Chapter 3 Smart Books

Should interested earned be subtracted or added to the bank balance? Company balance?

No entry; add

Should NSF checks be subtracted or added to the bank balance? Company balance?

No entry; subtract

Should bank service fees be subtracted or added to the bank balance? Company balance?

No entry; subtract

Which of the following statements is correct regarding a long-lived asset such as equipment?

When adjusting entries are recorded, the original cost in the Equipment account will not change.

Should checks over a certain amount be signed by two people?

Yes

The adjusting entry for an accrued revenue always includes:

a debit to an asset account a credit to a revenue account

A primary purpose of adjusting entries is to record events that

have occurred but that have not yet been recorded.

On November 1, 2019, Movers, Inc., paid $24,000 for 2 years' rent beginning on November 1. The Prepaid rent balance at December 31, 2019 equals ______.

$22,000

On August 1, 2019, a firm prepaid $53,520 for 2 years' rent of an office building. On March 1, 2020, the firm prepaid $34,800 for 2 years' rent of a warehouse. The rent agreements on both buildings went into effect on the dates the rents were prepaid. What amount will be shown for prepaid rent on the December 31, 2020 balance sheet?

$35,910

Which of the following transactions are examples of prepayments that will require an adjustment at the end of the accounting period on December 31?

A company pays a 6-month insurance premium at the beginning of October. A company pays for 4 months of advertising in the Wall Street Journal on November 1.

Which of the following transactions are examples of prepayments that will require an adjustment at the end of the accounting period on December 31?

A company pays for 4 months of advertising in the Wall Street Journal on November 1. A company pays a 6-month insurance premium at the beginning of October.

American Airlines operates a flight from Dallas to Los Angeles on August 16th. The pilot's salaries associated with the flight are paid on September 2nd. When does the company recognize the expense?

August 16th

occur when the cash flow occurs after either the expense is incurred or the revenue is earned.

Accruals, Accrua

Receiving a utility bill for costs in the current period but delaying payment until the following period is an example of a(n):_________.

Accrued expense

When recording an adjustment for the cost of using equipment during the current accounting period, which two accounts are affected?

Accumulated Depreciation and Depreciation Expense

Which of the following statements describes the effect that adjusting entries may have on liabilities?

Adjusting entries increase liabilities for the amount of any accrued and unpaid expenses at the end of the period.

What are current assets?

Assets that provide benefits within the next year.

When Pizza Company sells three $100 gift cards at the beginning of the month, it should record a $300 debit to ______ and a $300 credit to ______.

Cash; Deferred Revenue

What do internal controls struggle to see?

Collusion

Which of the following expressions correctly calculates "total assets?"

Current assets plus long-term assets

During December, Mainzel Interior Design Corporation redecorated the reception areas of a local hotel. The project was completed on December 31 with payment due in 30 days. Payment was received on January 21 of the following year. When should Mainzel recognize the related revenue using accrual accounting?

December 31

On January 1st, Pizza Hut pays for a one-year property insurance policy with coverage starting immediately. When does the company recognize the expense?

December 31st

Expense should be recorded to recognize the the cost of using long-lived assets, such as equipment, during the accounting period.

Depreciation

___ is an allocation of the cost of buildings, vehicles, and equipment to expense over time as they are used.

Depreciation

Allowing only certain individuals to have passwords to conduce online purchases is an example of which preventive control?

E-commerce controls.

Which of the following would be referred to as "accruals?"

Expenses incurred, not yet paid Goods and services provided, not yet collected

True or false: A contra-asset account, such as Accumulated Depreciation, will have a normal debit balance.

False

True or false: Accumulated Depreciation is a contra-account to a long-lived asset account, such as Equipment. This means that it is added to the balance of the long-lived asset in the balance sheet.

False

True or false: Adjusting entries ensure that assets in the balance sheet are reported at amounts that have been used up or expired during the period.

False

Sport Illustrated signs an agreement with CBS on January 12th to provide television advertisements during the Super Bowl. Payment is due within 3 weeks after February 4th, the day of the Super Bowl. Sports Illustrated makes the payment on February 23rd. When does the company recognize expense using cash-basis accounting?

February 23rd

Sport Illustrated signs an agreement with CBS on January 12th to provide television advertisements during the Super Bowl. Payment is due within 3 weeks after February 4th, the day of the Super Bowl. Sports Illustrated makes the payment on February 23rd. When does the company recognize the expense?

February 23rd

Which of the following would be referred to as "accruals?"

Goods and services provided, not yet collected Expenses incurred, not yet paid

Which of the following situations matches a journal entry that debits Deferred Revenue and credits Service Revenue.

Goods or services, for which cash was collected in advance, were provided during the current period.

When should supplies be recorded as an expense?

In the period the supplies are used, regardless of when they were purchased

The expense that relates to notes payable and accumulates or accrues throughout the accounting period is referred to as ___ expense.

Interest

Which of the following statements is correct regarding the adjusting entry to record interest accrued on a note payable?

Interest on the note payable is classified as an expense since it is a cost of borrowing.

Eddie Bauer pays cash on January 6th to purchase sunglasses from a wholesale distributer. The sunglasses are sold to customers on January 27th. When does the company recognize expense using cash-basis accounting?

January 16th

On January 1st, Pizza Hut pays for a one-year property insurance policy with coverage starting immediately. When does the company recognize expense using cash-basis accounting?

January 1st 20X1

Eddie Bauer pays cash on January 6th to purchase sunglasses from a wholesale distributer. The sunglasses are sold to customers on January 27th. When does the company recognize the expense?

January 27th

A company received an order from a customer in June for services to be provided. Those services were provided in July, and the customer paid the full amount in August. According to the revenue recognition principle, in which month should the company record revenue?

July

With respect to current assets, ___ refers to how quickly an asset can be converted to cash.

Liquidity

What are the three elements of a fraud triangle?

Motive, rationalization, opportunity

Should programmers handle accounting?

No

Should the person who approves the invoice also write the check?

No

Which of the following pre-payments requires an adjusting entry at the end of the year?

On November 1, the company pays rent for the next six months.

What does the treasurer do?

Only handles cash (takes money out of accounting control)

On November 1, 2019, Movers, Inc., paid $24,000 for 2 years' rent beginning on November 1 (assume rent is the same amount each month). Movers' year-end financial statements as of December 31, 2019 will show:

Prepaid rent of $22,000 Rent expense of $2,000

Which of the following transactions would normally be recorded as an asset when cash is paid?

Rent paid in advance

Which of the following statements regarding the statement of cash flows are correct?

Reports cash receipts The financial statement that is typically prepared last Reports cash disbursements

Which activities are part of the operating cycle?

Selling goods and services

American Airlines operates a flight from Dallas to Los Angeles on August 16th. The pilot's salaries associated with the flight are paid on September 2nd. When does the company recognize expense using cash-basis accounting?

September 2nd

On April 1, Katie Inc. collected $2,400 from a customer for a 12-month membership starting on that date. On December 31, Katie Inc. should credit:

Service revenue for $1,800

Which financial statement would report all of the following information: beginning balances for common stock and retained earnings; current period net income or loss; current period dividends; common stock issued during the year; ending balances of common stock and retained earnings?

Statement of stockholders' equity

Taggert Company paid $1,800 for a 6-month insurance premium on December 1. Which of the following statements are correct regarding the accounting for this insurance over the six-month period?

Taggert will credit Prepaid Insurance for $300 on Dec. 31. Taggert will debit Prepaid Insurance for $1,800 on Dec. 1. Taggert will debit Insurance Expense for $300 on Dec. 31.

Which of the following statements is correct regarding a long-lived asset such as a building?

The original cost in the building account will not change when an adjusting entry is recorded for depreciation.

What are the effects on the accounting equation when an adjusting entry is made for goods or services provided during the accounting period related to an amount previously received in advance from a customer?

Total liabilities will decrease and total stockholders' equity will increase.

What are the effects on the accounting equation from the adjustment for salaries incurred but not yet paid during the accounting period?

Total liabilities will increase and total stockholders' equity will decrease.

True or false: The adjusting entry for a prepaid expense always includes a debit to an expense account and a credit to an asset accounts.

True

True or false: The adjusting entry for accrued expense has the effects of decreasing net income and increasing liabilities.

True

True or false: The adjusting entry for an accrued revenue always includes a debit to an asset account and credit to a revenue account

True

True or false: The adjusting entry to record depreciation does not directly reduce the long-lived asset accounts, such as Equipment, so that the original cost of the asset remains unchanged.

True

In an adjusting entry for expenses incurred but not yet paid ______.

a liability is increasing since cash will be paid in the future due to the expense incurred

-basis accounting helps measure and report revenues and expenses in a way that clearly represents the net income of the company.

accrual

To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for ___ entries.

adjusting

What's a necessary part of the accrual-basis accounting?

adjusting entries

A prepayment that is originally recorded as an asset will be ______.

allocated to future accounting periods based on the cost of the asset used during the period

After the adjusting entries have been completed, the adjusted balance in the Prepaid Rent account represents the ______.

amount of the prepayment that remains towards future rental periods

The adjusting entry for supplies used during the period will result in ______ to the Supplies Expense account.

an increase

A prepayment such as "Prepaid Insurance" is originally recorded as a(n)___ when an insurance policy is purchased and will later be expensed in the period used.

asset

Adjusting entries ensure that ______ balances are reported at amounts representing the economic benefits that remain at the end of the period.

asset

Neumann Corporation purchases supplies that will be used during the following quarter. At the time of purchase, the supplies should be recorded as a(n)

asset

Supplies that are not used immediately are recorded as a(n) ______ when purchased.

asset

Norbert Inc. delivered goods and services during December. Payment is expected during the first week of January. The related adjusting entry should consist of a debit to a(n) ____ account and a credit to a(n) _____ account.

asset; revenue

A classified balance sheet shows subtotals for current___ and current ___.

assets liabilities

Which of the following best describes restricted cash? a. Cash to be collected from customers from sales on account. b. Cash that is not available to be used for current operations. c. Cash that has been lent by creditors with a high interest rate. d. Dividends that are expected to be paid to common stockholders in the following year.

b. Cash that is not available to be used for current operations.

Which of the following is NOT a reason why a bank reconciliation is necessary? a. The company has transactions that the bank has not recorded. b. Petty cash has a low balance. c. The bank has transactions that the company has not recoded. d. Reconciliations provide a control over cash.

b. Petty cash has a low balance.

Under the Sarbanes-Oxley Act, management is responsible for: a. Analyst's having the positive comments about the company's operations. b. The reliability of financial statements. c. Increasing the company's stock price. d. All of the other answers represent management responsibilities under the Sarbanes-Oxley Act.

b. The reliability of financial statements.

Deferred revenue appears on the ______

balance sheet as a liability

Deferred revenue appears on the ______.

balance sheet as a liability

Prepaid rent appears in the ______.

balance sheet because it is an asset

Which of the following is true regarding the post-closing trial balance? a. The post-closing trial balance will be distributed to investors and other stakeholders along with financial statements. b. the post-closing trial balance is a report prepared before adjustments and the financial statements to prove that debits equal credits. c. The post-closing trial balance is an internal report prepared as the last step in the accounting cycle. d. The post-closing trial balance proves that all entries have been made correctly and accurately during the accounting period.

c. The post-closing trial balance is an internal report prepared as the last step in the accounting cycle.

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

cash equivalents.

Depreciation is an allocation of the___ of buildings, vehicles, and equipment to expense over time as they are used.

cost

After the adjusting entries have been completed, the balance in the Rent Expense account represents the:

cost of rent for the accounting period

If an asset account such as Equipment has a normal debit balance, the associated contra account should have a normal ___ balance.

credit

If an asset account such as Equipment has a normal debit balance, the associated contra account should have a normal___ balance.

credit

Accumulated Depreciation has a normal ___balance which indicates that it ___total assets.

credit decreases

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records a:

credit to Revenue debit to Deferred Revenue

Assets that will be used up or converted to cash within the next year are _____ assets.

current

Assets that will be used up or converted to cash within the next year are ___assets.

current

Fraudulent reporting by management could include: a. Fictitious revenues from a fake customers b. Improper asset valuation. c. Mismatching revenues and expenses. d. All of the above.

d. All of the above.

Which of the following would typically be recorded as a cash sale? a. Sale in exchange for office supplies received. b. Sale in exchange for equipment received. c. Sale on account. d. Sale with credit card.

d. Sale with credit card.

The adjusting entry for prepaid rent requires a(n) ___ to Rent Expense and a(n) ___ to Prepaid Rent.

debit credit

Andy records an adjusting entry for deferred revenue. Andy should:

debit a liability account credit a revenue account

On July 1, Book Palace prepaid 12 months' fire insurance with coverage starting the following month. The adjusting entry on December 31 includes:

debit to Insurance Expense credit to Prepaid Insurance

The adjusting entry to record the supplies used during the period will result in a(n) ______.

decrease to Supplies and an increase to Supplies Expense

Prepaid expenses should be ______ by the cost of the asset used during the accounting period.

decreased

___revenue arises when a business receives cash in one period, but does not provide all of the related goods or services until a later period.

deferred

The process of allocating the cost of an asset to expense over the useful life of the asset is called

depreciation

The statement of stockholders' equity includes these amounts:

dividends for the period ending balance retained earnings net income

Adjusting entries are made at the____ of the accounting period, while daily transactions are made throughout the accounting period.

end, closing,

Munster Inc. debits Deferred Revenue and credits Service Revenue. As a result of this adjusting entry, Munster's:

equity will increase liabilities will decrease

If an adjusting entry's credit is to a liability account, then the debit must be to ______.

expense

Initially a prepayment for items such as rent or insurance are recorded as assets and later are recorded as a(n) _____ in the period the benefit expires.

expense

Initially a prepayment for items such as rent or insurance are recorded as assets and later are recorded as a(n)___ in the period the benefit expires.

expense

The adjusting entry to record salaries owed to employees at the end of the accounting period includes a debit to "Salaries___ " and a credit to "Salaries___ ."

expense payable

The adjusting entry for a prepaid expense includes a debit to a(n) ______ account and a credit to a(n) ____ account.

expense; asset

Adjusting entries help to ensure that all ______ are recorded in the period in which they are incurred

expenses

Adjusting entries help to ensure that all ______ are recorded in the period in which they are incurred.

expenses

True or false: Salaries Receivable is the account used to record salaries owed to employees for work performed during the current period.

false

True or false: Total assets must always be equal to total liabilities less stockholders' equity

false

True or false: Allowing the employee who authorizes purchases to also prepare the checks is an example of good internal control.

false- a single employee should not preform both of these tasks.

The information reported in the statement of cash flows is organized by these activities:

financing investing operating

A classified balance sheet ______.

groups together similar assets and similar liabilities, using a number of standard classifications and sections

An adjusting entry is necessary to record interest expense at year-end because the interest:

has already been incurred

Sabrina Company recorded an adjusting entry for salaries owed to employees at the end of the year. As a result of this entry, Sabrina Company's:

iabilities increase equity decreases

Revenues and expenses are reported in the:

income statement

___is defined as the "cost of borrowing money."

interest

Deferred revenue is a(n) ______.

liability

Deferred revenue is reported on the balance sheet as a current

liability

Deferred revenue is reported on the balance sheet as a current ___

liability

An asset that can quickly be turned into cash has the characteristic of

liquidity

Assets that provide benefits for more than one year are classified as

long-term

Long-term assets are expected to provide benefits for

more than one year

Which of these is a long-term liability?

mortgage payable due in 20 years

Adjusting entries for accrued expenses ensure that liabilities are reported for all amounts ______ at the end of the accounting period.

owed

If an adjusting entry's debit is to an expense account, then the credit must be to which of the following?

prepaid expense liability

At year-end, companies that utilize accrual-based accounting systems complete the measurement process through

recording of adjusting entries

After the adjusting entries have been completed, the ending balance in the Supplies account represents the cost of supplies ______.

remaining at the end of the accounting period

Stockholders' equity consists of two main components, common stock and ______.

retained earnings

Which of the following accounts should be classified as stockholders' equity?

retained earnings common stock

The two major categories reported in the income statement are

revenue expense

Under cash-basis accounting,

revenues are recorded when cash is received. expenses are recorded when cash is paid.

On a classified balance sheet, the sum of current and long-term liabilities refers to ___ liabilities.

total

The sum of current and long-term assets reported on the balance sheet is referred to as

total assets

True or false: company's should set maximum purchase limits on debit cards and credit cards as part of internal controls.

true

Adjusting entries:

update the accounts to their proper balances. are needed before financial statement preparation.

After the adjusting entries have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies:

used during the accounting period

A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,800, deposits outstanding of $1,230, NSF check of $300, and service fee of $50. Calculate the correct balance of cash.

$1,580 (4,230-3,880+1,230)

In a bank reconciliation, which items will require journal entries by the company? -Adjustments to the bank balance for items recorded on the books but not yet on the bank statement -Adjustments to the balance per books for items discovered on the bank reconciliation they were not yet recorded on the books -Both the adjustments to the bank balance and adjustments to the cash balance in the accounts records

-Adjustments to the balance per books for items discovered on the bank reconciliation they were not yet recorded on the books

When adjusting the company's cash account balance in a bank reconciliation, which items must decrease the company's cash account balance? -Change for NSF checks -Deposits outstanding -Outstanding checks -Service charges

-Change for NSF checks -Service charges

Which of the following items are included in cash? -Currency and coins -Checks from customers -Notes receivable from customers -Accounts receivable from customers -Balance in checking accounts

-Currency and coins -Checks from customers -Balance in checking accounts

Effective internal control over cash requires segregation or duties. Which of the following duties should be segregated? (Select all that apply) -Accepting credit cards and accepting cash -Opening the mail and making a list of checks received -Depositing checks into the bank and recording receipts in the accounting records -Opening the mail and deposit of checks in the bank

-Depositing checks into the bank and recording receipts in the accounting records -Opening the mail and deposit of checks in the bank

Which of the following will require a journal entry following a bank reconciliation? -Deposits outstanding -Notes collected by the bank -Outstanding checks -NSF checks

-Notes collected by the bank -NSF checks

Which of the following steps are necessary to reconcile the bank balance and the cash account balance. -Record items that reconcile the company's cash balance -Adjust bank's cash balance -Record items that reconcile the bank's cash balance -Adjust the company's cash balance

-Record items that reconcile the company's cash balance -Adjust bank's cash balance -Adjust the company's cash balance

Company employees who make necessary expenditures during the course of their employment may utilize "purchase cards", which may be in the form of: (select all that apply) -payment vouchers -debit cards -credit cards -promissory notes

-debit cards -credit cards

A debit card -withdraws funds immediately from the cardholders' bank account. -permits sales on account to customers. -is the same as a credit card.

-withdraws funds immediately from the cardholders' bank account.

List the steps for bank reconciliation in the correct order. A. Adjust the company's cash balance B. Adjust bank's cash balance C. Update the company's Cash account by recording items identified in the previous step

1. B. Adjust bank's cash balance 2. A. Adjust the company's cash balance 3. C. Update the company's Cash account by recording items identified in the previous step

Place the steps in the adjustment process at the end of the accounting period in the correct order. A. Post the adjusting journal entries to the T-accounts. B. Record the adjusting entries in the journal. C. Using the unadjusted trial balance, determine the accounts requiring adjustment. D. Prepare an adjusted trial balance to check the equally of the debits and credits.

1. C. Using the unadjusted trial balance, determine the accounts requiring adjustment. 2. B. Record the adjusting entries in the journal. 3. A. Post the adjusting journal entries to the T-accounts. 4. D. Prepare an adjusted trial balance to check the equally of the debits and credits.

What is separation of duties?

A set of procedures intended to separate duties among employees for authoring transactions, recording transactions, and controlling related assets

Which of the following statements describes the effect that adjustments may have on liabilities? A. Adjustments increase liabilities for the amount of any accrued and unpaired expenses at the end of the period. B. Adjustments do not have any effect on liabilities, since cash is not included in the adjusting entries. C. Adjustments reduce liabilities for the amount of any accrued and unpaid expenses at the end of the period.

A. Adjustments increase liabilities for the amount of any accrued and unpaired expenses at the end of the period.

Identify all the entries needed for the closing process. A. Credit Dividends Declared and debit Retained Earnings. B. Debit Dividends Declared and credit Retained Earnings. C. Debit each revenue, credit each expense, and record the difference in Retained Earnings. D. Credit each revenue, debit each expense, and record the difference in Retained Earnings.

A. Credit Dividends Declared and debit Retained Earnings. C. Debit each revenue, credit each expense, and record the difference in Retained Earnings.

On a classified balance sheet, long-term assets may be reported in these sub-categories: A. Long-term investments B. Inventories C. Property, plant, and equipment D. Trade receivables E. Intangible assets

A. Long-term investments C. Property, plant, and equipment E. Intangible assets

Adam Corporation uses the cash-basis of accounting. Adam Corporation should record expenses when: A. paid B. incurred, regardless of when it is paid C. the related revenue are recognized

A. paid

Should deposits outstanding be subtracted or added to the bank balance? Company balance?

Add; no entry

If an adjusting entry's debit is to an expense account, then the credit must be go which of the following accounts? (Select all that apply.) A. revenue B. liability C. prepaid expense D. cash expense

B. liability C. prepaid expense

Transactions that do not involve revenues or expenses and transactions that result in revenues and expenses being recorded at the same time as the cash flows A. require adjusting entries if the effect is material. B. never require adjusting entries. C. always require adjusting entries at the financial statement date.

B. never require adjusting entries.

Identify all transactions that do NOT require adjusting entries. A. transactions that result in revenues or expenses being recorded in a different period as the cash flow B. transactions that result in revenues or expenses being recorded at the same time as the cash flow C. transactions that involve depreciation D. transactions that do not involve revenue or expense activities E. transactions that involve revenue or expense activities

B. transactions that result in revenues or expenses being recorded at the same time as the cash flow D. transactions that do not involve revenue or expense activities

At the end of October, Pizza Company sold pumpkin spice pizzas for Halloween parties on account. The customers have 30 days to pay for the pizzas. In which month should Pizza Company record the revenue under accrual accounting? A. November B. At the end of the financial year C. October

C. October

A prepayment that is originally recorded as an asset will be _______. A. expensed in total at the end of the accounting period B. allocated to future accounting periods equally over the periods receiving the benefit C. allocated to future accounting periods based on the value of the benefit used during the period D. transferred to a liability account at the end of the accounting period

C. allocated to future accounting periods based on the value of the benefit used during the period

Revenue in the income statement for the year ended December 31, 2018 equals the __________. A. amount of cash collected from customers during 2018 B. accounts receivable balance in the December 31, 2018 balance sheet C. amount earned by selling goods or services to customers during 2018

C. amount earned by selling goods or services to customers during 2018

A classified balance sheet ________. A. shows only current assets and current liabilities. B. contains confidential information C. groups asset and liabilities into current and long-term categories D. shows changes in assets, liabilities, revenues and expenses

C. groups asset and liabilities into current and long-term categories

What are examples of investing activities?

Cash investments in long-term assets and investment securities.

What are deposits outstanding?

Cash receipts or the company that have not yet been added to the bank's record of the company's cash account.

What are examples of operating activities?

Cash transactions involving revenue and expense events during the period and are recorded in the income statement.

What are checks outstanding?

Checks that have not yet been subtracted from the bank's record of the company's cash balance.

What are checks outstanding?

Checks the company has written that have not been subtracts from the bank's record of the company's balance

When adjusting the company's cash account balance in a bank reconciliation, which item must be added to the cash account balance?

Collections of funds by the bank

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

Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

What component of internal control is for procedures for maintaining separation of duties?

Control activities

What component of internal control is for overall attitude of the company with respect to internal controls?

Control environment

What are detective controls?

Controls designed to detect errors or fraud that already have occurred.

What are preventive controls?

Controls designed to keep errors or fraud from occurring in the first place.

Who has the responsibility for preparing financial statements in accordance with generally accepted accounting principles?

Corporate management

As part of the closing process, dividends are closed to retained earnings. In the closing entry, correctly match the accounts with the appropriate debit/ credit. Debit Retained Earnings Credit Dividends

Debit Retained Earnings Credit Dividends

Do checks outstanding increase or decrease company's cash balance?

Decrease

_________ revenue arises when a business receives cash in one period, but does not provide all of the related goods or services until a later period.

Deferred

True or False: interest earned on a bank account is an example of a cash transaction recorded by the company and then later by the bank after notification.

False

True or false: Employee purchases using cash or purchase cards must be recorded immediately as business expense.

False

True or false: When referring to supplies, the term "on hand" refers to supplies that have been used up during the accounting period.

False

Do deposits outstanding increase of decrease bank's cash balance?

Increase

What component of internal control is for the transfer of data from lower managers to top executives for accurate financial reporting?

Information and communication

___________ is defined as the "cost of borrowing money."

Interest

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

Management

What are Reconciliations?

Management should periodically determine whether the amounts of physical assets of the company match the accounting records.

What component of internal control is for routine activities that are meant to continually observe internal control activities?

Monitoring

Are accounts receivable reported as part of cash and cash equivalents in the balance sheet?

No

Is inventory for sale to customers reported as part of cash and cash equivalents in the balance sheet?

No

Should deposits recorded twice by the company be subtracted or added to the bank balance? Company balance?

No entry; subtract

Which of the following are preventive controls? -Physical controls -Reconciliations -Performance reviews -Separation of duties

Physical controls and separation of duties

Two types of control activities are

Preventive and detective.

What are other examples of preventive controls?

Proper authorization, employee management, e-commerce controls

Which of the following are detective controls? -Physical controls -Performance reviews -Reconciliations -Audits -Proper authorization

Reconciliations, performance reviews, audits

What component of internal control is for formal policies to evaluate internal and externals threats to achieving company objectives?

Risk assessment

High profile accounting scandals in the early 2000s prompted the passage of the:

Sarbanes-Oxley Act, Section 404

Should checks outstanding be subtracted or added to the bank balance? Company balance?

Subtract; no entry

What does bank reconciliation match?

The balance of cash in the bank account with the balance of cash in the company's own records

What are examples of financing activities?

Transactions like borrowings and issuance of stock designed to raise cash or finance the business

True or false: Each adjusting entry is posted to the general ledger.

True

True or false: only transactions involving cash affect a company's cash flows.

True

Are checks reported as part of cash and cash equivalents in the balance sheet?

Yes

Are investments with maturities or less than three months reported as part of cash and cash equivalents in the balance sheet?

Yes

Is a balance in savings account reported as part of cash and cash equivalents in the balance sheet?

Yes

Is currency reported as part of cash and cash equivalents in the balance sheet?

Yes

Munchkin Inc. pays for promotional expenses by charging the company's credit card. Munchkin should debit an expense and credit

accounts payable.

Reporting revenues when goods or services are provided and expenses in the period they are incurred to generate related revenues is referred to as _______- basis accounting.

accrual

The Accounting basis that helps measure and report revenues and expenses in a way that clearly reflects the ability of a company to generate value for its owners is referred to as ________.

accrual-basis accounting.

To complete the measurement process, compared need to update balances of assets, liabilities, revenues and expenses for ______ entries.

adjusting

Neumann Corporation purchases supplies that will be used during the following quarter. At the time of purchase, the supplies should be recorded as a(n) _______.

asset

What is the primary purpose of a bank reconciliation? a. To ensure that for all cash transactions debits equal credits. b. To ensure that customers are paying amounts owned on a timely basis. c. To ensure the bank balance per reconciliation is equal to the company balance per reconciliation. d. To ensure cash receipts are greater than cash disbursements.

c. To ensure the bank balance per reconciliation is equal to the company balance per reconciliation.

The term commonly used to refer to short-term investments that have a maturity date no longer than three months from the date of purchase is________.

cash equivalents

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

collusion

Depreciation is an allocation of the _________ of buildings, vehicles, and equipment to expense over time as they are used.

cost

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

Liabilities that will be due within the next year are __________ liabilities.

current

Which of the following would not need to be accounted for in the bank reconciliation? a. Deposits outstanding recorded by the company but not the bank. b. Interest earned recorded by the bank but not the company. c. NSF checks recorded by the bank but not the company. d. Checks written by the company and recorded by the bank.

d. Checks written by the company and recorded by the bank.

After preparing the bank reconciliation, an NSF check would result in which of the following when recording the adjustment to the company's cash balance? a. Debit to Service Fee Expense. b. Credit to Accounts Payable. c. Credit to Service Revenue. d. Debit to Accounts Receivable.

d. Debit to Accounts Receivable.

Lindell sells $100 of goods to a customer. The customer pays with a personal check. Recording this transaction will include a

debit to cash.

The bank will show a customer's withdrawal as a ______.

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

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

deposits outstanding.

If an adjusting entry's credit is to a liability account, then the debit must be to _________.

expense

True or false: the final step in reconciling the bank's cash balance and the company's cash balance is to update the company's cash balance for the items used to reconcile the bank cash's balance.

false- the cash balance needs to be updated for items used to reconcile the company's cash balance.

With respect to current assets, ________ refers to how quickly an asset can be converted to cash.

liquidity

Under the accrual basis of accounting, the ____________ principle requires that expenses be recognized in the same period as the related revenues.

matching

The acronym NSF stands for is

nonsufficient funds.

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

reconciliation

According to the __________ ___________ principle, revenues should be recognized when goods or services are provided to customers, not necessarily when cash is received.

revenue recognition

The two major categories reported in the income statement are:

revenues and expenses

A critical aspect of a good internal control system is

separation of duties.

A petty cash fund is used for

small amounts of cash needed for low-cost items.

Closing entries move the balances from the _____ accounts into the Retained Earnings account.

temporary

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

timing

What must a company do to adjust the items used to reconcile the company's cash balance?

update the balance in its cash account