Exam 2

Question 1

How do you calculate the Gross Profit Ratio?

Answer 1

Gross Profit/Net Sales

Question 2

How to do you calculate the Current Ratio?

Answer 2

Current Assets/Current Liabilities

Question 3

How do you calculate Working Capital?

Answer 3

Current Assets - Current Liabilities

Question 4

What are the two methods of accounting for inventory?

Answer 4

Perpetual Method
-updates inventory after every sale
Periodic Method
-updates inventory at the end of a period

Question 5

What are the two entries made upon each sale when a company is using the Perpetual Inventory Method?

Answer 5

• record the sale

- update the inventory

Question 6

Where is “Freight-In” included? Where is “Freight-Out” included?

Answer 6

Freight-In part of NET PURCHASES

Freight-Out part of Operating Expenses

Question 7

Explain the title transfer process with FOB Shipping

Answer 7

• BUYER pays for shipping (Freight-In)

- Title transfers to buyer as soon as the goods leave companies property

Question 8

Explain the title transfer process with FOB Destination

Answer 8

• Title transfers from seller to buy whenever the goods are delivered
• Seller pays for shipping cost (Freight-Out)

Question 9

Explain the title transfer process with Consigned Goods

Answer 9

Seller transfers the physical product over to Buyer without forfeiting the legal title(title)

Question 10

What are the are Inventory Costing Methods associated with the Periodic System?

Answer 10

• Specific-Identification Method
• FIFO
• LIFO
• Avg Cost Method

Question 11

How do you find the average cost when using the Average Cost Method?

Answer 11

COGS / Total # of units (GAS units)

Question 12

Which inventory costing method of the Periodic System is the most used in the U.S.?

Answer 12

LIFO

Question 13

Which inventory costing method of the Periodic System is not allowed by the IASB?

Answer 13

LIFO

Question 14

What does the Inventory Turnover Ratio show?

Answer 14

Tells how many times a company buys inventory and then sells it during the year

Question 15

How is the Inventory Turnover Ratio calculated?

Answer 15

COGS / AVG Inventory

*Avg Inventory = (BI+EI) / 2

Question 16

What does the LIFO Conformity Rule say?

Answer 16

Says if a company uses LIFO to report COGS on it’s tax return, then it must also use LIFO on it’s Income Statement

Question 17

How does Inventory Profit occur?

Answer 17

Happens when a company is using FIFO during a time of rising prices
-current prices (high) go on the balance sheet causing the inventory to appreciate

Question 18

What is Lower-of-Cost-or-Market Rule (LCM)?

Answer 18

says that if a the FMV (fair market value) of inventory decreases lower than what a company paid for it. . . then the company must depreciate it’s inventory on the balance sheet

-follows conservatism

Question 19

What are the 2 methods to writing off Bad Debt Expense

Answer 19

Direct Write-Off Method

• specifically identifies each customer’s accounts receivable and writes them off
• ** only works for accounts receivable that are immaterial

-Allowance Method

Question 20

Do the Direct Write-Off Method and the Allowance Method follow the Matching principle?

Answer 20

Allowance Methods follows Matching Principle

Direct Write-Off Method DOES not follow Matching Principle

Question 21

Maturity Value = ___ + ___

Answer 21

Principal + Interest

Question 22

Acquisition Costs

Answer 22

All money spent to get the asset

Question 23

3 things that you don’t include in Acquisition Costs?

Answer 23

• money spent to repair damaged asset (if it was damaged)
• money spent on asset after it was installed
• interest expense if you bought the asset with borrowed money

Question 24

Acquisition costs of Land?

Answer 24

• purchase price
• sales commission
• title fees
• title insurance
• legal fees
• land preparation costs
• (proceeds from salvage)

Question 25

Acquisition costs of Buldings

Answer 25

- purchase price - closing costs - broker fees - commissions - remodeling costs

Question 26

Acquisition costs of Equipment?

Answer 26

- invoice price - (discounts) - freight-in - installation costs - trial runs - sales tax - material - labor - Insurance on shipping

Question 27

Is insurance on equipment in case it breaks bought before the sale included in acquisition costs of Equipment?

Answer 27

No

Question 28

Give an example of Land Improvements Are they included in acquisition costs of Land?

Answer 28

Driveways, Fences, Parking Lots No

Question 29

Which inventory costing method is the most conservative?

Answer 29

Average Cost Inventory

Question 30

True or False: The gross profit method may not be used to estimate ending inventory when preparing year-end financial statements

Answer 30

True

Question 31

True or False: If collection of accounts receivable is assured, then accounts receivable are considered to be cash equivalents

Answer 31

False

Question 32

True or False: Because the allowance method results in better matching, accounting standards require its use rather than the direct write-off method, unless bad debts are immaterial

Answer 32

True

Question 33

True or False: The main purpose of recording depreciation is to report the asset on the balance sheet at the estimated amount for which the asset could be sold on the balance sheet date

Answer 33

False