Accounting 211 Exam 2

Question 1

Limited Liability Corporation

Answer 1

1 or more owners called members; not additional income tax; limited liability; a separate legal entity; indefinite business life

Question 2

Corporation

Answer 2

1 or more owners called stockholders; additional corporate income tax; limited liability; a separate legal entity; indefinite business life

Question 3

Sole Proprietorship

Answer 3

1 owner; no additional business income tax; unlimited liability; no separate legal entity; business ends with owner death or choise

Question 4

Partnership

Answer 4

2 or more owners called partners; no additional business income tax; unlimited liability; no separate legal entity; business ends with partner death or choice

Question 5

External Users

Answer 5

Lenders, shareholders, boards of directors, external auditors, nonmanagerial, non executive, regulators, voters, government officials, contributors, suppliers, customers

Question 6

Internal User

Answer 6

Purchasing managers, human resource managers, production managers, distribution managers, marketing managers, service managers, research and development managers

Question 7

Fiscal year

Answer 7

12 consecutive months or 52 consecutive weeks

Question 8

Vouchers

Answer 8

Certifies a transaction

Question 9

Days’ sales uncollected

Answer 9

Accounts receivable divided by net sales times 365

Question 10

Current ratio

Answer 10

Current assets assets divided by current liabilities

Question 11

Acid-test ratio

Answer 11

(Cash and cash equivalents; short-term investments;current receivables) divided by current liabilities

Question 12

Inventory turnover

Answer 12

COGS divided by average inventory

Question 13

Gross margin

Answer 13

(Net sales minus COGS) divided by net sales

Question 14

Gross Profit

Answer 14

Net sales minus COGS

Question 15

Example: 3/10 n/45

Answer 15

3% discount if payed back within 10 days or full amount due in 45 days

Question 16

FIFO

Answer 16

First in; first out

Question 17

LIFO

Answer 17

Last in; first out

Question 18

Understatement of ending inventory affects COGS and Net income how?

Answer 18

COGS: Overstated

Net income: Understated

Question 19

Overstatement of ending inventory affects COGS and Net income how?

Answer 19

COGS: Understated

Net income: Overstated

Question 20

Lower of cost or market

Answer 20

Inventory is reviewed to ensure it is reported at the Lower of cost or market (LCM) for all costing methods

Question 21

Internal controls

Answer 21

Internal control is policies and procedures used to protect assets, promote efficient operations, ensure reliable accounting, and uphold company policies

Question 22

Days sales in inventory

Answer 22

Ending inventory divided by cost of goods sold times 365

Question 23

Profit margin

Answer 23

Net income divided by net sales

Question 24

Debt ratio

Answer 24

Total liabilities divided by total assets

Question 25

FOB Shipping point

Answer 25

Ownership transfers at shipping point, goods in transit owned by buyer, debit Merch. Inv. credit Cash

Question 26

FOB destination

Answer 26

Ownership transfers at destination, goods in transit owned by seller, debit Delivery Exp. credit Cash

Question 27

Ending Inventory

Answer 27

Beginning Inventory plus purchases minus COGS

Question 28

Operating Cycle for a merchandiser

Answer 28

Begins with the purchase of merchandise, credit sales (optional), collection of cash

Question 29

Limitations of internal control

Answer 29

Human error, human fraud, cost-benefit principle

Question 30

Technology, fraud, and internal control

Answer 30

Reduced processing errors, more extensive testing of records, new evidence of processing, increased E-commerce, separation of duties

Question 31

Independent reviews

Answer 31

Help ensure that procedures are followed, preferable done by external auditors, auditors evaluate efficiency and effectiveness of internal controls

Question 32

Apply technological controls

Answer 32

Cash registers make electronic files/records of each sale, time clock records exact time employee works, personal scanners limit access to authorized individuals

Question 33

Divide responsibility

Answer 33

Responsibility for a transaction should be divided between two or more individuals, ensures work of one person acts as a check on the others to prevent fraud or errors, called separation of duties

Question 34

Separate recordkeeping

Answer 34

Person who controls or has access to assets must not have access to assets' accounting records, reduces risk of theft or waste of an assets, employees would need to collude

Question 35

Insure assets

Answer 35

Assets should be insured, employees handling a lot of cash and other assets should be bonded, bonded means the company has purchased an insurance policy against theft by that employee

Question 36

Maintain Adequate records

Answer 36

Protects assets, helps managers monitor company activities, includes: Detailed records, use of chart of accounts, preprinted forms, prenumbered sales slips, computerized point-of-sales systems

Question 37

Establish responsibilities

Answer 37

Tasks should be clearly established, assigned to one person, then determine who is at fault

Question 38

Committee of sponsoring organizations (COSO)

Answer 38

Control environment, risk assessment, control activities, information and communication, monitoring

Question 39

Sarbanes Oxley Act (SOX)

Answer 39

The Sarbanes-Oxley Act requires managers and auditors of public companies to document and certify the system of internal controls

Question 40

Section 404 of SOX

Answer 40

Requires that managers document and assess the effectiveness of all internal control processes that can impact financial reporting.