ACCT 2110 Exam 3

Business Process Risk

risk associated with how the company allocates its resources to meet its objectives

Which of the following is not one of the five components of internal control? A. prepare tax returns B. gather information in a timely fashion C. define responsibility authority D. identify external risks

A. prepare tax returns

At the end of year inventory cost, if goods in transit are shipped FOB shipping point, they should be included in the inventory of: A. the buyer B. the shipping company C. the seller D. both buyer and seller

A. the buyer

The _ method makes an estimate of uncollectible accounts at the end of each period

allowance

Petty cash is not considered to be a cash equivalent

True

segregation of duties

action that reduces the likelihood that records could be used to conceal intentional misstatements, theft or fraud

If goods are shipped FOB shipping point at 9am on 3/30, who owns the goods on 3/30 at the end of the day?

the buyer

Control environment

the collection of environmental factors that influence the effectiveness of control procedures

How do you calculate gross profit?

= revenue - COGS

If the ending inventory is _ the net income is overstated

understated

What do the terms 1/15, net 30 mean?

1% discount if paid within 15 days, or full price within 30 days

In a period of falling prices, which inventory system will provide the highest net income? A. LIFO B. average cost C. specific identification D. FIFO

A. LIFO

Cost of goods sold is equal to: A. cost of goods available for sale less ending inventory B. amount of inventory on hand at the end of the accounting period C. purchase less beginning inventory plus ending inventory D. the inventory account as reported on balance sheet

A. cost of goods available for sale less ending inventory

Conservatism principle

An accounting principle that requires accounting procedures that recognize expenses as soon as possible, but delay the recognition of revenues until they are ensured

Which of the following is not one of the five categories of control activities? A. clearly defined authority and responsibility B. accrual accounting and the matching principle C. checks on recorded amounts D. safeguards over assets and records

B. accrual accounting and the matching principle

Which of the following elements of internal controls are the procedures designed to identify, analyze, and manage strategic risks and business process risks? A. controls activities B. risk assessment C. monitoring D. control Environment

B. risk assessment

Which of the following is not one of the three areas for which internal control systems are intended to provide reasonable assurance? A. financial reporting reliability B. effectiveness and efficiency of operations C. certification that all revenues and expenses have been properly recorded D. financial reporting has been done in compliance with all applicable laws and regulations

C. certification that all revenues and expenses have been properly recorded

Which of the following best describes the allowance for doubtful accounts? A. cash flow account B. income statement account C. contra account D. liability account

C. contra account

Transportation in is: A. added to transportation out as part of the calculation of cost of goods sold B. part of purchase returns and allowances C. part of the cost of net purchases D. an operating expense

C. part of the cost of net purchases

What is the goal of the Lower of Cost (LCM) rule? A. to apply the matching principle B. to lower expense C. to apply the conservatism principle D. to lower the cost of goods

C. to apply the conservatism principle

Which of the following describes estimating bad debt expense with the percentage of credit sales method? A. to estimate the amount of bad debt expense based on aging of accounts receivable B. to determine the amount of uncollectible accounts during a given period C. to estimate bad debt expense based on a percentage of credit sales made during a period D. to facilitate the use of the direct write off method

C. to estimate bad debt expense based on a percentage of credit sales made during the period

What is the primary role of internal controls in managing a business? A. to ensure that only authorize users are allowed to access the company's computer systems. B. to make it impossible for inventory to be stolen. C. to encourage fraud and collusion among employees. D. to place boundaries around employees' activities in order to prevent them from deviating from prudent and effective processes and procedures that are in the best interests of the business.

D. to place boundaries around employees' activities in order to prevent them from deviating from prudent and effective processes and procedures that are in the best interests of the business.

A check written by a company but not yet presented to the bank for payment is called a check in transit

False

Cash equivalents typically appear in the king term investments section of a balance sheet

False

The key to being classified as a cash equivalent is that the amount must be available to pay debt within a years time or less

False

When a bank collects a note on behalf of a company, the bank is likely to issue a debit memo

False

When reconciling a bank account the company must prepare an adjusting entry for deploying transit.

False

FOB shipping point

Situation in which the buyer takes ownership (title) to the goods after the goods leave the seller's place of business (shipping point) and the buyer typically pays the freight.

On a bank reconciliation, interest earned for the month is added to the cash balance per the company records

True

FOB destination

The seller/shipper pays all the shipping costs until the cargo arrives at the buyer's store, bears risk of loss

The length of the operating cycle affects the amount of capital a business needs

True

When reconciling a bank account, the company has to prepare an adjusting entry for outstanding checks

True

How do you get net realizable value?

accounts receivable - allowance for bad debts = net realizable value

What is the equation for performing a bank reconciliation starting with the bank balance?

bank balance + deposits in transit - outstanding checks = adjusted balance

What is an outstanding check? A. an amount received and recorded by the business, but not yet by the bank B. checks that have been returned to the depositor because the funds are not sufficient C. check issued and recorded by the business that has not been cashed by the recipient of the check D. fee charged by the bank

c. check issued and recorded by the business that has not been cashed by the recipient of the check

Internal Control System

collective term for procedures put into place to ensure that employees operate within the scope of their assigned responsibilities and act for the good of the business

What is the equation for performing a bank reconciliation starting with the company balance?

company balance + bank additions - bank deductions = adjusted balance

Accounting system

consists of the methods and records used to identify, measure, record, and communicate financial information about a business

If the ending inventory is overstated, the ending inventory is

correct

Net method

customer IS expected to pay within the discount period

Gross method

customer is NOT expected to pay within the discount period, sales revenue reduces

Aging method of receivables

estimating the appropriate balance for the allowance for doubtful accounts results in the appropriate value for net accounts receivable on the balance sheet

FIFO

first in, first out. Rotation system that uses the oldest products first

perpetual inventory system

inventory system that maintains a continual record of inventory purchased and sold

What is lower of cost of market

it is an example of conservatism, you report the value of goods as whichever is lower between what you paid for it and what its worth today

LIFO

last in, first out. Rotation system that uses the oldest products first

If the ending inventory is _ the net income is overstated

overstated

If the ending inventory is overstated, the total assets are

overstated

If the ending inventory is understated, the cost of goods sold is

overstated

Control activities

policies and procedures established by top management to help ensure that the company's accounting system and financial statements are as accurate as possible

Strategic risk

possible external threats to the organization's success in accomplishing its goals

Safeguarding

providing physical protection of company's assets

What is a petty cash fund?

small amount of cash kept on hand to pay for minor purchases

If the ending inventory is overstated, the cost of goods sold is

understated

periodic inventory system

updates the accounting records for merchandise transactions only at the end of a period