Exam 2 Review sheet w

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1.

Exam 2 Review

The Sarbanes-Oxley Act or 2002 introduced stiffer punishment for fraud in accounting. What 3 things are required for fraud to occur? a.

Incentive, Purpose, Cash

Cash, Assets, Opportunity b.

c.

d.

Incentive, Opportunity, Character

Character, Incentive, Cash

2.

Income Tax Expense was $80,000 for Amazon Company. The tax rate was 40%.

Other Expenses for Amazon.com was $10,000. General & Administrative expenses were 20,000. Net Sales for Amazon was $400,000. Determine Amazon’s cost of goods sold. a.

$210,000 b.

c.

d.

$200,000

$190,000

$180,000

Income Before Taxes X 0.4 = $80,000

Income Before taxes = $80,000/0.4 = $200,000

Income From operations – other expenses = Income before taxes

Income from operations = $200,000-10,000

= $190,000

Gross profit = Income from operations + G&A

= $190,000+20,000

= $210,000

Net sales – COGS = gross profit

COGS = net sales – gross profit = $400,000-210,000 = $190,000

3.

When an annual report is audited and released annual, which of the following forms is filed with the SEC? a.

Form 10k

Form 8K b.

c.

d.

Form 10Q

No filing required unless a major transaction occurs

4.

In reconciling the checking account, Morris Company noted the following items for the month of October:

Ending book balance

Deposits in transit

Outstanding checks

$5,775

$1,250

NSF check

Bank service charges

$2,075

$ 450

$ 25

Bank interest expense $ 250

Ending bank balance $ 5,875

What is the correct cas h balance at the end of October? a.

b.

$5,000

$5,050 c.

d.

$4,000

$5,750

Ending Book balance $5,775

NSF Check ($450)

-

-

Bank service charge (25)

Bank int expense (250)

-----------------------------------------

Ending Book balance $5,050 - Adjusted

5.

Target Company had 2009 and 2010 ending inventory of $2,000 and $4,000 respectively. In 2010, Target made $7,000 worth of purchases. What was Target’s cost of goods sold in 2010? a.

b.

$5,000

$11,000 c.

d.

$6,000

$3,000

COGS = Beg Inv + Purchases – Ending Inv

= 2000 + 7000 – 4000

= $5,000

6.

Under the perpetual inventory system, a.

There is a purchase account involved b.

c.

As inventory is sold, no entry is needed

To account for ending inventory, purchases account is closed and cost of goods sold is created

d.

Inventory is increased as purchased, and reduced as sold

7.

On March 1 st

, Kellogg’s Company made gross sales of $400,000 with terms 2/10,n30.

The customer later returned goods worth $20,000 because of defect on March 3 rd

.

Calculate the

net sales

of Kellogg’s company assuming the customer rendered full payment on March 9 th

in the same year. a.

b.

c.

d.

$380,000

$360,000

$372,000

$372,400

Net sales = Gross sales – sales return & allowance – sales discounts

= 400,000 – 20,000 – [((400,000-20,000) X 2%)

= 372,400

8.

Which of the following parties would have a raw materials inventory, work-inprocess inventory and finished goods inventory? a.

A retailer

A manufacturer b.

c.

d.

A distributor

None of the above

9.

Under which of the following inventory methods, cost of goods sold would generally be the highest? a.

FIFO

LIFO b.

c.

d.

Weighted-average method

Specific identification method

Answer questions 10, 11 and 12 based on the following information :

September 1 – Inventory balance on hand is $5,000 (500 units of inventory)

6 – Purchased 200 units @ $10.50 each

7 – Sold 500 units @ $15.00 each

8 – Purchased 200 units @ $11 each

19 – Sold 300 units @ $15.00 each

10.

Assuming the above company uses the FIFO inventory method, what would the cost of goods sold be? a.

$8,000 b.

c.

$8,050

$8,200 d.

$9,600

[( 500 units X $10) + (200units X $10.50) + (100units X $11)]

11.

Now assume the company uses a LIFO inventory method, what would the ending balance in inventory be at the end of September? a.

b.

$1,000

$1,200 c.

d.

$1,400

$1,600

Since its LIFO, only the first 100 units in beginning inventory will be left. Each units costs $10, so 100 X $10 = $1,000

12.

Assuming the company uses the LIFO inventory method, what would gross profit be? a.

$3,000 b.

c.

d.

$3,700

$3,900

$4,200

From previously, ending inv of LIFO would be $1,000.

Beg Inv = $5,000

Net sales = (500X$15.00 + 300 X $15.00) = $12,000

COGS = Beg Inv + Purchases – EI

= 5000 + 4,300 – 1,000

= 8,300

Gross profit = net sales –COGS

= 12,000 – 8,300

= $3,700

13.

According to the lower-of cost or market rule, what would the inventory balance be based on the following information?

Men’s sneakers

Women’s sneakers a.

b.

c.

d.

$1,400

$1,550

$1,600

$1,750

Quantity

20

15

Unit Cost

$50

$40

Replacement cost

$40

$50

14.

Bad debt expense is : a.

The actual write-off a company has to make because debtors defaulted b.

A fixed amount a company occurs every year based on the size of the company c.

An amount which is charged to expense arising from situations such as a debtor’s bankruptcy.

d.

An estimated amount based on credit sales or Accounts receivable

15.

Maxis Corporation has beginning balance in Allowance for Doubtful Accounts of

$2,000. Assuming credit sales totaled $50,000 and Celcom estimates 5% of net credit sales to be bad debt, what amount of bad debt expense would be recorded if Celcom uses the balance sheet method? a.

$500 b.

c.

d.

$2,500

$2,000

$1,500

Allowance for Doubtful Accounts

Beginning balance 2,000

Bad debt expense $5,00

Ending Balance $2, 500 (50,000 X

In this case, bad debt expense is a plug figure.

5%)

16.

Assume beginning balance of a company’s allowance for doubtful accounts is $4,000.

Net credit sales are $250,000 and 4% is estimated as bad debt. If the income statement method was used, what would bad debt expense be? a.

b.

$6,000

$10,000 c.

d.

$14,000

None of the above

Allowance for Doubtful Accounts

Beginning balance 4,000

Bad debt expense $10,000 (250,000 X 4%)

Since it’s the income statement method, bad debt expense is directly calculated from thje percentage of credit sales.

17.

Maxwell Company uses the income statement method for estimated bad debt expense. It estimates 2% of its $500,000 credit sales to be bad debt. Assume the beginning balance in the allowance for doubtful account was $4,000 and ending balance was $8,000. Determine the amount of write-off’s that the company made during the year. a.

b.

$2,000

$4,000

c.

d.

$6,000

$8,000

Write off $6, 000

Allowance for Doubtful Accounts

Beginning balance 4,000

Bad debt expense 10,000

Ending Balance 8,000

18.

Method Company issued cash for a $20,000, 5% note on May 1 st

, 2010. The note is due in one year. On December 31 st

, 2010, the fiscal year end, determine the amount of interest revenue recorded by Method. a.

$556

$667 b.

c.

d.

$1,000

$500

$20,000 X 5% X 8/12 = $667

19.

Which of the following assets is not amortized? a.

Goodwill

Trademarks b.

c.

d.

Trucks

Patents

20.

Which of the following is not depreciated? a.

Building b.

c.

d.

Equipment

Trucks

Land

21.

Using which method of depreciation would result in the highest depreciation expense when the asset is fully depreciated? a.

Straight-line b.

c.

d.

Units of Production

Double Declining balance

All methods results in the same depreciation expense at the end

22.

An equipment had a life of 8 years, cost of $20,000 and salvage value of $2,000.

What is the depreciation expense for this equipment in the first year? a.

$2,250 b.

c.

d.

$2,500

$3,000

$4,000

($20,000-2000) / 8 = $2,250

23.

Cy purchased a building with an estimated life of 10 years, for $200,000. The building is expected to have $20,000 in salvage value at the end of its life. Using the double declining balance method, what would accumulated depreciation be in the second year? a.

$32,000

$40,000 b.

c.

d.

$ 72,000

$20,000

Step 1 : Calculate DDRate = 1/10 X 2 = 0.20

Step 2 : Calculate depreciation expense for years 1 and 2.

Year 1 : DDR X BV = 0.2 X 200,000 = $40,000

Year 2 : 0.20 X (200,000-40,000) = $32,000

Accumulated depreciation = $40,000 + $32,000 = $72,000

24.

Which of the following would be part of the cost recorded in for the purchase of an equipment? a.

b.

Purchase price of the equipment

Installation cost for the equipment c.

d.

Transportation of the equipment

All of the above

25.

The copy machine of Iowa State had an estimated useful life of 8 years. After its 5 th year of use, the machine was sold for $5,000. The cost of the machine originally was

$15,000. Assuming at the end of the 5 th

year, the accumulated depreciation was

$5,000. What was the gain / loss on the sale of the copy machine? a.

Gain of $5,000

Loss of $5,000 b.

c.

d.

Gain of $15,000

Loss of $10,000

BV of machine at selling date = cost – acc dep = $15,000 – 5,000 = $10,000

Selling price = $5,000

So, 10,000 – 5,000 = Loss of $5,000

26.

A company has a debt-to-assets ratio of 0.5. What does this tell us about the company? (DTO = total liabilities / total assets) a.

For every $1 in liabilities, this company owns assets worth $0.50 b.

Liabilities increase by 0.5 times every year

c.

d.

Total liabilities are more than assets by 0.5

This company uses debt and equity evenly.

27.

Company A has asset turnover ratio this year of 1.20 compared to last year’s 0.9.

Which of the following information is false about Company A? a.

The company has generated more Sales revenue compared to last year. b.

c.

The company has a lower average total assets compared to last year.

The company generated $1.20 in revenue for every $1 in assets available this d.

year.

The company generated $1.20 more in revenue for every $1 in assets compared to last year.

28.

IBM Corp had cost of goods sold of $200,000 in 2010. Over the year, gross sales were $600,000. Sales return & allowance was $20,000 while sales discounts were

$10,000. Determine the Gross profit percentage for IBM

(Gross Profit % = Gross Profit / Net Sales) a.

50% b.

c.

65%

70% d.

75%

29.

A high inventory turnover ratio indicates that…..

(Inventory turnover ratio = COGS / Avg Inventory) a.

b.

c.

d.

The company generates a large amount of gross profit

The company’s inventory levels are constantly low

The company has high sales revenue

The company’s inventory is sold at a speedy rate.

30.

Asset impairment occurs when a.

b.

c.

d.

The value of our asset increased above the fair market value

The asset is used and depreciated

The future cash flows from the asset has fallen below book value

The asset is sold to another party for a lower price that our book value

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