Financial Accounting Exam II, Quiz Questions

The balance sheet of a manufacturing company typically includes three accounts: finished goods, work in process, and raw materials. Finished goods represent the products that have been completed and are ready for sale. Work in process refers to the products that are still being manufactured but are not yet finished. Raw materials represent the materials and components that are used in the manufacturing process. Therefore, all three accounts are commonly found in a manufacturer's balance sheet.

The cost of items that are not yet complete at the end of the period is shown in the Work in Process account. This account is used to track the costs incurred for partially completed goods that are still in the production process. The Work in Process account includes the costs of raw materials, direct labor, and manufacturing overhead that have been incurred but have not yet been transferred to the Finished Goods account. Therefore, the correct answer is Work in process account.

The cost of goods sold can be calculated by subtracting the ending inventory from the sum of the beginning inventory and the purchases made during the year. In this case, the beginning inventory was $20,000 and the purchases were $100,000, so the total inventory available for sale was $120,000. Subtracting the ending inventory of $28,000 from this gives us a cost of goods sold of $92,000.

The correct answer is $98,000. This is because the net purchases are calculated by subtracting any allowances or discounts from the total purchases. In this case, the inventory was purchased for $100,000, but an allowance of $7,000 was received for damaged inventory. Therefore, the net purchases would be $100,000 - $7,000 = $93,000. Additionally, the shipping cost of $5,000 is not included in the calculation of net purchases. Therefore, the total net purchases would be $93,000 + $5,000 = $98,000.

When the terms 2/10, n/30 are given, it means that the buyer can take a 2% discount if the payment is made within 10 days. Otherwise, the full amount is due within 30 days. In this case, Winner Company pays nine days after the purchase, which is within the discount period. Therefore, they can avail the 2% discount. The original cost of the purchase is $1000, and the discount is 2% of $1000, which is $20. So, the cost of the purchase after the discount will be $1000 - $20 = $980.

FIFO (First-In, First-Out) is the inventory method that generally results in the highest ending inventory during times of rising inventory costs. This is because FIFO assumes that the first items purchased or produced are the first ones sold, leaving the most recently acquired or produced items in inventory. As inventory costs rise, the older, lower-cost items are sold first, resulting in the higher-cost items remaining in inventory and increasing the ending inventory value. Therefore, FIFO is the preferred method in times of rising inventory costs to maximize the value of the ending inventory.

The operating expenses can be calculated by subtracting the cost of goods sold from the net sales revenue. In this case, the net sales revenue is $200,000 and the cost of goods sold is $110,000. Therefore, the operating expenses would be $200,000 - $110,000 = $90,000. However, this answer is not provided in the given options. Therefore, the correct answer cannot be determined based on the information given.

The correct answer is "Debit to inventory" because when the fan company purchases inventory on account, it increases their inventory asset account. The debit entry to the inventory account reflects the increase in the value of the inventory.

LIFO (Last-In, First-Out) is a cost flow assumption that assumes the most recent inventory purchases are sold first. In periods of rising inventory costs, LIFO results in the lowest reported amount of net income because the cost of the most recent inventory purchases is higher than the cost of older inventory. As a result, the cost of goods sold is higher under LIFO, leading to lower net income. This is in contrast to FIFO (First-In, First-Out), where the oldest inventory is assumed to be sold first, resulting in lower cost of goods sold and higher net income in periods of rising inventory costs.

If Witchel Company's ending inventory is understated by $500 at the end of the year and the error is not discovered, the company's gross profit for the year will be understated. This is because the ending inventory is subtracted from the cost of goods sold to calculate gross profit. If the ending inventory is understated, the cost of goods sold will be overstated, leading to a lower gross profit.

A sales discount is recorded as a contra revenue because it reduces the total revenue earned by the seller. It is deducted from the gross sales revenue to calculate the net sales revenue. Contra revenues are used to show reductions in revenue and are subtracted from the main revenue account on the income statement. Therefore, recording a sales discount as a contra revenue helps accurately reflect the actual revenue earned by the seller after accounting for any discounts given to customers.

The entry to record the estimate for uncollectible accounts includes a debit to Bad Debt Expense. This is because the estimate for uncollectible accounts represents an expense for the company, as it reflects the amount of accounts receivable that is expected to be uncollectible. By debiting Bad Debt Expense, the company recognizes and records this expense in its financial statements.

The adjustment to write-down inventory to market value would result in a decrease in net income. This is because the market value of the inventory is lower than its recorded cost, indicating a potential loss. By adjusting the inventory value to its market value, the company recognizes this loss and reduces its net income accordingly.

The allowance method is required under G.A.A.P. because it is consistent with properly recognizing the net realizable value of assets. This method helps to estimate and record potential losses from uncollectible accounts receivable, ensuring that the reported value of assets reflects their true value after accounting for potential losses. By recognizing the net realizable value of assets, the financial statements provide a more accurate representation of the company's financial position and performance.

The net realizable value of accounts receivable can be calculated by subtracting the adjusted balance in the Allowance for Uncollectible Accounts from the accounts receivable balance. In this case, the adjusted balance is $4000, so the net realizable value is $100,000 - $4000 = $96,000.

The amount of bad debt expense recorded on December 31 will be $6100. This can be calculated by multiplying the ending accounts receivable balance ($80,000) by the estimated percentage of uncollectible accounts (7%). $80,000 x 7% = $5600. However, since the unadjusted balance of the allowance for uncollectible accounts is a debit of $500, this amount needs to be added to the calculated bad debt expense. $5600 + $500 = $6100.

The bad debt expense recorded on December 31 will be $5100. This can be calculated by multiplying the estimated percentage of uncollectible accounts (7%) by the accounts receivable ending balance ($80,000). 7% of $80,000 is $5600, but since there is already a credit balance of $500 in the allowance for uncollectible accounts, the net bad debt expense will be $5600 - $500 = $5100.

When a company collects a previously written off account, it means that they have successfully recovered money from a customer who had previously failed to pay their debt. As a result, the company will increase the balance of the Allowance for Uncollectible Accounts. This is because the allowance account is used to estimate and record potential losses from uncollectible accounts. By increasing the balance of this account, the company is adjusting its estimate to reflect the fact that they were able to collect on an account that was previously deemed uncollectible.

The interest revenue recorded on December 31, 2012, will be $6,000. This is because the note is for $100,000 with an 8% interest rate, which means the annual interest is $8,000 ($100,000 x 8%). Since the note is for a one-year period, the interest for 9 months (from April 1 to December 31) will be $6,000 ($8,000 x 9/12). Therefore, Nelson Inc. will record interest revenue of $6,000 on December 31, 2012.

The cost of goods available for sale is the sum of the beginning inventory and the purchases made during the year. In this case, the beginning inventory is $10,000 and the purchases are $100,000. Therefore, the cost of goods available for sale is $10,000 + $100,000 = $110,000.

The note is for $100,000 with an interest rate of 8%. To calculate the interest revenue, we multiply the principal amount by the interest rate. $100,000 * 8% = $8,000. However, the interest is receivable on March 31, 2013, which means it has not yet been earned by that date. Therefore, the interest revenue recorded on March 2013 will be $0. However, since the question asks for the interest revenue, we need to consider the interest that has been earned up until March 2013. The note was accepted on April 1, 2012, so the interest earned for that period is $100,000 * 8% * (365/366) = $1,994.54, which can be rounded to $2,000. Therefore, the correct answer is $2,000.

The allowance method of accounting for uncollectible accounts involves estimating the amount of accounts receivable that will not be collected and recording it as a bad debt expense in the same year of the credit sale. This method allows for a more accurate representation of the company's financial statements by matching the expense with the revenue generated from the credit sale. Therefore, the correct answer is that bad debt expense is recorded during the year of the credit sale.

When a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account, the effect on net accounts receivable depends on the relationship between the allowance account balance and the amount of the write-off. If the allowance account balance is sufficient to cover the amount being written off, then the net accounts receivable do not change because the write-off has already been accounted for in the allowance. In this case, the company has already anticipated the loss and made provisions for it, so the write-off does not impact the net accounts receivable.