ACC 321 Ch 7 Smartbook PDF

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Chapter 7 Smartbook Homework Questions for MH Connect...

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Internal control consists of plans to (Select all that apply.) report misuse of company assets to investors. promote operational efficiency. encourage adherence to company policies and procedures. report management errors to the police. minimize errors and theft.

Which of the following items are included in cash? (Select all that apply.) currency and coins notes receivable from customers balance in checking accounts checks from customers accounts receivable from customers

A company's plans to adhere to policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data are referred to as general controls. internal controls. corporate regulations. security controls. protective controls.

Which of the following is an example of separation of duties in a good system of internal control? The individual who evaluates the employees may not hire employees. The individual who receives the inventory does not have access to the accounting records. The individual who hires the employees may not manage the employees. The individual who receives the inventory cannot count the inventory.

Which of the following items are not included in cash? currency and coins balance in checking accounts accounts receivable from customers cash in savings account

When a bank requires a borrower to set aside funds for the future payment of debt, this is known as what? Invested cash Interest expense Effective interest Restricted cash ( also, noncurrent asset)

Internal control consists of plans to (Select all that apply.) report misuse of company assets to investors. report management errors to the investors. enhance the reliability of accounting data. promote operational efficiency. enhance the accuracy of accounting data.

A cash restriction imposed by a bank wherein the debtor must leave a certain amount of funds such as 5% of the original loan in the low-interest or noninterest-bearing account is a interest rate loan guarantee. guaranteed interest balance. restricted loan advance. compensating balance.

A critical aspect of a good internal control system is separation of duties. employee job security. camera security. adequate compensation.

A compensating balance results in an effective interest on the loan that is ______ the stated rate on the debt. equal to lower than higher than

Which of the following is an internal control procedure for cash disbursements? Disbursements should be made only at the end of each month. Disbursements should be made by check. Disbursements should be made with a cashier's check. Disbursements should be made in cash.

Depending on the nature of the restriction and the classification of the related debt, compensating balances may be disclosed in the financial statements as (Select all that apply.) noncurrent assets. cash and cash equivalents. current assets. owners' equity. contra assets.

Cash that is restricted and is not available for current use may be reported in the balance sheet as (Select all that apply.) other assets. investments and funds. accounts receivable. trading securities. a noncurrent asset.

A difference between U.S. GAAP and IFRS in accounting for cash and cash equivalents is that IFRS allows the netting of bank overdrafts against the cash and cash equivalents. accounts payable to be netted against accounts receivable. restricted cash to be reported as cash and cash equivalents. notes due within 3 years to be classified as current if no compensating balance is required.

Which of the following situations require cash to be restricted? (Select all that apply.) Requirement to use cash for future plant expansion. Requirements not to pay dividends unless certain ratios are obtained.

Requirement to pay cumulative preferred dividends prior to paying dividends on common stock. Requirements to set aside funds to repay debt.

A restriction of cash wherein the borrower is required to maintain a specific amount in a lowinterest or noninterest-bearing account at the bank is called a(n)

compensa

balance.

When a company has a claim to receive assets in the future, how is this recorded on the balance sheet? A receivable A payable A transaction A guarantee

Lydia Corp. borrows $25,000 from the bank at an interest rate of 6%. If the bank requires a compensating balance of $5,000, the effective rate of interest on the loan is 30%. Reason:

$25,000 x 6% = $1,500.

$1,500/20,000

26%. Reason:

$25,000 x 6% = $1,500.

$1,500/20,000

4.8%. Reason:

$25,000 x 6% = $1,500.

$1,500/20,000= .075

7.5%.

An account receivable is normally classified as a current liability. noncurrent asset. current asset. noncurrent liability. Jackson Corp. borrowed $10,000 from Second National Bank. The note is due in 5 years and includes a contractual agreement requiring Jackson to maintain a compensating balance of $2,000. The $2,000 compensating balance should be reported as other current assets. noncurrent assets. cash and cash equivalents. Reason:

Because Jackson is required by the bank to maintain this balance, the amount is reported in noncurrent assets

Which method(s) permit the offsetting of bank overdrafts against cash balances? IFRS only U.S. GAAP only Both U.S. GAAP and IFRS

At what amount are accounts receivable initially recorded? The present value of expected future cash flows.

The exchange price agreed on by the buyer and seller. The future value of the amount expected to be collected.

Restrictions on cash may be (Select all that apply.) informal arising from management intent. imposed by stockholder intervention. imposed by government regulation. formal by contract. A company's claims to the future collection of cash, other assets, or services is called a ________. payable transaction receivable guarantee

A trade discount is a reduction from the list price, which is to (Select all that apply.) reduce the sale price for interest received. encourage customers to pay quickly. disguise real prices from competitors. give quantity discounts to customers. change prices without publishing a new catalog.

Accounts receivable are normally classified in the income statement as revenue. in the balance sheet as noncurrent assets. in the income statement as other income. in the balance sheet as current assets.

Which of the following is a discount that is a reduction in the amount to be paid if the customer pays within a specified time period? purchase discount sales discount trade discount quantity discount

Depending on the nature of the restriction and the classification of the related debt, compensating balances may be disclosed in the financial statements as (Select all that apply.) owners' equity. cash and cash equivalents. current assets. contra assets.

noncurrent assets.

At what amount are accounts receivable recorded? The future value of the amount collected. The present value of future cash flows. The amount expected to be collected.

Tom Company offers Jane Company discount terms of 5/15, n/45. What does this mean? Jane Company will receive a 15% discount if payment is made within 5 days. Jane Company must pay the full amount if payment is made after day 15. Jane Company will receive a 5% discount if payment is made within 45 days. Jane Company must pay the full amount if payment is made before day 15.

Which of the following situations require cash to be restricted? (Select all that apply.) Requirements not to pay dividends unless certain ratios are obtained. Requirement to pay cumulative preferred dividends prior to paying dividends on common stock. Requirements to set aside funds to repay debt. Requirement to use cash for future plant expansion.

True or false: The gross method and the cash method are the two ways to record sales discounts. True Reason:

The gross method and the net method are the two ways to record sales discounts.

False Reason:

The gross method and the net method are the two ways to record sales discounts.

A(n)

trade

discount is a way to change prices without publishing a new catalog.

What does a sales discount represent? A quantity discount for large customers. A reduction in the selling price of a good or service. A reduction in the amount to be paid if paid within a specified period of time.

Kim Corp. uses the gross method to record sales on account. Kim sells goods on account for $5,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) debit to accounts receivable, $5,000. credit to sales, $4,900. credit to sales, $5,000.

debit to accounts receivable, $4,900. credit to accounts receivable, $4,900. debit to sales, $5,000.

Jackson Corp. borrowed $10,000 from Second National Bank. The note is due in 5 years and includes a contractual agreement requiring Jackson to maintain a compensating balance of $2,000. The $2,000 compensating balance should be reported as cash and cash equivalents. Reason:

Because Jackson is required by the bank to maintain this balance, the amount is reported in noncurrent assets

noncurrent assets. other current assets.

Kilroy uses the net method to record sales on account. Kilroy sells goods on account for $1,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) credit to accounts receivable, $980. credit to sales, $980. debit to sales, $1,000. debit to accounts receivable, $1,000. debit to accounts receivable, $980. credit to sales, $1,000.

Company A offers Company B discount terms of 2/10, n/30. What does this mean? Company B will receive a 10% discount if payment is made within 30 days. Company B will receive a 10% discount if payment is made within 2 days. Company B will receive a 2% discount if payment is made within 10 days. Company B will receive a 2% discount if payment is made within 30 days.

Under the gross method, the initial recording of sales revenue will be ______ the amount recorded under the net method. higher than equal to lower than

The two methods used for recording sales discounts are the method.

net

A trade discount is a rebate from the manufacturer. an increase in the account receivable. a percentage reduction from list price. a percentage reduction of the amount due for early payment.

method and the

gross

Conceptually, the

gross

method of recording sales views a discount not taken by the customer

as part of sales revenue, whereas the revenue.

net

method considers discounts not taken as interest

Paredes uses the gross method to record sales on account. Paredes sells goods on account for $1,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) credit to accounts receivable, $980. credit to accounts receivable, $1,000. debit to accounts receivable, $980. credit to sales, $980. debit to accounts receivable, $1,000. credit to sales, $1,000.

Tim Corporation uses the net method to record sales on account. Tim sells goods on account for $5,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) debit to accounts receivable, $5,000. credit to sales, $4,900. credit to accounts receivable, $4,900. debit to sales, $5,000.

debit to accounts receivable, $4,900. credit to sales, $5,000.

A(n)

sales

return

occurs when a customer returns merchandise for a refund.

The two methods used for recording sales discounts are the gross method. valuation method. discount method. net method.

Glaser Corp. does not estimate sales returns. If Glaser sells goods on December 20, year 1, and the goods are returned January 15, year 2, what is the effect on its financial statements? Year 1 net income is overstated. Year 1 total assets are understated. Year 2 total assets are overstated. Year 2 net income is overstated. As we discussed in Chapter 6, sales returns are a form of variable consideration. Because products might be returned or prices adjusted, there is uncertainty as to the final amount the seller will be entitled to receive (the transaction price). Recognizing returns only at the time they happen might cause revenue and profit to be overstated in

the period the sale is made and understated in the return period. For example, assume merchandise is sold to a customer for $10,000 in December 2021, the last month in the selling company’s fiscal year, and that the merchandise cost $6,000. The company would recognize gross profit of $4,000 in 2021 ($10,000 – $6,000). If all of the merchandise is returned in 2022, after financial statements for 2021 are issued, gross profit will be overstated in 2021 and understated in 2022 by $4,000. The 2021 balance sheet also is affected, with a refund liability understated by $10,000 and inventory understated by $6,000.

The ____ of recording sales revenue recognizes the discount not taken as a part of the sale. net method gross method trade method How do sellers typically account for returns? (Select all that apply.) Using an adjusting entry at the end of the period for any remaining future expected returns. Using an estimate every time they make a sale. As returns occur.

Kim Corp. uses the gross method to record sales on account. Kim sells goods on account for $5,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) credit to sales, $5,000. debit to accounts receivable, $5,000. debit to accounts receivable, $4,900. credit to accounts receivable, $4,900. debit to sales, $5,000. credit to sales, $4,900.

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n)

sales

returns

Warner Corp. sells goods on account for $10,000. The customer pays the invoice in full on April 15, but on April 20, the customer returns $3,000 of the merchandise and receives a refund. What is the entry Warner will make on April 20 when the goods are returned? Debit Sales Returns; credit Cash. Debit Sales Returns; credit Accounts Receivable. Debit Bad Debt Expense; credit Accounts Receivable. Debit Sales Returns; credit Allowance for Uncollectible Accounts. Under the gross method, the initial recording of sales revenue will be ______ the amount recorded under the net method. equal to lower than higher than

Failing to estimate sales returns can result in income being _______ in the period the sale is made and _______ in the period the product is returned. overstated; overstated overstated; understated understated; understated understated; overstated

True or false: Most sellers estimate returns every time they make a sale.

True Reason:

It is impractical for most sellers to estimate returns every time they make a sale so instead, they account for returns as they occur.

False

Paredes uses the gross method to record sales on account. Paredes sells goods on account for $1,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) debit to accounts receivable, $980. credit to accounts receivable, $980. credit to sales, $980. debit to accounts receivable, $1,000. credit to accounts receivable, $1,000. credit to sales, $1,000.

When actual inventory returns occur in a perpetual inventory system, which of the following happens? Credit the asset inventory account Debit the allowance for sales returns account

Debit the asset inventory account

When a customer returns a product for a refund, in which account is the entry recorded? sales discount purchase discount purchase return sales return

Which of the following is a contra account to accounts receivable? Sales returns Inventory-estimated returns Allowance for sales returns

The difference between the gross method and net method of recording sales revenue, in terms of the effect on income is what? The net method results in a smaller sales value resulting in a smaller net sales revenue value. The timing of the recognition of any discounts not taken varies and could occur in different reporting periods. The gross method results in a greater sales value resulting in a greater net sales revenue value. There is no difference.

Examine the following journal entry. Debit Refund liability $10,000; credit Cash $10,000; debit Inventory $6,000; and credit Inventory-estimated returns $6,000. What is the transaction that required this entry? Returned inventory purchased to the supplier. Adjustment for sales returns that occurred. Adjustment for delinquent account of customer. Sale of of goods on account to a customer.

Glaser Corp. does not estimate sales returns. If Glaser sells goods on December 20, year 1, and the goods are returned January 15, year 2, what is the effect on its financial statements? Year 1 net income is overstated. Year 2 net income is overstated. Year 1 total assets are understated. Year 2 total assets are overstated.

The direct write-off method is used when the company expects excessive sales returns. a company elects to use this method as one of several alternatives. uncollectible accounts are not anticipated or are immaterial.

bad debts are expected to be material in amount.

How do sellers typically account for returns? (Select all that apply.) Using an estimate every time they make a sale. Using an adjusting entry at the end of the period for any remaining future expected returns. As returns occur.

The direct write-off method is not allowed for income taxes purposes could result in a mismatching of expenses and revenue is a commonly used method for financial reporting purposes How is inventory recorded related to returns? (Select all that apply.) The inventory account is decreased when returns occur to include the returned items. Inventory expected to be returned is included as an asset on the balance sheet. The inventory account is increased when returns occur to include the returned items. Inventory expected to be returned is included as income on the income statement.

If a company believes its sales returns will be material, an adjusting entry for expected returns should be made to which account? bad debt expense accounts receivable

sales discounts allowance for sales returns

A company believes its sales returns will be material. What is the journal entry required? Debit accounts receivable; credit allowance for sales returns. Debit sales returns; credit allowance for sales returns. Debit allowance for sales returns; credit accounts receivable. Debit allowance for sales returns; credit sales returns. 10,00 Refund liability 0 Sales returns ($70,000 – 10,00 $60,000) 0 Cost of goods sold (60% × $10,000) 6,000 Inventory—estimated returns 6,000

These adjustments remove the remaining 2021 balance from the refund liability and inventory—estimated returns. They also increase net sales revenue (by reducing sales returns) and cost of goods sold in 2022, the period in which the change in estimate occurs. When the direct write-off method is used, an entry for bad debt expense is required only when bad debts are recorded on the tax return. when each sale is made. when the account receivable is determined to be uncollectible. at the end of the year.

The direct write-off method is required...