exam 3

Question 1

What does recourse refer to in terms of factoring accounts receivable?

Answer 1

The obligation of the seller to pay the buyer if the accounts receivables can’t be collected

Question 2

What is true when using a periodic inventory system (4)

Answer 2

There is 1 journal entry on the date of each sale
The purchases account is debited for every purchase
Cost of Goods Sold is recorded at the end of each year
Under LIFO, Inventory purchased at any time throughout the year could be an expense for a sale at any time

Question 3

Which inventory method most accurately matches current costs to Cost of Goods Sold

Answer 3

LIFO

Question 4

Which inventory method most accurately matches current costs to Ending Inventory

Answer 4

FIFO

Question 5

What should NOT be put on a company’s balance sheet under Inventory? (3)

Answer 5

Goods received from another company for sale on consignment
Goods in transit which were purchased f.o.b. destination
Goods in transit which were sold f.o.b. shipping point

Question 6

When do we debit Cost of Goods Sold when recording an impairment of Inventory?

Answer 6

When write-down is common for that particular company

Question 7

When do we debit Loss when recording an impairment of Inventory?

Answer 7

When write-down is substantial & unusual

Question 8

Under US GAAP, why is the allowance method preferred to the direct write-off method under Accrual Accounting?

Answer 8

The allowance method better matches bad debt expense to revenue

Question 9

True or false? Trade receivables include notes receivable

Answer 9

True

Question 10

True or false?. In the gross method, sales discounts are reported as a deduction from sales.

Answer 10

True

Question 11

True or false? For receivables sold with recourse, the seller guarantees payment to the purchaser if they debtor fails to pay.

Answer 11

True

Question 12

True or false? When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss

Answer 12

False

Question 13

True or false? Purchase Discounts Lost is a financial expense and is reported in the “other expenses and losses section of the income statement.

Answer 13

True

Question 14

True or false?. If a supplier ships goods f.o.b. destination, title passes to the buyer when the goods are delivered to the common carrier.

Answer 14

False

Question 15

True or false? Both merchandising and manufacturing companies normally have multiple inventory accounts.

Answer 15

False

Question 16

True or false? In all cases when FIFO is used, the cost of goods sold would be the same whether a perpetual or periodic system is used.

Answer 16

True

Question 17

True or false? When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In.

Answer 17

False

Question 18

What is the normal journal entry for recording bad debt expense under the allowance
method?

Answer 18

Debit Bad Debt Expense
credit Allowance for Doubtful Accounts

Question 19

What is the normal journal entry when a previously written off receivable is deemed
collectible?

Answer 19

Debit Accounts Receivable
Credit Allowance for Doubtful Accounts

Question 20

. What is the normal journal entry when writing-off an account as uncollectible under
the allowance method?

Answer 20

Debit Allowance for Doubtful Accounts
Credit Accounts Receivable

Question 21

True or false? The cost flow assumption adopted for inventory must be consistent with the physical movement of the goods.

Answer 21

False

Question 22

True or false? Freight charges on goods purchased are considered a product cost and therefore is part of the cost of the inventory.

Answer 22

True

Question 23

True or false? A manufacturing concern would report the cost of units that were partially processed as inventory in the balance sheet.

Answer 23

True

Question 24

True or false? In most situations, the gross profit percentage is stated as a percentage of cost.

Answer 24

False

Question 25

True or false? When the conventional retail method includes both net markups and net markdowns in the cost-to-retail ratio, it approximates a lower-of-cost-or-market valuation.

Answer 25

False

Question 26

True or false? Application of the lower-of-cost-or-market rule results in inconsistency because a company may value inventory at cost in one year and at market in the next year.

Answer 26

True

Question 27

True or false? If the contract price on a noncancelable purchase commitment exceeds the market price, the buyer should record any expected losses on the commitment in the period in which the market decline takes place.

Answer 27

true

Question 28

True or false? . In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative sales value.

Answer 28

true

Question 29

True or false? In the retail inventory method, the term markup means a markup on the original cost of an inventory item.

Answer 29

False

Question 30

True or false? When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract.

Answer 30

False

Question 31

True or false? A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost

Answer 31

True

Question 32

What is the effect of freight-in on the cost-retail ratio when using the conventional retail method? A. No effect on the cost-retail ratio B. Increases the cost-retail ratio C. Depends on the amount of the net markups D. Decreases the cost-retail ratio

Answer 32

. Increases the cost-retail ratio

Question 33

When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term "market"? A. Current replacement cost B. Discounted present value C. Net realizable value D. Net realizable value less a normal profit margin

Answer 33

Current replacement cost

Question 34

In no case can "market" in the lower-of-cost-or-market rule be more than A. Estimated selling price in the ordinary course of business. B. Estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses. C. Estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin. D. Estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

Answer 34

Estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

Question 35

Goods in transit which are shipped f.o.b. shipping point should be A. None of these B. Included in the inventory of the buyer when shipped C. Included in the inventory of the shipping company D. Included in the inventory of the seller when shipped

Answer 35

Included in the inventory of the buyer when shipped

Question 36

Goods in transit which are shipped f.o.b. destination should be A. Included in the inventory of the seller when shipped B. Included in the inventory of the shipping company C. Included in the inventory of the buyer when shipped D. None of the answers are correct

Answer 36

Included in the inventory of the seller when shipped

Question 37

When using a perpetual inventory system A. A Cost of Goods sold account is used B. No Purchases account is used. C. All of the answers are correct. D. Two entries are required to record a sale.

Answer 37

All of the answers are correct.

Question 38

How is consignment inventory reported on the balance sheet? A. none of the answers are correct B. The inventory is reported on the consignor's balance sheet C. The inventory is reported on the consignee's balance sheet. D. The inventory is not reported on either the consignor or consignee's balance sheet

Answer 38

The inventory is reported on the consignor's balance sheet