Question

1_ The following accounts have subsidiary ledgers and are CONTROL ACCOUNTS:

        

         a. Cash and Accounts Receivable

         b. Cash and Accounts Payable

         c. Accounts Receivable and Accounts Payable

         d. Cash and Accounts Payable

2_

If ending inventory is erroneously understated (Clue: think of Cost of Goods Sold formula and Gross Profit formula):

      

         a. Cost of merchandise sold is understated and gross profit/net income is overstated

         b. Cost of merchandise sold is overstated and gross profit/net income is understated

         c. Cost of merchandise sold is understated and gross profit/net income is understated

         d. Cost of merchandise sold is overstated and gross profit/net income is overstated

Answer 1

Q1   c. Accounts Receivable and Accounts Payable....

Explanation - A subsidiary ledger includes two types of ledges such as accounts payable ledger and accounts receivable ledger. Control account is a summarized account that contains all the general ledgers and subsidiary ledgers.

Q2 b. Cost of merchandise sold is overstated and gross profit/net income is understated

Explanation Cost of goods/merchandise sold = Opening Inventory + purchases - Ending inventory

If ending inventory is understated, thus Cost of goods/merchandise sold is overstated by above equation

Further Gross profit = Sales - Cost of goods sold if cost of goods sold are overstated then Gross profit would be understated