Mega Accounting Test

The FIFO (First-In, First-Out) method is a common inventory valuation method that assumes the earliest goods purchased are the first to be sold. This means that when calculating the cost of goods sold, the cost of the oldest inventory is used first. This method is based on the assumption that the older inventory is sold before the newer inventory, which is often the case in many industries. Therefore, the given answer that the FIFO method assumes the earliest goods purchased are the first to be sold is correct.

The cost of goods sold can be calculated by subtracting the ending inventory from the sum of the beginning inventory and the cost of goods purchased. In this case, the beginning inventory is $60,000, the cost of goods purchased is $380,000, and the ending inventory is $50,000. Therefore, the cost of goods sold is $60,000 + $380,000 - $50,000 = $390,000.

In a perpetual inventory system, the cost of goods sold is determined each time a sale occurs. This means that the cost of the goods that are sold is immediately recorded and subtracted from the inventory balance. This allows the company to have real-time information about the cost of goods sold and the value of the remaining inventory. It also enables the company to have accurate and up-to-date financial statements. Therefore, the statement "In a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs" is true.

Sales Returns and Allowances is a contra revenue account because it is used to record the returns or allowances given to customers for goods or services that were previously sold. Contra revenue accounts have a normal balance opposite to the main revenue account, which in this case is Sales. Since Sales has a normal credit balance, Sales Returns and Allowances, being a contra account, will have a normal debit balance.

An error in the ending inventory of the current period can have an effect on net income of the next accounting period. This is because the ending inventory of one period becomes the beginning inventory of the next period. If there is an error in the ending inventory, it will carry over and affect the calculation of cost of goods sold and ultimately the net income of the next period. Therefore, the statement is false.

A multiple-step income statement is a financial statement that separates operating activities from non-operating activities. This allows for a clearer understanding of the company's financial performance by providing detailed information about the revenues, expenses, and gains or losses from both operating and non-operating activities. By distinguishing between these two types of activities, stakeholders can assess the profitability and sustainability of the company's core operations separately from any additional or one-time activities. Therefore, the given statement is true.

In a perpetual inventory system, the inventory records are continuously updated to reflect the changes in inventory levels. However, there may be instances where the recorded inventory does not match the actual inventory on hand due to factors like theft, damage, or errors in recording. In such cases, an adjusting entry is required to reconcile the recorded inventory with the actual inventory. Therefore, the statement that a merchandiser using a perpetual system will require one additional adjusting entry to make the record agree with the actual inventory on hand is true.

In a periodic system, the company uses separate accounts to record freight costs, returns, and discounts. This means that these expenses and transactions are tracked and recorded separately in the company's financial records. This allows for better visibility and analysis of these specific costs and transactions, making it easier for the company to understand and manage its financial performance.

The account Sales Discounts is classified as a contra revenue account. Contra revenue accounts are used to record reductions in revenue, such as discounts given to customers. Sales Discounts represents the amount of discounts given to customers for early payment or other reasons. It is deducted from the gross sales on the income statement to calculate the net sales. As it has a debit balance, it offsets the credit balance of the revenue accounts, resulting in a lower net revenue.

Net sales is calculated by subtracting sales returns and allowances as well as sales discounts from the total sales. Sales returns and allowances refer to merchandise that is returned by customers or allowances given for damaged or defective goods. Sales discounts, on the other hand, are reductions in the selling price offered to customers as an incentive for early payment or other reasons. Therefore, the correct answer is sales returns & allowances and sales discounts.

Manufacturing companies typically classify inventory into three categories. This categorization helps them effectively manage and track their inventory. By classifying inventory, companies can differentiate between raw materials, work-in-progress, and finished goods. This allows them to monitor the flow of inventory throughout the production process and make informed decisions regarding purchasing, production, and sales. Additionally, classifying inventory helps companies optimize their inventory levels, reduce holding costs, and ensure efficient production and delivery.

The statement is false because sales revenue less cost of goods sold is actually called gross profit, not net profit. Net profit is calculated by subtracting all expenses, including operating expenses, taxes, and interest, from the gross profit.

Under the lower of cost or market basis, market is defined as current replacement cost. This means that when valuing inventory, if the market value (current replacement cost) is lower than the cost, the inventory should be written down to the market value. This principle ensures that inventory is not overstated on the financial statements and reflects the most accurate value. Therefore, the statement is true.

In a perpetual system, inventory is continuously updated in real-time, while in a periodic system, inventory is only updated periodically, usually at the end of an accounting period. FIFO (First-In, First-Out) is a method of inventory valuation that assumes the first items purchased are the first ones sold. Since the order of inventory transactions is tracked in both systems, the results under FIFO will be the same in both a perpetual and a periodic system. Therefore, the statement that the results under FIFO in a perpetual system are the same as in a periodic system is true.

In a perpetual inventory system, the Merchandise Inventory account is debited when goods are purchased with the intent of being resold. This account represents the cost of the inventory on hand and is increased when new inventory is acquired. By debiting the Merchandise Inventory account, the company records the increase in the value of its inventory. This allows for accurate tracking of inventory levels and cost of goods sold.

FOB destination actually means that the seller is responsible for the freight costs and the risk of loss or damage to the goods until they reach the buyer's specified destination. Therefore, the given statement is false.

The credit sale of $750 on June 13 allows the customer to receive a discount of 2% if paid within 10 days. Since the return of $50 was granted on June 16, the customer only owes $700. However, since the payment is made on June 23, which is within the net/30 period, no discount is applied. Therefore, the amount received as payment in full on June 23 is $700.

Income from operations refers to the profit generated by a company's core business activities before taking into account non-operating expenses and income. It is calculated by subtracting operating expenses, such as salaries, rent, and utilities, from the gross profit. This measure provides insight into the profitability of a company's main operations and excludes any income or expenses that are not directly related to its core business. Therefore, the correct answer is "gross profit less operating expenses."

Dividends should not be reported in the Income Statement columns when preparing a worksheet for a merchandising company. Dividends are payments made to the company's shareholders as a distribution of profits, and they are not considered as an expense or revenue generated from the company's normal operations. Instead, dividends are reported in the Statement of Retained Earnings or the Statement of Changes in Equity. The Income Statement columns are used to report the company's revenues, expenses, and net income or loss from its core operations.

Outstanding checks are deducted from the bank balance in a bank reconciliation because these checks have been issued by the company but have not yet been presented to the bank for payment. Therefore, they have not yet been deducted from the company's bank account. Deducting outstanding checks from the bank balance helps to reconcile the actual balance in the bank account with the balance shown in the company's books.

During a period of inflation, the FIFO (First-In, First-Out) method produces the highest net income. This is because the FIFO method assumes that the items purchased first are sold first, which means that the cost of goods sold will reflect the older, lower-cost inventory. As a result, the ending inventory will consist of the newer, higher-cost inventory. In an inflationary period, this leads to a higher valuation of the ending inventory and lower cost of goods sold, resulting in a higher net income compared to other cost flow methods such as LIFO (Last-In, First-Out) or Average cost method.

The fraud triangle is a concept used to explain the factors that contribute to fraudulent behavior. It consists of three elements: rationalization, financial pressure, and opportunity. Rationalization refers to the mindset or justification that individuals use to convince themselves that fraud is acceptable. Financial pressure refers to the need for money or financial gain that may drive someone to commit fraud. Opportunity refers to the conditions or circumstances that allow fraud to occur. Segregation of duties, on the other hand, is a control mechanism that involves dividing responsibilities among different individuals to prevent fraud. Therefore, segregation of duties is not considered an element of the fraud triangle.

The correct answer is "calculated by subtracting cost of goods sold." Gross profit is a financial metric that represents the profit a company generates from its core operations, specifically from the sale of goods or services. It is calculated by subtracting the cost of goods sold (COGS) from the sales revenue. This figure indicates the profitability of a company's products or services before considering other operating expenses.

A single-step income statement reports sales revenue and "Other revenues and gains" in the revenues section of the income statement. This means that all revenues, including sales revenue and any other sources of income, are grouped together in one section. This type of income statement does not separate out gross profit or operating income, and it also does not report the cost of goods sold. Instead, it focuses on providing a simplified overview of the company's total revenues and gains.

In a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. Instead, they only update their inventory records periodically, such as at the end of each accounting period. This means that the company does not have real-time information about the quantity and value of the goods in their inventory. Instead, they rely on physical counts and calculations to determine the ending inventory and cost of goods sold. Therefore, the statement that companies keep detailed inventory records of the goods on hand throughout the period is false.

The given statement is false. The income statement for retailers typically contains multiple expense categories such as cost of goods sold, operating expenses, and non-operating expenses. This is because retailers incur various costs related to purchasing and selling goods, maintaining the store, and other operational expenses. On the other hand, the income statement of a service company usually includes fewer expense categories as their main focus is on providing services rather than selling physical products.

Operating expenses are shown for both merchandising and service companies. Operating expenses refer to the costs incurred in running the day-to-day operations of a business. These expenses include rent, utilities, salaries, advertising, and other expenses necessary to keep the business running. Both merchandising and service companies have operating expenses as they both incur costs in order to generate revenue and maintain their operations. Therefore, operating expenses are applicable to both types of companies.

Overstating beginning inventory will overstate the cost of goods sold. This is because the cost of goods sold is calculated by subtracting the ending inventory from the sum of beginning inventory and purchases. If the beginning inventory is overstated, it will lead to an inflated cost of goods sold figure, which in turn will result in a lower net income. This is because the cost of goods sold is an expense that is subtracted from the revenue to calculate net income.

The gross profit rate is calculated by dividing the gross profit by the net sales. In this case, the gross profit rate is 30%, which means the gross profit is 30% of the net sales. The net sales can be calculated by subtracting the cost of goods sold from the sales. Since the sales are $150,000 and the gross profit rate is 30%, the gross profit can be calculated as $150,000 * 30% = $45,000. The cost of goods sold can be calculated by subtracting the gross profit from the cost of goods available for sale, which is $135,000 - $45,000 = $90,000. The estimated cost of the ending inventory can be calculated by subtracting the cost of goods sold from the cost of goods available for sale, which is $135,000 - $90,000 = $45,000. Therefore, the correct answer is $30,000.

A debit memorandum is not issued by a bank when it collects a note receivable for a depositor. A debit memorandum is a document that a bank sends to a depositor to inform them of a deduction made from their account, such as fees or charges. Therefore, the correct answer is false.

In determining the cost of goods sold, freight-in is added to net purchases. Freight-in refers to the transportation costs incurred to bring the goods into the company's possession. By adding freight-in to net purchases, the company includes the cost of transportation in the calculation of the cost of goods sold. This ensures that the cost of acquiring the goods, including transportation expenses, is accurately reflected in the cost of goods sold figure.

Norman, the assistant treasurer, would be the best choice for preparing the monthly bank reconciliations because he is responsible for managing the company's cash flow and investments. This includes investing excess cash in short-term interest bearing securities, which requires a strong understanding of financial transactions and reconciling accounts. Additionally, as the assistant treasurer, Norman likely has a comprehensive understanding of the company's financial processes and controls, making him well-suited for the task of reconciling bank statements.

The statement is false because preparing a worksheet for a merchandising company and a service company involve the same number of steps. The process of preparing a worksheet typically includes listing all the accounts, entering the account balances, calculating net income, and preparing financial statements. These steps are applicable to both types of companies, regardless of whether they offer products or services. Therefore, the number of steps involved in preparing a worksheet is not dependent on the type of company.

Internal control is a system implemented by an organization to ensure the accuracy and reliability of its accounting records. By safeguarding its assets, the organization can protect its resources from theft, damage, or misuse. This includes implementing measures such as secure storage, access controls, and regular monitoring to prevent unauthorized access or loss of assets. By doing so, the organization can maintain the integrity of its financial records and ensure the protection of its valuable resources.

Interest expense would not be reported in the operating expenses section of a multiple-step income statement. This is because interest expense is a non-operating expense, which is typically reported separately from operating expenses. Operating expenses generally include costs directly related to the day-to-day operations of a business, such as advertising expense and freight-out.

The retail inventory method is used to estimate the cost of ending inventory. This method calculates the cost of inventory by applying a cost-to-retail ratio to the retail value of the inventory. It is commonly used in retail businesses where the cost of inventory is based on the selling price of the goods. By using this method, businesses can determine the value of their ending inventory and make informed decisions regarding pricing, purchasing, and profitability.