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

Question 1

In 2012,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 2012?

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

Answer 1

C

Question 2

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

Answer 2

D

Question 3

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

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

Answer 3

B

Question 4

A Co.and G Co.are competitors in the biotechnology market.In 2012,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)Smaller scale operations than A Co.
D)Larger scale operations than A Co.

Question 5

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

Question 6

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

Question 7

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

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

Question 8

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 15.
C)May 28.
D)May 30.

Question 9

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

Question 10

T Co's gross profit percentage has been increasing in the three years from 2010 through 2012 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 with lower margins
C)selling products for higher prices
D)discounted prices

Question 11

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

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

Question 12

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

Question 13

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

Question 14

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)20.5%
D)21.2%

Question 15

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

Question 16

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

Question 17

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

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

Question 18

G Co.,which is a biotechnology firm,reported the following revenues on their 2012 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 were reported as $104.5 million.What was their gross profit percentage?

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

Question 19

In 2012,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)Lower product cost as a percentage of sales
C)Ability to differentiate their product in consumers' eyes
D)Higher selling prices

Question 20

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

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

Question 21

When the allowance method is used,the entry which is appropriate when a particular account is written off as uncollectible should include which of the following?

A)debit to trade receivables.
B)debit to bad debt expense.
C)debit to allowance for doubtful accounts.
D)debit to sales revenue.

Question 22

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

Question 23

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 24

Albert 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 which of the following?

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

Question 25

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

Question 26

When using the allowance method for accounting for bad debts,trade receivables is reported on the statement of financial position at the expected net realizable value.When a particular receivable from a customer ultimately is determined to be uncollectible,the recording of this event will do which of the following?

A)decrease the net realizable value of the trade receivables.
B)have an effect that is not determinable from the information given.
C)increase the net realizable value of the trade receivables.
D)have no effect on the net realizable value of the trade receivables.

Question 27

Assuming the allowance method for bad debts is used,when a customer's uncollectible account is written off,a credit should be made to which of the following accounts?

A)Bad debt expense.
B)Allowance for doubtful accounts.
C)Sales revenue.
D)Trade receivables.

Question 28

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 which of the following?

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

Question 29

Accrual accounting requires that the loss resulting from the failure of credit customers to pay their bills should be which of the following?

A)not be recorded until cash is collected from the customer in settlement of the account because that is the only sure event.
B)be estimated in the period in which sales are made but should not be recorded until the customer defaults because of the matching principle.
C)be estimated and recorded in the period in which sales are made so that periodic expenses are matched with periodic revenues.
D)be recognized in the period in which the trade receivable proves to be uncollectible because that is the only date when the loss will really be known.

Question 30

As of December 31,Mesa Company has a balance of $5,000 in trade receivables of which $500 is more than 30 days overdue.Mesa has a credit balance of $45 in the allowance for doubtful accounts.Mesa estimates its bad debts losses at 1% of current accounts and 10% of accounts over thirty days.What adjustment should Mesa make to the allowance for doubtful accounts?

A)$50 (credit).
B)$55 (credit).
C)$95 (credit).
D)None,the current balance is correct.

Question 31

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 32

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

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

Question 33

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

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

Question 34

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

A)debit trade receivables.
B)credit trade receivables.
C)credit allowance for doubtful accounts.
D)debit allowance for doubtful accounts.

Question 35

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

Question 36

Which of the following is not an accurate description of allowance for doubtful accounts?

A)contra account.
B)statement of financial position account.
C)income statement account.
D)usually has a credit balance.

Question 37

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)debit to bad debt expense.
B)credit to bad debt expense.
C)debit to allowance for doubtful accounts.
D)debit to trade receivables.

Question 38

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 39

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 receivables was (a); as a result of the second entry only,the book value (net realizable value)of tradereceivable was (b):

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

Question 40

During 20A,Thomas Company recorded bad debt expense of $15,000 and wrote off an uncollectible tradereceivable 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)$5,000.
B)$15,000.
C)$20,000.
D)$25,000.

Question 41

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

Question 42

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

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

Question 43

A high receivables turnover ratio indicates

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

Question 44

Which of the following is NOT a control activity over cash?

A)The same individual receives the cash and pays the bills.
B)Surprise audits of cash on hand should be made occasionally.
C)Access to cash is limited.
D)Only designated personnel are authorized to handle cash.

Question 45

If C Co.'s trade receivables balance was $1,666 million in 2011 and $1,798 million in 2012,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)An increase in cash flow from investing activities
D)A decrease in cash flow from operating activities

Question 46

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 year-end balance sheet be?

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

Question 47

For accounting purposes,cash includes which of the following?

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

Question 48

In 2012,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)T Co.needs to decrease their ratio in order to improve collection time
B)WWW Co.has done a better job of collecting their receivables than T Co.
C)WWW Co.needs to focus on improving their credit and collection process
D)All of the statements are true

Question 49

Apple Company's bank statement showed an ending balance of $5,000.Items appearing in the bank reconciliation included: outstanding cheques,$500; deposits in transit,$1,000; bank service charges,$10; and Orange Company's cheque erroneously charged to Apple's bank account by the bank,$110.What is the correct cash balance at the end of the month?

A)$4,610
B)$5,390
C)$5,610
D)$6,610

Question 50

The WD Co.reported revenue of $23,402 million for 2012.Their trade receivables balance was $3,999 million in 2012 and $3,633 million in 2011.How much cash was collected from customers?

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

Question 51

For which of the following errors should the appropriate amount be added to the balance per bank on a bank reconciliation?

A)Cheque for $43 recorded as $34 by the company
B)A returned $200 cheque recorded by the bank as $20
C)Cheque for $35 recorded as $53 by the company
D)Deposit of $500 recorded by the bank as $50

Question 52

Bittner Corporation developed the following reconciling information in preparing its September bank reconciliation: Using the above information,determine the cash balance per books (before adjustments)for the Bittner Corporation.

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

Question 53

In 2012,A Co.reported product sales revenue of $2,514.4 million and trade receivables of $319.9 million for 2012 and $269.0 million in 2011.What was the cash flow generated by sales?

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

Question 54

When a depositor receives a bank statement indicating a "NSF cheque," what should he do?

A)credit a special receivable for the amount of the cheque.
B)record the amount as an expense of the current period.
C)credit the cash account for the amount of the cheque.
D)debit sales revenue.

Question 55

Which of the following is true about bad debt expense?

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

Question 56

The cash records and the bank statement of Molus Company showed the following at the end of February 20A: Outstanding cheques at the end of January 20A,$8,000; cheques written by Molus Company during February 20A,$50,000; and cheques cleared by the bank during February 20A,$54,000.Therefore,the outstanding cheques at the end of February 20A,amounted to which of the following?

A)$2,000.
B)$4,000.
C)$6,000.
D)$8,000.

Question 57

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)credit to allowance for doubtful accounts of $1,200.
C)debit to bad debt expense of $1,000.
D)debit to bad debt expense of $900.

Question 58

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

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

Question 59

In 2012,G CO.reported product sales of $717.8 million and trade receivables of $79.4 million.In 2011,product sales were $584.9 million and trade receivables were $71.4 million.What was its receivables turnover ratio for 2012?

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

Question 60

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

A)supervisor of receiving.
B)accounts payable bookkeeper.
C)treasurer.
D)purchasing agent.

Question 61

When preparing the monthly bank reconciliation,the accountant for Teddy Trucks discovered that a cheque correctly written to one of Teddy's suppliers for $159 had been incorrectly recorded in the books as $195.To correct the error,the accountant prepared an adjusting entry which required a debit to which of the following accounts?

A)Cash.
B)Bad debt expense.
C)Accounts receivable.
D)Purchases.

Question 62

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

Question 63

When preparing the monthly bank reconciliation,the accountant for Tiffany Toys noted that a cheque received from a customer last month for $89 was marked NSF and returned along with the bank statement.To correct the cash account balance,the accountant recorded an adjusting entry.This entry required a debit to which of the following accounts?

A)Cash.
B)Bad debt expense.
C)Trade receivables.
D)Sales.

Question 64

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 65

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

Question 66

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

Question 67

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

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

Question 69

Sales revenue is measured as the market value of the consideration received,or the book value of the item sold,whichever is more reliable.

Question 70

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

Question 71

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

A)one person handle the receipts and disbursements of cash.
B)cheques be prenumbered.
C)cash be deposited monthly in a bank.
D)a reconciliation of the bank balance with the cash balance be prepared twice a year.

Question 72

When preparing the monthly bank reconciliation,the accountant for Tiffany Toys noted that a cheque received from a customer last month for $89 was marked NSF and returned along with the bank statement.In reconciling the bank balance with the company's cash account,how should the $89 be recorded?

A)deducted from the bank balance.
B)added to the bank balance.
C)deducted from the company's cash balance.
D)added to the company's cash balance.

Question 73

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

Question 74

When is revenue recognized under the completed contract method?

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

Question 75

When is revenue recognized under the percentage of completion method?

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

Question 76

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)debit trade receivables for $200.
B)credit sales revenue for $200.
C)credit sales revenue for $196.
D)credit unearned sales revenue for $200.

Question 77

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

Question 78

Under the instalment method,revenue is recognized when the customer does which of the following?

A)orders the merchandise.
B)receives the merchandise.
C)receives the bill.
D)makes a cash payment.

Question 79

When preparing the monthly bank reconciliation,the accountant for Treetop Towers noted that all cash deposits for the month were listed on the bank statement except one for $1,200 that was made on the last day of the month.In reconciling the bank balance with the company's cash account,how should the $1,200 be recorded?

A)deducted from the bank balance.
B)added to the bank balance.
C)deducted from the company's cash balance.
D)added to the company's cash balance.

Question 80

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)Deposits in transit.
C)Outstanding cheques.
D)Bank service charges.