Deck 7: Reporting and Interpreting Cost of Goods Sold and Inventory

Question 1

Under the completed contract method, revenue is recognized

A) when the customer pays.
B) periodically as work is completed.
C) when the product is delivered to the customer.
D) when the initial contract is signed.

Answer 1

C

Question 2

In 2013, T Co. reported a receivables turnover ratio of 11.1 and their competitor, WWW Co., reported a ratio of 4.6. Which of the following is true?

A) WWW Co. needs to focus on improving their credit and collection process
B) T Co. needs to decrease their ratio in order to improve collection time
C) WWW Co. has done a better job of collecting their receivables than T Co.
D) All of the statements are true

Answer 2

A

Question 3

When is revenue recognized under the percentage of completion method?

A) Throughout the project, based upon the amount of cash received from the customer.
B) When construction begins on the project.
C) When the project is complete.
D) Throughout the project, based upon the amount of work completed each year.

Answer 3

D

Question 4

If a customer pays her bill after her account has already been written off, the company receiving the payment should record the account reinstatement with which of the following?

A) A debit to bad debt expense.
B) A credit to cash.
C) A credit to bad debt expense.
D) A credit to allowance for doubtful accounts.

Question 5

A credit sale of $2,500, terms 1/20, n/30, should be recorded with which of the following journal entries?

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 6

Profit for T Co. in 2013 was $59,156 (in thousands). There was a deduction from profit on the statement of cash flows for $2,781 (in thousands) for the change in trade receivables. The trade receivables balance on December 31, 2013 was $79,024 (in thousands). How much was the trade receivables balance on December 31, 2012?

A) $56,375
B) $76,243
C) $61,937
D) $81,805

Question 7

On Eli Corp's June bank reconciliation, cheques outstanding totaled $5,400. In July, the corporation issued cheques totalling $38,900. The July bank statement shows that $26,300 in cheques cleared the bank in July. A cheque from one of Eli Corp's customers in the amount of $300 was also returned marked "NSF." The amount of outstanding cheques on Eli's July bank reconciliation should be

A) $18,000.
B) $7,200.
C) $12,600.
D) $17,700.

Question 8

If an account is collected after having been previously written off,

A) there will be both a debit and a credit to trade accounts receivable.
B) only the control account needs to be credited.
C) the allowance account should be debited.
D) both statement of earnings and balance sheet accounts will be affected.

Question 9

When do most companies usually recognize revenue as earned and record the revenue?

A) When payment is received
B) When the order is delivered
C) When title and risks of ownership pass to the buyer
D) When the customer's order is received

Question 10

The WD Co. reported revenue of $23,402 million for 2013. Their trade receivables balance was $3,999 million in 2013 and $3,633 million in 2012. How much cash was collected from customers?

A) $23,306
B) $23,768
C) $23,036
D) $23,402

Question 11

Vida Corporation gathered the following reconciling information in preparing its July ban reconciliation: The adjusted cash balance per books at July 31 is

A) $2,310.
B) $4,010.
C) $4,160.
D) $2,460.

Question 12

Which of the following is required for effective control of cash?

A) A reconciliation of the bank balance with the cash balance be prepared twice a year.
B) One person handles the receipts and disbursements of cash.
C) Cash be deposited monthly in a bank.
D) Cheques be pre-numbered.

Question 13

In 2013, G CO. reported product sales of $717.8 million and trade receivables of $79.4 million. In 2012, product sales were $584.9 million and trade receivables were $71.4 million. What was its receivables turnover ratio for 2013?

A) 9.52
B) 8.64
C) 8.19
D) 9.04

Question 14

What do credit terms of 2/10, n/30 indicate?

A) Two percent discount for early payment is available within ten days of the invoice date.
B) 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.
C) 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.
D) Ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice.

Question 15

For accounting purposes, cash includes which of the following?

A) IOU's received from employees.
B) A note received from a customer in settlement of an overdue trade account receivable.
C) Balances on deposit in banks.
D) A post-dated cheque received from a customer.

Question 16

Central Company sold goods for $5,000 to Western Company on March 12 on credit. Terms of the sale were 2/10, n/30. At the time of the sale, Central recorded the transaction by debiting Trade Receivables for $5,000 and crediting Sales Revenue for $5,000. Western paid the balance due on April 9. To record the April 9 transaction, Central would debit which of the following?

A) Sales discounts for $100.
B) Trade Receivables for $5,000.
C) Cash for $5,000.
D) Cash for $4,900.

Question 17

Prior to the write off of a $30 customer account, Kraft Company had the following account balances: What was the net realizable value of the receivables before and after the write-off?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 18

If a company uses the completed contract method rather than the percentage of completion method, the total profit the company recognizes from the beginning of the project throughout its completion will be which of the following?

A) The same for both methods.
B) Greater if the completed contract method is used.
C) Greater for the completed-contract method only if the project takes longer than five years to complete.
D) Greater if the percentage of-completion method is used.

Question 19

Bank errors

A) are infrequent in occurrence.
B) are corrected by making an adjusting entry on the depositor's books.
C) must be corrected by debits.
D) occur because of time lags.

Question 20

Which of the following is true about bad debt expense?

A) It should not appear in the financial statements.
B) It should appear on the statement of financial position as a contra asset.
C) It should appear on the income statement as a contra revenue.
D) It should appear on the income statement as part of selling expenses.

Question 21

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

A) Note receivable collected by the bank.
B) Outstanding cheques.
C) Deposits in transit.
D) Bank service charges.

Question 22

Dobson Corporation gathered the following reconciling information in preparing its September bank reconciliation: The adjusted cash balance per bank at September 30 is

A) $15,500.
B) $1,775.
C) $6,500.
D) $9,725.

Question 23

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. What is the approximate annual rate?

A) 56%.
B) 18%.
C) 25%.
D) 38%.

Question 24

A company had the following partial list of account balances at year-end: What amount of Net Sales would be shown on the income statement?

A) $57,200.
B) $64,200.
C) $55,700.
D) $56,000.

Question 25

If C Co.'s trade receivables balance was $1,666 million in 2012 and $1,798 million in 2013, what would be the impact on the statement of cash flows?

A) A decrease in cash flow from investing activities
B) An increase in cash flow from operating activities
C) A decrease in cash flow from operating activities
D) An increase in cash flow from investing activities

Question 26

Under the percentage of completion method, the amount of work completed in a particular year is typically determined by comparing which of the following?

A) The total costs incurred to date divided by the contract price.
B) The cost incurred that year divided by the contract price.
C) The total costs incurred to date divided by the cash collected to date from the customer.
D) The costs incurred that year divided by the estimated total costs of the project.

Question 27

The books of Tweed Company provided the following information: Beginning balances: Transactions during the year:
Past collection experience has indicated that 1% of credit sales normally is not collected. Therefore, an adjusting entry for bad debt expense should be made in the amount of whic of the following?

A) $6,500.
B) $500.
C) $2,500.
D) $6,000.

Question 28

Upon completing an aging analysis of trade receivables, the accountant for Rosco Works estimated that $5,000 of the current $98,000 of trade receivables would be uncollectible. The allowance for doubtful accounts had a $400 credit balance at year-end prior to adjustment. What amount of bad debt expense should appear in Rosco's income statement for the year?

A) $5,000.
B) $5,400.
C) $4,600.
D) $0

Question 29

To aid internal control, the individual authorized to sign cheques should be which of the following?

A) Purchasing agent.
B) Accounts payable bookkeeper.
C) Supervisor of receiving.
D) Treasurer.

Question 30

The following information was available to the accountant of Dove Company when preparing the monthly bank reconciliation: What was the cash balance per books of Dove Company prior to beginning the bank reconciliation?

A) $2,336.
B) $2,270.
C) $2,238.
D) $2,354.

Question 31

The balance in Allowance for Doubtful Accounts would have a debit balance when

A) an uncollectible account is later recovered.
B) write-offs during the year have been less than previous provisions.
C) write-offs during the year have exceeded previous provisions.
D) the percentage of receivables basis is used.

Question 32

When using the allowance method for bad debts, how should bad debt expense be recorded?

A) When a particular account is written off.
B) Whenever the allowance for doubtful accounts has a debit balance.
C) As an adjusting entry at the end of the accounting period.
D) Whenever the allowance for doubtful accounts has a zero balance.

Question 33

Under the allowance method for uncollectible accounts, when a specific account is written off

A) net earnings will decrease.
B) total assets will be unchanged.
C) total assets will increase.
D) total assets will decrease.

Question 34

A customer purchased a $200 item at Best Bike Shop, paying with a credit card (VISA). The merchant is charged a 2% fee by the credit card company. When recording this sale, the merchant would do which of the following?

A) Credit sales revenue for $196.
B) Credit unearned sales revenue for $200.
C) Credit sales revenue for $200.
D) Debit trade receivables for $200.

Question 35

An aging of a company's trade receivables indicates that $6,500 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a

A) debit to Bad Debts Expense for $6,500.
B) debit to Bad Debts Expense for $7,700.
C) debit to Bad Debts Expense for $5,300.
D) debit to Allowance for Doubtful Accounts for $6,500.

Question 36

A high receivables turnover ratio indicates

A) customers are making payments slowly.
B) the company's sales are increasing.
C) a large proportion of the company's sales are on credit.
D) customers are making payments very quickly.

Question 37

Following the completion of an aging analysis, the accountant for Liberty estimated that $1,100 of the receivables would be uncollectible. The year-end adjusting entry to record bad debt expense would include which of the following?

A) Credit to allowance for doubtful accounts of $1,100.
B) Debit to bad debt expense of $1,000.
C) Debit to bad debt expense of $900.
D) Credit to allowance for doubtful accounts of $1,200.

Question 38

Albert Company agreed to build a bowling complex for Pins R Us for a price of $2,000,000. The project is expected to take three years to complete. Albert estimated that the total cost of the project would be $1,600,000. During the first year, construction costs amount to $600,000. If Albert uses the percentage of completion method, how much revenue will be recognized for the first year?

A) $750,000.
B) $600,000.
C) $0.
D) $150,000.

Question 39

If a company has the opportunity to take a discount of 2/10, n/30 but must borrow money at an annual rate of 16%, what would be the net advantage of taking the discount?

A) 8.3%
B) 8.8%
C) 21.2%
D) 20.5%

Question 40

In 2013, A Co. reported product sales revenue of $2,514.4 million and trade receivables of $319.9 million for 2013 and $269.0 million in 2012. What was the cash flow generated by sales?

A) $2,463.5 million
B) $2,565.3 million
C) $2,514.4 million
D) $2,194.5 million

Question 41

On a multiple-step income statement, what happens to the amount of sales returns and allowances?

A) It is subtracted from net sales to determine gross margin on sales.
B) It is subtracted from gross sales to determine net sales.
C) It is added in the calculation of cost of goods sold.
D) It is subtracted from gross margin on sales to determine net sales.

Question 42

On a bank reconciliation, which of the following would be deducted from the balance per bank?

A) Outstanding cheques.
B) Electronic payment by a customer on account.
C) Deposits in transit.
D) Bank service charges.

Question 43

To record estimated uncollectible accounts using the allowance method for uncollectible accounts, the adjusting entry would be a debit to?

A) Loss on Credit Sales and a credit to Trade Accounts Receivable.
B) Trade Accounts Receivable and a credit to Allowance for Doubtful Accounts.
C) Allowance for Doubtful Accounts and a credit to Trade Accounts Receivable.
D) Bad Debts Expense and a credit to Allowance for Doubtful Accounts.

Question 44

During 20A, Thomas Company recorded bad debt expense of $15,000 and wrote off an uncollectible trade receivable amounting to $5,000. Assuming a January 1, 20A, credit balance in the allowance for doubtful accounts of $10,000, the December 31, 20A, balance in the allowance account would be which of the following?

A) $25,000.
B) $5,000.
C) $15,000.
D) $20,000.

Question 45

Central Company sold goods for $5,000 to Western Company on March 12 on credit. Terms of the sale were 2/10, n/30. At the time of the sale, Central recorded the transaction by debiting trade receivables for $5,000 and crediting sales revenue for $5,000. Western paid the balance due, less the discount, on March 21. To record the March 21 transaction, Central would debit which of the following?

A) Cash for $5,000.
B) Trade receivables for $4,900.
C) Cash for $4,900.
D) Trade receivables for $5,000.

Question 46

School Supplies Company made the following journal entries (1) to write off an account judged to be uncollectible and (2) to record bad debt expense for 20A: As a result of the first entry only, the book value (net realizable value) of trade receivable was (a); as a result of the second entry only, the book value (net realizable value) of trade receivable was (b):

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 47

Following the completion of an aging analysis, the accountant for Liberty estimated that $1,100 of the receivables would be uncollectible. What would the net realizable value of the receivables on Liberty's year-end balance sheet be?

A) $30,100.
B) $28,900.
C) $29,900.
D) $28,800.

Question 48

In 2013, C Co. reported net sales revenues of $19.8 billion and cost of goods sold for $6.0 billion. What was their gross profit percentage for 2013?

A) 30.3%
B) 76.74%
C) 43.5%
D) 69.7%

Question 49

On the April 30 bank reconciliation, a deposit made by a company to its bank account on April 18 will appear as a(n)

A) deduction from the balance per books.
B) deduction from the balance per bank.
C) addition to the balance per books.
D) this will not affect the current period's bank reconciliation.

Question 50

On Liberty's income statement for the year, what would bad debt expense amount to?

A) $6,500.
B) $6,300.
C) $6,400.
D) $5,200.

Question 51

A Co. and G Co. are competitors in the biotechnology market. In 2013, A Co. reported a gross profit percentage of 86.3% while G Co's percentage was 80.7%. What is the most likely cause of G Co.'s lower gross profit percentage?

A) Increased product selling prices
B) Decreased product costs
C) Larger scale operations than A Co.
D) Smaller scale operations than A Co.

Question 52

The following information was available to the accountant of Midland Company when preparing the monthly bank reconciliation: What is the corrected cash balance per books following completion of the reconciliation?

A) $430.
B) $620.
C) $645.
D) $120.

Question 53

Liberty estimates that its annual bad debts approximate 4% of credit sales. What would the net realizable value of the receivables on Liberty's year-end balance sheet be?

A) $23,600.
B) $23,700.
C) $29,900.
D) $23,500.

Question 54

The revenue recognition principle indicates that revenue should be recognized in the accounting records

A) when it is earned.
B) in the period that income taxes are paid.
C) when cash is received.
D) when expenses are incurred.

Question 55

An NSF cheque should appear in which section of the bank reconciliation?

A) Addition to the balance per bank.
B) Deduction from the balance per books.
C) Deduction from the balance per bank.
D) Addition to the balance per books.

Question 56

Which of the following accounts is always treated as a contra revenue and not as a selling expense?

A) Net sales
B) Purchase returns and allowances
C) Cash equivalents
D) Sales returns and allowances

Question 57

What is the impact of treating sales returns and allowances as a contra revenue but treating sales discounts and credit card discounts as selling expenses?

A) Gross margin is reduced by sales returns and allowances, sales discounts and credit card discounts.
B) Gross margin is reduced by sales returns and allowances but all three accounts cause a decrease in profit from operations.
C) Gross margin is reduced by sales discounts and credit card discounts but all three accounts cause a decrease in profit from operations.
D) Gross margin is reduced by sales returns and allowance but operating profit is only reduced by sales discounts and credit card discounts.

Question 58

What is the annual interest rate of a sales discount of 2/10, n/30?

A) 37.2%
B) 24.3%
C) 24.8%
D) 36.5%

Question 59

Under the allowance method for uncollectible accounts, when a year-end adjustment is made for estimated uncollectible accounts,

A) liabilities decrease.
B) net earnings is unchanged.
C) total assets decrease.
D) total assets are unchanged.

Question 60

A customer purchased $2,000 of goods on credit from Holiday Party Supply on May 1. The customer received the bill on May 15 and mailed a $2,000 cheque on May 28. Holiday received the cheque on May 30. In recording this transaction, Holiday should credit Sales Revenue for $2,000 on which of the following dates?

A) May 1.
B) May 28.
C) May 30.
D) May 15.

Question 61

When an account is written off using the allowance method for uncollectible accounts, trade accounts receivable

A) decreases and the allowance account decreases.
B) decreases and the allowance account increases.
C) is unchanged and the allowance account increases.
D) increases and the allowance account increases.

Question 62

In 2013, T Co.'s gross profit percentage was 39.8% while their competitor, WWW's percentage was 31.8%. Which was the most likely reason for WWW's lower percentage?

A) Lower selling prices
B) Higher selling prices
C) Lower product cost as a percentage of sales
D) Ability to differentiate their product in consumers' eyes

Question 63

If a cheque correctly written and paid by the bank for $521 is incorrectly recorded on the company's books for $251, the appropriate treatment on the bank reconciliation would be to

A) add $270 to the balance per books.
B) add $270 to the balance per bank.
C) deduct $270 from the balance per books.
D) deduct $270 from the balance per bank.

Question 64

Which of the following would not be considered an element of good internal control?

A) Require monthly reconciliation of bank accounts with the cash account.
B) Require that approval for cash payments and the signing of cheques be assigned to different individuals.
C) Require that all cash receipts be deposited on a daily basis.
D) Require that the individual who handles cash receipts be responsible for the accounting function related to those funds.

Question 65

SRM Company uses the allowance method to record its bad debt expense. When the account of a particular customer is deemed to be uncollectible and is written off, which of the following will be included in the journal entry?

A) Credit to bad debt expense.
B) Debit to bad debt expense.
C) Debit to trade receivables.
D) Debit to allowance for doubtful accounts.

Question 66

Jackson Company uses the allowance method to account for bad debts. During 20D, a customer became bankrupt and a receivable of $5,000 was deemed uncollectible. What is the entry to record the uncollectible amount?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 67

T Co's gross profit percentage has been increasing in the three years from 2011 through 2013 from 36.5% to 39.8%. This change has most likely been caused by which of the following?

A) Higher product costs
B) Selling products for higher prices
C) Selling products with lower margins
D) Discounted prices

Question 68

Merchandise was sold on credit for $3,000, terms 1/10, n/30. The entry to record the cash collection should include which of the following?

A) Debit Cash, $3,000, and credit Trade Receivables, $2,970, and Sales Discount, $30, if collected within the discount period.
B) Debit Cash, $3,000, and credit Trade Receivables, $3,000, if collected after the discount period.
C) Debit Cash, $3,000, and credit Trade Receivables, $2,970, and Sales Discount, $30, if collected after the discount period.
D) Debit Cash, $3,000, and credit Trade Receivables, $3,000, if collected within the discount period.

Question 69

One might infer from a debit balance in Allowance for Doubtful Accounts that

A) the percentage of receivables basis is being used.
B) bad debts expense has been overestimated.
C) a posting error has been made.
D) more accounts have been written off than had been estimated.

Question 70

Cawthra Limited gathered the following reconciling information in preparing its June ban reconciliation: The adjusted cash balance per books at June 30 is

A) $16,500.
B) $8,775.
C) $16,725.
D) $12,000.

Question 71

Tabor Company had trade receivables of $450,000 and an allowance for doubtful accounts of $15,500 just prior to writing off as worthless a trade receivable from Fox Company of $5,000. What was the net realizable value of trade receivables as shown by the accounting record before and after the write-off?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 72

In recording the year-end adjusting entry for bad debt expense, a company would do which of the following?

A) Debit trade receivables.
B) Debit allowance for doubtful accounts.
C) Credit allowance for doubtful accounts.
D) Credit trade receivables.

Question 73

Cash equivalents typically include investments with original maturities of which of the following?

A) Three months or less.
B) One year or the operating cycle, whichever is longer.
C) One year or less.
D) One month or less.

Question 74

Outstanding cheques from the prior period which clear the bank in the current period

A) should be deducted from the balance per books.
B) do not affect the current period's bank reconciliation.
C) should be deducted from the balance per bank.
D) should be added to the balance per books.

Question 75

On February 15, a local business receives an invoice for electricity used in the month of January and pays it on March 1. In which month should the business recognize the expense?

A) March
B) January
C) February
D) No expense should be recorded.

Question 76

When credit terms for a sale are 2/15, n/40, the customer saves by paying the bill early. Approximately what percent would this savings amount to on an annual basis?

A) 30%.
B) 20%.
C) 37%.
D) 18%.

Question 77

Under the allowance method for uncollectible accounts,

A) the net realizable value of trade accounts receivable is greater before an account is written off than after it is written off.
B) Allowance for Doubtful Accounts is closed each year to Income Summary.
C) the net realizable value of trade accounts receivable in the balance sheet is the same before and after an account is written off.
D) Bad Debts Expense is debited when a specific account is written off as uncollectible.

Question 78

When goods are sold to a customer with credit terms of 2/15, n/30, the customer will receive which of the following?

A) A 15% discount if they pay within 30 days.
B) A 15% discount if they pay within 2 days.
C) A 2% discount if they pay within 15 days.
D) A 2% discount if they pay 15% of the amount due within 30 days.

Question 79

G Co., which is a biotechnology firm, reported the following revenues on their 2013 income statement: Product sales $582.2 million, Royalties $214.7 million, Contract revenue $107.0 million and Interest income $64.1 million. Their cost of sales was reported as $104.5 million. What was their gross profit percentage?

A) 88.4%
B) 89.2%
C) 82.1%
D) 86.9%

Question 80

When is revenue recognized under the completed contract method?

A) Throughout the project as bills are sent to the customer.
B) Throughout the project as cash payments are received from the customer.
C) When construction begins on the project.
D) When the project is complete.