Exam II Review

1
Exam II Review

• This review does not cover every thing. Study
  your text book, quizzes, handouts, notes, and
  other material.

2
Chapter 5

• What is (are)
• Cash
• Cash equivalents
• Commercial papers
• U.S. Treasury bills
• Money market funds

3
Chapter 5

• You need to know how to prepare a bank
  reconciliation statement.
• Why a company would keep a petty cash?

4
Chapter 5

• Internal control
• The control environment
• The accounting system
• Internal control procedures (important)
• Limitations of internal control
• Control over cash
• Control over cash received over the counter

5
Chapter 5

• Several items that must be included in a bank
  reconciliation schedule are listed below as
  questions 1-5. Using the following code letters,
  indicate how each item would be included in the
  bank reconciliation.
• A. Add to bank statement balance
• B. Deduct from bank statement balance
• C. Add to company's book balance
• D. Deduct from company's book balance

6
Chapter 5

• 1. Outstanding checks
• 2. Customer's NSF check returned with the bank
  statement
• 3. Bank service charges
• 4. Company check for 560 was recorded by the
  company as 650
• 5. Interest earned on checking account balance

7
Chapter 5

• 1 b
• 2 d
• 3 d
• 4 c
• 5 c

8
Chapter 5

• Clark Corp. prepares monthly bank reconciliations
  of its checking account balance. The bank
  statement for May 2005 indicated the following
• Balance, May 31, 2005 63,400
• Service charge for May 160
• Interest earned during May 100
• NSF check from Nark Corp.
• (deposited by Clark) 1,150
• Note (3,000) and interest
• (80) collected for Clark from a
• customer of Clark's 3,080

9
Chapter 5

• An analysis of canceled checks and deposits and
  the records of Clark revealed the following
  items
• Checking account balance per
• Clark's books 58,770
• Outstanding checks as of May 31 4,630
• Deposit in transit at May 31 1,780
• Error in recording check 205 issued by Clark
  90

10
Chapter 5

• The correct amount of check 205 is 540, but it
  was recorded as a cash disbursement of 450. The
  check was issued to pay for merchandise
  purchases. The check appeared on the bank
  statement correctly.
• Prepare a bank reconciliation schedule at May 31,
  2005, in proper form.

11
Chapter 5

• Clark Corp.Bank ReconciliationMay 31, 2005
• Balance per bank statement 63,400 
• Add deposit in transit
  1,780 
• Less outstanding checks
   (4,630)
• Total 60,550 
• Balance per books 58,770 
• Add Interest earned 100 
• Add note (3,000) and interest (80) collected by
  the bank 3,080 
• Less NSF check (1,150)
• Less service charges (160)
• Correction of error-check for 540 recorded as
  450     (90)
• Total 60,550 

12
Chapter 5

• Which of the following represents a group
  composed of key officers of a corporation and
  outside members responsible for the general
  oversight of the affairs of the company?
• a.Board of Directors
• b.Internal Audit Staff
• c.External Auditors
• d.Audit Committee
• ANS A

13
Chapter 6

• Investment in CDs
• Reason for which the companies invest in other
  companies
• The fair value method
• The three types of investments without
  significant influence
• Held to maturity securities
• Trading securities
• Available for sale securities

14
Chapter 6

• The differences in the accounting treatment among
  the three types of investments is very important.

15
Chapter 6

• Accounts receivable
• Accounting for bad debt
• Direct write off
• Allowance
• of credit sales
• of accounts receivable balance (aging method)
• The difference between these two methods is
  important.
• Accounts receivable turnover
• Interest bearing and non-interest bearing notes

16
Chapter 6

• 1- The Scotch Company purchased bonds of the
  Irish Company. Because the interest rate on the
  bonds is higher than similar investments, the
  Scotch Company intends to hold the bonds for
  their remaining lifetime. The bonds are
  described as
• a. trading securities
• b. available for sale securities
• c. subsidiary securities
• d. held-to-maturity securities

17
Chapter 6

• 2- Which of the following statements is NOT true
  with respect to investments in trading
  securities?
• a. Dividends on trading securities must be
  accrued by the investor at the end of the year.
• b. Trading securities are classified as current
  assets.
• c. Trading securities are initially recorded at
  cost plus all fees paid to acquire them.
• d. Companies make these investments with the
  intent of profiting from increases in market
  price over a short period of time.

18
Chapter 6

• 3- Able Company purchased 1,000 shares of Zebra
  Company for 22 per share and classified the
  investment as trading securities. At the end of
  the year, the fair value of Zebra stock was 20
  per share. How would Able Company record this
  change?
• a. An unrealized gain would be recorded in the
  income statement.
• b. An unrealized loss would be recorded in the
  balance sheet.
• c. The investment in Zebra stock would be
  decreased by 2,000.
• d. The investment in Zebra stock would be
  increased by 2,000.

19
Chapter 6

• 1 d
• 2 a
• 3 c

20
Chapter 6

• The following information is for Carpenter
  Associates at the end of 2005.
• Sales
  800,000
• Sales returns and allowances 8,000
• Accounts receivable, 12/31/05
  175,000
• Allowance for doubtful accounts, 12/31/05
• (before adjustment for bad debts)
  1,000
• Estimated uncollectible accounts per aging
• schedule at 12/31/05
  7,500

21
Chapter 6

• 4- Refer to Carpenter Associates. If bad debts
  are estimated at 1 of net sales, how much will
  Carpenter report as bad debts expense for 2005?

22
Chapter 6

• 5- Refer to Carpenter Associates. If the aging
  approach is used to estimate bad debts, how much
  bad debts expense will Carpenter report for 2005?

23
Chapter 6

• 4- (800,000 - 8,000) x .01 7,920
• 5- 7,500 - 1,000 6,500

24
Chapter 6

• . For each transaction listed, select the
  letters of the effect (A through G) each entry
  has on the accounting equation of the investor.
  You may use each letter more than once or not at
  all.
• Effects
• A. Increase in assets
• B. Decrease in assets
• C. Increase in net income
• D. Decrease in net income
• E. Increase in stockholders' equity other
  than retained earnings
• F. Decrease in stockholders' equity other
  than retained earnings
• G. No change in total assets, liabilities, or
  stockholders' equity

25
Chapter 6

• .. Effects Transactions
  
• 1. Trading securities that were purchased during
  the
  
• year at a cost of 640 have a market value of
  800
  
• at year end.
  
• 2. Trading securities that were purchased during
  the
  
• year at a cost of 500 have a market value of
  420
  
• at yearend.
  
• 3. Available-for-sale securities that were
  purchased
  
• during the year at a cost of 1,200 have a
  market
  
• value of 900 at yearend.
  
• 4. Available-for-sale securities that were
  purchased
• during the year at a cost of 1,400 have a
  market
• value of 1,600 at yearend.

26
Chapter 6

• Answer
• 1. A, C 2. B, D 3. B, F 4. A, E

27
Chapter 7

• What is inventory?
• The difference between retailer (or wholesaler)
  and a manufacturer in terms of the classification
  of the inventory accounts on their balance sheet.
• Credit terms and sales discounts
• What does 2/10, n/30 means?

28
Chapter 7

• You need to know how to use this equation
• Beginning inventory
• Plus Cost of goods purchased
• Cost of goods available for sale
• Less Ending inventory
• Cost of goods sold

29
Chapter 7

• You need to know how to use this equation
• Purchases
• Transportation in
• -Purchase returns and allowance
• Cost of Goods Purchased

30
Chapter 7

• You need to know the difference between perpetual
  inventory and periodic inventory systems.
• When a company purchase inventory, what is the
  effect on the accounting equation under each
  method?

31
Chapter 7

• You need to know the difference between FOB
  destination point and FOB shipping point.

32
Chapter 7

• (important) You need to know how to calculate the
  cost of ending inventory and the cost of goods
  sold under the following inventory costing
  methods
• Specific Identification
• Weighted average
• FIFO
• LIFO

33
Chapter 7

• In the case of raising prices which method will
  result in lower tax expense.
• You need to know about the LIFO issues.

34
Chapter 7

• The role of the lower cost or market
• Inventory turnover ratio (calculation and
  interpretation)
• Days sales in inventory (calculation and
  interpretation)

35
Chapter 7

• Questions 1-5 are concerned with merchandise
  sales and purchase transactions for Flash Corp.
  Flash uses the periodic inventory system and
  records sales and purchases at their gross
  amount. Assume all credit terms are n/30.

36
Chapter 7

• 1. Flash Corp. purchased merchandise with a cost
  of 5,000 on May 1st. The effects of this
  transaction on the accounting equation are
• a. increase Expenses and Liabilities 5,000.
• b. increase Assets and Liabilities 5,000.
• c. increase Expenses and decrease Assets 5,000.
• d. decrease Liabilities and Assets 5,000.

37
Chapter 7

• 2. On May 5th, Flash Corp. paid freight charges
  of 150 for the merchandise. How does this
  transaction affect the accounting equation?
• a. Assets increase
• b. Liabilities increase
• c. Owners' Equity increases
• d. Expenses increase

38
Chapter 7

• 3. If Flash Corp. pays the invoice for the
  transaction in question 1 on May 11th, what are
  the effects of this transaction on the accounting
  equation
• a. Liabilities increase and Owners' Equity
  decreases.
• b. Assets decrease and Owners' Equity decreases.
• c. Liabilities decrease and Assets decrease.
• d. Assets increase and Assets decrease by the
  same amount.

39
Chapter 7

• 4. Flash Corp. sells merchandise with a cost of
  5,000 to Bobcat Company for 7,500 on May 15th.
  The effects of this transaction on the accounting
  equation are
• a. Assets and Revenues increase 7,500.
• b. Assets and Expenses increase 7,500.
• c. Assets and Revenues increase 5,000.
• d. Assets decrease and Revenues increase 5,000.

40
Chapter 7

• 5- If payment is received by Flash Corp. from
  Bobcat Company on May 25th for the merchandise
  sale in question 4, what is the effect of this
  transaction on the accounting equation
• a. Assets increase and Owners' Equity increases.
• b. Assets decrease and Owners' Equity decreases.
• c. Liabilities increase and Owners' Equity
  decreases.
• d. Assets increase and Assets decrease by the
  same amount.

41
Chapter 7

• 6- Accountants who advocate the LIFO inventory
  method use the following arguments
• a. LIFO matches the current cost of merchandise
  purchased with current sales revenues
• b. LIFO reports ending inventory balances at the
  most current cost price
• c. both (a) and (b)
• d. none of the above

42
Chapter 7

• 7. An inventory cost method that usually yields
  the lowest net income during a period of rising
  prices is the
• a. FIFO method
• b. LIFO method
• c. specific-identification method
• d. weight-average method

43
Chapter 7

• 1 a
• 2 d
• 3 c
• 4 a
• 5 d
• 6 a
• 7 b

44
Chapter 7

• The beginning inventory and purchases for one of
  a number of products bought and sold by Kreme
  Corp. are presented below
• Beginning inventory 20 units at 19.50 each
  390
• Purchase 1 30 units at 21.00 each
  630
• Purchase 2 16 units at 20.50 each
  328
• Purchase 3 14 units at 22.00 each
  308
• Totals 80 1,656
• Sold 59 (at 30 per unit)
• Ending inventory 21

45
Chapter 7

• a. What is the weighted-average cost per unit
  that will be assigned to each unit in inventory
  and to each unit sold?
• b. What is the cost of goods sold (in dollars) if
  the FIFO method is used?
• c. What is the ending inventory (in dollars) if
  the LIFO method is used?
• d. Indicate the amount (in dollars) of difference
  in gross profit if the company uses LIFO rather
  than FIFO. Also, indicate whether the gross
  profit difference is "Higher" or "Lower" for
  LIFO as part of your answer.

46
Chapter 7

• 2.a. Weighted Average Cost
• 1,656 / 80 units 20.70 average unit cost
• 2.b. FIFO (periodic system)
• Cost of goods sold 1,204.50
• 2.c. LIFO (periodic system)
• Cost of ending inventory 411
• 2.d. Cost of goods sold--LIFO (1,656 -
  411) 1,245.00
• Cost of goods sold--FIFO (see b. above) 1,204.50
• Difference in cost of goods sold gross
  profit 40.50
• Cost of goods sold is 40.50 higher under LIFO
  thus, gross profit will be 40.50 lower under
  LIFO (Recall Sales - Cost of Goods Sold Gross
  Profit thus, if the expense, Cost of Goods Sold
  is higher, the Gross Profit will be lower

47
Chapter 8

• You need to know
• The calculation of the acquisition cost of PPE
• Group assets purchases
• When interest is capitalized

48
Chapter 8

• You need to know how to calculate the
  depreciation based on the following three
  methods
• Straight line method
• Units of production method
• Double declining balance method
• You need to know the reasons for choosing
• The straight line method
• The double declining method

49
Chapter 8

• You need to know
• how to handle the change in the depreciation
  estimates
• The difference between capital expenditures and
  revenue expenditures
• How to calculate the gain or loss that results
  from the disposal of an operating asset

50
Chapter 8

• You need to know
• Types of intangible assets
• Calculation of intangible assets amortization
• Analyzing long term assets
• Average life
• Average age
• Asset turnover

51
Chapter 8

• 1- The balance of a plant asset should include
  all of the following except
• a. installation costs
• b. freight charges
• c. break-in and training costs
• d. ordinary repairs
• e. extraordinary repairs

52
Chapter 8

• 2- Benedict Corporation purchased two used
  machines for a lump sum price of 45,000. For
  property tax purposes Machine A was appraised at
  a value of 10,000 and Machine B at a value of
  20,000. The two machines should be recorded on
  the books of Benedict Corporation as follows
• a. machine A, 10,000 machine B, 35,000
• b. machine A, 20,000 machine B, 25,000
• c. machine A, 10,000 machine B, 20,000
• d. machine A, 15,000 machine B, 30,000

53
Chapter 8

• 3- The Johnston Rug Company made a number of
  expenditures you must determine what amount
  should be recorded as revenue expenditures. They
  purchased a new rug cleaner for 10,000. Rug
  cleaner fluid costs were 100. Parts to repair
  the cleaner were 25. A major overhaul was
  performed on the cleaner for 2,000. The amount
  to be reported as revenue expenditures would be
• a. 25 b. 125 c. 2,125 d. 12,000

54
Chapter 8

• 4- Kurt Corporation purchased a patent for
  25,500 on January 1, 1999. The patent had a
  remaining legal life of 15 years and an economic
  life of 10 years at January 1, 1999. For 1999
  Kurt Corporation should record amortization
  expense of
• a. 0 b. 1,500 c. 1,700
• d. 2,550

55
Chapter 8

• 1 d
• 2 d
• 3 b
• 4 d

56
Chapter 8

• Jefferson Company purchased a machine at the
  beginning of 1999 for 30,000. It is expected to
  have a useful life of 5 years or 12,000 operating
  hours and a residual value of 3,000.
• a. What is the maximum amount that Jefferson can
  recognize as depreciation expense for this
  machine over the useful life of the machine?
• b. If the company uses the straight-line
  depreciation method, what is the book value of
  the machine at the end of 1999?
• c. If the units-of-production depreciation method
  is used, what is the depreciation rate per
  operating hour?
• d. If the double-declining-balance depreciation
  method is used, what is the depreciation expense
  for 2000?

57
Chapter 8

• 3.a. Cost - Residual Value Maximum Depreciation
  over life of asset
• 30,000 - 3,000 27,000
• 3.b. (30,000-3,000)/5 years 5,400
  Depreciation for 1998
• 5,400 is added to the Accumulated Depreciation
  account that previously had a zero balance
• Cost - Accumulated Depreciation Book Value
• 30,000 - 5,400 24,600
• 3.c. Depreciation rate per hour of operation
• (30,000 - 3,000)/12,000 hr 2.25/hr
• 3.d. Depreciation
• Year Expense
• 1999 30,000 x 40 12,000
• 2000 (30,000 - 12,000) x 40 7,200

58
Chapter 8

• Please let me know if you have any question