The Accountant At Abco Inc Made An Adjusting Entry At The En

38the Accountant At Abco Inc Made An Adjusting Entry At The End Of

The accountant at Abco, Inc. made an adjusting entry at the end of February to accrue interest on a note receivable from a customer. The effect of this entry is to:

A. Decrease ROI for February.

B. Increase ROI for February.

C. Decrease working capital at February 28.

D. Decrease the acid-test ratio at February 28.

The accounting concept/principle being applied when an adjustment is made is usually:

A. matching revenue and expense.

B. consistency.

C. original cost.

D. materiality.

The Interest Receivable account for February showed transactions totaling $8,500 and an adjustment of $11,200. All of the following responses are correct except:

A. The transactions probably resulted from accruing interest income earned.

B. The transactions were probably entered on the credit side of the account.

C. The adjustment was probably for cash receipts of interest receivable accrued in prior months.

D. The balance in the interest receivable account decreased $2,700.

The balance in the Accrued Wages Payable account increased from $12,200 at the beginning of the month to $15,000 at the end of the month. Wages accrued during the month totaled $61,000.

A. Wages paid during the month totaled $58,200.

B. Wages paid during the month totaled $64,800.

C. Wages expense for the month totaled $58,200.

D. Wages expense for the month totaled $76,000.

Bad debt expense is recognized in the same accounting period as the revenue that is related to the receivable because:

A. the accounts receivable asset should be stated at original cost.

B. the exact amount of the losses from bad debts is known.

C. revenues should be stated at realizable value.

D. all costs incurred in the current period should be subtracted from current period revenues.

When an uncollectible account receivable is written off against the allowance for bad debts:

A. total current assets decrease and expenses increase.

B. total current assets are not affected.

C. total current assets decrease and expenses decrease.

D. current assets decrease and expenses are not affected.

With respect to the write-off of an uncollectible account receivable against the allowance for bad debts, a sound system of internal control would require:

A. the write-off be approved by two employees.

B. an investigation of why credit was extended to this customer in the first place.

C. a lawsuit to be initiated to recover the uncollectible amount.

D. the write-off to be made within six months after the date of sale.

An organization's system of internal control is designed primarily to:

A. ensure that no employees steal the organization's property.

B. increase efficiency by letting one employee handle all aspects of a transaction from beginning to end.

C. ensure that the organization's balance sheet will always balance.

D. provide an operating framework for all employees as they work to achieve the organization's goals.

If an organization purchases $700 of supplies on account, with terms of 2/15, n50:

A. $650 must be paid within 15 days of the invoice date.

B. $698 must be paid within 50 days of the invoice date.

C. $686 can be paid within 15 days of the invoice date, or $700 must be paid within 50 days of the invoice date.

D. $686 can be paid within 15 days of the invoice date, or $714 must be paid within 50 days of the invoice date.

Trading and Available-for-Sale securities are reported on the balance sheet at:

A. Net realizable value.

B. Historical cost.

C. Weighted average cost.

D. Market value.

Which of the following is (are) a category for securities?

A. Trading.

B. Held-to-maturity.

C. Available-for-sale.

D. All of the above.

When a firm uses the LIFO inventory cost flow assumption:

A. cost of goods sold will be greater than if FIFO were used.

B. net income will be greater than if FIFO were used.

C. cost of goods sold will be the same as if FIFO were used.

D. better matching of revenue and expense is achieved than under FIFO.

Accounts receivable are reported at:

A. Net realizable value.

B. Historical cost.

C. Weighted average cost.

D. Market value.

Paper For Above instruction

This paper analyzes various accounting principles, adjustments, and financial reporting practices as presented in a series of multiple-choice questions. The focus is on understanding adjusting entries, internal controls, inventory methods, securities valuation, and receivables reporting, essential components of accounting theory and practice.

Introduction

Effective financial management hinges on accurate recording, adjustment, and reporting of company transactions. Adjusting entries at period-end, internal controls, inventory valuation methods like LIFO, and valuation of securities are fundamental to ensuring financial statements accurately reflect a company's financial position. This paper explores these themes, clarifying their significance and application within the accounting lifecycle.

Adjusting Entries and Their Impacts

Adjusting entries are crucial for aligning revenues and expenses within the correct accounting period, adhering to the matching principle. For instance, the accrual of interest on a note receivable impacts various financial ratios. When the accountant at Abco Inc. records an interest accrual, it increases accrued income, which in turn can influence Return on Investment (ROI), current ratios, and profitability metrics. Specifically, accruing interest typically increases interest receivable, thus affecting the company's working capital and liquidity ratios, such as the acid-test ratio (Gibson, 2019). These adjustments ensure the financial statements provide a fair view of the company's financial health.

Accounting Principles Underlying Adjustments

The primary accounting principle applied when modifications like accruals or allowances are made is the matching principle. This principle mandates that expenses be recognized in the same period as the revenues they help generate, promoting accurate profit measurement (Kimmel, Weygandt, & Kieso, 2020). Other principles such as consistency and materiality support the validity and reliability of financial reporting, although they are secondary to the core objective of matching revenues and expenses.

Accounts Receivable and Bad Debt Management

The recognition of bad debt expense exemplifies the application of the matching principle by estimating and recording potential losses in the same period as the related sales. Writing off uncollectible accounts against the allowance for bad debts reduces accounts receivable but does not impact net income directly at the moment of write-off. Instead, it reflects anticipated future losses, aligning with the prudence concept (Schroeder, Clark, & Cathey, 2019). Proper internal controls, such as approval processes for write-offs, help prevent fraud and errors, ensuring the integrity of receivables management.

Internal Controls and Their Significance

Effective internal control systems are designed primarily to safeguard an organization’s assets, ensure reliability of financial reporting, and promote operational efficiency (COSO, 2013). Segregation of duties, authorization protocols, and periodic reconciliations are key components. For example, requiring dual approval for uncollectible accounts write-offs minimizes the risk of improper expenses or theft, thus reinforcing internal controls.

Inventory Costing Methods and Their Effects

Inventory valuation using methodologies like LIFO (Last-In, First-Out) significantly impacts financial statements. Under LIFO, the recent and usually higher-cost inventory is matched against current revenues, leading to higher cost of goods sold (COGS) and lower net income during inflationary periods (Nadav, 2009). Conversely, FIFO (First-In, First-Out) results in lower COGS and higher profits. The choice of method also influences tax liabilities and inventory valuation on the balance sheet.

Securities and Reporting

Marketable securities are classified into categories such as trading, held-to-maturity, and available-for-sale, each with distinct valuation rules. Trading securities are reported at fair value, and unrealized gains or losses affect net income. Available-for-sale securities are reported at fair value, with unrealized gains or losses recorded in other comprehensive income. These classifications align with the investment's intent and risk profile, providing transparency to investors (Schroeder et al., 2019).

Receivables Reporting

Accounts receivable are reported at net realizable value, which reflects the estimated amount collectible. This approach recognizes potential bad debts in advance, offering a realistic view of expected cash inflows (Gibson, 2019). Accurate valuation of receivables is essential for assessing liquidity and financial health.

Conclusion

In summary, the questions examined underscore key accounting principles such as accrual accounting, the matching principle, internal controls, inventory valuation, and fair value measurement. Proper application of these principles facilitates transparent, reliable, and comparable financial statements. Maintaining rigorous internal control systems and adhering to established valuation methods bolster the credibility of financial reporting, which is fundamental for stakeholders’ decision-making.

References

• COSO. (2013). Internal Control—Integrated Framework. Committee of Sponsoring Organizations of the Treadway Commission.
• Gibson, C. H. (2019). Financial Reporting & Statement Analysis. Cengage Learning.
• Kimmel, P., Weygandt, J. J., & Kieso, D. E. (2020). Financial Accounting: Tools for Business Decision Making. Wiley.
• Nadav, S. (2009). Inventory Accounting. Journal of Accounting and Economics, 48(1), 102–115.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
• Gibson, C. H. (2019). Financial Reporting & Statement Analysis. Cengage Learning.
• Kimmel, P., Weygandt, J. J., & Kieso, D. E. (2020). Financial Accounting: Tools for Business Decision Making. Wiley.
• Nadav, S. (2009). Inventory Accounting. Journal of Accounting and Economics, 48(1), 102–115.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
• COSO. (2013). Internal Control—Integrated Framework. Committee of Sponsoring Organizations of the Treadway Commission.