Compare the flow of inventory costs between merchandisers and manufacturers.
> What accounts are used to record inventory purchase transactions under the periodic inventory system? Why aren’t these accounts used in a perpetual inventory system?
> Why do sales transactions under a perpetual inventory system require two journal entries?
> Hart Inc. began the year with $315,700 of accounts receivable. During the year, Hart sold a considerable amount of merchandise on credit and collected $2,427,000 of its credit sales. At the end of the year, the accounts receivable balance is $16,800 lowe
> Internal control systems include policies and procedures designed to provide reasonable assurance that the corporation’s objectives are being met in three areas: (a) Effectiveness and efficiency of operations, (b) Reliability of financial reporting, an
> Refer to the information for Morgan Inc. above. If Morgan uses a periodic inventory system, what is the cost of ending inventory under average cost at April 30? (Note Use four decimal places for per-unit calculations and round all other numbers to the ne
> Refer to the information for Morgan Inc. above. If Morgan uses a periodic inventory system, what is the cost of ending inventory under LIFO at April 30? a. $32,800 b. $38,400 c. $63,600 d. $69,200 Units Purchased at Cost Units Sold at Retail 1,200 u
> Refer to the information for Morgan Inc. below. If Morgan uses a periodic inventory system, what is the cost of goods sold under FIFO at April 30? a. $32,800 b. $38,400 c. $63,600 d. $69,200 Units Purchased at Cost Units Sold at Retail 1,200 units a
> Which of the following statements is true for a company that uses a periodic inventory system? a. The purchase of inventory requires a debit to Inventory. b. The return of defective inventory requires a debit to Purchase Returns and Allowances. c. The pa
> At the end of each day, Spangle counts the cash in its cash registers. Spangle then compares the physical amount of cash to the amount of cash that the register tape indicates should be in the cash drawer. On a recent day, Spangle Company obtained the fo
> Ignoring taxes, if a company understates its ending inventory by $10,000 in the current year: a. Assets for the current year will be overstated by $10,000. b. Net income for the subsequent year will be overstated by $10,000. c. Cost of goods sold for the
> An increasing inventory turnover ratio indicates that a company: a. Has reduced the time it takes to purchase and sell inventory. b. Is having trouble selling its inventory. c. May be holding too much inventory. d. Has sold inventory at a higher profit.
> Which of the following statements is true with regard to the gross profit ratio? 1. An increase in cost of goods sold would increase the gross profit rate (assuming sales remain constant). 2. An increase in the gross profit rate may indicate that a compa
> Which of the following statements regarding the lower of cost or market (LCM) rule is true? a. The LCM rule is an application of the historical cost principle. b. When the net realizable value of inventory drops below the historical cost of inventory, an
> Which method results in a more realistic amount for income because it matches the most current costs against revenue? a. FIFO b. Average cost c. Specific identification d. LIFO
> Hannah purchased a laptop computer from Perry Corp. for $1,500. Hannah’s receivable has been outstanding for over 180 days, and Perry determines that the total amount is uncollectible and writes off all of Hannah’s debt. Hannah later receives a windfall
> When purchase prices are rising, which of the following statements is true? a. LIFO produces a higher cost of goods sold than FIFO. b. LIFO produces a higher cost for ending inventory than FIFO. c. FIFO produces a lower amount for net income than LIFO. d
> Refer to the information for Morgan Inc. below. If Morgan uses a perpetual inventory system, what is the cost of ending inventory under average cost at April 30? (Note: Use four decimal places for per-unit calculations and round to the nearest dollar.)
> Refer to the information for Morgan Inc. below. If Morgan uses a perpetual inventory system, what is the cost of goods sold under LIFO at April 30? a. $37,500 b. $38,400 c. $63,600 d. $64,500 Units Purchased at Cost Units Sold at Retail 1,200 units
> Refer to the information for Morgan Inc. below. If Morgan uses a perpetual inventory system, what is the cost of ending inventory under FIFO at April 30? a. $32,500 b. $38,400 c. $63,600 d. $69,500 Units Purchased at Cost Units Sold at Retail 1,200 u
> U-Save Automotive Group purchased 10 vehicles during the current month. Two trucks were purchased for $20,000 each, two SUVs were purchased for $31,000 each, and six hybrid cars were purchased for $27,000 each. A review of the sales invoices revealed tha
> Zing Corp. prepares monthly bank reconciliations as part of its cash controls. Zing’s bank provided the following amount about Zing’s cash balance at the bank for during the month of April 2020: Balance, April 30, 2020...................................
> Which of the following transactions would not result in an adjustment to the inventory account under a perpetual inventory system? a. Sale of merchandise for cash b. Sale of merchandise on credit c. Receipt of payment from a customer within the discount
> Briggs Company purchased $15,000 of inventory on credit with credit terms of 2/10, n/30. Briggs paid for the purchase within the discount period. How much did Briggs pay for the inventory? a. $14,700 b. $14,850 c. $15,000 d. $15,300
> Which of the following transactions would not result in an entry to the inventory account in the buyer’s accounting records under a perpetual inventory system? a. Purchase of merchandise on credit b. Return of merchandise to the supplier c. Payment of a
> If beginning inventory is $20,000, purchases are $185,000, and ending inventory is $30,000, what is cost of goods sold as determined by the cost of goods sold model? a. $135,000 b. $175,000 c. $195,000 d. $235,000
> Ingrid Inc. has strict credit policies and only extends credit to customers with outstanding credit history. The company examined its accounts and determined that at January 1, 2019, it had balances in Accounts Receivable and Allowance for Doubtful Accou
> ‘‘For each inventory costing method, perpetual and periodic systems yield the same amounts for ending inventory and cost of goods sold.’’ Do you agree or disagree with this statement? Explain.
> How does an error in the determination of ending inventory affect the financial statements of two periods?
> What is the LIFO reserve, and when is it used?
> What do the gross profit and inventory turnover ratios tell company management about inventory?
> What is the effect on the current period income statement and the balance sheet when inventories are written down using the lower of cost or market method? What is the effect on future period income statements and balance sheets?
> Why are inventories written down to the lower of cost or market?
> Garrison Corporation was closing its books on May 31, 2020. Garrison’s accountant prepared a bank reconciliation as of May 31, 2020, and has found the following possible reconciling items between its book balance and its cash balance per the bank: Garri
> The Sarbanes-Oxley Act increased top management’s responsibility for what?
> How would the balance sheet accounts be affected if LIFO rather than FIFO were used when purchase prices are rising? When purchase prices are falling?
> How would reported income differ if LIFO rather than FIFO were used when purchase prices are rising? When purchase prices are falling?
> Firebird Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for February 2019 indicated the following: Balance, February 28, 2019 …………………………………………………….. $87,392 Service charge for February …………………………………………………
> If inventory prices are rising, which inventory costing method should produce the smallest payment for taxes?
> The costs of which units of inventory (oldest or newest) are allocated to ending inventory or cost of goods sold using the FIFO, LIFO, and average cost methods?
> Why do the four inventory costing methods produce different amounts for the cost of ending inventory and cost of goods sold?
> Describe the difference between F.O.B. shipping point and F.O.B. destination.
> Identify the accounting items for which adjustments are made to the invoice price of goods when determining the net cost of purchases.
> Why are adjustments made to the invoice price of goods when determining the cost of inventory?
> Why are perpetual inventory systems more expensive to operate than periodic inventory systems? What conditions justify the additional cost of a perpetual inventory system?
> How do the perpetual and periodic inventory accounting systems differ from each other?
> Samba Corporation operates in an industry with a high collectability issues. Recently, one of Samba’s customers wrote a check for $235 for services performed. Samba’s bank later informed Samba that its customer did not have cash available in his account
> How is cost of goods sold determined?
> Spotted Singer sells karaoke machines to businesses and consumers via the Internet. On January 1, 2019, Spotted Singer Inc. has an Accounts Receivable balance of $997,000 and a credit balance in its Allowance for Doubtful Accounts of $24,000. During 2019
> What are the components of cost of goods available for sale and cost of goods sold?
> Describe the types of inventories used by manufacturers and merchandisers.
> What are the differences between merchandisers and manufacturers?
> The information for Mathis and Reece companies given below. Mathis Company and Reece Company use the perpetual inventory system. The following transactions occurred during the month of April: a. On April 1, Mathis purchased merchandise on account from R
> Hempstead Company has the following data for 2019: Required: 1. How many units were sold? 2. Using the cost of goods sold model, determine the cost of goods sold. Item Units Cost Inventory, 12/31/2018 Purchases 940 4,510 $10,340 49,610 Inventory, 12/
> Spartan Inc. regularly provides services to Grieder Supply on terms 3/10, n/40 and records sales at gross. During a recent month, the two firms engaged in the following transactions: a. Spartan sold merchandise with a list price of $250,000. b. Spartan s
> Selected information from Small Company’s financial statements follows. Required: 1. Calculate the following ratios for 2018 and 2019: (a) Gross profit margin, (b) Operating margin, (c) Net profit margin, and (d) Accounts receivable
> Sloan Systems sells voice mail systems to small businesses. Sloan engaged in the following activities involving notes receivable (round to nearest dollar): a. On October 1, 2019, Sloan sold an $8,000 system to Majors Company. Majors gave Sloan a 7-month,
> Engle, a furniture company, made an error in recording a check received from a customer. Last month, Engle’s customer bought a table for $909. Upon receiving the check from the customer, Engel entered the check as an increase of cash of $990. Required:
> King Enterprises had 27 customers utilizing its financial planning services in 2019. Each customer paid King $25,000 for receiving King’s assistance. King estimates that 2% of its $675,000 credit sales in 2019 will be uncollectible. During 2020, King wro
> At the beginning of the year, Lennon Electronics had an accounts receivable balance of $34,800 and a balance in the allowance for doubtful accounts of $3,640 (credit). During the year, Lennon had credit sales of $891,420, collected accounts receivable in
> Carol Simon, the manager of Handy Plumbing has provided the following aging schedule for Handy’s accounts receivable: Carol indicates that the $125,200 of accounts receivable identified in the table does not include $9,400 of receivable
> Kelly’s Collectibles sells nearly half its merchandise on credit. During the past 4 years, the following data were developed for credit sales and losses from uncollectible accounts: * Losses from uncollectible accounts are the actual lo
> Johnson Tires has three stores. Each store manager is paid a salary plus a bonus on the sales made by his or her store. On January 5, 2020, Kevin Sampson, manager of one of the stores, resigned. Kevin’s store had doubled its expected December 2019 sales,
> Smithson Products sells legal supplies to law firms. Gross sales in 2019 were $2,750,600 (Smithson’s list price) on terms 3/10, n/30. Customers paid for $2,427,900 (Smithson’s list price) of the merchandise within the discount period and the remaining $3
> Parker Electronics sells cell phones. During 2019, Parker sold 1,500 units at an average of $500 per unit. Each unit cost Parker $350. At present, Parker offers no sales discounts. Parker’s controller suggests that a generous sales discount policy would
> Mary Wade owns a small business that rents parking spaces to students at the local university. Mary’s typical rental contract requires the student to pay the year’s rent of $720 ($60 per month) in advance. When Mary prepares financial statements at the e
> Katie Vote owns a small business that rents computers to students at the local university for the 9-month school year. Katie’s typical rental contract requires the student to pay the year’s rent of $1,800 ($200 per month) in advance. When Katie prepares
> Sims Company regularly provides services to Lauber Supply on terms 1/15, n/30 and records sales at gross. During a recent month, the two firms engaged in the following transactions: a. Sims provided services with a list price of $85,000. b. Sims provided
> Selected information from Bigg Company’s financial statements follows: Required: 1. Calculate the following ratios for 2018 and 2019: (a) Gross profit margin, (b) Operating margin, (c) Net profit margin, and (d) Accounts receivable
> Roeker Company provides information systems consultation services to large companies in the Chicagoland area. Due to a dip in the economy, Roeker has increased the percentage of credit sales which it believes will be uncollectible from 3.0% to 3.2% for 2
> Hula Corp. utilizes J.P. Morgan Chase in its banking transactions. For the month of August, 2019, J.P. Morgan Chase presented Hula with its bank statement as follows: Balance, August 31, 2019..............................................................
> Yarnell Electronics sells computer systems to small businesses. Yarnell engaged in the following activities involving notes receivable: a. On September 1, 2019, Yarnell sold a $10,000 system to Ross Company. Ross gave Yarnell a 6-month, 7% note as paymen
> At the beginning of the year, Tennyson Auto Parts had an accounts receivable balance of $31,800 and a balance in the allowance for doubtful accounts of $2,980 (credit). During the year, Tennyson had credit sales of $624,300, collected accounts receivable
> Cindy Bagnal, the manager of Cayce Printing Service, has provided the following aging schedule for Cayce’s accounts receivable: Cindy indicates that the $121,100 of accounts receivable identified in the table does not include $4,600 of
> The Glass House, a glass and china store, sells nearly half its merchandise on credit. During the past 4 years, the following data were developed for credit sales and losses from uncollectible accounts: * Losses from uncollectible accounts are the actual
> Yancy’s Hardware has three stores. Each store manager is paid a salary plus a bonus on the sales made by his or her store. On January 5, 2020, Bill Slick, manager of one of the stores, resigned. Bill’s store had doubled its expected December 2019 sales,
> Helmkamp Products sells golf clubs and accessories to pro shops. Gross sales in 2019 were $2,850,700 (Helmkamp’s list price) on terms 2/15, n/45. Customers paid for $2,000,000 (Helmkamp’s list price) of the merchandise within the discount period and the
> Compton Audio sells MP3 players. During 2019, Compton sold 1,750 units at an average of $225 per unit. Each unit costs Compton $150. At present, Compton offers no sales discounts. Compton’s controller suggests that a generous sales discount policy would
> Food To Go is a local catering service. Conceptually, when should Food To Go recognize revenue from its catering service? a. At the date the meals are served b. At the date the invoice is mailed to the customer c. At the date the customer places the orde
> Under the gross method, the seller records discounts taken by the buyer a. At the time of sale. b. At the end of the period in question. c. Never; discounts are irrelevant under the gross method. d. As a reduction to sales revenue.
> Assume the same information as in Brief Exercise 5-42: Gordon’s Grocers purchases bread from Buddy’s Bread Company at $1.45 per loaf. Gordon’s engaged in a customer service contract to purchase 20,000 loaves of Buddy’s bread. Buddy offered credit at term
> Net profit margin percentage is calculated by a. Dividing operating income by (net) sales. b. Subtracting operating income from (net) sales. c. Dividing net income by (net) sales. d. Subtracting net income from (net) sales.
> The Committee of Sponsoring Organizations of the Treadway Commission (COSO) discussed five components of internal control. Required: Define and discuss these five components of internal control.
> The ‘‘principal’’ of a note receivable refers to a. The amount of interest due. b. The amount of cash borrowed. c. The present value of the note. d. The financing company that is lending the money.
> Zenephia Corp. accepted a 9-month note receivable from a customer on October 1, 2019. If Zenephia has an accounting period which ends on December 31, 2019, when would it most likely recognize interest income from the note? a. December 31, 2019, and June
> Which one of the following statements is true if a company’s collection period for accounts receivable is unacceptably long? a. Cash flows from operations may be higher than expected for the company’s sales. b. The company may offer trade discounts to le
> The process by which firm’s package factored receivables as financial instruments or securities and sell them to investors is known as a. Credit extension. b. Bundling. c. Aging of accounts receivable. d. Securitization.
> The percentage of credit sales approach is closely related to the a. Income statement. b. Balance sheet. c. Statement of retained earnings. d. Statement of cash flows.
> The aging method is closely related to the a. Income statement. b. Balance sheet. c. Statement of cash flows. d. Statement of retained earnings.
> Which of the following best describes the concept of the aging method of receivables? a. An accurate estimate of bad debt expense may be arrived at by multiplying historical bad debt rates by the amount of credit sales made during a period. b. The precis
> Which of the following best describes the objective of estimating bad debt expense with the percentage of credit sales method? a. To estimate the amount of bad debt expense based on an aging of accounts receivable b. To determine the amount of uncollecti
> Gordon’s Grocers purchases bread from Buddy’s Bread Company at $1.45 per loaf. Gordon’s recently engaged in a customer service contract with Buddy’s to purchase 20,000 loaves of Buddy’s bread. Buddy offered credit to Gordon’s at terms of 2/10, n/30. Budd
> If a company uses the direct write-off method of accounting for bad debts, a. It will report accounts receivable on the balance sheet at their net realizable value. b. It is applying the matching principle. c. It will reduce the Accounts Receivable accou
> Which one of the following best describes the allowance for doubtful accounts? a. Cash flow account b. Income statement account c. Contra-account d. Liability account
> Internal controls play a crucial role in a business. Required: Discuss why internal controls are important. What are the potential consequences of an internal control failure?
> All of the following are ways in which receivables are commonly distinguished except a. Collectible or uncollectible. b. Trade or nontrade receivable. c. Current or noncurrent. d. Accounts or notes receivable.
> Which of the following statements concerning internal control procedures for merchandise sales is not correct? a. A sale and its associated receivable are recorded only when the order, shipping, and billing documents are all present. b. Shipping and bill
> On April 20, McLean Company provides lawn care services to Tazwell Corporation for $3,000 with terms 1/10, n/30. On April 28, Tazwell pays for half of the services provided, and on May 19 it pays for the other half. What is the total amount of cash McLea
> When should the net method be used to record sales revenue? a. Never—the gross method should always be used. b. When the discount terms are favorable to the customer. c. When the customer does not pay within the discount period. d. When the customer is e
> On August 31, 2019, Montana Corporation signed a 4-year contract to provide services for Minefield Company at $30,000 per year. Minefield will pay for each year of services on the first day of each service year, starting with September 1, 2019. Using the
> What does the phrase, ‘‘Revenue is recognized at the point of sale’’ mean? a. Revenue is recorded in the accounting records when the cash is received from a customer and reported on the income statement when sold to the customer. b. Revenue is recorded i
