ENTRE 311 Exam 1

Which document issued by a bank reflects a transaction that decreases a company's checking account balance? A credit memo A debit memo A reconciling entry A debit entry

A debit memo (A debit memo issued by a bank for such things as bank service charges reduces a company's account, and a credit memo increases it.)

Which of the following is not a procedure to maintain internal controls over cash payments? All checks should be prenumbered. A receipt should be provided to each cash customer. Checks should be properly authorized with approval signatures. Voided checks should be defaced and retained.

A receipt should be provided to each cash customer. (Providing receipts to each cash customer is a procedure to maintain internal controls over cash receipts, not cash payments.)

If the financial statements cannot be relied upon because they contain one or more material departures from GAAP, the auditor will issue the following type of audit opinion: Adverse opinion. Disclaimer. Unqualified opinion. Qualified opinion.

Adverse opinion (An adverse opinion indicates that the independent auditor found one or more material departures from GAAP.)

Which of the following is not a primary role of an independent auditor? Multiple Choice Advise client on tax strategies All of these answer choices are correct. Determine whether a company's financial statements are materially correct Assume legal and professional responsibilities to the public

Advise client on tax strategies (The independent auditor is not responsible for advising clients on tax strategies, although that is something that some other accountants do.)

How would accountants estimate the amount of a company's uncollectible accounts expense? Consider new circumstances that are anticipated to be experienced in the future. Compute as a percentage of credit sales. Consult with trade association and business associates. All of these answer choices are correct.

All of these answer choices are correct (Accountants use a variety of methods to estimate uncollectible accounts expense. There is no requirement that they use a particular approach.)

Which of the following would not require the company to make an adjustment to its books? An error in which the company's accountant recorded a check as $235 that was written correctly for $253. A check for $37 deposited during the month, but returned for non-sufficient funds. All of these answer choices would require the company to make an adjustment to its books. An error in which the bank charged the company $83 for a check that had been written by another account holder.

An error in which the bank charged the company $83 for a check that had been written by another account holder. (A bank error would cause an adjustment to the unadjusted bank balance, not the book balance. Only adjustments to the book balance require adjusting entries.)

Which of the following businesses is most likely to use a specific identification cost flow method? Multiple Choice Roofing company Car dealership Hardware store Grocery store

Car dealership (A car dealership sells a relatively small number of high-value items of inventory, each of which bears a unique vehicle identification number.)

What documentation issued by a bank increases a company's checking account balance at the bank? Multiple Choice Credit memo Certified check Debit memo Balance sheet

Credit memo (Credit memos include things such as interest earned.)

Which of the following is not a generally recognized internal control procedure? Multiple Choice Customer service comment cards Requiring regular vacations for certain employees Establishment of clear lines of authority Having employees covered by a fidelity bond

Customer service comment cards (While customer service comment cards are helpful in monitoring company performance, they are not a generally recognized internal control procedure.)

Which of the following is not a typical form associated with a bank checking account? Multiple Choice Deposit ticket Bank statement Debit memo Signature card

Debit memo (A debit memo is not a separate document. It is a notation on a bank statement indicating that the bank took cash out of a company's checking account, often for bank service charges.)

If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold? Weighted average LIFO, FIFO, and weighted average will all produce equal amounts. LIFO FIFO

FIFO (When prices are rising, FIFO will produce the lowest cost of goods sold compared with other methods because it is based on the earliest, lowest priced, purchases.)

The face value of Accounts Receivable plus the balance in the Allowance for Doubtful Accounts is equal to the net realizable value of the receivables. True False

False (Accounts receivable - allowance for doubtful accounts = net realizable value)

When a company accepts a credit card payment for a sale, the amount of sales revenue to be recorded is reduced by the amount of the credit card company's fee. True False

False (Revenue is recorded for the full amount of the sale, and the fee is recorded as a separate expense.)

At a time of declining prices, which cost flow assumption will result in the highest ending inventory? Multiple Choice Weighted average Either weighted average or FIFO LIFO FIFO

LIFO (In a period of declining prices, LIFO will result in the lowest cost of goods sold (most recent purchases) and the highest ending inventory (earliest purchases).)

An audit is useful to financial statement users because it: Provides reasonable assurance that the financial statements do not have material misstatements. Assures users that confidentiality is maintained. Guarantees that management has not been involved in misappropriation of assets. Guarantees that the financial statements are accurate and correct.

Provides reasonable assurance that the financial statements do not have material misstatements (The financial statement audit does not guarantee complete accuracy or the absence of fraud. It does provide reasonable assurance that there are no material misstatements and there is compliance with GAAP.)

Which of the following is not a component of the fraud triangle? Multiple Choice Opportunity Reliance Rationalization Pressure

Reliance (The fraud triangle includes opportunity, rationalization, and pressure.)

Which internal control procedure addresses the idea that the likelihood of employee fraud or theft is reduced if collusion is required to accomplish it? Use of prenumbered documents Separation of duties Physical controls Fidelity bonding

Separation of Duties (Separation of duties reduces the ability of a single employee to commit fraud without the assistance of other employees)

Which of the following statements concerning internal controls is true? Internal accounting controls are limited to the policies and procedures used to protect the company from embezzlement. Internal administrative controls are designed to limit the amount of funds spent on investments. Strong internal controls provide reasonable assurance that the objectives of a company will be accomplished. The control procedure, separation of duties, prohibits the employment of a husband and wife or other closely related parties within the same company.

Strong internal controls provide reasonable assurance that the objectives of a company will be accomplished (Strong internal controls provide reasonable, but not absolute, assurance that the objectives of a company will be accomplished)

Which one of the following is not an accurate description of the Allowance for Doubtful Accounts? Multiple Choice The account is a temporary account. The amount of the Allowance for Doubtful Accounts decreases the net realizable value of a company's receivables. The account is increased by an estimate of uncollectible accounts expense. The account is a contra account.

The account is a temporary account (Allowance for doubtful accounts is a contra account that decreases the net realizable value of a company's receivable. It is increased when a company estimates uncollectible accounts expense.)

For a business, Cash generally includes currency, customers' checks, and some savings accounts. True False

True (Cash includes currency, customers' checks that have not yet been deposited, and savings accounts, as long as those accounts to not impose substantial penalty for withdrawal.)

Even a good system of internal controls can be overridden by collusion among employees. True False

True (Collusion is cooperation among two or more employees to commit fraud, a practice that can override internal controls such as separation of duties.)

The specific identification inventory method is not practical for companies that sell many low-priced, high turnover items. True False

True (It is not cost effective for companies to track the specific costs of low-priced items.)

The longer an account receivable has been outstanding, the less likely it is to be collected. True False

True (This concept is the basis of aging receivables. The older receivables are assigned greater percentages of estimated uncollectibles.)

The most favorable audit opinion that a company can receive is a(n): qualified opinion. adverse opinion. unqualified opinion. disclaimer of opinion

Unqualified opinion (An unqualified opinion indicates that the independent auditor has found the financial statements to be materially correct and in compliance with GAAP.)

In the reconciliation of the June bank statement, a deposit made on June 30 did not appear on the June bank statement. In preparing the bank reconciliation, this deposit in transit should be: subtracted from the unadjusted bank balance. added to the unadjusted bank balance. added to the unadjusted book balance. subtracted from the unadjusted book balance.

added to the unadjusted book balance (Deposits in transit are added to the unadjusted bank balance because the bank has not yet received those deposits, but the company has already recorded them in its books.)

Effective internal controls for cash include: Multiple Choice all of these answer choices are correct. written cash receipts given to customers as evidence of payment. cash deposited in the bank on a timely basis. disbursements made by prenumbered check.

all of these answer choices are correct

The practice of reporting the net realizable value of receivables in the financial statements is commonly called the: allowance method of accounting for uncollectible accounts. cash flow method of accounting for uncollectible accounts. direct write-off method of accounting for uncollectible accounts. accrual method of accounting for uncollectible accounts.

allowance method of accounting for uncollectible accounts (The allowance method dictates that a company report its receivables net of estimated uncollectible accounts.)

The party that issues a promissory note is known as the: borrower and maker. borrower. maker. Incorrect lender.

borrower and maker (The terms maker and borrower can both be used to describe the issuer of a promissory note.)

The year-end adjusting entry to recognize uncollectible accounts expense will: Multiple Choice increase liabilities and increase equity. decrease liabilities and increase equity. increase assets and decrease equity. decrease assets and decrease equity.

decrease assets and decrease equity (The adjusting entry will decrease assets by increasing the contra-asset allowance for doubtful accounts and will increase uncollectible accounts expense, which decreases equity.)

In a bank reconciliation, a customer's NSF check included with the bank statement is: added to the company's cash balance to get the true cash balance. deducted from the bank's cash balance to get the true cash balance. deducted from the company's cash balance to get the true cash balance. added to the bank's cash balance to get the true cash balance.

deducted from the company's cash balance to get the true cash balance. (The NSF check was unknown to the company prior to receiving the bank statement, so it should be deducted from the company's cash balance to arrive at the true cash balance.)

A company's gross margin reported on the income statement is not affected by the inventory cost flow method it uses. true false

false (The selection of cost flow method impacts cost of goods sold, which impacts gross margin.)

In a company's bank reconciliation, an outstanding check is a check that: has been presented to the bank for payment but has not been reported on the bank statement. is guaranteed for payment by the bank. has been written for an amount that is greater than the balance in the account holder's bank account. has been issued by the company but has not been presented to the bank for payment.

has been issued by the company but has not been presented to the bank for payment. (Outstanding checks are deducted from the unadjusted bank balance.)

The primary reason for a business to allow customers to purchase goods or services on account is to: Multiple Choice decrease cost of goods sold. decrease the marketability of the company's inventory. increase cash flow from financing. increase sales.

increase sales (The primary benefit of offering credit to customers is to encourage sales that may not be made if customers are required to pay cash.)

Policies and procedures designed to reduce the opportunities for fraud are often called: Multiple Choice Internal controls. Asset source transactions. Accounting standards. Financial systems.

internal controls (Internal controls are policies and procedures designed to reduce the opportunities for fraud.)

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. Kincaid's entry to recognize the write-off of the uncollectible accounts will: decrease total assets and total equity. not affect total assets or total equity. increase total assets and total equity. increase total assets and decrease total equity.

not affect total assets or total equity (The write-off decreases both the allowance for doubtful accounts account (a contra-asset) and accounts receivable (an asset) equally. Therefore, there is no net effect on assets or equity

Making a loan to another party is considered an investing activity on the statement of cash flows. true false

true (Loaning cash is an investing activity.)