Accounting Chapter 4 Learn Smart

Selling stocks to investors is a ____________ activity

financing

List the steps for a bank reconciliation in the correct order.

1) adjust bank's cash balance 2) adjust the company's cash balance 3) update the company's Cash account by recording items identified in the previous step

List the steps of segregating specific responsibilities for duties involving cash receipts

1) cashiers are responsible for collecting cash and issuing a receipt at the point of sale 2) a supervisor is responsible for collecting the cash at the end of each cashier's shift 3) members of the accounting dept. are responsible for ensuring that cash sales are properly recorded

What are some detective controls?

Audits, Reconciliations, performance reviews

What are some preventive controls?

Physical controls and separation of duties

Separation of duties and E-commerce controls are examples of _______ controls

Preventive

The Public Company Accounting Reform and Investor Protection Act of 2002 is known as the

Sarbanes-Oxley Act

T or F: The entry for a sale to customers is different depending on whether the customer pays with cash or a check

True: a check is treated the same as cash

When reconciling the cash balance for a company, you should include

adding notes collected and subtracting NSF checks

an audit is an example of a ____________ control

detective

If a prospective investor wants to know how much cash a company has on December 31st, where could she find the information on the

statement of cash flows and on the balance sheet

Managers who are entrusted with taking care of the assets of the company are referred to as ________ of the company's assets

stewards

What allows greater reliance by investors on reported financial statements?

strong internal control systems

After a month of deliveries out of a petty cash fund, the company should

debit delivery expense and credit petty cash

If a specific expenditure cannot be identified for a missing petty cash amount, the amount should be

debited to miscellaneous expense

NSF checks cause a(n) (increase or decrease) in the company's cash account

decrease

Using a debit card results in a (increase or decrease) in the customer's cash in their checking accoung

decrease

In a bank reconciliation, an outstanding check is

deducted from the bank balance

In a bank reconciliation, the bank's charge of $10 for checking account fees is

deducted from the book balance

outstanding checks written by the company should be a(n) _________________ on the company's bank reconciliation

deduction from the bank balance

What is an internal control procedure for cash disbursements?

disbursements should be made by check

The petty cash custodian should NOT...

do the accounting for petty cash, be involved in approving checks to replenish petty cash

The amount of cash in the balance sheet reflects the

ending cash on the balance sheet date

internal control components are built on the foundation of the ________________ established by top management in its control environment

ethical tone

For a fast-food chain that sells hamburgers, the risk that a supplier ships poor quality meat to the restaurant is an ________ risk

external

Who has the responsibility to apply accounting standards when communicating with investors and creditors?

management

From the retailer's perspective, the difference between a cash sale and a credit card sale is

the retailer must pay a fee to the credit card company

A(n) _________ difference in cash occurs when a company records a transaction either before of after the bank records the same transaction

timing

A debit card

withdraws funds immediately from the cardholders' bank account

Internal control consists of plans to (3 things)

1) minimize errors and theft 2) safeguard company assets 3) encourage adherence to company policies and procedures

The Sarbanes-Oxley Act requires that lead audit partners are required to rotate every (how many) years

5

A company pays for a purchase with a credit card. What is the effect of this purchase on the accounts?

Accounts payable will increase

What are some cash equivalents?

CDs, treasury bills, and money market funds

The Sarbanes-Oxley Act applies to

Companies that are publicly traded

T or F: The entry for a sale to customers is different depending on whether the customer pays with case or a check

False, checks and cash are recorded the same

T or F: Variability in operating cash flows is unimportant as long as the total cash flows over a three-year period is sufficiently positive.

False, variability in operating cash flow is important

What are some other provisions in the Sarbanes-Oxley Act?

Require that audit firms are hired by the audit committee of the board of directors and require auditors to retain work papers for seven years

What are some reasons companies hold large amounts of cash?

allows company to act quickly to new opportunities and to weather potential negative shocks in the business cycle

What affects cash flows?

any debit or credit to cash will affect a company's cash flow

The PCAOB sets standards for

audited financial reports

Employee purchases should be included in the accounting records...

by the end of the accounting period

Short-term, high liquid investments such as money market funds or treasury bills are classified as

cash equivalents

Amounts readily availible to pay off debt or use in operations are considered _______ while highly liquid investments with a maturity date of 3 months or less are considered _____

cash; cash equivalents

Paying by check helps a business to control cash when the

checks are prenumbered and written sequentially, check is signed by an authorized manager, and the manager studies the documents supporting the payment before signing the check

Because cash normally is assumed to be available for spending, it is usually classified on the balance sheet as

a current asset

policies and procedures that help ensure management's directives are being carried out is considered what type of internal control?

control activites

During the month, the amount of cash in petty cash is equal to

the authorized amount of petty cash less the amount of receipts

When adjusting the cash account balance in a bank reconciliation, which items must be subtracted from the company's cash balance

Charges for NSF checks and Service charges

Cash includes:

currency and coins, checks from customers, balance in checking accounts

When adjusting the bank balance in a bank reconciliation, what must be added to the bank balance?

deposits outstanding

The acceptance of credit cards (increases or decreases) internal control over cash.

increases

For internal control purposes, risk assessment considers which two types of risk?

internal and external risks

A key factor in helping safeguard cash is a well functioning

internal control system

purchasing equipment is a(n) ___________ activity

investing

The employee responsible for the petty cash fund is often referred to as the

petty cash custodian

this type of internal control identifies and analyze factors that could prevent objectives from being acheived

risk assessment

In a bank reconciliation, which items will require journal entries by the company?

adjustment to the balance per books for items discovered on the bank reconciliation that were not yet recorded on the books

Small expenditures from a petty cash fund are normally recorded

at the end of a specific time period

what are some cash inflows from financing activities?

borrowing from a bank and issuing stock to investors for cash

The asset that is most easily stolen and susceptible to fraud is

cash

internal control procedures for cash disbursements (other than small disbursements from petty cash) should include

checks are signed by authorized individuals, all expenditures are authorized, and all disbursements are made by check, debit card, or credit card

Cash disbursements that have been recorded in the company's accounting records but are not yet recorded by the bank are called

checks outstanding

To make purchases on behalf of the company, employees may be allowed to utilize:

checks, petty cash, and purchase cards

When adjusting the cash account balance in a bank reconciliation, what must be added to the cash account balance?

collections of funds by the bank

Give some examples of cash inflows

collections on account; sale of services for cash

When two or more persons work together to circumvent internal control procedures and commit a fraud, this is called

collusion

The __________ sets the overall ethical tone of the company with respect to internal control

control environment

formal policies related to management's philosophy, assignment of responsibilites, and organizational structure is considered what type of internal control?

control environment

company employees who make necessary expenditures during the course of their employment may utilize "purchase cards" which may be in the form of

credit and debit cards

The bank will show a customer's deposit on bank statements as a

credit, because a deposit is a liability from the bank's point of view

The bank will show a customer's withdrawal as a

debit, because a withdrawal decreases its liability from the bank's point of view

The Committee of Sponsoring Organizations (COSO) of the Treadway Commission provided a framework for

designing an internal control system

The repayment of promissory notes and the payment of dividends are classified as ___________ activities on the statement of cash flows

financing

When a person intentionally deceives another person or company for personal gain, this is referred to as

fraud

The two reasons why companies may issue incorrect financial statements are

fraud and mistakes

The three elements present in every fraud are commonly referred to as the

fraud triangle

What are some common controls over cash receipts?

having two different employees take custody of the checks and making a deposit, opening mail daily and making a detailed list of checks received, and reducing the proportion of transactions that involve cash

What are some examples of financing activities?

issuance of common stock, borrowing from another company and signing a promissory note

The most common source of occupational fraud is

misuse of company resources

identifying and reporting control deficiencies is considered what type of internal control?

monitoring

What is riskier: cash flows with less or more variability?

more variability = more risk

Is accounts receivable from customers included in cash?

no

Auditors of public companies are prohibited from providing _________ services for their audit clients

nonaudit

Selling goods to customers is a(n) ________ activity

operating

The classification on the statement of cash flows are

operating, financing, and investing activities

The element of fraud which is easiest for companies to eliminate is

opportunity

When reconciling the cash balance for a bank, you should include

outstanding checks and deposits outstanding

What are some cash outflows from operating activities?

payment of accounts payable balance, payment of salaries purchase of supplies, interest paid on bonds

what are some cash outflows from operating activities?

payment of salaries and payment of an accounts payable balance, collection of accounts receivable, interest received on notes

A small amount of cash on hand to pay for minor purchases is commonly referred to as a

petty cash fund

Important internal control procedures for employee purchases include

predetermine spending limits for employees, clear rules for purchase authorization, and reconciliation of credit card statements

Two types of control activities are

preventive and detective controls

If a company is unable to reconcile the current year bank and cash account balances, the company should

recognize the difference in the current year income statement

Preparation of a bank ___________ helps maintain control of cash accounts

reconciliaiton

One of the most important internal controls for cash is the bank

reconciliation

Cash that is not available for current operations is referred to as

restricted cash

The key provisions of the Sarbanes-Oxley Act include:

restricting activities of auditors to prevent conflicts of interest, requiring documentation and assessing effectiveness of internal controls, requiring that corporate executives certify financial statements

What are some cash inflows from investing activities?

sale of equipment, sale of held-to-maturity investments, and sale of building

A critical aspect of a good internal control system is

separation of duties

Short-term highly liquid investments with a maturity of ______ months of less that can be readily converted to cash with little risk of loss are classified as cash equivalents

three

If a company records a transaction before the bank records the same transaction, this called a/an _______ difference

timing

What will cause differences between the bank statement balance and the accounting balance for cash?

timing differences and errors

What is the primary purpose of a bank reconciliation?

to ensure the bank balance per reconciliation is equal to the company balance per reconciliation

a non-sufficient funds check requiring an adjustment to the cash balance is written

to the company preparing the bank reconciliation

The framework for designing an internal control system is provided by the

Committee of Sponsoring Organizations (COSO) of the Treadway Commission

Which of the following led to the passage of the Sarbanes-Oxley Act of 2002?

High profile accounting scandals during the early 2000s

What will require a journal entry following a bank reconciliation?

NSF checks and notes collected by the bank

Give some examples of cash outflows

Payment on account; payment of salaries