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For what purpose are physical controls used in a business? A.To enhance the accuracy and reliability of its accounting records and to safeguard its assets B.To prevent fraud C.To produce accurate financial statements D.To deter employee dishonesty
A.To enhance the accuracy and reliability of its accounting records and to safeguard its assets Physical controls are implemented specifically to safeguard assets and to enhance the accuracy and reliability of accounting records. They do not prevent fraud.
Avoiding paying bills too early is an effective cash management principle. A.True B.False
A.True Paying bills no earlier than the due date is a valid cash management technique as long as payments are not stretched to the point of injuring a company's credit.
The financing section of a cash budget shows the expected repayment of borrowed principal and interest. A.True B.False
A.True Repayments of borrowed funds and interest appear in the financing section of a cash budget. This section is used when there is a deficiency or insufficient cash planned.
Segregation of duties reduces the risk of errors and irregularities. A.True B.False
A.True Segregation of duties substantially reduces the probability that any one person will make an error or initiate an irregularity that is material and that errors will go undetected.
Reasonable assurance rests on the premise that A.the costs of establishing controls should not exceed their expected benefit. B.bonding will prevent employees from stealing. C.employees are basically honest people. D.a system of internal controls will prevent errors.
A.the costs of establishing controls should not exceed their expected benefit. Reasonable assurance states that the costs of establishing control procedures should not exceed their expected benefit. As an extension of the cost/benefit concept, spending $100 to protect a $50 asset is not logical and should not be supported.
Which one of the following is not a physical control? A.Safes and vaults to store cash B.Independent bank reconciliations C.Locked warehouses for inventories D.Bank safety deposit boxes for important papers
B.Independent bank reconciliations Locked warehouses for inventories are physical controls in that they relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records.
For which item below might a bank issue a credit memorandum to a depositor's account? A.An NSF check B.Interest earned C.Monthly service charges D.Outstanding checks
B.Interest earned Because the bank considers the depositor's account balance to be a liability, a credit memo causes an increase in the bank account and a debit memo causes a decrease. A monthly service charge is processed with a debit memo.
Which internal control principle is most important in a control system for handling cash receipts? A.Physical controls B.Documentation procedures C.Independent internal verification D.Segregation of duties
D.Segregation of duties The system for handling cash receipts uses an important internal control principle that separates the record keeping from the physical custody of assets.
Which is the adjusting entry Max Company would prepare when the bank collects a $200 note receivable from one of Max's customers? A. Cash 200 Notes Rec 200 B. Cash 200 Sales Rev 200 C. Accts Pay 200 Cash 200 D. Cash 200 Customer Funds 200
A. Cash 200 Notes Rec 200 The cash account increases and notes receivable decreases. This is the same transaction that would be recorded if a company directly receives a check in the mail from a customer.
The following information was taken from Bounders Company cash budget for the month of July: Beginning cash balance $50,000 Cash receipts 48,000 Cash disbursements 68,000 If the company has a policy of maintaining an end of the month cash balance of $50,000, how much will the company need to borrow during July? A.$20,000 B.$10,000 C.$30,000 D.$12,000
A.$20,000 The beginning cash balance plus cash receipts less cash disbursements results in the estimated ending balance. If this amount is less than the $50,000 balance desired, money will have to be borrowed.
Jones Company collected the following information to prepare its May bank reconciliation: Cash balance per books, May 31 $5,300 Deposits in transit 510 Notes receivable with interest collected by bank 580 Bank service charges 30 Outstanding checks 180 NSF check 150 How much is the adjusted cash balance per books on May 31? A.$5,700 B.$5,810 C.$6,210 D.$5,660
A.$5,700 The book side of the cash reconciliation begins with $5,300 to which adjustments are made for amounts collected by the bank, here the note receivable of $580. Deductions are made for amounts the bank deducted from the account, which include the bank service charges of $30 and the NSF check of $150, to arrive at the adjusted cash balance per books of $5,700. Outstanding check and deposits in transit affect the bank side of the reconciliation.
Burt Company estimates that sales revenue will be $70,000 during July, $60,000 for June, and $75,000 for May In the past, the company collected 60% of its receivables in the month of sale, 30% in the month following the sale, and 10% in the second month following the sale. How much are the budgeted collections from customers for the month of July? A.$67,500 B.$42,000 C.$70,000 D.$60,000
A.$67,500 The total estimated collection for July is 10% of May sales, 30% of June sales, and 60% of July sales.
A check is written to replenish a $100 petty cash fund when the fund contains $3 of cash and $94 of receipts. Which of the following is one part of the entry to be used in recording the check to replenish? A.Cash Over and Short will be debited for $3 B.Petty Cash will be debited for $94 C.Cash will be credited for $94 D.Petty Cash will be credited for $3
A.Cash Over and Short will be debited for $3 The entry to replenish the petty cash account will have debits to expense accounts totaling $94, a debit to Cash Over and Short for $3, and a credit to cash for $97. After replenishment, the fund will have $100 in it.
Which of the following was not a result of the Sarbanes-Oxley Act? A.Companies must file financial statements with the Internal Revenue Service. B.All publicly traded companies must maintain adequate internal controls. C.The Public Company Accounting Oversight Board was created to establish auditing standards and regulate auditor activity. D.Corporate executives and board of directors must ensure that controls are reliable and effective, and they can be fined or imprisoned for failure to do so.
A.Companies must file financial statements with the Internal Revenue Service. The Sarbanes-Oxley Act requires all publicly traded U.S. companies to maintain an adequte system of internal controls. Corporate executives and boards of directors must ensure that these controls are reliable and effective. Companies that fail to comply are subject to fines and company officers can be imprisoned. The Act does not address reporting to the IRS. In addition this Act created the Public Company Accounting Oversight Board to establish auditing standards and regulate auditor activity.
Which one of the following statements is correct? A.Internal auditors are company employees who evaluate the effectiveness of the company's system of internal control on a continuous basis. B.External auditors are company employees who evaluate the effectiveness of the company's system of internal control on a continuous basis. C.The public accountants conducting annual audits are responsible for continuous evaluations of a company's system of internal control. D.Only large companies employ internal auditors and utilize a system of internal controls.
A.Internal auditors are company employees who evaluate the effectiveness of the company's system of internal control on a continuous basis. Internal auditors are employees of the company and continuously evaluate the effectiveness of the company's internal control systems.
When replenishing the petty cash fund, which of the following accounts will not be involved in the accounting entry? A.Petty cash B.Cash C.Various expense and asset accounts D.All of these answer choices are correct.
A.Petty cash The accounts that are included in the replenishment entry are debits to various expense and asset accounts and a credit to Cash. Petty cash is used only to establish, increase, or decrease the fund.
Which of the following is not a basic principle of cash management? A.Keep inventory levels low B.Grant customers as much time as they want to pay their receivables C.Delay the payment of liabilities D.Invest idle cash
B.Grant customers as much time as they want to pay their receivables Rather than granting customers as much time as they want to pay their obligations, receivables should be collected as quickly as possible.
WRONG 31. Barker Company collected the following information to prepare its November bank reconciliation: Cash balance per bank, November 30 $21,000 Note receivable plus interest collected 9,000 Outstanding checks 6,000 Deposits in transit 5,400 Bank service charges 85 NSF check 2,100 How much is the cash balance per books prior to preparing the reconciliation? A.$20,400 B.$13,585 C.$6,815 D.$27,815
B.$13,585 The book side of the cash reconciliation begins with the general ledger cash account balance to which adjustments are made for amounts collected by the bank. Deductions are made for amounts the bank deducted from the account. Outstanding check and deposits in transit affect the bank side of the reconciliation. Note that once the adjusted total on the bank side is determined, this is also the total on the book side of the reconciliation. You can then work backwards to determine the missing balance per books amount.
On which financial statement(s) will cash be reported? A.Income statement, balance sheet, and the statement of cash flows B.Balance sheet and the statement of cash flows C.Income statement and the statement of cash flows D.Only the statement of cash flows
B.Balance sheet and the statement of cash flows Companies report cash on two different statements: the balance sheet and the statement of cash flows.
Of which of the following is obtaining insurance protection against dishonest employees an example? A.Documentation procedures B.Bonding C.Establishing responsibility D.Segregation of duties
B.Bonding Bonding is one example of insurance against dishonest employees.
Expected payments for direct materials will be listed in the __________ section of a cash budget. A.Cash receipts B.Cash disbursements C.Cash investments D.Financing
B.Cash disbursements Cash disbursements are an element of cash outflows in a cash budget.
Handly Inc. permits only designated personnel such as cashiers to handle cash receipts. What principle is being applied? A.Segregation of duties B.Establishment of responsibility C.Independent internal verification D.Rotation of employees
B.Establishment of responsibility Control is most effective when only one person is responsible for a given task.
Collusion occurs when two or more people are responsible for a single task. A.True B.False
B.False Collusion occurs when two or more people work together to get around the rules and regulations in order to conduct unethical or illegal activities.
Deposits in transit are added to the cash balance per books on the bank reconciliation. A.True B.False
B.False Deposits in transit are deposits the business knows are in route to the financial institution, but are not yet processed by the bank. They need to be added to the bank's balance in the bank reconciliation process.
All disbursements, even incidental amounts, must be paid by check. A.True B.False
B.False Businesses often establish a petty cash fund to pay small unforeseen bills such as postage due deliveries. This fund is a cash fund that is subject to audit as part of the safeguarding of assets.
Internal controls guarantee the accuracy and reliability of the accounting records. A.True B.False
B.False This statement is false. While proper internal controls will enhance accuracy and reliability, errors can still be expected and undetected.
Which of the following would not be an example of good cash management? A.Providing discounts to customers to encourage early payment B.Investing temporary excess cash into the stock of a small company C.Carefully monitoring payments so that payments are not made too early D.Employ just-in-time inventory methods to keep inventory low
B.Investing temporary excess cash into the stock of a small company Investing excess cash to purchase stock in a small company is inappropriate because the stock of small companies is often not easily converted to cash.
Which of the following is not a basic principle of cash management? A.Increase collection of receivables B.Keep inventory levels high C.Delay payment of liabilities D.Invest idle cash
B.Keep inventory levels high Increasing collections is a basic principle of cash management.
Which one of the following is not a control procedure used for over-the-counter receipts? A.Use of a cash register where the amount rung up is clearly visible to the customer B.Pre-numbered checks are used to buy supplies C.Providing the customers with an itemized receipt D.A cash register's tape is locked in the register and only a supervisor can access it
B.Pre-numbered checks are used to buy supplies This is a technique used to control over-the-counter receipts.
Which of the following statements is correct? A.Control is most effective when two or three people are given responsibility for the same task. B.The person who has custody of assets should not perform the record keeping for the assets. C.The person who has custody of assets should also perform the record keeping for the assets. D.It is often a waste of company resources to have an employee perform independent internal verification.
B.The person who has custody of assets should not perform the record keeping for the assets. The person who has custody of assets should not perform the record keeping for the assets.
An authorization form which is prepared for each expenditure in most medium and large organizations is A.invoice. B.voucher. C.receiving report. D.purchase order.
B.voucher. A voucher is an authorization form which is prepared for each expenditure prior to payment.
Which of the following is the correct adjusting entry for the account holder when the bank submits a debit memorandum for a monthly service charge of $30? A. Cash 30 Bank Service Fee 30 B. Cash 30 Acct Rev 30 C. Miscellaneous Exp 30 Cash 30 D. Loss on Bank Transactions 30 Cash 30
C. Miscellaneous Exp 30 Cash 30 This journal entry recognizes the $30 miscellaneous expense and reduces the cash account on the accounting records.
Springer Company listed outstanding checks totaling $4,500 on its September bank reconciliation. In October, the company issued checks totaling $45,700. The October bank statement shows that checks totaling $39,800 cleared the bank. In addition, a check from one of Springer's customers in the amount of $500 was returned as NSF. The outstanding checks on the October bank reconciliation should total A.$5,900. B.$9,900. C.$10,400. D.$1,400.
C.$10,400. Adding the amount of checks outstanding at the beginning of the period ($4,500) to the checks issued in the period ($45,700) and subtracting the checks cleared ($39,800) results in the October outstanding checks amount of $10,400.
The following information was taken from the Carson Company cash budget for the month of April: Beginning cash balance $45,000 Cash receipts 27,000 Cash disbursements 51,000 If the company has a policy of maintaining a minimum cash balance of $37,000, how much will the company need to borrow? A.$24,000 B.$8,000 C.$16,000 D.$14,000
C.$16,000 To determine the amount to borrow, add the beginning balance ($45,000) to the receipts ($27,000), and then subtract the disbursements ($51,000). Since the $21,000 tentative balance is $16,000 less than the required minimum balance of $37,000, the company will have to borrow $16,000.
A company has the following items at year end: cash on hand, $1,000; cash in a checking account, $3,000; cash in a savings account, $5,000; postage stamps, $50; and Treasury bills, $10,000 that mature in less than 90 days. How much should the company report as cash and cash equivalents on its balance sheet? A.$9,000 B.$9,050 C.$19,000 D.$19,050
C.$19,000 Cash equivalents are highly liquid investments that are readily convertible to known amounts of cash, and are so near their maturities that their market value is relative insensitive to changes in interest rates.
Which of the following items in a cash drawer at November 30 is not reported as cash on the November 30 balance sheet? A.Money orders B.Coins and currency C.A customer check dated December 1 D.A customer check dated November 28
C.A customer check dated December 1 A customer check dated December 1 is post-dated. It is not cash to the company until the date of the check arrives.
As used in a bank reconciliation, how are deposits in transit handled? A.Deducted from the book balance B.Added to the book balance C.Added to the bank balance D.Deducted from the bank balance
C.Added to the bank balance Deposits in transit are deposits made by the company that have not yet been recorded by the bank. They need to be added to the bank balance.
Which statement correctly describes the reporting of cash? A.Cash can be combined with cash equivalents if it is restricted. B.The petty cash fund is a cash equivalent. C.Cash is listed first in the current assets section of the balance sheet. D.Restricted cash funds cannot be reported as a current asset.
C.Cash is listed first in the current assets section of the balance sheet. Current assets are listed in order of liquidity on the balance sheet.
WRONG 29. Globally, what percentage of companies reported fraud losses from 2003 to 2005 A.More than 5% but less than 10% B.More than 20% but less than 30% C.Close to 50% D.Less than 1%
C.Close to 50% According to the international accounting firm PWC in their Global Economic Crime Survey, around 45% of companies reported fraud losses from 2003 through 2005.
Which of the following is not a principle of internal control? A.Segregation of duties B.Documentation procedures C.Collusion between employees D.Bonding of employees
C.Collusion between employees Internal controls are established to preclude collusion between employees. It is not a principle of internal control.
A company's monthly bank statement shows a collection of a note receivable by the bank in the amount of $500. Which of the following is one part of the journal entry needed to record the note collection by the company? A.Credit to Cash for $500 B.Credit to Note Expense for $500 C.Credit to Notes Receivable for $500 D.Debit to Notes Receivable for $500
C.Credit to Notes Receivable for $500 Cash will be debited for $500 while Notes Receivable will be credited for $500.
Which one of the following is not one of the principles of internal control? A.Establishment of responsibility B.Documentation procedures C.Financial performance measures D.Independent internal verification
C.Financial performance measures The establishment of responsibility, documentation producures, and independent internal verification are all principles of internal control. Financial performance measures are used to evaluate, but not to enhance the accuracy and reliability of its accounting records and safeguard assets.
WRONG 30. In the PWC study conducted in 2005, what are the average losses by companies impacted by fraud? A.Losses that average $200,000 B.Losses that average $500,000 C.Losses that average $1,700,000 D.Losses that average $1,200,000
C.Losses that average $1,700,000 The average losses per the study are approximately $1,700,000.
Aptara Construction Supplies has a cashier who is also the accounts receivable clerk for the company. Which internal control principle is violated A.Rotating employee duties B.Establishment of responsibility C.Segregation of duties D.Documentation procedures
C.Segregation of duties The cashier maintaining the books violates segregation of duties because she also receives, records, and deposits cash.
Which of the following is not an element of the fraud triangle? A.Rationalization B.Financial pressure C.Segregation of duties D.Opportunity
C.Segregation of duties The three components of the fraud triangle are opportunity, financial pressure, and rationalization.
Why should a bank reconciliation be prepared? A.To make sure the actual cash balance is the same as the cash received from customers B.To make sure employees have not committed fraud C.To explain any difference between the depositor's balance per books and the balance per bank D.To explain any difference between the bank deposits and the checks written
C.To explain any difference between the depositor's balance per books and the balance per bank Bank reconciliations should be prepared periodically to explain any difference between the depositor's balance per books with the balance per bank.
Internal auditors A.are hired by CPA firms to audit business firms. B.are employees of the IRS who evaluate the internal controls of companies filing tax returns. C.evaluate the system of internal controls for the companies that employ them. D.cannot evaluate the system of internal controls of the company that employs them because they are not independent.
C.evaluate the system of internal controls for the companies that employ them. Internal auditors evaluate the system of internal controls for the companies that employ them.
With respect to cash management, most companies try to A.keep as much spare cash on hand as possible in case of emergency. B.keep a lot of cash in a non-interest-bearing checking account because that type of account has the lowest fees. C.invest idle cash, even if only overnight. D.invest idle cash in illiquid investments because this will generate the greatest return.
C.invest idle cash, even if only overnight. Illiquid investments may not be convertible into cash when needed.
Which one of the statements below is true? A.Both deposits in transit and outstanding checks are deducted from the balance per the bank statement during the bank reconciliation process. B.Both deposits in transit and outstanding checks are added to the balance per the bank statement during the bank reconciliation process. C.Deposits in transit are deducted from the balance per the bank statement, and outstanding checks are added to the balance per the bank statement during the bank reconciliation process. D.The deposits in transit are added to the balance per the bank statement, and outstanding checks are deducted from the balance per the bank statement during the bank reconciliation process.
D. The deposits in transit are added to the balance per the bank statement, and outstanding checks are deducted from the balance per the bank statement during the bank reconciliation process. Deposits in transit are deposits that the company presented to the bank, but due to timing, the bank did not post them to the customers' account at time bank statement was printed. Outstanding checks are checks written by the company to suppliers and others who haven't presented these to bank to deduct from company's bank account. Since bank has not yet recorded deposits in transit, this amount should be added to balance according to bank. Since the bank has not yet deducted the outstanding checks from the account balance, this amount should be subtracted.
Which one of the following control activities is relevant when a company uses a computerized (rather than manual) accounting system? A.Establishment of responsibility B.Segregation of duties C.Independent internal verification D.All of these answer choices are correct.
D.All of these answer choices are correct. All the principles of internal control activities are relevant to both manual and computerized accounting systems.
Which of the following is a reason why an organization establishes a system for internal control? A.To safeguard its assets B.To increase efficiency of operations C.To ensure compliance with laws and regulations D.All of these answer choices are correct.
D.All of these answer choices are correct. Internal control consists of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations.
Which of the following is an effective internal control over cash disbursements? A.The use of prenumbered checks B.The storage of blank checks in a secure place C.The separation of authorization of checks and the actual writing of the checks D.All of these answer choices are correct.
D.All of these answer choices are correct. The use of prenumbered checks is one of numerous effective internal control measures over cash disbursements.
Which one of the following is proposed under the new IFRS? A.Cash equivalents will not be allowed to be reported on a balance sheet. B.Bank reconciliations will have to be part of the financial statements. C.Internal controls will not be required by small companies. D.Cash equivalents cannot be combined with cash.
D.Cash equivalents cannot be combined with cash. IFRS is proposing that cash equivalents will not be combinable with cash. They will have to be reported on a separate line item.
Which of the following is not one of the sections of a cash budget? A.Cash receipts section B.Cash disbursements section C.Financing section D.Cash from operations section
D.Cash from operations section The sections of the cash budget are cash receipts, cash disbursements, and financing.
Which of the following will not require an adjusting entry? A.NSF checks B.Book errors C.Bank service charges D.Deposits in transit
D.Deposits in transit Deposits in transit are deposits the company presented to the bank before the end of the month that have not yet been posted to the bank account. They will be posted in the next accounting period. No adjusting entry is needed.
For which of the following might a bank issue a debit memorandum to a depositor's account? A.Interest earned B.Collection of a note receivable C.Deposits in transit D.Monthly service charges
D.Monthly service charges Because the bank considers the depositor's account balance to be a liability, a credit memo causes an increase in the account and a debit memo causes a decrease. The collection of a note receivable would increase the liability.
For which of the following will an adjusting entry be required as the result of a bank reconciliation? A.Outstanding checks B.Deposits in transit C.Bank errors D.NSF checks
D.NSF checks NSF checks are deductions made by the bank from the company's account that must be removed from the company's accounting records with an adjusting entry that credits Cash and debits Accounts Receivable.
Which one of the following is an international company that has been victim of international fraud as discussed in your textbook? A.BP (United Kingdom) B.UBS (Switzerland) C.McDonalds (US) D.Parmalat (Italy)
D.Parmalat (Italy) Parmalat of Italy was involved in a complex fraud involving the concealment of debt by executives ultimately causing its bankruptcy.
Under which of the following do computer programs that limit unauthorized access to certain files fall? A.Human resource controls B.Independent internal verification C.Documentation procedures D.Physical controls
D.Physical controls Independent internal verification is accomplished primarily by unannounced audits, review of employee's work and reporting/documenting deficiencies and irregularities committed by an employee.
Which one of the following is not a primary component of an internal control system? A.Risk assessment B.Information and communication C.Monitoring D.Rationalization
D.Rationalization Rationalization is one of the elements of the fraud triangle. The five primary components of an internal control system are control environment, risk assessment, control activities, information and communication, and monitoring.
If cash is restricted as to its use, and is expected to be used within the next year, how is it reported? A.Included in the Cash and Cash Equivalents line on the balance sheet B.Reported as a current liability on the balance sheet C.Reported as a noncurrent asset on the balance sheet D.Reported as a current asset separate from Cash and Cash Equivalents on the balance sheet
D.Reported as a current asset separate from Cash and Cash Equivalents on the balance sheet Since this cash is restricted from general usage and is expected to be used in the next year, it should be reported as a current asset in a separate line item from Cash and Cash Equivalents on the balance sheet.
What does IFRS require as it relates to internal controls of foreign companies listed on U.S. stock exchanges? A.Presentation of the company's controls to the SEC for approval B.Requirements that are consistent with SOX C.Requirements that are more stringent than currently mandated under SOX D.There are no internal controls required for foreign companies listed on U.S. stock exchanges
D.There are no internal controls required for foreign companies listed on U.S. stock exchanges IFRS makes no requirements for internal controls for foreign companies listed on US exchanges.
When is the petty cash fund replenished? A.When the fund reaches a minimum level B.When there is not enough cash to cover future withdrawals C.When the internal auditor is coming to check the fund's management D.When the fund reaches a minimum level and when there is not enough cash to cover future withdrawals
D.When the fund reaches a minimum level and when there is not enough cash to cover future withdrawals Companies should replenish a petty cash fund when the fund reaches a minimum level but there is a better answer.