Practice Test Exam 2

The operating cycle of a merchandising company is ordinarily _____ that of a service firm.

A) the same as
B) longer than
C) shorter than
D) has fewer steps than

Which of the following items do not result in an entry to the inventory account under a perpetual system?

A) Payment of freight costs for goods received from a supplier
B) A return of inventory to the supplier
C) Payment of freight costs for goods shipped to a customer
D) A purchase of merchandise

Marsh Inc. paid for freight costs on merchandise it shipped to a customer. In what account will Marsh record this cost in a perpetual inventory system?

A) Cost of goods sold account
B) Freight-out account
C) Freight-in account
D) Inventory

In a perpetual inventory system, which accounts will the seller credit when merchandise is returned by a consumer?

A) Sales Return & Allowances and AR
B) Inventory and COGs
C) Sales Returns and Allowances and Inventory
D) AR and COGs

When the SELLER is recording a sale that had a discount applied, is Sales Discount debited or credited?

Which of these accounts normally have a debit balance?

A) Sales returns and allowances only
B) Both 
C) Sales discounts only
D) Neither

On what amount is a sales discount based?

A) Invoice price plus freight-out
B) Invoice price plus freight-out
C) Invoice price less returns and allowances
D) Invoice less discount

Net income is $16,900, operating expenses are $21,700, and net sales total $76,600. How much is cost of goods sold?

Which of the following is classified in an income statement as a nonoperating activity?

A) Cost of goods sold
B) Freight-out
C) Advertising expense
D) Interest expense

Which of the following would appear on both a single-step and a multiple-step income statement?

A) Cost of goods sold
B) Gross profit
C) Income from operations
D) Other expenses and losses

Under what system is cost of goods sold determined at the end of an accounting period?

A) Perpetual inventory system
B) Double entry inventory system
C) Single entry inventory system
D) Periodic inventory system

Gross Profit Rate

A company has the following account balances: Sales revenue $2,048,000: Sales Returns and Allowances $252,000: Sales Discounts $54,100: COGs $1,294,1000. How much is gross profit rate?

Profit Margin

Net income is $19,100, operating expenses are $23,100, net sales total $76,000, and sales revenues total $95,500. How much is the profit margin?

With the assumption of costs and prices generally rising, which of the following is correct?

A) LIFO yields cost of goods sold closest to current replacement cost
B) LIFO yields an ending inventory closes to current replacement cost
C) The specific identification method yields cost of goods sold closest to current replacement cost
D) FIFO yields cost of goods sold closest to current replacement cost

In a period of falling prices, which of the following methods will give the largest net income?

A) Specific identification
B) Average-cost
C) FIFO
D) LIFO

Which of the following statements is true?

A) FIFO inventory valuation requires physical flow of goods to be representative of the cost flow.
B) Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.
C) Average-cost costing requires physical flow of goods to be representative of the cost flow.
D) LIFO inventory valuation requires physical flow of goods to be representative of the cost flow.

Blue company purchased 2400 phones and has 520 phones in its ending inventory cost of $112 each and a current replacement cost of $104 each. The net realizable value of each phone in the ending inventory is $96. The ending inventory lower-of-cost or net-realizable value is:

What is the underlying rationale for the lower-of-cost or net-realizable-value rule?

A) The historical cost principle
B) The economic entity assumption
C) The materiality constraint
D) The conservatism constraint

Which of the following control activities is not relevant when a company uses a computerized (rather than manual) accounting system?

A) Establishment of responsibility.
B) Independent internal verification.
C) Segregation of duties.
D) All of these answers are correct

Internal auditors

A) are employees of the IRS who evaluate the internal controls of companies filing tax returns.
B) cannot evaluate the system of internal controls of the company that employs them because they are not independent.
C) evaluate the system of internal controls for the companies that employ them.
D) are hired by CPA firms to audit business firms.

Which of the following is not requirement of the SOX for publicly traded companies?

A) Corporate executive and boards and directors must ensure that controls are reliable and effective
B) Employees working in the accounting departments must be licensed CPAs
C) U.S. corporations are required to maintain an adequate system of internal control
D) Compliance failures could result in imprisonment of corporate executives

If an employee is not supervised or does not report to anyone else, or if employees report to one another:

A) Their actions may result in fraud as there is no one to check the actions of unsupervised employees.
B) The activities of unsupervised employees cannot be monitored
C) All of these are true.
D) There may be collusion between employees who report to each other which may result in undetected fraud.

Why should a bank reconciliation be prepared?

A) To explain any difference between the bank deposits and the checks written.
B) To make sure employees have not committed fraud.
C) To make sure the actual cash balance is the same as the cash received from customers
D) To explain any difference between the depositor's balance per books and the balance per bank.

Pronghorn Company listed outstanding checks totaling $4580 on its September bank reconciliation. In October, the company issued checks totaling $47500. The October bank statement shows the checks totaling $41800 cleared the bank. In addition, a check from one of Pronghorn's customers in the amount of $600 was returned as NSF. The outstanding checks on the October bank reconciliation should total...

If cash is restricted as to its use, and is expected to be used within the next year, how is it reported?

A) Included in the Cash and Cash Equivalents line on the balance sheet.
B) Reported as a current liability on the balance sheet.
C) Reported as a noncurrent asset on the balance sheet.
D) Reported as a current asset separate from Cash and Cash Equivalents on the balance sheet.

How to journalize freight cost for buyer/ seller

Reporting which of the following allows analysts to make adjustments to compare companies using different cost flow methods?

A) Current replacement cost
B) LIFO reserve
C) FIFO reserve 
D) Inventory turnover

Cecil gives goods on consignment to Jerry who agrees to try to sell them for a 25% commission. At the end of the accounting period, which of the following parties include in its inventory the consigned goods?

A) Jerry
B) Cecil
C) Both
D) Neither