See attached file for full problem description.
The following information is available for Franco Company for the month of March, 2006.
Beginning Inventory 60 Units @ $40
First Purchase 90 Units @ $50
Second Purchase 50 Units @ $60
Third Purchase 50 Units @ $55
Assume that Franco uses a periodic inventory system and that there are 65 units on hand at the end of the month.
The following items are taken from the adjusted trial balance of ABC for the year ended 12/31/06.
Accounts Payable $8,000
Accounts Receivable 10,000
A/D - Equipment 28,000
Common Stock 70,000
Depreciation Expense 18,000
Interest Expense 3,000
Note Payable, Due 6/30/2010 80,000
Rent Expense 12,000
Retained Earnings, 1/1/2006 32,000
Salaries Expense 58,000
Service Revenue 133,000
Prepare the closing entries at 12/31/2006.
Question 3 True or false
1 Segregation of duties means that employees should duplicate efforts so that one employee can evaluate the work of the other.
2 The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities.
3 An error that overstates the ending inventory will also cause net income for the period to be overstated.
4 The matching principle dictates that expenses be recognized when cash is paid or when the work is performed.
5 Internal control is most effective when only one person is responsible for a given task.
6 The full disclosure principle requires that events that make a difference to financial statement users be disclosed.
7 A general ledger should be arranged in the order in which accounts are presented in the chart of accounts.
8 A principle becomes generally accepted only when both the Financial Accounting Standards Board (FASB) and the SEC vote in favor of it.
9 The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period.
10 The balance reported on the bank statement is assumed to be the correct balance.
11 The post-closing trial balance will contain only retained earnings statement accounts and balance sheet accounts.
12 In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method.
13 Supplies and supplies expense are both permanent accounts.
14 The debits and credits in each journal entry do not have to be equal as long as the ledger balances at the end of the accounting period.
15 Collusion may result when one individual circumvents prescribed controls and may significantly impair the effectiveness of a system.
16 Correcting entries are made any time an error is discovered, even though it may not be at the end of an accounting period.
17 If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.
18 Inventory turnover measures the number of times on average that the inventory sold during the period.
19 An advantage of developing accounting principles on a problem-by-problem basis is that it results in consistent rules and practices over time.
20 Accounting communicates financial information about a business enterprise to both internal and external users.
21 The journal provides a chronological record of transactions.
22 The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance.
23 The duties of approving an item for payment and paying the item should be done be different departments or individuals.
24 The weighted average unit cost method of costing inventories tracks the actual physical flow of the goods available for sale.
1 During 2006, its first year of operations, Meyers had revenues of $40,000 and expenses of $22,000. The business paid cash dividends of $12,000. What
is the balance in Retained Earnings at December 31, 2006?
a. $12,000 credit.
b. $12,000 debit.
c. $6,000 credit.
d. $18,000 credit.
2 Which of the following is a violation of consistency?
a. A company uses LIFO inventory costing in the first year of business, then switches to FIFO the next year in order to increase reported profits.
b. A company uses straight-line depreciation for financial reporting purposes but an accelerated method for tax accounting.
c. A company's financial statements are audited annually.
d. A company uses weighted average inventory costing because most of the other firms in its industry use that method.
3 The income statement columns of the Harries Company's worksheet reports total debits of $50,000 and total credits of $35,000. This means that:
a. the company earned net income of $15,000 for the period.
b. the worksheet has an error because debits do not equal credits.
c. the company has a net loss of $15,000.
d. distributions to owners for the period totalled $15,000.
4 Donalds Company had beginning inventory of $15,000 at March 1, 2006. During the month, the company made purchases of $40,000. The inventory at the end
of the month is $17,300. What is the cost of goods sold for the month of March?
5 At December 31, 2006, Company A has an inventory of software for which it paid $1,200. The current replacement cost for the inventory is
$1,000. They expects to sell the inventory for $1,500 in 2007. At what value should the inventory be reported on the 12/31/2006 balance sheet?
6 If employees are bonded:
a. it means that they are not allowed to handle cash.
b. they have worked for the company for at least ten years.
c. they have been insured against misappropriation of assets.
d. it is impossible for them to steal from the company.
7 Closing entries are made for all accounts except:
d. Common Stock.
8 Using pre-numbered checks and accounting for them in sequence is an example of:
a. establishment of responsibility.
b. documentation procedures.
c. physical control.
d. segregation of duties.
9 All of the following statements about the post-closing trial balance are correct, except it:
a. shows that the accounting equation is in balance.
b. provides evidence that the journalizing and posting of closing entries have been properly completed.
c. contains only permanent accounts.
d. proves that all transactions have been recorded.
10 Two individuals at a retail store work the same cash register. You evaluate this situation as:
a. a violation of establishment of responsibility.
b. a violation of separation of duties.
c. supporting the establishment of responsibility.
d. supporting internal independent verification.
11 The selection of an appropriate inventory cost flow assumption for an individual company is made by:
a. the external auditors.
b. the SEC.
c. the internal auditors.
12 The purpose of a post-closing trial balance is to:
a. prove that no mistakes were made.
b. prove the equality of the balance sheet account balances that are carried forward into the next accounting period.
c. prove the equality of the income statement account balances that are carried forward into the next accounting period.
d. list all the balance sheet accounts in alphabetical order for easy reference.
13 Qualitative characteristics include all of the following, except:
14 The principle of establishing responsibility does not include:
a. one person being responsible for one task.
b. authorization of transactions.
c. independent internal verification.
d. approval of transactions.
15 The LIFO inventory method assumes that the cost of the latest units purchased are:
a. the last to be allocated to cost of goods sold.
b. the first to be allocated to ending inventory.
c. the first to be allocated to cost of goods sold.
d. not allocated to cost of goods sold or ending inventory.
16 Which one of the following is not an objective of financial reporting according to the conceptual framework?
a. To provide information that will increase the value of a company.
b. To provide information in assessing future cash flows.
c. To provide information that is useful for making investment and credit decisions.
d. To provide information that identifies economic resources, the claims to those resources, and the changes in those resources and claims.
17 Mike purchased supplies for $1,000. The paid $500 in cash and agreed to pay the balance in 30 days. The journal entry to record this transaction
would include a debit to an asset account for $1,000, a credit to a liability account for $500. Which of the following would be the correct way to complete the
recording of the transaction?
a. Credit an asset account for $500.
b. Credit another liability account for $500.
c. Credit the Retained Earnings account for $500.
d. Debit the Retained Earnings account for $500.
18 The accounting process is correctly sequenced as:
a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.
19 Which of the following is an example of an irregularity in the accounting process:
a. An employee steals inventory.
b. Towards the end of the month, the bookkeeper puts bills in a drawer to be recorded in the next month instead of recording the expenses and liabilities
in the accounting records when incurred.
c. The store manager refuses to take vacations.
d. The bookkeeper borrows cash on Fridays and repays it on Monday
20 "Generally accepted" in the phrase generally accepted accounting principles means that the principles:
a. are proven theories of accounting.
b. have substantial authoritative support.
c. have been approved by the Internal Revenue Service.
d. have been approved for use by the managements of business firms.
21 Which of the following accounts does not normally have a debit balance?
b. Accounts Receivable
c. Accounts Payable
d. Interest Expense
22 At January 1, 2006, MC Industries reported Retained Earnings of $130,000. During 2006, Burton had a net loss of $30,000 and paid dividends to the
stockholders of $20,000. At December 31, 2006, the balance in Retained Earnings:
a. $130,000 debit.
b. $140,000 credit.
c. $100,000 debit.
d. $80,000 credit.
This solution is comprised of a detailed explanation to compute (a) the cost of goods sold and (b) the value of the ending inventory under the FIFO method.
Financial Accounting : LIFO and FIFO - Application Problem
The management of Congo Co. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2002, the accounting records show the following data.
Inventory, January 1 (10,000 units) $35,000
Cost of 110,000 units purchased 478,000
Selling price of 95,000 units sold 665,000
Operating expenses 120,000
Units purchased consisted of 40,000 units at $4.20 on May 10; 50,000 units at $4.40 on August 15; and 20,000 units at $4.50 on November 20. Income taxes are 28%.
a) Prepare comparative condensed income statements for 2002 under FIFO and LIFO. (Show computations of ending inventory)
b) Answer the following questions for management.
(1) Which inventory cost flow method produces the most meaningful inventory amounts for the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningul net income? Why?
(3) Which inventory cost flow method is most likely to approximate actual physical flow of the goods? Why?
(4) How much additional cash will be available for management under LIFO than under FIFO? Why?
(5) How much of the gross profit under FIFO is illusory in comparison with the gross profit under LIFO?