ACCTG 101 - Chapter 4 - Smart learning

The two types of control procedures are preventive and ___________

detective

Holding too much cash may be a signal that the company

does not have additional opportunities for profitable expansion.

The amount of cash in the balance sheet reflects the

ending cash on the balance sheet date.

The balance of cash held by a company should be high enough to

ensure that the company can pay its debts as they become due.

When adjusting the bank balance in a bank reconciliation, which item must be added to the bank balance?

Deposits outstanding

In a bank reconciliation, a deposit outstanding is

added to the bank balance

The statement of cash flows classifies items as

operating, investing, and financing.

Companies have the greatest ability to eliminate this element of fraud

opportunity

The asset that is most easily stolen and susceptible to fraud is ------

Cash or Money

When two or more persons work together to circumvent internal control procedures and commit a fraud, this is called -------

collusion

Largo Corp. discovered $2,000 for an NSF check in its bank reconciliation. When the cash account is updated for items that affect the company's cash balance, the entry will include

credit Cash, $2,000.

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

Because cash is assumed to be available for spending, it is typically reported on the balance sheet as a(n) ---------

current asset

The employee responsible for the petty cash fund is often referred to as the petty cash -------

custodian

Because managers are entrusted with company resources by both lenders and owners, they are referred to as

stewards

Managers who are entrusted with taking care of the assets of the company are referred to as ______ of the company's assets.

stewards

Which of the following might be included in cash equivalents on the balance sheet?

- Money market funds - Treasury bills - Certificates of deposit

Effective internal control over cash requires segregation of duties. Which of the following duties should be segregated?

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

Which of the following are provisions included in the Sarbanes-Oxley Act?

- Require auditors to retain work papers for 7 years. - Require that audit firms are hired by the audit committee of the board of directors.

Credit card companies earn revenues from

- charging the credit card holder interest. - charging the retailer a fee for each credit card sale.

Which of the following are common controls over cash receipts?

- having two different employees take custody of the checks and make the deposit - opening mail daily and making a detailed list of checks received

A good internal control system would require that the employee who handles cash must not be involved in (with)

- reconciling the bank statement. - the accounting records.

The key provisions of the Sarbanes-Oxley Act include

- restricting activities of auditors to prevent conflicts of interest. - requiring documentation and assessing effectiveness of internal controls. - requiring that corporate executives certify financial statements.

What requirements for corporate accountability are included in the Sarbanes-Oxley Act?

-Corporate executives must personally certify the financial statements -Corporate executives may be criminally liable for fraudulent financial statements

Which of the following are detective controls?

-Performance reviews -Reconciliations -Audits

Which of the following are preventive controls?

-Physical controls -Separation of duties

The Sarbanes-Oxley Act requires auditors to retain work papers for ______ years.

7

Amounts readily available to pay off debt or use in operations are considered cash, while highly liquid investments with a maturity date of 3 months or less are considered -------- --------

Cash Equivalents

Who must personally certify the financial statements and company disclosures or risk financial penalties and criminal prosecution for fraudulent misstatements?

Corporate executives

Clem sells $1,000 of goods to a customer. The customer pays with a VISA credit card. VISA charges a 4% fee on the sale. Recording the sale would include which of the following?

Debit Service Fee Expense $40

ethical

Having to do with morals, values, right and wrong

Which of the following led to the passage of the Sarbanes-Oxley Act of 2002?

High profile accounting scandals during the early 2000s

For internal control purposes, risk assessment considers which two types of risk?

Internal and external risks

Which of the following is true regarding acceptance of credit cards by retailers?

It improves internal control because employees do not handle cash.

Who has final responsibility for internal controls?

Management

For internal control purposes, which of the following responsibilities should be separated for cash disbursements?

Payment authorization and check preparation

A manager compares the monthly sales revenue to the amount forecasted. Which type of internal control is this?

Performance review

Separation of duties and E-commerce controls are examples of ______ controls.

Preventative

The acronym PCAOB stands for

Public Company Accounting Oversight Board.

A good internal control system would require that the employee who handles cash must not be involved in

Reconciling the bank statement

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

Sarbanes-Oxley Act

The requirement that companies must document internal controls and assess their adequacy is required by the

Sarbanes-Oxley Act, Section 404

The Sarbanes-Oxley Act applies to

companies that are required to file with the SEC.

The most common source of occupational fraud is

misuse of company resources

The element of fraud which is easiest for companies to eliminate is -----

opportunity

Controls designed to prevent errors or fraud from occurring are referred to as _____ controls.

preventive

Two types of control activities are

preventive and detective controls

A critical aspect of a good internal control system is

separation of duties.

Independent financial statement audits are most commonly required of:

stock exchange listed companies

Internal control consists of plans to

-safeguard company assets. -provide accurate and reliable accounting information.

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows?

1) - purchase of supplies with cash - interest paid on notes - payment of employee salaries or 2) - payment of salaries - payment of an accounts payable balance

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

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

Neumann, Inc.'s books show an ending cash balance of $20,000 before preparing the bank reconciliation. Given that the bank reconciliation shows outstanding checks of $2,000; deposits outstanding of $3,000; NSF check of $200; and interest earned on the bank account of $30, the company's up-to-date ending cash balance equals:

19.830 $ (Reason: $20,000-$200+$30)

The Sarbanes-Oxley Act requires that lead audit partners are required to rotate every ______ years.

5

In a bank reconciliation, an outstanding check is -----

deducted from the bank balance

In a bank reconciliation, interest revenue earned on a company's bank account is:

added to the company's cash balance

In a bank reconciliation, the electronic funds transfer (EFT) received by the bank from a customer's note receivable owed to the company is ______.

added to the company's cash balance

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

deposits outstanding.

The Committee of Sponsoring Organizations (COSO) of the Treadway Commission provided a framework for

designing an internal control system

An audit is an example of a(n) ---- control.

detective

Controls designed to find errors or fraud that have occurred are referred to as _____ controls.

detective

Debit and credit cards used by employees in the course of fulfilling their employment objective are commonly referred to as _____.

purchase cards

The three elements present in the fraud triangle are

rationalization motive opportunity

Klein Company's accountant is unable to reconcile the current year bank and cash account balances. If no cause can be determined to explain this difference, the difference should be

recognized as miscellaneous expense or revenue.

One of the most important internal controls for cash is the bank --------

reconciliation

Preparation of a bank ------ helps maintain control of cash accounts.

reconciliation

Strong internal control systems allow greater reliance by investors on

reported financial statements

Careful consideration of internal and external factors that may cause harm to a company is called ------ assessment.

risk

Rice Corp. noticed that a check written by the company for $1,000 was incorrectly recorded by the bank as $1,100. How should this error be handled in a bank reconciliation?

$100 should be added to the bank balance.

Brighton Corporation establishes a petty cash account for $200. During the month, Brighton uses petty cash to purchase postage for $50. At the end of the period when Brighton recognizes the expenditure, what entry is required?

Debit Postage Expense $50

When adjusting the bank balance in a bank reconciliation, which item must be subtracted from the bank balance?

Outstanding checks

Who is responsible for providing an opinion on management's assessment of internal control?

The company's auditors

Small expenditures from a petty cash fund are normally recorded:

at the end of a specific time period

The PCAOB sets standards for

audited financial reports

The balance of cash held by a company should be low enough to ensure they avoid

idle and inefficient use of cash.

The acceptance of credit cards ______ internal control over cash.

increases

Separation of duties requires that

individuals who have physical responsibility for assets should not have access to accounting records.

A periodic performance review is an example of a(n) ________ control

internal

A key factor in helping safeguard cash is a well functioning ------- ------- system.

internal control

Because most companies receive payments for the sale of products and services either in the form of cash or as a check received through the mail,

internal control over cash receipts is important.

Under the Sarbanes-Oxley Act, corporate management is responsible for (Select all that apply.)

internal control. the financial statements.

A company's plans to safeguard company assets and enhance the reliability and accuracy of accounting information are referred to as

internal controls.

Auditors of public companies may not perform which of the following for their clients?

investment advising

Section 404 of the Sarbanes Oxley Act requires management and auditors to document and assess

the company's internal control procedures

From the retailer's perspective, the difference between a cash sale and a credit card sale is

the retailer must pay a fee to the credit card company.

short term highly liquid investments with a maturity of ________ months or less that can readily be converted into cash with little risk of loss are classified as cash equivalents

three

A bank statement may not agree with the amount of cash recorded by the company in the cash account because of ------ differences and errors.

timing

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

timing

A bank reconciliation compares the company's cash records with the bank statement and discovers differences in those amounts due to

timing differences and errors.

The individual or groups of individuals who are most able to override internal control features is (are):

top management

The three elements present in every fraud are commonly referred to as the fraud ------

triangle

Since debit cards withdraw funds directly from the cardholder's bank account at the time of use, a sale on a debit card is most similar to a sale

with a check.

A debit card

withdraws funds immediately from the cardholders' bank account.

The Public Company Accounting Reform and Investor Protection Act of 2002 is known as the -----

Sarbanes-Oxley Act.

Smith Company has a discrepancy of $50 at the end of the bank reconciliation. Smith has come to the conclusion that $50 of cash went missing somewhere. The journal entry to record this discrepancy includes:

- debit miscellaneous expense $50 - credit cash $50

The journal entry necessary to establish a petty cash fund is:

- debit petty cash - credit cash

Which of the following effectively mitigate the natural risks of running any business without being capable of completely eliminating the risk?

- effective internal control - ethical employees

In a bank reconciliation, which of the following items does not need to be recorded to adjust the company's cash balance?

Deposit outstanding

Melon Corp. noticed that a check written by the company for $2,100 was incorrectly recorded in the accounting records as $1,200. How should this error be handled in a bank reconciliation?

$900 should be subtracted from the cash balance in the accounting records.

Which of the following items are included in cash?

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

Which of the following are cash inflows from financing activities?

- Borrowing from bank - Issuing stock to investors for cash

Which of the following responsibilities are separated in a good internal control system for cash disbursements?

- Cash disbursement documentation and the accounting recording function. - Check writing and check signing.

When adjusting the company's cash account balance in a bank reconciliation, which items reduce the company's cash account balance?

- Charges for NSF checks - Service charges

Which of the following are components of internal control?

- Control environment - Monitoring - Risk assessment - Control activities

Joyce Inc. sells $5,000 of goods to a customer. The customer pays with a VISA credit card. VISA charges a 3% fee on the sale. Recording the sale would include which of the following?

- Debit Cash $4,850 - Credit Sales $5,000 - Debit Service Fee Expense $150

Which of the following entries affect a company's cash flows?

- Debit rent expense; credit cash - Debit supplies; credit cash

Which of the following will cause differences between the bank statement balance and the accounting balance for cash?

- Errors - Timing differences

Why is it often easy for top level management to commit fraud?

- Fewer internal controls may be in place at that level. - Subordinates feel intimidated and may not report it. - They can override the internal control system

Which of the following items will require a journal entry following a bank reconciliation?

- NSF checks - Notes collected by the bank

Which of the following are cash outflows from financing activities?

- Pay dividends - Repay borrowing from bank

Match each activity with its classification on the statement of cash flows. Instructions - Purchasing inventory from vendors - Signing a long-term promissory note - Selling equipment

- Purchasing inventory from vendors Operating Activity - Signing a long-term promissory note Financial Activity - Selling equipment Investing Activity

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 - Adjust the company's cash balance

Which of the following are errors in accounting for cash?

- Recording a cash collection of $4,000 but depositing $3,000 into the bank. - The bank processing a check for $210 as $120. - Recording a check for $168 for $186 in the cash account.

Match each activity with its classification on the statement of cash flows. Instructions - Sell goods to customers - Sell stock to investors - Purchase equipment

- Sell goods to customers Operating Activity - Sell stock to investors Financial Activityterm-188 - Purchase equipment Investing Activity

What would cause a bank statement not to agree with the cash balance in the accounting records?

- The bank made an error in recording a deposit made by the company. - The company made an error in recording a deposit. - The bank paid interest that the company has not recorded. - Deposits outstanding that have been recorded on the company's records, but not on the bank's.

Which of the following may be important reasons for companies to hold large amounts of cash?

- To weather potential negative shocks in the business cycle - Allows company to act quickly to new opportunities

Margot, a prospective investor, wants to know how much cash Ziegler Inc. has on December 31. Margot can find the information in Ziegler's:

- balance sheet - statement of cash flows

Credit card companies earn revenues from

- charging the retailer a fee for each credit card sale. - charging the credit card holder interest.

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that

- checks are signed by authorized individuals. - all expenditures are authorized. - all disbursements are made by check, debit card, or credit card.

Which of the following items are classified as cash inflows from operating activities on the statement of cash flows?

- collection from customers - receipt of interest - interest received on notes receivable

Night Corporation establishes a petty cash account for $200. During the month, Night used petty cash to purchase postage for $50 and supplies for $100. At the end of the month, Night recognizes the related expense and replenishes petty cash. The journal entry to replenish petty cash is:

- credit Cash (checking account) $150 - debit Petty Cash $150

Clancy Corp. establishes a petty cash fund for $200. The entry required is to

- credit Cash (checking account) $200. - debit Petty Cash $200.

Company employees who make necessary expenditures during the course of their employment may utilize "purchase cards," which may be in the form of:

- debit cards - credit cards

At the beginning of February, Neumann established a petty cash fund. During the month, the petty cash custodian disbursed $105 for small deliveries. At the end of the month, Neumann should:

- debit delivery expense - credit petty cash

The three classifications on the statement of cash flows are cash flows from

- investing activities. - operating activities. - financing activities.

Which of the following are cash outflows from investing activities?

- purchase of land - purchase of long-term investments - purchase of building - purchase of investment securities

Which of the following cash transactions are classified as cash inflows from investing activities?

- sale of land - sale of investments - sale of equipment - sale of building

Important internal control procedures for employee purchases include:

- separation of duties - reconciliation of credit card statements - clear rules for purchase authorization - predetermined spending limits for employees

Companies commonly restrict cash for which of the following reasons?

- to finance a major purchase of equipment - to pay off a large loan when due - to have cash available for future investment opportunities

Arcelia Corp.'s bank statement has an end balance of $40,000. The deposits outstanding were $7,000. A note was collected by the bank for $2,000. Checks outstanding at the end of the month were $1,000. Using the bank statement, what is the corrected cash balance?

46.000 $ (Reason: $40,000 + 7,000 - 1,000 = $46,000. The note collected by the bank is already reflected on the bank statement.)

Malik Corp.'s bank statement has an end balance of $50,000. The deposits outstanding were $6,000. NSF checks were $1,000. Checks outstanding at the end of the month were $3,000. Using the bank statement, what is the corrected cash balance?

53.000 $ (Reason: $50,000 + 6,000 - 3,000 = $53,000. The NSF checks are already recorded by the bank.)

Acme, Inc.'s books show an ending cash balance of $10,000 before preparing the bank reconciliation. Given that the bank reconciliation shows outstanding checks of $3,000; deposits outstanding of $2,000; NSF check of $100; and interest earned on the bank account of $10, the company's up-to-date ending cash balance equals:

9.910 $ (10.000-100+10)

A company pays for a purchase with a credit card. What is the effect of this purchase on the accounts?

Accounts payable will increase

Which of the following items are not included in cash?

Accounts receivable from customers

In a bank reconciliation, which of the following will require a journal entry by the company?

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

While preparing the bank reconciliation for March, the accountant for ABC Company discovered that a $694 check in payment of an account payable had been entered incorrectly in the journal as $649. Which of the following is true?

An entry must be made to debit Accounts Payable and credit Cash for $45.

The asset that is most susceptible to employee fraud is

Cash

During the year, Bernard Company's cash balance increased by $10,000. The sum of which totals reported on Bernard Company's statement of cash flows would also be equal to $10,000?

Cash flows from Operating, Investing, and Financing Activities

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 accounting term for a situation where two or more people act in coordination to circumvent internal controls is ------

Collusion

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

Committee of Sponsoring Organizations (COSO) of the Treadway Commission

Rollins Corp. purchases inventory by paying the supplier $1,000 with a credit card. Recording this transaction will require which of the following?

Credit accounts payable $1,000

Rollins Corp. purchases inventory by paying the supplier $1,000 with a debit card. Recording this transaction will require which of the following?

Credit cash $1,000

Melon Corp. noticed that a check written by the company for $2,100 for advertising expense was incorrectly recorded in the accounting records as $1,200. What needs to be recorded to correct this error?

Debit Advertising Expense $900; credit Cash $900.

Which of the following is an internal control procedure for cash disbursements?

Disbursements should be made by check, debit, or credit card.

A(n) ------ is a mistake in accounting, which can be intentional or unintentional.

Error

Published financial statements may be incorrect because of

Errors Fraud

True or false: All companies are required to have an independent auditor assess the adequacy of their internal control procedures.

False

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

False

True or false: Internal controls prevent and detect all errors and fraud.

False

True or false: The entry for a sale to customers is different depending on whether the customer pays with cash or a check.

False

True or false: Variability in operating cash flows is unimportant as long as the total cash flows over a three-year period is sufficiently positive.

False

This month's bank statement shows interest earned of $45. How would this item be treated on the bank reconciliation?

It would be added to the company balance.

This month's bank statement shows that the bank incorrectly credited ABC Corp.'s account for a $600 deposit that should have been credited to XYZ Corp.'s account. How would this item be treated on ABC's bank reconciliation?

It would be deducted from the bank balance. (Reason: ABC should also call the bank and report the error.)

Match each component of internal control with its definition. Monitoring: Control activities: Risk assessment: Control environment:

Monitoring: includes formal procedures for reporting control deficiencies Control activities: Policies and procedures that help ensure management's directives are being carried out Risk assessment: Identifies and analyzes factors that could prevent objectives from being achieved Control environment: Formal policies related to management's philosophy, assignment of responsibilities, and organizational structure

Which of the following is classified as part of the control environment?

Overall ethical tone of the organization with respect to internal control

Cash that is not available for current operations is referred to as ---- cash

Restricted

Smith's operating cash flows in millions were $100, $150, $80 during the past three years; while Jones' operating cash flows in millions were $105, $115, $110 during the same period. From the perspective of operating cash flows, which company would likely be perceived as riskier?

Smith

Which of the following allows greater reliance by investors on reported financial statements?

Strong internal control systems

Under the Sarbanes-Oxley Act, who is responsible for the selection of a corporation's auditor?

The audit committee of the Board of Directors

The ending balance in cash is reported in which financial statement(s)?

The balance sheet and statement of cash flows

Which of the following is an example of separation of duties in a good system of internal control?

The individual who receives the inventory does not have access to the accounting records.

Which of the following occurs when petty cash is used to pay for an item?

The receipt or a voucher is placed in the petty cash fund.

If a company records a transaction before the bank records the same transaction, this is called a/an ______ difference.

Timing

True or false: An internal control goal for cash receipts is to ensure that the business documents the correct amount of cash received and safely deposits the cash into its bank account.

True

Periodically, management should verify that amounts related to the company's physical assets agree with the ------ records.

accounting

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

accounts payable

The components of internal control are

based on the ethical tone set by management.

Employee purchases should be included in the accounting records

by the end of the accounting period.

A check that is NSF (nonsufficient funds) is a check that

cannot be paid because the account does not contain enough funds.

A journal entry that affects a company's Statement of Cash Flows will include an inflow or outflow of -----

cash

The asset most susceptible to fraudulent activity is(are)

cash

A bank reconciliation reconciles the bank statement with the company's

cash account in the balance sheet.

Internal control over cash is important because

cash can be stolen.

Currency, coins, and checking accounts are considered cash, whereas short-term highly liquid investments of 3 months or less are considered

cash equivalents.

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

cash equivalents.

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

checks outstanding.

To replenish a petty cash fund, the company will

debit petty cash; credit cash.

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

If a specific expenditure cannot be identified for a missing petty cash amount, the amount should be:

debited to Miscellaneous Expense

Smith Company cannot identify a missing petty cash amount, the amount should be:

debited to Miscellaneous Expense

In a bank reconciliation, the bank's charge of $10 for checking account fees is

deducted from the company's cash balance.

The two reasons why companies may issue incorrect financial statements are fraud and ------

error or mistakes

Differences between the bank statement balance and the cash account balance in the accounting records are primarily caused by timing differences and ------

errors

Internal control components are built on the foundation of the ------- tone established by top management in its control environment.

ethical

The two most common sources of occupational fraud are

financial statement manipulation misuse of company resources

The repayment of promissory notes and the payment of dividends are classified as ----- activities on the statement of cash flows.

financing

An intentional error by an employee that results in theft is referred to as a ______.

fraud

The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources is called occupational --------

fraud

When a person intentionally deceives another person or company for personal gain, this is referred to as -----

fraud

A petty cash fund is used for

small amounts of cash needed for low-cost items.

The statement of cash flows is useful because

it provides information on the company's ability to maintain long-term success.

The control environment is most affected by the attitudes and actions of

management

The sum of net cash flows from operating, investings, and financing activities reported in the statement of cash flows represents the:

net increase or decrease in cash during the year

The acronym NSF stands for

nonsufficient funds.

If a bank reconciliation included a deposit outstanding of $670, the company's entry for this reconciling item would include:

nothing; the deposit has already been recorded

The cash flow category that is closely related to a company's profitability is cash from ----- activities.

operating

A small amount of cash on hand to pay for minor purchases is commonly referred to as a(n) ------ fund.

petty cash

The person usually in charge of a petty cash fund is the:

petty cash custodian

Which of the following represents a critical component of a well functioning internal control system?

separations of ditties