Chapter 4 Practice Questions

Employee purchases of supplies with a company-issued credit card is typically recorded with a credit to a. Accounts Payable. b. Supplies. c. Cash. d. Supplies Expense.

a. Accounts Payable.

What is the concept behind separation of duties in establishing internal control? a. Employee fraud is less likely to occur when access to assets and access to accounting records are separated. b. The company's financial accountant should not share information with the company's tax accountant. c. Duties of middle-level managers of the company should be clearly separated from those of top executives. d. The external auditors of the company should have no contact with managers while the audit is taking place.

a. Employee fraud is less likely to occur when access to assets and access to accounting records are separated.

Which of the following adjusts the company's balance of cash in a bank reconciliation? a. Interest earned. b. Checks outstanding. c. Deposits outstanding. d. An error by the bank.

a. Interest earned.

Operating cash flows would include which of the following? a. Payment for prepaid insurance. b. Receipt of cash from selling a building. c. Payment of dividends to stockholders. d. Receipt of cash from bank borrowing.

a. Payment for prepaid insurance.

The primary reason the balance of cash in the company's records will differ from the balance of cash in the bank's records includes: a. Timing differences of recording cash transactions by the company and by the bank. b. Cash theft by the company's employees. c. Accounting errors made by the company. d. Accounting errors made by the bank.

a. Timing differences of recording cash transactions by the company and by the bank.

What is a direct purpose of internal controls? a. To improve the accuracy and reliability of accounting information. b. To help managers determine which projects are likely to be more profitable. c. To assist top executives in planning employment capacity. d. To minimize tax payments to the Internal Revenue Service (IRS).

a. To improve the accuracy and reliability of accounting information.

Which of the following adjusts the company's balance of cash in a bank reconciliation? a. interest on bank deposit b. checks outstanding c. an error by the bank d. deposits outstanding

a. interest on bank deposit

Who is ultimately responsible for the establishment and success of a company's internal control system? a. the company's top executives b. the company's stockholders c. the company's external auditors d. the company's board of directors

a. the company's top executives

Consistent with the COSO framework, an effective internal control system includes the control environment. The control environment refers to: a. the ethical tone set by top management b. accountability through separation of duties c. the risk of failing to achieve company objectives d. the reliability of financial information

a. the ethical tone set by top management

Operating cash flows include which of the following? a. Cash received from a customer. b. Cash paid for supplies. c. Cash received from the sale of a used company truck. d. Cash received from the issuance of common stock.

b. Cash paid for supplies.

Section 404 of the Sarbanes-Oxley Act requires companies to: a. Provide financial statements. b. Document and assess internal controls. c. Provide healthcare for employees. d. File their tax return with the Internal Revenue Service.

b. Document and assess internal controls.

Which of the following generally would be considered a good internal control over cash payments? a. Employees responsible for making cash disbursements should also be in charge of cash receipts. b. Ensure checks are serially numbered and signed only by authorized employees. c. The employee who authorizes payment should also be the employee who prepares the check. d. Require only one signature for larger checks.

b. Ensure checks are serially numbered and signed only by authorized employees.

Operating cash flows would include which of the following? a. Repayment of borrowed money. b. Payment for employee salaries. c. Services provided to customers on account. d. Payment for a new operating equipment.

b. Payment for employee salaries.

Which of the following generally would not be considered good internal control of cash receipts? a. Allowing customers to pay with a debit card. b. Requiring the employee receiving the cash from the customer to also deposit the cash into the company's bank account. c. Recording cash receipts as soon as they are received. d. Allowing customers to pay with a credit card.

b. Requiring the employee receiving the cash from the customer to also deposit the cash into the company's bank account.

Which of the following generally would be considered good internal control of cash disbursements? a. Make all cash disbursements using cash rather than debit cards or credit cards. b. Set maximum purchase limits on debit cards and credit cards. c. The employee responsible for making cash disbursements should be in charge of cash receipts. d. The employee who authorizes payments should also prepare the check.

b. Set maximum purchase limits on debit cards and credit cards.

At any given time, the amount of cash in the petty cash fund should equal: a. All vouchers written during the accounting period. b. The established balance of the fund less all vouchers written during the accounting period. c. The amount of cash withdrawn from the fund during the accounting period. d. The amount of cash used to establish the fund.

b. The established balance of the fund less all vouchers written during the accounting period.

Sarbanes-Oxley Act (SOX) was passed in response to: a. increasing inflation b. corporate scandals involving unethical behavior of top executives c. increasing pressure of foreign competition for American products and services d. the establishment of the Securities and Exchange Commission

b. corporate scandals involving unethical behavior of top executives

A company's own cash records show a balance of $3,200. After examining the bank statement, the following information is revealed: Bank's balance for cash: $4,000 Deposits outstanding: $2,300 NSF check: $600 Checks outstanding: $1,800 Note collected by the bank: $2,000 Service fee charged by the bank: $100 a. debit to notes receivable b. debit to accounts receivable c. credit to service fee expense d. credit to service revenue

b. debit to accounts receivable

A company's own cash records show a balance of $3,200. After examining the bank statement, the following information is revealed: Bank's balance for cash: $4,000 Deposits outstanding: $2,300 NSF check: $600 Checks outstanding: $1,800 Note collected by the bank: $2,000 Service fee charged by the bank: $100 a. $3,700 b. $3,400 c. $4,500 d. $4,800

c. $4,500

At the end of the previous year, a company's balance sheet reports cash of $30,000. For the current year, the company's statement of cash flows reports operating cash inflows of $90,000; investing outflows of $110,000; and financing inflows of $40,000. What amount of cash will be reported in the current year's balance sheet? a. $90,000. b. $20,000. c. $50,000. d. $120,000.

c. $50,000.

Investing cash flows include which of the following? a. Cash received from a customer. b. Cash paid for supplies. c. Cash received from the sale of a used company truck. d. Cash received from the issuance of common stock.

c. Cash received from the sale of a used company truck.

Which of the following is considered cash for financial reporting purposes? a. Accounts receivable. b. Investments with maturity dates greater than three months. c. Checks received from customers. d. Accounts payable.

c. Checks received from customers.

The Sarbanes-Oxley Act of 2002 applies to all companies that: a. Use accrual-basis accounting. b. Use either cash or accrual- basis accounting. c. File reports with the Securities and Exchange Commission. d. File their tax return with the Internal Revenue Service.

c. File reports with the Securities and Exchange Commission.

In response to widespread fraudulent reporting in the late 1990's and early 2000's, Congress: a. Enacted the Securities and Exchange Commission. b. Established the Financial Accounting Standards Board. c. Passed the Sarbanes-Oxley Act. d. Organized the Internal Revenue Service.

c. Passed the Sarbanes-Oxley Act.

The purpose of a petty cash fund is to a. Provide a convenient form of payment for the company's customers. b. Pay employee salaries at the end of each period. c. Provide cash on hand for minor expenditures. d. Allow the company to save cash for major future purchases.

c. Provide cash on hand for minor expenditures.

Financing cash flows would include which of the following? a. Payment of salaries to employees. b. Sale of services to customers for cash. c. Repayment of long-term borrowing to the bank. d. Purchase of equipment for cash for company operations.

c. Repayment of long-term borrowing to the bank.

Effective internal control over cash includes the requirement that: a. Only checks are used for payment of purchases. b. The same person who makes deposits should also record the deposits. c. The person who makes deposits should NOT record the deposits. d. Only checks are used for payment of purchases and the same person who makes deposits should also record the deposits.

c. The person who makes deposits should NOT record the deposits.

Managers should act: a. as creditors of the company b. as owners of the company c. as stewards of the company's assets d. in their own best interest

c. as stewards of the company's assets

Which of the following adjusts the bank's balance of cash in a bank reconciliation? a. interest on bank deposit b. NSF check c. deposits outstanding d. bank service fees

c. deposits outstanding

When preparing a bank reconciliation, nonsufficient funds (NSF) checks would be: a. added to the company's cash balance b. added to the bank's cash balance c. subtracted from the company's cash balance d. subtracted from the bank's cash balance

c. subtracted from the company's cash balance

When employee expenditures with company-issued credit cards are recorded: a. Cash is debited. b. Expenses are credited. c. Retained Earnings is debited. d. Accounts Payable is credited.

d. Accounts Payable is credited.

Fraudulent reporting by management could include a. Fictitious revenues from a fake customer. b. Improper asset valuation. c. Mismatching revenues and expenses. d. All of the answer choices are correct.

d. All of the answer choices are correct.

The Sarbanes-Oxley Act (SOX) mandates which of the following? a. Increased regulations related to auditor-client relations. b. Increased regulations related to internal control. c. Increased regulations related to corporate executive accountability. d. All of the answer choices are correct.

d. All of the answer choices are correct.

A company's ratio of cash to noncash assets provides some indication of the company's ability to: a. Maintain normal operations. b. Respond quickly to new opportunities. c. Prevent bankruptcy. d. All of the choices are correct.

d. All of the choices are correct.

Which of the following could cause a company to have a high ratio of cash to noncash assets? a. Highly volatile operations. b. Low dividend payments. c. Significant foreign operations. d. All of these factors could contribute to a high ratio of cash to noncash assets.

d. All of these factors could contribute to a high ratio of cash to noncash assets.

A company's petty cash refers to: a. Cash used to pay employee salaries. b. Investment in short-term securities. c. Cash held in the bank. d. Cash on hand to pay for minor purchases.

d. Cash on hand to pay for minor purchases.

Financing cash flows include which of the following? a. Cash received from a customer. b. Cash paid for supplies. c. Cash received from the sale of a used company truck. d. Cash received from the issuance of common stock.

d. Cash received from the issuance of common stock.

Which of the following adjusts the bank's balance of cash in a bank reconciliation? a. NSF checks. b. Service fees. c. An error by the company. d. Checks outstanding.

d. Checks outstanding.

Which of the following is an example of detective controls? a. The company should establish formal guidelines to handle cash receipts and make purchases. b. Important documents should be kept in a safe place, and electronic files should be backed up regularly. c. Employees should be made aware of the company's internal control policies. d. Management periodically determines whether the amount of physical assets agree with the accounting records.

d. Management periodically determines whether the amount of physical assets agree with the accounting records.

Investing cash flows would include which of the following? a. Payment for advertising. b. Payment of dividends to stockholders. c. Cash sales to customers. d. Payment for land.

d. Payment for land.

Corporate executive accountability under the Sarbanes-Oxley Act requires corporate executives to: a. Hire an independent auditor. b. Work more than 40 hours per week. c. Be compensated only when the company is profitable. d. Personally certify the company's financial statements.

d. Personally certify the company's financial statements.

Which of the following is considered cash for financial reporting purposes? a. coins and currency b. debit card sales c. checks received from customers d. all of the choices are correct

d. all of the choices are correct

Which of the following is considered cash for financial reporting purposes? a. prepaid insurance b. credit card purchases c. investments in a 6-month Certificate of Deposit d. amounts held in checking accounts

d. amounts held in checking accounts

Which of the following is considered cash for financial reporting purposes? a. inventory that is likely to be sold within three months b. amounts to be collected from customers c. amounts owed to suppliers d. balances in savings accounts

d. balances in savings accounts

When preparing a bank reconciliation, outstanding checks would be: a. added to the company's cash balance b. added to the bank's cash balance c. subtracted from the company's cash balance d. subtracted from the bank's cash balance

d. subtracted from the bank's cash balance