Exam #2 Review

Chapter 5

Chapter 6

Chapter 15

Chapter 7

Chapter 8

100

True or False: Income Tax Expense: measures the profitability of each sales dollar above the cost of gold sold.

False

100

________ A business's financial statements must report enough information for outsiders to make knowledgeable decisions about the company.

Disclosure Principle

100

True or False: Current Ratio- Measures the company's ability to pay current liabilities from current assets. Total current assets / Total current liabilities.

True

100

True or False: Nonsufficient Funds (NSF) Check = on the check , the number that identifies the account upon which the payment is drawn.

False: Account Number

100

True or False: acid-test ratio =

is used to measure a company’s ability to pay its current liabilities.

True

200

What is the term?

A business that sells merchandise, or goods, to customers.

a. Merchandiser

b. Retailer

c. Wholesaler

a. Merchandiser

200

What are the formulas for inventory turnover and days’ sales in inventory:

Inventory turnover = cost of goods sold/ average mechanize inventory

200

What is the purpose of the horizontal analysis?

Horizontal analysis is the study of percentage changes in line items from comparative financial statements.
Many decisions hinge on whether the numbers are increasing or decreasing

200

What are the internal control procedures with respect to cash payments?

List the 4 steps for the purchasing and payments process:

Safeguard assets

Encourage employees to follow company policies

Promote operational efficiency

Ensure accurate, reliable accounting records.

200

Define the word allowance method:

is based on the matching principle

300

During the year, Smart Touch Learning buys $697,710 of inventory, returns $150,000 of the goods, and takes a $9,510 early payment discount. The company also pays $36,400 of freight in

Purchases. $ 697,710

Less: Purchase Returns and Allowances. 150,000

Purchase Discounts. 9,510

Plus: Freight In. 36,400

Net Cost of Inventory Purchased. $574,600

300

If the ending merchandise inventory is overstated, then cost of goods sold is _____________, and the net income is _______________.
If the ending merchandise inventory is understated, then cost of goods sold is ____________, and the net income is _______________.

If the ending merchandise inventory is overstated, then cost of goods sold is _understated , and the net income is _overstated__.
If the ending merchandise inventory is understated, then cost of goods sold is _overstated__, and the net income is _understated__.

300

What information can the current ratio provide? What is the formula used to calculate current ratio?

The current ratio, which is calculated as the total current assets divided by total current liabilities, measures a company’s ability to pay its current liabilities with its current assets.

current ratio = total current assets/ total current liabilities

300

Espinoza Air Conditioning and Heating had the following select financial data as of June 30,2024.

Cash= $10,000

Cash Equivalents= $8,850

Accounts Receivable= $3,700

Total Current Liabilities = $29,000

What is Espinoza’s cash ratio? What is the equation?

cash ratio = (cash+ cash equivalents) / total current liabilities

(10,000 + 8,850) / 29,000= 0.65

300

When the business collects cash from both customers on August 29—$4,000 from Brown and $8,000 from Smith—Smart Touch Learning makes the following entry:

Date/Accounts and Explanation/Debit/Credit

Aug,29. Cash. 12,000

accounts receivable -brown. 4,000

accounts receivable -smith 8,000

400

Name five accounts that a merchandiser might have on the adjusted trial balance that needs to be closed out that a service business does not have on an adjusted trial balance:

- Merchandise Inventory
- Cost of Goods Sold
- Estimated returns Inventory
- Refunds Payable
- Sales discount Forfeited

400

ABC Company paid $3,000 for its merchandise inventory. At the end of the accounting period, the merchandise inventory can now be replaced for $2,700 and this decline appears to be permanent. Write the journal entry to write down the inventory to LCM:

Date. Accounts and Explanation. ..Debit. Credit

Jan 31. Cost of good sold 300

Merchandise Inventory (3000- 2700). 300

400

Net Sales Revenue is $100,000 and gross profit is $40,000 for 2020. What is the percentage of gross profit to net sales revenue?

gross profit % = gross profit / nets sale revenue
40000/100000= 0.4 = 4%

400

What are the internal control procedures needed for petty cash and how are petty cash transactions recorded?

Date: Jan 1Record the journal entry to create a petty cash fund of $150.

Date. Accounts and Explanation. Debit. Credit

Jan 1. Petty Cash. 150

Cash 150

400

Smart Touch Learning provides $5,000 in services to Brown on account and sells $10,000 (sales price) of merchandise inventory to Smith on account on August 8. Ignore Cost of Goods Sold.

Date/Accounts and Explanation/Debit/Credit

Aug 8. Accounts Receiable 5,000

Servie Revenue. 5,000

500

a) the purchase of merchandise inventory of $1,000, with related freight charge of $100, on account with the terms of 2/10 or n/30. Terms of shipment are FOB shipping point, and the seller prepays the freight charge;

b) the payment of the merchandise inventory within the discount period.

Journal entires:

a) Merchandise Inventory ............. 1,100...............

...........Account Payable ..........................1,100....

b) Account Payable........................1,100...............

.............Merchandise Inventory ...............20.........

................Cash......................................1080....

500

company just starting business made the following four inventory purchases in June:

June 1 150 units @ $5.20/unit = $ 780

June 10 200 units @ $5.85/unit = 1,170

June 15 200 units @ $6.30/unit = 1,260

June 28 150 units @ $6.60/unit = 990

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand.Using the FIFO inventory method, the amount allocated to cost of goods sold for June is

A. $3,128 B. $2,895 C. $2,545 D. $1,305

B. $2,895

500

Smart Touch Learning’s Net Sales Revenue was $750,000 in 2022 and rose to $858,000 in 2026.
Net Sales Revenue
2026 = 858,000
2025= 803, 000
2024 = 780,000
2023 = 748, 000
2022= 750,000
The trend percentage for 2023 is calculated as follows:

Trend Anaylsis= (any period amount /base period amount ) x 100

(748,000/750,000) /100

99.7%

500

Smart Touch Learning sells merchandise inventory (ignore Cost of Goods Sold) to a customer for $3,000 on August 15. The customer pays with a third-party credit card. The card processor assesses a 8% fee and deposits the net amount. Entry on the sale date using the net method:

Date Accounts and Explanation. Debit. Credit

August 15. Cash 2760

Credit Card Expense (3,000 X 0.08). 240

Sales revenue 3000

500

How do we use the acid-test ratio, accounts receivable turnover ratio, and days’ sales in receivable to evaluate business performance?
Use the following information to answer the questions below:
Cash & Cash Equivalents = $2,000
Short-term Investments = $1,500
Total Current Liabilities (Dec. 31) = $ 700
Net Credit Sales = $ 640
Accounts Receivable (Jan. 1) = $ 450
Accounts Receivable (Dec. 31) = $ 470
i) What is the acid-test ratio at the end of the year?

ii) What is the accounts receivable turnover at the end of the year?

i) What is the acid-test ratio at the end of the year?
acid-test ratio= (cash including cash equivalents + short term investments + net current receivables)/ total current liability
2,000 + 1,500 + 920 / 700 = 6.31

ii) What is the accounts receivable turnover at the end of the year?

accounts receivable turnover ratio = net cred it sales /average net accounts receivable

640/ 920 = .69 = 69%