Deck 6: Internal Control and Financial Reporting for Cash and Merchandise Sales

Question 1

A retailer is a company that buys products from manufacturers and sells them to wholesalers.

Answer 1

False

Question 2

Sales discounts, Sales returns & allowances and Cost of goods sold are all temporary accounts which are closed to retained earnings at the end of the accounting period.

Answer 2

True

Question 3

Operating cycle activities involve both inflows and outflows of cash.

Answer 3

True

Question 4

Physical counts of inventory are necessary to measure and adjust for inventory shrinkage.

Question 5

A service company earns net income by buying and selling merchandise.

Question 6

Gross profit or gross margin is not a ledger account name.

Question 7

A company must solely be a service company, a merchandising company, or a manufacturer.

Question 8

Few companies take a physical count of inventory each year, and rely on inventory records to determine the amount of inventory on hand at the end of the year.

Question 9

An organization implements internal controls without consideration of whether or not the cost exceeds their benefits.

Question 10

Perpetual inventory systems often use technology such as bar codes, optical scanners, and computers.

Question 11

The Sales Returns and Allowances account balance should be reported as a deduction from the Sales account balance because it is a contra revenue account.

Question 12

The gross profit percentage is computed by dividing operating income by net sales.

Question 13

A wholesaler is a company that buys products from manufacturers or other wholesalers and sells them to final consumers.

Question 14

Sales discounts are offered by sellers to encourage credit customers to make payments promptly.

Question 15

Cost of goods sold is reported on both the income statement and the balance sheet.

Question 16

If a merchandiser offers a sales discount of 2/10, net/30 on a sale of $1,000, the amount due in 30 days is the net amount of $980.

Question 17

Internal controls include the policies and procedures a company implements to protect against theft of assets, to promote efficiency, and to ensure compliance with laws and regulations.

Question 18

Most companies report their sales revenue and contra-revenue accounts, as well as net sales, on their externally reported income statements.

Question 19

In a perpetual inventory system, only one journal entry is required when goods are sold from inventory.

Question 20

FOB shipping point means that ownership of goods passes to the buyer when the goods reach their destination.

Question 21

Internal control policies and procedures are identical across companies.

Question 22

Electronic funds transfer (EFT) is the use of electronic communications to transfer funds from one party's bank account to another.

Question 23

Which of the following statements regarding sales returns and allowances is true?

A) Recording sales returns and allowances in a separate account is an important internal control that allows management to evaluate the volume of returns and allowances as a potential indicator of the quality of their products.
B) The Sales Returns and Allowances account balance should be added to the Sales account balance when computing net sales.
C) Sales Returns and Allowances account is an example of a contra-asset account.
D) Recording a sales allowance requires two entries.

Question 24

Common internal control principles include establishing responsibility and segregating duties.

Question 25

How many of the statements regarding bank reconciliations appearing below are true?
A bank reconciliation is an internal report prepared to verify the accuracy of both the cash account of a business or individual and the bank statement.
After preparing a bank reconciliation, no adjusting journal entries need to be made for outstanding checks or deposits in transit.
If a company's records show a different cash balance from that shown on the company's bank state ment, either the company or the bank has made an error.

A) None
B) One
C) Two
D) Three

Question 26

When a customer returns a defective product for credit, the seller would record the transaction using which of the following accounts?

A) Purchase Returns and Allowances
B) Sales Returns and Allowances
C) Sales
D) Sales Discounts

Question 27

Which of the following statements regarding "shrinkage" is not true?

A) Perpetual inventory systems can help managers detect "shrinkage".
B) "Shrinkage" is another term for inventory loss due to theft, error, or fraud.
C) "Shrinkage" is detected by comparing the balance in the inventory ledger account and the results of the physical inventory count.
D) It is easier to detect "shrinkage" in a periodic inventory system than in a perpetual inventory system.

Question 28

Segregation of duties means that a company assigns responsibilities so that:

A) sufficient workers are available to cover all necessary jobs.
B) responsibilities for related activities are assigned to two or more people.
C) employees are restricted to jobs for which they have adequate training.
D) workers are divided into those who make decisions and those who carry them out.

Question 29

A good voucher system includes procedures and approvals designed to control cash disbursements.

Question 30

Which of the following statements regarding gross profit (margin)is true?

A) Gross margin is net sales minus cost of goods sold.
B) A company sells $10,000 of goods. The gross profit percentage is 32%. Net income would be $3,200.
C) Gross profit is recorded by a credit to the gross profit account.
D) If net sales are $100 and cost of goods sold is $50 then the gross profit percentage is 100%.

Question 31

Cash equivalents are short-term, highly liquid investments purchased within three months of maturity.

Question 32

Technologically advanced accounting systems do not need checks-and-balances for errors because computers always process transactions correctly.

Question 33

A merchandising company's operating cycle begins with the sale of merchandise and ends with the cash collection from sales.

Question 34

Which of the following statements regarding inventory counts is NOT true?

A) Companies need to perform a physical count of their inventory at least yearly regardless of which inventory system is being used.
B) A perpetual inventory system does not require a physical count during the accounting period to determine cost of goods sold.
C) In a perpetual inventory system, the inventory count is compared to the inventory account balance to reveal shrinkage.
D) If a company uses a perpetual inventory system and the inventory count at the end of the accounting period

Question 35

Which of the following statements regarding journal entries under a perpetual inventory system is true?

A) "Freight-out" or delivery costs associated with sales should be included in the cost of goods sold amount.
B) When a company receives payment from a customer for a sale, cash is debited and accounts payable is credited.
C) When a company grants an allowance to a customer, inventory is credited when using a perpetual inventory system.
D) When a customer returns inventory, the seller debits Sales Returns & Allowances under a perpetual inventory system.

Question 36

A store holding a "25% off" sale will probably experience gross profit than usual and sales volume.

A) higher, higher
B) lower, lower
C) higher, lower
D) lower, higher

Question 37

How many of the following statements regarding discounts are true?
If a company offers a discount to encourage prompt payment and the discount is taken, the discount reduces the amount of Net Sales.
Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount may be taken; if not paid within two days, the full invoice price will be due in thirty days.
The terms "sales discounts" and "purchase discounts" are used interchangeably by a company.

A) None
B) One
C) Two
D) Three

Question 38

A properly designed system of internal controls is an integral part of the accounting system.

Question 39

On a bank statement, deposits are listed as debits from the bank's point of view because the bank increases its cash account when the deposit is made.

Question 40

The use of internal controls gives guaranteed protection against losses due to operating activities.

Question 41

Deposits in transit:

A) have been recorded by the company but not yet by the bank.
B) have been recorded by the bank but not yet by the company.
C) have not been recorded by the bank or the company.
D) are customers' checks that have not yet been received by the company.

Question 42

According to the Sarbanes-Oxley Act, the responsibility for issuing a report on a company's internal controls over financial reporting rests with:

A) both the company and its independent auditor.
B) the company.
C) the independent auditor.
D) neither the company nor its independent auditor.

Question 43

The following information was available to the accountant of Horton Company when preparing the monthly bank reconciliation: The amount of cash that should appear on the balance sheet following completion of the reconciliation and adjustment of the accounting records is:

A) $660.
B) $640.
C) $620.
D) $305.

Question 44

Your company receives $857 and makes a deposit in its checking account. Which of the following describes how this transaction should be accounted for?

A) You add $857 to your recorded cash balance and the bank deducts $857 from your checking account balance.
B) You deduct $857 from your recorded cash balance and the bank deducts $857 from your checking account balance.
C) You add $857 to your recorded cash balance and the bank adds $857 to your checking account balance.
D) You deduct $857 from your recorded cash balance and the bank adds $857 to your checking account balance.

Question 45

Which of the following situations would cause the balance per bank to be more than the balance per books?

A) Deposits in transit.
B) Service charges.
C) Outstanding checks.
D) Checks from customers returned as NSF.

Question 46

Notification by the bank that a customer's deposited check was returned NSF requires that the company make the following adjusting journal entry:

A) Option A
B) Option B
C) Option C
D) Option D

Question 47

A company buys footwear and clothing from manufacturers, which it resells to discount stores in a large urban area. This company is an example of a:

A) wholesale merchandising company.
B) service company.
C) retail merchandising company.
D) secondary service company.

Question 48

Before reconciling to its bank statement, Lauren Cosmetics Corporation's general ledger had a month-end balance in the cash account of $5,250. The bank reconciliation for the month contained the following items: Given the above information, what adjusted cash balance should Lauren report at month-end?

A) $4,500.
B) $4,820.
C) $5,160.
D) $5,590.

Question 49

When preparing this month's bank reconciliation, you find that you failed to record a $95 deposit for a payment you received from a customer. You immediately prepare a journal entry to record the deposit. Which of the following describes the actions to be taken when preparing next month's bank reconciliation?

A) You must decrease the balance per bank by $95.
B) You must increase the balance per bank by $95.
C) You must increase the balance per books by $95.
D) No further action is necessary.

Question 50

Which of the following items appearing on a bank reconciliation would require journal entries to bring the cash account up to date?

A) Deposits in transit
B) Checks from customers returned as NSF.
C) Outstanding checks.
D) An error made by the bank in recording a deposit.

Question 51

Your company writes a check for $857. Which of the following describes how this transaction should be accounted for?

A) You add $857 to your recorded cash balance and the bank deducts $857 from your checking account balance.
B) You deduct $857 from your recorded cash balance and the bank deducts $857 from your checking account balance.
C) You add $857 to your recorded cash balance and the bank adds $857 to your checking account balance.
D) You deduct $857 from your recorded cash balance and the bank adds $857 to your checking account

Question 52

Intel makes microchips from raw materials acquired from suppliers. Intel is a :

A) service company.
B) retail company.
C) manufacturer.
D) merchandising company.

Question 53

Which of the following items on a bank reconciliation would require an adjusting journal entry on the company's books?

A) An error by the bank.
B) Outstanding checks.
C) A bank service charge.
D) A deposit in transit.

Question 54

DigDug Corporation had outstanding checks totaling $5,400 on its June bank reconciliation. In July, DigDug issued checks totaling $38,900. The July bank statement shows that $26,300 in checks cleared the bank in July. The amount of outstanding checks on DigDug's July bank reconciliation should be:

A) $12,600.
B) $18,000.
C) $5,400.
D) $7,200.

Question 55

Internal controls are concerned with:

A) only manual systems of accounting.
B) the extent of government regulations.
C) protecting against theft of assets and enhancing the reliability of accounting information.
D) preparing income tax returns.

Question 56

On October 31, 2010, the bank's records say that your company has $12,956.73 in its checking account. You are aware of three outstanding checks for a total of $2,112.19. During October, 2010, the bank rejected two deposited checks from customers totaling $654.19 because of insufficient funds and charged you $12.00 in service fees. You had not yet received notice about the bad checks, but you were aware of and have recorded the $12.00 of service fees. Prior to adjustment on October 31, 2010, your Cash account would have a balance of:

A) $14,402.73.
B) $15,711.11.
C) $11,498.73.
D) $10,202.35.

Question 57

BetterBuy purchases computers from companies like Hewlett Packard and IBM and sells them to consumers. BetterBuy is a:

A) merchandising company at the retail level.
B) service company.
C) merchandising company at the wholesale level.
D) manufacturer.

Question 58

Which of the following is an activity common to the operations of merchandising, manufacturing, and service companies?

A) Producing the product.
B) Incurring operating expenses.
C) Buying goods or raw materials.
D) Selling the good or physical product.

Question 59

The internal control principle related to separating employees' duties so that the work of one person can be used to check the work of another person is called:

A) duplication of responsibility.
B) independent internal verification.
C) segregation of duties.
D) rotation of duties.

Question 60

On October 31, 2010, your company's records say that the company has $16,451.03 in its checking account. A review of the bank statement shows you have three outstanding checks totaling $5,643.01, and the bank has paid you interest of $12.19 and charged you $9.00 in fees. The bank statement dated October 31, 2010 would report a balance of:

A) $22,090.85.
B) $10,811.21.
C) $22,097.23.
D) $10,804.83.

Question 61

When a company collects from a customer who pays within the discount period, the company:

A) debits a contra-revenue account.
B) debits a liability account.
C) credits a liability account.
D) debits a revenue account.

Question 62

Your company purchases $50,000 of inventory from a wholesaler who allows you 45 days to pay. In addition, the wholesaler offers a 3% discount if payment is made within 12 days. These payment terms would be expressed as:

A) .03/12, n/45.
B) n/45, 3/12.
C) n/45, .03/12.
D) 3/12, n/45.

Question 63

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 accounts receivable 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:

A) Cash for $4,900.
B) Accounts Receivable for $4,900.
C) Cash for $5,000.
D) Accounts Receivable for $5,000.

Question 64

On December 31, 2011, you count 300 tie clips in inventory. During the next quarter, you carefully record the effect of each purchase and sale transaction on inventory. You buy 128 tie clips during the next quarter. On March 31, 2012, you count 288 tie clips in inventory. Which of the following is not true?

A) Ending inventory on March 31, 2012 should be 288 tie clips.
B) Your company uses the perpetual inventory method.
C) Your company's records would show that 140 tie clips were sold during the quarter.
D) You are certain that no shrinkage or theft must have occurred even though you have not taken a physical count to verify the inventory on hand.

Question 65

B-Mart sells $5,000 of blue jeans. The customer later tells B-Mart that $200 of them are defective. The sale of the $5,000 of blue jeans on account has already been recorded. The customer agrees to keep the blue jeans and B-Mart agrees to a $100 allowance. B-Mart will:

A) debit Accounts Payable for $200 and credit Inventory for $200.
B) debit Inventory for $200 and credit Accounts Payable for $200.
C) debit Accounts Payable for $200 and credit Sales Returns & Allowances for $200.
D) debit Sales Returns & Allowances for $200 and credit Accounts Receivable for $200.

Question 66

BetterBuy sells a computer from inventory for $599 on credit. BetterBuy originally bought the computer from IBM for $395 and uses the perpetual inventory system. How is the sale recorded in Bet terBuy's journal entries?

A) Debit Cash for $599, credit Sales for $599; debit Inventory for $395 and credit Cost of Goods Sold for $395.
B) Debit Accounts Receivable for $599, credit Inventory for $395, and credit Retained Earnings for $204.
C) Debit Accounts Receivable for $599, credit Sales for $599; debit Cost of Goods Sold for $395 and credit Inventory for $395.
D) Debit Inventory for $395, debit Cost of Goods Sold for $204, and credit Accounts Receivable for $599.

Question 67

Thirty years ago, most companies relied mainly upon periodic inventory systems. Why?

A) Theft was an insignificant source of loss compared to today.
B) The tax code required physical inventory counts until tax regulations were changed in the 1980s.
C) New technology, allowing perpetual inventory systems to be installed more easily and inexpensively, was not available thirty years ago.
D) Before the advent of computers, perpetual systems were less accurate than periodic systems.

Question 68

BetterBuy sells $50,000 of TVs to a customer. The credit terms state a 2% discount if paid in 7 days and a 1% discount if paid in 8-14 days. The customer pays in 12 days. How would BetterBuy record the customer's payment?

A) Debit Cash for $50,000 and credit Accounts Receivable for $50,000.
B) Debit Accounts Payable for $50,000, credit Cash for $49,500, and credit Inventory for $500.
C) Debit Cash for $49,500, credit Accounts Receivable for $50,000, and debit Sales Discounts for $500.
D) Debit Cash for $49,500, credit Accounts Receivable for $49,000, and credit Sales Returns & Allowances for

Question 69

When you identify outstanding checks in performing a bank reconciliation, you must:

A) deduct the amount of the outstanding checks from the balance per books.
B) deduct the amount of the outstanding checks from the balance per bank.
C) add the amount of the outstanding checks to the balance per books.
D) add the amount of the outstanding checks to the balance per bank.

Question 70

A company sells goods at a selling price of $20,000. The cost of the goods is $15,000 Under a perpetual inventory system the journal entries to record the sale will include:

A) $15,000 will be debited to Inventory and $15,000 will be credited to Accounts Payable.
B) $15,000 will be debited to Cost of goods sold and $15,000 will be credited to Inventory.
C) $15,000 will be credited to Inventory and $15,000 will be credited to Sales.
D) $15,000 will be debited to Cost of goods sold and $15,000 will be credited to Sales.

Question 71

Merchandise was sold on credit for $3,000, terms 1/10, n/30. How should the seller record the cash collection?

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

Question 72

When you identify interest received from the bank in performing a bank reconciliation, you must:

A) add the amount of interest to the balance per bank.
B) deduct the amount of interest from the balance per books.
C) add the amount of interest to the balance per books.
D) deduct the amount of interest from the balance per bank.

Question 73

The Tuck Shop began the current month with inventory costing $10,000, then purchased inventory at a cost of $35,000. The perpetual inventory system indicates that inventory costing $30,000 was sold during the month for $40,000. If an inventory count shows that inventory costing $14,500 is actually on hand at month-end, what amount of shrinkage occurred during the month?

A) $500.
B) $5,000.
C) $14,495.
D) $15,000.

Question 74

On June 15, Oakley Inc. sells merchandise on account to Sunglass Hut (SH) for $1,000, terms 2/10, n/30. On June 20, SH returns to Oakley merchandise that SH had purchased for $300. On June 24, SH completely fulfills its obligation to Oakley by making a cash payment. What is the amount of cash paid by SH to Oakley?

A) $680.
B) $686.
C) $700.
D) $1,000.

Question 75

If a company returns an item to a supplier, the supplier will record the return as:

A) sales returns and allowances.
B) shrinkage.
C) sales discounts.
D) purchase returns and allowances.

Question 76

In order to calculate shrinkage:

A) both periodic and perpetual inventory systems are needed.
B) a periodic inventory system is more effective.
C) a perpetual inventory system requires an occasional count of actual inventory.
D) it does not matter which system one uses.

Question 77

The perpetual inventory method of tracking inventory is considered superior to the periodic method because the perpetual method:

A) makes calculations easier and less technology can be deployed.
B) tells what inventory a company should have at any point in time.
C) saves a company from ever having to count the goods in inventory.
D) is more consistent with how companies calculated inventory in the past.

Question 78

A company sells goods on account at a selling price of $20,000. The cost of the goods is $15,000 .Under a perpetual inventory system the journal entries to record the sale will include:

A) $20,000 will be debited to Inventory and $20,000 will be credited to Accounts Payable.
B) $20,000 will be debited to Cost of goods sold and $20,000 will be credited to Inventory.
C) $15,000 will be credited to Inventory and $15,000 will be credited to Sales.
D) $20,000 will be debited to Accounts receivable and $20,000 will be credited to Sales.

Question 79

Which of the following statements regarding periodic versus perpetual inventory systems is true?

A) Periodic inventory systems provide a superior means of determining optimal times to reorder merchandise.
B) Periodic inventory systems require a greater investment in technology to implement them.
C) Perpetual inventory systems may assist in determining inventory lost due to shrinkage.
D) Periodic inventory systems allow sales personnel to provide more immediate information regarding availability of inventory.

Question 80

Companies using a perpetual inventory system:

A) ever physically count their inventory.
B) must count their inventory at least once a week.
C) still need to count the inventory at the end of the period.
D) always know the actual amount in inventory from their accounting records.