average net accounts receivable ($55,000*). Average net accounts receivable ($55,000) = [beginning net accounts receivable ($45,000) + ending net accounts receivable ($65,000)] ÷ 2. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #82 Topic Area: Measuring And Reporting Receivables

83.

The Rye Corporation has provided the following information: • Total sales were $1,200,000. • Beginning net accounts receivable was $45,000. • Ending net accounts receivable was $65,000. • Sales returns and allowances totaled $100,000. What was Rye's average collection period? A. B. C. D.

16.7 19.7 36.5 18.3

Receivable turnover ratio (20) = Net sales ($1,200,000 - $100,000) ÷ Average net accounts receivable ($55,000*). *Average net accounts receivable ($55,000) = [beginning net accounts receivable ($45,000) + ending net accounts receivable ($65,000)] ÷ 2. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #83 Topic Area: Measuring And Reporting Receivables

84.

Which of the following transactions will result in a decrease in the receivable turnover ratio? A. B. C. D.

The journal entry to record bad debt expense. Writing off an uncollectible account receivable. Selling inventory on account. Collecting an account receivable.

Selling inventory on account results in an increase in both net sales (numerator) and average net receivables (denominator). However, the increase in the denominator is greater relative to the increase in the numerator. Therefore the receivable turnover ratio decreases. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #84 Topic Area: Accounting For Sales Revenue

85.

Which of the following transactions will result in an increase in the receivable turnover ratio? A. B. C. D.

The journal entry to record bad debt expense. Writing off an uncollectible account receivable. Selling inventory on account. Purchasing inventory on account.

The journal entry to record bad debt expense involves a credit to allowance for doubtful accounts, which decreases net accounts receivable and therefore increases the receivable turnover ratio. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #85 Topic Area: Accounting For Sales Revenue

86.

Which of the following statements is correct? A. A decrease in the accounts receivable balance means that credit sales exceeded cash collections from customers. B. The accounts receivable balance increases when cash collected from customers exceeds credit sales. C. A decrease in accounts receivable is deducted from net income when determining cash flow from operations. D. An increase in accounts receivable is deducted from net income when determining cash flow from operations. An increase in accounts receivable is added to net income, rather than deducted from net income, when determining cash flow from operations. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #86 Topic Area: Measuring And Reporting Revenues

87.

Which of the following does not correctly describe the effect of recording a credit sale of inventory for a profit? A. B. C. D.

The receivables turnover ratio decreases. Current assets increase. Gross profit increases. Operating expenses increase.

Cost of goods sold is not an operating expense. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #87 Topic Area: Accounting For Revenues, Measuring And Reporting Revenues

88.

The Soft Company has provided the following information: • Allowance for doubtful accounts increased $19,000 and accounts receivable increased • $390,000 during the year. • Accounts written off as uncollectible totaled $20,000. • Net sales totaled $2,700,000. • The gross profit percentage was 40%. • Sales discounts were $100,000. How much was Soft's bad debt expense? A. B. C. D.

$39,000 $1,000 $19,000 $20,000

Bad debt expense ($39,000) = Increase in allowance for uncollectible accounts ($19,000) + Accounts written off as uncollectible ($20,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #88 Topic Area: Measuring And Reporting Receivables

89.

The Soft Company has provided the following information: • Allowance for doubtful accounts increased $19,000 and accounts receivable increased $390,000 during the year. • Accounts written off as uncollectible totaled $20,000. • Net sales totaled $2,700,000. • The gross profit percentage was 40%. • Sales discounts were $100,000. How much was Soft's gross profit? A. B. C. D.

$1,040,000 $1,072,400 $1,032,400 $1,080,000

Gross profit ($1,080,000) = Net sales ($2,700,000) × Gross profit percentage (40%) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #89 Topic Area: Measuring And Reporting Receivables

90.

Redwing Company sold inventory costing $500 to a customer on account for $700. Which of the following correctly describes the collection of $686 cash when the customer takes advantage of a discount? A. B. C. D.

Operating expenses increase $14. Accounts receivable decreases $686. Current assets decrease $14. Gross profit is not affected.

Cash increases $686 and accounts receivable decreases $700. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #90 Topic Area: Accounting For Sales Revenue

91.

Redwing Company sold inventory costing $500 to a customer on account for $700. Which of the following does not correctly describe the collection of $686 cash when the customer takes advantage of a discount? A. B. C. D.

Gross profit decreases $14. Accounts receivable decreases $700. Current assets decrease $14. Operating income is not affected.

The sales discount decreases net sales, gross profit, and operating income. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #91 Topic Area: Accounting For Sales Revenue

92.

Sabre Company sold inventory costing $600 to a customer on account for $900 with terms of 3/10, n/ 30. Which of the following is not correct? A. Gross profit increases $300 on the date of sale. B. Total current assets aren't affected on the date of cash collection if the customer pays 15 days after the date of sale. C. Total current assets increase $27 on the date of cash collection if the customer pays within 15 days of the date of sale. D. Gross profit and net sales both decrease $27 on the date of cash collection if the customer pays within 15 days of the date of sale. Cash increases $873 and accounts receivable decreases $900, therefore total current assets decrease $27. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #92 Topic Area: Accounting For Sales Revenue

93.

One of Hawk Company's customers returned products that cost Hawk $300, which was sold on account for $450. Which of the following does not correctly describe the affect of the return on the financial statements? A. B. C. D.

Gross profit decreases $150. Total current assets decrease $150. Sales returns and allowances increase $150. Operating expenses increase $150.

Sales returns are not operating expenses. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #93 Topic Area: Accounting For Sales Revenue

94.

One of Hawk Company's customers returned products that cost Hawk $500, which was sold on account for $800. Which of the following correctly describes the affect of the return on the financial statements? A. B. C. D.

Gross profit decreases $800. Total current assets decrease $300. Sales returns and allowances increase $300. Net sales increase $300.

Inventory increases $500 and accounts receivable decreases $800. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #94 Topic Area: Accounting For Sales Revenue

95.

Which of the following transactions does not affect gross profit? A. A customer returning merchandise that was sold for a profit. B. The collection of cash on an account receivable which was paid for by the customer within the discount period. C. The journal entry to record bad debt expense. D. Selling inventory for less than its cost. Bad debt expense is an operating expense which does not affect gross profit. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #95 Topic Area: Accounting For Sales Revenue

96.

Which of the following is not a component of the gross profit calculation? A. B. C. D.

Cost of goods sold Sales returns and allowances Allowance for doubtful accounts Credit card discounts

Allowance for doubtful accounts is a contra-asset account on the balance sheet. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #96 Topic Area: Accounting For Sales Revenue

97.

The following data were taken from the records of Lilo Corporation for the year ended December 31, 2010: Answers will vary

Feedback: The following items have not been included in above amounts: Estimated bad debt expense is 1% of credit sales. The income tax rate is 35%. 10,000 of shares of common stock are outstanding. Requirements: A. Based on the above data, prepare a multiple-step income statement (including gross profit, pretax income, and earnings per share). B. 1. What was the gross profit ratio? 2. Explain what gross profit and the gross profit ratio mean.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #97 Topic Area: Accounting For Sales Revenue

98.

A portion of the income statement for Oscar Company is shown below. Provide the missing account titles and amounts.

Answers will vary Feedback: A. Sales revenue B. $350,000 - $348,000 = $2,000 C. Net sales D. Cost of goods sold; $348,000 - $90,000 = $258,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #98 Topic Area: Accounting For Sales Revenue

99.

A portion of the income statement for Lone Star Company is shown below. Provide the missing account titles and amounts.

Answers will vary Feedback: A. Sales revenue B. $380,000 - $20,000 = $360,000 C. Gross profit D. $360,000 - $100,000 = $260,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #99 Topic Area: Accounting For Sales Revenue

100.

Indicate whether each of the accounts listed below normally will have a debit or a credit balance. Record your answer to the left of each account by entering either Dr or Cr.

Answers will vary Feedback: 1. Cr; 2. Dr; 3. Dr; 4. Cr; 5. Dr; 6. Dr; 7. Cr; 8. Dr AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #100 Topic Area: Accounting For Sales Revenue

101.

Anthony Inc. reported the following amounts on their 2011 and 2010 income statements:

Requirements: A. Compute the gross profit percentage for both years. B. Provide at least two potential causes for the change in Anthony's gross profit percentage. Answers will vary Feedback: A. 2011 = 61.1% ($12,495/$20,438) 2010 = 59.7% ($12,169/$20,367) B. Anthony may have higher sales prices, lower costs of producing their product, or a change in the sales mix of their products toward selling more of the higher margin products. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #101 Topic Area: Accounting For Sales Revenue

102.

Hill Company has reported the following information on their income statements for the years 2008 through 2012:

A. Compute the gross profit percentage for each year. B. Has the gross profit ratio for Hill improved over time or worsened? Explain your answer. Answers will vary Feedback: A. 2012 = 31.0% ($3,517/$11,332), 2011 = 29.9% ($3,541/$11,862), 2010 = 26.7% ($2,979/ $11,170), 2009 = 30.2% ($3,328/$11,038), 2008 = 30.6% ($3,040/$9,932). B. The gross profit margin was eroding from 2008 through 2010 but then it recovered from the low of 26.7% in 2010 to its highest level in 2012 of 31.0%. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #102 Topic Area: Accounting For Sales Revenue

103.

Hickory Corporation recorded sales revenue during the year of $350,000 of which $100,000 was on credit. The company has experienced an average loss rate of 2% of credit sales. Give the adjusting journal entry at the end of the year to record bad debt expense. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #103 Topic Area: Measuring And Reporting Receivables

104.

Prior to the year-end adjustment to record bad debt expense the ledger of Stickler Company included the following accounts and balances:

Cash collections on accounts receivable during 2010 amounted to $450,000. Sales revenue during 2010 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of the credit sales made in 2010 would ultimately become uncollectible. Determine the balances of the allowance for doubtful accounts and bad debt expense after the adjusting entry to record bad debt expense was made. The allowance for doubtful accounts has a credit balance prior to the adjusting entry. Answers will vary Feedback: Allowance for doubtful accounts $13,000 ($1,000 + $12,000) Bad debt expense $12,000 debit [($800,000 x 75%) x 2%)] AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #104 Topic Area: Measuring And Reporting Receivables

105.

On December 31, 2011, Colonial Corporation had the following account balances related to credit sales and receivables prior to recording adjusting entries:

Requirements: Present the necessary year-end adjusting entry related to uncollectible accounts for each of the following independent assumptions: A. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables outstanding at year-end will be uncollectible. B. It is estimated that 1% of credit sales for the year will prove to be uncollectible. C. Assume the same information presented in part A. Except that prior to adjustment, the allowance for doubtful accounts had a debit balance of $200 rather than a credit balance of $200. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #105 Topic Area: Measuring And Reporting Receivables

106.

On January 1, American Company's allowance for doubtful accounts had a credit balance of $3,000. The balance in the Accounts Receivable account on that date was $75,000. On January 2, prior to any credit sales, a $500 account from National Company was deemed to be uncollectible and written off. Required: A. Compute the net realizable value of American's receivables on January 1. B. Present the journal entry American would record on January 2 related to the write-off of National's account. C. Compute the net realizable value of American's receivables on January 2, immediately following the write-off of National's account. Answers will vary

Feedback AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #106 Topic Area: Measuring And Reporting Receivables

107.

Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Describe how the change in accounts receivable will affect the calculation of cash flow from operations for 2011 and 2010. Answers will vary Feedback: The decrease [$90,561 - $68,648] in accounts receivable of $21,913 results in an increase in cash flow from operations during 2011. The increase [$90,561 - $56,454] in accounts receivable of $34,107 results in a decrease in cash flow from operations during 2010. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #107 Topic Area: Measuring And Reporting Revenues

108.

Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Calculate the accounts receivable turnover for 2011 and 2010: Answer: Answers will vary Feedback: 2011 = 9.01 ($717,422/$79,604.5) 2010 = 15.1 ($1,110,178/$73,507.5) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #108 Topic Area: Measuring And Reporting Revenues

109.

Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Calculate the days' sales in receivables for 2011 and 2010: Answers will vary Feedback: 2011 = 40.5 days, (365/9.01) 2010 = 24.2 days (365/15.1) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #109 Topic Area: Measuring And Reporting Revenues

110.

A recent annual report for Kirova Company contained the following data:

Requirements: A. Calculate the accounts receivable turnover ratio and average days' sales in receivables for 2011. B. Explain the meaning of each number. Answers will vary Feedback: A. Accounts receivable turnover ratio (9.6) = Net sales ($18,158) ÷ Average net accounts receivable ($1,814 + $1,973) ÷ 2 Average days' sales in receivables (38 days) = 365 days ÷ Accounts receivable turnover (9.6) B. The turnover ratio indicates the number of times on average that the receivables are collected while the days sales in receivables shows the length of time in days it takes the company to collect its receivables from the credit customers. The higher the turnover ratio, the fewer days it takes to collect our receivables, thereby increasing liquidity of the receivables. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #110 Topic Area: Measuring And Reporting Revenues

111.

During 2011, Charles Inc. recorded credit sales of $2,000,000. Based on prior experience, it estimates a 1 percent bad debt rate on credit sales. At the beginning of the year, the balance in net accounts receivable was $150,000. At the end of the year, but before the bad debt expense adjustment was recorded and before any bad debts had been written off, the balance in net accounts receivable was $125,000. A. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recorded for the year 2011 and accounts receivable totaling $10,000 were written off for the year, what was the receivables turnover ratio for the year? B. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recorded for the year 2011 and accounts receivable totaling $12,000 were written off for the year, what was the receivables turnover ratio for the year? C. Explain why the answers to parts 1 and 2 differ or do not differ. Answers will vary Feedback: A. Receivables Turnover (15.7) = Net sales ($2,000,000) ÷ Average net accounts receivable ($150,000 + $105,000) ÷ 2 B. Receivables Turnover (15.7) = Net sales ($2,000,000) ÷ Average net accounts receivable ($150,000 + $105,000) ÷ 2 C. The ratio stayed the same because only the adjusting entry affects the balance of net accounts receivable while the actual write off of customer accounts simply offsets the asset against the contraasset account so that net accounts receivable doesn't change. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #111 Topic Area: Measuring And Reporting Revenues

112.

Where, if at all, do items A through G (listed below) belong in the following bank reconciliation?

Items: A. Checks written during June that had not cleared the bank by June 30. B. Bank service charges for June which were not known until the June 30th bank statement arrived. C. Deposit made on June 30 that did not reach the bank until July 1. D. Upon reviewing the company's cash receipts book after June 30, it was discovered the accounting clerk had neglected to post one receipt to the cash account. E. The bank statement reported a "NSF check" during June. F. The bank incorrectly deducted the check of another company to the bank account during June. G. The company was paid interest on its account by the bank. Answers will vary Feedback :(1.) C, F; (2.) A; (3.) D, G; (4.) B, E. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #112 Topic Area: Reporting And Safeguarding Cash

113.

Why is the reconciliation of a company's cash account to the bank statement so important for effective internal control for cash? Answers will vary Feedback: The reconciliation of the cash account is very important in determining the correct, up-todate balance for cash to be presented on the company's balance sheet. It is also a good tool for detecting errors in the cash account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #113 Topic Area: Reporting And Safeguarding Cash

114.

Illinois Company prepared the following bank reconciliation at May 31:

Prepare the necessary journal entries for Illinois Company required by the May 31 bank reconciliation. Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #114 Topic Area: Reporting And Safeguarding Cash

115.

Chicago Company has hired you to reconcile its bank statement and cash account. For June, the Cash account showed the following:

There were neither outstanding checks nor deposits in transit at May 31. A. Prepare the bank reconciliation. B. Prepare the adjusting journal entries needed due to the bank reconciliation. C. What is the June 30 ending cash balance? Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #115 Topic Area: Reporting And Safeguarding Cash

116.

A comparison of the balance in Cottonwood Company's cash account (per its books) as of April 30, 2009, and the bank statement dated April 30, 2009, revealed the following information:

Required: Prepare a bank reconciliation using the format below. Indicate the proper handling of each of the items given above by listing the appropriate item code (letter) and amount under each section of the reconciliation statement form below. Then determine the correct cash balance. Note: If one or more of the items given above should not appear on the reconciliation statement, do not include the item(s).

Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #116 Topic Area: Reporting And Safeguarding Cash

117.

Burke Company has just received its June 30 bank statement from Urban Bank. The bank statement and the cash account, summarized below, are to be reconciled for the month of June.

Required: A. Prepare the June 30 bank reconciliation. B. Prepare the journal entries that should be made in the accounts of Burke Company as a result of the bank reconciliation. Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #117 Topic Area: Reporting And Safeguarding Cash

118.

What are "cash equivalents"? Specifically where would they appear on the financial statements? Answers will vary Feedback: Cash equivalents are short-term investments that can be readily converted into cash and whose value is unlikely to change. They normally have maturities of three months or less. They usually appear with cash on the balance sheet as the first listed current asset. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #118 Topic Area: Reporting And Safeguarding Cash

119.

You are the new manager of West Coast Company. The company distributes goods throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within two weeks. You notice that one employee is responsible for opening all incoming payments, recording them in the accounting records, and depositing all receipts in the bank daily. When asked why this one person performed all of these duties, you were told that it was more efficient for one person to handle cash and to keep track of things. If any cash was missing, responsibility could be easily determined. Do you agree with this arrangement? What changes would you make, and why? Answers will vary Feedback: Note: Answers may vary. This is definitely not a good system. One person should not be responsible for the receipt of cash, accounting for cash, and depositing in the bank. The duties of handling cash and accounting for cash should definitely be separated. This person could be stealing from the firm; since he/she is the only one handling the receipt of cash, the theft could easily be concealed. For example, when a customer pays cash on account, the employee could debit sales returns and allowances instead of the cash account. To prevent such an occurrence, different employees should have the responsibility of receiving cash, accounting for cash, and depositing cash in the bank on a daily basis. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #119 Topic Area: Reporting And Safeguarding Cash

120.

Asia Company sold $10,000 of goods to Euro Company on credit on May 1. At the time of the sale, Asia recorded a debit to Accounts Receivable and a credit to Sales Revenue for $10,000. Terms were 2/ 10, n/30. Required: Present the entries Asia Company would record for each of the following independent situations: A. Euro paid the balance due, less the discount, on May 10. B. Euro returned half of the goods for credit on May 4. Euro paid the balance due, less the discount, on May 10. C. Euro paid their bill on May 30 (there were no returns). Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #120 Topic Area: Accounting For Sales Revenue

121.

On July 10, 2010, Rex Company sold merchandise at an invoice price of $5,000 with terms of 2/10, n/ 30. Give the journal entries required below by indicating the account code of the appropriate account for each debit and credit and the amounts involved.

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #121 Topic Area: Accounting For Sales Revenue

122.

On June 1, 2010, Concorde Company sold merchandise on credit at an invoice price of $1,000; terms 2/ 10, n/30. Give the journal entries to record the following: A. To record the sale. B. Assumption A: To record collection on June 28, 2010. C. Assumption B: To record collection on June 9, 2010. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #122 Topic Area: Accounting For Sales Revenue

123.

Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component. B. If the transaction results in a decrease in the financial statement component. C. If the transaction does not affect the financial statement component. Transaction 1: The adjusting entry to record bad debt expense was made. Gross profit ______ Current assets ______ Stockholders' equity ______ Transaction 2: An account receivable was collected for which the customer took advantage of a 2% discount and remitted the payment less the discount. Net sales ______ Gross Profit ______ Current assets ______ AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #123 Topic Area: Measuring And Reporting Receivables.

124.

When goods are shipped FOB shipping point, title passes to the buyer on the shipment date. TRUE When goods are shipped FOB shipping point, the title passes to the buyer when the goods are shipped.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; and service companies. Libby - Chapter 06 #1 Topic Area: Accounting For Sales Revenue

125.

When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date. FALSE When goods are shipped FOB destination, the revenue is recognized when the goods are delivered.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; and service companies. Libby - Chapter 06 #2 Topic Area: Accounting For Sales Revenue

126.

Credit card discounts are reported as operating expenses on an income statement. FALSE Credit card discounts are deducted from sales to calculate net sales. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #3 Topic Area: Accounting For Sales Revenue

127.

Sales discounts are deducted from sales in the calculation of net sales. TRUE Sales discounts are deducted from sales to calculate net sales. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #4 Topic Area: Accounting For Sales Revenue

128.

Sales returns and allowances is a contra-revenue account. TRUE Sales returns and allowances are deducted from sales to calculate net sales. They are therefore a contrarevenue account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #5 Topic Area: Accounting For Sales Revenue

129.

Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; if not paid within two days, the full invoice price will be due in thirty days. FALSE The "2/10" means that a 2% discount is given if the payment is made within 10 days. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #6 Topic Area: Accounting For Sales Revenue

130.

A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the money because they will have a net savings of 19.2%. TRUE The annual interest rate associated with the credit terms is 37.2% and is calculated by multiplying the 20-day interest rate ($600 ÷ $29,400) by the number of 20-day periods during a year (365 ÷ 20). Borrowing at 18% will save the company 19.2% (37.2% - 18%). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #7 Topic Area: Accounting For Sales Revenue

131.

The gross profit percentage is calculated by dividing net sales by gross profit. FALSE The gross profit percentage is calculated by dividing gross profit by net sales. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #8 Topic Area: Measuring And Reporting Receivables

132.

The gross profit percentage decreases when operating expenses increase. FALSE The gross profit percentage is calculated by dividing gross profit by net sales. Operating expenses do not affect either gross profit or net sales. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #9 Topic Area: Measuring And Reporting Receivables

133.

The journal entry to record bad debt expense is made during the year that it is determined that a particular receivable is uncollectible. FALSE Bad debt expense is recorded during the year of sale, not during the year the receivable is determined to be uncollectible. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #10 Topic Area: Measuring And Reporting Receivables

134.

When a particular account receivable is determined to be uncollectible, the journal entry to write-off the account reduces net income. FALSE The entry to write-off an account receivable includes a debit to the allowance for doubtful accounts and a credit to accounts receivable; this entry does not affect the income statement. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #11 Topic Area: Measuring And Reporting Receivables

135.

The allowance for doubtful accounts is reported as a contra-asset on the balance sheet. TRUE Allowance for doubtful accounts is deducted from accounts receivable on the balance sheet. It is therefore a contra-asset account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #12 Topic Area: Measuring And Reporting Receivables

136.

The journal entry to write-off an uncollectible account does not change the net realizable value (book value) of accounts receivable. TRUE The journal entry to write-off an account receivable includes a debit to allowance for doubtful accounts and a credit to accounts receivable; this entry reduces both accounts equally and therefore doesn't change net realizable value (accounts receivable minus allowance for doubtful accounts). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #13 Topic Area: Measuring And Reporting Receivables

137.

The year-end journal entry to record bad debt expense reduces current assets and net income. TRUE The journal entry increases the allowance for doubtful accounts balance which decreases current assets and the journal entry increases expenses which decreases net income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #14 Topic Area: Measuring And Reporting Receivables

138.

Net sales multiplied by an historical percentage for bad debt expense, equals bad debt expense when using the percentage of credit sales method. TRUE The percentage of credit sales method estimates bad debt expense by multiplying net credit sales times an historical bad debt percentage. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #15 Topic Area: Measuring And Reporting Receivables

139.

The accounts receivable aging schedule determines the dollar amount of uncollectible accounts receivable at year-end; this dollar amount of uncollectible accounts receivable is the bad debt expense that is recorded for the year regardless of the allowance for doubtful accounts balance. FALSE The bad debt expense for the year takes into consideration the existing allowance for doubtful accounts balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #16 Topic Area: Measuring And Reporting Receivables

140.

Prior year financial statements are adjusted when it is determined that prior year bad debt expense was too low. FALSE Prior year financial statements aren't adjusted; the current and/or future financial statements however will be adjusted. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #17 Topic Area: Measuring And Reporting Receivables

141.

If the accounts receivable turnover ratio increases, the number of days it takes to collect the receivables also increases. FALSE The average collection period is calculated by dividing 365 by the receivables turnover ratio. Therefore the higher the receivable turnover ratio, the lower the number of days to collect the receivable will be. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #18 Topic Area: Measuring And Reporting Receivables

142.

When preparing the statement of cash flows, the reason that we must adjust net sales revenue for the change in accounts receivables to convert net sales to cash collected from customers is that accounts receivable represents sales revenue not collected from customers at the beginning and end of the accounting year. TRUE The change in the accounts receivable balance represents the difference between cash collections and net sales revenue. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #19 Topic Area: Measuring And Reporting Receivables

143.

Cash equivalents such as treasury bills are reported as investments on the balance sheet. FALSE Cash and cash equivalents are combined and reported on the balance sheet as a current asset. Cash equivalents are not reported as an investment on the balance sheet. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #20 Topic Area: Reporting And Safeguarding Cash

144.

Cash equivalents on the balance sheet include certificates of deposit with maturities of 60 days or more. FALSE Cash equivalents have maturities of less than 90 days. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #21 Topic Area: Reporting And Safeguarding Cash

145.

Effective internal control of cash should include the separation of the duties for receiving and disbursing cash. TRUE Separation of the responsibilities for receiving and disbursing cash is a basic internal control for cash. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #22 Topic Area: Reporting And Safeguarding Cash

146.

If a check received from a customer that has been deposited by the seller is returned with the bank statement as a nonsufficient funds (NSF) check, it would appear on the seller's bank reconciliation as a deduction from the ending bank statement balance. FALSE The NSF check would be deducted from the book balance not the bank balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #23 Topic Area: Reporting And Safeguarding Cash

147.

Deposits in transit are deducted from the book balance when preparing the bank reconciliation. FALSE Deposits in transit are added to the bank balance when preparing the bank reconciliation. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #24 Topic Area: Reporting And Safeguarding Cash

148.

An objective of preparing the bank reconciliation is to reconcile the bank balance at the end of the period with the company's book balance at the end of the period. TRUE The bank reconciliation is an internal control device with the intent being to test the equality of the bank statement balance with the book balance after the applicable adjustments have been made to both balances. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #25 Topic Area: Reporting And Safeguarding Cash

149.

When completing the bank reconciliation, bank service charges should be deducted from the company's cash balance. TRUE Bank service charges are deducted from the book cash balance because they were unrecorded prior to receipt of the bank statement. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #26 Topic Area: Reporting And Safeguarding Cash

150.

Which of the following statements is correct? A. B. C. D.

Revenue is recognized at the time of shipment when goods are shipped FOB destination. Sales returns and allowances are reported as operating expenses on an income statement. Revenue is recorded when title and risks of ownership transfer to the buyer. Sales discounts are reported as operating expenses on an income statement.

Most businesses recognize revenue when the product is delivered and/or service is provided. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; and service companies. Libby - Chapter 06 #27 Topic Area: Accounting For Sales Revenue

151.

A company sells magazines and collects subscription fees prior to the publication and distribution of the magazine. Which of the following correctly describes the impact on the financial statements when cash is received in advance from customers? A. B. C. D.

Current assets increase and gross profit increases. Current liabilities aren't affected and stockholders' equity isn't affected. Current assets increase and stockholders' equity increases. Current liabilities increase and gross profit is not affected.

Receiving payments in advance of providing goods and/or services creates and liability and does not create revenue or gross profit. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #28 Topic Area: Accounting For Sales Revenue

152.

Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much is Newark's cost of goods sold? A. B. C. D.

$307,000 $252,000 $440,000 $340,000

Net sales ($450,000 + $1,350,000 - $90,000 - $43,000) minus cost of goods sold ($307,000) equals gross profit ($1,360,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #29 Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables.

153.

Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much is Newark's gross profit percentage? A. B. C. D.

75.5% 81.6% 53.7% 83.2%

The gross profit percentage (81.6%) equals gross profit ($1,360,000) divided by net sales ($450,000 + $1,350,000 - $90,000 - $43,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #30 Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables

154.

Newark Company has provided the following information: • Cash sales, $450,000 • Credit sales, $1,350,000 • Selling and administrative expenses, $330,000 • Sales returns and allowances, $90,000 • Depreciation expense, $101,000 • Gross profit, $1,360,000 • Increase in accounts receivable, $55,000 • Bad debt expense, $33,000 • Sales discounts, $43,000 How much are Newark's net sales? A. B. C. D.

$1,634,000 $1,800,000 $1,667,000 $1,745,000

Net sales ($1,667,000) equals ($450,000 + $1,350,000 - $90,000 - $43,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #31 Topic Area: Accounting For Sales Revenue

155.

Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $490,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 How much is bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible? A. B. C. D.

$5,500 $6,700 $4,240 $4,300

Bad debt expense ($4,300) = 5% of accounts of accounts receivable (5% × $110,000) - allowance for doubtful accounts credit balance ($1,200). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #32 Topic Area: Measuring And Reporting Receivables

156.

Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $490,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 Flyer estimates bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded? A. B. C. D.

$5,500 $6,700 $4,240 $4,300

The allowance for doubtful accounts balance ($5,500) equals 5% of accounts of accounts receivable (5% × $110,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #33 Topic Area: Measuring And Reporting Receivables

157.

Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $290,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 Flyer estimates bad debt expense assuming that 1.5% of credit sales are uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded? A. B. C. D.

$7,950 $6,750 $5,550 $7,800

The allowance for doubtful accounts ($7,950) = Bad debt expense (1.5% × $450,000) plus the allowance for doubtful accounts credit balance ($1,200). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #34 Topic Area: Measuring And Reporting Receivables

158.

Flyer Company has provided the following information: • Cash sales, $150,000 • Credit sales, $450,000 • Selling and administrative expenses, $110,000 • Sales returns and allowances, $30,000 • Gross profit, $290,000 • Accounts receivable, $110,000 • Sales discounts, $14,000 • Allowance for doubtful accounts credit balance, $1,200 How much is Flyer's bad debt expense assuming that 1.5% of credit sales have historically been uncollectible. A. B. C. D.

$7,950 $6,750 $5,550 $7,800

Bad debt expense ($6,750) =1.5% × $450,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #35 Topic Area: Measuring And Reporting Receivables

159.

Which of the following is correct when bad debt expense is recorded at year-end? A. B. C. D.

Current assets are not affected. Gross profit will decrease. Income from operations will decrease. Current liabilities will increase.

Bad debt expense is an operating expense. An increase in operating expenses decreases income from operations. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #36 Topic Area: Measuring And Reporting Receivables

160.

Which of the following statements is false? A. B. C. D.

The journal entry to record bad debt expense decreases current assets. The journal entry to record bad debt expense decreases retained earnings. The journal entry to write-off an uncollectible account receivable decreases operating income. The journal entry to write-off an uncollectible account receivable does not affect current assets.

The journal entry to write-off an uncollectible account receivable decreases accounts receivable and the allowance for uncollectible accounts balances and does not affect operating income. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #37 Topic Area: Measuring And Reporting Receivables

161.

Which of the following journal entries correctly records bad debt expense?

A. B. C. D.

Option A Option B Option C Option D

The journal entry to record bad debt expense involves a debit to bad debt expense and a credit to allowance for doubtful accounts. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #38 Topic Area: Measuring And Reporting Receivables

162.

Which of the following journal entries correctly records the write-off of an uncollectible account receivable?

A. B. C. D.

Option A Option B Option C Option D

The journal entry to write-off an account receivable requires a debit to allowance for doubtful accounts and a credit to accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #39 Topic Area: Measuring And Reporting Receivables

163.

The CHS Company has provided the following information: • Accounts receivable written-off as uncollectible during the year amounted to $11,500. • The accounts receivable balance at the beginning of the year was $150,000. • The accounts receivable balance at the end of the year was $210,000. • The allowance for doubtful accounts balance at the beginning of the year was $14,000. • The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900. • Credit sales during the year totaled $900,000. How much was CHS Company's bad debt expense? A. B. C. D.

$11,500 $12,900 $10,400 $14,000

Ending allowance for doubtful accounts ($12,900) = Beginning allowance for doubtful accounts ($14,000) - Accounts receivable write-offs ($11,500) + Bad debt expense ($10,400). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #40 Topic Area: Measuring And Reporting Receivables

164.

The CHS Company has provided the following information: • Accounts receivable written-off as uncollectible during the year amounted to $11,500. • The accounts receivable balance at the beginning of the year was $150,000. • The accounts receivable balance at the end of the year was $210,000. • The allowance for doubtful accounts balance at the beginning of the year was $14,000. • The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900. • Credit sales during the year totaled $900,000. How much cash was received from collections of accounts receivable? A. B. C. D.

$888,500 $828,500 $690,000 $701,500

Ending accounts receivable ($210,000) = Beginning accounts receivable ($150,000) - Accounts receivable write-offs ($11,500) + Credit sales ($900,000) - Cash collections ($828,500). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #41 Topic Area: Measuring And Reporting Receivables

165.

Which of the following statements is correct? A. The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to accounts receivable. B. The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to allowance for doubtful accounts. C The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad . debt expense and a credit to accounts receivable. D The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad . debt expense and a credit to allowance for doubtful accounts. The journal entry to record bad debt expense requires a debit to bad debt expense (an operating expense) and a credit to allowance for doubtful accounts (a contra-asset account). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #42 Topic Area: Measuring And Reporting Receivables

166.

Clark Company estimated the net realizable value of their accounts receivable as of December 31, 2011, based on an aging schedule of accounts receivable, to be $165,000. Clark has also provided the following information: • The accounts receivable balance on December 31, 2011 was $175,000. • Uncollectible accounts receivable written-off during 2011 totaled $12,000. • The allowance for doubtful accounts balance on January 1, 2011 was $15,000. How much is Clark's 2011 bad debt expense? A. B. C. D.

$10,000 $7,000 $13,000 $3,000

The December 31, 2011 balance in allowance for uncollectible accounts ($10,000) equals the accounts receivable balance on December 31, 2011 ($175,000) minus the December 31, 2011 net realizable value of accounts receivable ($165,000). The December 31, 2011 balance in allowance for uncollectible accounts ($10,000) equals the balance in allowance for doubtful accounts on January 1, 2011 ($15,000) minus accounts receivable write-offs ($12,000) during 2011 plus the 2011bad debt expense ($7,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #43 Topic Area: Measuring And Reporting Receivables

167.

Which of the following statements correctly describes the effect of recording the collection of a $10,000 account receivable for which a 2% sales discount was recorded at the time of collection? A. B. C. D.

Current assets will remain the same. Gross profit will decrease $200. Accounts receivable will decrease $9,800. Net sales will increase $9,800.

The $200 sales discount ($10,000 x 2%) reduces net sales and therefore gross profit. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #44 Topic Area: Accounting For Sales Revenue

168.

Which of the following journal entries correctly records the collection of an account receivable for which a 1% sales discount was recorded at the time of collection?

A. B. C. D.

Option A Option B Option C Option D

The journal entry involves a debit to both cash and sales discounts and a credit to accounts receivable. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #45 Topic Area: Accounting For Sales Revenue

169.

Which of the following correctly describes the effect of a journal entry involving the recording of a sales return? A. B. C. D.

Gross profit is not affected. Net sales increases. Current assets remain the same. Operating income decreases.

The journal entry involves a debit to sales returns and allowances which reduces gross profit and therefore operating income. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #46 Topic Area: Accounting For Sales Revenue

170.

Which of the following doesn't correctly describe the effect of a journal entry involving the recording of a credit card discount? A. B. C. D.

Net sales decrease and gross profit decreases. Net sales decrease and operating income decreases. Operating expenses remain the same and operating income decreases. Neither operating expenses nor operating income is affected.

The credit card discount account is a contra-sales account which reduces net sales, gross profit, and therefore operating income. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #47 Topic Area: Accounting For Sales Revenue

171.

Which of the following correctly describes credit terms of 2/10, n/30? A A two percent discount for early payment is available if the invoice is paid before the tenth day of the . month following the month the sale. B. A two percent discount for early payment is available within ten days of the date of sale. C. A ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice. D A two percent discount for early payment is available if the invoice is paid after the tenth day, but . before the thirtieth day of the invoice date. The credit term 2/10 implies that a 2% discount is available within ten days of the date of sale and the term n/30 implies that the full sales price is due within 30 days of the sale. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #48 Topic Area: Accounting For Sales Revenue

172.

A customer purchased and received $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 30. Discount Paper Supply received the check on October 4. On which of the following dates should Discount Paper Supply record sales revenue? A. B. C. D.

September 1 September 13 September 30 October 4

Sales revenue should be recorded on the date of sale. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; and service companies. Libby - Chapter 06 #49 Topic Area: Accounting For Sales Revenue

173.

When a credit sale is made with terms of 2/10, n/30 on May 10 and the customer's check is received on May 19, which of the following is true about the May 19 journal entry? A. The debit to cash will equal the credit to accounts receivable because the discount was recorded on May 10. B. There will be a debit to sales discounts on May 10. C. The debit to cash will be less than the credit to accounts receivable on May 19. D. There will be a credit to sales discounts on May 19. The customer paid within the discount period so the discount is recognized on May 19. The discount reduces the cash received so therefore the debit to cash is less than the credit to accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #50 Topic Area: Accounting For Sales Revenue

174.

A company had the following partial list of account balances at year-end:

How much is net sales revenue? A. B. C. D.

$91,900 $90,700 $89,900 $88,600

Net sales revenue ($91,900) equals sales revenue ($95,000) minus both sales discounts ($2,100) and sales returns and allowances ($1,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #51 Topic Area: Accounting For Sales Revenue

175.

A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. Which of the following is the annual interest rate (rounded)? A. B. C. D.

56%. 38%. 25%. 18%.

30-day interest rate (.031) = Amount saved ($3) ÷ Amount paid ($97) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #52 Topic Area: Accounting For Sales Revenue

176.

When credit terms for a sale are 2/15, n/40, the customer saves by paying early. What percent (rounded) would this savings amount to on an annual basis? A. B. C. D.

18%. 20%. 30%. 37%.

25-day interest rate (.02) = Amount saved ($2) ÷ Amount paid ($98) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #53 Topic Area: Accounting For Sales Revenue

177.

Which of the following accounts is not a contra-revenue? A. B. C. D.

Sales discounts Credit card discounts Sales returns and allowances Allowance for doubtful accounts

Allowance for doubtful accounts is a contra-asset account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #54 Topic Area: Accounting For Sales Revenue

178.

Which of the following is the most likely cause of a decrease in a company's gross profit percentage? A. B. C. D.

The selling price decreased. The product cost as a percentage of sales decreased. The operating expenses increased. Fewer products were sold.

Net sales - Cost of goods sold = Gross profit. Gross profit divided by net sales equals the gross profit percentage. A decrease in the selling price results in a decrease in net sales, gross profit, and therefore the gross profit percentage. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #55 Topic Area: Accounting For Sales Revenue

179.

Dillon Company uses the allowance method to account for bad debts. The entry to write-off a bad account (one that will never be collected) should be:

A. B. C. D.

Option A Option B Option C Option D

Writing-off an uncollectible account involves a debit to allowance for doubtful accounts and a credit to accounts receivable. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #56 Topic Area: Measuring And Reporting Receivables

180.

When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this event will A. B. C. D.

decrease the net realizable value of the accounts receivable. have an effect that is not determinable from the information given. increase the net realizable value of the accounts receivable. have no effect on the net realizable value of the accounts receivable.

Writing-off an uncollectible account involves a debit to allowance for doubtful accounts (a contraasset account) and a credit to accounts receivable (an asset account). Therefore the net realizable value (accounts receivable minus allowance for doubtful accounts) does not change. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #57 Topic Area: Measuring And Reporting Receivables

181.

Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts of the $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000. The net realizable value of accounts receivable as shown by the accounting records before and after the write-off was as follows:

A. B. C. D.

Option A Option B Option C Option D

Writing-off an uncollectible account involves a debit to allowance for doubtful accounts (a contraasset account) and a credit to accounts receivable (an asset account). Therefore the net realizable value (accounts receivable minus allowance for doubtful accounts) does not change; it is $728,500 both before and after the write-off. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #58 Topic Area: Measuring And Reporting Receivables

182.

Woodland Company uses the allowance method to account for bad debts. During 2009, a customer became bankrupt and a receivable of $10,000 was deemed uncollectible. Which of the following journal entries records the uncollectible account write-off?

A. B. C. D.

Option A Option B Option C Option D

Writing-off an uncollectible account involves a debit to allowance for doubtful accounts (a contra-asset account) and a credit to accounts receivable (an asset account). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #59 Topic Area: Measuring And Reporting Receivables

183.

At year end, Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments. Chief estimates that 1% of current accounts and 10% of accounts over thirty days are uncollectible. How much is bad debt expense? A. B. C. D.

$90 $190 $290 $100

Allowance for doubtful accounts desired balance ($190) = ($1,000 × .10) + ($9,000 × .01). Bad debt expense ($90) = Allowance for doubtful accounts desired balance ($190) - Allowance for doubtful accounts current balance ($100). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #60 Topic Area: Measuring And Reporting Receivables

184.

Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works aged the accounts receivable and estimated that $5,000 of the $98,000 accounts receivable balance would be uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior to adjustment. How much is bad debt expense? A. B. C. D.

$5,000 $5,400 $4,600 $400

Bad debt expense ($5,400) = Allowance for doubtful accounts desired credit balance ($5,000) + Allowance for doubtful accounts current debit balance ($400). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #61 Topic Area: Measuring And Reporting Receivables

185.

Which of the following statements does not correctly describe the allowance for doubtful accounts balance? A. B. C. D.

It is reported on the balance sheet as a component of current assets. It is a contra-asset account. It is reported on the balance sheet as a current liability. It is created as a result of the adjusting entry to record bad debt expense.

Allowance for doubtful accounts is a contra-asset account and is not a current liability. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #62 Topic Area: Measuring And Reporting Receivables

186.

The Roscoe Company's March 1, 2010 bank statement balance was $70,000. As of March 1, outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March 1, 2010 cash balance on their books? A. B. C. D.

$63,000 $77,000 $70,000 $107,000

Book cash balance ($63,000) = Bank balance ($70,000) - Outstanding checks ($22,000) + Deposits in transit ($15,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #63 Topic Area: Reporting And Safeguarding Cash

187.

The Tanner Company's April 1, 2010 pre-reconciliation cash balance on their books was $35,000. While preparing the April 1 bank reconciliation, Tanner determined that outstanding checks total $11,000, deposits in transit total $7,000, and bank service charges are $50. How much was Tanner's April 1, 2010 cash balance per the bank statement? A. B. C. D.

$31,000 $30,950 $38,950 $39,000

Bank cash balance ($38,950) = Corrected book balance ($35,000 - $50) + Outstanding checks ($11,000) - Deposits in transit ($7,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #64 Topic Area: Reporting And Safeguarding Cash

188.

The Conner Company's August 1, 2010 cash balance on their books was $90,000. As of August 1, outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August 1, 2010 cash balance on their bank statement? A. B. C. D.

$76,000 $90,000 $13,000 $104,000

Bank cash balance ($104,000) = Book balance ($90,000) + Outstanding checks ($44,000) - Deposits in transit ($30,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #65 Topic Area: Reporting And Safeguarding Cash

189.

Which of the following statements pertaining to bank reconciliations is false? A. Outstanding checks are deducted from the bank cash balance. B. Deposits in transit are added to the bank cash balance. C. Bank service charges are deducted from the bank cash balance. D. Non-sufficient funds checks identified in the bank statement are deducted from the book cash balance, not the bank cash balance. Bank service charges are deducted from the book cash balance, not the bank cash balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #66 Topic Area: Reporting And Safeguarding Cash

190.

When a depositor receives a bank statement indicating that there was a "NSF check", the depositor should do which of the following? A. B. C. D.

Reduce the cash account per the books for the amount of the "NSF check". Reduce the cash account per the bank statement for the amount of the "NSF check". Credit allowance for doubtful accounts for the amount of the check. Increase the sales returns and allowances account.

NSF checks are deducted from the book cash balance when preparing a bank reconciliation. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #67 Topic Area: Reporting And Safeguarding Cash

191.

A deposit in transit on a bank reconciliation should be A. B. C. D.

added to the depositor's book cash balance. subtracted from the depositor's book cash balance. added to the bank statement balance. subtracted from the bank statement balance.

Deposits in transit represent deposits recorded on the books which have not yet been recorded on the bank statement. They are therefore added to the bank statement balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #68 Topic Area: Reporting And Safeguarding Cash

192.

Linetech Company's bank statement showed an ending balance of $8,000. Items appearing in the bank reconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50; and Driver Company's $250 check erroneously deducted from Linetech's bank account by the bank. How much is the correct cash balance at the end of the month? A. B. C. D.

$10,600 $8,750 $8,500 $8,250

Book cash balance ($8,750) = Bank balance ($8,000) - Outstanding checks ($500) + Deposits in transit ($1,000) + Bank error ($250). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #69 Topic Area: Reporting And Safeguarding Cash

193.

Which of the following demonstrates a poor internal control procedure? A.The bookkeeper makes cash deposits and records journal entries related to cash, while the treasurer prepares the bank reconciliation. B. The president, who does no bookkeeping, prepares the bank reconciliation each month. C. The treasurer signs all checks after the bookkeeper prepares the supporting documents. D. One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journal and ledger. The bookkeeper's cash record keeping and cash handling responsibilities need to be separated. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #70 Topic Area: Reporting And Safeguarding Cash

194.

The cash records and the bank statement of Frankel Company showed the following at the end of February 2010: Outstanding checks as of the beginning of February 2010, $8,000; checks written by Frankel Company according to their books during February 2010, $50,000; and checks cleared by the bank during February 2010, $54,000. How much were the outstanding checks at the end of February 2010? A. B. C. D.

$2,000 $4,000 $6,000 $8,000

Outstanding checks at the end of February ($4,000) = Outstanding checks at the beginning of February ($8,000) + Checks written per the books during February ($50,000) - Checks clearing the bank during February ($54,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #71 Topic Area: Reporting And Safeguarding Cash

195.

The cash account and the December bank statement of Gomez Company showed the following: deposits made by Gomez Company during December $90,000; deposits reflected on the December bank statement, $88,000; and deposits in transit on December 1, $5,000. How much were the deposits in transit at the end of December? A. B. C. D.

$10,000 $7,000 $5,000 $2,000

Deposits in transit at the end of December ($7,000) = Deposits made per the books during December ($90,000) - {Deposits per the December bank statement ($88,000) - December 1 deposits in transit ($5,000)}. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #72 Topic Area: Reporting And Safeguarding Cash

196.

When preparing the monthly bank reconciliation, the accountant for Farris Corporation discovered that a check correctly written to one of Farris' suppliers for $159 had been incorrectly recorded in the books as $195. Which of the following statements is correct with respect to the bank reconciliation process? A. B. C. D.

The cash balance per the books will be decreased. The cash balance per the bank statement will be increased. The cash balance per the bank statement will be decreased. The cash balance per the books will be increased.

The error incorrectly decreases the cash balance per the books. To correct the books, the difference ($195 - $159) is added back to the book balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #73 Topic Area: Reporting And Safeguarding Cash

197.

When preparing a bank reconciliation, which of the following would be deducted from the company's cash balance? A. B. C. D.

Interest income paid by the bank. The dollar amount of deposits in transit. The dollar amount of outstanding checks. The bank service charges included on the bank statement.

The bank service charges are recorded on the bank statement and need to be deducted from the book balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #74 Topic Area: Reporting And Safeguarding Cash

198.

Merchandise was sold on credit for $10,000, terms 2/10, n/30. Which of the following journal entry descriptions correctly describes the cash collection? A. Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is within the discount period. B Cash is debited for $10,000, accounts receivable is credited for $9,800 and sales discounts is credited . for $200 if the collection is within the discount period. C Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is credited . for $200 if the collection is after the discount period. D. Cash is debited for $10,000, accounts receivable is credited for $10,000 if the collection is after the discount period. When the payment is received after the discount period, a sales discount is not recorded and cash is debited and accounts receivable is credited for the selling price. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #75 Topic Area: Accounting For Sales Revenue

199.

Merchandise was sold on credit for $30,000, terms 3/15, n/30. Which of the following journal entry descriptions correctly describes the cash collection? A. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is within the discount period. B Cash is debited for $29,100, sales discounts is debited for $900, and accounts receivable is credited . for $30,000 if the collection is within the discount period. C Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales discounts is . credited for $900 if the collection is within the discount period. D. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is after the discount period. When the payment is received within the discount period, a sales discount ($900) is recorded via a debit and cash is debited for the selling price less the discount ($30,000 - $900) and accounts receivable is credited for the selling price ($30,000). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #76 Topic Area: Accounting For Sales Revenue

200.

Which of the following does not correctly describe the following journal entry?

A. B. C. D.

Current assets increase. Gross profit decreases. Net sales decreases. Operating income is not affected.

The debit to the credit card discount account is a contra-revenue account which reduces both gross profit and operating income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #77 Topic Area: Accounting For Sales Revenue

201.

Which of the following correctly describes the following journal entry?

A. B. C. D.

The gross profit percentage remains the same. Operating income decreases. Current assets increase. Net sales increases.

The debit to the credit card discount account is a contra-revenue account which reduces both gross profit and operating income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #78 Topic Area: Accounting For Sales Revenue

202.

Which of the following does not correctly describe the following journal entry?

A. B. C. D.

Current assets decrease. Gross profit decreases. Net sales decreases. Operating expenses increase.

The debit to the sales returns and allowances account is a contra-revenue account which reduces both gross profit and operating income. Sales returns and allowances is not an operating expense. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #79 Topic Area: Accounting For Sales Revenue

203.

The Ward Company has provided the following information: • Net sales totaled $750,000. • Beginning net accounts receivable was $65,000. • Ending net accounts receivable was $85,000. What was Ward's receivable turnover ratio? A. B. C. D.

10.0 8.8 11.54 5.0

Receivable turnover ratio (10) = Net sales ($750,000) ÷ Average accounts receivable ($75,000*). *Average net accounts receivable ($75,000) = [beginning net accounts receivable ($65,000) + ending net accounts receivable ($85,000)] ÷ 2 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #80 Topic Area: Measuring And Reporting Receivables

204.

The Ward Company has provided the following information: • Net sales totaled $750,000. • Beginning net accounts receivable was $65,000. • Ending net accounts receivable was $85,000. What was Ward's average collection period? A. B. C. D.

73 days 41.8 days 31.6 days 36.5 days

Receivable turnover ratio (10) = Net sales ($750,000) ÷ Average net accounts receivable ($75,000*). *Average accounts receivable ($75,000) = [beginning net accounts receivable ($65,000) + ending net accounts receivable ($85,000)] ÷ 2. Average collection period (36.5 days) = 365 ÷ receivables turnover (10). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #81 Topic Area: Measuring And Reporting Receivables

205.

The Rye Corporation has provided the following information: • Total sales were $1,200,000. • Beginning net accounts receivable was $45,000. • Ending net accounts receivable was $65,000. Sales returns and allowances totaled $100,000. What was Rye's receivable turnover ratio? A. B. C. D.

21.8 18.5 10.0 20.0

Receivable turnover ratio (20) = Net sales ($1,200,000 - $100,000) ÷ Average net accounts receivable ($55,000*). Average net accounts receivable ($55,000) = [beginning net accounts receivable ($45,000) + ending net accounts receivable ($65,000)] ÷ 2. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #82 Topic Area: Measuring And Reporting Receivables

206.

The Rye Corporation has provided the following information: • Total sales were $1,200,000. • Beginning net accounts receivable was $45,000. • Ending net accounts receivable was $65,000. • Sales returns and allowances totaled $100,000. What was Rye's average collection period? A. B. C. D.

16.7 19.7 36.5 18.3

Receivable turnover ratio (20) = Net sales ($1,200,000 - $100,000) ÷ Average net accounts receivable ($55,000*). *Average net accounts receivable ($55,000) = [beginning net accounts receivable ($45,000) + ending net accounts receivable ($65,000)] ÷ 2. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #83 Topic Area: Measuring And Reporting Receivables

207.

Which of the following transactions will result in a decrease in the receivable turnover ratio? A. B. C. D.

The journal entry to record bad debt expense. Writing off an uncollectible account receivable. Selling inventory on account. Collecting an account receivable.

Selling inventory on account results in an increase in both net sales (numerator) and average net receivables (denominator). However, the increase in the denominator is greater relative to the increase in the numerator. Therefore the receivable turnover ratio decreases. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #84 Topic Area: Accounting For Sales Revenue

208.

Which of the following transactions will result in an increase in the receivable turnover ratio? A. B. C. D.

The journal entry to record bad debt expense. Writing off an uncollectible account receivable. Selling inventory on account. Purchasing inventory on account.

The journal entry to record bad debt expense involves a credit to allowance for doubtful accounts, which decreases net accounts receivable and therefore increases the receivable turnover ratio. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #85 Topic Area: Accounting For Sales Revenue

209.

Which of the following statements is correct? A. A decrease in the accounts receivable balance means that credit sales exceeded cash collections from customers. B. The accounts receivable balance increases when cash collected from customers exceeds credit sales. C. A decrease in accounts receivable is deducted from net income when determining cash flow from operations. D. An increase in accounts receivable is deducted from net income when determining cash flow from operations. An increase in accounts receivable is added to net income, rather than deducted from net income, when determining cash flow from operations. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #86 Topic Area: Measuring And Reporting Revenues

210.

Which of the following does not correctly describe the effect of recording a credit sale of inventory for a profit? A. B. C. D.

The receivables turnover ratio decreases. Current assets increase. Gross profit increases. Operating expenses increase.

Cost of goods sold is not an operating expense. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #87 Topic Area: Accounting For Revenues, Measuring And Reporting Revenues

211.

The Soft Company has provided the following information: • Allowance for doubtful accounts increased $19,000 and accounts receivable increased • $390,000 during the year. • Accounts written off as uncollectible totaled $20,000. • Net sales totaled $2,700,000. • The gross profit percentage was 40%. • Sales discounts were $100,000. How much was Soft's bad debt expense? A. B. C. D.

$39,000 $1,000 $19,000 $20,000

Bad debt expense ($39,000) = Increase in allowance for uncollectible accounts ($19,000) + Accounts written off as uncollectible ($20,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #88 Topic Area: Measuring And Reporting Receivables

212.

The Soft Company has provided the following information: • Allowance for doubtful accounts increased $19,000 and accounts receivable increased $390,000 during the year. • Accounts written off as uncollectible totaled $20,000. • Net sales totaled $2,700,000. • The gross profit percentage was 40%. • Sales discounts were $100,000. How much was Soft's gross profit? A. B. C. D.

$1,040,000 $1,072,400 $1,032,400 $1,080,000

Gross profit ($1,080,000) = Net sales ($2,700,000) × Gross profit percentage (40%) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #89 Topic Area: Measuring And Reporting Receivables

213.

Redwing Company sold inventory costing $500 to a customer on account for $700. Which of the following correctly describes the collection of $686 cash when the customer takes advantage of a discount? A. B. C. D.

Operating expenses increase $14. Accounts receivable decreases $686. Current assets decrease $14. Gross profit is not affected.

Cash increases $686 and accounts receivable decreases $700. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #90 Topic Area: Accounting For Sales Revenue

214.

Redwing Company sold inventory costing $500 to a customer on account for $700. Which of the following does not correctly describe the collection of $686 cash when the customer takes advantage of a discount? A. B. C. D.

Gross profit decreases $14. Accounts receivable decreases $700. Current assets decrease $14. Operating income is not affected.

The sales discount decreases net sales, gross profit, and operating income. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #91 Topic Area: Accounting For Sales Revenue

215.

Sabre Company sold inventory costing $600 to a customer on account for $900 with terms of 3/10, n/ 30. Which of the following is not correct? A. Gross profit increases $300 on the date of sale. B. Total current assets aren't affected on the date of cash collection if the customer pays 15 days after the date of sale. C. Total current assets increase $27 on the date of cash collection if the customer pays within 15 days of the date of sale. D. Gross profit and net sales both decrease $27 on the date of cash collection if the customer pays within 15 days of the date of sale. Cash increases $873 and accounts receivable decreases $900, therefore total current assets decrease $27. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #92 Topic Area: Accounting For Sales Revenue

216.

One of Hawk Company's customers returned products that cost Hawk $300, which was sold on account for $450. Which of the following does not correctly describe the affect of the return on the financial statements? A. B. C. D.

Gross profit decreases $150. Total current assets decrease $150. Sales returns and allowances increase $150. Operating expenses increase $150.

Sales returns are not operating expenses. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #93 Topic Area: Accounting For Sales Revenue

217.

One of Hawk Company's customers returned products that cost Hawk $500, which was sold on account for $800. Which of the following correctly describes the affect of the return on the financial statements? A. B. C. D.

Gross profit decreases $800. Total current assets decrease $300. Sales returns and allowances increase $300. Net sales increase $300.

Inventory increases $500 and accounts receivable decreases $800. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #94 Topic Area: Accounting For Sales Revenue

218.

Which of the following transactions does not affect gross profit? A. A customer returning merchandise that was sold for a profit. B. The collection of cash on an account receivable which was paid for by the customer within the discount period. C. The journal entry to record bad debt expense. D. Selling inventory for less than its cost. Bad debt expense is an operating expense which does not affect gross profit. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #95 Topic Area: Accounting For Sales Revenue

219.

Which of the following is not a component of the gross profit calculation? A. B. C. D.

Cost of goods sold Sales returns and allowances Allowance for doubtful accounts Credit card discounts

Allowance for doubtful accounts is a contra-asset account on the balance sheet. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #96 Topic Area: Accounting For Sales Revenue

220.

The following data were taken from the records of Lilo Corporation for the year ended December 31, 2010: Answers will vary

Feedback: The following items have not been included in above amounts: Estimated bad debt expense is 1% of credit sales. The income tax rate is 35%. 10,000 of shares of common stock are outstanding. Requirements: A. Based on the above data, prepare a multiple-step income statement (including gross profit, pretax income, and earnings per share). B. 1. What was the gross profit ratio? 2. Explain what gross profit and the gross profit ratio mean.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #97 Topic Area: Accounting For Sales Revenue

221.

A portion of the income statement for Oscar Company is shown below. Provide the missing account titles and amounts.

Answers will vary Feedback: A. Sales revenue B. $350,000 - $348,000 = $2,000 C. Net sales D. Cost of goods sold; $348,000 - $90,000 = $258,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #98 Topic Area: Accounting For Sales Revenue

222.

A portion of the income statement for Lone Star Company is shown below. Provide the missing account titles and amounts.

Answers will vary Feedback: A. Sales revenue B. $380,000 - $20,000 = $360,000 C. Gross profit D. $360,000 - $100,000 = $260,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #99 Topic Area: Accounting For Sales Revenue

223.

Indicate whether each of the accounts listed below normally will have a debit or a credit balance. Record your answer to the left of each account by entering either Dr or Cr.

Answers will vary Feedback: 1. Cr; 2. Dr; 3. Dr; 4. Cr; 5. Dr; 6. Dr; 7. Cr; 8. Dr AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. Libby - Chapter 06 #100 Topic Area: Accounting For Sales Revenue

224.

Anthony Inc. reported the following amounts on their 2011 and 2010 income statements:

Requirements: A. Compute the gross profit percentage for both years. B. Provide at least two potential causes for the change in Anthony's gross profit percentage. Answers will vary Feedback: A. 2011 = 61.1% ($12,495/$20,438) 2010 = 59.7% ($12,169/$20,367) B. Anthony may have higher sales prices, lower costs of producing their product, or a change in the sales mix of their products toward selling more of the higher margin products. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #101 Topic Area: Accounting For Sales Revenue

225.

Hill Company has reported the following information on their income statements for the years 2008 through 2012:

A. Compute the gross profit percentage for each year. B. Has the gross profit ratio for Hill improved over time or worsened? Explain your answer. Answers will vary Feedback: A. 2012 = 31.0% ($3,517/$11,332), 2011 = 29.9% ($3,541/$11,862), 2010 = 26.7% ($2,979/ $11,170), 2009 = 30.2% ($3,328/$11,038), 2008 = 30.6% ($3,040/$9,932). B. The gross profit margin was eroding from 2008 through 2010 but then it recovered from the low of 26.7% in 2010 to its highest level in 2012 of 31.0%. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Libby - Chapter 06 #102 Topic Area: Accounting For Sales Revenue

226.

Hickory Corporation recorded sales revenue during the year of $350,000 of which $100,000 was on credit. The company has experienced an average loss rate of 2% of credit sales. Give the adjusting journal entry at the end of the year to record bad debt expense. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #103 Topic Area: Measuring And Reporting Receivables

227.

Prior to the year-end adjustment to record bad debt expense the ledger of Stickler Company included the following accounts and balances:

Cash collections on accounts receivable during 2010 amounted to $450,000. Sales revenue during 2010 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of the credit sales made in 2010 would ultimately become uncollectible. Determine the balances of the allowance for doubtful accounts and bad debt expense after the adjusting entry to record bad debt expense was made. The allowance for doubtful accounts has a credit balance prior to the adjusting entry. Answers will vary Feedback: Allowance for doubtful accounts $13,000 ($1,000 + $12,000) Bad debt expense $12,000 debit [($800,000 x 75%) x 2%)] AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #104 Topic Area: Measuring And Reporting Receivables

228.

On December 31, 2011, Colonial Corporation had the following account balances related to credit sales and receivables prior to recording adjusting entries:

Requirements: Present the necessary year-end adjusting entry related to uncollectible accounts for each of the following independent assumptions: A. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables outstanding at year-end will be uncollectible. B. It is estimated that 1% of credit sales for the year will prove to be uncollectible. C. Assume the same information presented in part A. Except that prior to adjustment, the allowance for doubtful accounts had a debit balance of $200 rather than a credit balance of $200. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #105 Topic Area: Measuring And Reporting Receivables

229.

On January 1, American Company's allowance for doubtful accounts had a credit balance of $3,000. The balance in the Accounts Receivable account on that date was $75,000. On January 2, prior to any credit sales, a $500 account from National Company was deemed to be uncollectible and written off. Required: A. Compute the net realizable value of American's receivables on January 1. B. Present the journal entry American would record on January 2 related to the write-off of National's account. C. Compute the net realizable value of American's receivables on January 2, immediately following the write-off of National's account. Answers will vary

Feedback AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Easy Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #106 Topic Area: Measuring And Reporting Receivables

230.

Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Describe how the change in accounts receivable will affect the calculation of cash flow from operations for 2011 and 2010. Answers will vary Feedback: The decrease [$90,561 - $68,648] in accounts receivable of $21,913 results in an increase in cash flow from operations during 2011. The increase [$90,561 - $56,454] in accounts receivable of $34,107 results in a decrease in cash flow from operations during 2010. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #107 Topic Area: Measuring And Reporting Revenues

231.

Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Calculate the accounts receivable turnover for 2011 and 2010: Answer: Answers will vary Feedback: 2011 = 9.01 ($717,422/$79,604.5) 2010 = 15.1 ($1,110,178/$73,507.5) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #108 Topic Area: Measuring And Reporting Revenues

232.

Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

Calculate the days' sales in receivables for 2011 and 2010: Answers will vary Feedback: 2011 = 40.5 days, (365/9.01) 2010 = 24.2 days (365/15.1) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #109 Topic Area: Measuring And Reporting Revenues

233.

A recent annual report for Kirova Company contained the following data:

Requirements: A. Calculate the accounts receivable turnover ratio and average days' sales in receivables for 2011. B. Explain the meaning of each number. Answers will vary Feedback: A. Accounts receivable turnover ratio (9.6) = Net sales ($18,158) ÷ Average net accounts receivable ($1,814 + $1,973) ÷ 2 Average days' sales in receivables (38 days) = 365 days ÷ Accounts receivable turnover (9.6) B. The turnover ratio indicates the number of times on average that the receivables are collected while the days sales in receivables shows the length of time in days it takes the company to collect its receivables from the credit customers. The higher the turnover ratio, the fewer days it takes to collect our receivables, thereby increasing liquidity of the receivables. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #110 Topic Area: Measuring And Reporting Revenues

234.

During 2011, Charles Inc. recorded credit sales of $2,000,000. Based on prior experience, it estimates a 1 percent bad debt rate on credit sales. At the beginning of the year, the balance in net accounts receivable was $150,000. At the end of the year, but before the bad debt expense adjustment was recorded and before any bad debts had been written off, the balance in net accounts receivable was $125,000. A. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recorded for the year 2011 and accounts receivable totaling $10,000 were written off for the year, what was the receivables turnover ratio for the year? B. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recorded for the year 2011 and accounts receivable totaling $12,000 were written off for the year, what was the receivables turnover ratio for the year? C. Explain why the answers to parts 1 and 2 differ or do not differ. Answers will vary Feedback: A. Receivables Turnover (15.7) = Net sales ($2,000,000) ÷ Average net accounts receivable ($150,000 + $105,000) ÷ 2 B. Receivables Turnover (15.7) = Net sales ($2,000,000) ÷ Average net accounts receivable ($150,000 + $105,000) ÷ 2 C. The ratio stayed the same because only the adjusting entry affects the balance of net accounts receivable while the actual write off of customer accounts simply offsets the asset against the contraasset account so that net accounts receivable doesn't change. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows. Libby - Chapter 06 #111 Topic Area: Measuring And Reporting Revenues

235.

Where, if at all, do items A through G (listed below) belong in the following bank reconciliation?

Items: A. Checks written during June that had not cleared the bank by June 30. B. Bank service charges for June which were not known until the June 30th bank statement arrived. C. Deposit made on June 30 that did not reach the bank until July 1. D. Upon reviewing the company's cash receipts book after June 30, it was discovered the accounting clerk had neglected to post one receipt to the cash account. E. The bank statement reported a "NSF check" during June. F. The bank incorrectly deducted the check of another company to the bank account during June. G. The company was paid interest on its account by the bank. Answers will vary Feedback :(1.) C, F; (2.) A; (3.) D, G; (4.) B, E. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #112 Topic Area: Reporting And Safeguarding Cash

236.

Why is the reconciliation of a company's cash account to the bank statement so important for effective internal control for cash? Answers will vary Feedback: The reconciliation of the cash account is very important in determining the correct, up-todate balance for cash to be presented on the company's balance sheet. It is also a good tool for detecting errors in the cash account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #113 Topic Area: Reporting And Safeguarding Cash

237.

Illinois Company prepared the following bank reconciliation at May 31:

Prepare the necessary journal entries for Illinois Company required by the May 31 bank reconciliation. Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #114 Topic Area: Reporting And Safeguarding Cash

238.

Chicago Company has hired you to reconcile its bank statement and cash account. For June, the Cash account showed the following:

There were neither outstanding checks nor deposits in transit at May 31. A. Prepare the bank reconciliation. B. Prepare the adjusting journal entries needed due to the bank reconciliation. C. What is the June 30 ending cash balance? Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #115 Topic Area: Reporting And Safeguarding Cash

239.

A comparison of the balance in Cottonwood Company's cash account (per its books) as of April 30, 2009, and the bank statement dated April 30, 2009, revealed the following information:

Required: Prepare a bank reconciliation using the format below. Indicate the proper handling of each of the items given above by listing the appropriate item code (letter) and amount under each section of the reconciliation statement form below. Then determine the correct cash balance. Note: If one or more of the items given above should not appear on the reconciliation statement, do not include the item(s).

Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #116 Topic Area: Reporting And Safeguarding Cash

240.

Burke Company has just received its June 30 bank statement from Urban Bank. The bank statement and the cash account, summarized below, are to be reconciled for the month of June.

Required: A. Prepare the June 30 bank reconciliation. B. Prepare the journal entries that should be made in the accounts of Burke Company as a result of the bank reconciliation. Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #117 Topic Area: Reporting And Safeguarding Cash

241.

What are "cash equivalents"? Specifically where would they appear on the financial statements? Answers will vary Feedback: Cash equivalents are short-term investments that can be readily converted into cash and whose value is unlikely to change. They normally have maturities of three months or less. They usually appear with cash on the balance sheet as the first listed current asset. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #118 Topic Area: Reporting And Safeguarding Cash

242.

You are the new manager of West Coast Company. The company distributes goods throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within two weeks. You notice that one employee is responsible for opening all incoming payments, recording them in the accounting records, and depositing all receipts in the bank daily. When asked why this one person performed all of these duties, you were told that it was more efficient for one person to handle cash and to keep track of things. If any cash was missing, responsibility could be easily determined. Do you agree with this arrangement? What changes would you make, and why? Answers will vary Feedback: Note: Answers may vary. This is definitely not a good system. One person should not be responsible for the receipt of cash, accounting for cash, and depositing in the bank. The duties of handling cash and accounting for cash should definitely be separated. This person could be stealing from the firm; since he/she is the only one handling the receipt of cash, the theft could easily be concealed. For example, when a customer pays cash on account, the employee could debit sales returns and allowances instead of the cash account. To prevent such an occurrence, different employees should have the responsibility of receiving cash, accounting for cash, and depositing cash in the bank on a daily basis. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 06-06 Report; control; and safeguard cash. Libby - Chapter 06 #119 Topic Area: Reporting And Safeguarding Cash

243.

Asia Company sold $10,000 of goods to Euro Company on credit on May 1. At the time of the sale, Asia recorded a debit to Accounts Receivable and a credit to Sales Revenue for $10,000. Terms were 2/ 10, n/30. Required: Present the entries Asia Company would record for each of the following independent situations: A. Euro paid the balance due, less the discount, on May 10. B. Euro returned half of the goods for credit on May 4. Euro paid the balance due, less the discount, on May 10. C. Euro paid their bill on May 30 (there were no returns). Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #120 Topic Area: Accounting For Sales Revenue

244.

On July 10, 2010, Rex Company sold merchandise at an invoice price of $5,000 with terms of 2/10, n/ 30. Give the journal entries required below by indicating the account code of the appropriate account for each debit and credit and the amounts involved.

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #121 Topic Area: Accounting For Sales Revenue

245.

On June 1, 2010, Concorde Company sold merchandise on credit at an invoice price of $1,000; terms 2/ 10, n/30. Give the journal entries to record the following: A. To record the sale. B. Assumption A: To record collection on June 28, 2010. C. Assumption B: To record collection on June 9, 2010. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S) Libby - Chapter 06 #122 Topic Area: Accounting For Sales Revenue

246.

Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component. B. If the transaction results in a decrease in the financial statement component. C. If the transaction does not affect the financial statement component. Transaction 1: The adjusting entry to record bad debt expense was made. Gross profit ______ Current assets ______ Stockholders' equity ______ Transaction 2: An account receivable was collected for which the customer took advantage of a 2% discount and remitted the payment less the discount. Net sales ______ Gross Profit ______ Current assets ______ AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Libby - Chapter 06 #123 Topic Area: Measuring And Reporting Receivables.

ch6 Summary Category # of Questions AACSB: Analytic 134 AACSB: Reflective Thinking 112 AICPA BB: Critical Thinking 246 AICPA FN: Measurement 60 AICPA FN: Reporting 74 AICPA FN: Reporting, Measurement 112 Bloom's: Apply 134 Bloom's: Remember 112 Difficulty: Easy 34 Difficulty: Hard 28 Difficulty: Medium 184 Learning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for 8 typical retailers; wholesalers; manufacturers; and service companies. Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts 52 reported as net sales. Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts 24 reported as net sales. (S) Learning Objective: 06-03 Analyze and interpret the gross profit percentage. 24 Learning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on 70 financial statements. Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on 26 cash flows. Learning Objective: 06-06 Report; control; and safeguard cash. 54 Libby - Chapter 06 246 Topic Area: Accounting For Revenues, Measuring And Reporting Revenues 2 Topic Area: Accounting For Sales Revenue 90 Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables 2 Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables. 2 Topic Area: Measuring And Reporting Receivables 82 Topic Area: Measuring And Reporting Receivables. 2 Topic Area: Measuring And Reporting Revenues 12 Topic Area: Reporting And Safeguarding Cash 54